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Baha Mar 2

(Some imagined or actual version of the Baha Mar Resort)

As we discussed in two prior posts (Part 1 and Part 2), on June 15, 2015, a 6-3 Supreme Court held in the Chapter 11 case of Baker Botts, L.L.P. v. ASARCO, LLC that bankruptcy professionals employed under Section 327(a) of the Bankruptcy Code may not, under Section 330(a)(1) of the Bankruptcy Code, recover as compensation fees incurred in defending their bankruptcy fee applications. Here’s a link to the combined post: Click Here.

In pertinent part, we submitted that some view Section 328(a) of the Bankruptcy Code as a possible Baker Botts workaround. Under § 328(a), a court may approve in advance “reasonable terms and conditions of employment” for a professional. Thanks to a heads-up from the folks at Law360, it appears that the United States Trustee in Delaware objected to the reliance by two unsecured creditor committees on § 328(a) as a Baker Botts workaround in two pending Chapter 11 cases: In re Boomerang Tube, LLC, et al. and In re Northshore Mainland Services, Inc., et al. (a/k/a the Baha Mar case).

Specifically, in those two cases, the Unsecured Creditor Committees filed their respective Applications to Employ Counsel: Boomerang App and Baha Mar App.

United States Trustee’s Objections

In the Boomerang case, the Committee proposed that, as “part of the compensation payable to Brown Rudnick, the Committee agrees that Brown Rudnick shall be indemnified and be entitled to payment from the Debtors’ estates, subject to approval by the Court pursuant to 11 U.S.C. §§ 330 and 331, for any fees, costs or expenses, arising out of the successful defense of any fee application by Brown Rudnick in these bankruptcy cases in response to any objection to its fees or expenses in these Chapter 11 cases.”

In turn, the proposed order on the Application provided as follows: “Brown Rudnick shall be indemnified and be entitled to payment from the Debtors’ estates, for any fees or costs arising out of the successful defense of any fee application by Brown Rudnick in response to any objection to its fees or expenses in these cases pursuant to section 328(a) of the Bankruptcy Code.” In the Baha Mar case, the Committee proposed to retain Whiteford, Taylor & Preston, LLC on the same terms, almost verbatim, in both the application and the proposed order.

Andrew Vara, the Acting United States Trustee in Delaware, objected to both applications, here and here. His more recent objection in the Baha Mar case fully captures his argument. First, he argues that § 328(a), like § 330(a), does not overcome the presumption under the American Rule that each party is to pay its own fees for fee defense work. Second, he argues that, regardless of whether the American Rule precludes approval of the proposed fee defense provisions, they cannot be approved because fee defense falls outside of the scope of § 328(a) because fee defense falls outside of the scope of the professional’s proposed employment. In other words, § 1103(a) permits a committee to retain a professional to provide “services” for the committee, but, after Baker Botts, fee defense costs cannot be a “service.” Indeed, the UST points to § 328(a) as addressing “how the professional is paid” and not the services “for which the professional may be paid.” [We agree with the Committee that the UST offers little support for its reading of § 328(a).]

Third, and for similar reasons, the UST argues that the provisions fail the “reasonable terms and conditions” test under § 328(a) because, if the Committees are proposing compensation for something that is not a “service,” then the provisions are unrelated to what a professional may be compensated for and, thus, are not reasonable under § 328(a). Fourth, he argues that, regardless of what § 328(a) contemplates, § 330(a) is still the “exclusive provision authorizing the ‘award’ of compensation.” Therefore, because fee defense is not compensable under § 330(a) after Baker Botts, a court cannot award compensation for fee defense work, even for professionals “with pre-approved terms” under § 328(a). [We think that the better argument is that, by operation of Baker Botts, the proposed term never gets approved under § 328(a) in the first place.]

Fifth, the UST argues that consent by the Committee to reimburse its professionals for defense costs cannot overcome the statutory requirements (as interpreted definitively by the Supreme Court in Baker Botts). Essentially, the UST makes the same argument that we hinted at last month: If consent is all that it takes to circumvent Baker Botts, then what is stopping a party from circumventing the Bankruptcy Code in other, similar ways (e.g., by consenting to the payment of unnecessary or duplicative services)?

Response to United States Trustee’s Objections

Although the Baha Mar Committee has not yet responded to the UST’s objection, the Boomerang Committee responded here. Essentially, the Committee attempts to limit Baker Botts to § 327(a) and § 330(a) and then separate § 328(a) from § 330(a). First, the Committee articulates the “limited” holding in Baker Botts: (i) the American Rule is presumed to apply unless a statute or contract provides otherwise; (ii) § 330(a)(1) does not provide otherwise; and, thus, (iii) defense costs are not reimbursable under § 330(a)(1). However, argues the Committee, Baker Botts does not address whether § 328(a) provides an exception to the American Rule. Therefore, Baker Botts does not apply to § 328(a). Further, the Committee suggests in a footnote that an objection to a Committee fee app might not even invoke the American Rule if the objecting creditor would never be liable for the Committee’s defense costs. See Part 2 #18 of our prior post (suggesting that Baker Botts really only makes sense where the statutory fiduciary objects to its own professional’s fees).

Second, the Committee accuses the UST of superimposing, without any supporting authority, the requirements of § 330 on § 328 when, in fact, § 330(a)(1) explicitly provides that § 330(a)(1) is “subject to sections 326, 328, and 329” (not the other way around). With very little support of its own, the Committee then tries to separate the Supreme Court’s emphasis on compensable services under § 330 from the word “employment” in § 328. In a footnote, it even makes the strained argument that fee defense costs fall into the “actual, necessary expenses” language under § 330(a)(1)(B) (which doesn’t refer to “services”) instead of the “actual, necessary services” language in § 330(a)(1)(A) (which does refer to “services”). Defense costs, argues the Committee, are “more appropriately viewed as a contractual right to be reimbursed for costs and expenses related to challenges to the services actually rendered to the estates.”

Therefore, the argument goes, if a bankruptcy court approves a proposed § 328(a) employment term as being reasonable, then that approved term will trump any prohibitions under § 330(a)(1). The Committee then submits that the Boomerang court should approve the proposed indemnity provision because courts have, for decades, approved similar contractual indemnification provisions under § 328 using a “market-driven” approach rather than necessarily applying § 330(a)(1) to determine reasonableness under § 328. The Committee points to In re Energy Partners, Ltd., 409 B.R. 211 (Bankr. S.D. Tex. 2009) for the market factors for evaluating § 328 terms and conditions. In fact, submits the Committee, the UST approved an even broader indemnity provision for Lazard Frères (the Investment Banker in Boomerang) that covered all defense costs, regardless of the outcome.

The Boomerang Court Weighs-In (Sort of)

The Committee and the UST then filed supplemental briefs (here and here) to address a question that the Boomerang court asked at an initial hearing: Is it “an established practice for attorneys to obtain payment for their fees and expenses in defending fee applications”?

The Committee responded to the inquiry by providing the Court with examples of attorneys being reimbursed for defense costs in and outside of Chapter 11. The Committee also quoted against the UST the same language from the United States Trustee Large Case Fee Guidelines that we discussed in our prior posts (i.e., where the UST suggests that a judicial exception to the prohibition on reimbursing fee defense costs might be where an applicant “substantially prevails” in its fee defense). Ultimately, though, the Committee falls back on its main argument: Baker Botts does not address § 328. Therefore, if a post-ASARCO court finds a § 328 term (e.g., a fee defense provision) reasonable, then a court can approve it such that it’s compensable under § 330(a), despite Baker Botts.

The UST responded to the Committee’s supplemental brief by arguing that Baker Botts foreclosed on the “market approach” when the Supreme Court held that, because “no attorneys, regardless of whether they practice in bankruptcy, are entitled to receive fees for fee-defense litigation absent express statutory authorization,” requiring them “to pay for the defense of their fees thus will not result in any disparity between bankruptcy and nonbankruptcy lawyers.” In other words, argues the UST, the Committee misses the point by citing dozens of bankruptcy and non-bankruptcy cases where similar provisions were approved because “those cases are irrelevant and no longer good law after ASARCO.” [That’s quite a bold statement!]

Further, the UST rejects the Committee’s “contract theory.” The application and order thereon are not contracts. Rather, they reflect a “request that a judge, acting within the constraints of section 328(a), authorize the term or condition of employment.” Particularly in the context of a Committee engagement, the party who is to be liable for the defense costs (i.e., the debtor’s estate) is not even a party to the alleged “contract.” As the UST puts it, the “American Rule’s prohibition against fee shifting can be altered by statute, and it can be altered by contract. But the American Rule cannot be altered by a contract that violates a statute.” Therefore, the proposed terms cannot be saved by a contracts argument if they violate the Bankruptcy Code.

[Indeed, we can’t forget that the Committee is a creature of statute and, thus, inherits all of its powers, including its power to enter into contracts, and limitations thereon, from an order of the bankruptcy court that complies with the Bankruptcy Code.]

Finally, the UST rejects the Committee’s suggestion that defense costs are expenses as opposed to services–otherwise, argues the UST, Baker Botts could have hired outside counsel to litigate the fee objections in Baker Botts and then simply expensed that firm’s fees and costs under § 330(a)(1)(B) as a workaround.

Our Thoughts

Ultimately, the § 328 issue boils down to one question: Does the Supreme Court’s holding that professionals may not, under § 330(a)(1), recover their defense costs as compensation also extend to § 328? Unfortunately, we think that the UST gets it right. It’s difficult to argue that the Supreme Court would have (or that a bankruptcy court interpreting Baker Botts should) come to a different conclusion on § 328. That is because § 328 still applies to those employed under § 327 or § 1103 (just like § 330) and emphasizes “reasonable terms and conditions of employment.” In other words, why would the Supreme Court read § 327 and § 330 together to exclude defense costs from compensation, but then read § 328 and § 330 together to include defense costs in compensation?

To be sure, we think that Baker Botts is a bad decision because the American Rule makes no sense in the bankruptcy context. However, it’s now binding. Right or wrong, the main basis for Baker Botts is the assumption that defense costs never constitute “services” to the party who employs the professional and, thus, are never compensable under § 330. Therefore, as we suggested last month, a § 328 “workaround” simply fails at the employment application stage, rather than at the fee application stage. We don’t have any expectation that the Supreme Court would change its tune on defense costs just because a clever lawyer tried to slip defense costs in on the front-end of the case. [As an aside, though, could the Committee’s proposed professional get an indemnity agreement from the Committee members themselves? After all, their ability to contract is not a creature of statute.]

Arguably, the dozens of cases cited by the Committee showing courts approving defense cost provisions in the past might suggest that the Supreme Court erred in Baker Botts, but they don’t suggest that the Supreme Court would come down differently on § 328. In short, we read Baker Botts as the Supreme Court’s determination that employment terms proposing the payment of defense costs out of the bankruptcy estate are never reasonable. And that is consistent with the “subject to” language in § 330(a)(1) because § 330 would still be “subject to” the reasonable terms approved under § 328–it’s just that the particular term in question (reimbursement of defense costs) never makes it past § 328 in the first place.

The parties and the armchair bloggers have weighed-in; now it’s time for the Delaware Bankruptcy Court to weigh-in. Our money’s on the UST, but our hope lies with the Committees.

As we discussed in two prior posts, on June 15, 2015, a 6-3 Supreme Court held in the Chapter 11 case of Baker Botts, L.L.P. v. ASARCO, LLC that bankruptcy professionals employed under Section 327(a) of the Bankruptcy Code may not, under Section 330(a)(1) of the Bankruptcy Code, recover as compensation fees incurred in defending their bankruptcy fee applications.

We originally issued this as a 2 part blog post, covering 10 questions each about Baker Botts. Part 1 covered the background and the majority opinion. Part 2 emphasized the dissent, possible errors in the decision, and the potential impacts on bankruptcy practice.

We’ve now combined them below in one, easy-to-download, easy-to-print .pdf.

 

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(Click Image to Download Article)

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 (courtesy of Dave’s iPhone on June 18, 2015)

As a recap of Part 1, on June 15, 2015, a 6-3 Supreme Court held in the Chapter 11 case of Baker Botts, L.L.P. v. ASARCO, LLC that bankruptcy professionals employed under Section 327(a) of the Bankruptcy Code may not, under Section 330(a)(1) of the Bankruptcy Code, recover as compensation fees incurred in defending their bankruptcy fee applications.

Baker Botts did not draw nearly as much attention as Obergefell v. Hodges (the same-sex marriage case and subject of the above photo) or King v. Burwell (the Obamacare tax subsidies case). And since we posted Part 1 two weeks ago, the Supreme Court finished the term by issuing additional front-page decisions. Although Baker Botts was caught in the undertow of those decisions, it’s still important, especially for bankruptcy professionals whose compensation depends on § 330(a)(1).

For example, take the mega Lehman Brothers Chapter 11. Our review shows that Weil Gotshal spent over 21,387 hours and over $6.4 million in fees (i.e. an average of 2100+ hours and $641,000+ per fee application) preparing and litigating its fee applications. Whereas Weil’s compensation-related charges were less than 1.5% of the overall bill, it’s not unusual, especially in small consumer Chapter 7 cases (where frivolous fee objections are most common) for a trustee or professional to spend 10%-20% on fee defense. And after Baker Botts, many of those charges aren’t recoverable. Therefore, Baker Botts bears emphasis for all bankruptcy professionals.

Part 1 covered the background and the majority opinion. Part 2 emphasizes the dissent, possible errors in the decision, and the decision’s potential impacts on bankruptcy practice.

[Unless noted otherwise, quotations are from the opinion.]

[Additionally, SCOTUSblog has collected all of the briefs, with a link to Oyez for the oral argument audio.]

11. How did the dissent come down on the issue?

The dissent agrees with the majority that fee-defense is not a “service” under § 330(a)(1). However, unlike the majority, the dissent agrees with the Government that fee-defense work is simply part of the compensation for the “underlying services.” Therefore, the dissent hinges on recognizing a bankruptcy court’s “broad discretion” to determine “reasonable compensation” based on all “relevant factors” (including the possible need to award defense costs to maintain compensation parity between bankruptcy and non-bankruptcy professionals). For the dissent, that need is no different than other factors warranting “increased compensation” (e.g., “exceptionally protracted litigation”).

The thrust of the dissent is best summarized by the dissent’s fee dilution example: What if a professional has fees of $50,000, but spends another $20,000 defending them “against meritless objections”? Arguably, that effective payment of $30,000 is “unreasonable” and warrants additional compensation in the court’s discretion. Indeed, wonders the dissent, how is that form of fee dilution any different than the fee dilution that the Supreme Court rejected in Jean under the Equal Access to Justice Act?

The dissent concludes that interpreting “reasonable compensation” any other way “would undercut a basic objective of the statute.” Therefore, courts should retain broad discretion to award defense costs.

12. Does the dissent believe that § 330(a)(1) displaces the American Rule? 

Yes. The dissent claims that in Alyeska Pipeline, the Supreme Court “recognized that through § 330(a),” Congress “displaced the American Rule.”

However, rather than focusing on how § 330(a) displaces the American Rule, the dissent focuses on Jean. Specifically, it argues argues that if Court found that the Equal Access to Justice Act displaced the American Rule even though it doesn’t explicitly mention fee-defense work, then it’s inconsistent for the majority to find that § 330(a) doesn’t displace the American Rule simply because it doesn’t explicitly mention fee-defense work. Compare the EAJA (“fees,” “prevailing party,” and “civil action”) to § 330(a) (“reasonable compensation for actual, necessary services rendered”). Neither explicitly mentions fee-defense, but the Court treated them differently.

Given that § 330 is arguably the most comprehensive statutory fee regime in all of federal law, we wonder whether the American Rule applies at all. As the amicus fee examiners explained, a “Chapter 11 reorganization proceeding is not inherently or pervasively adversarial.” Thus, the “American Rule is inapposite” to fee-defense costs in bankruptcy. As they suggest, “courts exercise two very different functions” in bankruptcy: adjudication and administration. For the former, the court determines “specific rights through motions, objections, and adversary proceedings.” For the latter, the court ensures that “the progression of the case” follows the Code. Finally, they explain that, unlike in a fee-shifting case, “where the award of fees is part of the litigation itself,” all bankruptcy fees require court review, regardless of whether there is litigation.

In short, associating fee-defense costs with a “winning side” via the American Rule makes no sense in bankruptcy.

13. How does the dissent address § 330(a)(6) regarding fee application preparation?

The dissent doesn’t read § 330(a)(6) as making prep work compensable. Rather, § 330(a)(6) merely clarifies how to calculate reasonable prep work when it’s requested. Further, the dissent rejects the majority’s “mechanic’s invoice” analogy (see Part 1 Q9). Specifically, it criticizes the majority’s argument that, because a fee app is not a condition for payment outside of bankruptcy, a fee app is a service in bankruptcy. If its status as a bankruptcy-specific requirement is what makes it compensable, then shouldn’t the “time that a professional spends at a hearing defending his or her fees” also be compensable? Neither are required outside of bankruptcy. Therefore, both should be compensable under the majority’s view.

In short, the dissent believes that “preparing for or appearing at” a fee hearing is “an integral part of fee-defense work” that should be compensable.

14. Did anyone else come to the defense of bankruptcy professionals?

12 amicus curiae briefs were filed: 10 in favor of Baker Botts; only 1 in favor of ASARCO; and 1 neutral.

15. That’s a lot of support for an ultimately losing position. Did the Court depart from a “majority” view?

Possibly. Some suggest that the Court took the case to resolve a split between the Fifth Circuit (the case on appeal), Eleventh Circuit, and Ninth Circuit. If there was a split, then the Court resolved it in favor of the Fifth and Eleventh Circuits without saying so. In fact, it’s notable that the majority cites only 2 bankruptcy cases that are even remotely close to the issue (Alyeska and Laime) and only 4 bankruptcy cases overall. After the Court’s significant praise of bankruptcy court wisdom in May’s Bullard v. Blue Hills Bank, one would think that the Court would have turned more to the lower courts for direction. Nope.

For point of reference, Robert Keach, Co-Chair of the ABI Commission, summarized the pre-Baker Botts views during the ABI Panel Discussion. The “majority view” was that defense costs aren’t recoverable unless the applicant “substantially prevails” in defending his fees. The “minority” view was that defense costs don’t benefit the bankruptcy estate and, thus, are never recoverable, per se.

See also United States Trustee Large Case Fee Guidelines (recognizing “substantially prevails” exception); amicus brief of Florida Bar (starting at .pdf p. 18) (collecting cases, especially in the 11th Circuit).

 16. Which side got it right? 

The dissent. Although we disagree with the dissent’s conclusion that fee-defense is not a “service,” we agree that the majority erred by adopting a per se prohibition on defense costs rather than leaving them to the court’s discretion under § 330’s comprehensive scheme.

The first possible error is the Court’s insistence on forcing an American Rule discussion on § 330–a “talk about what we know” approach; a “round hole, square peg” sort of error. The Court sidesteps that error (mostly) because, although it talks a lot about the American Rule, the Court ultimately doesn’t base the holding on that rule. Rather, it construed the statute itself (albeit erroneously) by focusing on the intersection of § 327(a) (disinterested persons assisting the trustee) and § 330(a)(1) (necessary services rendered).

The second possible error is the Court’s refusal to use § 330(a)(6) to make defense costs recoverable. At first, it appears that the Court held that defense costs aren’t recoverable because § 330(a)(6) explicitly references fee preparation, but not fee-defense. After all, many of the briefs addressed whether § 330(a)(6) authorizes prep work or merely clarifies how to calculate reasonable prep work when it’s requested. However, the Court dodges those arguments altogether, holding, correctly, that § 330(a)(6) “does not presuppose that courts are free to award compensation based on work that does not qualify as a service to the estate administrator” (i.e., § 330(a)(6) is neither here nor there on compensability).

That gets us to the heart of the Court’s error: It splits § 330 into separate analytical parts rather than recognizing that § 330 works as a whole to calculate reasonable compensation. In the process, the Court adopts a per se prohibition on defense costs that robs courts of the discretion to determine when they benefit the bankruptcy case and/or are necessary for its administration. Thus, the Court ends-up sanctioning the very form of fee dilution that it rejected in Jean.

Specifically, the Court appears to treat § 330 as requiring 2 steps: (1) a threshold § 330(a)(1) determination of whether something is a compensable “service” and (2) a follow-up § 330(a)(3) determination of whether the professional charged the compensable service reasonably. However, we believe that §330(a)(3) and § 330(a)(4) actually inform the threshold “compensable service” determination under § 330(a)(1):

  • § 330(a)(3)(C) emphasizes “whether the services were necessary to the administration of, or beneficial…toward the completion of” the bankruptcy case.
  • § 330(a)(4) emphasizes only paying for services that were (i) “reasonably likely to benefit the debtor’s estate” or “necessary to the administration of the case.”

And by focusing so much on (a)(1) and so little, if at all, on (a)(3) and (a)(4), the Court commits 3 real errors.

Error #1: Court adopts an overly narrow, mutually exclusive view of “benefit.”

The Court adopts an overly narrow, mutually exclusive view of “benefit.” The Court’s view is too narrow because it focuses only on the relationship between the trustee and the professional. For example, the Court recognized that fee preparation is a “service” to the administrator because it “allows the customer to understand–and, if necessary, dispute his expense.” If one looks just at § 330(a)(1), then one might conclude that the administrator is the sole customer. However, (a)(3) and (a)(4) suggest that the “customer” is, in fact, the administrator, the United States Trustee, the constituencies who have claim against the estate, the constituencies that have an obligation to help administer the estate (e.g., committees, fee examiners, etc.), and the court itself.

The Court views “benefit” in a mutually exclusive manner because it doesn’t recognize that a service can benefit the professional and other constituencies without forfeiting disinterestedness. In fact, the compensation process contemplates a certain level of self-interest because it has the estate bearing a professional’s reasonable compensation. For example, preparing a fee application benefits the professional because it’s a condition for payment; it benefits other constituencies because it permits them to satisfy their duty to the estate to “understand” and even “dispute” fee applications. How is fee-defense any different? The Court doesn’t tell us.

Error #2: Court fails to consider if fee-defense is necessary for case administration.

The Court also ignores the alternative basis for compensation: whether a service is “necessary to the administration” or “completion of” the bankruptcy case. After all, the Code requires a detailed and itemized fee application that’s unknown outside of bankruptcy. It requires notice to the United States Trustee and other parties-in-interest. At a minimum, the court must review the application for compliance with § 330. Finally, the trustee can’t satisfy its duty to complete the case until there’s a resolution (not just an assertion) of all claims against the estate, including § 503(b)(2) administrative claims for compensation. And with limited exceptions, such resolution is impossible without a hearing. As Baker Botts argued, “fee-defense litigation is necessary to a case’s completion because it is an indivisible part of a complex fee-assessment process that the Code specifically mandates.”

If “compensability” is the sole province of § 330(a)(1), then it makes no sense for § 330(a)(1) to require that services be “necessary” (and for the Court to read “benefit” into the term “services”) and for (a)(3) and (a)(4) to also emphasize benefit and necessity. In other words, if (a)(1), (a)(3), and (a)(4) don’t work together as a whole, then (a)(3) and (a)(4) are superfluous. 

Error #3: Court flip-flops on fee parity and fee dilution.

Eventually, Jean comes back to haunt the Court. It’s not the language that the majority quotes from Jean (i.e., “We find no textual or logical argument for treating so differently a party’s preparation of a fee application and its ensuing efforts to support that same application.”). After all, there was no doubt in Jean that the EAJA extended to core fees and fee-defense. Rather, it’s the language from Jean that the majority doesn’t quote: “Denying attorneys’ fees for time spent in obtaining them would dilute the value of a fees award by forcing attorneys into extensive, uncompensated litigation in order to gain any fees.”

That brings us to the bottom line: Almost all of the parties argued extensively that a per se prohibition on defense work, without regard to whether the defense is meritorious, could dilute compensation and, thus, contravene Congress’ intent that there be compensation parity between bankruptcy and non-bankruptcy professionals. The parties even screamed that argument from the roof-tops in at least 16 separate briefs. Nevertheless, the Court wasn’t buying it. Relying on its flawed invoice analogy and unsupported assertions about what motivates attorneys, the Court simply dismissed the dilution argument as a “flawed and irrelevant policy argument.” Unfortunately, that’s that.

17. After Baker Botts, which fees and costs are reimbursable and not reimbursable?

The way we read Baker Botts, the “reimbursable v. non-reimbursable” debate is resolved this way:

Employment Applications/Compensation Procedure Motions

There’s nothing in Baker Botts suggesting that fees related to prosecuting § 327 employment applications aren’t reimbursable. A professional benefits from employment matters, but it’s difficult to argue that employment matters aren’t “actual, necessary services.” At bottom, employment applications are the first services rendered to a trustee. That rationale also applies to compensation procedure motions under § 331, as such motions establish a review process that benefits all constituencies and promotes administration.

However, that’s not to say that someone will not try to use Baker Botts to challenge typical “first day” employment or compensation procedure matters.

Fee Statements and Fee Applications

For purposes of Baker Botts, interim fee statements that are served under a procedures order should be treated like interim and final fee applications. Therefore, Baker Botts likely impacts statements and applications as follows: (i) under § 330(a)(6), the cost of preparing, serving, and filing them (as applicable) are recoverable; but (ii) the cost of correcting them and of reviewing and responding to information requests or objections are not recoverable because such costs are in the prohibited “defending” category.

Non-preparation fees and expenses likely amount to “defending” the applicant’s fees and, thus, are not recoverable. They include fee-related corrections, explanations, negotiations, research, and responses occurring after a fee application is served.

Hearings on Compensation Requests

We can argue about whether “after notice and a hearing” requires a hearing when no objection is filed, but our judges, at least, tend to require a hearing unless, under Rule 2002(a)(6), the requested compensation doesn’t exceed $1,000. Under Rule 9014, those hearings fall into 2 categories: (i) uncontested hearings without objections and (ii) contested hearings with objections. Under Baker Botts, preparing for, traveling to, or participating in any contested (“adversarial”) fee hearing is not recoverable.

However, do uncontested hearings fall outside of Baker Botts’ prohibitions? Can the court award compensation for defense costs related to a court–ordered fee hearing as long as the applicant merely presents his application, summarizes his fees, and the answers questions to establish a record? We hope so, but probably not.

Baker Botts is not clear. On the one hand, the dissent asserted that the “majority does not believe that preparing for or appearing at [an uncontested hearing]–an integral part of fee-defense work–is compensable.” On the other hand, Robert Keach pointed out that “[u]nder the majority opinion, apparently you can now attend the hearing, but if you do any defending while you’re there, you can’t be paid for that time.” Ultimately, the majority speaks for itself: A court can’t award fees “for work performed in defending a fee application in court.” Therefore, we don’t see a definitive basis for treating uncontested hearings differently (but see Question 18 re: limiting Baker Botts).

Arguing about Baker Botts

Under the Court’s “benefit theory,” applicants will likely bear the expense of obtaining answers to any questions that Baker Botts leaves unanswered.

18. That’s an awfully strict reading of Baker Botts. Can we work around it?

Limiting Baker Botts to its Facts

We might be able to limit Baker Botts to adversarial litigation between the applicant and the debtor (based on the following language that we’ve emphasized):

  • The court can’t “shift the costs of adversarial litigation from one side to the other” (i.e., from “attorneys” to the “administrator“).
  • “Time spent litigating a fee application against the administrator” isn’t “labor performed” for or “disinterested service to” the administrator.
  • The term “services” doesn’t “encompass adversarial fee defense litigation.”
  • Even in the mechanic’s invoice analogy, the Court speaks only of a “battle“ over a bill.

In other words, the Court emphasizes (1) adversarial litigation (2) between two sides (3) where one side (the applicant) is seeking to have the other side (the applicant’s client) pay its defense fees. That only occurs when the debtor or trustee objects because the shifting of fees, if any, can only be to the debtor or the trustee. Compare that to a dispute between an applicant and a creditor: The applicant is not seeking to transfer the fees to the creditor–the estate bears them or it doesn’t.

Therefore, we might limit Baker Botts in 2 ways, such that the prohibition on defense costs only applies:

  1. When the applicant’s client (i.e., the debtor) objects; or
  2. When an objection leads to litigation (regardless of who objects).

In the former, a pretty aggressive limitation, the “substantially prevails” standard would still apply to non-debtor objections.

In the latter, a less aggressive limitation, uncontested fee hearings would be compensable.

Implementing Contractual Workarounds

Two problematic reactions to Baker Botts might be “I’ll just increase my hourly rate” or “I’ll just get the debtor to agree to pay fee-defense costs.”

Increasing Rates. Although the Supreme Court didn’t mention it, the Fifth Circuit made the rather incredible suggestion that bankruptcy professionals can address fee dilution by “anticipat[ing]” it “in their hourly rates.” As the amicus judges explain, this “rate-padding scheme will make the fee award process less transparent.” Worse, the suggestion should fail the reasonableness test out of the gate.

Finally, how is it fair or loyal to burden all clients with padded fees that are otherwise not compensable just because a few clients might embroil the professional in fee litigation? The New York Bar stated it best: “It would be an odd system indeed that allowed professionals to be compensated for defending fee applications indirectly through their hourly rates instead of directly through compensation for reasonable actual defense fees.”

Modifying Engagement Letters. The Court held that the American Rule applies “unless a statute or contract provides otherwise” (emphasis added). Therefore, can having debtors agree to pay for defense costs displace the American Rule as a matter of contract? Probably not. First, does an attorney have an ethical duty on the front-end to disclose Baker Botts? How would that conversation go? “The Supreme Court just held that you aren’t required to pay for defense costs, but I’d like you to pay them anyway.” Second, even if the debtor agrees to pay for defense costs, wouldn’t the attorney simply be setting himself up for a § 327 employment objection when he discloses the terms to the court?

Freedom of contract is important, but we aren’t sure how it can trump the Code on compensation limitations and reasonableness.

Applying for Employment under Section 328

Some, including those on the ABI Panel Discussion, have wondered whether § 328(a) provides a workaround. Under § 328(a), a court may approve in advance “reasonable terms and conditions of employment” for a professional. A § 328(a) compensation arrangement cannot be altered after the conclusion of the employment unless it proves “improvident in light of developments not capable of being anticipated.” Typically, § 328 issues arise with investment bankers and the like, and the reasonableness of their retainers.

We also don’t see how § 328 helps. After all, the court still has a duty to determine whether the terms are “reasonable.” We’d think that Baker Botts will bear on that determination. Such an arrangement might also be an improper attempt to contract around § 328(a)’s disinterestedness requirement.

Of course, if (and it’s a big “if”), the court approves payment of fee-defense costs on the front-end, then § 328 likely is a solution.

Seeking Sanctions under Rule 11

The majority remarked that if the “United States harbors any concern about the possibility of frivolous objections to fee applications,” then Rule 9011 “authorizes the court to impose sanctions for bad-faith litigation conduct.” However, as the amicus judges explained, the “standard for imposing sanctions is too high for bankruptcy judges to prevent dilution with that rarely used cudgel” (citing a Delaware bankruptcy case holding that the “stringent” Rule 9011 standard demands “exceptional circumstances” where a claim is “patently unmeritorious or frivolous”). Even ASARCO’s objections weren’t patently frivolous. Finally, even a successful Rule 9011 movant will be lucky to break-even on the cost and burden of litigating Rule 9011.

19. Does Baker Botts impact the award of “fee enhancements”?

No. The issue of enhancements was a big issue below, but the parties didn’t take it up. Some might say that the lower court decisions advance the cause for fee enhancements. Others might say that a fee enhancement from “probably the most successful Chapter 11 of any magnitude in the history of the Code” is hardly helpful precedent in (surely) more humble cases.

20. What are others saying about Baker Botts? Have courts gotten involved yet?

What Others are Saying

Law360 collected various reactions to Baker Botts here, including one from Dechert’s Eric Brunstad Jr. (a Supreme Court bankruptcy star in his own right):

“Bankruptcy is a highly specialized context, and reliance on general fee-shifting principles is at odds with the purpose, policy, and reality behind the supervision and award of fees in Chapter 11 cases. Unfortunately, this decision will create problems in the administration of Chapter 11 matters.”

Similarly, Prof. Stephen Lubben, one of the amici and a frequent Credit Slips contributor, observed that:

“The majority seems to be totally out of touch with the reality of bankruptcy practice, and its opinion seems to be an open invitation for bomb throwers who stop just short of Rule 11.”

You can find additional commentary by listening to the excellent ABI Panel Discussion.

What the Courts are Saying

So far, 6 courts have cited Baker Botts, but not on the fee-defense issue. As an aside, we couldn’t help but notice that one of our S.D.G.A. judges cited it on the general issue of statutory interpretation. We’ll keep our eyes on other cases.

CONCLUSION

Our knee-jerk reaction to Baker Botts was that it represents another example of the Supreme Court’s disdain for bankruptcy practice. Perhaps we’ve been recovering fee-defense costs for so long that we can’t imagine bankruptcy practice any other way. Nevertheless, Baker Botts is now controlling law. The most that we can probably hope for is that lower courts will limit Baker Botts to fee litigation rather than fee presentation, such that the cost of court-ordered, uncontested fee hearings is still compensable.

Supreme Court

 (courtesy of Dave’s iPhone on June 18, 2015)

Two Thursdays ago, we visited my wife’s family in Potomac, Maryland. In addition to seeing the usual sites, we did a Supreme Court “drive-by” and snapped the above photo, a very timely now outdated, but still very political picture.

Indeed, Friday morning, the Supreme Court issued its 5-4 decision in Obergefell v. Hodges ruling that same sex-marriage is a Constitutional right. The day before, it issued its 6-3 decision in King v. Burwell upholding tax subsidies under the Affordable Care Act (a/k/a “Obamacare”). And, as a I type, folks are waiting impatiently for the Supreme Court (i.e., “Waiting for Lyle“) to issue at 10 a.m. the remaining decisions from this term on congressional redistricting, power plant emissions, and execution methods. Meanwhile, the ink is now two weeks old on the Court’s Baker Botts, L.L.P. v. ASARCO, LLC decision, a much less-awaited decision that likely didn’t attract protestors to the Courthouse steps.

Nevertheless, Baker Botts is an important case for bankruptcy professionals, especially those who aren’t strangers to fee application litigation. In a nutshell, a 6-3 Supreme Court, with Justice Thomas delivering the opinion, held that bankruptcy professionals may not, under Section 330(a)(1) of the Bankruptcy Code, recover their fees and costs in defending their bankruptcy fee applications.

In this post, we’ll experiment with a “20 Questions” format to see if we can get to the heart of the matter: How will Baker Botts impact day-to-day bankruptcy professionals, including those whose compensation depends the Code’s “fee app” procedure? In Part 1, we’ll cover the basics, including background and the majority opinion. In Part 2, we’ll cover the dissent, humbly challenge the decision, and, more importantly, explore the potential impacts, legal and practical.

[Unless noted otherwise, quotations are from the opinion.]

1. How did this matter find its way to the Supreme Court?

In 2005, ASARCO, one of the leading copper producers in the U.S., filed a free-fall Chapter 11 in the Southern District of Texas. ASARCO had everything wrong with it: cash flow issues; potentially massive environmental liabilities; corporate governance and tax problems; a striking workforce; and a litigious parent company. As the bankruptcy court pointed out in its initial fee award order (see p. 65a), the DOJ described the ASARCO case as “the largest environmental bankruptcy in U.S. history.” ASARCO’s CEO and board resigned and its replacement director conflicted-out. Therefore, the Bankruptcy Court approved the appointment of an independent board.

In pertinent part, ASARCO, acting through its new board and with court authorization under § 327(a) of the Code, retained Baker Botts as well as Jordan, Hyden, Womble, Culbreth & Holzer as its bankruptcy counsel. Among other things, the lawyers prosecuted a fraudulent transfer claim against two of ASARCO’s parent entities, ASARCO, Inc. and Americas Mining Corp. (“AMC”). The claim challenged ASARCO’s transfer to AMC of ASARCO’s controlling interest in Southern Copper Corp. ASARCO obtained a judgment against the parent worth between $7 and $10 billion. In turn, the judgment fueled a 100%, $3.56 billion payout to creditors (compared to the pennies on the dollar that most had expected at the beginning of the case). ASARCO emerged from bankruptcy 4 years later in 2009 with “$1.4 billion in cash, little debt, and resolution of its environmental liabilities.”

After confirmation, the 2 law firms filed their final fee applications under § 330(a)(1). ASARCO, by then reorganized and back under the control of its parent, objected to the fee applications. Following extensive discovery and a 6-day trial, the Bankruptcy Court overruled the objections and awarded $120 million in compensation, $4.1 million as an “enhancement for exceptional performance,” and $5 million in fees for defending the applications.

On appeal, the District Court affirmed the Bankruptcy Court, but the Fifth Circuit reversed. The Fifth Circuit held that (i) the American Rule (discussed below) controls absent explicit statutory authority providing reimbursement of defense fees and (ii) defense fees fall outside of § 330(a)(1)’s requirement that services are only compensable “if they are likely to benefit a debtor’s estate or are necessary to case administration” because the professional, not the estate, is the “primary beneficiary of a professional fee application.” For a more detailed summary of the lower court decisions, see Gregory Werkheiser’s excellent Jan. 2015 ABI Journal article.

The Supreme Court then granted certiorari and heard oral argument on February 25, 2015 (transcript and audio). Aaron Streett of Baker Botts argued for Baker Botts. Brian Fletcher, Asst. to the Solicitor General, argued for the United States as amicus curiae. Jeffrey Oldham of Bracewell & Giuliani argued for ASARCO. [Interestingly, after ASARCO’s initial Aug. 2014 brief in opposition to the petition, ASARCO added Supreme Court star Paul Clement of Bancroft (along with Jeffrey Harris) to ASARCO’s Jan. 2015 brief, but neither Paul nor Jeffrey presented. Having their names on the signature block probably didn’t hurt, though.]

2. For the most part, those are the official Supreme Court facts. What was really going on?

Given that the majority focuses exclusively on the text of the Bankruptcy Code while ignoring “flawed and irrelevant” policy arguments, the Court’s rather vanilla recitation of a hotly-contested, 7 year fee dispute is forgivable. After all, the Code either permits compensation for defending fees or it doesn’t. Nevertheless, depending on who you believe, there was quite a bit more going on in Baker Botts–it wasn’t just any old attorneys’ fee dispute.

In fact, the results obtained in ASARCO were so breathtaking and the core fee objections so unsuccessful, that it’s astonishing that this case became the test case for fee-defense costs under § 330(a)(1).

Largest Judgment and Most Successful Chapter 11 Ever?

As Baker Botts pointed out in its petition, the lower courts had acknowledged that the judgment that Baker Botts obtained for ASARCO was the largest judgment “in Chapter 11 history and possibly the largest unreversed actual-damages award in American history” (compared to the $7.53 billion actual-damages Pennzoil v. Texaco judgment, another Baker Botts award). Further, it pointed out in its petition that (i) the Bankruptcy Court noted that the ASARCO case was  “probably the most successful Chapter 11 of any magnitude in the history of the Code” (our emphasis); (ii) the District Court called the judgment “a once in a lifetime result” (ours again); and (iii) the Fifth Circuit agreed that the result was due to ASARCO’s lawyers’ “exemplary” performance and “creativity, tenacity and talent.” Indeed, the Fifth Circuit noted that “[w]e do not disagree with the lower courts’ effusive evaluations of the results obtained.”

Nevertheless, ASARCO objected to the fees charged by Baker Botts.

Baker Botts describes the fee fight one way; ASARCO describes it another way.

According to Baker Botts:

Baker Botts pointed out that although it received 100% payment from ASARCO on 13 interim fee statements over 52 months without objection, Reorganized ASARCO still “launched a massive assault” on the final application and “attacked everything.” It “stonewalled every effort at efficiently resolving its objections,” “refused” to be particular about which entries were objectionable and, thus, “forc[ed] Baker Botts to self-audit thousands of pages of invoices, culminating in a 1160-page supplement.” Further, “less than a month before the fee trial,” it “served Baker Botts a 104-page report accompanied by a 16-foot-tall stack of schedules containing thousands of pages of individual billing entries alleged to be non-compliant.”

According to Baker Botts, the “U.S. Trustee joined none of these objections, nor indeed any objections to Baker Botts’ core fees” of about $113 million. ASARCO “demanded immense discovery, forcing production of every single document that hundreds of professionals created or received during the 52-month bankruptcy.” Baker Botts claimed that 9 of its lawyers and their staff spent 2,440 hours reviewing hundreds of boxes of offsite documents just to protect privilege. It claimed that it ultimately “produced 2,350 boxes of hard-copy documents (nearly six million pages) and 189 GB of electronic data (approximately 325,000 documents).” In response, claims Baker Botts, ASARCO “sent just two lawyers to review the massive results of discovery” and only “copied 1% of the material” during its five day review.

To hear Baker Botts tell it, ASARCO filed a spiteful, meritless fee objection to get back at Baker Botts for having sued ASARCO’s parent.

According to ASARCO:

ASARCO highlighted a “substantial rise in copper prices”–something Baker Botts “cannot claim responsibility for”–as a “key factor” in ASARCO’s 100% payout to creditors. ASARCO also reminded the Court that Baker Botts initially sought more than it was awarded: $120 million in core fees, over $24 million in fee enhancements, and over $8 million in fee defense costs. It generally summarized its objection categories for the Court: excessive, vague, block-billed, lumped, and/or non-compensable clerical or administrative time and expense entries. It noted that the parties had resolved some expense-related objections by agreement. ASARCO explained that it objected to the enhancements because Baker Botts “had been adequately compensated at their full hourly rates that they had set—and increased throughout the bankruptcy—and that these lodestar fees were paid without delay during the bankruptcy.”

It argued that “over $8 million in fees for the five-month litigation over fees [including 191 Baker Botts timekeepers] was excessive.” It disagreed with Baker Botts’ claim that “every single objection was overruled” because, in fact, Baker Botts had agreed to a $112,927 and a $19,463.52 reduction in fees and expenses [for a total reduction of only 0.09%?!], respectively. It also claimed that the Bankruptcy Court had reduced the requested fee enhancement to around $20 million. ASARCO explained that the bankruptcy court found that the defense costs were “higher than were reasonable and necessary” and, thus, reduced them from $8 million to $5 million. Finally, ASARCO noted that, although the bankruptcy court overruled ASARCO’s objections to the core fees (“after agreed-upon reductions”), the court did not find that the objections were “frivolous or made in bad faith”–objections that cost ASARCO “almost $2 million in fees” to litigate.

To hear ASARCO tell it, ASARCO’s objection was merely a garden variety and good faith inquiry into Baker Botts’ significant fees.

Although ASARCO defends the appropriateness of its objection a little more vigorously in its second brief, it still focuses more on Baker Botts’ excessive defense fees than it does on the merits of ASARCO’s objection, suggesting that Baker Botts might have a point about ASARCO’s possible ulterior motive in filing the objection and litigating it for 7 years. But then again, we represent debtors, so of course we read it that way.

3. How did the Justices come down? 

The Goldberg Variation6-3

Majority: Justice Thomas delivered the opinion, with Justices Roberts, Scalia, Kennedy, and Alito joining, and Sotomayor joining all but part III B 2.

Dissent: Justice Breyer delivered the dissent, with Justices Ginsberg and Kagan joining.

As an aside, compliments of SCOTUSBlog, after Justice Thomas delivered the opinion, Justice Scalia announced Kerry v. Din (and in process, inadvertently referred to Justice Ginsberg as Justice “Goldberg.” Hilarity ensued.

 

(Image by Art Lien via SCOTUSBlog)

4. In one sentence, how did the majority hold?

Professionals employed under § 327(a) of the Bankruptcy Code are not entitled under § 330(a)(1) to recover fee-defense costs incurred in “defending” their own fee applications.

5. In two sentences, what was the rationale?

The American Rule (i.e., the rule that each litigant pays his own attorney’s fees) is deeply rooted in the common law and, thus, is presumed to apply absent express statutory or contractual language. Given that § 327(a) and § 330(a) of the Bankruptcy Code do not expressly shift the burden of fee-defense litigation to the bankruptcy trustee, and only provide for reasonable compensation for actual, necessary services rendered to a bankruptcy trustee in a loyal and disinterested manner, it follows that Congress did not intend to depart from the American Rule with respect to fees incurred by bankruptcy professionals in defending their fees, especially given that such fees neither constitute “services” to nor benefit the estate.

6. Why is the Supreme Court so focused on the American Rule?

Without any analysis, the Court presumes that § 330(a)(1) is a statute that involves an “award of attorney’s fees.” Although we don’t agree with the Court’s application of the American Rule to § 330(a)(1) (more on that later), the Court’s assumption is not without support at a basic, textual level, as § 330(a)(1) explicitly provides that the court, and we quote the statute, “may award to a trustee . . .or a [§ 327 or  § 1103] professional . . . reasonable compensation for actual, necessary services rendered” (emphasis added). Thus, the Court’s “basic point of reference” is the “American Rule” where each “litigant pays his own attorney’s fees, win or lose, unless a statute or contract provides otherwise” (internal quotation marks omitted).

Hence the approach: When a statute involves an award of attorneys’ fees, the Court will not, “absent explicit statutory [contractual?] authority,” “deviate” from the American Rule.

7. Why did the Court refuse to deviate from the American Rule with respect to § 330(a)(1)?

The Court concluded that “Congress did not expressly depart from the American Rule” to permit fee-defense awards. In searching for that express departure, the Court starts with § 327(a) which provides for the employment of “disinterested” professionals “to represent or assist the trustee in carrying out the trustee’s duties” under the Code. In other words, “professionals are hired to serve the administrator of the estate for the benefit of the estate.”

The Court then turns to § 330(a)(1), concluding that “reasonable compensation for actual, necessary services rendered” is limited to “work done to assist the administrator of the estate.” It explains that, unlike the language in other fee-shifting statutes (more on those later, too), the language in § 330(a)(1) “neither specifically nor explicitly authorizes courts to shift the costs of adversarial litigation from one side to the other” (our emphasis for later). Rather, it only permits compensation awards for “work done in service of the estate administrator” (emphasis in original); “for ‘actual, necessary services rendered‘” (emphasis in original).

Adopting the Government’s analysis almost verbatim and focusing on the dictionary definition of “services” (“labor performed for another”), the Court holds that time “litigating a fee application against the administrator of a bankruptcy estate cannot be fairly described” as “labor performed” much less “disinterested service” to that administrator (i.e., “client”). [As the Government states it, “it is work that the professional does on its own behalf”.]

In short, if Congress had wanted to shift fee-defense costs, then it “easily could have done so,” but it didn’t.

The Court asserts that “other provisions of the Bankruptcy Code expressly” shift litigation costs from “one adversarial party to the other,” but it only refers to one: § 110(i) (requiring petition preparers to pay debtors their “reasonable attorneys’ fees and costs” for moving successfully for damages for preparer violations).

8. Does the majority agree that fee-defense is a part of the underlying services, though?

No. That was the Government’s argument (and the dissent’s take): Even though fee-defense is not, itself, “an independently compensable service,” compensation for fee-defense is “part of the compensation for the underlying services in [a] bankruptcy proceeding” (quoting the Government’s brief) (emphasis in original). The majority rejects that argument (and, thus, the dissent, which we’ll cover in Part 2) because “reasonable compensation” is only available “for actual, necessary services rendered.” In other words, a fee or cost is only compensable if it arises from actual and necessary services. Because fee-defense is not a service, according to the Court, it’s not compensable and, thus, its reasonableness is irrelevant.

The Court would have us first determine whether a fee or cost is compensable and if, and only if, it’s compensable, then determine its reasonableness. In fact, it appears that the Court views the reasonableness factors in § 330(a)(3) as irrelevant to the question of whether something is compensable, as those factors presume that the applicable fee or cost satisfies the threshold “Is it compensable?” test. We don’t view it that way. See Question 16 in Part 2

9. How does the Court address § 330(a)(6) regarding fee app preparation?

The Government relied on § 330(a)(6) which provides that “[a]ny compensation awarded for the preparation of a fee application shall be based on the level and skill reasonably required to prepare the application” (emphasis added). However, the Court rejects the Government’s argument that “because time spent preparing a fee application is compensable, time spent defending it must be too.” The Court explains that, whereas fee application preparation is a service rendered to the estate administrator, “defense of that application is not.” The Court relies on a strained analogy to a “car mechanic’s preparation of an itemized bill”: Preparation of the bill is a service to the customer because it helps the customer understand and even dispute its bill; however, a “subsequent court battle over the bill” is not a “part of the ‘services rendered’ to the customer.”

Further, the Court, without naming them as such, quotes against the Government the United States Trustee Large Case Fee Guidelines. In the Guidelines, the USTP opined that fee app preparation is compensable because it’s “not required for lawyers practicing in areas other than bankruptcy as a condition to getting paid” but fee app defense is not compensable because it’s “for the benefit of the professional and not the estate.”

Finally, the Court distinguishes its “remark” in Commissioner, Ins. v. Jean that “[w]e find no textual or logical argument for treating so differently a party’s preparation of a fee application and its ensuing efforts to support that same application.” The Court explains that “everyone agreed” that the Equal Access to Justice Act (EAJA) at issue in Jean “authorized court-awarded fees for fee-defense litigation” because “fees and other expenses . . . incurred . . . in any civil action” didn’t support a distinction between the legal work and fees defending it. And based on the Court’s narrow reading of “services rendered,” the language in § 330(a)(1) “reaches only the fee-application work.”

At bottom, the Court didn’t view “reasonable compensation” (an “open-ended phrase”) as a “specific and explicit” provision signaling a departure from the American Rule.

[Admittedly, we weren’t aware that the Fee Guidelines already come down so hard on post-preparation fees and costs (including explaining, defending, or litigating the application). However, Baker Botts takes it a step further by eliminating from the Guidelines any notion that compensation might be available if an applicant “substantially prevails” at trial in defending its application. Some suggest that, before Baker Botts, the “substantially prevails” approach in the Guidelines was the “majority” approach. Not anymore.]

10. How does the Court address the “parity” issue regarding non-bankruptcy professionals? 

“Ultimately,” the Court holds, the “Government’s theory rests on a flawed and irrelevant policy argument”: that awarding defense fees is a “judicial exception” that is “necessary to the proper functioning of the Bankruptcy Code.” Specifically, argues the Government, uncompensated fee-defense costs “will be particularly costly” because multiples parties can object in bankruptcy versus the usual lawyer versus client dispute outside of bankruptcy.

The Court rejects the Government’s argument for two reasons. First, the Court refused to substitute “unsupported” and “policy-oriented” predictions for the “statutory text,” especially given that the Government had argued the opposite view below (i.e., “requiring a professional to bear the normal litigation costs of litigating a contested request for payment . . . dilutes a bankruptcy fee award no more than any litigation over professional fees”) (we add emphasis for Part 2). Second, the Court figured that the threat of sanctions under Rule 9011 provides a sufficient deterrent or remedy for “frivolous” fee objections (more on that later, too).

In short, text trumps policy:

  • “Our unwillingness to soften the import of Congress’ chosen words even if we believe the words lead to a harsh outcome is longstanding” (quoting Lamie v. United States Trustee, 540 U. S. 526, 538 (2004)) (internal quotation marks omitted). “[T]hat is no less true in bankruptcy than it is elsewhere.”
  • “Our job is to follow the text even if doing so will supposedly ‘undercut a basic objective of the statute.’”

[But for the Court’s Thursday ruling in King v. Burwell, those quotes (joined by Chief Justice Roberts) might not be surprising. However, in upholding the health insurance tax subsidies (“saving Obamacare!” as some accuse or celebrate), Chief Justice Roberts explained that “in every case we must respect the role of the Legislature, and take care not to undo what it has done. A fair reading of legislation demands a fair understanding of the legislative plan. Congress passed the Affordable Care Act to improve health insurance markets, not to destroy them. If at all possible, we must interpret the Act in a way that is consistent with the former, and avoids the latter.”]

In Part 2, we will dive into the dissent, challenge aspects of the decision, and explore the potential impact of Baker Botts, especially on Chapter 11 debtors’ attorneys. Stay tuned.

In the meantime, we encourage you to subscribe to Plan Proponent to receive important updates as they’re posted (including Part 2).

 

(My Favorite Homemade Blog Photo: Justice Gorsuch’s Trans Am from In re Haberman with Judge Garland Looking On)

February 12, 2024 will mark Plan Proponent’s 9th Anniversary. Back in the early days, I’d be holed-up in Jessica’s parents’ basement in Potomac on New Year’s Eve preparing a Year in Review Top 10 List. Of course, that was back when I posted more than ten posts per year. While the post total is now 132 posts, my productivity has dropped off over the years and, thus, I’m embarrassed to admit that I haven’t done a year-end Top 10 list since January 2020.

Quality over quantity, right? Anyway, to force myself to do something even “bigger” for the 10th Anniversary and to save the Justice Sandra Day O’Connor tribute post for later in January, here are my Top 10 favorite (i.e., most readable, least boring) Plan Proponent blog posts.

Thanks for nine years of support and Happy New Year!

10. ABI Commission Report – Small and Medium-Sized Debtor Enterprises

Remember the 402-page ABI Commission Report from 2014? Well, that Report is what started it all for Plan Proponent with its first ever post on February 12, 2015. Ridiculously, I blogged about every single confirmation-related page of that Report, from February 12, 2015 to August 15, 2015, a total of 23 separate posts!

In hindsight, I like the Small and Medium-Sized Debtor Enterprises (SME) post the best because not only was it the last post in an exhausting, “put it out of its misery!” series, but it also provided a primitive preview of what later became Subchapter V almost 5 years later with the SBRA. Sixty days to file a plan? Yikes!

9. David Cassidy and the Absolute Priority Rule

Speaking of the SBRA, the absolute priority rule (APR) posts haven’t aged well and have lost much of their relevance now that so many individual Chapter 11 cases are Sub V cases where (thank God) the APR no longer applies.

But back in 2014, when I was a wee associate, I literally read every single APR opinion ever written for individual debtors to help my longtime mentor Ward Stone prepare for an APR panel for ABI Southeast 2014. That resulted in our APR Case Chart (lasted updated 02/13/17).

And for Plan Proponent’s second ever post, the late David Cassidy (of Partridge Family fame) provided an excuse to leverage the Chart when he filed his Florida Chapter 11 case on February 11, 2015. I revisited it on the blog’s 2nd anniversary in early 2017 when his plan confirmation litigation started. Unfortunately, Cassidy died later that year.

8. Baker Botts SCOTUS Series

I like to joke that, for a year or so, I was the leading expert on the U.S. Supreme Court’s 2015 Baker Botts, L.L.P. v. ASARCO, LLC “fees for fees” bankruptcy opinion wherein the Court held that professionals employed under § 327(a) may not, under § 330(a), recover as compensation fees incurred in defending their fee applications. What that really means is that, for a year or so, I had an unhealthy obsession with Baker Botts, a case that took § 327 professionals by storm but is now rarely mentioned.

But while my instinct is to make fun of myself, the Baker Botts experiment, no matter how irrelevant Baker Botts is today, did provide some minor publishing opportunities and a few run-ins with legal journalists who were seeking soundbites about such an esoteric decision.

7. Book Excerpt: A Southern Lawyer’s Lunch with Harvey Miller

Growing tired of bi-weekly case summaries, I was honored in 2017 when my friend and Atlanta bankruptcy lawyer Doug Ford let me post an excerpt from his self-published book  I Do My Own Stunts: Finding My Way as an Attorney. And while the Harvey Miller “clickbait” was irresistible, I really like Doug’s story about meeting Harvey in NYC.

6. Justice Thomas Crashes a Bankruptcy Breakout Session

Chief Judge Austin Carter (Bankr. M.D. Ga.)—who supplemented my bankruptcy training from Ward by teaching me everything I know about day-to-day Chapter 11 practice when he was my Stone & Baxter colleague—was nice enough to invite Jessica and me to the 2016 Eleventh Circuit Judicial Conference in Point Clear Alabama.

Typed-up from my hotel room on the last day of the Conference, this post not only covers all of the inevitable pomp and circumstance of collecting an entire circuit of federal judges in a single hotel, but also portrays a charming and jolly Justice Thomas. As federal judges are prone to enjoy, the Conference invited an Abe Lincoln impersonator to provide entertainment during lunch. He was in character for the entire lunch and Justice Thomas loved it. The post also tells of our personal encounter with none other than one of President Obama’s potential SCOTUS nominees—perhaps the most humble and unassuming judge at the conference.

It’s a fun, almost bankruptcy-free read.

5. Forcing Bankruptcy Relevance on SCOTUS Nominees

The U.S. Supreme Court has such a disdain for bankruptcy that bankruptcy is one of the few areas that the Justices almost always agree about. Thus, when President Obama threw up one last nominee in Judge Garland and President Trump was nominating potential Justices on a seemingly weekly basis (including now Justices Gorsuch and Kavanaugh), I really enjoyed forcing a bankruptcy angle on these nominees, tongue-in-cheek or otherwise.

  • Click here for the Judge Garland post
  • Click here for part 1 and here for part 2 of the Justice Gorsuch post
  • Click here for the Justice Kavanaugh post

The photoshopped picture above, which I used on Twitter X but was too bashful (until now) to use on the blog, is Burt Reynolds (disguised as Justice Gorsuch), with a wishful Judge Garland looking on, wondering what could have been. And the Trans Am is from In re Haberman, with (now) Justice Gorsuch introducing a bankruptcy opinion like no one else can:

At one level, this is a dispute over loan payments secured by a nearly 30 year old Pontiac Trans Am. At another level, this case tests the limits of a bankruptcy trustee’s statutory power to displace existing lienholders.

4. Baseball Bankruptcies in October Series

But for the depth of work and/or sentimentality that characterize my top three favorites, the Baseball Series will always be my favorite. I love October Baseball and it just so happens that it has featured recently-bankrupt teams (the Chicago Cubs and the L.A. Dodgers) and a “bankruptcy-adjacent” team (the Houston Astros).

And while baseball games are now supposed to be shorter in duration, the pre-2023 World Series games provided plenty of time for in-game blogging:

  • Click here for the Chicago Cubs post that started the series
  • Click here for the L.A. Dodgers post
  • Click here for the Houston Astros post

3. Justice Antonin Scalia’s Bankruptcy Opinions

3. Justice Ruth Bader Ginsburg’s Bankruptcy Opinions

I can’t choose between these two tributes and, because Justice Scalia and Justice Ginsburg were such unlikely friends from opposite ends of the spectrum, I won’t. I got lucky that such historically-important and larger than life justices also had such a significant bankruptcy footprint. In many ways, these bookend posts define the blog for me.

2. History of Law Firm and Professional Websites

The three-part New Years 2023 series on the history of professional websites (going back to the 90s) was an insane labor of love that took more than two years of off an on work to complete. At one point, I think I was hitting the Wayback Machine site so frequently that I literally shut it down.

But that site revealed an Easter Egg of all Easter Eggs when I uncovered the long lost King & Spalding “2001 Blooper Reel” video that was buried in the archive of its old website.

Anyway, these posts are loaded with nostalgia.

  • Click here for Part 1
  • Click here for Part 2
  • Click here for Part 3

1. Judge W. Homer Drake, Jr. Series

At least in Georgia, we’ve all been riding Judge Drake’s coattails for decades. And it goes beyond Georgia because so many people reached out to me after I posted this series—not about the series or even the cases summarized in the series, but Judge Drake himself, the judge who the American College of Bankruptcy describes as the longest serving bankruptcy judge in history and one of the longest serving federal judges ever.

Sadly, Judge Drake died about a year later. It’s only fitting, then, that I road Judge Drake’s coattails one last time last March when the Southeastern Bankruptcy Law Institute asked me if I’d participate in the SBLI’s luncheon honoring Judge Drake. As many of you know, Judge Drake founded SBLI in Atlanta in 1974. In fact, it will celebrate its 50th year this year.

SBLI thought that Judge Paul Bonapfel was giving the keynote tribute to Judge Drake, with me giving only a short introduction. Thus, I’m sure its planners were understandably surprised and nervous when Judge Bonapfel switched the order a week prior and asked me to do it. On the one hand, I’m easily the least distinguished person to ever tribute Judge Drake in public. On the other hand, that neat opportunity would have been unavailable without this blog and Judge Bonapfel’s generosity.

Bonus: A Tribute to Jerome L. “Jerry” Kaplan

This might not be your favorite, but I’d be remiss not to mention the post that is dearest to my firm and me. And that is my tribute to Jerry Kaplan, who happened to be friends with Judge Drake going way back. Naturally, this tribute turned into a history of Stone & Baxter and its predecessors going back 60 plus years. They just don’t make lawyers like Jerry anymore.

And so there you have it, my favorite posts. If you’d like to know about other times when I occasionally post something other than boring case summaries, then you can subscribe to Plan Proponent via email here.

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.

Conclusion

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.

If you’d like to stay on top of this and other important bankruptcy issues, then you can subscribe to Plan Proponent via email here.

 

 

A year and a day ago, we published our first of a number of posts on Baker Botts  v. ASARCO, wherein the Supreme Court held that bankruptcy professionals may not recover fee-defense costs incurred in “defending” their fee applications. So, what better way to mark the one year anniversary of our coverage of Baker Botts than more coverage of Baker Botts. And, we figured we’d make-up for a lost June (this is our first and last post in June!) by plugging some of our non-blog coverage that came out in June. That counts, right?

First, I participated in a short interview with Jim Christie of Reuters on June 15. Jim, a reporter out of San Francisco, has been covering Baker Botts for quite a few months now, especially as it has played out in Delaware. He’s been nice enough over the last year to call a few times and ask this humble country lawyer from Macon, Georgia what he thinks about the cases. This time around, Jim called about the latest Baker Botts objection filed in Delaware in the Sports Authority Chapter 11. In that case, the Acting United States Trustee, Andrew Vara, who’s been leading the charge on Baker Botts, objected to the debtor’s application to employ Gordon Brothers Asset Advisors as an appraiser. The application garners a copy/paste objection from Vara because it reflects yet another attempt in Delaware to avoid Baker Botts. The objection is notable, though, because it’s aimed at a non-attorney professional. Click here for the Reuters article.

Second, the Association of Insolvency & Restructuring Advisors published its Second Quarter 2016 AIRA Journal earlier this week. Reflecting its exceptional taste or a fit of insanity, AIRA chose my Baker Botts article for the front cover of all places! The article is titled “Baker Botts v. ASARCO: An Equal Opportunity Application of the Supreme Court’s Prohibition on Fee-Defense Reimbursement to All Bankruptcy Professionals.” Super catchy and concise, eh? It provides a nice summary of the case for those, especially non-attorneys, who don’t read Plan Proponent.

It also covers an issue that we haven’t covered already: the application of Baker Botts to non-attorneys. Back in March when I submitted article, In re River Road Hotel Partners, LLC, an Illinois case, had just hit the District Court on appeal and, thus, was a good starting point for that issue. In that case, the bankruptcy court held that there is no meaningful distinction under Baker Botts between attorneys and non-attorneys and, thus, Baker Botts applies to non-attorney professionals, too. Fast forward to June: Mr. Vera relies on In re River Road in his objection (as he should).

We’ll keep an eye on Sports Authority and the River Road appeal. In the meantime, click here for the 2Q 2016 Edition of the AIRA Journal. You can also click that giant, subtle picture at the top!

That’s all for the moment. I’ll now go enjoy the last 15 minutes of my 30s!

If you’d like to stay on top of this and other important bankruptcy issues, then you can subscribe to Plan Proponent via email here.

 

(Getty Images)[1]

Talk about timing. Yesterday, barely a week after Dave blogged about Justice Thomas’ admission that he might enjoy and appreciate bankruptcy cases more than his colleagues, Justice Thomas was the sole dissenting justice in the Supreme Court’s 7-1 decision in Husky International Electronics, Inc. v. Daniel Lee Ritz. The stated issue before the Court: Does the term “actual fraud” in 11 U.S.C. § 523(a)(2)(A) require a misrepresentation? The Court answered “No.” Justice Thomas disagreed.

We’ll cover Husky in 2 posts. Today, I’ll provide the overview that all Supreme Court decisions merit. Next, I’ll attempt to untangle Justice Sotomayor’s dicta (holding?) regarding the term “obtained by” in § 523(a)(2). Thus, over the next couple of days, we’ll aim to sort out whether the Supreme Court’s surgical attempt to resolve a limited split between the Fifth and Seventh Circuits spilled over into and, thus, clouded (rather than illuminated) our understanding of § 523(a)(2)(A).

Overview of the Case

The Husky facts do not represent a typical voidable transfer[2]. As a result, they’re necessary to, but also might obstruct, a clear understanding of the majority’s opinion.

Underlying Dispute

Husky, an electronic components supplier, sold its products to Chrysalis. Over the course of Chrysalis’ purchases, Chrysalis ran-up a $163,999 bill. During that time, Daniel Ritz was a director of Chrysalis and owned at least 30% of Chrysalis’ common stock. In 2006 and 2007, Ritz drained Chrysalis of sufficient assets to pay Husky by transferring large sums of Chrysalis’ money to other entities controlled by Ritz. In 2009, Husky sued Ritz, claiming that Ritz was personally liable for Chrysalis’ debt under Texas Business Organizations Code § 21.223(b). While the Supreme Court did not quote that provision, the text is important.

Specifically, it provides that § 21.223(a)(2), which limits shareholder liability for corporate obligations, “does not prevent or limit the liability of a holder, beneficial owner, subscriber, or affiliate if the obligee demonstrates that the holder, beneficial owner, subscriber, or affiliate caused the corporation to be used for the purpose of perpetrating and did perpetrate an actual fraud on the obligee primarily for the direct personal benefit of the holder, beneficial owner, subscriber, or affiliate.” Essentially, § 21.223(b) is a veil-piercing statute.

Ritz Files Bankruptcy

Before the federal District Court could rule, Ritz filed an individual Chapter 7 bankruptcy. In response, Husky simply repackaged its claim against Ritz in an adversary proceeding in the Bankruptcy Court and then raised § 523(a)(2)(A) as bar to Ritz being discharged of his liability for that claim on account of his “actual fraud.” Section 523(a)(2)(A) provides that a bankruptcy discharge “does not discharge an individual debtor from any debt…for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by…false pretenses, a false representation, or actual fraud…”

Bankruptcy Court v. District Court 

The Bankruptcy Court rejected both of Husky’s claims, concluding that (1) Ritz was not liable for Chrysalis’ debt under the Texas statute and (2) even if Ritz were liable, § 523(a)(2)(A) did not except that liability from discharge. The District Court disagreed with the former, concluding that, by draining Chrysalis of its assets (i.e., orchestrating “fraudulent transfers”) Ritz committed “actual fraud” against Husky within the meaning of the Texas statute. Therefore, Ritz was personally liable for the Chrysalis debt. Nevertheless, the District Court agreed with the latter. Specifically, it concluded that, because the term “actual fraud” in § 523(a)(2)(A) requires a misrepresentation and Ritz made no misrepresentation to Husky, Ritz’ liability for Chrysalis’ debt should still be discharged in Ritz’ bankruptcy.

Appeal in the Fifth Circuit

On appeal, the Fifth Circuit affirmed. However, it didn’t address whether Ritz was liable for Chrysalis’ debt under Texas law. Instead it focused on the the § 523(a)(2)(A) issue. That is, does the term “actual fraud” in § 523(a)(2)(A) require a misrepresentation? Agreeing with the District Court, the Fifth Circuit held, as paraphrased by the Supreme Court, that a “necessary element of ‘actual fraud’ is a misrepresentation from the debtor to the creditor.” And because the fraudulent transfers orchestrated by Ritz didn’t involve misrepresentations to Husky, § 523(a)(2)(A) didn’t provide an exception. In holding so, the Fifth Circuit split with the Seventh Circuit’s decision in McClellan v. Cantrell (holding, essentially, that the term “actual fraud” doesn’t require a misrepresentation).

Part A of the Decision: Majority Reads “Actual Fraud” Broadly

A 7-1 Supreme Court reversed, with Justice Thomas dissenting. The majority opinion breaks down into two major sections. Part A addresses the circuit split: Does the term “actual fraud” in § 523(a)(2)(A) require a false representation? No, answers the majority. Part B addresses Ritz’, as well as Justice Thomas’, positions. In the process, the majority discusses § 523(a)(2)(A)’s “obtained by” term and, arguably, confuses an otherwise straightforward opinion. Put another way, my knee-jerk reaction was to get caught-up in that discussion instead of the stated “actual fraud” issue that created the Circuit split. More on this later.

Does “actual fraud” require a misrepresentation? No.

The majority concludes that the term “actual fraud” does not, in fact, require a misrepresentation. First, the majority makes much of the distinction between the prior Bankruptcy Act (“false pretenses or false representations”) and the current Bankruptcy Code (“false pretenses, a false representation, or actual fraud). Emphasizing, as it always does, the canons of construction, the Court presumed that Congress intended a change to the statute and, thus, rejected Justice Thomas’ contention that “actual fraud” was added to clarify, rather than expand, the scope of the phrases “false pretenses” and “false representation.”

Second, the majority relies on the Court’s Field v. Mans decision to conclude that the common law informs the terms used in § 523(a)(2)(A), including the term “actual fraud.” Thus, under the common law, the word “actual” refers to any fraud that involves “moral turpitude” or “intentional wrong.” On the one hand, the majority, refusing to be pinned-down on a definition “for all times and all circumstances,” leaves the definition of “fraud” open. On the other hand, the majority is satisfied that, going all of the way back to the Statute of 13 Elizabeth, “fraud” has included transfers of assets that (“like Ritz’ scheme”) impair a “creditor’s ability to collect” (i.e., fraudulent transfers). Further, the majority concludes that, historically, being liable for such “fraud” didn’t depend on a “false representation” or any representation, for that matter. Ultimately, the majority concludes that § 523(a)(2)(A) isn’t limited to “inducement-based” frauds; a “false representation has never been a required element” of “actual fraud”; and, thus, “actual fraud” can include fraudulent conveyances.

Our takeaway on the “actual fraud” question

To be sure, the Supreme Court granted certiorari on the limited issue of whether the term “actual fraud,” as used in § 523(a)(2)(A), requires a misrepresentation. Indeed, the Supreme Court sensed a sufficient split between the Fifth and Seventh Circuits on that precise issue. Additionally, much of the discussion and commentary leading-up to the decision focused on that question. For example, see here and here. Finally, but for Part B of the decision (which I’ll focus on in tomorrow’s post), the majority decision, right or wrong, articulates that limited issue, addresses that limited issue, and, still arguably decides just that issue.

Thus, one might expect that I’d devote this part of the post to evaluating whether the majority decided that limited issue correctly. That is, did the Supreme Court err in holding that a misrepresentation is not a required element of “actual fraud” under § 523(a)(2)(A)? However, if I’ve learned one thing about blogging about Supreme Court opinions, it is that opinions are a dime a dozen. From our standpoint as practitioners, however, does it really matter? It is now the law of the land that “actual fraud” doesn’t require a misrepresentation. Unlike other recent Supreme Court cases where the core holdings might leave room for discussions about scope (e.g., Baker Botts v. ASARCO), Part A of Husky is clear: misrepresentations aren’t required, period.

In short, if answering the “Did they get it right?” question is not essential to communicating the potential impact of a Supreme Court decision, then we’d just as soon leave that question to those who specialize in and are better-equipped for answering academic questions. For example, in his amicus brief, Eric Brunstad argued, rather convincingly, that equating the culpability required for “actual fraud” and for “actual intent” to “hinder, delay, or defraud” is not only inappropriate, but also expands § 523(a)(2)(A) in a dangerous way. However, his argument merely represents a studied conclusion that differs from the majority’s studied conclusion. Both conclusions flow from the same question: What does common law tell us? It just so happens that answering that question is the exclusive purview of the Supreme Court, whether acting as 8 or acting as 9.

For us as practitioners, while we like the debate and intellectual combat, the question is now decided.

Conclusion

In short, I’ll let those with more perspective and more time weigh-in on whether the majority decided the “actual fraud” question correctly in Part A. However, I’m still very interested in whether, notwithstanding Part A, the majority decision might impact our practice area in ways that exceed the Circuit split.  That (i.e., Part B) will be the subject of the next post. Reserving the right to change my mind on further reflection, my initial reaction to Part B is that the majority, in seeking to overcome Justice Thomas’ dissent, begins to reach. As I’ll discuss in the next post, Part B is a straightforward and correct response to Ritz’ arguments on appeal. However, finding a more formidable foe in Justice Thomas, the majority starts to color outside the lines of an otherwise precise and defensible decision. As a result, even the best of the practitioners studying the decision might find themselves confused without additional effort. Thus, I’m punting ’til next time!

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[1]  Commenting on the March 1, 2016 Husky oral argument, the ABI’s Bill Rochelle remarked that “I very much miss Justice Scalia and his laser-like analysis of statutory language. It is remarkable how different oral argument is without him on the bench and without his insistence on a careful reading of the statute.” Not only are Bill’s remarks fitting in light of the above photo, but they also might explain a little about the now 8 justice Court’s Husky v. Ritz decision.

[2] The Supreme Court’s terminology is behind the times. Not that the Court would care, but in Georgia, for example, these causes of action are now voidable transfers under the new Model Act passed last year. In deference to the Court (and most of the other states that have not adopted the Uniform Voidable Transfer Act, we will use the term “fraudulent transfer” and “fraudulent conveyance.” For more info, here’s a panel discussion that Dave participated in in 2014.

East Texas drilling

This will be a placeholder post for the Baker Botts, L.L.P. v. ASARCO, LLC timeline. On March 17, Delaware’s Judge Shannon formally adopted in his New Gulf Resources Chapter 11 case Judge Walrath’s Baker Botts opinion in Delaware’s Boomerang Tube Chapter 11 case. We’ve been covering Baker Botts and the fee-defense cost issue since June 2015 when the U.S. Supreme Court held that bankruptcy professionals may not recover fee-defense costs incurred in “defending” their fee applications. And as we discussed back in February, Judge Walrath was the first of the Delaware bankruptcy judges to weigh-in on Baker Botts. Specifically, she held that neither § 328(a) of the Bankruptcy Code, nor a retention agreement provides a sufficient Baker Botts workaround.

In New Gulf, the debtors moved to employ Baker Botts as counsel under § 327(a). Unlike the Boomerang Tube application, the New Gulf application is rather exotic. Pointing out that it was charging hourly rates that were 10-15% lower than usual, Baker Botts proposed that it be paid a “Fee Premium” to account for bankruptcy payment risk equal to 10% of its billings during the case, with two conditions: (i) the fee would accrue during the case, but not be payable until the court approved the final fee application and (ii) the court must determine that Baker Botts incurred “material” fee-defense costs. However, if the court determined that Baker Botts incurred material fee-defense costs, then Baker Botts would earn the Fee Premium “regardless of the outcome of the objection.”

On February 1, Judge Shannon entered an initial opinion letter suggesting that he was inclined to reject the Fee Premium. However, he permitted Baker Botts to file another brief on March 2, 2016. In its brief, Baker Botts insisted that it was not seeking compensation for fee-defense. Rather, it was merely seeking a payment risk premium. Although it suggested that the premium merely brought its hourly rates in line with the market, Baker Botts conditioned the premium on the incurrence of material fee-defense costs. As the U.S. Trustee had put it, the premium is a “direct attack on ASARCO, repackaged.”

In his March 17 final opinion letter, Judge Shannon explained that “I stand by my earlier determination” that Baker Botts’ proposal “runs afoul of the holdings in Asarco and Boomerang Tube.” It was a “creative approach,” but there was no “meaningful distinction” between the New Gulf and Boomerang.

Therefore, we now have 3 cases rejecting attempted Baker Botts workarounds:

In re Boomerang Tube, LLC; In re New Gulf Resources, LLC; and Samson Resources Corporation.

Conclusion

Rather than adding more commentary of our own, we’ll conclude by pointing you to the excellent Basis Points blog. Specifically, Evan Flaschen and Chelsea Dal Corso address the March 17 letter, and are somewhat colorful in their growing impatience with these failed attempts to avoid Baker Botts. Here’s their blog entry from March 18: Enough With the Fees-on-Fees Already: ASARCO Really Means What It Says.

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