Monday, October 6, 2014

Supreme Court to Resolve Bankruptcy "Fees on Fees" Issue

By Michael FullerThe Underdog Lawyer ®

On Thursday the Supreme Court agreed to hear an appeal from the Fifth Circuit concerning the discretion of judges to award "fees on fees" under section 330 of the Bankruptcy Code.

Click here to read the Supreme Court's Order granting writs for certiorari in Asarco LLC v. Baker Botts.

What are "Fees on Fees"?

After bankruptcy professionals successfully litigate an issue on behalf of the estate, they must apply for fee compensation. Fee applications can be highly contested and cost professionals tens of thousands of dollars to defend.

"Fees on fees" are the fees incurred defending a fee application.

"Fees on fees" are generally not available under the American Rule, which says that each party must bear its own expenses.

However, "fees on fees" are commonly provided for under consumer protection statutes to encourage law enforcement by private litigants with little money or bargaining power.

The Circuits are split as to whether section 330 of the Bankruptcy Code allows judges to award so-called "fees on fees" for successfully defending a fee application.

The Circuit Split

The 11th Circuit (Grant v. George Schumann et al (1990)), and now the 5th Circuit, do not allow "fees for defense of fees" because defending a fee application does not "benefit a debtor’s estate" and is not "necessary to case administration."

The 11th and 5th Circuits acknowledge that "fees on fees" are allowed in the consumer protection context, such as FDCPA, automatic stay, and civil rights litigation. However, these courts feel that unlike consumer protection, Congress did not intend to encourage depletion of the estate under section 330 through "satellite fee litigation".

Other courts, including the 9th Circuit (In re Smith (2002)), allow "fees on fees" under section 330. These courts reason that compensating professionals for defending fee applications is discretionary so long as the work is "reasonable and necessary."

Effect on Consumer Bankruptcy Litigation

The Supreme Court's decision should have little impact on consumer bankruptcy litigation under the automatic stay and discharge injunction for a few reasons.

First, unlike section 330, Congress passed sections 362(k) and 524 to encourage Code enforcement through litigation.

Second, litigation under 362(k) and 524 protects (rather than depletes) the estate and typically serves to reign in overreaching creditors.

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