Substantial Contribution Claims

The first opinion involved three bondholder/hedge funds' collective application for a $16.7 million substantial contribution claim. In re ASARCO LLC, No. 05-21207, 2010 Bankr. LEXIS 3352 (Bankr. S.D. Tex. Sept. 28, 2010) [hereinafter ASARCO I]. The bondholders claimed that the competing plan proposed by one of the funds caused ASARCO and its parent companies to amend their plans in a bidding war for ownership of ASARCO, ultimately resulting in the debtor's parent's proposal of a full payment plan in which the parent would retain 100% ownership of ASARCO. The bondholders also cited “virtually every action they undertook” during the bankruptcy case, including their objections to an earlier version of the parent's plan and their (unsuccessful) bid for ASARCO's assets at an (unsuccessful) prior auction. Id. at *5, 10.

The second opinion involved the separate applications of the United States, Texas, Washington, and Montana, referred to by the court as the “Governmental Movants,” for substantial contribution claims in the aggregate approximate amount of $6.1 million. In re ASARCO LLC, Case No. 05-21207, ECF No. 15624 (Bankr. S.D. Tex. Sept. 29, 2010) [hereinafter ASARCO II]. The Governmental Movants were environmental creditors that had previously settled all claims for response costs (including attorneys' fees and costs) under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended, 42 U.S.C. ” 9601-9675 (CERCLA), and other applicable environmental laws, in exchange for allowed claims. In general, their asserted substantial contribution was acting as an unofficial committee of environmental creditors, supporting ASARCO's unsuccessful plan and proposed asset sales in opposition to the parent's successful plan, and achieving global settlement of the majority of ASARCO's environmental liabilities. See Id. at 3-4. The court found that all of the Governmental Movants had, through the settlement agreements, received full satisfaction of their response cost claims, including fees for legal services and expenses. Id. at 2. Thus, in order to recover any additional legal fees and expenses as substantial contribution claims, the Governmental Movants would have to show that they made a substantial contribution and that the fees and expenses were not included in the settled environmental claims. Id. at 3.

Substantial Contribution Standards in the Fifth Circuit

Pursuant to ' 503(b)(3)(D) of the Bankruptcy Code, “there shall be allowed administrative expenses, including ' the actual, necessary expenses, other than compensation and reimbursement specified in paragraph (4) of this subsection, incurred by ' a creditor ' in making a substantial contribution in a case under Chapter 9 or 11 of this title ' .” 11 U.S.C. ' 503(b)(3)(D). Pursuant to ' 503(b)(4), if a creditor has an expense allowable under ' 503(b)(3)(D), a court can then also authorize an administrative expense for “reasonable compensation for professional services rendered by an attorney or an accountant of [such creditor], based on the time, nature, the extent, and the value of such services, and the cost of comparable services other than in a case under this title, and reimbursement for actual, necessary expenses incurred by such attorney or accountant.” 11 U.S.C. ' 503(b)(4).

“Substantial contribution” is not a defined term in the Bankruptcy Code, but the Fifth Circuit has concluded that the term “substantial contribution” in ' 503(b)(3)(D) means a contribution that is “considerable in amount, value or worth.” Hall Fin. Group, Inc. v. DP Partners, L.P. (In re DP Partners L.P.), 106 F.3d 667, 673 (5th Cir. 1997), cert. denied, 522 U.S. 815 (1997). Because an expansive application of ” 503(b)(3) and (4) could drain valuable estate resources, courts narrowly construe the substantial contribution provisions. Thus, only extraordinary circumstances warrant allowance of a substantial contribution claim ' “[a]ctivities of a creditor or their counsel that are ordinary, expected, routine, or duplicative do not constitute a substantial contribution to a debtor's estate.” ASARCO I, 2010 Bankr. LEXIS 3352, at *23. Services provide a “substantial contribution” if the services “foster and enhance, rather than retard or interrupt the progress of reorganization.” DP Partners, 106 F.3d at 672 (quoting In re Consol. Bancshares, Inc., 785 F.2d 1249, 1253 (5th Cir. 1986)). In addition, there must exist a direct and causal connection between the creditor's actions and the benefit to the estate before the creditor can qualify for “substantial contribution.” Id. at 673. The party asserting a substantial contribution claim has the burden of proving a “direct, significant, and demonstrable benefit to the estate” by a preponderance of the evidence before such treatment can be granted. Buttes Gas & Oil Co., 112 B.R. at 194. In essence, the term “substantial contribution” means that the creditor took direct causal action that resulted in measurable value or new unrealized assets being brought into the estate for the benefit of all creditors. Id.

The ASARCO court concluded that “[f]ailing to show a direct, significant and demonstrable benefit to the estate caused by the actions of the applicant is, therefore, fatal to a substantial contribution claim.” ASARCO I, 2010 Bankr. LEXIS 3352, at *22 (emphasis added). If the “asserted contribution would have occurred without the claimant's involvement,” the creditor has not made a substantial contribution. Id. at *23,24. A creditor must prove this by a preponderance of the evidence ' “[m]ere conclusory statements regarding the causation or provision of a substantial contribution are insufficient to establish that a substantial contribution has been made.” Id. at *22, 23. The ASARCO court therefore did not rely on its own ability to divine creditors' intent; instead, the court provided a bright-line rule easy to follow in other cases. But for the creditor's actions, the benefit to the estate would not have occurred. This is what substantial contribution means.

ASARCO Court's Holdings

As to the bondholders, the court found that there was no direct evidence that they caused any of the amendments to ASARCO and the parent's plans which resulted in the parent's topping bid of a true full payment plan. ASARCO I, 2010 Bankr. LEXIS 3352, at *26. The bondholders admitted as much. Id. To prove causation, the bondholders relied merely on the temporal proximity of their actions and the plan amendments. Id. at *26'27. The court held that “[w]hile it is correct that certain events chronologically occurred after other events, there was no evidence adduced at
[t]rial that established a direct causal relationship between any action by the Movants” and the escalating bidding war between ASARCO's plan sponsor and its parent which resulted in enormous benefit to the estate. Id. at *27. And “[n]either unsuccessful bidders in bankruptcy auctions (especially unsuccessful auctions) nor unsuccessful competing plan proponents are eligible to receive a substantial contribution claim merely for putting forth a bid or a competing plan.” Id. at *24. Absent any direct causal evidence of a significant benefit to the estate, the bondholders' substantial contribution claim failed.

The Governmental Movants also did not cause the confirmation of the parent's full payment plan. The court held certain of the attorneys for the Governmental Movants in high esteem, but expertise and outstanding legal representation are expected. ASARCO II, ECF No. 15624 at 5. The Governmental Movants obtained very favorable claim settlements for themselves and negotiated in good faith with the debtor and other creditor constituencies, but even this simply constitutes routine creditor actions calculated to enhance recovery on a claim. Id. The court held that “[u]nlike the creditor who locates a valuable asset or engages in some other extraordinary behavior that brings in a benefit to the estate for all creditors, ordinary creditor conduct such as compromising of claims to obtain allowance in bankruptcy and assisting in obtaining court approval of such compromises is ineligible for compensation as a 'substantial contribution.'” Id. at 7. The court noted that for a creditor like the United States holding over $1 billion in claims, “it would be extraordinary if such a creditor did not actively participate in the plan process.” Id. at 8. The Governmental Movants merely supported one plan over a competing plan, and the ultimate confirmation of the full payment plan was not caused by the Governmental Movants' support of the defeated plan. Id. The court found that there was no substantial contribution by the Governmental Movants. Moreover, the court found that any such claim was compromised in certain environmental claim settlements which preceded the substantial contribution application because the requested attorneys' fees and costs were “response costs” under CERCLA and were therefore released in the settlement agreements. Id. at 9'11.

Conclusion

If a creditor does not directly bring about a significant benefit to the estate, it has not made a substantial contribution. Causation is outcome determinative ' not the creditor's intent in undertaking the activity it claims made a substantial contribution. Because the ASARCO court's definition of a substantial contribution claim requires objective evidence, it provides the much-needed bright-line rule for these claims and should discourage such undeserving applications in future cases.

Dion W. Hayes ([email protected]), a member of this newsletter's Board of Editors, is a partner, and K. Elizabeth Sieg ([email protected]) is an associate, in the Restructuring and Insolvency Group at the Richmond, VA, office of McGuireWoods LLP. The firm represents the Plan Administrator in the ASARCO case, and the views expressed herein are not necessarily the views of the firm or any of its clients.

In two recent decisions arising out of the ASARCO bankruptcy cases (In re ASARCO LLC (Case No. 05-21207)), the United States Bankruptcy Court for the Southern District of Texas (Hon. Richard S. Schmidt) clarified the subjective standards regarding a creditor's entitlement to an allowed administrative expense under ' 503(b)(3) and (4) of the Bankruptcy Code for making a substantial contribution in the debtor's case. The ASARCO court denied several applications for substantial contribution claims because none of the applicant-creditors had caused the extraordinary outcome of the case ' confirmation of a Chapter 11 plan that provided payment in full, plus post-petition interest, on all allowed claims. The court found that this successful outcome was possible not because of the actions of the moving creditors, but because of a rise in copper prices during the four-year duration of the bankruptcy and other unrelated factors. Thus, as the ASARCO court concluded, mere active participation by a creditor in a case that results in a full payment plan does not qualify a creditor for a substantial contribution award.

The Bankruptcy Code does not define substantial contribution, permitting a bankruptcy judge to award such claims at her discretion. Predictably, then, courts have created various tests to gauge whether a creditor made a substantial contribution. Some courts focus on the creditor's intent when taking the actions alleged to have substantially contributed to the case ' did the creditor transcend self-interestedness for the benefit of the estate as a whole, or was the creditor acting as routinely expected to enhance the recovery on its claim? Courts following this approach must rely more on their own intuition than on any objectively verifiable facts. The ASARCO court took the opposite approach and focused primarily on whether the creditors had indeed caused the extraordinary benefit they claimed to have obtained for the estate. This approach is enormously helpful because it eliminates the uncertainty resulting from other courts' intent-divining rulings that are not easily applied to other cases. The element of causation was outcome determinative for the ASARCO court ' no matter how selfless, how well its attorneys performed, or how rare and successful the case's outcome may be, if a creditor did not directly cause the benefit to the estate which it cites as evidence of its substantial contribution, then it has not made a substantial contribution.

Background

The first opinion involved three bondholder/hedge funds' collective application for a $16.7 million substantial contribution claim. In re ASARCO LLC, No. 05-21207, 2010 Bankr. LEXIS 3352 (Bankr. S.D. Tex. Sept. 28, 2010) [hereinafter ASARCO I]. The bondholders claimed that the competing plan proposed by one of the funds caused ASARCO and its parent companies to amend their plans in a bidding war for ownership of ASARCO, ultimately resulting in the debtor's parent's proposal of a full payment plan in which the parent would retain 100% ownership of ASARCO. The bondholders also cited “virtually every action they undertook” during the bankruptcy case, including their objections to an earlier version of the parent's plan and their (unsuccessful) bid for ASARCO's assets at an (unsuccessful) prior auction. Id. at *5, 10.

The second opinion involved the separate applications of the United States, Texas, Washington, and Montana, referred to by the court as the “Governmental Movants,” for substantial contribution claims in the aggregate approximate amount of $6.1 million. In re ASARCO LLC, Case No. 05-21207, ECF No. 15624 (Bankr. S.D. Tex. Sept. 29, 2010) [hereinafter ASARCO II]. The Governmental Movants were environmental creditors that had previously settled all claims for response costs (including attorneys' fees and costs) under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended, 42 U.S.C. ” 9601-9675 (CERCLA), and other applicable environmental laws, in exchange for allowed claims. In general, their asserted substantial contribution was acting as an unofficial committee of environmental creditors, supporting ASARCO's unsuccessful plan and proposed asset sales in opposition to the parent's successful plan, and achieving global settlement of the majority of ASARCO's environmental liabilities. See Id. at 3-4. The court found that all of the Governmental Movants had, through the settlement agreements, received full satisfaction of their response cost claims, including fees for legal services and expenses. Id. at 2. Thus, in order to recover any additional legal fees and expenses as substantial contribution claims, the Governmental Movants would have to show that they made a substantial contribution and that the fees and expenses were not included in the settled environmental claims. Id. at 3.

Substantial Contribution Standards in the Fifth Circuit

Pursuant to ' 503(b)(3)(D) of the Bankruptcy Code, “there shall be allowed administrative expenses, including ' the actual, necessary expenses, other than compensation and reimbursement specified in paragraph (4) of this subsection, incurred by ' a creditor ' in making a substantial contribution in a case under Chapter 9 or 11 of this title ' .” 11 U.S.C. ' 503(b)(3)(D). Pursuant to ' 503(b)(4), if a creditor has an expense allowable under ' 503(b)(3)(D), a court can then also authorize an administrative expense for “reasonable compensation for professional services rendered by an attorney or an accountant of [such creditor], based on the time, nature, the extent, and the value of such services, and the cost of comparable services other than in a case under this title, and reimbursement for actual, necessary expenses incurred by such attorney or accountant.” 11 U.S.C. ' 503(b)(4).

“Substantial contribution” is not a defined term in the Bankruptcy Code, but the Fifth Circuit has concluded that the term “substantial contribution” in ' 503(b)(3)(D) means a contribution that is “considerable in amount, value or worth.” Hall Fin. Group, Inc. v. DP Partners, L.P. (In re DP Partners L.P.), 106 F.3d 667, 673 (5th Cir. 1997), cert. denied, 522 U.S. 815 (1997). Because an expansive application of ” 503(b)(3) and (4) could drain valuable estate resources, courts narrowly construe the substantial contribution provisions. Thus, only extraordinary circumstances warrant allowance of a substantial contribution claim ' “[a]ctivities of a creditor or their counsel that are ordinary, expected, routine, or duplicative do not constitute a substantial contribution to a debtor's estate.” ASARCO I, 2010 Bankr. LEXIS 3352, at *23. Services provide a “substantial contribution” if the services “foster and enhance, rather than retard or interrupt the progress of reorganization.” DP Partners, 106 F.3d at 672 (quoting In re Consol. Bancshares, Inc., 785 F.2d 1249, 1253 (5th Cir. 1986)). In addition, there must exist a direct and causal connection between the creditor's actions and the benefit to the estate before the creditor can qualify for “substantial contribution.” Id. at 673. The party asserting a substantial contribution claim has the burden of proving a “direct, significant, and demonstrable benefit to the estate” by a preponderance of the evidence before such treatment can be granted. Buttes Gas & Oil Co., 112 B.R. at 194. In essence, the term “substantial contribution” means that the creditor took direct causal action that resulted in measurable value or new unrealized assets being brought into the estate for the benefit of all creditors. Id.

The ASARCO court concluded that “[f]ailing to show a direct, significant and demonstrable benefit to the estate caused by the actions of the applicant is, therefore, fatal to a substantial contribution claim.” ASARCO I, 2010 Bankr. LEXIS 3352, at *22 (emphasis added). If the “asserted contribution would have occurred without the claimant's involvement,” the creditor has not made a substantial contribution. Id. at *23,24. A creditor must prove this by a preponderance of the evidence ' “[m]ere conclusory statements regarding the causation or provision of a substantial contribution are insufficient to establish that a substantial contribution has been made.” Id. at *22, 23. The ASARCO court therefore did not rely on its own ability to divine creditors' intent; instead, the court provided a bright-line rule easy to follow in other cases. But for the creditor's actions, the benefit to the estate would not have occurred. This is what substantial contribution means.

ASARCO Court's Holdings

As to the bondholders, the court found that there was no direct evidence that they caused any of the amendments to ASARCO and the parent's plans which resulted in the parent's topping bid of a true full payment plan. ASARCO I, 2010 Bankr. LEXIS 3352, at *26. The bondholders admitted as much. Id. To prove causation, the bondholders relied merely on the temporal proximity of their actions and the plan amendments. Id. at *26'27. The court held that “[w]hile it is correct that certain events chronologically occurred after other events, there was no evidence adduced at
[t]rial that established a direct causal relationship between any action by the Movants” and the escalating bidding war between ASARCO's plan sponsor and its parent which resulted in enormous benefit to the estate. Id. at *27. And “[n]either unsuccessful bidders in bankruptcy auctions (especially unsuccessful auctions) nor unsuccessful competing plan proponents are eligible to receive a substantial contribution claim merely for putting forth a bid or a competing plan.” Id. at *24. Absent any direct causal evidence of a significant benefit to the estate, the bondholders' substantial contribution claim failed.

The Governmental Movants also did not cause the confirmation of the parent's full payment plan. The court held certain of the attorneys for the Governmental Movants in high esteem, but expertise and outstanding legal representation are expected. ASARCO II, ECF No. 15624 at 5. The Governmental Movants obtained very favorable claim settlements for themselves and negotiated in good faith with the debtor and other creditor constituencies, but even this simply constitutes routine creditor actions calculated to enhance recovery on a claim. Id. The court held that “[u]nlike the creditor who locates a valuable asset or engages in some other extraordinary behavior that brings in a benefit to the estate for all creditors, ordinary creditor conduct such as compromising of claims to obtain allowance in bankruptcy and assisting in obtaining court approval of such compromises is ineligible for compensation as a 'substantial contribution.'” Id. at 7. The court noted that for a creditor like the United States holding over $1 billion in claims, “it would be extraordinary if such a creditor did not actively participate in the plan process.” Id. at 8. The Governmental Movants merely supported one plan over a competing plan, and the ultimate confirmation of the full payment plan was not caused by the Governmental Movants' support of the defeated plan. Id. The court found that there was no substantial contribution by the Governmental Movants. Moreover, the court found that any such claim was compromised in certain environmental claim settlements which preceded the substantial contribution application because the requested attorneys' fees and costs were “response costs” under CERCLA and were therefore released in the settlement agreements. Id. at 9'11.

Conclusion

If a creditor does not directly bring about a significant benefit to the estate, it has not made a substantial contribution. Causation is outcome determinative ' not the creditor's intent in undertaking the activity it claims made a substantial contribution. Because the ASARCO court's definition of a substantial contribution claim requires objective evidence, it provides the much-needed bright-line rule for these claims and should discourage such undeserving applications in future cases.

Dion W. Hayes ([email protected]), a member of this newsletter's Board of Editors, is a partner, and K. Elizabeth Sieg ([email protected]) is an associate, in the Restructuring and Insolvency Group at the Richmond, VA, office of McGuireWoods LLP. The firm represents the Plan Administrator in the ASARCO case, and the views expressed herein are not necessarily the views of the firm or any of its clients.