Justices divide on lawyers' right to 'fees on fees'

Law firm sought additional fees for defending challenge to fees

By Steve Lash
The Daily Record Newswire
With millions of dollars at stake in this case alone, Supreme Court justices appeared divided Wednesday on whether lawyers for companies in bankruptcy proceedings are entitled to compensation for defending the fees they request or have already been awarded.

Justice Sonia Sotomayor objected to such compensation, saying attorneys defend their fee awards out of “self-interest” and not in support of their client company or trustee, who may in fact be the one challenging the fee.

But Justice Ruth Bader Ginsburg said the fee litigation is part of the bankruptcy proceeding and warrants compensation under the Bankruptcy Code.

“It seems to me that it is all one package,” Ginsburg said “There is a fee application and then there is a reply.”

The case before the high court concerned Houston-based law firm Baker Botts LLP’s representation of copper-mining giant ASARCO LLC in a complex Chapter 11 bankruptcy proceeding in 2005. Tucson, Ariz.-based ASARCO ultimately emerged from bankruptcy, having paid its creditors in full, about $3.6 billion.

Baker Botts applied for $113 million in attorney’s fees, $6 million in court costs and an “enhancement” of 20 percent, or $4.2 million, for the quality and value of its work. That included resolving environmental, tax, tort and labor liabilities and retrieving $7 billion from ASARCO’s parent company, Tucson-based Americas Mining Corp.

The parent challenged the $123 million fee application but lost after a six-day trial in U.S. Bankruptcy Court in Corpus Christi, Texas.

Baker Botts then sought additional fees of $8 million for defending against the challenge and was awarded $5 million.

The parent company appealed, arguing the Bankruptcy Code does not permit attorneys to collect fees for defending a fee award, referred to in the legal community as “fees on fees.”

The U.S. District Court in Corpus Christi affirmed the award.

But the 5th U.S. Circuit Court of Appeals reversed, saying attorneys’ fees under Section 330(a) of the Bankruptcy Code are available for work “reasonably likely to benefit the debtor’s estate” or “necessary to the administration of the case.”

“Fees on fees” are unavailable in bankruptcy court because such litigation seeks to benefit the attorney, not the estate, and does not involve case administration, the 5th Circuit ruled, prompting Baker Botts’ petition to the Supreme Court.

The San Francisco-based 9th U.S. Circuit Court of Appeals, and most lower courts that have considered the issue, have approved “fees on fees,” the certiorari petition noted.
The Supreme Court took the case to resolve the matter.

Whose benefit?
Appearing before the justices on Wednesday, Baker Botts’ partner Aaron M. Streett argued that the “broad, open language” of the Bankruptcy Code gives judges discretion to compensate attorneys for the defense of their fee awards to ensure the lawyers remain justly compensated for taking on these often complex and protracted cases.

The initial fee award would “be diluted” if attorneys were denied compensation for their costs in defending that award, Streett said.

“The National Associations of Trustees support Baker Botts’ position on this point, because it’s not just a small expense that can be counted as overhead…,” Streett added later. “The litigation cost [of defense] will eat up all the core fees.”

But Chief Justice John G. Roberts Jr. pointed out that the “American Rule” of civil litigation generally does not provide for an award of attorneys’ fees, much less fees for the defense of such awards.

Congress would have stated so “more clearly” in the Bankruptcy Code if it wanted to permit attorneys to collect fees on fees, Roberts said.

Attorneys generally are not awarded litigation costs when they sue a client for not paying their fee, he added.

Sotomayor said the Bankruptcy Code is concerned principally with the benefit and administration of the estate, whereas the defense of attorneys’ fees are a concern exclusively of the attorney.

“There is a self-interest,” Sotomayor said. “It puts more money in your pocket, not more money in the estate’s pocket.”

In response to another question from Sotomayor, Streett said the idea that fee litigation is adverse to the estate “cannot be right,” since the Bankruptcy Code “requires you to litigate the fee application if it’s challenged.”

Kagan’s ‘cab fare’
Assistant U.S. Solicitor General Brian H. Fletcher also appeared before the justices to press the Obama administration’s support for the award of fees on fees in bankruptcy cases.

The additional compensation ensures that attorneys’ initial fee awards are kept “whole,” Fletcher said.

Addressing a point Roberts raised, Fletcher said a bankruptcy attorney defending a fee award faces greater challenges than a lawyer suing a client for unpaid fees. In bankruptcy, any party to the proceeding, including creditors, can object to a fee award and challenge it in court, driving up the attorneys’ costs, Fletcher said.

“It’s not just the client that you have to please,” he added.

But Jeffrey L. Oldham, the parent’s attorney, picked up on Sotomayor’s concern and said an attorney’s defense of a fee award is “self -interested litigation” that is not compensable.

“When fee litigation arises … you pay your own way,” said Oldham, of Bracewell & Giuliani LLP in Houston.

But Justice Elena Kagan, like Ginsburg, said the defense of attorneys’ fees is as much “a normal part of the process” of bankruptcy as the work that led to the initial award of fees.

Kagan likened the initial award of fees to her offering someone $10 to shovel her driveway but then telling the person she would pay him or her at the courthouse. The person’s $5 cost of travel to the court would be like an attorney’s cost of defending the award.

“You [the attorney] also have to be paid for the cab fare,” Kagan said.

The Supreme Court is expected to render its decision in the case, Baker Botts LLP v. ASARCO LLC, No. 14-103, by the end of June.


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