In Brief: Delaware Bankruptcy Court Rules That Bond Indenture Fee Defense Provision Satisfies <i>ASARCO</i> Standard

In Brief: Delaware Bankruptcy Court Rules That Bond Indenture Fee Defense Provision Satisfies ASARCO Standard

In an opinion and order issued on March 8, 2017, the Delaware bankruptcy court presiding over the chapter 11 cases of defunct telecommunications company Nortel Networks Inc. and its affiliates (collectively, "Nortel") held in In re Nortel Networks Inc., No. 09-10138 (KG) (Bankr. D. Del. Mar. 8, 2017), that a provision in a bond indenture obligating Nortel to pay legal fees charged by the indenture trustee’s attorneys for defending their requested fees did not violate the U.S. Supreme Court’s ruling in Baker Botts L.L.P. v. ASARCO LLC, 135 S. Ct. 2158 (2015).

The court concluded that the terms of the indenture served as an exception to the "American Rule," which requires each litigant to pay its own attorneys’ fees—win or lose—unless a statute or contract provides otherwise. In ASARCO, the Supreme Court ruled that "lawyers could not recover fees for defending their fees in [a] bankruptcy case" and that section 330 of the Bankruptcy Code, which provides that a court may award reasonable compensation for actual, necessary services rendered by professionals employed in a bankruptcy case, is not an exception to the rule because it does not mention "fees," a "prevailing party," and a "civil action."

The Nortel court concluded that the case before it satisfied the ASARCO standard and was distinguishable from In re Boomerang Tube, Inc., 548 B.R. 69 (Bankr. D. Del. 2016). In Boomerang, the official unsecured creditors’ committee sought to retain attorneys under section 328 of the Bankruptcy Code, which authorizes a bankruptcy trustee or an official committee to retain professionals "on any reasonable terms and conditions." The retention agreement provided that the bankruptcy estate would bear the cost of fees charged by the attorneys for defending their fees. Citing ASARCO, the court refused to approve the fee defense provision. It ruled that section 328 "is not a ‘specific and explicit’ statute that authorizes the prevailing party to recover fees in an adversarial action."

The Boomerang court found that "the retention agreement was a contract, but that it was not a bilateral agreement, and that its terms were subject to the court’s approval and modification." It accordingly held that "the retention agreement was not ‘a contract between two parties providing that each will be responsible for the other’s legal fees if it loses a dispute between them,’ " but instead, "a contract between the creditors’ committee and its attorneys providing that the estate, a third party, would pay the defense costs even if the estate was not the objecting party."

In Nortel, the court explained that, unlike in Boomerang, the indenture "provides for payment of the Indenture Trustees’ and its attorneys’ fees incurred in the fee dispute" because it "requires the Debtors . . . to indemnify the Indenture Trustee for ‘costs and expenses of defending itself’ " and "entitles the Indenture Trustee to exercise a charging lien against distributions to secure payment." Accordingly, the court ruled that the indenture "is clearly outside the circumstances of ASARCO and Boomerang [and the] . . . Indenture Trustee and its lawyers are therefore awarded their fees for the fee dispute."

The Nortel court also partially sustained the objection of two investment funds holding 90 percent of the bonds to a portion of the professional fees asserted by the indenture trustee’s attorneys. The court disallowed as "unnecessary" approximately $914,000 of $8.1 million in fees requested by two law firms representing the indenture trustee.

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