The United States Supreme Court issued a ruling yesterday rejecting the right of bankruptcy attorneys to bill for work and costs associated with defending approval of their fees.
In Chapter 13 cases, clients may have a retainer paid to a bankruptcy lawyer. That lawyer cannot draw against those funds without bankruptcy court approval so they will need to file a fee application. When granted, the judge enters an order allowing for payment of the bankruptcy attorney fees.
Sometimes, the bankruptcy trustee or bankruptcy debtor objects to the fees in the proposed application. The bankruptcy attorney can then file a response to the objection explaining why the fees are proper. The court later holds a hearing with the bankruptcy attorney and all objecting parties to determine whether or not the full fees should be approved.
Prior to this ruling, bankruptcy attorneys in the Sixth Circuit (where we in Michigan are located) were allowed to bill for defending their fees. Any time and resources spent were billable.
This ruling by the Supreme Court reverses the Sixth Circuits normal practice and now bankruptcy attorneys will not be awarded compensation for the defense of fees.
The Supreme Court determined that nothing in the statute provides for payment for defense of a fee application. Further, the Court held that the American rule is that each party bears their own cost for their representation. Therefore, the Court held that bankruptcy attorneys cannot bill for defending their fees.
Held: Section §330(a)(1) does not permit bankruptcy courts to award fees to §327(a) professionals for defending fee applications. Pp. 3–13.
(a) The American Rule provides the “ ‘basic point of reference’ ” for awards of attorney’s fees: “ ‘Each litigant pays his own attorney’s fees, win or lose, unless a statute or contract provides otherwise.’ ” Hardt v. Reliance Standard Life Ins. Co., 560 U. S. 242, 252–253. Because the rule is deeply rooted in the common law, see, e.g., Arcambel v. Wiseman, 3 Dall. 306, this Court will not deviate from it “ ‘absent explicit statutory authority,’ ”Buckhannon Board& Care Home, Inc.v. West Virginia Dept. of Health and Human Resources, 532 U. S. 598, 602. Departures from the American Rule have been recognized only in “specific and explicit provisions,” Alyeska Pipeline Service Co. v. Wilderness Society, 421 U. S. 240, 260, usually containing language that authorizes the award of “a reasonable attorney’s fee,” “fees,” or “litigation costs,” and referring to a “prevailing party” in the context of an adversarial “action,” see generally Hardt, supra, at 253, and nn. 3–7. Pp. 3–4.
(b) Congress did not depart from the American Rule in §330(a)(1) for fee-defense litigation. Section 327(a) professionals are hired to serve an estate’s administrator for the benefit of the estate, and §330(a)(1) authorizes “reasonable compensation for actual, necessary services rendered.” The word “services” ordinarily refers to “labor performed for another,” Webster’s New International Dictionary 2288. Thus, the phrase “ ‘reasonable compensation for services rendered’ necessarily implies loyal and disinterested service in the interest of” a client, Woods v. City Nat. Bank & Trust Co. of Chicago, 312 U.S. 262, 268. Time spent litigating a fee application against the bankruptcy estate’s administrator cannot be fairly described as “labor performed for”—let alone “disinterested service to”—that administrator. Had Congress wished to shift the burdens of fee-defense litigation under §330(a)(1), it could have done so, as it has done in other Bankruptcy Code provisions, e.g., §110(i)(1)(C). Pp. 4–7.
(c) Neither the law firms nor the United States, as amicus curiae, offers a persuasive theory for why §330(a)(1) should override the American Rule in this context. Pp. 7–13.
Read more on the Supreme Court’s website: http://www.supremecourt.gov/opinions/14pdf/14-103_bpdg.pdf
