The District Court for the Southern District of New York in Lehman Brothers recently threw cold water on a growing body of cases that permit compensation of professional fees incurred by individual members of official committees of unsecured creditors.  Last year, the Lehman bankruptcy court confirmed a plan providing for payment of the reasonable professional fees incurred by individual members sitting on the Official Committee of Unsecured Creditors in the case.  That decision had augmented and extended that court’s prior decision in the Adelphia bankruptcy proceedings, which held that certain individual creditors and ad hoc committees could be compensated under a plan for professional fees incurred by them.  The committee members at issue in Lehman hired attorneys who collectively billed $26 million for their services. In megacases likeLehman, it is not uncommon for committee members to hire their own professionals to help them satisfy their duties to the committee, which can be substantial.

On appeal, Judge Sullivan of the United States District Court for the Southern District of New York reversed the Lehman bankruptcy court and held that such plan provisions are invalid under Section 503(b) of the Bankruptcy Code, which is the exclusive avenue for payment of fees of this kind.  Although the district court acknowledged that individual committee members may retain their own professionals to effectuate the goals of the committee, the court determined that “the structure of § 503(b)(3) and (4) glaringly exclude professional fee expenses for official committee members,” and therefore, members may not be compensated for reasonable professional fee expenses as a de facto administrative claim or as a permissive plan payment solely on the basis of their committee membership.

The district court nevertheless left the door on this issue slightly ajar, recognizing that Section 503(b)(3)(D) would permit compensation for a creditor that makes a “substantial contribution in a case” regardless of whether such creditor was also a member of the creditors’ committee.  Although the committee members raised the substantial contribution issue before the bankruptcy court, that court declined to address it.  The district court remanded the case for a determination of whether any of the Appellants performed such extraordinary work in the Lehman case.

It remains to be seen whether the district court’s decision in Lehmanwill stand.  While it does, however, it imperils a developing body of caselaw that offered debtors and other stakeholders some flexibility in their plan negotiations with creditors’ committees and their members.

To read the district court’s opinion in Davis v. Elliot Management Corp. (In re Lehman Bros. Holdings, Inc.), Case No. 13 Civ. 2211(RJS) (S.D.N.Y. Mar. 31, 2014), click here.