Attorney Fees in Bankruptcy May Increase Because of a Supreme Court Opinion

The recent Supreme Court opinion in Baker Botts L.L.P. v. ASARCO LLC makes some case law on the question of attorney fees in bankruptcy. The decision may end up causing higher attorney fees in bankruptcy cases. Phoenix bankruptcy attorney Thomas Salerno explains the decision in this report.

Thomas Salerno

Thomas Salerno

The case was a “battle of the giants,” says Salerno. ASARCO was a large mining company owned by a Mexican company, Grupo Mexico. It was alleged that Grupo Mexico had drained all of the cash and liquid assets out of ASARCO some time prior to the bankruptcy, which was filed in Texas. Grupo Mexico was sued in the bankruptcy to recover the assets that it had taken out of ASARCO in a fraudulent transfer action. It was, says Salerno, “an extremely contentious and ugly case.”

At the end, the bankruptcy judge ruled that the assets had been wrongfully taken out. Grupo Mexico wound up funding the reorganization of ASARCO and paying all creditors in full. As happens in contentious litigation, a lot of attorneys were involved, resulting in a lot of attorneys’ fees. One of the law firms was Baker Botts, representing ASARCO.

Once the case came out of bankruptcy, the lawyers were required to get approval from the bankruptcy court for payment of their fees. Grupo Mexico objected to the fee submission by Baker Botts. Their fees came to $120 million, plus a $4 million “premium” for doing a good job in getting all creditors paid in full. So litigation between Grupo Mexico and Baker Botts followed, also contentious. Baker Botts incurred $5 million additional fees defending their fee application. The case that went to the Supreme Court was the issue of whether Baker Botts should be paid in the fee approval litigation.

The various federal appellate circuits had different rules on the fee question. The 9th Circuit had the rule that the fees lawyers racked up defending their fee applications were compensable. The 5th Circuit, which covers Texas, had a rule that the fees a lawyer spends trying to collect fees in bankruptcy are not compensable. The Supreme Court decided, in a 6-3 decision, that they would follow the 5th Circuit rule. Salerno thinks that this decision will dramatically change corporate bankruptcy practice.

While it is true that Baker Bottss received a large fee award from the basic case, it is also true that they spent a lot of money collecting the fees. The trial to collect the fees was full-blown litigation, with depositions, witnesses, and a full trial. The Supreme Court essentially endorsed what is called the “American rule.” Absent a statute to the contrary, all parties to litigation pay their own attorney fees. The bankruptcy didn’t really change that rule, in the opinion of the Court. This ruling will affect anyone who is seeking to recover fees from the estate in bankruptcy.

Salerno points out that anyone can object to a fee application in bankruptcy. If there is an objection, the party seeking the fee approval will have to bear the costs of the proceeding. This will have an adverse effect on lawyers involved in complex matters like corporate restructuring.

Salerno opines that the ruling will have an unintended consequence. He says that counsel for debtors will probably charge more for bankruptcy work than for non-bankruptcy work. They will probably charge more to build in some padding in case they are forced into litigation to defend their fee applications.

Thomas J. Salerno is a partner in the Phoenix, AZ firm of Stinson Leonard Street LLP. He works in the Bankruptcy and Creditors’ Rights practice, and he represents distressed companies, acquirers and creditors in financial restructurings and bankruptcy proceedings, pre- and post-bankruptcy workouts, and corporate recapitalizations. The Legal Broadcast Network is a featured network of the Sequence Media Group.