In a noteworthy case from the last few years, the United States Supreme Court held that attorneys hired by the bankruptcy estate may not be awarded fees for defending their fee application in court. Baker Botts L.L.P. v. ASARCO LLC, 135 S. Ct. 2158, 192 L. Ed. 2d 208 (2015).
In the ASARCO case, the law firms submitted fee petitions seeking more than $120 million for their work in the bankruptcy proceeding, among which over $5 million was for time spent litigating in defense of their fee application.
The court first recognized the American Rule where “[e]ach litigant pays his own attorney’s fees, win or lose, unless a statute or contract provides otherwise.” It then observed that while section 330(a)(1) of the Bankruptcy Codes authorizes “reasonable compensation for actual, necessary services rendered” by law firms working for the trustee, defending the firms’ own fee petition is not a “service” rendered for the benefit of the estate, and thus is not compensable under section 330(a)(1). The court distinguished the “reasonable services rendered” language in section 330(a)(1) from other fee-shifting provisions which specifically mention awarding “fees” to the “prevailing party” in a “civil action.” Id. at 2164. In Woods v. city National Bank & Trust Co. of Chicago, the court held that the phrase “reasonable services rendered” implies “loyal and disinterested service in the interest of” a client. Id. at 2165 (citation omitted). In a fee application, however, “the primary beneficiary … is the professional.” Id. at 2163 (internal quotation mark omitted). In conclusion, because the Bankruptcy Code “does not explicitly override the American Rule with respect to fee-defense litigation,” the attorneys cannot seek reimbursement for defending their fee petitions.