Delaware Bankruptcy Court Holds, Twice: “ASARCO is Here to Stay” (But Your Authors Have Hatched Another Plan; Read Below!)
March 10, 2016
Authored by: Jay Krystinik and Mark Duedall
You may recall the holding and analysis of ASARCO / from Jay’s previous post, here. At bottom, ASARCO followed a strict interpretation of Section 330(a) of the Bankruptcy Code,/ holding that professionals are allowed to charge certain fees for the preparation of a fee application per Section 330(a)(6). But as there is no express statutory authority to charge the estate for defense of a fee application, the “American rule” prevails, requiring professionals to bear their own defense costs if a third party objects to the fees./
The efforts to get around ASARCO are well underway, primarily in the venue of the Delaware Bankruptcy Court. So far, the score is ASARCO (two wins), to frustrated estate professionals (zero). And, even as your authors were writing this post, there is another means underway, using the “upcharge” principal – the hourly rates will be $x if no one objects to the fees, but 10% more than $x if someone does object to the professional fees. This bevy of cases, and our own proposed solution, are discussed below.
The first effort to side-step ASARCO was In re Boomerang Tube./ In that case, certain creditors’ committee professionals argued that their engagement letters required, as a contractual matter, the payment of fee application defense costs. Because Section 328 of the Bankruptcy Code allows the approval of any “reasonable term and condition of employment,”/ the Court could avoid ASARCO’s limited reading of Section 330(a), the professionals argued. The Boomerang Tube Court, via Judge Walrath, rejected that. First, the Court held that an engagement letter is a contract between a professional and its client (here, a creditors’ committee), yet the professional fee defense provision seeks to bind the estate – and under Section 330 of the Code, there is no authority for the estate to be forced to cover such costs./ Moreover, the Boomerang Tube Court held, any argument that similar market-based provisions are permitted in bankruptcy cases — such as exculpation and indemnity clauses for estate financial advisors and investment bankers/ — must yield to the more specific ruling of ASARCO, which rejected a market-based approach to reasonableness./
A few weeks later came In re Samson Resources. In that case, the Delaware Bankruptcy Court, this time through Judge Sontchi, agreed that Boomerang Tube’s analysis would apply equally to debtor professionals, and not just committee professionals./
Not to be dissuaded, a third effort is underway in Delaware (and this time Judge Shannon gets to weigh in). In that case,/ debtors’ counsel is not seeking to use Section 328 to assert that fee application defense costs can be allowed. Instead, debtors’ counsel argues that estate professionals should be allowed to charge one rate if there is no objection to the fees, but then also a 10% premium if there is an objection. In short, it is an upcharge, like substituting a yummy Caesar salad at your fav bistro for the wilted garden salad it usually serves you./ Your authors love the creativity, but have their doubts that this will work; stay tuned./
Anyway, now that we have seen what unique ideas don’t work, your authors have another! (Let it not be said that we just blog about goings-on in the esoteric world of restructuring – we are here to solve problems, not just describe them!) And the idea is this – if a professional thinks it may be subject to second-guessing later in the case from disgruntled creditors, then don’t wait until the end of the case to seek allowance. Instead, smoke out those objectors, while the case is ongoing. Thus, once a discrete portion of the case is done – such as first days, a 363 sale, a major piece of litigation, perhaps even the first round of exclusivity and stability of the case – seek final allowance of the fees and expenses incurred for that portion of the case. If an objection is raised, you still cover your own costs, but at least then you can learn it early, adjust your case strategy, and perhaps get a ruling from a judge directing such malcontents to stand down, lest their own positions in the case come under attack.
We know this is a weird option. But it is no weirder than trying to use Section 328’s generality to get around Section 330’s specificity, or seeking to impose an upcharge to recover fees which ASARCO says you cannot get. Let the arguments continue further!
/ Baker Botts v. ASARCO, 135 S. Ct. 2158 (2015).
/ 11 U.S.C. § 330(a).
/ ASARCO, 135 S. Ct. at 2164-65.
/ In re Boomerang Tube, Inc., Case No. 15–11247, 2016 WL 385933 (Bankr. D. Del. Jan. 29, 2016).
/ 11 U.S.C. § 329(a).
/ In re Boomerang Tube, Inc., 2016 WL 385933 at *4. The Court also noted that the result is the same if the professional incurs fees to defend its fees, or if the costs to defend a fee application are set forth as expenses (such as where the professional hires another professional to defend its fees). Id. at *8.
/ See, e.g., In re United Artists Theatre Co., 315 F.3d 217. 234 (3d Cir. 2003) (permitting tailored financial advisor indemnity provisions in bankruptcy cases, based on market evidence that such provisions are customary outside of bankruptcy).
/ In re Boomerang Tube, Inc., 2016 WL 385933 at *7. This is concerning to your authors – does this mean exculpation and indemnity clauses for FAs and IBS, long the norm in most courts under United Artists and many other cases, could be in doubt? Wow.
/ In re Samson Resources Corp., Case No. 15-11934 (CSS), letter opinion dated Feb. 8, 2016, at Docket No. 641.
/ In re New Gulf Resources, LLC, Case No. 15-12566 (BLS), Brief in Support of Retention Application, dated March 2, 2016, at Docket No. 344.
/ The foregoing sentence was brought to you by Mark Duedall.
/ And aside from loving the creativity, we also sympathize with Baker Botts, and other estate professionals (like our beloved Bryan Cave!), that face the risk of objections to fees from disgruntled creditors with an axe to grind. The facts of ASARCO (in which the estate professional was Baker Botts) are worth noting again here – an incredibly complicated case, in which the estate had to sue its parent company for very serious matters. The suit was successful to the tune of at least $7 billion, and creditors were paid in full – an amazing result. When Baker Botts filed its fee application and sought a fee enhancement, the parent company which Baker Botts sued was right there ready to object to virtually everything about the fees. ASARCO is an unfair result, and a poster child for the mischief that results when cranky creditors object to fees. That being said, ASARCO is now the law, and will remain so absent Congressional action (unlikely) or a creative lower court ruling (unlikely too). So deal with it we must.