In the recent opinion of In re Boomerang Inc., et al., Case No. 15-11247 (Bankr. D. Del. Jan. 29, 2016), the Delaware Bankruptcy Court considered the United States Trustee’s (“UST”) objections to retention applications of several law firms seeking to represent the Official Committee of Unsecured Creditors (the “Committee”) of Boomerang Tube, LLC (the “Debtor”).
The UST objected to the applications because they include a provision indemnifying them for expenses incurred in any successful defense of their fees.
The Court sustained the UST’s objection. The Court concluded that section 328 of the Bankruptcy Code, like section 330, does not provide an exception to the American Rule and cannot support the fee defense provisions at issue under the Supreme Court’s ruling in Baker Botts L.L.P. v. ASARCO LLC, 135 S. Ct. 2158, 2169 (2015).
Moreover, the Court found that the retention agreements were not contractual exceptions to the American Rule requiring each party to pay their own attorneys’ fees. The Court also found that the retention agreements could not bind the estate, which is not a party to them. Finally, the Court agreed with the UST that the fee defense provisions do not fit the scope of Section 328(a).
This is an important read for any party to a bankruptcy action considering a retention agreement that attempts to provide indemnification to the retained professionals for defending their fees.
Carl D. Neff is a partner with the law firm of Fox Rothschild LLP. You can reach Carl at (302) 622-4272 or at email@example.com.