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Opinion analysis: Divided Court rules that “American Rule” bars fees for litigation over attorney’s fees in bankruptcy

The Court’s opinion in Baker Botts v. ASARCO, LLC pretty much amounts to an application of the first sentence Justice Clarence Thomas writes in his opinion for the Court after summarizing the facts: “Our basic point of reference when considering the award of attorney’s fees is the bedrock principle known as the American Rule: Each litigant pays his own attorney’s fees, win or lose, unless a statute or contract provides otherwise.” Some Justices might start out an opinion that ends up awarding fees with that sentence, but Justice Thomas probably is not one of them.

The dispute in this case involves fees for defending a fee application in bankruptcy. Law firms that work for the estate are appointed by the court and get paid only after the court approves fee applications, in a process that contemplates notice and a hearing to all involved in the case. The attorneys in this case (petitioners Baker Botts and Jordan, Hyden, Womble, Culbreth & Holzer) did extraordinary work for respondent ASARCO in its bankruptcy; among other things, they recovered a judgment against ASARCO’s parent for more than $7 billion. The attorneys sought fees of $120 million, which the court awarded after an extended dispute. The court also awarded $5 million in fees for the time that the firms spent defending their fee applications, challenged by the ungrateful ASARCO (now under control of the company that the firms successfully sued). The Fifth Circuit did not doubt that the $5 million was a reasonable fee for the time spent, but it held that the Bankruptcy Code does not authorize the award of those fees.

The Court’s opinion pretty much starts and finishes with the American Rule quoted above. Indeed, the decision’s collection and reaffirmation of quotations and citations calling for broad application of that rule is likely to earn frequent citations in the years to come far beyond the bankruptcy context. After this opinion, what lower court will want to stick its neck out reading a statute as opting out of the American Rule without the most explicit statutory text?

In any event, once the opinion constructs such a sharply focused lens through which to view the relevant statute, the result is easily justified. The statute in question (Bankruptcy Code § 330) authorizes “reasonable compensation for actual, necessary services rendered.” Obviously the phrase contemplates compensation of law firms for the services they render. But it is easy for the Court to say that the statute “neither specifically nor explicitly authorizes courts to shift the costs of adversarial litigation from one side to the other.” End of story.

The Court offers a few additional paragraphs rejecting the various arguments of the law firms (and the United States , which filed an amicus brief supporting them). Citing 1930s dictionaries – because the phrase was added to the bankruptcy statute in 1934 – the Court reasons that “services” are labor performed for another, that defending a fee application is labor performed for the firm, and thus that defending a fee application is not a service. The Court notes other places in the Bankruptcy Code that displace the American Rule more explicitly.

Finally, it rejects the argument of the United States (embraced by three dissenting Justices – Stephen Breyer, joined by Ruth Bader Ginsburg and Elena Kagan) that including the cost of the fee application is necessary to ensure that the award in fact amounts to “reasonable compensation.” The Court views the defense of the fee application as a separate activity, no more part of the “services” the firm provides than a subsequent court battle over a car mechanic’s bill. Perhaps a bit defensive about that rather circular argument, the Court buttresses it by pointing out that the United States changed its position here: the United States Trustee traditionally has taken the opposite view, opposing these fees; indeed it filed a brief taking that position in the Fifth Circuit.

The opinion’s tone is best summarized by the rousing conclusion that “Congress has not granted us roving authority to allow counsel fees whenever we might deem them warranted” and that the Court’s “job is to follow the text even if doing so will supposedly undercut a basic objective of the statute.” Stirring rhetoric to be sure, but few readers will think that the majority thought fees were “warranted” here.

PLAIN LANGUAGE ANALYSIS: Attorneys who work in large bankruptcies are paid from the assets of the bankrupt company. The court decides how much to pay them based on the time and effort they spend on the case. Often, creditors will think the attorneys want too much money. When that happens, the court has a hearing to decide the appropriate fee. Sometimes, in large cases, those hearings amount to a separate trial. The question is whether the attorneys also can get paid for defending their fee in that trial. The Court says that they cannot. The only fee they get is the work they did for the estate, not the work they did defending the fee they want to charge.

Recommended Citation: Ronald Mann, Opinion analysis: Divided Court rules that “American Rule” bars fees for litigation over attorney’s fees in bankruptcy, SCOTUSblog (Jun. 16, 2015, 10:02 AM),