Substantial Contribution to the Case

In Davis v. Elliot Management Corp., (In re Lehman Brothers Holdings Inc.),1 the United States District Court for the Southern District of New York, reversing a decision of the Bankruptcy Court, held that a provision in a chapter 11 plan authorizing the payment of reasonable fees and expenses, including attorneys’ fees, incurred by individual members of an official committee was insufficient on its own to permit such payments. The District Court also found that professional fees incurred by a member of an official committee are not administrative expenses under section 503(b) solely by virtue of membership on the committee. However, the court also held that committee members may seek reimbursement from a debtor’s estate for their professional fees by utilizing section 503(b)(3)(d) and (b)(4) of the Bankruptcy Code and demonstrating that they have made a “substantial contribution” to the bankruptcy case.

Background

Lehman Brothers Holdings, Inc. (“Lehman”), together with its subsidiaries and affiliates, filed a petition for relief under chapter 11 of the Bankruptcy Code in 2008, commencing the largest bankruptcy case in history. Over the course of the Lehman cases, individual members of the official committee of unsecured creditors (the “Committee”) hired their own professionals, in addition to the committee’s counsel, to assist them in the reorganization process. As part of negotiations surrounding Lehman’s chapter 11 plan (the “Plan”), the parties agreed to provide in the Plan that the reasonable professional fees and expenses of the individual members of the Committee incurred in connection with the chapter 11 cases would be allowed as administrative expenses and paid from the bankruptcy estate. Section 6.7 of the Plan provided, in relevant part:

[s]ubject to entry of the Confirmation Order, the reasonable fees and expenses (including attorneys fees) of . . . the individual members of the Creditors’ Committee . . . incurred in their capacities as . . . member[s] of the Creditors’ Committee . . . shall . . . be Allowed as Administrative Expense Claims and paid by the Debtors . . . 2

After the Plan was confirmed in 2011, members of the Committee filed an application for reimbursement of reasonable professional fees and expenses, basing their request on Section 6.7 of the Plan. In the alternative, the members of the Committee requested such reimbursement under sections 503(b)(3) and 503(b)(4) of the Bankruptcy Code for having made a “substantial contribution” to the Lehman cases. The United States Trustee (the “UST”) objected to the application, arguing, among other things, that the Committee members could not rely solely on Section 6.7 of the Plan for reimbursement, as section 503(b) of the Bankruptcy Code was the sole grounds for recovery in this instance. The UST also argued that, even if they had made a substantial contribution to the case, sections 503(b)(3) and 503(b)(4) prohibit the estate from paying professional fees and expenses incurred by the individual committee members.

Bankruptcy Court Ruling

The Bankruptcy Court approved the application of the individual members of the Committee, ruling that Section 6.7 of the Plan was enforceable and was sufficient justification for the allowance and payment of their attorneys’ fees and expenses.3 As to the standard for review of the fees and expenses, the Bankruptcy Court held that it only had to review the fees and expenses to determine whether they were reasonable.  The Bankruptcy Court further reasoned that, although sections 503(b)(3) and 503(b)(4) did not provide for the allowance of professional fees and expenses of individual members of a committee, sections 503(b)(3) and 503(b)(4) did not forbid the payment of such fees and expenses and, therefore, because it was not inconsistent with the Bankruptcy Code, Section 6.7 of the Plan was enforceable. Having so found that Section 6.7 of the Plan was a sufficient basis for recovery, there was no need for the Bankruptcy Court to reach the issue of whether or not committee membership precludes recovery under sections 503(b)(3)(D) and 503(b)(4) of the Bankruptcy Code. The Bankruptcy Court did state in a footnote that “a creditor, even one serving on an official creditors’ committee, can seek to have his, her or its attorney/accountant fees reimbursed for having made a ‘substantial contribution’ to the case under Section 503(b)(3)(D).”4

District Court’s Analysis

The District Court, in reversing the decision of the Bankruptcy Court, viewed Section 6.7 of the Plan as an impermissible backdoor around the requirements of section 503(b) of the Bankruptcy Code, which the court considered to be the exclusive section dealing with administrative expenses. Focusing on the language and legislative history of sections 503(b)(3) and 503(b)(4), the District Court concluded that Congress intended to prohibit an individual member of an official committee from recovering from the bankruptcy estate professional fees and expenses incurred solely in the performance of duties as a member of the committee.  Thus, as Section 6.7 of the Plan was attempting to provide for the allowance, as an administrative expense, of payments inconsistent with section 503(b), Section 6.7 was impermissible under section 1123(b)(6), which allows the proponent of a chapter 11 plan to include in a plan only those provisions that are not inconsistent with the Bankruptcy Code. The District Court then addressed as a separate issue whether individual members of an official committee could recover their professional fees and expenses for having made a “substantial contribution.” Again focusing on the language of section 503(b), especially subsections 503(b)(3)(D) and 503(b)(4), the District Court found that Congress intended to enable committee members to obtain reimbursement of professional fees incurred in making a substantial contribution to a bankruptcy case by performing “extraordinary work to benefit the estate, above and beyond normal committee duties.”5    Accordingly, the District Court ruled that “[a]lthough official committee membership alone cannot be a sufficient condition for reimbursement of professional fee expenses, it is not a disqualification. As such, to the extent the [official committee members] qualify under § 503(b)(3)(D) by virtue of  having made a ‘substantial contribution’ to the bankruptcy case, they may have their professional fee expenses paid under § 503(b)(4).”6

Conclusion

The District Court’s decision does, for members of official committees, expressly confirm the right of individual members of an official committee to be reimbursed by the estate for his or her professional fees and expenses based on having made a substantial contribution to the chapter 11 case. Unfortunately for the chapter 11 process, the District Court’s decision denies parties the flexibility to negotiate consensual chapter 11 plans that provide for the reimbursement of reasonable professional fees and expenses incurred by members of the official committee of unsecured creditors without the uncertainty, delay, and expense of litigating whether the committee members had made a substantial contribution to the case. By narrowly construing the Bankruptcy Code, the District Court invalidated such a plan provision.