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Some Much Needed Transparency Required on Liquidating Trustees, Liquidating Trusts, Plan Documents, and Other Post-Confirmation Matters

We at The Bankruptcy Cave applaud the recent ruling by Judge Whipple of the Bankruptcy Court for the Northern District of Ohio, seeking to make the post-confirmation parties, processes, and procedures far more transparent. In In re Affordable Med Scrubs, LLC,[1] Judge Whipple declined to approve a disclosure statement for a secured creditor’s liquidating plan.  The key deficiencies were as follows:

 

  1. Disclosure Must be Provided about the Liquidating Trustee: While the secured creditor’s disclosure statement did state who the liquidating trustee would be, it provided no disclosures about the putative trustee’s connections to key creditors and other parties in interest. We applaud this effort to require disclosures about a proposed liquidating trustee or plan administrator. The selection of a liquidating trustee or plan administrator is a murky process – at best, it is based on some vague (and undisclosed) considerations of pricing and experience of the individual or company that will serve in this role.  At worst, selection of a liquidating trustee or plan administrator may reek of “payola,” favors being returned, or other completely inappropriate (and also undisclosed) factors.  It is not much to ask, at all, for any proposed post-confirmation parties to make a full disclosure under Bankruptcy Rules 2014 and 2016.

 

  1. The Same Disclosure Must be Made About any “Plan Oversight Committee”: See above – the same rules apply to Oversight Committees or other parties involved in supervising post-confirmation actions.

 

  1. Better Disclosure of Litigation Claims Against Key Parties: The Affordable Med Scrubs disclosure statement also did not clearly deal with potential claims against the largest creditor (which is not very surprising, as the largest creditor was the party submitting the disclosure statement).  References, cross-references, and unclear descriptions of claims don’t help anyone – plan proponents should carefully and plainly describe in one place in the disclosure statement what they know about various claims, and whether they plan on pursuing them or recommending that the liquidating trustee pursue them (or not pursue them).  No one should be surprised later that a claim is brought, or that a claim against a key party is not brought by the Liquidating Trustee (see above, in relation to the risk that side-deals may be involved in selection of Liquidating Trustees or Oversight Committees).[2]

 

  1. The Liquidating Trust Agreement and Other Key Documents Should be Filed with the Disclosure Statement: We at The Bankruptcy Cave are increasingly annoyed with the massive dump of “plan documents” being filed 5-10 days before confirmation.  The Affordable Med Scrubs court was not pleased with the failure of the parties to file the proposed Liquidating Trust agreement with the disclosure statement.  This is particularly important as such agreement often has key terms on the authority of the liquidating trustee, fees paid to the liquidating trustee and his or her professionals, and other items about which creditors should be aware (some or all of which, such as post-confirmation professional fees, may be shielded from future court or creditor scrutiny altogether).

 

This is an important case on issues that are not typically addressed. We look forward to a raising of the bar in our collective practices to require more disclosure of post-confirmation parties, how they came to be chosen and their connections with creditors and other parties in interest, and expected post-confirmation events and claims.

[1]           Case No. 15-33448, Bankr. N.D. Ohio, Order Disapproving Disclosure Statement, Docket No. 267 (July 5, 2016).

 

[2]           We don’t intend to imply, at all, that anything improper was going on among the parties in the Affordable Med Scrubs case – many of the deficiencies the court notes with the disclosure statement could simply be oversight, or a desire for expediency.  The Affordable Med Scrubs court does not even hint at any impropriety, and we didn’t see any in the facts at all – just a lack of disclosure.  But we have seen other cases in which substantial litigation claims are not brought, or settled for small amounts, as to creditors that had a major role in selecting the parties that will control those very same post-confirmation events.

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Supreme Court Rules No Fees for Defending Fee Applications

The Supreme Court of the United States recently addressed whether estate professionals could recover fees expended in defending fee applications. Baker Botts L.L.P. v. ASARCO LLC, 576 U.S. _____ (2015). A divided court ruled that the plain language of 11 U.S.C. § 330(a)(1) allowed compensation only for “actual, necessary services rendered[,]” and that to allow fees for defending fee applications would be contrary to the statute and the “American Rule” that each litigant pay her own attorneys’ fees unless a statute or contract provides otherwise.
Procedural Background

In 2005, ASARCO, a copper mining, smelting, and refining company, filed for Chapter 11 bankruptcy protection. ASARCO obtained the Bankruptcy Court’s permission to hire two law firms, Baker Botts L.L.P. and Jordan, Hyden, Womble, Culbreth & Holzer, P.C. Among other services, the firms prosecuted fraudulent-transfer claims against ASARCO’s parent company and ultimately obtained a judgment against it worth between $7 and $10 billion. This judgment contributed to a successful reorganization in which all of ASARCO’s creditors were paid in full.

After ASARCO’s counsel filed fee applications under § 330(a)(1), ASARCO, controlled again by its parents company, objected to the compensation requested. After extensive discovery and a 6-day trial on fees, the Bankruptcy Court rejected ASARCO’s objections and awarded the firms approximately $120 million for their work in the bankruptcy proceeding plus a $4.1 million enhancement for exceptional performance. The court also awarded the firms over $5 million for time spent litigating in defense of their fee applications.

The Court of Appeals for the Fifth Circuit ultimately reversed the award of fees for defending the fee application, observing that §330(a)(1) provides “that professional services are compensable only if they are likely to benefit a debtor’s estate or are necessary to case administration.” In re ASARCO, L.L.C., 751 F.3d 291, 299 (5th Cir. 2014).

The Supreme Court’s Rationale

The Supreme Court’s affirmance of the Fifth Circuit was rooted in the “American Rule”: Each litigant pays his own attorney’s fees, win or lose, unless a statute or contract provides otherwise. Slip Op. at 3 (citing Hardt v. Reliance Standard Life Ins. Co., 560 U. S. 242, 252–253 (2010)). In a textual analysis, the Court reasoned that defending a fee application against a client was simply not a “service rendered” on behalf of the client. In so concluding, the Court rejected the law firms’ argument that the estate does benefit from lawyers defending fee applications.

The Court also rejected arguments by the United States as amicus curiae, which urged the Court to allow fees incurred defending fee applications on policy reasons and because such fees were part of the “reasonable compensation” awardable under § 330(a)(1). Justice Breyer’s dissent additionally argued that the “reasonable compensation” provision of § 330(a)(1) allows an award of fees incurred defending fee applications because in some cases, unless such fees are allowed, the fee award would be artificially low and, therefore, not “reasonable.” The Court rejected these arguments and stated in passing that Federal Rule of Bankruptcy Procedure 9011 could be used to militate against the risk of frivolous objections to fee applications.
Potential Ramifications

An increase in objections to fee applications should be anticipated. Because defense fees will be unrecoverable, debtor’s counsel may be inclined to efficiently resolve objections rather than engage in protracted litigation.
We anticipate the most likely avenue bankruptcy professionals will employ will be to include a provision in engagement letters that fees incurred defending fee applications are expressly recoverable. This would address the American Rule by expressly providing, in a contract, that fees are recoverable. However, courts could refuse to uphold such provisions based on an argument that the Bankruptcy Code evidences Congress’s intent to preempt state law regarding compensation of bankruptcy professionals. Ultimately, congressional intervention and amendment of the Bankruptcy Code would be the most certain way to ensure fair compensation for bankruptcy professionals.

[1] Justice Thomas delivered the opinion of the Court, in which Justices Roberts, Scalia, Kennedy, and Alito joined, and in which Justice Sotomayor joined as to all but Part III-B-2. Justice Sotomayor filed an opinion concurring in part and concurring in the judgment. Justice Breyer filed a dissenting opinion, in which Justices Ginsberg and Kagan joined.

[2] The Government alleged that requiring bankruptcy professionals to pay the cost of defending their fee applications would dilute fees awarded and result in bankruptcy lawyers receiving less compensation than nonbankruptcy lawyers, thereby undermining the congressional aim of ensuring that talented attorneys will take on bankruptcy work.

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