In two recent decisions, judges of the U.S. Bankruptcy Court for the District of Delaware declined to approve retention applications that included provisions entitling counsel to reimbursement of fees, costs and expenses arising from the successful defense of their fee applications (so-called fee defense provisions). In In re Boomerang Tube, Case No. 15-11247 (MFW) (Del. Bankr. Jan. 29, 2016), U.S. Bankruptcy Judge Mary Walrath of the District of Delaware rejected the application of two law firms as counsel to the official committee of unsecured creditors because the retention agreements included fee defense provisions. In In re Samson Resources, Case No. 15-11934 (CSS) (Del. Bankr. Feb. 9, 2016), U.S. Bankruptcy Judge Christopher Sontchi rejected the applications of two law firms as counsel for the debtors and debtors-in-possession because they included fee defense provisions, basing his decision expressly on the reasoning of Walrath in Boomerang Tube.
In Boomerang Tube, the U.S. trustee objected to the retention applications because of the fee defense provisions. The trustee argued that the U.S. Supreme Court decision in Baker Botts v. Asarco, 135 S. Ct. 2158 (2015), which held that a bankruptcy estate may not compensate professionals under Section 330 of the Bankruptcy Code for fees incurred in defending fee applications, directly barred the fee defense provisions; that Section 328(a) of the Bankruptcy Code, which provides that, with the court’s approval, a professional may be employed “on any reasonable terms and conditions of employment,” creates no exception to the American Rule’s general prohibition against fee-shifting; and that the fee defense provisions cannot be approved under Section 328(a) because they were unreasonable and sought to compensate professionals for work not within the scope of their employment.
