Under the American Rule, each party to a litigation is responsible for paying its own attorney fees, unless a statute or contract provides otherwise. Though this tenet is widely accepted, and seemingly straightforward, the application of statutory or contractual exceptions is not always clear cut.

In a recent article for The New York Law Journal, Partners Seth Lieberman, Patrick Sibley and Associate Matthew Silverman of Pryor Cashman's Bankruptcy, Reorganization + Creditors' Rights Group examined the bankruptcy bar's interpretation of parties' rights to recover attorney fees in the aftermath of the seminal U.S. Supreme Court decision, Baker Botts v. Asarco (2015). 

Asarco and its Impact on Fee Defense Litigation

Finding itself in dire financial straits, Asarco, a mining and refining company, filed for Chapter 11 bankruptcy in 2005. As part of its reorganization efforts, the company engaged two law firms, whose retentions were subject to two related provisions of the Bankruptcy Code.

The first provision, §327, allows a bankruptcy trustee or debtor-in-possession to employ professionals - including attorneys, accountants and financial advisors - to facilitate a reorganization, provided they hold no interest adverse to the bankruptcy estate. The second provision, §330, authorizes a bankruptcy court to award "reasonable compensation for actual, necessary services" performed by a professional retained pursuant to §327.

Over the course of the four-year bankruptcy, Asarco's attorneys successfully reorganized the company such that it emerged from Chapter 11 with a leaner balance sheet and was able to repay its creditors in full. Yet, when the law firms sought to have their fees approved by the bankruptcy court, Asarco challenged their requested compensation. The bankruptcy court ultimately rejected Asarco's challenge and granted the law firms their fees for time spent defending their fee applications.

Appeals followed, and the issue of whether the law firms were entitled to payment of their fees for time spent defending fee applications made its way to the U.S. Supreme Court. The Court ruled that §330 does not permit an award of attorney fees for work performed defending fee applications, reasoning in part that compensation for fee-defense litigation is not compensation for work done in service of the estate, and therefore is not recoverable under the statute.

The Bankruptcy Bar Reacts to Asarco

"Asarco was greeted by some in the bankruptcy bar with dismay," the co-authors wrote. "Requiring counsel to shoulder the costs of defending challenges to their fees, the thinking goes, is unfair in light of the unique dynamics of the typical bankruptcy case;" namely, the volume of potential challengers in a bankruptcy case. 

The authors went on to note that, since Asarco, bankruptcy and estate professionals and financial advisors have attempted to sidestep its holding by focusing on the "contract exception" to the American Rule. Courts, meanwhile, have taken varying approaches to limiting Asarco's reach.

In one post-Asarco case, In re Nortel Networks (2017), the bankruptcy court was tasked with deciding, among other things, whether a law firm that represented an indenture trustee was entitled to fees for work performed defending its fees. In finding that the indenture trustee and its lawyers were entitled to payment of their fees for the fee dispute, the court focused on the language of the indenture, which required the debtors to "indemnify the Indenture Trustee for 'costs and expenses of defending itself,'" concluding that the indenture amounted to a contract which qualified for an exception to the American Rule.

"Nortel demonstrates that, even after Asarco, courts might allow fees and expenses for defending fee applications where recovery is based on contractual or applicable non-bankruptcy law rather than express statutory authority under the Bankruptcy Code," the authors explained. "This distinction could prove critical to oversecured creditors who, pursuant to the Bankruptcy Code, seek to have fees and costs incurred defending a fee application included in their allowed claim based on the agreement or non-bankruptcy statute under which their claim arose."

Guidance for Parties Relying on the American Rule

The authors recommended that any party relying on the contract exception of the American Rule "include language broad enough to allow for the reimbursement of fees, including reimbursement for defending their own fees."

To read the full article, please click here.

Representative Bankruptcy Matters

Over the past decade, Pryor Cashman has represented indenture trustees in many of the largest U.S. bankruptcies, including:

To learn more about our work in this area, please visit our  Bankruptcy, Reorganization + Creditors' Rights practice page.

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