Overview

In what is arguably one of the largest and most complex chapter 11 proceedings of all time, In re Lehman Brothers Holdings, Inc., et al., the United States Bankruptcy Court for the Southern District of New York recently issued a decision reaffirming, and perhaps expanding, the already extensive permissible breadth and scope of a chapter 11 plan under the Bankruptcy Code. More specifically, the court upheld a plan provision allowing the reasonable fees and expenses, including attorneys' fees, of individual members of the unsecured creditors' committee, including the indenture trustees for two series of notes (collectively, Applicants"), to be paid by the bankruptcy estates, even though the plan provision did not require the Applicants to demonstrate they made a "substantial contribution" to Lehman's reorganization.1 This decision will likely lead individual members of official committees and other similarly situated parties to demand plan provisions that explicitly provide for payment of their attorneys' fees and other expenses by the estate, thus affecting negotiations between plan proponents and individual unsecured creditors as well as other interested parties such as indenture trustees, bondholders and unofficial committees.

Background Leading to Fee Dispute

Following an extensive negotiation process, which Judge Peck described as "unprecedented in its complexity," the Lehman debtors and other parties reached agreement on a plan that later was confirmed by the court (Plan). Under the Plan, the Applicants' costs, expenses and attorneys' fees received priority identical to allowed administrative expense claims, and would be paid upon application, subject to court approval of their reasonableness. After the Plan was confirmed, the Applicants filed applications for $26.3 million in fees (Fee Applications). As Judge Peck noted, "[A] total of $26 million is at stake, but in the context of the Lehman cases, that is not much money."2 In the Lehman cases, the aggregate amount of professional fees and expenses incurred exceeds $1.8 billion.3

The United States Trustee (UST) objected to the Fee Applications, arguing, among other things, that section 503(b) of the Bankruptcy Code does not permit payment of fees and expenses to individual members of a creditors' committee and that the indenture trustees had not demonstrated they had made a "substantial contribution" in the Lehman cases, as required by the statute. In order to demonstrate it has made a "substantial contribution" in a case, typically an administrative claimant must show it took extraordinary actions that directly resulted in tangible benefits to the bankruptcy estate (as opposed to taking action in the claimant's self-interest that may have generated only incidental benefits to other creditors).4 To avoid an explosion of administrative expenses, this provision usually is narrowly construed and applications thereunder are subject to scrutiny. After negotiations between the Applicants and the UST failed, the court overruled the UST's objection and approved the Fee Applications.

The Lehman Decision

Extolling the "creativity of the plan process itself," the court rejected the UST's restrictive interpretation of section 503(b) which would bar, under any and all circumstances, members of creditors' committees, including the Applicants, from having their fees and expenses paid by the estates as administrative expenses pursuant to a chapter 11 plan. While the court agreed with the UST that section 503(b) did not expressly authorize the payments, it also found section 503(b) did not prohibit such payments pursuant to a provision in a chapter 11 plan.5 From the court's perspective, the Lehman debtors' Plan achieved a "pragmatic global settlement" of a multitude of issues, including, among others, the payment of the Applicants' administrative expense claims. Moreover, the court noted "the undisputed fact remains that payment of these fees became an element of the grand bargain that all creditors voted on and accepted by a landslide."6

Many of the court's observations and justifications for its decision may have broader implications for chapter 11 proceedings. Judge Peck begins with the unremarkable proposition that section 1123(b)(6) of the Bankruptcy Code allows a plan to contain any appropriate provision "not inconsistent" with the Bankruptcy Code; as a result, parties have wide latitude in negotiating and drafting plan provisions.7 As he explained, a plan provision must be "clearly in conflict" with a provision of the Bankruptcy Code to be unenforceable.8 In his elaboration on this principle, he intimates that it should be liberally applied and may only be restrained in limited circumstances:

When it comes to plan provisions, the variations are virtually without limit, and properly so. To fulfill its reorganization purposes, a plan must be an endlessly adaptable tool that fits the particular needs and dynamics of the case. The free expression of plan proponents should not be restrained except to the extent of complying with the requirements of the Bankruptcy Code that govern plan content.9

Implications

The holding in Lehman is somewhat limited, given the court's acknowledgement of the "atypical" context of the fee dispute in the Lehman cases - considered by many to be the most complicated bankruptcy cases in history, involving issues as stated by the court that would have been "virtually impossible to litigate" - and its suggestion that plan provisions such as the one in question should be limited to "special occasions." Notwithstanding the limited nature of the holding, it is likely that parties similarly situated to the Applicants will bargain for plan provisions that provide for reimbursement of their expenses and attorneys' fees in future chapter 11 cases based on the Lehman decision.

In addition, Lehman may have implications going well beyond situations involving payment of fees pursuant to a plan. Indeed, the expansive view expressed in Lehman regarding the permissible scope of bankruptcy plan provisions (a plan provision is permissible so long as it does not clearly conflict with another provision of the Bankruptcy Code) may serve as a basis for advocates to attempt to avoid "inconvenient" or "problematic" judicial standards or doctrines under the Bankruptcy Code. In either case, the Lehman decision establishes an important precedent for legal professionals who represent indenture trustees, bondholders, unofficial committees, debtors and creditors.