Restructuring

Contributed by Katherine Doorley
This morning, in a 6-3 decision, the Supreme Court held in Baker Botts LLP v. ASARCO that under section 330(a)(1) of the Bankruptcy Code, estate professionals are not entitled to fees for defending fee applications.  The Court found that in drafting the Bankruptcy Code, Congress had not expressly departed from the American Rule, which provides that each side must pay its own attorney’s fees, unless a statute or contract provides otherwise. 
A more in-depth analysis of this decision will follow, but we wanted to alert our readers to this latest decision from what has been an active term for bankruptcy cases at the Supreme Court.
A few initial thoughts:

• The Supreme Court only addressed the fees awarded to Baker Botts for defending its fee applications, not the $4.1 million fee enhancement that Baker Botts was previously awarded for its “exceptional performance” or the time spent preparing the fee applications.
• The Supreme Court’s decision may result in an increase in meritless fee objections because there is no longer any obvious downside for creditors. Previously, if creditors had filed fee objections, the cost of defending those objections could have been recouped from the estate and would have diluted creditor recoveries.  After Baker Botts, creditors may decide to file more frequent objections to professional fee applications, including for strategic reasons.
• In addressing concerns about potential frivolous objections to fee applications, Justice Thomas pointed to Bankruptcy Rule 9011, which authorizes courts to impose sanctions for bad-faith litigation conduct. However, it is unclear whether the threat of sanctions under the generally high bar of Rule 11 would be a full deterrent to creditors seeking to use fee application objections as part of an overall litigation strategy.
• The “American Rule” provides that each litigant pays its own attorney’s fees, win or lose, unless a statute or contract provides otherwise. One potential result of the Baker Botts decision is that estate professionals will seek contractual language in their engagement letters and retention orders providing that the debtor will compensate the professional for any fees associated with defending fee applications.  It remains to be seen whether this contractual work-around will be upheld by courts.