Lawyers Can't Use ‘Workaround' to Get Paid for Defending Fees

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By Diane Davis

Feb. 5 — Lawyers can't include fee defense provisions in their retention applications as a way to circumvent a recent U.S. Supreme Court ruling, the U.S. Bankruptcy Court for the District of Delaware held Jan. 29.

The Supreme Court held 6–3 in Baker Botts LLP v. ASARCO LLC, 135 S. Ct. 2158 (2015) , that bankruptcy attorneys can't be awarded attorneys' fees for their work in defending their own fee applications. The majority opinion, delivered by Justice Clarence Thomas, said that Bankruptcy Code Section 330(a)(1) doesn't permit bankruptcy courts to award fees to attorneys and professionals who work on behalf of an estate for defending fee applications.

“Almost as soon as the ink was dry on the ASARCO decision, bankruptcy professionals began to seek ways to escape the draconian impact of that holding,” Prof. Charles J. Tabb, Mildred Van Voorhis Jones Chair in Law, University of Illinois, told Bloomberg BNA Feb. 4. “The primary effort to do so has focused on attempting to incorporate an indemnification provision for fee-defense fees in the contract retaining a bankruptcy professional pursuant to § 328,” he said.

This case has been a “closely-watched case by bankruptcy professionals across the country,” according to Tabb.

The opinion by Judge Mary F. Walrath concluded that the Supreme Court's ruling in ASARCO, “prevents the Court from concluding that section 328 permits defense fees even if they were routinely allowed by the market in bankruptcy or non-bankruptcy contexts prior to that ruling.”

While Walrath's decision may not bind other Delaware judges, they might follow the path that she has created if they have other cases pending with similar issues. Attorneys need to know if this “workaround” method for getting their fee defenses paid will be accepted by the courts.

Workarounds Won't Work

“[C]ontractual workarounds of ASARCO are unlikely to work,” Tabb said. “Since Walrath did not universally reject the very concept of a possible contract exception to the American Rule, one can expect bankruptcy professionals to try to devise other forms of contracts to effect enforceable indemnification agreements,” he said.

“At the very least, it would seem, that the representative of the bankruptcy estate (either the DIP [debtor in possession] or trustee) would have to join such an agreement as a party, and indeed notice and the opportunity to object should be given to all parties in interest,” Tabb said.

“In short, it would seem that something akin to the procedure for approving critical vendor orders or other extraordinary entitlements would be required. But even with that, it is hard to be sanguine about the prospects for success if other courts agree with Judge Walrath,” he said.

UST Objects to Retention Applications

Brown Rudnick LLP and Morris, Nichols, Arsht & Tunnel LLP, Committee counsel to the Official Committee of Unsecured Creditors for debtor Boomerang Tube, LLC included a provision indemnifying them for expenses incurred in any successful defense of their fees.

Boomerang Tube, a maker of products used by drillers in the exploration and production of petroleum and natural gas, filed for bankruptcy June 9, 2015 .

The U.S. Trustee objected to the applications, saying that it was precluded by ASARCO. The UST also argued that the fee defense provisions shouldn't be approved because they are outside the scope of employment and aren't reasonable.

The Creditor's Committee contended that the court had the authority under Section 328 to approve the fee defense provisions.

Section 328 provides that with court approval, a professional may be employed “on any reasonable terms and conditions of employment, including on a retainer, or on an hourly fee basis.” Section 330(a)(1)(A), which was the provision at issue in ASARCO, provides that bankruptcy judges may award “reasonable compensation” to attorneys and other professionals who work on behalf of an estate.

In ASARCO, the Supreme Court held that any statutory departures from the American Rule must be “specific and explicit” and must “authorize the award of ‘a reasonable attorney's fee,' ‘fees,' or ‘litigation costs,' and usually refer to a ‘prevailing party' in the context of an ‘adversarial action.'” Under the American Rule, each litigant pays his own attorney's fees, win or lose, unless a statute or contract provides otherwise.

Walrath found that Section 328 doesn't provide a statutory exception to the American Rule and can't provide authority for approval of the fee defense provisions.

She agreed with the Creditor's Committee that ASARCO did acknowledge a contractual exception to the American Rule, but concluded that any such contract has to be consistent with other provisions of the Bankruptcy Code.

Okay in Market Argument?

Walrath asked the parties to provide evidence that similar indemnification provisions are normally provided to counsel in non-bankruptcy contexts.

The Creditor's Committee cited to numerous bankruptcy cases in which indemnification provisions and fees for defending fees have been approved, and noted that the UST guidelines permit award of such fees “if it is judicially allowed in the district.” In support of their market argument, they also cited to decisions in 11 states, including Delaware, where courts or state bar disciplinary authorities have held that similar indemnification provisions are permissible and don't “run afoul of the Model Rules of Professional Conduct.”

The UST argued that the Supreme Court's ruling in ASARCO precludes the court's consideration of the market in determining the reasonableness of the indemnification agreements.

The court didn't find the Creditor's Committee evidence to be compelling. According to the court, the UST guidelines generally state that the UST will object to requests for fees defending fee applications.

Ultimately, Walrath agreed with the UST, and said that the cases considering market factors all pre-dated ASARCO. Therefore, ASARCO prevents the court from “concluding that Section 328 permits defense fees even if they were routinely allowed by the market in bankruptcy or non-bankruptcy contexts prior to that ruling,” the court said.

The court also found that the fee defense provision isn't a “reasonable term of employment for serving as Committee Counsel.”

Ryan M. Bartley, Robert S. Brady, Patrick A. Jackson, Michael S. Neiburg, Young, Conaway, Stargatt & Taylor, LLP, Wilmington, Del., Sean Matthew Beach, Margaret Whiteman Greecher, Young, Conaway, Stargatt & Taylor, Wilmington, Del.; Elizabeth Soper Justison, Young Conaway, Wilmington, Del.; Nick S. Kaluk, III, My Chi To, Debevoise & Plimpton LLP, New York, N.Y., represented debtor Boomerang Tube, LLC, aka Oilfield Tubulars, LLC; Benjamin A. Hackman, Office of the United States Trustee, Wilmington, Del.; Hannah Mufson McCollum, Office of the United States Trustee, U. S. Department of Justice, Wilmington, Del., represented the United States Trustee; Derek C. Abbott, Daniel B. Butz, Curtis S. Miller, Morris, Nichols, Arsht & Tunnell, Wilmington, Del.; Daniel B. Butz, Morris, Nichols, Arsht & Tunnell LLP, Wilmington, Del., represented the Official Committee of Unsecured Creditors.

To contact the reporter on this story: Diane Davis in Washington at ddavis@bna.com

To contact the editor responsible for this story: Jay Horowitz at jhorowitz@bna.com