At issue in In re Legacy Corp. was the right to allowance and payment as an administrative expense of the professional fees and expenses of the Movant, a holder of a prepetition gift card claim against the Debtors, for his involvement in the resolution and settlement of prepetition gift card holder claims. The United States Bankruptcy Court for the District of Delaware denied the motion, holding that the Movant did not confer a substantial contribution to the estate and was therefore not entitled to allowance and payment of his claim as an administrative expense pursuant to section 503(b)(3).
At the first-day hearing in the Radio Shack chapter 11 cases, the Bankruptcy Court authorized the Debtors to pay or honor outstanding prepetition gift cards pursuant to the Debtors’ customer programs motion. During the pendency of the case, the Texas Attorney General’s Office (“AG Office”) filed a complaint, along with a motion for summary judgment and proof of claim, on behalf of Texas consumers holding unredeemed gift cards. The complaint asserted, among other things, that the unredeemed gift cards were entitled to priority status pursuant to section 507(a)(7) of the Bankruptcy Code. The Debtors, joined by the Official Committee of Unsecured Creditors (“UCC”), opposed the summary judgment motion. One month after the complaint was filed, the Movant commenced his own adversary proceeding seeking to certify the gift card claim holders as a class and asserting the same claim to priority status as the AG Office complaint.
The Debtors, the UCC, the AG Office, and certain state attorneys general subsequently negotiated a settlement resolving the gift card claims, which the court approved over the Movant’s objection. The Movant then filed his motion seeking allowance and payment of his administrative expense claim, arguing that he obtained significant concessions and recoveries for the benefit of gift card claim holders by filing the adversary proceeding, intervening in the AG Office’s adversary proceeding, persuading the State of Virginia to abandon its unclaimed property claim, procuring agreements to honor certain gift cards, and improving notice to gift card claim holders. The Movant argued that he broke the litigation deadlock between the parties, pressuring them to settle.
The Bankruptcy Court discussed the legal standard for allowance of administrative expense claims, emphasizing that a showing of “substantial contribution” requires a tangible, clearly demonstrable benefit to the estate and that section 503(b)(3) is strictly construed to minimize administrative expenses. The court further noted that in the Third Circuit, for purposes of determining substantial contribution, a creditor is presumed to act in a self-interested manner and must show that its efforts went beyond self-protection.
In holding that the Movant failed to overcome the presumption that his efforts were not primarily designed to serve his own interests, the Bankruptcy Court reasoned that the Movant’s continued objection to the global settlement, which provided priority status for certain gift card claim holders, showed his self-interest. In particular, the Movant had a strong economic self-interest in certifying the class, which would entitle his counsel to attorneys’ fees. Moreover, if the Movant had won priority status for all gift card claims, it merely would have diminished funds available to general unsecured creditors rather than enhancing recoveries to the overall body of creditors.
The Bankruptcy Court further held that even if the Movant had overcome the presumption, he failed to establish a causal connection between his involvement and the treatment of the gift card claims. The court reasoned that the fact that the Movant’s participation was eventually followed by a settlement does not show that the Movant’s services in any way caused the settlement, especially considering that his involvement was duplicative of services already provided by other professionals.
This case is a reminder that the bar remains high for establishing a substantial contribution under section 503(b)(3). Creditors planning to seek reimbursement under this section should be prepared to foot the bill absent “rare and extraordinary” circumstances.