Vol 13 (2016) - Issue 1

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Professional Fees Incurred Defending Fee Applications Not Compensable under US Bankruptcy Code – Baker Botts L.L.P. v Asarco LLC, 135 S. Ct. 2158 (2015)

Introduction
In US bankruptcy cases, the fees and expenses of professionals employed by a trustee and an official committee of unsecured creditors typically are paid from the bankruptcy estate. These professionals (referred to hereafter as 'Estate Professionals') must file applications for approval of their compensation; these applications are subject to review by the bankruptcy court, and to objections that may be lodged by any party in interest. Depending on the nature of the objections, Estate Professionals may incur significant fees defending their fee applications, even if the objections are not well founded.
In a landmark ruling issued on 15 June 2015, the US Supreme Court (the 'Court') held that the Bankruptcy Code does not permit a bankruptcy court to award compensation to an Estate Professional for fees incurred defending a fee application. The Court based its ruling on the so-called 'American Rule', which requires a litigant to pay its own attorney fees, win or lose, absent a statute or contract that provides otherwise. The Court concluded that in enacting Bankruptcy Code section 330, the primary section governing compensation of Estate Professionals, 'Congress did not depart from the American Rule'. In reaching that conclusion, the Court reasoned that to be compensable, the services in question had to be rendered to the estate administrator – despite a separate Bankruptcy Code provision that appears to permit compensation for services 'necessary to the administration of the case'.
The Court rejected the argument that disallowing compensation for defence of fee applications would 'dilute' compensation and result in bankruptcy professionals receiving less compensation than their non-bankruptcy counterparts, noting that under the US legal system, absent express statutory authorisation, attorneys generally are not entitled to counsel fees incurred in fee-defence litigation.

Background
ASARCO LLC ('ASARCO'), a copper mining, refining and smelting company, filed for protection under chapter 11 of the Bankruptcy Code in 2005. Pursuant to Bankruptcy Code section 327(a), ASARCO retained the law firms Baker Botts L.L.P. and Jordan, Hyden, Womble, Culbreth & Holzer, P.C., to assist it in the bankruptcy proceedings. ASARCO’s reorganisation was a resounding success. After successfully prosecuting multi-billion dollar fraudulent transfer claims against its former parent, the company emerged from bankruptcy in 2009 with USD 1.4 billion in cash and little debt. Unsecured creditors were paid in full, and the company was able to resolve massive environmental liabilities.