United States: District Court Vacates Decision In Lehman Brothers Bankruptcy Case

Last Updated: May 12 2014
Article by Ronni N. Arnold, Leah M. Eisenberg and Andrew I. Silfen

Often times indenture trustees seek to sit on creditors committees in furtherance of their fiduciary duties to holders. Obviously, the professional fees and expenses can be paid as a first priority pursuant to a charging lien as provided for under the indenture documents. The payment of such fees and expenses becomes an issue, however, when there are no plan distributions to holders or the plan distributions are illiquid or non-cash.

On March 31, 2014, the United States District Court for the Southern District of New York issued a decision in In re Lehman Brothers Holdings Inc., et al., vacating the Bankruptcy Court's decision allowing the payment of individual committee members' professional fee expenses, and remanding to the Bankruptcy Court to determine whether such expenses qualify for an administrative expense payment as a "substantial contribution" under sections 503(b)(3)(D) and 503(b)(4) of the Bankruptcy Code.

The holding of the Lehman decision may now impede the inclusion of provisions in plans of reorganization that provide for the payment of professional fees and expenses of individual members of an official committee of unsecured creditors absent a showing of "substantial contribution." As a result of this decision, indenture trustees who sit and serve as members of a creditors committee may find it more difficult, or a real challenge, to have their professional fees and expenses paid under a plan of reorganization. Fortunately, there may be alternative avenues for payment available, which will be discussed below.

Case Summary

By way of background, Lehman's plan of reorganization (the Plan) included a provision, section 6.7, which provided that the reasonable professional fee expenses of the individual members of the official committee of unsecured creditors (the Individual Members) would be allowed as "Administrative Expense Claims" and, therefore, would be paid in full. Once the Plan was confirmed, the Individual Members filed a joint application with the Bankruptcy Court for payment pursuant to section 6.7 of the Plan, or, in the alternative, pursuant to sections 503(b)(3)(D) and 503(b)(4) of the Bankruptcy Code. The United States Trustee objected to the joint application, arguing that not only did the Bankruptcy Code not provide for the payment of the Individual Members' professional fee expenses, but that it actually prohibited such payment and as a result, section 6.7 of the Plan was invalid.

In a decision dated February 15, 2013, the Bankruptcy Court held that section 6.7 of the Plan was permissible, and therefore it declined to decide whether the expenses could be paid under sections 503(b)(3)(D) and 503(b)(4). Although the Bankruptcy Court acknowledged that the Bankruptcy Code did not expressly provide for the payment of committee members' professional fees, even characterizing section 6.7 of the Plan as an attempt to "circumvent the apparent restrictions on administrative expense treatment for professional compensation claims of this sort," it nonetheless held that the Bankruptcy Code did not forbid such payment. Therefore, the Bankruptcy Court held that the payments provided for pursuant to section 6.7 of the Plan were not inconsistent with any Bankruptcy Code provision and were thus permissible pursuant to section 1123(b)(6) of the Bankruptcy Code. The United States Trustee thereafter appealed this ruling.

In its discussion, the District Court first addressed section 1123(b)(6) of the Bankruptcy Code, a catch all provision, which provides that a plan provision is permissible if it is both appropriate and not inconsistent with any applicable provision of the Bankruptcy Code. The District Court stated that therefore, at a minimum, section 1123(b)(6) does not authorize plan provisions that override, undermine or rewrite relevant provisions of the Bankruptcy Code. Next, the District Court went on to discuss section 503(b) of the Bankruptcy Code, which (a) is the exclusive avenue for payment of administrative expenses, and (b) does not provide for payment of the professional fee expenses of individual members of an official committee. Indeed, the District Court stated that official committee members' professional fee expenses are glaringly excluded as a result of the structure of sections 503(b)(3) and (4) of the Bankruptcy Code. Section 503(b)(3) allows for the payment of actual, necessary expenses incurred in certain situations, one of which includes the payment of the expenses incurred by official committee members in performing committee work. See  Bankruptcy Code section 503(b)(3)(F). However, professional fee expenses are not dealt with in section 503(b)(3) but instead are covered by section 503(b)(4), which authorizes professional fee expenses for any entity that qualifies for expenses under sections 503(b)(3)(A) through (E). The District Court noted that entities eligible for expenses under section 503(b)(3)(F) – members of an official committee – are not covered by 503(b)(4). Therefore, sections 503(b)(3) and 503(b)(4) guarantee payment in full for any professional fee expense incurred in a situation covered by 503(b)(3)(A) through (E), but not F.

The District Court was further persuaded by the fact that the provision for reimbursement of professional fees of committee members as an administrative expense was removed from the Bankruptcy Code. Until 2005, the Bankruptcy Code allowed professional fees incurred by individual committee members to be paid as an administrative expense in chapter 11. The enactment of what is referred to as BAPCPA amended the Bankruptcy Code to remove the allowance of these types of payments as administrative expenses by no longer including (F) in 503(b)(3). Therefore, the District Court held that because section 503(b) of the Bankruptcy Code excludes the payment of professional fee expenses on the basis of committee membership, the Individual Members could not have their professional fee expenses paid as administrative expenses solely on the basis of committee membership.

The District Court determined that section 6.7 of the Plan did in fact call for the payment of administrative expenses on the basis of committee membership, a result which was impermissible. The Individual Members received payment in full only because the Plan provided for payment in full of all "Administrative Expense Claims," which included the Individual Members' professional fee expenses. Functionally, the District Court said the Plan attempted to give the Individual Members' professional fee expenses special priority payment treatment. As a result, according to the District Court, "there is no practical difference between an administrative expense under [section] 503(b) and an 'Administrative Expense Claim' under section 6.7." Appellees, the Individual Members, argued that paying expenses, such as those included in section 6.7 of the Plan, in full, incentivizes committee members to take on the work necessary for a productive bankruptcy process, thereby benefiting all claimants. According to the District Court, however, section 6.7 effectively rewrote section 503(b) by seeking to pay an administrative expense on a basis that section 503(b) omits. As a result, the District Court found section 6.7 was inconsistent with section 503(b), and therefore impermissible under section 1123(b)(6).

Judge Sullivan refused to extend administrative expense priority beyond those specifically set out in the Bankruptcy Code. Judge Sullivan also disregarded a distinction or difference between plan payments and payment of administrative expense claims. That is, plan payments that are negotiated, consensual and agreed upon under a confirmed plan of reorganization are permitted under section 1123(b)(6) of the Bankruptcy Code, subject to court review in the case of fees and expenses as provided under section 1129(a)(4) of the Bankruptcy Code. Thus, it can be argued that plan payments are not inconsistent or specifically precluded under the Bankruptcy Code (even though this argument was not accepted by Judge Sullivan).

Appellees relied on In re Adelphia Commcn's Corp., 441 B.R. 6 (Bankr. S.D.N.Y. 2010) in support of their position that payments pursuant to section 6.7 of the Plan were distinct from administrative expense payments pursuant to section 503(b) of the Bankruptcy Code. There, the Bankruptcy Court reasoned that the Bankruptcy Code does not state that administrative expense payments are the only kinds of permissible plan payments; section 1129(a)(4) "permits the possibility" of making plan payments for professional fees beyond the payments authorized by section 503(b); and 1123(b)(6)'s "broad grant of authority" allows debtors and bankruptcy courts to include plan provisions to meet the needs of a particular case. The District Court, however, was not persuaded for several reasons. First, allowing payments under the Plan beyond claims and expenses "could lead to mischief"; for example, a junior claimant could be paid ahead of a senior claimant in violation of the absolute priority rule by virtue of a plan provision specifically authorizing such payment. Moreover, none of the reasons raised by the Adelphia  court nor Appellees could justify a plan provision that is "merely a backdoor to administrative expenses that [section] 503 has clearly excluded." The District Court noted that with the 2005 BAPCPA Amendments, Congress and the President clearly determined that individual committee members are already motivated to advance the bankruptcy process, and do not have to be incentivized with payment of their professional fees by the estate. Therefore, the District Court concluded that section 6.7 of the Plan called for the payment of administrative expenses, and that Appellees could not circumvent the requirements of section 503(b) of the Bankruptcy Code by using the label of "permissive plan payments."

The District Court did disagree with the United States Trustee's argument that the Individual Members cannot be paid under sections 503(b)(3)(D) and 503(b)(4) of the Bankruptcy Code on the ground that they made a "substantial contribution" to the case. The United States Trustee argued that such payment is impossible, because section 503(b) forbids reimbursement of official committee members' professional fee expenses, even if the committee members independently satisfy some other category listed in that section. The District Court disagreed, noting that there is no reason to think the Bankruptcy Code would punish an entity that has made a substantial contribution solely because it also served on the official committee. Therefore, the District Court remanded the case to the Bankruptcy Court to determine whether the Individual Members made a substantial contribution and, as a result, their professional fee expenses could be satisfied as an administrative expense claim.

Unfortunately, absent consensus, it has been historically difficult for a creditor or an indenture trustee to have its fees and expenses qualify as an administrative expense under the "substantial contribution" standard. The standard generally requires a showing that a creditor's actions led to a tangible benefit to the creditors, debtor or estate. Judge Sullivan appears to have recasted or tweaked the standard by stating that a committee member needs to show extraordinary work which benefits the estate, and that such work is beyond normal committee duties. It is uncertain as to whether Judge Sullivan's formulation of the standard to be applied to committee members will be adopted by other courts. What is clear is that either standard is not easily satisfied, and in any event requires a difficult and detailed evidentiary showing.

Current Procedural Status

The Individual Member Appellees filed a motion to certify the case for interlocutory appeal pursuant to 28 U.S.C. section 1292(b) to the Second Circuit Court of Appeals, along with a memorandum of law in support of the motion. The District Court ordered that Appellant must submit any opposition to Appellee's motion by May 16, 2014. Oral argument will take place on May 30, 2014 at 11:45 a.m.

Thoughts and Solutions

Although this decision is not binding in other jurisdictions, including Delaware, and may not be controlling precedent on the Bankruptcy Courts in the Southern District, it still may be considered persuasive authority.

Depending on the circumstances of the proceeding, indenture trustees may now want to consider alternative ways to recover their professional fees and expenses. Possible alternatives to recover professional fees and expenses include (a) having the debtor and other supporting parties agree or stipulate that the indenture trustee has made a substantial contribution, (b) having the debtor incorporate a substantial contribution finding in favor of the indenture trustee in the confirmation order, (c) prior to plan confirmation, resolving the payment of indenture trustee fees and expenses as a settlement under Section 363 of the Bankruptcy Code and Bankruptcy Rule 9019, (d) seeking payment as an administrative claim through the payment or indemnity provisions of the applicable indenture or (e) including in a plan a topping provision which would provide that the plan distribution to holders include the amount of professional fees and expenses owed to the indenture trustee and having those payments remitted directly to the indenture trustee.

For now, indenture trustees serving on creditors committees should not assume that their professional fees will be paid under a confirmed plan of reorganization or that approval of such professional fee and expense payments will be easy to obtain. Thought should be given to obtaining approval of such payments outside of a plan, or through other negotiated transaction or plan structure alternatives to obtain payment. 

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

*** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.