The U.S. Supreme Court ruled on Monday that bankruptcy attorneys must bear the expense of defending their fees, which could make it harder for lawyers to get paid for their often-costly Chapter 11 work.
The 6-3 decision stemmed from the 2005 bankruptcy of Asarco, a mining and smelting company, and a dispute over the fee awarded to its law firm, Baker Botts.
Baker Botts was eventually awarded $117 million for its work, which was considered particularly successful because creditors were repaid in full. However, Baker Botts also wanted to be compensated for the $5.2 million it spent battling for the fee.
In an 13-page opinion written by Justice Clarence Thomas, the work of Baker Botts was compared to that of a car mechanic.
A car mechanic could charge for preparing an itemized bill but "it would be less natural to describe a subsequent court battle over the bill as part of the 'services rendered' to the customer," Thomas wrote.
Therefore, Baker Botts, like the car mechanic, should have to pay to defend the bill, Thomas added.
Baker Botts said in a statement it was disappointed with the ruling.
The high cost of bankruptcy has long been a sore point with investors and creditors. Wilbur Ross, who made billions of dollars buying steel mills and other troubled businesses out of bankruptcy, has urged changes to Chapter 11 professional fees, which he says have risen far more quickly than inflation.
Lawyers and professionals working for a bankrupt company or the official committee of unsecured creditors must seek approval from a U.S. Bankruptcy judge for their fees because it potentially reduces the amount that will be paid to creditors.
Justice Stephen Breyer, in his dissenting opinion, said the ruling could open the way for meritless objections to drastically reduce the amount a law firm would make on a bankruptcy case.
Brian Netter, an attorney with the firm Mayer Brown, said the ruling changes the calculus that goes into whether to pursue a fee dispute because the estate of the bankrupt company no longer bears the entire cost of the litigation.
"Just from incentive structure you should expect to see more fee litigation," Netter said.
