They’re Rare and They’re Exceptional: Fee Enhancement Authorization by Bankruptcy Courts
By: Adrianna R. Grancio
St. John’s Law Student
American Bankruptcy Institute Law Review Staff
Recently, in In re Asarco,[i] the Fifth Circuit held that a bankruptcy court did not abuse its discretion in authorizing fee enhancements to two law firms representing a chapter 11 debtor in connection with their remarkably successful fraudulent transfer litigation.[ii] The Fifth Circuit also agreed with the lower court decision in rejecting compensation for the defense of fee applications[iii]. In In re Asarco, Baker Botts L.L.P. (“Baker Botts”) and Jordan, Hyden, Womble, Culbreth & Holzer, P.C. (“Jordan Hyden”) served as debtor’s counsel to the chapter 11 debtor and helped the debtor confirm a plan that paid creditors in full[iv]. In connection with that representation, Baker Botts and Jorden Hyden successfully prosecuted complex fraudulent transfer claims against the debtor’s parent corporation resulting in an unprecedented judgment valued at between $7 and $10 billion.[v] While Baker Botts and Jordan Hyden were compensated pursuant to section 330(a) of the Bankruptcy Code, the bankruptcy court authorized a twenty percent fee enhancement for Baker Botts and a ten percent fee enhancement for Jordan Hyden.[vi] The bankruptcy court based the authorization of the fee enhancements on the “rare and exceptional” performance of the firms in successfully prosecuting a multi-billion dollar fraudulent conveyance action and the fact that the rates charged by Baker Botts were roughly twenty percent below market rate.[vii] On appeal to the district court, the fee enhancements were affirmed.[viii] After the parent corporation appealed again, the Fifth Circuit affirmed the lower court’s authorization of the fee enhancements.[ix] Further, the Fifth Circuit, ruling in line with the Eleventh Circuit[x] held that based on the plain meaning reading of Section 330(a) compensation for the cost counsel or professionals incur in defending fee applications is not permissible.
Compensation of attorneys in bankruptcy cases is governed by section 330 of the Bankruptcy Code, which states a court may award to a “professional person employed’ . . . “reasonable compensation for actual, necessary services rendered . . . .”[xi] However, case law has been crucial in defining the factors that courts consider in determining whether the proposed compensation is reasonable.[xii] For example, in Johnson v. Georgia Highway Express, Inc.,[xiii] a non-bankruptcy case that has been relied upon by many bankruptcy courts and has largely been codified in in section 330(a)(3), the court listed twelve factors (“Johnson Factors[xiv]”) to be used in determining how to award attorney fees.[xv] In addition to the factors listed in section 330(a)(3), courts also utilize the lodestar method when determining attorney fees.[xvi] The lodestar method consists of multiplying the number of hours of work performed by the attorneys by the hourly rates.[xvii] Following calculation of compensation under the lodestar method, courts have the discretion to either increase or decrease the award to reflect consideration of the Johnson factors.[xviii] Section 330(a), the lodestar method, and the Johnson factors all work together to guide a court in determining the compensation awarded to attorneys.[xix] However, in addition to standard compensation under section 330, courts have held that in “rare and exceptional circumstances” the bankruptcy court has the discretion to enhance the award to the attorneys.[xx] For example, in Asarco, the Fifth Circuit focused almost exclusively on the result obtained by the two firms as the main impetus for the fee enhancement. The Fifth Circuit acknowledged that a judgment which both saved a company and funded a one hundred percent recovery for all parties involved was a “once in a lifetime result,” thereby emphasizing the importance of the rare and exceptional nature of the results Baker Botts and Jordan Hayden obtained.[xxi] In regards to compensation for defense of fee applications, the court indicated that section 330(a)(6) explicitly only allows for possible compensation for the preparation of a fee application, and not the defense of such fee litigation.[xxii] Additionally, 330(a)(6) emphasizes the skill in putting together the application rather than the skill in defending the application, further supporting the interpretation that compensation for defense of a fees are not permissible.[xxiii] The court reasoned that services are only compensable if they are likely to benefit a debtor’s estate or are necessary to case administration.[xxiv] However, the primary beneficiary of a professional fee application is the professional, not the debtor’s estate.[xxv] The Fifth Circuit in ruling on the issue also rejected multiple arguments in favor of issuing reimbursement for defense of fees such as the necessary quality of fee litigation, fee defense being similar to federal fee shifting statutes and non-reimbursement of fee defense costs unfairly diluting bankruptcy compensation.[xxvi]
Ultimately, the Asarco decision is important because while the Fifth Circuit allowed the fee enhancements at issue, the court emphasized how rarely courts should grant fee enhancements only in “rare and exceptional circumstances[xxvii].” Therefore, the Fifth Circuit’s decision to uphold the fee enhancements seems to be based more on the “once in a lifetime result”[xxviii] obtained by the two firms in the bankruptcy litigation than it was on the fact that the firms charged below-market rates. Accordingly, a law firm should not undercut its rates when seeking to represent a debtor or committee solely with the hopes of receiving a fee enhancement for the mere fact that it charged below market rates. This is not to say that there are not reasons for a law firm to charge below-market rates. Law firms are currently faced with more competition for few cases because as with all bankruptcy filings, the number of business chapter 11 filings have decreased recently[xxix]. As a result, a law firm may want to undercut the prevailing market rates, which may already be facing downward pressure because of this increased competition for representations, in order to get retained in the first place. Additionally, compensation for defense of fee litigation, while impermissible at the moment may provide firms representing debtor or creditor committees with new sources of revenue. However, final review of the bankruptcy court’s ability to charge for defending fee applications is pending before the Supreme Court as they have granted certiorari as of October 2, 2014.[xxx]
[i] Asarco, L.L.C. v. Baker Botts, L.L.P. (In re Asarco), 751 F.3d 291 (5th Cir. 2014).
[ii] In re Asarco 751 F.3d at 299.
[iv] Id. at 296.
[v] Id. at 293.
[vi] Id. at 294.
[x] Grant v. George Shumann Tire & Batt. Co., 908 F.2d 874, 882-883 (11th Cir. 1990)
[xi] 11 U.S.C. § 330 (a)(1)(A) (2012); Collier on Bankruptcy Colliers ¶ [330.01] (Alan N. Resnick & Henry J. Somme reds., 16th ed. 2014), available at LEXIS, 3 Collier on Bankruptcy P 330.01.
[xii] Id. at 330.03.
[xiii] Johnson v. Ga. Highway Express, Inc 488 F.2d 714 (5th Cir. 1974).
[xiv] In re Asarco 751 F.3d at 295 (citing the Johnson Factors: (1) the time and labor required; (2) The novelty and difficulty of the questions; (3) The skill requisite to perform legal services properly; (4) The preclusion of other employment by the attorney due to acceptance of the case; (5) The customary fee; (6) whether the fee is fixed or contingent; (7) Time limitations imposed by the client or other circumstances; (8) The amount involved and the results obtained; (9) the experience, reputation, and ability of the attorneys; (10) the ‘undesirability ‘of the case; (11) the nature and length of the professional relationship with the client; (12) awards in similar cases).
[xv] Id. Under section 330(a)(3), courts consider the time spent on services; the rates charged for services; whether the services rendered were necessary or beneficial to the completion of the case; whether the services were performed within a reasonable time with respect to their complexity; the board certification and or experience and skill in bankruptcy of the professional rending the services; and the reasonableness of the compensation based upon compensation charged by other professionals of comparable skill. See 11 U.S.C § 330(a)(3) (2012).
[xvi] In re Asarco, 751 F.3d at 295.
[xviii] In re Asarco, 751 F.3d 291, 295 (5th Cir. 2014) (citing Johnson v. Ga. Highway Express, Inc., 488 F.2d 714, 717-19 (5th Cir. 1974).
[xix] In re Asarco, 751 F.3d at 295 (citing Pilgrim’s Pride v. Neary, 690 F.3d 650, 656 (5th Cir. 2012)).
[xx] Id. Such cases occurred in Lawlor v. Toefan 807 F.2d 1207, 1213 (5th Cir. 1987), Pilgrim’s Pride Corp v. Neary 690 F.3d 650, 660 (5th Cir. 2012) and, Rose Pass Mines v. Howard See 615 F.2d 1088 (5th Cir. 1980). In each case, the bankruptcy court approved fee enhancements for lawyers based on exceptionally good results and nowhere did any of these courts enumerate any additional factor necessary to achieve such a fee enhancement. See In re Asarco, 751 F.3d 291, 295 (5th Cir. 2014) (citing Rose Pass Mines v. Howard, 615 F.2d 1088, 1092 (5th Cir. 1980); see also In re Asarco, 751 F.3d at 295.
[xxi] In re Asarco 751 F.3d at 296.
[xxii] Id. at 300, 11 U.S.C. §330(a)(6) (2012).
[xxiii] In re Asarco 751 F.3d at 300.
[xxiv] 11 U.S.C. §330(a)(4), In re Asarco 751 F.3d at 299.
[xxv] In re Asarco 751 F.3d at 299.
[xxvi] Id. at 300 (rejecting the first argument that defense of fee’s is necessary by stating that it is not necessary due to bankruptcy rules calling for detailed billing which almost always eliminates the need for litigation on the issue. Court rejects the second argument that the defense of fees is similar to federal fee shifting statutes where counsel is compensated for litigation of fee awards. However, the court points that federal fee shifting statutes were intended for financially disadvantaged plaintiffs not applicable to the bankruptcy sphere. Lastly in regards to unfair fee dilution, the court acknowledged that it is the cost was not drastic and only accounted for 4.4% of the core fee, therefore no unfair dilution).
[xxix] United States Courts, http://www.uscourts.gov/Statistics/JudicialBusiness/2013/us-bankruptcy-courts.aspx (last visited Nov. 26, 2014) (Table 7 depicting a 9.7% decrease in chapter 11 cases filed from 2009- 2013).
[xxx] SCOTUSblog Coverage: Baker Botts, L.L.P v. ASARCO, L.L.C , scotussblog, http://www.scotusblog.com/case-files/cases/baker-botts-l-l-p-v-asarco-l-l-c/ (last visited Nov. 26, 2014).