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Baker & Botts: Efforts continue to define its scope.

Byline: Mark D. Taylor

In Baker & Botts LLP v. Asarco LLC, the Supreme Court held that (a) the American Rule applies to fee-defense fees in bankruptcy fee applications, and (b) Section 330(a)(1) of the Bankruptcy Code does not include a statutory exception to the American Rule, but rather only authorizes reasonable compensation for actual, necessary services. Reasonableness, in turn, is evaluated using the lodestar analysis of Section 330(a)(3). The American Rule provides that, absent statutory or contractual exception, each litigating party must bear its own legal expenses. The structural effect of this ruling is to deny compensation to retained professionals who seek receiver of fees incurred while defending their fees.

The bankruptcy bar initially received this decision with surprise, since many in the bar had little familiarity with the American Rule and no appreciation for the fact that it might apply in multi-party contests, like complex bankruptcy proceedings. However, true to form, the bar has begun exploring the parameters of Baker & Botts and using it as a tool to create leverage.


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Most recently, the issue was raised in two Delaware cases, in which proposed committee counsel sought to write exceptions to the American Rule as applied to fee-defense litigation in their retention agreements. See In re Boomerang Tube, LLC, and In re Northshore Mainland Serv., Inc. The U.S. Trustee has objected to both of these applications. The end result in these cases has yet to be determined.

Anecdotally, the issue has been raised by debtors and sub-lenders when negotiating with senior lender's in claims disallowance proceedings. This may seem far-fetched. However, in some circuits, a lender's right to reasonable attorneys' fees is evaluated under the lodestar analysis of Section 330(a)(3). In re Consolidated Prop. LP (reasonableness of Section 506(b) secured lender's fees reviewed under lodestar analysis). The differences between Section 330(a), and its requirement of actual, necessary services, and Section 506(b), and its requirement of reasonable fees provided for in the underlying loan documents, should be sufficient to end the discussion. Further, Baker & Botts applies only to retained professionals and only to fee applications under Section 330(a) of the Bankruptcy Code. Lenders clearly do not fall within the category of retained professionals.

However, while application of Baker & Botts to fee-defense fees of secured lenders seems like a straw man, it is axiomatic in bankruptcy that out of the money creditors seek leverage wherever leverage can be found. If carried to its farthest extreme, could Baker & Botts apply to any party, who seeks to establish the reasonableness of its attorneys' fees, if those fees are evaluated by a Section 330(a) lodestar analysis?

This question takes us back to the contractual exception to the American Rule proposed in the two Delaware cases, i.e., contractual provisions authorizing recovery of fees-defense fees. Although it remains to be seen whether Baker & Botts applies to fee-defense fees of lender's counsel, debtors and out-of-the-money subordinate debt holders or unsecured creditors' committees could use the threat of costly fee-defense litigation to leverage a settlement that might otherwise be unavailable. Accordingly, lenders may want to consider revising future loan agreements to protect themselves, and their counsel, from the impact of Baker & Botts.

The ultimate scope of Baker & Botts has yet to be determined. However, any party in interest seeking to establish the reasonableness of its attorneys' fees through a court order should consider including contractual exceptions to the American Rule for fee-defense fees.
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Publication:Inside Counsel Breaking News
Date:Oct 21, 2015
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