June 15, 2015

Supreme Court Decides Baker Botts L.L.P. v. ASARCO LLC

On June 15, 2015, the U.S. Supreme Court decided Baker Botts L.L.P. v. ASARCO LLC, No. 14-103, holding that § 330(a)(1) of the Bankruptcy Code does not permit bankruptcy courts to award fees that § 327(a) professionals incur in defending their own fee applications.

ASARCO filed for Chapter 11 bankruptcy and administered its own estate as debtor in possession (no trustee was appointed). The Bankruptcy Court gave ASARCO permission under §  327(a) of the Bankruptcy Code to hire Baker Botts as one of two law firms providing legal representation during the bankruptcy.

After ASARCO emerged from bankruptcy, Baker Botts sought compensation for its work under § 330(a)(1) of the Bankruptcy Code. That section provides that a bankruptcy court “may award . . . reasonable compensation for actual, necessary services rendered by” professionals hired under § 327(a). ASARCO challenged the compensation request. After significant discovery and a 6-day trial, the Bankruptcy Court rejected ASARCO’s objections and awarded the two law firms more than $100 million in fees, as well as more than $5 million for time spent defending their fee applications. The District Court affirmed the Bankruptcy Court’s award of fees that the firms incurred in defending their fee applications.

The Fifth Circuit reversed, noting that § 330(a)(1) states that “professional services are compensable only if they are likely to benefit a debtor’s estate or are necessary to case administration.” Because the primary beneficiary of a law firm’s fee application is the law firm, and not the bankruptcy estate, compensation for defending the application does not fall within the scope of § 330(a)(1).

The Supreme Court affirmed, holding that the award of fees incurred in defending the fee applications was not authorized by § 330(a). The Court first emphasized the well-known American Rule: “Each litigant pays his own attorney’s fees, win or lose, unless a statute or contract provides otherwise.” The Court reiterated that it recognizes departures from the American Rule only in specific and explicit provisions for the allowance of attorney’s fees under selected statutes. Here, Congress did not expressly depart from the American Rule to permit compensation for fee-defense litigation by professionals hired to assist trustees in bankruptcy proceedings. Section 330(a)(1) provides compensation for all manner of work done in service of the estate administrator, but the Court concluded that “[t]ime spent litigating a fee application against the administrator of a bankruptcy estate cannot be fairly described as . . . ‘disinterested service to’ . . . that administrator.”

The Court was not persuaded by Baker Botts’ argument that fee-defense litigation is part of the services rendered to the estate administrator. Nor did it agree with the United States’ argument as amicus curiae that compensation for fee-defense litigation is properly viewed as part of the compensation for the underlying services in the bankruptcy proceeding. If Congress had wanted to allow compensation for fee-defense litigation, it could have. But it did not, and the Fifth Circuit’s decision was affirmed.

Justice Thomas delivered the opinion of the Court, in which Chief Justice Roberts and Justices Scalia, Kennedy, and Alito joined, and in which Justice Sotomayor joined as to all but Part III-B-2. Justice Sotomayor filed an opinion concurring in part and concurring in the judgment. Justice Breyer filed a dissenting opinion, in which Justices Ginsburg and Kagan joined.

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