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Judge Walrath Denies Approval of Retention Agreement Provision Indemnifying Committee Counsel for Expenses Incurred in Successfully Defending Their Fees

By Charlene D. Davis

On January 29, 2016, the Honorable Mary F. Walrath of the United States Bankruptcy Court for the District of Delaware  (the “Court”) issued an Order and Opinion denying the requests by Brown Rudnick LLP (“Brown Rudnick”) and Morris, Nichols, Arsht & Tunnel LLP (“MNAT” and together with Brown Rudnick, “Committee Counsel”) for approval, pursuant to Section 328(a) of the Bankruptcy Code, of retention applications allowing fees for defending any objections to Committee counsel’s fee applications.  In re Boomerang Tube, Inc. et al. Case no. 15-11247 (MFW).  On June 9, 2015, the Debtors filed voluntary Chapter 11 petitions in the Court.  The United States Trustee (the “UST”) formed a committee of unsecured creditors (the “Committee”), which thereafter retained counsel.  Committee Counsel sought approval of a provision in their retention applications under Code Section 328(a) entitling them to compensation from the Debtors’ estates (subject to approval by the Court pursuant to Sections 330 and 331).  The UST objected to the provision, arguing it is precluded by the recent Supreme Court decision in Baker Botts LLP v. ASARCO LLC. 135 Supr. Ct. 2158.2169 (2015). The UST also maintained that such fees are impermissible under Code Section 328(a) because they are outside the scope of employment and unreasonable.

In arriving at its decision, the Court first considered whether ASARCO prohibits the approval of a provision that awards fees and expenses to professionals that successfully defend their fee applications when challenged.  The UST argued that the ASARCO Court had found that section 330 of the Bankruptcy Code was not a statutory exception to the American Rule (requiring each party to bear its own costs in litigation) because it neither explicitly nor specifically authorized the shifting of fees in an adversarial litigation.  Committee Counsel however maintained that they were seeking approval of the provision pursuant to Section 328(a) of the Code, not Section 330, and that Section 328(a) is an exception to Section 330 that permits provisions indemnifying them for costs and fees incurred successfully defending fee objections.  The Court agreed with the Committee that Section 328(a) is an exception to Section 330 but found that like Section 330, Section 328(a) is not a statute that explicitly and specifically authorizes the award of attorney fees to the prevailing party in an adversarial action.

The Court next considered and agreed with the Committee that in ASARCO the Supreme Court acknowledged that a contractual exception to the American Rule may be asserted but concluded that any such contract must be consistent with the provisions of the Bankruptcy Code.  Although the Court also agreed with the Committee that the retention agreement is a contract, it found that the retention agreement is not a bi-lateral contract because it is subject to objection by other parties and ultimately approval by the Court.  The Court noted that the retention agreement between the Committee and Committee Counsel is not typical of a contract modifying the American Rule, where two parties agree that each will be responsible for the fees of the other if it loses in a legal contest.  Here the parties were agreeing that a third party, the estate, would be responsible.  Moreover, the agreements could not bind the estate, which was not a party to them, and were not simply contractual matters, since they require Court approval.

The Court also concluded that a provisions shifting costs in a successful defense of fees is not a reasonable term of employment for purposes of Section 328 since the  services rendered by Committee Counsel in those circumstances are not services rendered to the Committee.  Moreover, the Court concluded that ASARCO prevents the Court from concluding that section 328 permits defense fees even if they were routinely allowed by the market in bankruptcy or non-bankruptcy contexts prior to the ruling.

A copy of the Court’s opinion is available here.

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