© 2015 The Texas Lawbook.
By Mark Curriden
(June 15) – Lawyers who vigorously fight with their own clients in bankruptcy court over legal fees cannot seek reimbursement for the time they spent battling over those fees – even if the bankruptcy judge rules the lawyers did a great job and deserve the money, the Supreme Court of the United States ruled Monday.
In a six to three decision, the justices ruled that ASARCO does not have to pay Baker Botts the $5 million in time the law firm spent fighting the copper mining company over the $120 million in legal fees that the bankruptcy judge awarded the Houston-based firm.
Justice Clarence Thomas, writing for the majority, said the bankruptcy law “does not authorize the award of fees for defending a fee application, and that is the end of the matter.”
“Congress has not granted us roving authority to allow counsel fees whenever we might deem them warranted,” Justice Thomas said.
Legal experts say the impact of the decision is unclear, but it gives debtors and creditors a tool in negotiating lower legal fees at the end of a bankruptcy case.
“This decision could bring about more fights over fees, which means it could make bankruptcy even more expensive,” said Godwin Lewis bankruptcy partner Sid Scheinberg.
While businesses only rarely object to the fees awarded to lawyers by bankruptcy judges, the cases where it does happen can be very expensive and time consuming because the amount of legal bills in complex bankruptcies, such as those in the Radio Shack and Energy Future Holdings cases, can exceed tens of millions of dollars.
“It remains to be seen whether this decision will give creditors and debtors a tactical tool to effectively seek lower fees, especially if the parties think the lawyer fees are too high,” said Bill Wallander, a partner in the bankruptcy section at Vinson & Elkins.
Wallander, who is chair of the Bankruptcy Section of the State Bar of Texas, said companies that frivolously fight legal fees could face the wrath of bankruptcy judges who can still issue sanctions and penalties against companies they feel are misusing the court proceedings.
“The facts in the ASARCO case are very unique,” Scheinberg said.
ASARCO, a subsidiary of Grupo Mexico, hired Baker Botts to file for restructuring and reorganization in U.S. Bankruptcy Court in Corpus Christi in 2005. The mining, smelting and refining company faced huge fines and clean up costs at nearly 20 locations that the U.S. Environmental and Protection Agency identified as Superfund sites.
By all accounts, Baker Botts did a superb job for its client in bankruptcy court. The law firm obtained a $7 billion judgment against ASARCO’s parent company on fraudulent transfer claims. All of ASARCO’s creditors were paid in full and the company emerged from bankruptcy with $1.4 billion in the bank.
The bankruptcy judge awarded about $120 million in fees to the lawyers, including a $4.1 million bonus enhancement for a job well done.
The newly formed ASARCO objected to the lawyer fee award. The company demanded that Baker Botts turn over six million pages of documents stored in more than 2,000 banker boxes. It also wanted and received 189 gigabytes of electronic data.
At the end of a six day trial, the bankruptcy judge found in favor of Baker Botts and awarded the law firm an additional $5.2 million in legal fees to cover the cost of ASARCO’s nasty and expensive fight over lawyer fees.
On Monday, the five conservative justices and Justice Sonia Sotomayor rejected Baker Botts’ request, stating that the bankruptcy law simply didn’t allow for the extra award of litigation fees.
“ASARCO has argued from the beginning that the Bankruptcy Code’s plain text does not authorize Baker Botts’ attempt to get paid from estate funds for its purely self-interested work litigating over its underlying fee requests,” said Jeffrey Oldham, a partner for Bracewell & Giuliani in Houston who represents ASARCO in the case.
Aaron Streett, a partner in Baker Botts’ Houston office, said he was disappointed that the law firm would not be compensated “for defeating meritless objections” to the fee application.
“We are gratified that the Court recognized Baker Botts’ exceptional performance in the ASARCO bankruptcy, which led to the Fifth Circuit affirming a $4.1 million bonus for Baker Botts’ extraordinary performance and results—an outcome that remains undisturbed by the Supreme Court’s opinion,” Streett said in an email.
Martin Sosland, a bankruptcy partner at Weil, Gotshal & Manges in Dallas, said Monday’s decision is unfortunate.
“It makes it easier for certain parties to file tactical fee objections that are akin to strike suits, where the burden placed on the applicant to respond to the fee application is disproportionate to the cost to the objecting party of lodging the objection, where lack of merit in the objection does not change this circumstance,” Sosland said.
Sosland points out that Baker Botts won at trial and its fees were found to be reasonable.
“It was even awarded an enhancement because of the exceptional value of its services,” he said. “Once the objection was filed, [Baker Botts] faced a dilemma – cut fees that were reasonable to begin with or spend millions defending the fee application.”
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