January 9, 2015
The Bankruptcy Court Gave and the District Court Hath Taken Away: A Commentary on the Southern District of New York’s Lehman Bros. Decision
By Justin R. Alberto
The U.S. District Court for the Southern District of New York, in an opinion written by Judge Richard J. Sullivan, recently held that a plan of reorganization that provides for the payment of professional fees of the individual members of an official committee violates § 503(b) of the Bankruptcy Code.1 The decision, in an appeal from the Lehman Brothers bankruptcy, reversed a 2013 ruling by Judge James M. Peck of the Southern District of New York Bankruptcy Court that the plan payment provision was permissible under § 1123(b)(6)’s catchall provision, as not inconsistent with § 503(b).2 The bankruptcy court’s opinion provided added support to a growing trend of cases that followed a similar 2010 decision from the SDNY Bankruptcy Court in Adelphia,3 which seemed to bless the use of plan provisions to pay a creditor’s professional fees solely on the basis of that creditor’s committee membership and without demonstrating that the creditor’s actions constituted a substantial contribution to the case. The district court’s recent decision seems to discredit this practice, but all may not be lost for creditors seeking payment of their professional fees from the bankruptcy estate.
A brief review of the statutory predicates is helpful in understanding the impact of the district court’s decision. The opening clause of § 503(b)(3) indicates that certain favored post-petition expenses will be afforded administrative priority status and be paid in full from the debtor’s estate.4 Achieving administrative expense status is critical for creditors because unsecured claims commonly receive less than 100 percent recovery in Chapter 11 plans. Section 503(b)(3) lists the types of allowable administrative expenses in subsections A through F. For instance, § 503(b)(3)(D) allows a creditor or indenture trustee to recoup its actual and necessary expenses upon a showing that it made a substantial contribution to the case.5 Similarly, § 503(b)(3)(F) allows reimbursement of expenses incurred by the members of an official committee as a result of those entities’ participation on the committee.6
The opening sentence of § 503(b)(3), however, expressly excludes professional services from the administrative claims otherwise allowable under subsections A through F. Thus a creditor seeking reimbursement of legal fees incurred in the bankruptcy case must look to another section of the code. For its part, § 503(b)(4) accords administrative priority status to professional fees where the entity requesting the reimbursement holds an expense otherwise available for administrative expense status under subsections A through E of § 503(b)(3) and establishes a reasonableness standard for the court to employ in reviewing the requested fees. Notably, the category of expenses allowed by subsection 503(b)(3)(F)—committee member expenses—had been among those listed in § 503(b)(4) but was removed from the code as part of the 2005 Bankruptcy Abuse and Consumer Protection Act (BAPCPA) amendments. In other words, while a creditor that demonstrates a substantial contribution to the case under § 503(b)(3)(D) can recoup its reasonable legal fees under § 503(b)(4), a creditor may not recoup legal fees incurred solely by virtue of its membership on a committee even though its nonprofessional, out-of-pocket expenses are otherwise allowable asadministrative expenses under subsection 503(b)(3)(F).
The Lehman Brother’s bankruptcy cases were the largest in history and among, if not the, most complex cases ever filed. The varying positions and holdings of the parties, coupled with complex issues that stretched across legal and political landscapes, underscored the unprecedented nature of the proceedings. Achieving a con
The U.S. District Court for the Southern District of New York, in an opinion written by Judge Richard J. Sullivan, recently held that a plan of reorganization that provides for the payment of professional fees of the individual members of an official committee violates § 503(b) of the Bankruptcy Code.1 The decision, in an appeal from the Lehman Brothers bankruptcy, reversed a 2013 ruling by Judge James M. Peck of the Southern District of New York Bankruptcy Court that the plan payment provision was permissible under § 1123(b)(6)’s catchall provision, as not inconsistent with § 503(b).2 The bankruptcy court’s opinion provided added support to a growing trend of cases that followed a similar 2010 decision from the SDNY Bankruptcy Court in Adelphia,3 which seemed to bless the use of plan provisions to pay a creditor’s professional fees solely on the basis of that creditor’s committee membership and without demonstrating that the creditor’s actions constituted a substantial contribution to the case. The district court’s recent decision seems to discredit this practice, but all may not be lost for creditors seeking payment of their professional fees from the bankruptcy estate.
The Interplay of §§ 503(b)(3) and 503(b)(4)
A brief review of the statutory predicates is helpful in understanding the impact of the district court’s decision. The opening clause of § 503(b)(3) indicates that certain favored post-petition expenses will be afforded administrative priority status and be paid in full from the debtor’s estate.4 Achieving administrative expense status is critical for creditors because unsecured claims commonly receive less than 100 percent recovery in Chapter 11 plans. Section 503(b)(3) lists the types of allowable administrative expenses in subsections A through F. For instance, § 503(b)(3)(D) allows a creditor or indenture trustee to recoup its actual and necessary expenses upon a showing that it made a substantial contribution to the case.5 Similarly, § 503(b)(3)(F) allows reimbursement of expenses incurred by the members of an official committee as a result of those entities’ participation on the committee.6
The opening sentence of § 503(b)(3), however, expressly excludes professional services from the administrative claims otherwise allowable under subsections A through F. Thus a creditor seeking reimbursement of legal fees incurred in the bankruptcy case must look to another section of the code. For its part, § 503(b)(4) accords administrative priority status to professional fees where the entity requesting the reimbursement holds an expense otherwise available for administrative expense status under subsections A through E of § 503(b)(3) and establishes a reasonableness standard for the court to employ in reviewing the requested fees. Notably, the category of expenses allowed by subsection 503(b)(3)(F)—committee member expenses—had been among those listed in § 503(b)(4) but was removed from the code as part of the 2005 Bankruptcy Abuse and Consumer Protection Act (BAPCPA) amendments. In other words, while a creditor that demonstrates a substantial contribution to the case under § 503(b)(3)(D) can recoup its reasonable legal fees under § 503(b)(4), a creditor may not recoup legal fees incurred solely by virtue of its membership on a committee even though its nonprofessional, out-of-pocket expenses are otherwise allowable asadministrative expenses under subsection 503(b)(3)(F).
The Bankruptcy Court’s Decision
The Lehman Brother’s bankruptcy cases were the largest in history and among, if not the, most complex cases ever filed. The varying positions and holdings of the parties, coupled with complex issues that stretched across legal and political landscapes, underscored the unprecedented nature of the proceedings. Achieving a con