DOJ to SCOTUS: Bankruptcy lawyers can bill for defending their fees

December 12, 2014

Baker Botts has to be feeling good about the amicus support it received this week at the U.S. Supreme Court, where the firm is trying to overturn a decision by the 5th U.S. Circuit Court of Appeals that not only cut $5 million from the fees awarded to Baker Botts in the Asarco bankruptcy but also held that the U.S. Bankruptcy Code, as a matter of law, precludes debtors’ lawyers from charging for the cost of defending their fee applications. Baker Botts persuaded the Supreme Court in October to take up the question, arguing that the Bankruptcy Code gives judges the authority to award fees for the successful defense of a fee application.

Among this week’s eight amicus briefs backing Baker Botts were filings by a group of bankruptcy bar associations, two former bankruptcy judges and nine bankruptcy professors. All of them agreed with the law firm that the 5th Circuit’s ruling dilutes overall fees for bankruptcy lawyers and discourages lawyers from taking bankruptcy cases – exactly what Congress was trying to avoid when it gave bankruptcy judges the discretion to award fees that put bankruptcy lawyers on a par with colleagues in other practices. In its amicus brief, the National Association of Consumer Bankruptcy Attorneys warned that individuals and small businesses won’t be able to find lawyers at all if the 5th Circuit ruling stands because the cost of defending their fee applications could swallow the fee awards themselves.

The most interesting of the amicus briefs for Baker Botts is from the Justice Department. I say that not because of the arguments advanced by Solicitor General Donald Verrilli on behalf of the U.S. bankruptcy trustees. The Justice Department quibbles a little bit with Baker Botts’ merits brief about which provision of the Bankruptcy Code justifies fees for the work expended to defend fee applications, but on the whole, Justice makes points similar to those of Baker Botts’ other amici. Instead, what’s notable about the DOJ brief is that the federal government changed its mind about whether judges can grant the fees.

As the filing acknowledges, when the Asarco fee dispute was in federal district court in 2011, the U.S. trustee took the position that the Bankruptcy Code bars compensation for the cost of defending a fee application – the essence of the 5th Circuit opinion. The Executive Office for U.S. Trustees subsequently issued guidelines that hedged on the question, saying fees for defending fee applications are “generally” not appropriate but judges may carve out exceptions in extraordinary cases.

In this week’s amicus brief, however, the government offered a firmer, broader policy on these fees. The Justice brief contends that when bankruptcy lawyers successfully fend off challenges to the core fees they have been awarded, they are entitled also to recover the cost of defending their fee application. The 5th Circuit’s contrary holding, the government said – aligning with Baker Botts and its other amici – creates a statutorily unjustified distinction between bankruptcy lawyers and lawyers in other practice areas who are permitted to seek fees in similar fee-shifting circumstances.

The background of this case makes it easy to see why Baker Botts was so distressed by the 5th Circuit’s ruling. Asarco was a subsidiary of Americas Mining Corporation, which is wholly owned by Grupo Mexico. After Asarco entered Chapter 11, Baker Botts accused the parent companies of stripping the metals producer of its key assets. The firm’s multibillion-dollar fraudulent conveyance case was so successful that every Asarco creditor ended up being paid in full. Baker Botts was eventually awarded $120 million in core fees and costs and a $4 million enhancement for its outstanding results in the fraud litigation. The firm was awarded an additional $5 million because Grupo Mexico – which controlled the reorganized Asarco after it emerged from Chapter 11 – vehemently opposed the firm’s fee application. It cost Baker Botts $5 million to defend its core fees from Grupo Mexico’s challenge.

Both Asarco and the U.S. trustee initially filed appeals to the 5th Circuit. The trustee ended up dropping its appeal, which challenged whether Baker Botts could be compensated for costs tied to its application for enhanced fees. The U.S. government took no position in Asarco’s case at the 5th Circuit, which challenged both the enhancement itself and the $5 million fees based on Baker Botts’ defense of its fee application. The Justice Department also did not volunteer any view when Baker Botts asked for Supreme Court review.

Typically, after the justices grant cert in a case in which the government has not taken a position, both sides will lobby the solicitor general for support. Neither Aaron Streett of Baker Botts nor Asarco counsel Jeffrey Oldham of Bracewell Giuliani would comment when I asked them about the Justice Department’s brief. Streett said in an emailed statement that the firm was “grateful for the strong amicus support from various bankruptcy bar associations, as well as from the United States, former bankruptcy judges, leading bankruptcy law professors, and national organizations who represent consumers and small businesses in bankruptcy.” Those amici, he said, “understand that the 5th Circuit’s decision creates an improper incentive for parties to raise meritless challenges to the fees earned by lawyers entitled to compensation under the Bankruptcy Code.”

Oldham said that Asarco and its lawyers “obviously think the 5th Circuit got it right,” adding that the issue is a matter not of policy interpretations but of what the Bankruptcy Code actually says. Asarco’s merits brief is due next month, when we will also find out about amicus support for its position.

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