United States: Committee Members’ Professional Fees And Expenses: To Pay Or Not To Pay, That Is The Question

The United States District Court for the Southern District of New York entered a decision in Davis v. Elliot Management Corp., et al. (In re Lehman Bros. Holdings Inc.) addressing the applications for payment of professional fees in the approximate total amount of $26 million submitted by certain members of the official committee of unsecured creditors appointed under Section 1102 of the Bankruptcy Code in the historical and unprecedented bankruptcy cases of Lehman Brothers Holdings Inc. and its affiliated debtors. The authors of this article discuss the case and its implications.

The United States District Court for the Southern District of New York entered a decision in Davis v. Elliot Management Corp., et al. (In re Lehman Bros. Holdings Inc.)1addressing the applications for payment of professional fees in the approximate total amount of $26 million submitted by certain members of the official committee of unsecured creditors (the "Committee") appointed under Section 1102 of the Bankruptcy Code—i.e. an official committee—in the historical and unprecedented bankruptcy cases of Lehman Brothers Holdings Inc. and its affiliated debtors (collectively, the "Debtors"). At issue before the district court was an appeal by the United States Trustee for Region 2 (the "UST") from the February 15, 2013 decision of Judge James Peck of the United States Bankruptcy Court for the Southern District of New York, pursuant to which Judge Peck granted an omnibus application (the "Application") for the payment of fees and reimbursement of expenses claimed by individual members of the Committee despite an objection by the UST. In a decision that was viewed with surprise by some, the district court disagreed with the bankruptcy court as to the permissibility of the fees and expenses, and remanded the matter back to the bankruptcy court for further adjudication. The Committee members thereafter filed a motion—albeit unsuccessful—seeking immediate certification for interlocutory appeal of the district court's order to the United States Court of Appeals for the Second Circuit pursuant to 28 U.S.C. § 1292(b) with respect to the district court's reversal of the bankruptcy court's decision insofar as it awarded the fees as permissible consensual plan payments.

Specifically, as acknowledged by the bankruptcy court, the dispute as to whether to allow the professional fees of Committee members highlights the potential ability to use Chapter 11 plan provisions as a means to authorize and effectuate the payment of professional fees in instances where such fees would otherwise likely not qualify as recoverable administrative expenses under Sections 503(b)(3) and 503(b)(4) of the Bankruptcy Code.2

BANKRUPTCY COURT DECISION

Section 503(b)(3) of the Bankruptcy Code sets forth those fees that, after notice and a hearing, shall be allowed as administrative expenses. In particular, Section 503(b)(3)(F) includes the fees of "a member of a committee appointed under section 1102 [of the Bankruptcy Code], if such expenses are incurred in the performance of the duties of such committee."3Meanwhile, Section 503(b)(4) authorizes the "reasonable compensation for professional services rendered by an attorney. . ..of an entity whose expense is allowable under subparagraph (A), (B), (C), (D), or (E) of paragraph (3) of this subsection, based on the time, the nature, the extent, and the value of such services, and the cost of comparable services other than in a case under this title, and reimbursement for actual, necessary expenses incurred by such attorney. . .."4 Notably, subparagraph (F) of Section 503(b)(3) is not mentioned in the list of subsections enumerated in Section 503(b)(4). Accordingly, as the Lehman bankruptcy court explained, when read collectively, these provisions seemingly authorize official committee members to seek reimbursement for expenses incurred in connection with their service on the committee, but not for professional services rendered to individual committee members.5

Based on the foregoing statutory analysis, the Lehman bankruptcy court concluded that the fees sought by the Committee members in the Application did not qualify for payment in the ordinary course as administrative expenses under Sections 503(b)(3) and 503(b)(4). However, by what was presumably intentional draftsmanship in attempt to circumvent the very issues that are now in play before the courts, Section 6.7 of the Debtors' Chapter 11 plan (the "Plan") expressly secured the right to payments of such fees for the Committee members, notwithstanding the absence of any statutory basis therefore. Indeed, Section 6.7 of the Plan "introduce[d] what amount[ed] to a contractual patch designed to cure these statutory omissions, and therein lies the rub." Given the fact that the requested fees were not explicitly authorized under the Bankruptcy Code, but nevertheless were authorized under the Plan, the question before the bankruptcy court put at stake "important appearance and policy issues: should members of any official committee who by statute have a central role in plan negotiations be allowed to use the plan process for their own financial gain and should they be able to realize benefits that the Bankruptcy Code ordinarily would not sanction?" Notably, while payment of such fees may not be expressly referenced within the Bankruptcy Code itself, the Bankruptcy Code nonetheless considered the purported banality of using a Chapter 11 plan to achieve permissible "desired economic outcomes" and to reflect consensual arrangements between debtors and their stakeholders.

The UST's objection to the Committee members' Application advanced what the bankruptcy court ultimately described as an "overly restrictive reading of section 503(b)" and was premised on the presumption that Section 503(b) was the "exclusive pathway" by which the Committee members could potentially be entitled to receive compensation. In other words, the UST's reading of the Bankruptcy Code argued that Section 503(b) not only eliminates the potential for members of an official committee to recover fees thereunder, but also forecloses any ability for such amounts to be recovered by other permissible means within the Chapter 11 context-such as under the Plan. In contrast, the Committee members argued that Section 503(b) is not the only mechanism for approval of administrative expenses for professional fees and expenses, and that courts may also properly look to other potentially applicable provisions of the Bankruptcy Code-namely Section 1129(a)(4)-which permits a bankruptcy court to approve a restructuring plan if payments made for services or costs and expenses in connection with the case or plan are found to be reasonable.

Ultimately, the bankruptcy court was persuaded by the Committee members' arguments and ruled that, if upheld, the UST's argument "would negate in absolute terms the possibility of plan treatment that might offer to compensate members of an official committee for their individual professional fees under any and all circumstances." Notably, the bankruptcy court categorized the UST's argument as flawed in that it presumed that Section 504(b) "functions as a trump card that extends across the Bankruptcy Code to block the formulation of a plan that proposes independent grounds for granting comparable payment rights." Further, the bankruptcy court highlighted that the UST's argument failed to consider not only the broad leeway that debtors have pursuant to Section 1123(b)(6) of the Bankruptcy Code, but also the discretion and authority afforded to bankruptcy courts under Section 1129(a)(4) to approve reasonable payments.6Indeed, as the bankruptcy court stated, "[t]o fulfill its reorganization purposes, a plan must be an endlessly adaptable tool that fits the particular needs and dynamics of each 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."

Footnotes

Ingrid Bagby is a partner at Cadwalader, Wickersham & Taft LLP, focusing her practice on bankruptcy, restructuring, and commercial litigation. Michele C. Maman is an associate at the firm. The authors may be contacted at ingrid.bagby@cwt.com and michele.maman@cwt.com, respectively.

1 Davis v. Elliot Mgmt. Corp. (In re Lehman Bros. Holdings Inc.), 508 B.R. 283 (S.D.N.Y. 2014).

2 In re Lehman Bros. Holdings Inc., 487 B.R. 181, 183–184 (Bankr. S.D.N.Y. 2013).

3 11 U.S.C. § 503(b)(3)(F).

4 11 U.S.C. § 503(b)(4).

5 In re Lehman Bros. Holdings Inc., 487 B.R. 189-190 (Bankr. S.D.N.Y. 2013).

6 Further, the bankruptcy court noted its "general repository of power" under Section 105(a) of the Bankruptcy Code to "issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of [the Bankruptcy Code]." In re Lehman Bros. Holdings Inc., 487 B.R. 190 (Bankr. S.D.N.Y. 2013) (quoting 11 U.S.C. § 105(a)).

Originally published in Pratt's Journal of Bankruptcy Law

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