Objection Use it or Lose it after Final Fee Order

By: David Wohlstadter
St. John's Law Student
American Bankruptcy Institute Law Review Staff

In AASI Creditor Liquidating Trust v. Raymond James & Associates, Inc. (In re All American Semiconductor, Inc.),[1] a bankruptcy court held that res judicata barred creditors from objecting to a final fee order because the creditors had notice of the prior hearing regarding the fee application and should have objected to the specific fees then.  The liquidating trustee challenged pre-petition fees paid to a financial advisor for his efforts to sell various assets owned by the debtor.[2]  The bankruptcy court overruled the trustee’s objection because the creditor’s committee and United States Trustee had already objected unsuccessfully during the final fee hearing.[3]

The doctrine of res judicata has four elements: (1) the prior judgment must come from a court of competent jurisdiction, (2) the parties or their privies must have participated in the prior litigation, (3) the prior judgment must be final and on the merits, and (4) the two suits must involve the same cause of action.[4]  The first two requirements are rarely disputed,[5] and the third was not in controversy here.[6] Accordingly, the All American court focused on what constitutes the same cause of action.[7]  In Kaiser Aerospace and Electronics Corp. and PAQ, Inc. v. Teledyne Industries (In re Piper Aircraft Corp.), the Eleventh Circuit defined the same cause of action as two claims arising out of the same nucleus of operative fact.[8]  The nucleus of operative facts must be matters that at least could have been in issue at a bankruptcy court hearing.[9]  In All American, the pre-petition fees were actually considered at the final fee hearing and were expressly part of the Final Fee Order; therefore the trustee was barred from recovery.[10]  

Parties in interest have the ability to object to any final fee application and are normally barred from objecting after the court enters an order approving those fees.[11]  For example, in Osherow v. Ernst & Young, LLP (In re Intelogic Trace, Inc.), the debtor negotiated down Ernst & Young’s fees using suspicion of malpractice as a bargaining chip and the fee order was approved.[12]  The Fifth Circuit held that a subsequent malpractice suit was barred by res judicata because the approved fees contemplated malpractice.[13]  When the debtor agreed to the final fee order, it was essentially waiving any known claims.[14]  Similarly, the First, Fourth and D.C. Circuits also have held that res judicata barred professional malpractice claims after final fee orders were entered.[15]

The All American decision is significant because it puts parties in interest on notice to fully consider fees prior to a final fee order.  A failure to evaluate all fees may be detrimental to a party in interest who later seeks to enlarge the bankruptcy estate.  When assessing fees, parties in interest should ensure that all pertinent facts are known regarding the quality of the professional work product. Additionally, parties in interest should not rely on the U.S. Trustee to enforce their rights.  As happened in All American, the parties in interest withdrew their objection, relied on the U.S. Trustee and are now barred from arguing fees that have been approved should be disgorged. While an objection need not be raised in every single circumstance, a practitioner would be wise to at least investigate thoroughly each fee and the underlying work product.