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Bankruptcy Code ' 503(b) provides that the allowed administrative expenses of a bankruptcy estate shall include fees and expenses incurred by creditors, indenture trustees and certain non-estate-retained professionals who make a “substantial contribution” in a Chapter 9 or Chapter 11 case. This is certainly the most often used provision under which such compensation is sought, but is it the exclusive method for such payment?
Despite vociferous objections from the United States Trustee (the UST) in the Southern District of New York, courts have recognized an alternative method for obtaining payment from the debtor's estate of certain fees. As opposed to the more onerous “substantial contribution” test of ' 503(b), you may be awarded fees under a plan subject only to a “reasonableness” test set forth in Bankruptcy Code ' 1129(a)(4). Indeed, courts have concluded that Bankruptcy Code ” 503(b) and 1129(a)(4) provide alternative methods for obtaining such relief and are not mutually exclusive.
The Battle Between Bankruptcy Code ” 503(b) and 1129(a)(4)
Whether a party has made a “substantial contribution” is a question of fact that imposes the burden of proof on the applicant to show by a preponderance of the evidence that the services it rendered provided a substantial benefit to the estate. In re Hooker Invs., Inc., 188 B.R. 117, 120 (S.D.N.Y. 1995); In re Best Prods. Co., 173 B.R. 862, 865 (Bankr. S.D.N.Y. 1994). Active participation alone is insufficient; there must be a substantial net benefit. In re Granite Partners, L.P., 213 B.R. 440, 445-46 (Bankr. S.D.N.Y. 1997). Substantial contribution provisions are narrowly construed. Id. at 445 (need to “discourage mushrooming expenses” and “do not change the basic rule that the attorney must look to his own client for payment”).
Creditors face an especially difficult burden in passing the substantial contribution test, since “they are presumed to act primarily for their own interests.” In re Dana Corp., 390 B.R. 100, 108 (Bankr. S.D.N.Y. 2008); Granite Partners, 213 B.R. at 446. Moreover, “[e]fforts undertaken by creditors solely to further their own self interest are not compensable under section 503(b)” and “services calculated primarily to benefit the client do not justify an award even if they also confer an indirect benefit on the estate.” Id. In the majority of cases where courts have allowed creditors substantial contribution claims under ' 503(b)(3), courts have found that the creditor played a leadership role that normally would be expected of an estate-compensated professional, but was not so performed. See, e.g., Granite Partners, 213 B.R. at 446-47.
An applicant may, however, be able to recover certain fees and expenses from the estate without establishing that it provided a “substantial contribution.” Bankruptcy Code ' 1123(b) provides that a plan “may” include certain types of provisions. The list of provisions in” 1123(b) is voluntary, and a plan proponent has discretion to tailor a plan to the specific needs of the case. In particular, ' 1123(b)(6) provides that a plan may “include any other appropriate provision not inconsistent with the applicable provisions of [the Bankruptcy Code].” See 11 U.S.C. ' 1123(b)(6).
Bankruptcy Code ' 1129(a)(4) establishes a “reasonableness” standard for payments that are made pursuant to a Chapter 11 plan. It provides that the bankruptcy court “shall” confirm a plan only if all of the following requirements are satisfied:
Any payment made or to be made by the proponent [or] by the debtor ' for services or for costs and expenses in or in connection with the case, or in connection with the plan and incident to the case, has been approved by, or is subject to the approval of, the court as reasonable.
Taken together, ” 1123(b)(6) and 1129(a)(4) authorize a plan proponent to include in its plan a provision for the payment of fees and expenses of certain parties and authorize the court to approve the payments as part of the plan provided they are “reasonable.”
Current Status of the Case Law
The only published opinions addressing the payment of fees relying on ” 1123(b)(6) and 1129(a)(4) have been issued by bankruptcy courts in the Southern District of New York. In each case, the UST objected to payment of fees under any provision of the Bankruptcy Code other than ' 503(b). The arguments posited by the UST can be summarized as follows: 1) as a matter of statutory construction, the specific provisions of ' 503(b) supersede the more general provisions of ' 1129(a)(4); otherwise ' 503(b) would be superfluous; and 2) compensation under the reasonableness standard of ' 1129(a)(4) without satisfying the elements of ' 503(b) is “inconsistent” with the limitations of ' 503, which would render ' 1123(b)(6) inapplicable by its own terms.
In each of the Adelphia, Lehman and American Airlines cases, the courts held that ' 503(b) is not the exclusive means for payment of creditors' and/or indenture trustees' fees and expenses and that such payments were authorized by ' 1123(b)(6), subject to the ' 1129(a)(4) reasonableness standard. Beginning with Judge Robert E. Gerber's decision in Adelphia, followed by Judge James Peck in Lehman and, most recently, by Judge Sean Lane in American Airlines, the courts implicitly or explicitly found that there is no conflict or inconsistency between ' 1129(a)(4) and ' 503(b) because ' 503(b) is a nonconsensual mechanism for payment of fees and expenses, whereas a plan provision is a consensual mechanism for payment of fees and expenses. See In re Adelphia Commc'ns Corp., 441 B.R. 6, 12 (Bankr. S.D.N.Y. 2010); In re Lehman Brothers Holdings Inc., 487 B.R. 181, 191-92 (Bankr. S.D.N.Y. 2013); In re AMR Corp., 497 B.R. 690, 694-96 (Bankr. S.D.N.Y. 2013).
Adelphia
In Adelphia, 14 ad hoc committees and certain individual creditors sought approximately $88 million in legal fees and expenses. The parties had ended their intercreditor disputes with a global settlement that included a plan provision allowing the applicants to receive payment of their reasonable fees incurred during the course of the cases.
In what appears to have been a case of first impression, Judge Gerber was asked to determine whether it was permissible to approve such payments pursuant to a plan provision and the reasonableness standard of ' 1129(a)(4), as distinguished from the substantial contribution test of ' 503(b). Adelphia, 441 B.R. at 9-10. The UST objected on the grounds that a plan could not provide for payment of these parties absent a substantial contribution finding. Id. at 9.
The court first analyzed whether the “substantial contribution” standard was the only basis for authorizing the payment of such fees. Reading the plain language of ' 503(b), the court concluded that ' 503(b) “does not provide, in words or substance, that it is the only way by which fees of this character may be absorbed by an estate.” Id. at 12. Thus, the court was “free to look to other provisions of the Code that might also authorize a payment.” Id. at 12-13. Accordingly, the court looked to Bankruptcy Code ” 1123(b) and 1129(a)(4).
In particular, the court looked to ' 1123(b)(6), which provides that a plan may include any provision “not inconsistent” with applicable provisions of the Bankruptcy Code. Because the court had concluded that ' 503(b) was not the exclusive authority for the payment of non-estate-retained professionals' fees and expenses, it reasoned that the payment of such fees and expenses pursuant to a plan was “not inconsistent” with ' 503(b). Id. at 14-15. The court ruled that a plan could include a provision to pay professionals for ad hoc committees and individual creditors without a showing of substantial contribution. Id. The court did, however, stress that ' 1129(a)(4) imposes a reasonableness requirement on the payment of any fees under a plan.
Lehman
Although Bankruptcy Code ' 503(b) provides for the payment of fees and expenses for an official creditors' committee, since the 2005 amendments to the Bankruptcy Code, ' 503(b) does not expressly permit individual committee members to seek reimbursement of professional fees for services rendered by an attorney or an accountant. In Lehman, the plan provided for the payment of approximately $26 million in professional fees for individual committee members' attorneys' fees, subject only to the reasonableness standard of ' 1129(a)(4). Lehman, 487 B.R. at 184-85. The UST objected on the basis that the plan provision attempted to circumvent the Bankruptcy Code's restrictions on administrative expense treatment for professional compensation claims. Id. at 183-84.
Noting the “lopsided affirmative vote by a vast majority of accepting creditors,” the Lehman court appeared reluctant to disrupt the heavily negotiated terms of a multi-billion-dollar plan for a fee dispute of this size. Id. at 193. Ultimately, Judge Peck followed the reasoning in Adelphia and concluded that such payments under a plan were proper, provided that the payments were reasonable and not inconsistent with applicable provisions of the Bankruptcy Code. Id. at 191-93. The court further found that the payments were indeed not inconsistent with ' 503(b). Specifically, the court wrote that “[s]ection 503(b) is not a straitjacket, and the provisions of that section that directly govern the allowance of administrative claims do not control the plan process and are not inconsistent with [] the more liberal treatment provided in” a plan. Id. at 186. Thus, the court concluded that the broad language of ” 1123(b)(6) and 1129(a)(4) allowed members of a creditors' committee to bargain for their fees to be paid under a Chapter 11 plan without meeting the requirements of ' 503(b). Id. at 193. The decision is currently on appeal before the U.S. District Court for the Southern District of New York. See In re Lehman Brothers Holdings, Inc., No. 13-cv-02211-RJS (S.D.N.Y.).
American Airlines
In American Airlines, the debtors' plan also provided for the payment of individual creditors' committee members' professional fees pursuant to the ' 1129(a)(4) reasonableness standard. AMR, 497 B.R. at 693. As in Adelphia and Lehman, the UST objected on the grounds that professional fees not explicitly authorized by ' 503(b) could not be paid. Judge Lane found the rulings in Adelphia and Lehman persuasive and reached the same conclusion that fees are permissible when proposed and approved in a consensual plan. Judge Lane specifically noted that ' 503(b): 1) provides a creditor with an affirmative right to a claim whether or not a debtor agrees to such payment, provided that the creditor meets the standards set forth therein; and 2) does not contain prohibitive or restrictive language and thus permits fees paid pursuant to a reasonableness standard under ” 1123(b)(6) and 1129(a)(4) if such provision is proposed and approved through a consensual plan. Id. at 695.
Notably, there are no published opinions in the District of Delaware that address the ' 1129(a)(4) versus ' 503(b) issue. However, there are several instances of plans in Delaware incorporating a fee provision pursuant to the ' 1129(a)(4) reasonableness standard that have been confirmed without objection from the Delaware UST. See, e.g., In re Tribune Co., No. 08-13141(KJC) (Bankr. D. Del.), ECF No. 11747; 12074; In re Amicus Wind Down Corp. (Friendly's Ice Cream), No. 11-13167(KG) (Bankr. D. Del.), ECF No. 948, 1123; In re Rotech Healthcare Inc., No. 13-10741 (PJW) (Bankr. D. Del.), ECF No. 512, 1007.
Is the Adelphia Fee Decision and Its Progeny As 'Radical' As Feared?
Courts that have addressed the issue have found a way to reconcile ” 1129(a)(4) and 503(b) under the appropriate circumstances. There is significant leeway granted to plan proponents under ' 1123(b)(6) to include in plans any appropriate provision not inconsistent with the applicable provisions of the Bankruptcy Code, and courts are granted authority and discretion to approve payments in connection with a plan, subject to the reasonableness standard of ' 1129(a)(4).
The UST Executive Office authored an article immediately following the Adelphia decision suggesting that the decision would set troubling precedent. See John Sheahan, You Support My Plan, I'll Pay Your Attorneys: Adelphia's Troubling Precedent, Am. Bankr. Inst. J. 24 (May 2012), available at http://1.usa.gov/1fZ6Pbi (last visited on Feb. 12, 2014). In that article and in its now numerous objections filed in bankruptcy cases pending in the Southern District of New York, the UST argued that Adelphia would lead to a parade of horribles, including: 1) use of ' 1129(a)(4) as a vehicle for fraud or abuse and illegitimate settlements entered into in exchange for the withdrawal of a plan objection or a competing plan, even asserting that a promise to pay attorneys' fees could induce a committee member to violate its fiduciary duty to its constituency or an attorney to violate a duty to a client or to cover up wrongdoing; 2) creative attorneys trying to bypass ' 330 as the exclusive vehicle for paying professionals retained by the estate; 3) the payment of administrative expenses would be subject to two entirely different standards depending on whether the plan proponent (typically the debtor) is aligned with the applicant; and 4) plan proponents might attempt to evade other specific limitations of ' 503, including the ' 503(b)(7) cap on damage claims under previously assumed leases or the ' 503(b)(4) prohibition on payment of attorneys who represent individual committee members. In the three years since the Adelphia decision, however, it does not appear that the UST's dire prognostications have come to pass.
Conclusion
Although reliance on ' 1129(a)(4) for payment of fees may not arise in the typical case, it is important for creditors and interested parties to know that the substantial contribution provision of ' 503(b) is not the only avenue for approval of their fees. Such parties should consider whether it would be appropriate to seek a plan provision for the payment of their fees under the reasonableness standard of ' 1129(a)(4). If a party secures a provision for payment of fees in a plan that is ultimately confirmed (particularly in cases where there is overwhelming creditor support for the plan), that party may be relieved of the burden of proving substantial contribution. In cases where the substantial contribution test might not otherwise be met, the ' 1129(a)(4) alternative can make the difference between obtaining payment of fees from the estate or not.
Lori Sinanyan and Bennett Spiegel are in the Business Restructuring & Reorganization practice of Jones Day, resident in the Los Angeles office. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the view of Jones Day or its clients.
Bankruptcy Code ' 503(b) provides that the allowed administrative expenses of a bankruptcy estate shall include fees and expenses incurred by creditors, indenture trustees and certain non-estate-retained professionals who make a “substantial contribution” in a Chapter 9 or Chapter 11 case. This is certainly the most often used provision under which such compensation is sought, but is it the exclusive method for such payment?
Despite vociferous objections from the United States Trustee (the UST) in the Southern District of
The Battle Between Bankruptcy Code ” 503(b) and 1129(a)(4)
Whether a party has made a “substantial contribution” is a question of fact that imposes the burden of proof on the applicant to show by a preponderance of the evidence that the services it rendered provided a substantial benefit to the estate. In re Hooker Invs., Inc., 188 B.R. 117, 120 (S.D.N.Y. 1995); In re Best Prods. Co., 173 B.R. 862, 865 (Bankr. S.D.N.Y. 1994). Active participation alone is insufficient; there must be a substantial net benefit. In re Granite Partners, L.P., 213 B.R. 440, 445-46 (Bankr. S.D.N.Y. 1997). Substantial contribution provisions are narrowly construed. Id. at 445 (need to “discourage mushrooming expenses” and “do not change the basic rule that the attorney must look to his own client for payment”).
Creditors face an especially difficult burden in passing the substantial contribution test, since “they are presumed to act primarily for their own interests.” In re Dana Corp., 390 B.R. 100, 108 (Bankr. S.D.N.Y. 2008); Granite Partners, 213 B.R. at 446. Moreover, “[e]fforts undertaken by creditors solely to further their own self interest are not compensable under section 503(b)” and “services calculated primarily to benefit the client do not justify an award even if they also confer an indirect benefit on the estate.” Id. In the majority of cases where courts have allowed creditors substantial contribution claims under ' 503(b)(3), courts have found that the creditor played a leadership role that normally would be expected of an estate-compensated professional, but was not so performed. See, e.g., Granite Partners, 213 B.R. at 446-47.
An applicant may, however, be able to recover certain fees and expenses from the estate without establishing that it provided a “substantial contribution.” Bankruptcy Code ' 1123(b) provides that a plan “may” include certain types of provisions. The list of provisions in” 1123(b) is voluntary, and a plan proponent has discretion to tailor a plan to the specific needs of the case. In particular, ' 1123(b)(6) provides that a plan may “include any other appropriate provision not inconsistent with the applicable provisions of [the Bankruptcy Code].” See 11 U.S.C. ' 1123(b)(6).
Bankruptcy Code ' 1129(a)(4) establishes a “reasonableness” standard for payments that are made pursuant to a Chapter 11 plan. It provides that the bankruptcy court “shall” confirm a plan only if all of the following requirements are satisfied:
Any payment made or to be made by the proponent [or] by the debtor ' for services or for costs and expenses in or in connection with the case, or in connection with the plan and incident to the case, has been approved by, or is subject to the approval of, the court as reasonable.
Taken together, ” 1123(b)(6) and 1129(a)(4) authorize a plan proponent to include in its plan a provision for the payment of fees and expenses of certain parties and authorize the court to approve the payments as part of the plan provided they are “reasonable.”
Current Status of the Case Law
The only published opinions addressing the payment of fees relying on ” 1123(b)(6) and 1129(a)(4) have been issued by bankruptcy courts in the Southern District of
In each of the Adelphia, Lehman and
Adelphia
In Adelphia, 14 ad hoc committees and certain individual creditors sought approximately $88 million in legal fees and expenses. The parties had ended their intercreditor disputes with a global settlement that included a plan provision allowing the applicants to receive payment of their reasonable fees incurred during the course of the cases.
In what appears to have been a case of first impression, Judge Gerber was asked to determine whether it was permissible to approve such payments pursuant to a plan provision and the reasonableness standard of ' 1129(a)(4), as distinguished from the substantial contribution test of ' 503(b). Adelphia, 441 B.R. at 9-10. The UST objected on the grounds that a plan could not provide for payment of these parties absent a substantial contribution finding. Id. at 9.
The court first analyzed whether the “substantial contribution” standard was the only basis for authorizing the payment of such fees. Reading the plain language of ' 503(b), the court concluded that ' 503(b) “does not provide, in words or substance, that it is the only way by which fees of this character may be absorbed by an estate.” Id. at 12. Thus, the court was “free to look to other provisions of the Code that might also authorize a payment.” Id. at 12-13. Accordingly, the court looked to Bankruptcy Code ” 1123(b) and 1129(a)(4).
In particular, the court looked to ' 1123(b)(6), which provides that a plan may include any provision “not inconsistent” with applicable provisions of the Bankruptcy Code. Because the court had concluded that ' 503(b) was not the exclusive authority for the payment of non-estate-retained professionals' fees and expenses, it reasoned that the payment of such fees and expenses pursuant to a plan was “not inconsistent” with ' 503(b). Id. at 14-15. The court ruled that a plan could include a provision to pay professionals for ad hoc committees and individual creditors without a showing of substantial contribution. Id. The court did, however, stress that ' 1129(a)(4) imposes a reasonableness requirement on the payment of any fees under a plan.
Lehman
Although Bankruptcy Code ' 503(b) provides for the payment of fees and expenses for an official creditors' committee, since the 2005 amendments to the Bankruptcy Code, ' 503(b) does not expressly permit individual committee members to seek reimbursement of professional fees for services rendered by an attorney or an accountant. In Lehman, the plan provided for the payment of approximately $26 million in professional fees for individual committee members' attorneys' fees, subject only to the reasonableness standard of ' 1129(a)(4). Lehman, 487 B.R. at 184-85. The UST objected on the basis that the plan provision attempted to circumvent the Bankruptcy Code's restrictions on administrative expense treatment for professional compensation claims. Id. at 183-84.
Noting the “lopsided affirmative vote by a vast majority of accepting creditors,” the Lehman court appeared reluctant to disrupt the heavily negotiated terms of a multi-billion-dollar plan for a fee dispute of this size. Id. at 193. Ultimately, Judge Peck followed the reasoning in Adelphia and concluded that such payments under a plan were proper, provided that the payments were reasonable and not inconsistent with applicable provisions of the Bankruptcy Code. Id. at 191-93. The court further found that the payments were indeed not inconsistent with ' 503(b). Specifically, the court wrote that “[s]ection 503(b) is not a straitjacket, and the provisions of that section that directly govern the allowance of administrative claims do not control the plan process and are not inconsistent with [] the more liberal treatment provided in” a plan. Id. at 186. Thus, the court concluded that the broad language of ” 1123(b)(6) and 1129(a)(4) allowed members of a creditors' committee to bargain for their fees to be paid under a Chapter 11 plan without meeting the requirements of ' 503(b). Id. at 193. The decision is currently on appeal before the U.S. District Court for the Southern District of
In
Notably, there are no published opinions in the District of Delaware that address the ' 1129(a)(4) versus ' 503(b) issue. However, there are several instances of plans in Delaware incorporating a fee provision pursuant to the ' 1129(a)(4) reasonableness standard that have been confirmed without objection from the Delaware UST. See, e.g., In re Tribune Co., No. 08-13141(KJC) (Bankr. D. Del.), ECF No. 11747; 12074; In re Amicus Wind Down Corp. (Friendly's Ice Cream), No. 11-13167(KG) (Bankr. D. Del.), ECF No. 948, 1123; In re Rotech Healthcare Inc., No. 13-10741 (PJW) (Bankr. D. Del.), ECF No. 512, 1007.
Is the Adelphia Fee Decision and Its Progeny As 'Radical' As Feared?
Courts that have addressed the issue have found a way to reconcile ” 1129(a)(4) and 503(b) under the appropriate circumstances. There is significant leeway granted to plan proponents under ' 1123(b)(6) to include in plans any appropriate provision not inconsistent with the applicable provisions of the Bankruptcy Code, and courts are granted authority and discretion to approve payments in connection with a plan, subject to the reasonableness standard of ' 1129(a)(4).
The UST Executive Office authored an article immediately following the Adelphia decision suggesting that the decision would set troubling precedent. See John Sheahan, You Support My Plan, I'll Pay Your Attorneys: Adelphia's Troubling Precedent, Am. Bankr. Inst. J. 24 (May 2012), available at http://1.usa.gov/1fZ6Pbi (last visited on Feb. 12, 2014). In that article and in its now numerous objections filed in bankruptcy cases pending in the Southern District of
Conclusion
Although reliance on ' 1129(a)(4) for payment of fees may not arise in the typical case, it is important for creditors and interested parties to know that the substantial contribution provision of ' 503(b) is not the only avenue for approval of their fees. Such parties should consider whether it would be appropriate to seek a plan provision for the payment of their fees under the reasonableness standard of ' 1129(a)(4). If a party secures a provision for payment of fees in a plan that is ultimately confirmed (particularly in cases where there is overwhelming creditor support for the plan), that party may be relieved of the burden of proving substantial contribution. In cases where the substantial contribution test might not otherwise be met, the ' 1129(a)(4) alternative can make the difference between obtaining payment of fees from the estate or not.
Lori Sinanyan and Bennett Spiegel are in the Business Restructuring & Reorganization practice of
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