In Re Hungry Horse – A New Decision Raises Troubling Questions For Delaware Professionals

A new day recently dawned in the post-ASARCO bankruptcy world, as the Bankruptcy Court for the District of New Mexico became the first court to hold that debtors and their attorneys can include “fees on fees” provisions in their retention agreements. In re Hungry Horse, LLC, 574 B.R. 740 (Bankr. D.N.M. 2017). In reaching this holding, Judge Thuma expressly disagreed with Judge Walrath’s holding in In re Boomerang Tube, Inc., 548 B.R. 69 (Bankr. D. Del. 2016). Unlike Judge Walrath, Judge Thuma believes that a “fees on fees” provision can be a “reasonable term and condition” of the employment of an estate professional. Compare id. at 76-78 withHungry Horse, 574 B.R. at 747. This disagreement, however, raises new questions for Delaware practitioners—will the Bankruptcy Court for the District of Delaware invalidate any employment terms in a retention agreement that solely benefit the estate professional?

As Cole Schotz previously reported here, the Supreme Court held in Baker Botts L.L.P. v. ASARCO LLC, 135 S. Ct. 2158 (2015) that bankruptcy attorneys may no longer bill the debtor’s estate for fees incurred by the professional while defending its own fees from challenges. The Supreme Court reached this conclusion by looking to the language of 11 U.S.C. §330(a)(1), which provides that a professional employed by the estate may receive “reasonable compensation for actual, necessary services rendered by” the professional. ASARCO, 135 S. Ct. at 2165 (emphasis in original) (quoting 11 U.S.C. § 330(a)(1)). As the Supreme Court saw it, when a professional is defending its own fees from challenge, it is not “rendering a service” to the estate. Id. at 2165-66.

11 U.S.C. § 328(a), in contrast, provides that a debtor, “with the court’s approval, may employ or authorize the employment of a professional person on any reasonable terms and conditions of employment… .” (emphasis added). In Boomerang, however, Judge Walrath concluded that “ASARCOprevents the Court from concluding thatsection 328permits defense fees even if they were routinely allowed by the market in bankruptcy or non-bankruptcy contexts prior to that ruling.” 548 B.R. at 78. As we previously detailed here, Judge Walrath’s opinion was subsequently followed by many of the other judges in the District of Delaware in unpublished letter rulings.

Judge Thuma disagreed. Hungry Horse, 574 B.R. at 747. He felt that ASARCO, decided in the context of § 330(a), did not reach the question of whether a “fees on fees” provision was a reasonable term of employment under § 328(a). Id. Judge Thuma also emphasized a fundamental point of disagreement with the Bankruptcy Court for the District of Delaware—namely, that “an employment term must benefit the estate to be reasonable.” Id. As Judge Thuma explained, retention agreements commonly contain numerous terms solely for the benefit of the professional. Id. (providing examples such as returned check fees, guarantees of payment, liens on recovery, and retainer requirements). Judge Thuma held that even if a retention provision directly benefits only the professional, the estate benefits indirectly because such terms are necessary for “the client [to] obtain[] the services of needed, able professionals.” Id.

Judge Thuma’s holding—and the distinction he drew with Boomerang—raises an interesting question: will the Bankruptcy Court for the District of Delaware invalidate any employment term that solely benefits the estate professional? That could be the case—Judge Walrath explicitly stated in Boomerang that “[t]hefee defense provisions are not reasonable terms for the employment of Committee Counsel because they do not involve any services for the Committee. Rather, they are for services performed by Committee Counsel only for their own interests.“ Boomerang, 548 B.R. at 75. It is not clear that Judge Walrath’s decision was intended to be read to encompass terms of employment other than the “fees on fees” provisions addressed in ASARCO. However, if taken to the extreme, Boomerang could be read for the proposition that all of the provisions Judge Thuma listed in Hungry Horse are subject to challenge in the Bankruptcy Court for the District of Delaware if they appear in a retention agreement.

As yet, challenges to these sorts of provisions in a retention agreement do not appear common. More importantly, retainers are safe—they are among the type of “reasonable terms” specifically enumerated in section 328(a). Nonetheless, Judge Thuma’s list of employment terms that could be construed to solely benefit the professional would pose concerns for practitioners in the District of Delaware, if Boomerang were to be read as going beyond the limited ruling in ASARCO. And it is not difficult to imagine other employment terms not listed by Judge Thuma that solely benefit a professional: limitations on the scope of the engagement and restrictions on a client’s authority to direct the application of a retainer are just a few examples.

It should be noted that Judge Thuma recognized and offered a solution to another problem noted in Boomerang—namely, that the estate (which actually pays the fees of the creditors’ committee’s professionals) is not the party who retains those professionals. As Judge Walrath explained, a retention agreement between a creditors’ committee and its counsel cannot “bind the estate, which is not a party to it.” Boomerang, 548 B.R. at 75. Judge Thuma, instead, proposes that there should always be a level playing field—if the debtor’s professionals receive a “fees on fees” provision, so too must the committee’s professionals. Hungry Horse, 574 B.R. at 748. Presumably, this provision in favor of the committee’s professional must be in the debtors’ professionals’ retention agreement (so that the estate is a party to the agreement containing the fees on fees provision for the committee’s professionals).

Finally, Hungry Horse makes clear that the law is not yet settled in the post-ASARCO world. It remains to be seen whether other courts will embrace Boomerang or Hungry Horse. Debtors’ professionals nationwide, of course, will keep their fingers crossed for the latter.