Response by Professor Alan B. Morrison
Geo. Wash. L. Rev. Docket (Oct. Term 2014)
“Faced with falling copper prices, debt, cash flow deficiencies, environmental liabilities, and a striking workforce, ASARCO filed for Chapter 11 bankruptcy.”1 With the approval of the bankruptcy court, ASARCO hired two law firms to represent it. The question the Court had to decide was whether the courts had the power to order ASARCO to pay the $5 million spent by the two law firms to recover the $124.1 million in fees they sought from ASARCO. The apparent reason the fees were so high is that “the firms prosecuted fraudulent-transfer claims against ASARCO’s parent company and ultimately obtained a judgment against it worth between $7 and $10 billion.”2 As a result of that recovery, “ASARCO emerged in 2009 with $1.4 billion in cash, little debt, and resolution of its environmental liabilities.”3
The Bankruptcy Code specifically authorizes debtors like ASARCO to hire attorneys to assist them, and in the Supreme Court everyone agreed that the two firms were entitled to recover the full $124.1 million. The question was whether the remaining $5 million could be paid under § 330(a)(1), which permits a bankruptcy court to “award . . . reasonable compensation for actual, necessary services rendered by” its lawyers. According to the majority, in an opinion written by Justice Clarence Thomas, and joined by Chief Justice Roberts, Justices Scalia, Kennedy and Alito (with a concurring opinion on the main argument by Justice Sotomayor), the outcome in federal court was foreordained by the American Rule, under which each side bears its own attorneys’ fees unless Congress has expressly provided to the contrary. The majority parsed the relevant provisions of the Code and found nothing that changed the basic rule and hence the Court upheld the denial of the $5 million in fees for what the Court referred to as “defending their fee application.” Justice Stephen Breyer, along with Justices Ginsburg and Kagan, dissented. As they saw the question, “reasonable compensation” may include the cost of defending the fee application.4
There is one fact about this case that neither opinion noted that should be taken into account in deciding whether the law firms can be paid for doing what they had to do to collect their fees. Because it filed for bankruptcy protection against its creditors, ASARCO lost some of its freedom to carry on its business as it chose. That included the ability to hire and pay counsel, which both became subject to the court’s approval. Included in those approvals are not simply the fact of the retainer, but their terms as well. That control by the court is crucial because it meant that the two firms could not do what law firms and many other businesses (such as landlords and banks) do: include in their contracts a provision that allows the party to recover its attorneys’ fees if a dispute arises, which in this case would be over the amount of fees owed to the law firms. The American Rule does not generally override express contractual provisions to the contrary. But in bankruptcy, the requirement of court approval—which is there mainly to protect creditors in the event there are insufficient funds to pay everyone in full, as is often the case—does override it, or at least it does when necessary to protect other parties to the proceeding. On that understanding, the phrase “reasonable compensation” should be broad enough to permit the bankruptcy court to exercise its discretion to award fees for having to file an application and prove up the value of services rendered at an evidentiary hearing. That seems an appropriate tradeoff for not simply being able to send a bill and expect that it be paid, or, if not, suing the client to recover its fees. In short, under these circumstances, the American Rule does much less work than the majority concluded.
The dissent, and interestingly the United States, read the fee awarding authority much like fee-shifting statutes that Congress has enacted, under which the applicant ordinarily is awarded fees for establishing an entitlement to fees.5 But that analogy does not quite seem to fit for two reasons. First, in most fee-shifting statutes, the reason for the exception is either that prevailing party will not recover a sum of money to pay his counsel (think of Freedom of Information Act cases where no lawyer would want a percentage of the documents made available) or special encouragement is thought desirable to advance a substantive goal (eliminate discrimination)—or sometimes both, where there is a recovery but the amount is too small to properly compensate the lawyer. Those rationales have no bearing in bankruptcy where there is always cash to pay for attorneys and no special reason to encourage the bringing of claims or defending them.
Second, under statutory exceptions to the American Rule, the party paying the fees on fees (as they are sometimes called) is the defendant, which in bankruptcy would be the debtor. But in many bankruptcies, the real parties in interest are the creditors, unless they are being paid in full, which happened here, but rarely does. That reality suggests that “reasonable compensation” should not generally provide for fees on fees (as is true in under other fee-shifting provisions), especially if the creditors are not being paid in full. But here, when the creditors were made whole, and ASARCO ended up with $1.4 billion in cash and almost no debt, there is no reason to hold back on fees on fees. In short, § 330 is neither a restatement of the American Rule, nor a fee-shifting provision. Instead, it is authority for courts to control fees that debtors incur in bankruptcy to protect the interest of creditors to the extent that they may not be paid in full.
The law firms and the United States argued that denying the firms the additional $5 million was ill advised as a policy matter. The majority rejected these arguments, saying that they were matters left to Congress if it wished to change the otherwise applicable American Rule. That response is relevant only if this is an American Rule case, and I suggest it is not. And if it is not, policy arguments, including how a bankruptcy judge should exercise discretion in deciding on reasonable compensation, are relevant. One such argument is that the rule accepted by the majority gives double leverage to debtors like ASARCO: they can make law firms jump over high hurdles to collect their fees, knowing that they will not have to pay for being unreasonable (although not outrageous enough to trigger Bankruptcy Rule 9011 or 28 U.S.C. § 1927), and they know the firms cannot protect themselves by inserting clauses in their retainer agreements providing expressly for fees on fees, because § 330(a)(1) has now been construed to forbid such fees.
It is hard to work up much sympathy for law firms that were paid $124.1 million and wanted another $5 million for collecting that fee. It is also hard to imagine what they did that would cost $5 million, even if there were extensive discovery and a six-day hearing, after they filed a detailed fee application that presumably set forth the full basis for their requests and for which they were paid. The next case will probably involve much smaller amounts, but the debtor’s leverage will remain the same, and the law firm may have to settle for an unreasonably low fee in order to avoid spending much more money trying to collect what it reasonably believes it is owed. That does not seem consistent with what § 330(a)(1) was designed to accomplish: permit the debtor to hire competent lawyers and pay them “reasonable compensation” under the circumstances of each bankruptcy.
Dean Alan B. Morrison is the Lerner Family Associate Dean for Public Interest and Public Service Law at The George Washington Law Review. Dean Morrison has argued twenty cases in the Supreme Court, including victories in Goldfarb v. Virginia State Bar (holding lawyers subject to the antitrust laws for using minimum fee schedules); Virginia State Board of Pharmacy v. Virginia Citizens Consumer Council (making commercial speech subject to the First Amendment); and INS v. Chadha (striking down over 200 federal laws containing the legislative veto as a violation of separation of powers).
1. Baker Botts LLP v. ASARCO LLC, No. 14-103, slip op. at 1 (U.S. June 15, 2015) (majority opinion).
2. Id. at 2 (majority opinion).
3. Id. at 2 (majority opinion).
4. Id. at 1 (Breyer, J., dissenting).
5. Commissioner v. Jean, 490 U.S. 154, 163 (1990).
Alan B. Morrison, Response, Barket Botts, LLP v. ASARCO, LLC, Geo. Wash. L. Rev. Docket (June 15, 2015), http://www.gwlr.org/baker-botts-llp-v-asarco-llc/.