Lehman Brothers Green-Lights the Payment Of Committee Members' Professional Fees

Which Section Controls Requests for Payment of Committee Members' Professional Fees?

On Jan. 30, 2012, the Committee Members, seeking to enforce their rights under the disputed Plan Payment Provision, filed an application for payment of approximately $25.4 million in fees (the Application). Dkt. No. 24762. The Committee Members argued that their Application should be analyzed under the “reasonableness” standard of Bankruptcy Code Section 1129(a)(4), rather than the more stringent “substantial contribution” standard of Bankruptcy Code Section 503(b). Alternatively, the Committee Members argued that, in the event Section 503(b) were held to apply to their Application, the Committee Members had made a “substantial contribution” to the success of the Debtors' cases.

In connection with its Section 1129(a)(4) argument, the Committee Members asserted that the Plan Payment Provision is a permissible plan provision under Bankruptcy Code Section 1123(b)(6). Dkt. No. 24762 at 6. Section 1123(b)(6) permits plan proponents to include in a Chapter 11 plan any “appropriate provision not inconsistent with the applicable provisions of [the Bankruptcy Code].” The Committee Members relied on In re Adelphia Commc'ns Corp., 441 B.R. 6 (Bankr. S.D.N.Y. 2010), as support for their position that the Plan Payment Provision satisfied both the “appropriate” and “not inconsistent” tests of Section 1123(b)(6).

In Adelphia, the bankruptcy court approved the enforcement of a plan provision providing for the payment of professional fees of ad hoc bondholder groups. The bankruptcy court explained that a plan provision should be deemed “appropriate” pursuant to Section 1123(b)(6) if it does not violate: 1) any federal statute other than the Bankruptcy Code; 2) relevant case law; and 3) important policy considerations. Adelphia, 441 B.R. at 17. Applying these criteria, the bankruptcy court held that the plan payment provision therein was “appropriate” because it did not violate statutory or case law and did not run afoul of public policy. Id. at 17. The bankruptcy court further explained that the plan payment provision was “not inconsistent” with the Bankruptcy Code because, while Section 503(b) generally applies to the payment of fees of “nonfiduciary creditors,” it “does not provide, in words or substance, that it is the only way by which fees of this character may be absorbed by the estate.” Id. at 12 (emphasis in original). Thus, the Adelphia court concluded that, where the policy benefits of approving such payment provisions outweigh any perceived policy detriments and the provisions do not clearly violate the law, they should be approved.

The Committee Members argued that the reasoning in Adelphia applied to the Plan Payment Provision and, therefore, the Application was subject only to the “reasonableness” standard under Section 1129(a)(4). The Committee Members claimed that they satisfied the “reasonableness” standard because the sophisticated nature of the Debtors' businesses necessitated guidance from individual counsel and their professional fees were justified by the complexity of the case. Dkt. No. 24762 at 10-13.

The Committee Members asserted that Section 503(b)'s “substantial contribution” test did not apply to the Application because “by its own terms, section 503(b) applies only to compensation requests that are not otherwise agreed to by the debtor and provided for in a plan.” Id. at 14. Thus, the Application was not an “end run-around” Section 503(b) because the Committee Members did not seek to “compel” the Debtors to pay their legal fees. Id. at 7, n.5.

On Feb. 15, 2012, the Trustee objected to the Application, reiterating her argument that the Plan Payment Provision was merely an effort to circumvent the standards imposed by Section 503(b) and the prohibition against reimbursement of committee members' professional fees implicitly contained within Section 503(b)(3)(F). Dkt. No. 25394 at p. 3. The Trustee made a statutory construction argument, asserting that the more specific Section 503(b) governing payment of fees and reimbursement of expenses applied exclusively to the Application, rather than the more general,
non-specific Section 1129(a)(4). Id. at 12. Section 503(b), argued the Trustee, prohibits compensation for professional fees for services rendered to a member of the Creditors' Committee because such statute expressly provides for the reimbursement of expenses only. Id. at 24. Thus, the Trustee interprets Section 503(b)(3)(F)'s silence as to professional fees as a strict prohibition against compensation for such fees.

The Trustee went on to argue that the Committee Members had not satisfied the “substantial contribution” test because: 1) the fee requests were for general Committee services and/or activities designed to advance solely their own individual interests; and 2) none of these activities rose to the level of a “substantial contribution” under Section 503(b). Id. at 22-23.

Payment of Committee Members' Professional Fees Permissible Under ' 1123(b)(6)

Judge Peck distilled the controversy over the Plan Payment Provision to a single question: “Can a plan properly circumvent the apparent restrictions on administrative expense treatment for professional compensation claims of this sort?” Memorandum Decision Granting Omnibus Application for Payment of Fees and Reimbursement of Expenses Claimed by Individual Members of Official Committee of Unsecured Creditors (the Opinion). Dkt. No. 34720 at 7. He concluded that the payments envisioned under the Plan Payment Provision were proper, “provided that the payments are reasonable and not inconsistent with applicable provisions of the Bankruptcy Code.” Id.

In arriving at this conclusion, Judge Peck looked at the language of Sections 503(b), 1123(b)(6) and 1129(a)(4). While Judge Peck agreed with the Trustee's assertion that Sections 503(b)(3)(F) and 503(b)(4) exclude the possibility of obtaining administrative expense treatment for professional services rendered to committee members, he was unmoved by the Trustee's argument that the omission of such professional fees from the text of Section 503(b)(3)(F) is tantamount to a prohibition against compensating committee members for such professional fees. Id. at 14. Indeed, he stated that, “while a fair reading of the internal standards applicable to allowance of administrative claims, [the Trustee's interpretation] fails to take into account the ability ' to identify other means to provide for reimbursement of such professional fees.” Id.

Turning to Section 1123(b)(6), Judge Peck held that this section is “a broadly-worded, open ended invitation to the creativity of those who are engaged in drafting plan language.” Opinion at 15. Section 1123(b)(6), the bankruptcy court held, allows for “[j]ust about anything [to] be included, provided that the terms of the plan do not run afoul of applicable bankruptcy law.” Id. Based upon the broad language of Section 1123(b)(6), Judge Peck held that the Plan Payment Provision is not inconsistent with the provisions that govern allowance of administrative expenses. The Plan Payment Provision, Judge Peck reasoned, “may be another structure to achieve the same basic objective (payment of fees), [however,] the path chosen is not improper simply because it provides an alternative method to secure payment of fees.” Id. at 17.

The bankruptcy court further rejected the Trustee's argument that Adelphia was inapplicable to its analysis of the Application, holding that “regardless of whether the focus is an ad hoc committee or an official committee, Section 503(b) does not prohibit the payment of professional fees by means other than the allowance of administrative expenses.” Id. at 18. The bankruptcy court adopted the reasoning in Adelphia that basic differences exist between a claim for reimbursement of professional fees under Section 503(b) and payments that are made pursuant to a plan of reorganization ' namely, that Section 503(b) payments are nonconsensual, whereas payments made under a plan payment provision are ordinarily made on a consensual basis. Id. at 18-19.

Judge Peck noted that the Plan Payment Provision “offers a vivid example of a spectacularly successful plan process” because it “was accepted in a lopsided affirmative vote by a vast majority of accepting creditors.” Opinion at 19. In short, the creditors had spoken; therefore, unless the Plan Payment Provision clearly conflicted with applicable provisions of the Bankruptcy Code, there was no reason to disturb the agreements reached by the stakeholders and ratified by the vast majority of creditors via the voting process.

Reserving the “reasonableness” analysis for a later date, Judge Peck ordered the Committee Members to meet and confer with the Trustee to resolve any remaining questions regarding the reasonableness of their professional fee claims. Id. at 20. To the extent any unresolved questions remained, Judge Peck would then make a determination of reasonableness in accordance with Section 1129(a)(4). Id.

Finally, Judge Peck cautioned that the Plan Payment Provision is “not standard” and “should be reserved for those special occasions of exceptional justification comparable to those presented by the Applicants,” thereby seeking to avoid a scenario in which plan payment provisions are incorporated as a matter of course in all future reorganization cases. Id.

Dissatisfied with Judge Peck's ruling, the Trustee filed a notice of appeal on March 1, 2013.

Plan Payment Provisions: Strategies to Consider

If the Opinion is upheld on appeal, the authors expect that similar plan payment provisions will be the subject of negotiation in other large or complex bankruptcy cases.

For those supporting adoption of a plan payment provision, it should be raised early in the plan negotiations. Committee members should be prepared to satisfy the “reasonableness” standard of Section 1129(a)(4). Counsel should keep
detailed time records in anticipation of having to later submit fee applications to combat potential arguments regarding the “reasonableness” and necessity of the services rendered and the amount of the fees. Counsel should also be prepared to explain why the services rendered were “extraordinary” relative to the bankruptcy case (i.e., the case was of such a large, complex and/or intricate nature necessitating the assistance of counsel for the committee member to perform his/her/its fiduciary responsibilities). Plan approval should be solicited from as many creditors as possible, so as to support the conclusion that the plan payment provision was overwhelmingly supported by creditors from whose recovery the proceeds are to be taken to satisfy the committee members' fee claims.

Parties opposed to plan payment provisions are now on notice that it is not enough to rely upon the bankruptcy court to reject these provisions. Rather, such parties should oppose the plan payment provision during negotiations and plan voting. If a plan payment provision is approved by creditors, opponents may wish to argue that the extension of the Lehman decision to their case is not warranted. Opponents may wish to argue that the services for which reimbursement is sought were not reasonable and necessary.

While it remains to be seen whether the enforcement of the Plan Payment Provision survives appeal and is embraced in other cases, the Opinion will likely encourage committee members to more freely engage counsel to assist them in fulfilling their committee duties, comforted by the knowledge that there now exists at least the chance that they will be reimbursed for such legal fees.

'

Todd L. Padnos, a member of this newsletter's Board of Editors, is a partner and Danielle Kennedy is an associate in the San Francisco office of Sheppard Mullin Richter & Hampton LLP. They can be reached, respectively, at [email protected] and [email protected].

'

'

'

From the largest Chapter 11 case to date, In re Lehman Brothers Holdings Inc., et al., emanates yet another decision of great interest to the restructuring community. On Feb. 15, 2013, Bankruptcy Judge James M. Peck overruled the United States Trustee's objection and authorized the enforcement of a plan provision allowing the payment of professional fees incurred by individual members of the Official Committee of Unsecured Creditors.

Background

Lehman's Third Amended Joint Chapter 11 Plan of Reorganization (the Plan) [Dkt. No. 19268] included a provision allowing for the payment, as administrative expense claims, of the professional fees incurred by individual committee members (the Plan Payment Provision). Plan at ' 6.7. The U.S. Trustee objected to the Plan Payment Provision, arguing that it constituted an “end-run around the clear provisions of the Bankruptcy Code” that forbid the payment of professional fees to individual committee members. Dkt. No. 21640 at pp. 11-12. Prior to the confirmation hearing, however, the Trustee withdrew her objection upon a reservation of rights, thereby deferring the adjudication of the dispute over the legality of the Plan Payment Provision. The Plan was approved by creditors and confirmed by the bankruptcy court on Dec. 6, 2011. Dkt. No. 23023.

Which Section Controls Requests for Payment of Committee Members' Professional Fees?

On Jan. 30, 2012, the Committee Members, seeking to enforce their rights under the disputed Plan Payment Provision, filed an application for payment of approximately $25.4 million in fees (the Application). Dkt. No. 24762. The Committee Members argued that their Application should be analyzed under the “reasonableness” standard of Bankruptcy Code Section 1129(a)(4), rather than the more stringent “substantial contribution” standard of Bankruptcy Code Section 503(b). Alternatively, the Committee Members argued that, in the event Section 503(b) were held to apply to their Application, the Committee Members had made a “substantial contribution” to the success of the Debtors' cases.

In connection with its Section 1129(a)(4) argument, the Committee Members asserted that the Plan Payment Provision is a permissible plan provision under Bankruptcy Code Section 1123(b)(6). Dkt. No. 24762 at 6. Section 1123(b)(6) permits plan proponents to include in a Chapter 11 plan any “appropriate provision not inconsistent with the applicable provisions of [the Bankruptcy Code].” The Committee Members relied on In re Adelphia Commc'ns Corp., 441 B.R. 6 (Bankr. S.D.N.Y. 2010), as support for their position that the Plan Payment Provision satisfied both the “appropriate” and “not inconsistent” tests of Section 1123(b)(6).

In Adelphia, the bankruptcy court approved the enforcement of a plan provision providing for the payment of professional fees of ad hoc bondholder groups. The bankruptcy court explained that a plan provision should be deemed “appropriate” pursuant to Section 1123(b)(6) if it does not violate: 1) any federal statute other than the Bankruptcy Code; 2) relevant case law; and 3) important policy considerations. Adelphia, 441 B.R. at 17. Applying these criteria, the bankruptcy court held that the plan payment provision therein was “appropriate” because it did not violate statutory or case law and did not run afoul of public policy. Id. at 17. The bankruptcy court further explained that the plan payment provision was “not inconsistent” with the Bankruptcy Code because, while Section 503(b) generally applies to the payment of fees of “nonfiduciary creditors,” it “does not provide, in words or substance, that it is the only way by which fees of this character may be absorbed by the estate.” Id. at 12 (emphasis in original). Thus, the Adelphia court concluded that, where the policy benefits of approving such payment provisions outweigh any perceived policy detriments and the provisions do not clearly violate the law, they should be approved.

The Committee Members argued that the reasoning in Adelphia applied to the Plan Payment Provision and, therefore, the Application was subject only to the “reasonableness” standard under Section 1129(a)(4). The Committee Members claimed that they satisfied the “reasonableness” standard because the sophisticated nature of the Debtors' businesses necessitated guidance from individual counsel and their professional fees were justified by the complexity of the case. Dkt. No. 24762 at 10-13.

The Committee Members asserted that Section 503(b)'s “substantial contribution” test did not apply to the Application because “by its own terms, section 503(b) applies only to compensation requests that are not otherwise agreed to by the debtor and provided for in a plan.” Id. at 14. Thus, the Application was not an “end run-around” Section 503(b) because the Committee Members did not seek to “compel” the Debtors to pay their legal fees. Id. at 7, n.5.

On Feb. 15, 2012, the Trustee objected to the Application, reiterating her argument that the Plan Payment Provision was merely an effort to circumvent the standards imposed by Section 503(b) and the prohibition against reimbursement of committee members' professional fees implicitly contained within Section 503(b)(3)(F). Dkt. No. 25394 at p. 3. The Trustee made a statutory construction argument, asserting that the more specific Section 503(b) governing payment of fees and reimbursement of expenses applied exclusively to the Application, rather than the more general,
non-specific Section 1129(a)(4). Id. at 12. Section 503(b), argued the Trustee, prohibits compensation for professional fees for services rendered to a member of the Creditors' Committee because such statute expressly provides for the reimbursement of expenses only. Id. at 24. Thus, the Trustee interprets Section 503(b)(3)(F)'s silence as to professional fees as a strict prohibition against compensation for such fees.

The Trustee went on to argue that the Committee Members had not satisfied the “substantial contribution” test because: 1) the fee requests were for general Committee services and/or activities designed to advance solely their own individual interests; and 2) none of these activities rose to the level of a “substantial contribution” under Section 503(b). Id. at 22-23.

Payment of Committee Members' Professional Fees Permissible Under ' 1123(b)(6)

Judge Peck distilled the controversy over the Plan Payment Provision to a single question: “Can a plan properly circumvent the apparent restrictions on administrative expense treatment for professional compensation claims of this sort?” Memorandum Decision Granting Omnibus Application for Payment of Fees and Reimbursement of Expenses Claimed by Individual Members of Official Committee of Unsecured Creditors (the Opinion). Dkt. No. 34720 at 7. He concluded that the payments envisioned under the Plan Payment Provision were proper, “provided that the payments are reasonable and not inconsistent with applicable provisions of the Bankruptcy Code.” Id.

In arriving at this conclusion, Judge Peck looked at the language of Sections 503(b), 1123(b)(6) and 1129(a)(4). While Judge Peck agreed with the Trustee's assertion that Sections 503(b)(3)(F) and 503(b)(4) exclude the possibility of obtaining administrative expense treatment for professional services rendered to committee members, he was unmoved by the Trustee's argument that the omission of such professional fees from the text of Section 503(b)(3)(F) is tantamount to a prohibition against compensating committee members for such professional fees. Id. at 14. Indeed, he stated that, “while a fair reading of the internal standards applicable to allowance of administrative claims, [the Trustee's interpretation] fails to take into account the ability ' to identify other means to provide for reimbursement of such professional fees.” Id.

Turning to Section 1123(b)(6), Judge Peck held that this section is “a broadly-worded, open ended invitation to the creativity of those who are engaged in drafting plan language.” Opinion at 15. Section 1123(b)(6), the bankruptcy court held, allows for “[j]ust about anything [to] be included, provided that the terms of the plan do not run afoul of applicable bankruptcy law.” Id. Based upon the broad language of Section 1123(b)(6), Judge Peck held that the Plan Payment Provision is not inconsistent with the provisions that govern allowance of administrative expenses. The Plan Payment Provision, Judge Peck reasoned, “may be another structure to achieve the same basic objective (payment of fees), [however,] the path chosen is not improper simply because it provides an alternative method to secure payment of fees.” Id. at 17.

The bankruptcy court further rejected the Trustee's argument that Adelphia was inapplicable to its analysis of the Application, holding that “regardless of whether the focus is an ad hoc committee or an official committee, Section 503(b) does not prohibit the payment of professional fees by means other than the allowance of administrative expenses.” Id. at 18. The bankruptcy court adopted the reasoning in Adelphia that basic differences exist between a claim for reimbursement of professional fees under Section 503(b) and payments that are made pursuant to a plan of reorganization ' namely, that Section 503(b) payments are nonconsensual, whereas payments made under a plan payment provision are ordinarily made on a consensual basis. Id. at 18-19.

Judge Peck noted that the Plan Payment Provision “offers a vivid example of a spectacularly successful plan process” because it “was accepted in a lopsided affirmative vote by a vast majority of accepting creditors.” Opinion at 19. In short, the creditors had spoken; therefore, unless the Plan Payment Provision clearly conflicted with applicable provisions of the Bankruptcy Code, there was no reason to disturb the agreements reached by the stakeholders and ratified by the vast majority of creditors via the voting process.

Reserving the “reasonableness” analysis for a later date, Judge Peck ordered the Committee Members to meet and confer with the Trustee to resolve any remaining questions regarding the reasonableness of their professional fee claims. Id. at 20. To the extent any unresolved questions remained, Judge Peck would then make a determination of reasonableness in accordance with Section 1129(a)(4). Id.

Finally, Judge Peck cautioned that the Plan Payment Provision is “not standard” and “should be reserved for those special occasions of exceptional justification comparable to those presented by the Applicants,” thereby seeking to avoid a scenario in which plan payment provisions are incorporated as a matter of course in all future reorganization cases. Id.

Dissatisfied with Judge Peck's ruling, the Trustee filed a notice of appeal on March 1, 2013.

Plan Payment Provisions: Strategies to Consider

If the Opinion is upheld on appeal, the authors expect that similar plan payment provisions will be the subject of negotiation in other large or complex bankruptcy cases.

For those supporting adoption of a plan payment provision, it should be raised early in the plan negotiations. Committee members should be prepared to satisfy the “reasonableness” standard of Section 1129(a)(4). Counsel should keep
detailed time records in anticipation of having to later submit fee applications to combat potential arguments regarding the “reasonableness” and necessity of the services rendered and the amount of the fees. Counsel should also be prepared to explain why the services rendered were “extraordinary” relative to the bankruptcy case (i.e., the case was of such a large, complex and/or intricate nature necessitating the assistance of counsel for the committee member to perform his/her/its fiduciary responsibilities). Plan approval should be solicited from as many creditors as possible, so as to support the conclusion that the plan payment provision was overwhelmingly supported by creditors from whose recovery the proceeds are to be taken to satisfy the committee members' fee claims.

Parties opposed to plan payment provisions are now on notice that it is not enough to rely upon the bankruptcy court to reject these provisions. Rather, such parties should oppose the plan payment provision during negotiations and plan voting. If a plan payment provision is approved by creditors, opponents may wish to argue that the extension of the Lehman decision to their case is not warranted. Opponents may wish to argue that the services for which reimbursement is sought were not reasonable and necessary.

While it remains to be seen whether the enforcement of the Plan Payment Provision survives appeal and is embraced in other cases, the Opinion will likely encourage committee members to more freely engage counsel to assist them in fulfilling their committee duties, comforted by the knowledge that there now exists at least the chance that they will be reimbursed for such legal fees.

'

Todd L. Padnos, a member of this newsletter's Board of Editors, is a partner and Danielle Kennedy is an associate in the San Francisco office of Sheppard Mullin Richter & Hampton LLP. They can be reached, respectively, at [email protected] and [email protected].

'

'

'