Help Center

January ABI Journal Article Examines Potential Implications for Professional Fee Defense in Supreme Courts Upcoming Consideration of ASARCO Case

Alexandria, Va. — The Supreme Court’s upcoming consideration of In re ASARCO LLC could have potentially costly implications for bankruptcy professionals, according to the lead article in the January edition of the ABI Journal. “The U.S. Supreme Court will decide whether § 330(a) of the Bankruptcy Code grants a bankruptcy judge the discretion to award compensation for the defense of a fee application,” Gregory W. Werkheiser of Morris, Nichols, Arsht & Tunnell LLP (Wilmington, Del.) writes in “ASARCO and the High Cost of Getting Paid in the Fifth Circuit.” Oral argument in the ASARCO case is scheduled for Feb. 25. The issue before the Court stems from a recent decision of the U.S. Court of Appeals for the Fifth Circuit. That court held that compensation for a successful defense of a fee application is never authorized by § 330(a). The anticipated ruling from the Supreme Court will resolve a circuit split, with the Fifth and Eleventh Circuits and a handful of lower courts aligned on one side of the issue, while the Ninth Circuit and a host of lower courts permit recovery of professional fees. The challenge stems from the chapter 11 case and successful reorganization of copper mining company ASARCO. The debtor’s lead bankruptcy and litigation counsel, Baker Botts LLP, filed its fee and fee adjustments with the bankruptcy court, which were challenged by the debtor. Upon successful defense of its fee applications, Baker Botts was awarded $5 million by the bankruptcy court in fees incurred in defending its fee application. The Fifth Circuit reversed this decision, with the court observing that “the primary beneficiary of a professional fee application, of course, is the professional,” not the debtor’s estate. “According to the Fifth Circuit, bankruptcy judges already have the tools to quell the tactical misuse of fee objections by ‘practicing vigilance and sound case management’ to ‘thwart punitive or excessively costly attacks on professional fee applications,’” Werkheiser writes. The Fifth Circuit’s ruling proffered two potential suggestions to bankruptcy professionals, according to Werkheiser. Bankruptcy professionals “can anticipate the possibility of not being reimbursed for defending fee applications by (1) adjusting upward their hourly rates and (2) more thoroughly documenting their fee applications.” However, Werkheiser writes that such ad hoc rate modifications are not a viable solution because the U.S. Trustee Program recently implemented revised standards requiring professionals in larger chapter 11 cases “to establish that the compensation sought is reasonable as compared to the market measured by the billing practices of the applicant and its peers for bankruptcy and non-bankruptcy engagements,” and the USTP has a stated policy to “ordinarily object to fees that are above the market rate for comparable services.” “Moreover, requiring professionals to prophylactically more thoroughly document fee applications will simply increase the cost to estates of fee application preparation across the board.” It is unlikely to meaningfully reduce objections, which in Werkheiser’s experience are almost always tactically motivated, or to eliminate costly proceedings to resolve them. “If the Supreme Court embraces the view that § 330(a) never permits compensation for the defense of fee applications, then bankruptcy professionals will need to adapt their practices to the new reality that they will normally not be compensated for successfully defending their applications.” To obtain a copy of “ASARCO and the High Cost of Getting Paid in the Fifth Circuit,” published in the January issue of the ABI Journal, please contact John Hartgen at 703-894-5935 or via email at jhartgen@abiworld.org. ### ABI is the largest multi-disciplinary, nonpartisan organization dedicated to research and education on matters related to insolvency. ABI was founded in 1982 to provide Congress and the public with unbiased analysis of bankruptcy issues. The ABI membership includes more than 12,000 attorneys, accountants, bankers, judges, professors, lenders, turnaround specialists and other bankruptcy professionals, providing a forum for the exchange of ideas and information. For additional information on ABI, visit www.abiworld.org. For additional conference information, visit http://www.abiworld.org/conferences.html.