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Delaware Bankruptcy Court Permits Attorneys’ Fees in Fee Defense, Distinguishing ASARCO and Boomerang Tube

In re Nortel Networks Inc., No. 09-10138 (KG), 2016 WL 932947 (Bankr. D. Del. Mar. 8, 2017)

In the Nortel family of cases, the Delaware Bankruptcy Court sustained, in part, an objection to the attorneys’ fees sought by the Nortel Networks Capital Corporation Bonds Indenture Trustee (the “Indenture Trustee”), slashing its attorneys’ fee request by almost one million dollars.  However, the more noteworthy ruling came when Judge Gross permitted the Indenture Trustee’s attorneys’ fees for defending their fees, distinguishing the Supreme Court’s ruling in ASARCO and the Delaware Bankruptcy Court’s recent ruling in Boomerang Tube.  The Court held that the indenture explicitly provides for the payment of the Indenture Trustee’s attorneys’ fees, and clearly falls outside the circumstances of ASARCO and Boomerang Tube.

To say that the Nortel bankruptcy case is complex and contentious does not do it justice.  On the “allocation dispute” alone, the Delaware Bankruptcy Insider has blogged four times—most recently last June.  This winter the parties reached a global settlement over the allocation of the $7.3 billion in sale proceeds, and the Bankruptcy Court approved the global settlement and confirmed a plan based thereon.  Thereafter, the Indenture Trustee sought approval of its attorneys’ fees from January 14, 2009 through the present in the approximate amount of $8.1 million.  Solus Alternative Asset Management LP and Point State Capital LP (together, the “Noteholders”) objected to the fee request in the amount of approximately $4.4 million for the law firms of Dewey & LeBoeuf LLP (“Dewey”), Patterson Belknap Webb & Tyler LLP (“Patterson Belknap”), and Borden Ladner Gervais LLP (“BLG”).  Generally, the Noteholders objected on the grounds that much of the attorneys’ work consisted of duplicative efforts, time billed for “committee work” and unnecessary fees for the allocation dispute.

On the reasonableness of the attorneys’ fees, the Court held that the evidence, on balance, indicated that the Indenture Trustee performed its responsibilities prudently, except in two instances.  Op. at 12.  One such instance was having more than one attorney attend, and prepare for, committee meetings.  The Court therefore cut the fee requests by approximately $600,000.  Another instance in which the Court cut fees related to Dewey’s “wrongful conduct” in transferring its work papers to Patterson Belknap after Dewey’s engagement ended, which caused disadvantage and delay to the Indenture Trustee.  Notwithstanding those exceptions, the Court denied the Noteholders’ objection to the attorneys’ work on the allocation dispute as being “clearly wrong.”  Op. at 20.  The Court noted that the Indenture Trustee was a “Core Party” in the allocation dispute, which obligated their participation through every stage of the hotly contested matter.  The Court further criticized the Noteholders’ “hindsight” opinion that the Indenture Trustee’s attorneys should not have worked on critical aspects of the allocation dispute, including attending depositions, mediations, and trial.

On the more significant issue, the Court permitted Patterson Belknap’s request for fees incurred to defend its fees.  Typically, under the so-called American Rule, each litigant pays its own attorney’s fees, win or lose, unless a statute or contract provides otherwise.  Op. at 23.  In Baker Botts L.L.P. v. ASARCO LLC, the Supreme Court held that section 330 of the Bankruptcy Code did not provide a statutory exception to this rule, barring estate professionals from recovering the fees incurred for defending their fees in a bankruptcy case.  Following the Supreme Court’s lead, Judge Walrath of the Delaware Bankruptcy Court in In re Boomerang Tube, Inc. denied estate professionals their fees incurred for defending fees under Bankruptcy Code section 328 and related retention agreements that attempted to contract for fee defense costs.  Judge Walrath’s decision in Boomerang Tube has been endorsed by Judges Sontchi and Shannon and Judges Gross and Silverstein of the Delaware Bankruptcy Court. 

In Boomerang Tube, the Court held that a committee could not contract for fee defense costs because a committee’s retention agreement is not simply a bilateral agreement (i.e., it is not a contract between two parties, but rather a contract between the committee and its attorneys providing that the estate, a third party, would pay defense costs).  Moreover, it is subject to court approval and modification.  The indenture here, Judge Gross rules, is different—it is a contract between two parties that explicitly indemnifies costs and expenses of fee defense.  As such, the Court held that the indenture is “clearly outside the circumstances of ASARCO and Boomerang Tube[,]” and therefore, qualifies as an exception to the American Rule.