In a decision that will have profound implications for insolvency professionals of all types, the U.S. Supreme Court has agreed to hear an appeal of the 5th U.S. Circuit Court of Appeals’ decision that Section 330 of the U.S. Bankruptcy Code does not allow applicants to seek compensation in connection with successful defenses to objections to fee applications.
The case, styled as ASARCO LLC v. Jordan Hyden Womble Culbreth & Holzer P.C., et al., stems from the four-plus year Chapter 11 proceeding of ASARCO LLC, the copper mining, smelting, and refining giant. That proceeding culminated in confirmation of a plan of reorganization that left the company with little debt and $1.4 billion in cash, and resolved potentially difficult environmental, asbestos, and toxic tort claims. ASARCO’s plan was funded with the proceeds generated from fraudulent transfer litigation between ASARCO and its corporate parent. The judgment, valued at between $7 billion and $10 billion, was the largest in the history of Chapter 11.
In their final fee applications, the law firms of Baker Botts LLP and Jordan Hyden Womble Culbreth & Holzer P.C., which served as debtors’ counsel during the Chapter 11, sought compensation based on a lodestar calculation, a 20 percent fee enhancement for the successful result of the case, and expenses incurred in preparing and litigating their final fee applications. This final piece of counsels’ application became important when ASARCO (now under the control of the corporate parent against whom the massive fraudulent transfer judgment was obtained) challenged the fees requested and a drawn-out litigation ensued in which counsel incurred $5 million in additional fees.
As part of the discovery process, Baker Botts was required to produce every document it created as part of the bankruptcy. The firms responded with more than 2,300 boxes of documents and almost 190 GB of data. Ultimately, a six-day trial was required to resolve ASARCO’s objections, after which the bankruptcy court approved all of counsels’ core fees, which totaled $120 million in the aggregate, and awarded fee enhancements for the work performed in the fraudulent transfer litigation. The court also authorized payment of the fees and expenses exceeding $5 million incurred by the firms in litigating the defense of their fees. On appeal, the District Court agreed that the fees incurred to defend counsels’ core fees were compensable under the Bankruptcy Code.
Noting that the plain language of Section 330(a) of the Bankruptcy Code, which governs the compensation of professionals in bankruptcy cases, did not explicitly authorize the payment of fees incurred in fee application litigation, however, the 5th Circuit reversed the lower court rulings. The appellate court observed that, under Section 330(a), compensation is not allowed for services—like fees incurred defending fees—that are not reasonably likely to benefit the debtor’s estate or necessary to the administration of the bankruptcy estate.
The court also noted that Section 330(a)(6) of the code, which specifically authorizes fee awards for time expended preparing fee applications “based on the level and skill reasonably required to prepare the application,” was fundamentally different than authorizing fees related to litigation over the reasonableness of fee requests. The court concluded that requiring professionals to defend their fee applications without estate compensation was “a cost of doing business consistent…with the reality of the bankruptcy process.”
The Supreme Court’s review of the 5th Circuit’s ruling, which deviates from prior rulings of the 9th U.S. Circuit Court of Appeals and a number of lower courts throughout the country, will be closely watched by bankruptcy practitioners for obvious reasons. Indeed, a Supreme Court ruling barring professionals from being compensated by the estate for successfully defending against challenges to their fees would provide considerable leverage to fee examiners and other parties willing to use the adversary process as a means to reduce the administrative costs of Chapter 11 restructuring and liquidation.