Argument recap: Justices dubious of paying fees for defending bankruptcy fee applications
on Feb 26, 2015 at 3:20 pm
It looked bleak for petitioner Baker Botts from the earliest moments of the argument yesterday in Baker Botts L.L.P. v. ASARCO LLC. The issue in the case is whether the fees that a law firm (Baker Botts) spends defending a fee application in bankruptcy can be compensated out of the estate, and the Justices who showed much interest in that question seemed hesitant (at best) to allow compensation.
For almost the entire time Aaron Streett was at the lectern (for Baker Botts), he was peppered with questions from the Chief Justice and Justices Antonin Scalia and Sonia Sotomayor. Justice Scalia’s comments suggested that he was sympathetic to the argument of ASARCO (the party opposing Baker Botts’s fee application) that the statute permits compensation for fees only if the services help the estate. Distinguishing between the costs of preparing the fee application (which plainly are compensable) and the costs of litigation defending the application (the issue here), Justice Scalia commented: “[W]hen you prepare [the fee application] you’re serving the trustee – you’re serving his needs. But if he’s disallowing it, you’re, the contrary, acting against the trustee’s interest.”
Justice Sotomayor emphasized the same point in her questioning of Streett:
You’re ignoring one important … difference, which is [that] in everything else, you’re acting for the estate. When you’re defending fees, you’re acting for yourself. There is a self-interest involved because you could just give up on the objections and walk away. The only reason you’re fighting them is because it puts more money in your pocket. Not because it puts more money in the estate’s pocket.
For his part, the Chief Justice focused on the issue of “parity.” One of the leading points Streett presented was that Congress had intended to put bankruptcy attorneys at parity with non-bankruptcy attorneys, so that highly skilled firms would be willing to work in bankruptcy proceedings. To the Chief Justice, that actually argued against payment of these fees:
[O]n the parity point, if you’re not doing bankruptcy work and you send the client a bill and they don’t pay it, if you’ve got to take litigation action or whatever, you don’t get … those fees back. We follow the normal American rule and you pay your own fees and if you win, good; if not, you don’t.
Returning to the same point a few minutes later, he tied that point to a theme common in the Court’s recent bankruptcy decisions – that the Bankruptcy Code is so detailed that it is reasonable to expect it to explain important deviations from common expectations:
[T]he American rule is very fundamental, and it strikes me bankruptcy is one of those areas where they go into considerable detail telling you who pays what and when you can get it …. It seems to me that if they wanted to go against the basic American rule – it’s the American rule, patriotic – they would have spelled that out a little more clearly.”
Streett worked diligently to get his position across to the Court, but there was little sign that he had made any headway by the time he gave way to Assistant to the Solicitor General Brian Fletcher, representing the government in support of Baker Botts.
The main results of Fletcher’s presentation, however, seemed to be the revelation of two further reasons the Justices seemed predisposed to deny the fees. First, acknowledging the allegations in Baker Botts’s brief that ASARCO acted abusively during the litigation opposing its fees, Justice Samuel Alito dismissed that as a basis for making fees generally available: “Why isn’t the problem here better dealt with by sanctions. If a party like ASARCO makes frivolous objections, then sanctions can be imposed on them. And the fees fall on the party that caused the problem rather than on the estate.”
Even more tellingly, when Fletcher argued that attorneys would not be made whole if their fee was diluted by the costs of litigation to recover it, Justice Scalia pointedly commented:
No more so than the lawyer who submits a bill outside of bankruptcy to a client, and the client objects, and the lawyer has to litigate. Would you say that dilutes the lawyer’s recovery? No, I assume that the lawyer’s fees are set at a high enough level that they take into account the fact that sometimes you will have to litigate to get the fees. And why can’t bankruptcy lawyers do the same thing?
By contrast, the argument of Jeffrey Oldham (appearing for ASARCO) was largely uneventful. The Justices had several practical questions: whether lawyers charge private clients for the costs of preparing fee applications, whether fee litigation is more common in bankruptcy than in other fields of practice, and the like. But what they didn’t have were any pointed criticisms of his client’s position.
The most intense questioning was an exchange with Justice Elena Kagan about whether it really was “reasonable” compensation for what the attorneys had done if they didn’t get the costs of obtaining their fees, but nothing heated ever developed. It wasn’t clear that Oldham satisfied her concerns, but she certainly didn’t seem as incisively critical of his comments as the Justices had been of Streett’s presentation earlier in the day.
The most ominous point for Streett surely was the closing of Oldham’s argument, where he talked for several minutes straight through – an eternity in the time frame of the Justices – without a single interruption. It is difficult to believe that five of the Justices disagreed with what Oldham was saying but sat silently for so long listening to it. I think this is another case that we can mark down as a likely candidate for a relatively prompt opinion.