Bankruptcy Court Refuses to Approve Provision of Employment Application Providing Indemnity for Fees Incurred in Successful Defense of Fee Request

On January 29, 2016, the United States Bankruptcy Court for the District of Delaware refused to approve a provision in a retention application that would have allowed counsel to be reimbursed by the bankruptcy estate for fees incurred in a successful defense of an objection to their fees in the case.  See In re Boomerang Tube, Inc., Case No. 15-11247 (Bankr. D. Del. Jan. 29, 2016).

In Boomerang Tube, proposed counsel to the committee of unsecured creditors filed a retention application which provided, among other things, for indemnification by the estate for expenses incurred in any successful defense of their fees.  The Bankruptcy Court cited Baker Botts L.L.P. v. ASARCO LLC, 135 S. Ct. 2158 (2015), in which the United States Supreme Court affirmed a decision denying recovery of fees by a debtor’s counsel incurred in defending itself from a fee objection raised by the debtor.  The Supreme Court in ASARCO relied on the language of 11 U.S.C. 330(a), which allows a court to award only “reasonable compensation for actual, necessary services rendered,” and held that a different result would violate the “American Rule” of each litigant paying its own fees.

The applicants in Boomerang Tube attempted to distinguish ASARCO by appealing to 11 U.S.C. 328, which allows compensation to professionals (if approved in advance by the court) that otherwise would not have been available under Section 330.

The Bankruptcy Court agreed that Section 328 provided an exception to Section 330.  Nevertheless, the court declined to approve the indemnification provision, finding Section 328 insufficiently “specific and explicit” to create a statutory “prevailing party” exception to the American Rule.

The court further held that the terms of the proposed retention application did not amount to a contractual exception to the American Rule.  Although the court agreed that counsel’s retention agreement was a contract and Section 328 does not prohibit defense fees, the court noted that there was no contractual relationship between counsel and the parties that would be responsible for paying counsel’s fees, and that the estate was not a party to the retention agreement and could not be bound.

Finally, the court held that, even if ASARCO did not preclude approval of the fee defense provisions, those provisions still could not be approved because all terms of employment must actually relate to the services to be rendered — in this case, representation of the creditors’ committee and its interests.  The court held that counsel defending its own fees is not a service performed for the committee but instead for counsel itself.

Although the Bankruptcy Court’s decision is logical, practitioners must take note when calculating the risks of representing a committee — or a debtor (as the Bankruptcy Court explicitly stated its holding applies to all professional applications under 11 U.S.C. 328, and not only applications for committee counsel) — that a contractual indemnity for fees and costs incurred successfully defending objections to a fee application is not permissible, even with the client’s consent.

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