Delaware Bankruptcy Courts Reject Attempts to Work Around Baker Botts

In June 2015, the United States Supreme Court in the case of Baker Botts, L.L.P. v. ASARCO, L.L.C., 135 S. Ct. 2158 (2015), issued a ruling that dramatically changed the landscape for professionals retained to represent bankruptcy debtors, trustees, and official creditors’ committees.  Attorneys and other advisors retained by a debtor, a trustee or an official creditors’ committee are known as “estate professionals,” because their retention in each case must be approved by the bankruptcy court, and their fees and expenses are paid from the debtor’s bankruptcy estate and are subject to review and approval pursuant to Section 330 of the United States Bankruptcy Code (“Bankruptcy Code”).  Bankruptcy Code Section 330(a)(1) provides that a Bankruptcy Court may award “reasonable compensation for actual, necessary services rendered.”
 
In Baker Botts the Supreme Court resolved an appellate court split and made clear that defense of a fee application is not necessary to the administration of the bankruptcy case and, therefore, bankruptcy judges do not have discretion to award compensation for the defense of a fee application under Bankruptcy Code Section 330(a).  In Baker Botts, the Supreme Court relied on the “American Rule” for attorney fee awards that each litigant pays for his or her own attorney’s fees, win or lose, unless a statute or contract provides otherwise.  Although the Supreme Court conceded that it had recognized departures from the American Rule in the past, it had only done so with instances of “specific and explicit provisions for the allowance of attorneys’ fees under selected statutes,” noting that such provisions generally authorize the award of “a reasonable attorney’s fee,” “fees,” or “litigation costs,” and usually refer to a “prevailing party” in the context of an adversarial “action.” Accordingly, the Supreme Court found that Bankruptcy Code Section 330(a)(1) did not fall within this description “because it neither specifically nor explicitly authorizes courts to shift the costs of adversarial litigation from one side to the other… as most statues that displace the American Rule do.”
 
Subsequent to Baker Botts, certain professionals in bankruptcy cases pending in the United States Bankruptcy Court for the District of Delaware have sought to gain prospective approval of fees that they may incur in connection with successfully defending fee applications by including an indemnification provision in their engagement agreements and/or the proposed order submitted with their retention application.  The United States Trustee (“UST”) for the District of Delaware, however, has objected to, or provided informal comments to, most if not all of these professionals’ retention applications, asserting that Baker Bottsprecludes approval of such an indemnification provision. 
 
On 29 January 2016, in the case of Boomerang Tube, Case No. 15­11247, 2016 WL 385933 (Bankr. D. Del.Jan. 29, 2016), Judge Walrath issued an extensive opinion on the approval of fee defense provisions under Bankruptcy Code Section 328(a).  In Boomerang Tube, professionals for the official committee of unsecured creditors sought to distinguish Baker Bottsby arguing, among other things, that because they were seeking approval of a fee defense provision under Bankruptcy Code Section 328(a), rather than Bankruptcy Code Section 330(a), Baker Bottswas not binding precedent.  Bankruptcy Code Section 328 is an express exception to Bankruptcy code Section 330, and allows compensation to professionals if approved in advance by the court not otherwise available such as fixed fees and contingent fees. 
 
The UST disagreed, asserting that although committee professionals were retained under Bankruptcy Code Section 328(a) (as opposed to Bankruptcy Code Section 327(a) as discussed in Baker Botts), they could only be paid pursuant to Bankruptcy Code Section 330(a) and therefore Baker Bottswas directly on point.  The court agreed with the UST, stating that “[n]either section 330 nor section 328 contain similar express language awarding attorneys’ fees for successful prosecution of a defense to a fee objection.” Consequently, the court held that “section 328, like section 330, does not provide an exception to the American Rule and cannot support the fee defense provisions at issue under the Supreme Court’s ruling in Baker Botts.”
 
Moreover, committee counsel argued that Baker Bottsacknowledged a contractual exception to the American Rule and that their retention agreements with the committee fall within that exception.  The court agreed with committee counsel that a contract exception to the American Rule was not precluded by Baker Botts.  However, it stated that retention agreements are “ultimately subject to approval (and modification) by the Court” and are not exceptions to the American Rule because they are not the “typical contract modifying the American Rule,” which is “a contract between two parties providing that each will be responsible for the other’s legal fees if it loses a dispute between them.” In support of this finding, the court also noted that a retention agreement between committee professionals and the committee could not bind the bankruptcy estate because it is not a party to the contract.  Judge Walrath concluded her opinion by expressly warning other professionals not to parse her decision to find other possible ways to avoid Baker Botts: “Such provisions are not statutory or contractual exceptions to the American Rule and are not reasonable terms of employment of professionals.”
 
After the Baker Botts decision was issued bankruptcy practitioners opined that there will likely be an increase in oppositions to fee applications because of the potential to minimize fee awards without additional cost to the bankruptcy estate.  The committee’s professionals in Boomerang Tubewere unsuccessful in eliminating the potential significant burden of having to expend substantial resources in defending its fee applications. 
 
Judge Walrath’s decision in Boomerang Tube is persuasive, but not binding on other courts.  It is inevitable that estate professionals will be making similar attempts in other bankruptcy courts to protect themselves in fee disputes and the Office of the United States Trustee will be opposing such attempts.  Since the Delaware bankruptcy courts are a bellwether for bankruptcy courts across the United States, Boomerang Tube will undoubtedly be cited and followed by many other courts.  Consequently, unless Congress amends the Bankruptcy Code to specifically permit compensation for fees incurred by professionals in defending objections to their fee applications, bankruptcy professionals will not be fully compensated for their work in the bankruptcy case to the extent that such professionals will be compelled to absorb fee application defense costs. 

Richard H Golubow is a founding member and the managing shareholder of Winthrop Couchot Professional Corporation, a premier bankruptcy, insolvency and financial restructuring law firm established in 1995 and located in Newport Beach, California. 
 
Devoting his practice to the areas of complex bankruptcy and business reorganisations, litigation, liquidations and acquisitions, Mr.  Golubow’s clients include debtors, creditors, creditor committees, bankruptcy trustees, assignees for the benefit of creditors, receivers and asset purchasers in a wide range of industries, including retail, manufacturing, distribution, importing, construction, entertainment, education, non-profit institutions, healthcare, hospitality, real estate, automotive, golf and country club, biotech, transportation, telecommunications and Internet businesses.

Richard can be contacted on +1 949 720 4135 or by email on rgolubow@winthropcouchot.com