Approval of Fee Defense Provisions in Retention Agreements Post-'ASARCO'

The Bankruptcy Code authorizes a debtor (or its bankruptcy trustee) to retain and compensate attorneys and other professionals during the course of the debtor's bankruptcy case. Specifically, Section 327 allows a debtor, with bankruptcy court approval, to employ attorneys, accountants or other professionals to represent or assist the debtor in connection with its bankruptcy case. Section 328, in turn (and again subject to court approval), allows the debtor to retain such professionals “on any reasonable terms and conditions of employment, including on a retainer, on an hourly basis, on a fixed or percentage fee basis or on a contingent fee basis.” Finally, Section 330 permits a court to award to a professional retained under Section 327 “reasonable compensation for actual, necessary services” and “reimbursement for actual, necessary expenses.” Given this framework, the retention and compensation of professionals in a bankruptcy case is often a routine affair. The debtor will seek, and usually receive, authority to retain its professionals on specified terms. Thereafter, professionals may periodically file applications seeking payment of fees and expenses incurred during the course of the bankruptcy case. If the court concludes that the requested compensation is reasonable, it will award payment by the debtor's estate. However, if any party objects to a professional's fee application, this process can take an unwelcome turn.

Contested fee application litigation can result in additional professional fees and expenses. Vexingly for the professional, these “fee defense” costs may not be payable from the debtor's bankruptcy estate: In Baker Botts v. ASARCO (135 S. Ct. 2158 (2015)), the U.S. Supreme Court held that fees and costs incurred by a professional on account of fee-defense litigation are not compensable under Section 330. To mitigate this risk, bankruptcy professionals have begun to include fee-defense provisions in their retention agreements. While these types of provisions have been met with objection, the U.S. Bankruptcy Court for the District of New Mexico in In re Hungry Horse, Case No. 16-11222 (Bank. D.N.M. Sept. 20, 2017) recently approved a retention agreement between a debtor and its counsel that entitled counsel to payment of all reasonable fees incurred in defending its fee applications. Importantly, the bankruptcy court determined that such a provision was not barred by the Supreme Court's holding in ASARCO.

In ASARCO, the Supreme Court began its analysis by recognizing the “bedrock principle known as the American Rule” which requires each litigant to pay its own attorney fees—win or lose—unless a statute or contract provides otherwise. Because none of the parties in ASARCO relied on the contract exception to the American Rule, the Supreme Court considered whether Section 330 of the Bankruptcy Code provides a statutory exception to the American Rule in the context of fee defense litigation. On this point, the Supreme Court concluded that nothing in Section 330 warranted an exception to the American Rule. Indeed, the Supreme Court recognized that Section 330(a)(1) authorizes compensation only for “actual, necessary services rendered” by the professional. The Supreme Court therefore concluded that because “litigation in defense of a fee application is not a 'service' [to the debtor's estate] within the meaning of Section 330(a)(1),” fees and expenses incurred in connection therewith are not allowable as compensation under Section 330.