October 31, 2017 Practice Points

A Fee-Defense Provision in a Retention Agreement Can be Approved Under Section 328(a)

The New Mexico Bankruptcy Court rules in In re Hungry Horse, LLC.

By Travis J. Cuomo

The New Mexico Bankruptcy Court held that a properly drafted fee-defense provision in a retention agreement can be approved under section 328(a) of the Bankruptcy Code. See In re Hungry Horse, LLC, Case No. 16-11222 (Bankr. D. N.M. September 20, 2017). The creditors’ committee objected to a fee-defense provision in the proposed debtor’s counsel’s retention agreement. The committee argued that the proposed provision was barred by the Supreme Court’s decision in Baker Botts L.L.P. v. ASARCO LLC, 135 S. Ct. 2158 (2015), in which the Supreme Court concluded that section 330 of the Bankruptcy Code limited attorney compensation to services rendered to the client. The Supreme Court held that Section 330 did not provide a statutory exception to the American rule for litigating fee applications against the administrator of a bankruptcy estate. However, the New Mexico court held that the ASARCO ruling did not apply because it did not address a fee-defense provision in a retention agreement that was subject to approval under section 328(a). If a retention agreement is approved by the bankruptcy court under section 328(a), then compensation is governed by those terms and conditions, not by section 330. Thus the contract exception to the American rule rather than the statutory exception was at issue, and the New Mexico court concluded that it would consider approving a fee-defense provision as a “reasonable term” under section 328(a).

Travis J. Cuomo is an associate with Richards, Layton & Finger, P.A., in Wilmington, Delaware. 

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Travis J. Cuomo – October 31, 2017