Dating back at least to the 18th century, the “American Rule” provides that each litigant pays his or her own attorneys’ fees, regardless of the outcome, unless provided otherwise by statute or a contract between the parties. Justice Thomas, writing for the majority in the Supreme Court’s June 15, 2015 decision in Baker Botts v. ASARCO, LLC, referred to this rule as a “bedrock principle” that would serve as the Court’s basic point of reference in evaluating this dispute from the Fifth Circuit.
The case stemmed from defense of a bankruptcy fee application by two law firms that had represented respondent ASARCO in its bankruptcy. Following the bankruptcy proceeding, the firms sought compensation under §330(a)(1) of the Bankruptcy Code, which provides that a bankruptcy court “may award . . . reasonable compensation for actual, necessary services rendered by” professionals. The firms also filed fee applications as required. The bankruptcy court eventually awarded $120 million in fees to the firms. While that fee may not have thrilled ASARCO, at issue was an additional $5 million in fees for time that the law firms spent defending their fee applications, which the bankruptcy court determined the law firms could recover. On appeal, however, the Fifth Circuit reversed, citing the American Rule and finding that the beneficiary of a professional fee application is the professional, not the litigant, and thus the professional is not entitled to compensation for defending a fee application.
The Supreme Court, in a 6-3 decision, agreed. The Bankruptcy Code authorizes compensation “for actual, necessary services rendered,” which the parties did not dispute equaled $120 million. But the bankruptcy rules “neither specifically nor explicitly authorize courts to shift the costs of adversarial litigation from one side to the other—in this case, from the attorneys seeking fees to the administrator of the estate—as most statutes that displace the American Rule do.” Defense of a fee application, the Court determined, is a separate activity that does not factor into the compensation authorized under the Code.