In an appeal in ASARCO LLC’s chapter 11 bankruptcy case, pending in the Southern District of Texas, the U.S. District Court recently affirmed the Bankruptcy Court’s award of a fee enhancement, a.k.a. a fee bump, to ASARCO‘s bankruptcy counsel, which had obtained “extremely favorable” results for the Debtor and its creditors. See ASARCO LLC v. Baker Botts, L.L.P., Case No. 2:11-CV-290 (S.D.T.X. Aug. 8, 2012). In doing so, the District Court also clarified many of the standards used for the award of fees in general.
Originally founded in 1899, ASARCO was an integrated copper-mining, smelting and refining company that was one of the leading producers of copper and one of the largest nonferrous metal producers in the United States.
On August 9, 2005, citing a downturn in the copper market, significant labor problems, hundreds of millions of dollars in environmental claims, 95,000 in asbestos-related, personal injury claims, and $490 million in bond debt and lease obligations, ASARCO and several subsidiaries filed for chapter 11 relief in the Southern District of Texas.
Shortly before the bankruptcy, the Debtor engaged a very reputable Texas law firm, Baker Botts, to represent it during its bankruptcy. The bankruptcy continued for a number of years and included a variety of legal, factual and economic hurdles until finally a plan of reorganization was confirmed in November 2009.
The District Court noted that the bankruptcy reorganization was a resounding success, with ASARCO emerging from bankruptcy with $1.4 billion in cash, little outstanding debt and the resolution of very serious environmental, asbestos and toxic tort claims.
At the conclusion of the bankruptcy case, the Debtor’s counsel submitted a fee application seeking approval of $135,870714.58 in fees and $6,046,135.06 in expenses, of which $113,074,527.74 had already been approved on an interim basis, pursuant to section 331 of the Bankruptcy Code. The total amount requested could be broken down as follows:
- $263,994.74 in unpaid fees for work performed in November/December 2009;
- $22,645,119.10 in a fee enhancement (which represents approximately a 20% increase over the fees billed and charged), based on a lodestar analysis as required by section 330 of the Bankruptcy Code;
- $8,004,920.50 in fees and $457,443.83 in expenses related to the preparation and defense of several fee applications (including, notably, $2,684,243.50 in fees and $252,883.23 in expenses for pursuing its fee enhancement request); and
- a voluntary credit (reduction) of $112,927.00.
After multiple hearings on the final fee application, the Bankruptcy Court awarded Debtor’s counsel:
- $117,651,298.18 in fees and $6,046,135.06 in expenses billed;
- $4,161,708.96 in a fee enhancement requested;
- $5,000,000.00 in fees and $457,443.83 in expenses for preparing and defending fee applications;
- minus $132,390.52 in voluntary credits;
- plus post-judgment interest on all accrued amounts.
Objection to Fees Awarded
The Reorganized ASARCO, the U.S. Trustee and the Plan Administrator objected to and appealed the following items in the final fee award:
- the $4,161,708.96 fee enhancement;
- the $5,457,443.83 awarded for the preparation and defense of fee applications; and
- the award of post-judgment interest.
The U.S. Trustee and Reorganized ASARCO additionally claimed that the fee enhancement was precluded by the recent Supreme Court decision in Purdue v. Kinney, __U.S.___, 130 S.Ct. 1662, 176 L.Ed.2d 494 (2010).
On appeal, the U.S. District Court addressed all of these issues.
Ruling on Purdue
Regarding the Purdue case, the Court found that this Supreme Court case involved a fee enhancement in a federal fee shifting context, not in a bankruptcy context, and further that the Fifth Circuit Court of Appeals had a pending bankruptcy appeal in the case of CRG Porters L.L.C. v. United States Trustee, 445 B.R. 667 (N.D. Tex. 2011), where it was specifically asked to determine whether Purdue applied in bankruptcy cases.
The Purdue opinion, of course, severely restricts the award of fee enhancements, holding, among other things, that the lodestar method results in a presumptively correct award and enhancements are only awarded in “rare” and “exceptional” circumstances.
With uncertainty as to whether Purdue applied in bankruptcy cases, the Court declined to apply Purdue, but did find that if Purdue did apply, no fee award was warranted, because there was a lack of specific evidence to support that Debtor’s counsel was no adequately compensated.
Ruling on Fee Enhancement
The District Court next turned to whether the fee enhancement was permissible under prevailing Fifth Circuit bankruptcy cases. Pursuant to section 330 of the Bankruptcy Code, a bankruptcy court has discretion to award reasonable compensation for debtor’s counsel, taking into consideration, among other things:
- the time spent on such services;
- the rates charged for such services;
- whether the services were necessary to the administration of, or beneficial at the time the services were rendered, toward the compilation of a case;
- whether the services were performed within a reasonable amount of time; and
- whether the compensation is reasonable based on the customary compensation in cases outside of bankruptcy.
The Bankruptcy Code codifies these factors in section 330(a)(3). The Fifth Circuit has also traditionally used the lodestar method to calculate “reasonable” fees. See In re Fender, 12 F.3d 480, 487 (5th Cir. 1994). A court computes the lodestar by multiplying the number of hours an attorney would reasonably spend for the same type of work by the prevailing hourly rate in the community. See Shipes v. Trinity Indus., 987 F.2d 311, 319 (5th Cir. 1993). A court may then adjust the lodestar based on the factors listed in section 330 and the following twelve factors:
- the time and labor required;
- the novelty and difficulty of the questions;
- the skill requisite to perform the legal service properly;
- the preclusion of other employment by the attorney due to acceptance of the case;
- the customary fee;
- whether the fee is fixed or contingent;
- time limitations imposed by the client or circumstances;
- the amount involved and results obtained;
- the experience, reputation, and ability of the attorneys;
- the “undesirability” of the case;
- the nature and length of the professional relationship with the client; and
- awards in similar cases.
See Johnson v. Georgia Highway Express, Inc., 488 F.2d 714, 717-19 (5th Cir. 1974) (setting forth these Johnson factors).
The Court noted that the burden of proving reasonableness is on the applicant, and there is a strong presumption that the lodestar is reasonable. However, upward adjustments in bankruptcy cases are permissible provided the applicant shows “rare and exceptional” circumstances. See In re El Paso Refinery, L.P., 257 B.R. 809, 835 (Bankr. W.D. Tex. 2000).
The Court further noted that various courts have analyzed “rare and exceptional circumstances,” to include cases where creditors are paid in full. Others look at special facts that set the case apart from others. In the El Paso Refinery case, the Fifth Circuit suggested a 3 factor test:
- whether the professional encountered unique and unforeseen obstacles;
- whether the results far exceeded expectations at the onset; and
- whether the party paying for the fees agreed to it.
See El Paso Refinery, 257 B.R. at 839.
Applying this wealth of knowledge, the Court affirmed the Bankruptcy Court’s finding that the Debtor’s counsel was not entitled to a 20% fee enhancement on its entire fees, but was entitled to a 20% fee enhancement on certain litigation that was extremely complex and brought exceptional results for the Company.
According to the Court, whether the judgment awarded to the Debtor in this litigation was record-breaking could be debated, but what was not debatable was that the results were a “game-changer” and allowed the Debtor not merely to survive but prosper. The Court held that “the recovery of stock and cash worth at least seven billion dollars is both rare and extraordinary,” thereby meeting the prevailing fee enhancement standard.
Prosecution of the Fee Application
The Debtor’s counsel sought $8,004,920.50 in fees and $457,443.84 in expenses incurred in defending the fee application, including $2,684,243.50 in fees and $252,883.23 in expenses in pursuit of the fee enhancement.
The Bankruptcy Court awarded $5,000,000.00 in fees and $457,443.83 in expenses. However, the Bankruptcy Court did not delineate what awarded fees were attributable solely to the preparation and defense of its fee application, as opposed to efforts expended on the pursuit of the fee enhancement.
The District Court noted that “[t]he vast majority of courts find that compensating bankruptcy lawyers for the preparation of and successful defense of their fee applications is necessary to avoid unfair dilution of their fees.” The Court remained consistent with the majority view that defending a fee application is “necessary and beneficial to the bankruptcy system as a whole, and indirectly, to each estate participating in the system.” Citing In re Engman II, 404 B.R. 467, 483 (W.D. Mich. 2009).
While the District Court found that the efforts by Debtor’s counsel to prepare and defend the regular fee applications benefited the estate, the Court held that the Debtor’s counsel’s efforts in pursuit of a fee enhancement did not benefit the estate and therefore was non-compensable under section 330 of the Bankruptcy Code. The Court, therefore, remanded the case back to the Bankruptcy Court to eliminate any legal fees and expenses related to the pursuit of a fee enhancement.
Interest on Accrued Fees
Finally, the Court determined that post-judgment interest was not collectible on an administrative priority claim such as the one requested by Debtors’ counsel. In doing do, the Court found that an award of administrative expenses is not akin to an award of a judgment, where federal law allows interest to be collected.
Many professionals would consider the results of the ASARCO case to be rare and exceptional, thereby justifying an overall fee bump. However, the District Court found that the exceptional results and services related solely to a seemingly discrete piece of litigation–which likely was record-breaking. As demonstrated, the conclusion of the Court is consistent with Fifth Circuit precedent, as it stands right now. Whether the Fifth Circuit changes the rules and determines stricter standards for fee enhancements are to be applied in the future, in accordance with the Purdue opinion, will remain to be seen.