In Baker Botts LLP v. ASARCO LLC, the Supreme Court held that law firms that represented the debtor in possession (DIP) cannot recover from the estate for fees incurred defending their fee petition. Two firms representing the DIP had successfully litigated a fraudulent transfer claim against ASARCO's parent corporation and obtained a judgment in favor of the estate worth around $7-10 billion. The parent objected to the fees and after a six day trial, the court awarded the firms about $120 million for legal services, a $4.1 million enhancement for exceptional performance, and over $5 million for time spent defending their fee petition. The parent corporation appealed and the Fifth Circuit reversed on the award of fees for defending fees. It held that absent express statutory authority, each party pays his own attorney's fees (the "American Rule"), and although the Bankruptcy Code provides for payment of fees for legal services rendered to the estate, it does not provide a statutory basis to shift to the estate the fees incurred defending a fee petition.
Justice Thomas wrote the opinion for the majority (Thomas, Roberts, Scalia, Kennedy, Alito). Justice Sotomayor concurred in part and concurred in the judgment. Justices Breyer, joined by Ginsburg and Kagan, dissented. Justice Thomas invoked the Court's general jurisprudence regarding attorneys' fee awards under the American Rule. Under the Bankruptcy Code, the bankruptcy court may "award...reasonable compensation for actual, necessary services rendered by" such lawyers but only after "notice to the parties in interest and the United States Trustee, and a hearing....." 11 U.S.C. sec.330(a)(1). The U.S. Trustee regulates and monitors the fee petition process and requires compliance with its guidelines for compensation which impose timekeeping and reporting standards for professionals who submit fee petitions. The Court held that the phrase "reasonable compensation for actual, necessary services rendered" in section 330(a)(1) limits recovery of fees to those rendered for services to the DIP. In contrast, the law firms' claim for attorneys' fees were incurred in representing themselves in the fee petition process.
The law firms, of course, saw it differently. They argued that the litigation over the propriety of their fees was part of "services rendered" to the estate. The Court called that argument "untenable" and noted that the dissent rejected it too. The balance of the opinion addressed the arguments made by the United States as amicus curiae. The government conceded that defense of a fee application is not "service to the estate." But, it argued that such fees should be borne by the estate because costs incurred in defending fees affect the net compensation an attorney receives. This is the effect of the American Rule in every context in which it applies.
The United States argued that the unique nature of bankruptcy litigation justified a "judicial exception" to the American Rule. Outside of bankruptcy, a dispute about attorneys' fees is a private matter between the lawyers and the client. In a bankruptcy proceeding, the court supervises attorneys' fees (and other professional fees), with notice to and an opportunity to be heard from "parties in interest" who may raise their own objections to the fees on the merits or for strategic reasons. Justice Thomas concluded that whether bankruptcy litigators are especially vulnerable to fee dilution due to abusive litigation over their fees, "Congress has not granted us 'roving authority... to allow counsel fees...whenever [we] might deem them warranted. (citation omitted). Our job is to follow the text even if doing so will supposedly undercut a basic objective of the statute.'"