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Is the American Rule “American?” David Kupetz Authors Los Angeles Lawyer Article

Compensation of professionals, including attorneys, employed in bankruptcy cases is subject to court approval.  Under Bankruptcy Code section 330(a), the court is authorized to award “reasonable compensation for actual, necessary services” rendered by attorneys and other professionals employed by the bankruptcy estate’s representative. The clear intent underlying the Code is that attorneys and other professionals serving in bankruptcy cases be compensated no less favorably in bankruptcy cases than they would for performing comparable services in non-bankruptcy cases. The Code contains a specific provision providing for compensation for preparing a fee application required to be filed with the court.  However, the Bankruptcy Code lacks any explicit, specific language authorizing compensation to professionals for work performed in defending a fee application.

Outside of the bankruptcy context, there is a long-established and familiar “American Rule” that each side must pay its own attorney’s fees, unless a statute or contract provides otherwise.  In his Los Angeles Lawyer article “Is the American Rule ‘American’?” David Kupetz discusses the ASARCO case, in which the U.S. Supreme Court addressed a collision between the American Rule and the intent underlying the Bankruptcy Code that attorneys in bankruptcy cases be compensated at the same rate they would be outside of bankruptcy court.

The Supreme Court considered “whether §330(a)(1) permits a bankruptcy court to award attorney’s fees for work performed in defending a fee application in court.”  Justice Thomas delivered the opinion of the Court holding that a departure from the American Rule was not warranted and, accordingly, the rule precluded the award of fees.  The dissenting opinion filed by Justice Breyer asserts, among other things, that “the American Rule is a default rule that applies only where ‘a statute or contract’ does not ‘provid[e] otherwise.’  And here, the statute ‘provides otherwise.'”

In his article, David Kupetz suggests that an amendment to section 330 of the Bankruptcy Code specifically authorizing the court to award fees for the successful defense of a fee application would address the threat to comparable compensation posed by ASARCO.  While the Bankruptcy Code already directs the court to consider all relevant factors when determining reasonable compensation, the Supreme Court finds that inadequate to overcome the American Rule.  As a result, bankruptcy professionals face a significant risk of fee dilution when forced to address objections to their fees.  This risk is heightened by the asymmetrical nature of bankruptcy cases in contrast to the ordinarily bilateral litigation from which the America Rule arose.

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