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Are Estate Professionals Entitled to Compensation for Defending Their Own Fees?

By Catherine Steege – December 3, 2014


When it comes to getting paid “[b]ankruptcy professionals operate in an environment that is virtually unheard of in the legal profession as a whole.” Comm. on the Judiciary, Hearing on Professional Fees in Bankruptcy (Mar. 24, 1992). Unlike most non-bankruptcy representations, simply pleasing the client is not enough to get the bill paid. Instead, counsel for a bankruptcy estate must subject his or her bill to close scrutiny not only by the bankruptcy court but also by every other party-in-interest in the case. That means that those in active litigation with the bankruptcy estate typically enjoy the right to object to the fees incurred by their opponent. Not surprisingly, many litigants take advantage of that opportunity, using the bankruptcy compensation process as another tool in their defense strategy, often at some considerable expense to the petitioning attorney. And when counsel seeks compensation for defending his or her fees, that request is often met with objections from the United States Trustee or others in the case. The net effect can be a significant bankruptcy tax on counsel’s bill, particularly in smaller cases where the fees incurred for defending fees can be a significant percentage of the overall bill.


Many believed that Congress had fixed this problem with the 1994 amendments to 11 U.S.C. §330. And the overwhelming majority of lower courts to consider the question have held that fees for defending fees are recoverable under §330. See, e.g., In re ASARCO LLC, No. 05–21207, 2011 WL 2974957, at *38 n.109 (Bankr. S.D. Tex. July 20, 2011) (collecting cases). But in April, the Fifth Circuit bucked this trend, holding that estate professionals cannot receive compensation under §330 for defending a fee application. Applying the so-called American Rule that each party must bear its own attorney fees, the Fifth Circuit held that except in the case of vexatious or frivolous objections, estate professionals cannot be compensated for defending their fees. See In re ASARCO, L.L.C., 751 F.3d 291, 299-302 (5th Cir. 2014). This October, the Supreme Court granted Baker Botts’s petition for a writ of certiorari from that decision and will decide “whether §330(a) grants bankruptcy judges discretion to award compensation for the defense of a fee application.” Baker Botts L.L.P v. ASARCO LLC, -- S. Ct. --, 2014 WL 3795992 (U.S. cert. granted).


The text of §330, its legislative history, and public policy all support allowing bankruptcy estate professionals fees to be paid for defending their fees in most circumstances. First, the broad authority granted to bankruptcy courts to award compensation under §330 supports the conclusion that bankruptcy courts may award compensation for defending a fee request. Section 330 provides that bankruptcy courts “shall consider ... all relevant factors” when determining the amount of compensation to be awarded and are prohibited from allowing compensation in only two circumstances—where the fees sought are an “unnecessary duplication of services” or the services were not “reasonably likely to benefit the debtor’s estate” or “necessary to the administration of the case.” 11 U.S.C. §330(a)(3), (a)(4)(A). Section 330(a)(3)(C) also specifically provides that services necessary to complete a case are compensable.


Read together, these three provisions authorize bankruptcy courts to grant compensation for defending a fee petition. The “estate has an interest in obtaining a just determination of the amount it should pay its professionals.” In re First State Bancorp., No. 7–11–11916 JA, 2014 WL 1203141, at *2 n.10 (Bankr. D.N.M. March 24, 2014). Thus, such work is “necessary and beneficial to the bankruptcy system as a whole, and indirectly, to each estate participating in the system.” Boyd v. Engman, 404 B.R. 467, 483 (W.D. Mich. 2009). Further, until fee petitions are decided, a bankruptcy case cannot be closed;thus, such services are necessary towards the goal of closing the case. Put differently, had Congress intended to foreclose compensation for defending fee petitions, it would have included this type of work in its list of the types of services for which compensation cannot be allowed.


Second, when Congress enacted the modern Bankruptcy Code, it wanted to ensure that qualified counsel would accept bankruptcy representations, so it sought to legislatively end the practice of subordinating professional fees to the “economy of the estate,” a principle that required bankruptcy courts to award counsel lower fees than what most counsel could command for similar services outside of bankruptcy. Jacobowitz v. Double Seven Corp., 378 F.2d 405, 407 (9th Cir. 1967). Congress recognized that the only way to encourage highly qualified counsel to take bankruptcy cases was to provide for parity in compensation with fees that such counsel could earn in other comparable practice areas. See, e.g., In re UNR Indus., Inc., 986 F.2d 207, 209 (7th Cir. 1993). Thus, Congress provided that bankruptcy courts should consider “the cost of comparable services other than in a case under this title” when awarding professional compensation. 11 U.S.C. § 330(a)(1); see also H.R. Rep. No. 95-595 at 330 (1977). In response to bankruptcy court decisions that continued to hold that compensation could be awarded only if the fees “benefitted the estate,” Congress amended §330 in 1994 to provide that services necessary to the administration of the estate and rendered toward the completion of the case were compensable. See Bankruptcy Reform Act of 1994, Pub. L. No. 103-394, 108 Stat. 4106 (1994).


Third, sound policy reasons exist to allow such compensation. Forcing bankruptcy professionals to shoulder the financial burden of defending their fee applications “would be to provide an unhealthy incentive for persons opposed to professional fees to mount spurious objections as a means of extracting fee reductions, rather than because the work done for the estate was genuinely not for the benefit of the estate.” In re Worldwide Direct Inc., 334 B.R. 108, 112 (D. Del. 2005). This incentive would be particularly great in smaller cases where the cost of defending a fee application might be a substantial percentage of the fees sought. See, e.g., In re Walters, No. BKR. 04–06902–JM7, 2006 WL 6589027, at *7–8 (Bankr. S.D. Cal. May 30, 2006) (the fees for defending the fee application amounted to 27 percent of the fees requested). Moreover, the Fifth Circuit’s answer to this problem—that the possibility of sanctions will prevent abusive objections—is not a viable solution given the cost of obtaining a sanction award and the reluctance of courts to impose sanctions.


Further, denying compensation for defending a fee petition places an unfair tax on bankruptcy work that necessarily makes such work less profitable than non-bankruptcy engagements. For most engagements, an attorney need only obtain his or her client’s agreement to pay the bill. That is not true for estate professionals who must prepare detailed fee petitions and obtain court approval after public scrutiny of the bill. If the cost of defending the fee petition is not compensable, the effective hourly rate of the professional is reduced. That leads to the very lack of parity that Congress wanted to avoid when it enacted the Bankruptcy Code. Or as one court put it: “requiring counsel who has successfully defended a fee claim to bear the costs of that defense is no different than cutting counsel's rate or denying compensability on an earlier fee application. The economic effect is precisely contrary to the ... instruction that bankruptcy professionals are to stand on an equal footing with their non-bankruptcy counterparts.” Worldwide Direct, 334 B.R. at 112. Thus a policy that promotes parity necessarily has to provide for compensation for services that are mandated only because of the unique aspects of a bankruptcy case and the requirements of the code.


Strong arguments exist to allow bankruptcy professionals to be paid for defending their fee applications. Sometime next year, the Supreme Court will decide whether these arguments carry the day or whether further congressional amendments to §330 will be necessary to ensure that bankruptcy professionals are compensated on par with non-bankruptcy professionals.


Keywords: bankruptcy and insolvency litigation,11 U.S.C. § 330,compensation, fee objections


Catherine Steege is a partner with Jenner & Block LLP in Chicago, Illinois.



 
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