Delaware Bankruptcy Judges Expand Boomerang Tube Holding that Professionals Cannot Contract Around Baker Botts v. ASARCO

Contributed by Katherine Doorley
On February 8, 2016 we reported on the decision of Judge Walrath of the United States Bankruptcy Court for the District of Delaware in In re Boomerang Tube, Inc., which held that a provision in the engagement letter for counsel to the Unsecured Creditors’ Committee that required the estate to indemnify them for expenses incurred in any successful defense of their fees ran afoul of the Supreme Court’s ruling in Baker Botts v. ASARCO.  At the time, we speculated whether potential work-arounds still existed, whether other judges in Delaware and beyond would adopt Boomerang Tube, and, given Judge Walrath’s analysis, whether bankruptcy courts would reach a different conclusion involving indemnification provisions in engagement agreements entered into by debtors in possession with their own professionals.  
Subsequent to Judge Walrath’s ruling in Boomerang Tube, two of her colleagues in the Delaware bankruptcy court, Judges Sontchi and Shannon, adopted and expanded Boomerang Tube, indicating that Boomerang Tube is likely now the law in Delaware.
New Gulf Resources
Prior to the Boomerang Tube ruling, New Gulf Resources filed an application seeking to retain Baker Botts as counsel in its bankruptcy case.  Included in Baker Botts’ retention application was a request for approval of a “fee premium” payable in the event of litigation over Baker Botts’ fees.  Judge Shannon deferred consideration of the fee premium provision because, at the time, Boomerang Tube was fully-briefed and under consideration in front of Judge Walrath.  Subsequent to the Boomerang Tube decision, Judge Shannon filed a letter noting that he agreed with the holding of Boomerang Tube as well as with the result.  Judge Shannon requested that the parties submit an order clarifying the terms of retention in accordance with Boomerang Tube.
Samson Resources
On February 8, 2016, Judge Sontchi filed a letter in the Samson Resources bankruptcy case addressing pending applications to retain Kirkland & Ellis and Klehr Harrison Harvey Branzburg as counsel to the debtors in possession.  Both of the retention applications contained provisions regarding reimbursement of fees and expenses incurred in connection with participating in, preparing for, or responding to any action, claims, suit or proceeding related to the legal services provided under their respective engagement letters.  Judge Sontchi stated that he agreed with and “endorsed” the reasoning of Judge Walrath in Boomerang Tube and found Judge Walrath’s ruling “equally applicable” to professionals being retained by the debtor in possession.  Accordingly, Judge Sontchi stated that he would not approve the reimbursement provisions sought in the Kirkland and Klehr Harrison retention applications.
After these latest developments, it appears that the prohibition against contracting around ASARCO in Boomerang Tube is the law of the land, or at least of Delaware.  Although it remains to be seen whether bankruptcy courts outside of Delaware will follow the ruling in Boomerang Tube, or whether other courts will determine that Baker Botts did not prevent contractual work-arounds, contractual work-arounds no longer appear to be a viable option in Delaware bankruptcy courts.  It also remains to be seen if professionals will develop other creative solutions to recover fees associated with defending fee applications, or if professionals, at least in Delaware, will ultimately be forced to bear those costs.
Kate Doorley is an Associate at Weil Gotshal & Manges, LLP in New York.