Asarco, L.L.C. v. Jordan Hyden Womble Culbr

Citations: 751 F.3d 291; 2014 WL 1698072Docket: 12-40997

Court: Court of Appeals for the Fifth Circuit; April 30, 2014; Federal Appellate Court

Original Court Document: View Document

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Baker Botts and Jordan Hyden, serving as debtor's counsel for ASARCO, L.L.C. during its Chapter 11 bankruptcy, helped confirm a reorganization plan that fully paid all creditors. The case involves two key fee-related issues: (1) whether the bankruptcy court improperly authorized a 20% premium for Baker Botts and a 10% premium for Jordan Hyden due to their success in fraudulent transfer litigation; and (2) whether attorneys’ fees for defending their fee applications were justified under 11 U.S.C. 330. The court upheld the fee enhancements but reversed the award of fees for the litigation of their fee applications.

ASARCO, a copper mining company, filed for Chapter 11 bankruptcy in 2005, grappling with financial difficulties and environmental liabilities. Before the bankruptcy, ASARCO’s Parent directed it to transfer a controlling interest in Southern Copper Corporation (SCC), which led to significant fraudulent transfer claims successfully prosecuted by Baker Botts and Jordan Hyden. The resulting judgment against ASARCO’s Parent, valued at $7 to $10 billion, marked a historic precedent in Chapter 11 cases. After 52 months, ASARCO emerged from bankruptcy in late 2009, backed by funds from its Parent and with minimal debt.

In their final fee applications, the firms sought lodestar fees, expenses, a 20% fee enhancement for their overall work, and additional fees for litigating their final applications. ASARCO contested these fees extensively, prompting a substantial discovery request that yielded thousands of documents. Ultimately, the bankruptcy court dismissed ASARCO's objections to the core fees, awarding over $113 million to Baker Botts and $7 million to Jordan Hyden. The court granted additional fee enhancements solely for the SCC Litigation work, amounting to $4.1 million for Baker Botts and over $125,000 for Jordan Hyden, based on their exceptional performance. Fees for defending their fee applications were later contested but ultimately resulted in $5 million (plus expenses) for Baker Botts and over $15,000 for Jordan Hyden.

ASARCO, during its appeal to the district court, withdrew its objections to the fee award for Baker Botts. The same judge from the previous SCC Litigation affirmed the bankruptcy court’s fee enhancements, emphasizing the exceptional nature of a seven billion dollar recoverable judgment that allows for a complete recovery for all parties involved. The district court agreed that the fees for Baker Botts and Jordan Hyden related to their core fee defense were compensable and upheld the bankruptcy court's authorization to seek appellate fee awards. However, it found that certain attorneys' fees awarded to Baker Botts for pursuing its fee enhancement were improper, remanding the matter to the bankruptcy court to assess the relevance of a $5 million defense-fee award to the enhancement.

On remand, the bankruptcy court determined that the entire defense-fee award pertained to defending core fees. The district court affirmed this final award while deeming the appellate fees permissible but premature, prompting ASARCO to file another appeal. The excerpt outlines the standard of review, indicating that bankruptcy courts have broad discretion in determining reasonable attorneys' fees, with appellate courts only intervening in cases of abuse of discretion, which includes improper legal standards or clearly erroneous factual findings.

The discussion on fee enhancements references Section 330(a)(3) of the Bankruptcy Code, which provides factors for determining reasonable compensation for legal services rendered in bankruptcy cases. These factors include the nature and extent of services, time spent, rates charged, and the qualifications of the professionals involved. The lodestar method is typically used to calculate fees, which involves multiplying the hours worked by the applicable hourly rates, with the option for bankruptcy courts to adjust the resulting lodestar based on additional relevant factors.

The Johnson v. Ga. Highway Express, Inc. case outlines twelve factors that courts consider when determining attorney fees under 11 U.S.C. § 330(a)(2). These factors include time and labor, complexity of legal questions, requisite skill, impact on the attorney's other employment opportunities, customary fees, fee structure (fixed or contingent), time constraints, the amount at stake and results achieved, attorney experience and reputation, case undesirability, client relationship length, and awards in similar cases. The court clarified that the lodestar method and Johnson factors guide fee discretion, with four factors related to attorney skill and complexity only justifying fee enhancements in rare circumstances. 

In the present case, the bankruptcy court diverged from standard practices by approving fee enhancements of 20% and 10% for firms involved in the SCC Litigation. ASARCO challenged these enhancements, arguing that the Supreme Court’s Perdue v. Kenny A. decision restricts fee enhancements to three exceptions, none of which applied here, and suggested that since ASARCO's board did not endorse the enhancements, they should not be granted. However, the court noted that Pilgrim’s Pride affirmed that Perdue does not eliminate bankruptcy courts' discretion to award enhancements in exceptional cases. It highlighted that, unlike in Perdue, where taxpayer concerns were paramount, the creditors in this case had been fully compensated. The court also dismissed ASARCO’s claim that the judgment was not “rare and exceptional,” citing evidence of a substantial, recoverable $7 billion judgment that significantly benefited creditors. The district court supported the bankruptcy court’s enhancement decision, emphasizing the extraordinary nature of the outcome.

The excerpt critiques ASARCO's objections to fee enhancements awarded in various bankruptcy cases. ASARCO acknowledges the lower courts' positive evaluations of the results but argues that no fee enhancement has been affirmed without a compelling additional factor. It cites cases such as *Pilgrim’s Pride*, where fees were consented to and attorneys demonstrated efficiency and below-market compensation, and *Rose Pass Mines*, which also involved below-market rates. ASARCO highlights that the enhancement in *Lawler* was justified by the risk of non-payment and challenges that the lack of consent in *Pilgrim’s Pride* does not materially distinguish it from other cases.

The excerpt emphasizes that while exceptional performance and results are acknowledged, the court has not mandated a “plus factor” for fee enhancement beyond the Johnson factors. ASARCO disputes the bankruptcy court's finding that Baker Botts' rates were below market, arguing that the court's documentation was insufficient. However, the court's findings relied on relevant data regarding market rates in Texas.

ASARCO also contends that its arguments regarding fee enhancements apply to Jordan Hyden, which it claims played a largely administrative role. In contrast, Jordan Hyden argues it was integral to the SCC Litigation, with the district court finding its contributions necessary and essential. The court concluded that there was no clear error in recognizing Jordan Hyden's role and the enhancement it received, which was significantly less than Baker Botts.

ASARCO challenged the fee enhancement granted to Baker Botts, arguing it lacked specific evidence and detailed findings from the lower courts. However, the bankruptcy court provided a thorough explanation of the "rare and exceptional" circumstances justifying the enhancement. It highlighted Baker Botts' instrumental role in achieving extraordinary results in ASARCO's Chapter 11 reorganization, which transformed the company from insolvency to a competitive entity. The court praised Baker Botts for its exemplary performance across various legal specialties, emphasizing the unprecedented success of the SCC Litigation, which was labeled ASARCO's "crown jewel." The court noted that the firm’s success stemmed from its own efforts, not from any shortcomings of opposing counsel or favorable external circumstances. Baker Botts' ability to effectively analyze vast amounts of documentation and present a compelling narrative in court resulted in a judgment valued at over $6 billion, the largest fraudulent transfer verdict in U.S. history, enhancing creditor recovery expectations. The bankruptcy court meticulously detailed Baker Botts' performance in its 85-page opinion, affirming its rarity and excellence. Additionally, Jordan Hyden played a crucial support role in the overall strategy and trial preparation, contributing significantly to the successful reorganization, which warranted the modest fee enhancement awarded to him.

The bankruptcy court's award of counsel fees for defending their fee applications has sparked debate among the parties. Section 330(a) governs the compensation of all professionals whose fees are paid by the bankruptcy estate, allowing the court to award reasonable compensation for actual, necessary services and reimbursement for expenses, provided that the services rendered benefit the debtor’s estate or are necessary for case administration. Case law indicates a division of opinion on this matter. However, a close reading of Section 330(a) reveals that it does not permit compensation for costs incurred by counsel in defending their fee applications. 

The court is instructed to assess all relevant factors regarding professional services, evaluating whether they were necessary for administering the case and if the compensation is reasonable compared to non-bankruptcy cases. Compensation is prohibited for services that do not benefit the estate or are unnecessary for administration. Furthermore, fees for preparing a fee application must reflect the skill level reasonably required for such preparation.

Both parties in interest and the United States Trustee have the right to notice and to question professional fees, which implies the potential for fee litigation. However, Section 330 explicitly states that compensation is permissible only if the services are likely to benefit the debtor’s estate or necessary for case administration. The primary beneficiary of a professional's fee application is the professional themselves, and typically, creditors bear the costs. This interpretation, supported by the Eleventh Circuit, emphasizes that fees for defending fee applications are not compensable from the debtor's estate, as evidenced by a precedent where appeals brought no benefit to the estate or its creditors.

Section 330(a)(6) imposes limitations on professional fees by distinguishing between compensation for preparing a fee application and fees incurred in defending that application in court. The statute emphasizes the necessary skills for preparing the application rather than for defending it, indicating that satellite litigation over fee applications is not covered. If Congress intended for such litigation fees to be considered "reasonable and necessary" under Section 330(a)(3)(C), the specific limits in subsection (4) would be redundant. While some argue that resolving professional fees is essential for closing a bankruptcy case, the court in In re Smith recognized that the discretion to award such fees may be limited, especially if counsel fails to adequately defend their fees.

The Smith case illustrates the complexities in determining the reasonableness and necessity of such services, contrasting with the broader interpretation proposed in Grant. In bankruptcy, where payouts to creditors are typically less than full, every dollar spent on administrative expenses, including professional fees, reduces the recovery for unsecured creditors. The potential for costly and time-consuming litigation over fee applications can further harm the debtor by inflating administrative costs.

Bankruptcy rules require professionals to submit detailed, itemized billing records to ensure transparency and mitigate disputes over fees, reducing the likelihood of unnecessary litigation. Baker Botts' comparison of fee defense in bankruptcy to federal fee-shifting statutes is rejected, as those statutes aim to support financially disadvantaged plaintiffs, whereas bankruptcy involves competing rights among debtors and creditors with limited assets. In this context, no party is inherently at fault regarding administrative fees.

Requiring professionals to justify their fee applications aligns with the realities of the bankruptcy process, particularly in light of the potential for perverse incentives that could arise from compensating professionals for engaging in satellite fee litigation. Compensation for "fees for fee defense" is supported by Section 330(a)(4), which emphasizes comparability; without reimbursement for defense fees, professionals could receive less than their counterparts in non-bankruptcy cases. The case of Baker Botts, which spent $5 million to defend a fee award exceeding $113 million, illustrates this dilution. The Bankruptcy Code aimed to eliminate the "economy of the estate" rule present in prior law, thus increasing professional fees. However, no clear standard exists to assess the comparability of services across bankruptcy and other legal fields. Courts have varied in their approach, with some denying fee enhancements to bankruptcy firms on grounds that such enhancements are not typical in transactional work, while others have recognized that bankruptcy rates can exceed those in other practices. In absolute terms, Baker Botts's defense costs appear significant, but they constitute only about 4.4% of the core fee, leading to subjective assessments of comparability. The American Rule typically prevents recovery of attorney fees for defending fee applications unless statutory or contractual provisions exist, a principle reiterated by multiple bankruptcy cases. Baker Botts argues that this rule does not apply in bankruptcy due to statutory provisions for professional compensation, citing a footnote from Alyeska Pipeline Serv. Co. v. Wilderness Society that acknowledges exceptions to the American Rule in certain statutory contexts. However, the text accompanying that footnote underlines that while Congress has made specific allowances for attorney fees, they vary widely among different statutes.

The court's opinion clarifies that it does not endorse Baker Botts' interpretation of Section 330's fee compensation, emphasizing that the Bankruptcy Act's original compensation provisions were restructured under Section 330, which does not permit "fees for defense of fees" as reasonable or necessary costs. The bankruptcy court expressed concern that disallowing such fees could incentivize parties to object to professional fees, potentially deterring capable counsel from taking on bankruptcy cases. It noted a historical issue where court-appointed counsel colluded in silence regarding fee applications. However, the opinion cautions against encouraging unfounded objections to fee requests, highlighting the need for thorough documentation to minimize ancillary litigation. The court asserts that Section 330's standards protect many professional actions from fee reduction challenges and expresses confidence in bankruptcy courts to manage and dismiss unjustified fee objections. The ruling allows for fee shifting in cases of bad faith or oppressive behavior, referencing Chambers v. NASCO. Ultimately, the district court's judgment is affirmed concerning fee enhancements for Baker Botts and Jordan Hyden but reversed regarding additional fee awards connected to their fee applications. The decision is affirmed in part and reversed in part.