Bankruptcy Lawyers Can’t Get Paid Their Fees in Defending Their Fees?? The Supremes Got It Right
Monday, June 22, 2015
“Stop in the name of love, before you break my heart”
That’s what bankruptcy lawyers are now proclaiming in the wake of Baker Botts v. Asarco, in which the Supreme Court held that the debtor’s law firm could not be paid its “fees on fees” in defending against an objection to their fees. Two disclaimers. First, our firm represented the winning party in Baker Botts. Second, I am a bankruptcy lawyer and I would like to be paid all of my fees, including fees on fees. But it ain’t right or, at least, it ain’t what Congress authorized in Bankruptcy Code § 330.
Baker Botts presented a conflict between competing principles. The first principle is the American Rule, which says that each party to litigation pays its own fees unless there is law that expressly provides otherwise. The second principle is that, in Chapter 11, estate professionals must file applications to approve their fees and anyone in the case can object. Because of this second principle, as well as the multi-party dynamics of Chapter 11 proceedings, there may often be the need to defend fees in a Chapter 11 setting.
Now let’s review for reality. Lawyers in the restructuring/Chapter 11 world have some of the highest hourly rates in the legal profession. For example, a recent fee application in the Energy Future Holdings case shows the debtor’s lawyer hourly rates as high as $1,325/hr. This is understandable (in my unbiased opinion as a bankruptcy lawyer!), for two primary reasons. First, the highest rates are charged in the largest cases with the most money at stake, and effective (or ineffective) counsel can often move the needle substantially as to the debtor’s reorganization prospects and creditor recoveries. Second, the restructuring/Chapter 11 world often presents higher payment risk, self-evidently because the borrower paying the fees is in financial distress.
Add to all of this that there is nothing in Bankruptcy Code § 330(a) that specifically abrogates the American Rule as to defending against fee objections. The appellant, as well as the US government as an amicus, did not seriously dispute this but basically said that “bankruptcy is different, the American Rule shouldn’t apply, the policy should be not to discourage estate professionals by imposing additional fee risk.” While the dissenting opinion agreed with this, the majority opinion said, in effect, “we read the law as it is written, not as parties think it should be written, and the American Rule is the American Rule.”
The bankruptcy world has gone berserk in terms of internet publications and blog postings, asserting that Baker Botts will discourage counsel from representing debtors and committees and encourage frivolous fee objections. As the other Supremes sang, slightly paraphrased, “Stop in the name of fees, before you break my heart.” But as they also sang, “Nothin’ can ever change this love I have for you,” and bankruptcy lawyers (me included) love charging impressive rates and participating in impressive cases.
Baker Botts was paid more than $100 million for its work, plus a multi-million dollar bonus. Nice work if you can get it. So show me one law firm who will now turn down a restructuring/Chapter 11 assignment, or jack up its rates further, because they might have to pay their own “fees on fees” responding to fee objections. Puh-leez, show me that law firm, because I will gladly take the assignment in their stead!
So, as Ann Landers often said, “quitcherbellyachin.”
Evan Flaschen is the chair of the Financial Restructuring Group at Bracewell LLP, described by Legal 500 as a "phenomenally committed team" that practices as a "seamless national firm" with "vast international experience." Who's Who Legal has named Evan as the 2015 "Most Highly Regarded Insolvency & Restructuring Individual in the World" who "is 'simply the best' according to our sources." His practice includes representation of many of the world's largest borrowers, institutional investors, private investment funds, Chapter 11 debtors and financial services...