Ordinarily, we would not go back over ground already covered by Bill Rochelle in his excellent Rochelle’s Daily Wire feed. However, we’ll make an exception for anything related to the U.S. Supreme Court’s Baker Botts, L.L.P. v. ASARCO, LLC opinion, an opinion that we’ve covered extensively. In short, Bill pointed all of us to an October 26, 2016 Middle District of Florida decision in In re Stanton wherein esteemed bankruptcy judge Michael G. Williamson held that the Supreme Court’s prohibition on fee-defense costs does not, generally speaking, apply to a fee applicant’s efforts in supplementing a fee application.
Refresher on Baker Botts
As a refresher, a 6-3 Supreme Court held in Baker Botts that professionals employed under § 327(a) of the Bankruptcy Code may not, under § 330(a), recover as compensation fees incurred in defending their bankruptcy fee applications. Application preparation, however, is compensable.
The Facts of Stanton
In re Stanton is a converted Chapter 7 bankruptcy case. The Chapter 7 trustee had employed two lawyers in the case–Herb Donica, generally, and Ed Rice, as special counsel. Donica filed a fee application requesting $748,875 in fees. Those fees covered 2,000 hours in 2 categories: time spent in the main case and time spent pursuing a fraudulent conveyance. In particular, the avoidance action resulted in a $6.5 million settlement recovery for the estate.
However, the United States Trustee (UST) objected to Donica’s fee application. Although the application complied with the requirements of a typical Chapter 7 fee application, the UST insisted that the application satisfy the more rigorous requirements of a Chapter 11 fee application. Specifically, the UST requested more of a breakdown of Donica’s time in the main case; more of a breakdown of the labor as between Donica and Rice (to assess potentially redundant services); and a more detailed narrative of the results that Donica obtained for the bankruptcy estate.
Donica saluted by supplementing his application. Ultimately, the supplement resolved all informational objections. Additionally, Judge Williamson resolved all objections as to duplication of services in Donica’s favor. With that, Donica filed a follow-up application for the time that he spent preparing and then supplementing his fee application. In total, he billed $33,840 for the 2 fee applications. The UST, joined by the IRS, objected to $27,520 of the $33,840 on Baker Botts grounds.
Time Spent Supplementing a Fee Application is Generally Compensable
Judge Williamson held that Donica’s time spent preparing and supplementing the initial fee application was compensable. He reasoned that time spent supplementing a fee application is more akin to the compensable preparation of a fee app than it is to the non-compensable defense of a fee app.
First, Judge Williamson provides a faithful and general summary of the holding in Baker Botts.
Second, he drills down on Justice Thomas’ Baker Botts mechanic’s analogy to resolve the UST’s objection. That is, Judge Thomas, in holding that fee application preparation is a compensable service to the bankruptcy estate, analogized to a mechanic’s bill. As it goes, preparing the mechanic’s bill is a service to a customer because it permits him to understand what services were provided, but arguing with the customer about the bill is not a service.
[We’ve never been big fans of Justice Thomas’ analogy, but Judge Williamson’s reliance on it doesn’t produce a wrong result.]
With that in mind, Judge Williamson concludes that the $27,520 that Donica spent in supplementing his application and responding to the UST’s primarily informational objections was more akin to fee application prep than it was to fee application defense. That is because the additional information better-positioned the UST and other interested parties to understand the services and, if necessary, object to them. Therefore, the supplement benefited the estate–the existence of which benefit is, as Judge Williamson explains, the “touchstone” for determining whether professional fees are recoverable after Baker Botts.
As Judge Williamson viewed it, the parties were not fighting over the amount of the bill as much as they were fighting about whether the bill was detailed enough. Indeed, the parties in Stanton disputed whether Donica’s Chapter 7 fee app even needed to have the additional detail that is required in a Chapter 11 fee app. The UST requested the additional info and the Court agreed that it was a reasonable request. However, Judge Williamson reasoned that whether Donica had provided that information in the initial fee application or had provided it via a supplement, it was all compensable preparation time under Baker Botts.
Finally, Judge Williamson addressed, but ultimately rejected, 2 of the UST’s concerns.
First, he rejected the UST’s fear that the judge’s ruling would cause applicants to file bare-bones fee apps on the understanding that they could always supplement. He rejected that fear because applicants are compensated for all of their reasonable fees in preparing a fee application.
Second, he rejected the UST’s insistence on a bright-line rule that all supplementation is unrecoverable. He rejected that bright line rule because he believed that it might encourage just the opposite: overdisclosure so as to avoid unrecoverable supplementation. If the overdisclosure is still reasonable then it is still recoverable. And if it is unreasonable, then litigation over reasonableness and, thus, expenses would increase.
Last year in our first Baker Botts post, we concluded that fees incurred in correcting and explaining a fee application after a fee application is served likely amount to “defending” the applicant’s fees and, thus, are not recoverable. However, now that we’ve read Judge Williamson’s opinion, we think he gets it right. As Judge Williamson puts it, better than we can, the “takeaway from the Supreme Court’s decision in Baker Botts is clear: it is the nature of the work–not when it is performed–that determines whether it is compensable.”
Therefore, if the detail provided is necessary for the administration of, and benefits, the estate, then the fees in providing it should be recoverable.