In re Capitol Litho Printing Corp. - Chapter 11

573 B.R. 771, 2017 Bankr. LEXIS 2209, 64 Bankr. Ct. Dec. (CRR) 129
CourtUnited States Bankruptcy Court, D. Arizona
DecidedJuly 28, 2017
DocketCase Number: 2:14-bk-13840-EPB; Case Number: 2:14-bk-17480-EPB; (Jointly administered under Case Number 2:14-bk-13840-EPB)
StatusPublished

This text of 573 B.R. 771 (In re Capitol Litho Printing Corp. - Chapter 11) is published on Counsel Stack Legal Research, covering United States Bankruptcy Court, D. Arizona primary law. Counsel Stack provides free access to over 12 million legal documents including statutes, case law, regulations, and constitutions.

Bluebook
In re Capitol Litho Printing Corp. - Chapter 11, 573 B.R. 771, 2017 Bankr. LEXIS 2209, 64 Bankr. Ct. Dec. (CRR) 129 (Ark. 2017).

Opinion

Eddward P. Ballinger Jr., Bankruptcy Judge

On December 27, 2015, this Court approved Debtors’ request to employ BGC Real Estate of Arizona, LLC, dba New-mark Grubb Knight Frank, and its agents, Geoffrey M. Waldrom and Dan Dobric (jointly referred to hereinafter as “BGC”), to market and sell certain real estate of Debtors. Debtors sought BGC’s employment pursuant to 11 U.S.C. § 327 and agreed to pay BGC a fixed commission based on a percentage of the selling price as provided in the listing agreement executed between the parties. The Court retained the right to adjust the commission pursuant to Local Bankruptcy Rule 2014-1 [772]*772and 11 U.S.C. § 828(a). In addition, BGC was required to file an application for expense reimbursement pursuant to ■ 11 U.S.C. § 330(a)(1)(B). Notably, the listing agreement also contained a prevailing party provision: “In the event a claim or controversy arises between the parties, the prevailing party shall, be entitled to its costs and reasonable attorneys’ fees in any legal action.” Exhibit A, Docket 179.

After the sale of the property, Debtors objected to BGC’s commission. The Court overruled Debtors’ objection and concluded that BGC was entitled to a 4% sales commission and permitted BGC to file an application for attorney’s fees and costs pursuant to the listing agreement and Arizona Revised Statute (“A.R.S.”) § 12-341.01. BGC filed its application seeking fees under the listing agreement’s prevailing party provision, A.R.S. § 12-341.01, and 11 U.S.C. § 330(a)(3). Debtors objected on a variety of grounds that the Court rejected during the hearing held on April 11, 2017. However, at that hearing, the United States Trustee questioned whether the fees were prohibited by the United States Supreme Court’s decision in Baker Botts L.L.P. v. ASARCO LLC, — U.S. —, 135 S.Ct. 2158, 192 L.Ed.2d 208 (2015) and its progeny. The Court granted the parties the opportunity to brief the issue.

The Court has reviewed the parties’ briefs and additional relevant case law.

I. Baker Botts L.L.P. v. Asarco LLC

The issue in Baker Botts was whether 11 U.S.C. § 330(a)(1) permits a bankruptcy court to award a professional employed under 11 U.S.C. § 327(a) legal fees incurred in defending its fee application (“defense fees”). 135 S.Ct. at 2162-63. The debtor in Baker Botts hired two law firms to represent it in its Chapter 11 bankruptcy proceeding. Both firms sought compensation under § 330(a)(1)(A), which allows for “reasonable compensation for actual, necessary services rendered by ... a professional person, or attorney.” The bankruptcy court awarded the law firms approximately $120 million for the work performed and an additional $5 million for fees incurred defending their fee applications. Debtor appealed, inter alia, the defense fee award.

The Supreme Court’s opinion begins by recognizing the well-settled American Rule that each litigant pays its own attorneys’ fees unless a statute or contract explicitly provides otherwise. The question presented was whether 11 U.S.C. § 330(a)(1)(A) is an explicit statutory exception to this rule. The Court held that it was not because professionals employed pursuant to § 327 are employed to “serve'the administrator of the estate for the benefit of the estate.” Id. at 2164. In turn, § 330(a)(1)(A) provides that a “court may award ... a professional employed under section 327 ... reasonable compensation for actual, necessary services rendered by” the professional. The Court concluded that attorneys’ fees incurred defending a fee application are not incurred for the benefit of the estate or in service of the estate. They are incurred only for the benefit of the professional. Id. at 2165.

While in this case BGC initially sought its defense fees pursuant to § 330(a)(3), as opposed to § 330(a)(1), the Baker Botts analysis equally applies to a request under that subsection. Subsection (a)(3) defines what constitutes reasonable compensation for purposes of subsection (a)(1) and similarly relies on the fees being necessary and for the benefit of the administration of the estate.

II. In. re Boomerang Tube, Inc.

Alternatively, BGC argues that Baker Botts expressly recognizes that a contractual exception to the American Rule may [773]*773also exist. Thus, under the prevailing party provision in the listing agreement, BGC believes it is entitled to its defense fees. Debtors argue that In re Boomerang Tube, Inc., 548 B.R. 69 (Bankr. D. Del. 2016), rejects contracting around Baker Botts. Debtors are somewhat correct. The UST in Boomerang made the very argument Debtors make here—that Baker Botts per se barred fee defense provisions, but the court in fact recognized that contractual exceptions continue to exist post-Baker Botts: “[T]he Court agrees with the Committee’s argument that the contract exception to the American Rule is not precluded by the ruling in ASARCO [Baker Botts].”1 Id. at 73. The practical effect of Boomerang, however, suggests that contracting around Baker Botts will be difficult, if not impossible.

In Boomerang, the UST appointed an Official Committee of Unsecured Creditors, which in turn retained legal counsel. Committee counsel sought approval under § 328 of a provision in the retention agreements requiring the estate to indemnify counsel for expenses incurred in successfully defending their fees, subject to court approval under §§ 330 and 331. The court sustained the UST’s objections to these provisions, concluding that the indemnification provisions were not generally recognized exceptions to the American Rule. Id. at 74-75. Unlike a true prevailing party provision, the subject indemnification provisions were unilateral, requiring only debtor’s estate to reimburse the defense fees. Committee counsel owed no reciprocal obligation to the estate. Additionally, the agreements were between the Committee and counsel. The estate was not a party. Yet they purported to require payment from the bankruptcy estate regardless of who objected to counsel’s fees.2 The Court then addressed whether the fee defense provision was permissible under 11 U.S.C. § 328(a), which requires the employment of a professional be on “reasonable terms and conditions” and concluded such a provision was not reasonable because it could benefit only the professional and not the estate.3

In a subsequent Delaware case, In re Nortel Networks, Inc., 2017 WL 932947 [774]*774(Bankr. D. Del.

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573 B.R. 771, 2017 Bankr. LEXIS 2209, 64 Bankr. Ct. Dec. (CRR) 129, Counsel Stack Legal Research, https://law.counselstack.com/opinion/in-re-capitol-litho-printing-corp-chapter-11-arb-2017.