Frequently Asked Questions – Professional Retention and Compensation
The United States Trustee Program is prohibited from providing legal advice to private individuals. These questions and answers relate to general circumstances involving bankruptcy.
Duty of Professionals to Disclose Connections
In December 2019, the U.S. Trustee Program issued guidance to its staff establishing principles to apply in reviewing the adequacy of disclosures by professionals seeking court approval for employment in chapter 11 bankruptcy cases and in determining whether to object. This internal guidance is essential to ensuring consistent enforcement practices and is available to view here.
Implications of the Supreme Court’s Decision in ASARCO LLC
Yes. The Supreme Court ruled that attorneys’ fees for defending objections to applications for compensation (“defense fees” or “fees-on-fees”) are per se prohibited because section 330 does not expressly alter the American Rule against fee shifting. See generally Baker Botts LLP v. ASARCO LLC, 135 S. Ct. 2158, 2167 (2015). Although the U.S. Trustee Fee Guidelines for Attorneys in Larger Chapter 11 cases (“LCFG”) state that billing the estate for defending fee applications is “generally inappropriate” unless the defense fees fall “within a judicial exception applicable within the [judicial] district,” LCFG, B.2.g., there are no applicable judicial exceptions after ASARCO.
No. The Court in ASARCO did not disallow reasonable compensation for preparing a fee application and noted that “preparation of a fee application is best understood as a ‘servic[e] rendered’ to the estate administrator under § 330(a)(1).” 135 S. Ct. at 2167. Thus, reasonable charges for preparing interim and final fee applications are compensable because section 330(a)(1) allows them, and section 330(a)(6) requires that the compensation for the fee application be reasonable in relation to the level and skill required to prepare it. See also LCFG, B.2.f. (preparation of a fee application is not required for lawyers practicing in areas other than bankruptcy as a condition to getting paid).
Generally no, but it depends on the facts and circumstances of each case. Work that is an extension of fee application preparation will not generally be objectionable. Thus, good faith communications and negotiations regarding a well-prepared fee application may be considered an extension of fee application preparation. But patently poor and deficient fee applications that elicit extensive inquiries or negotiations and require extensive amendment may not be considered part of the fee application preparation. For example, fees related to repeated billing errors, such as vague descriptions or block-billing, will draw an objection. In the absence of further court guidance post-ASARCO, the USTP will consider many factors in determining whether such defense fees appear to be for the professional’s benefit or for the client’s and, therefore, objectionable or not. The USTP’s goal is to apply ASARCO faithfully, while encouraging sound billing practices and professional cooperation and compliance short of litigation, where possible.
Yes. Professionals’ employment and compensation rights in bankruptcy arise by statute. ASARCO’s analysis is relevant to all Bankruptcy Code sections dealing with employment and compensation. First, section 328 permits a professional to seek court approval for any reasonable terms and conditions of employment. But section 328, like section 330, does not contain explicit statutory authority for deviating from the American Rule against fee-shifting. Second, section 328 terms must both relate to the scope of the professional’s employment and be reasonable. Paying fees-on-fees is neither a term of employment nor is it reasonable for the estate to pay for work that is not a client service. Third, section 330(a)(1) governs the award of compensation, subject to sections 326, 328, and 329, and ASARCO expressly precludes an award of fees-on-fees under section 330(a)(1). (A section 330 award is what gives the professional an administrative claim against estate assets under section 503(b)(2)).
In addition, estate-paid professionals cannot by consent or contract create an exception to pay what the Code does not allow. See In re Lehman Bros. Holdings, Inc., 508 B.R. 283, 294 (S.D.N.Y. 2014). The Code, through sections 326-331 and 503, regulates both professional compensation and administrative expenses paid from the estate in a comprehensive way that parties are not free to rewrite. See id. Thus, fees cannot be shifted by a contract that violates a statute, and the USTP will generally object to efforts to pay fees-on-fees in circumvention of ASARCO.
Yes. The Court in ASARCO considered—and rejected—the idea of bankruptcy premiums or enhancements based on the risk of “dilution.” “In our legal system, no attorneys, regardless of whether they practice in bankruptcy, are entitled to receive fees for fee-defense litigation absent express statutory authorization. Requiring bankruptcy attorneys to pay for the defense of their fees thus will not result in any disparity between bankruptcy and nonbankruptcy lawyers.” ASARCO, 135 S. Ct. at 2168. This analysis is consistent with section 330(a)(3)’s standard that a bankruptcy practitioner’s reasonable compensation is what is customary and comparable to a non-bankruptcy practitioner’s, i.e., market rates and billing practices. See 11 U.S.C. § 330 (a)(3)(F). To the extent the Fifth Circuit suggested otherwise in its earlier ASARCO decision, 751 F.2d 291 (5th Cir. 2014), the Supreme Court disagreed.
Moreover, dilution risk is minimal. ASARCO is an exceedingly rare case for many reasons. First, ASARCO involved the very unusual circumstance where management of the reorganized debtor was again controlled by the parent upon confirmation. Post-confirmation management was uniquely motivated to be hostile to debtor’s bankruptcy counsel because bankruptcy counsel had represented the debtor in obtaining an extraordinarily large judgment against the parent during the bankruptcy—and any reduction in fees would have been a dollar-for-dollar economic benefit to the parent. Second, the fee defense costs were $5 million, reflecting again the very unusual nature of the case. Third, in many cases, the USTP is the only party that objects to a fee application. See In re Busy Beaver Building Centers, Inc., 19 F.3d 833 (3rd Cir. 1994). Finally, because an objecting party must pay its own attorneys’ fees to pursue fee objections, this should discourage frivolous objections. And to the extent there are bad faith or frivolous fee objections, the Court noted that a bankruptcy professional can avail itself of Rule 9011 sanctions. 135 S. Ct. at 2168, n.4.
Any newly filed interim application and any final application containing a request for defense fees for the first time should be reviewed under the standards discussed above. That is, if the fees-on-fees resulted from fee litigation, an objection is generally appropriate. If no fee objection was ever filed, then whether the fees-on-fees are objectionable depends on the facts and circumstances of the case.
If fees-on-fees have been previously awarded on an interim application that would have been disallowed under ASARCO’s ruling, the USTP should determine whether an objection at the final application stage is advisable based on controlling law within the jurisdiction.
Yes. There is no statutory authorization to shift fees for preparing invoices (as opposed to fee applications) to the estate, and the Court in ASARCO did not rule otherwise.
As explained in the LCFG, “routine billing activities . . . typically are not compensable outside of bankruptcy. Most are not compensable because professionals do not charge a client for preparing invoices, even if detailed. Reasonable charges for preparing interim and final fee applications, however, are compensable, because the preparation of a fee application is not required for lawyers practicing in areas other than bankruptcy as a condition to getting paid.” LCFG, B.2.f. This rationale applies to all cases, including those not subject to the LCFG.
Yes, using standards analogous to those discussed above that apply to attorneys seeking compensation for fee defense work. Regardless of whether the fee defense request is made by a legal or financial professional, the result must be the same based on ASARCO: A professional’s legal fees for litigating fee objections cannot be paid. Non-lawyer professionals, such as financial advisors, are entitled to no better and no worse treatment than lawyers with respect to legal fees for defending objections to fee applications in a bankruptcy case.
Because legal fees for defending fee application objections cannot be paid as compensation under section 330(a)(1)(A), those same legal fees cannot be reimbursed as expenses under section 330(a)(1)(B). Section 330(a)(1)(B) allows the award of “necessary” expenses. But those expenses must relate and be incident to the work for which the professional can be compensated under section 330(a)(1)(A). Otherwise, in ASARCO, Baker Botts need only have retained outside counsel to defend its fee applications and expensed the legal fees for reimbursement rather than seek compensation for them.