The U.S. Supreme Court said Monday that bankruptcy courts can’t award fees to a law firm for the time its lawyers spent defending its fees in a nasty billing dispute.
The ruling grew out of a fight between law firm Baker Botts LLP and copper miner Asarco LLC, which hired the firm to handle its bankruptcy in 2005. Baker Botts said the company should cover $5 million the firm spent to defend its fee applications in court.
Asarco disagreed, and a majority of the high court sided with the company. Bankruptcy professionals have to cover their own costs in a fight to get court approval of their fees, the majority said.
“Asarco has argued from the beginning that the bankruptcy code’s plain text does not authorize Baker Botts’s attempt to get paid from estate funds for its purely self-interested work litigating over its underlying fee requests,” said Jeff Oldham, who argued the case for the company before the Supreme Court. Asarco is “gratified,” Mr. Oldham said.
“While we are of course disappointed in the holding that bankruptcy attorneys may not be compensated under Section 330(a) for defeating meritless objections to their fee applications, we respect the Court’s conclusion. We are gratified that the Court recognized Baker Botts’s exceptional performance in the Asarco bankruptcy, which led to the Fifth Circuit affirming a $4.1 million bonus for Baker Botts’s extraordinary performance and results—an outcome that remains undisturbed by the Supreme Court’s opinion,” said Aaron Streett, chairman of Baker Botts’s Supreme Court practice.
In a 6-3 decision, the court rejected the law firm’s contention that defense of fees is part of the “services rendered” to the bankruptcy estate. In bankruptcy proceedings, courts have the final say on how much lawyers are paid in a case when the funds come out of money that could go to creditors, and anyone is allowed to challenge the fees.
Justice Clarence Thomas, writing for the court, said that awarding fees to a law firm for defending its fees would require a “particularly unusual deviation” from the common-law rule that “each litigant pays his own attorney’s fees, win or lose, unless a statute or contract provides otherwise.”
Three dissenting justices said there is indeed a statute that provides otherwise, but the majority misread it. “The statute permits compensation for fee-defense work as a part of compensation for the underlying services,” Justice Stephen Breyer wrote.
Lawyers who handle corporate bankruptcies say the high court ruling is a bad one, and they warn that troubled companies and their creditors may ultimately pay the price as firms retreat from the work.
“It’s going to render the practice of representing debtors and creditors’ committees altogether unprofitable,” said Thomas Fawkes, a Chicago bankruptcy lawyer who often represents official committees of unsecured creditors.
Lenders to distressed companies and their lawyers won’t be affected by the decision, said Brian Netter of Mayer Brown LLP, a firm that typically represents banks and other secured creditors in bankruptcy cases.
“This creates two different categories of bankruptcy lawyers,” Mr. Netter said. Lawyers for creditors’ committees and troubled firms, who have to file fee applications, now face a heightened risk they will have to spend to collect their money, he said. Lawyers for secured lenders are generally paid as part of bankruptcy-financing arrangements and their fees aren’t easily challenged.
But firms that work for companies and official creditors’ committees must survive court review to collect. Monday’s ruling tilts the playing field against court-supervised professionals, who are now looking at big legal bills of their own if they get into a scrap over fees, Mr. Netter said.
“A decision like today’s changes the incentive structure for most of the parties and should reasonably cause them to reconsider the steps they take in the course of the bankruptcy proceeding,” Mr. Netter said.
While relatively rare, open-court fee fights are a fact of life for bankruptcy professionals.
“Everyone at some point has to fend off an attack on their fees. It doesn’t matter how high quality the work is. It’s often used as an offensive litigation tactic,” said Mr. Fawkes, the Chicago bankruptcy lawyer. “Sometimes the other side just wants to inflict pain.”
The relationship between Grupo Mexico-controlled Asarco and Baker Botts, which received $113 million in fees for its work as Asarco’s counsel, soured when it sued parent company Grupo Mexico for improperly transferring Asarco’s main asset in the run-up to the bankruptcy. After that, Baker Botts officials said Asarco “attacked everything—time-entry descriptions, task codes in invoices, staffing choices, and the necessity and quality of various legal services.” The chapter 11 case ended with Asarco’s owner agreeing to pay all creditors in full after getting stuck with a judgment of more than $6 billion.
“Asarco was a huge case and Baker Botts made a lot of money,” said Mr. Fawkes. “In that situation, it’s a business decision whether to litigate in hopes of collecting more.”
Hardest hit will be the small and medium-size firms that represent small and medium-size companies in bankruptcy court, he said. Large firms may be able to absorb the cost of fee litigation, but a small firm forced to spend $20,000 to defend a $100,000 fee bill could wind up working for free, he said. That is not a business decision.
“You can’t set yourself up to lose a substantial amount of money,” Mr. Fawkes said.
Even bankruptcy-fee examiners, who are hired under court order and charged with finding questionable billing practices, argued against forcing bankruptcy professionals to pay for defending their fees.
“This can be added to the list of things that Congress needs to fix in the bankruptcy code,” said Robert Keach of Maine, a bankruptcy lawyer who is often named as a fee examiner. “I think it is a very bad outcome.”
Grupo Mexico, which lost control of Asarco but then reacquired it as part of the bankruptcy proceedings, appealed the $5 million awarded for the defense of the fees. A U.S. District Court upheld the awards, and Asarco’s owner appealed again. The Fifth Circuit ruled in the mining company’s favor on the defense costs.
Four justices joined Justice Thomas’s opinion in full with Justice Sonia Sotomayor joining in part. Justices Ruth Bader Ginsburg and Elena Kagan joined in Justice Breyer’s dissent.
(Published by The Wall Street Journal - June 15, 2015)