Timely. Cutting Edge. Noteworthy.

District Court Strikes Committee Fee Provision From Plan

May 05, 2014

On March 31, 2014, the United States District Court for the Southern District of New York (the “District Court”) issued a decision in the Lehman Brothers Case holding that a plan of reorganization may not provide for payment of Committee members’ professional fees absent a demonstration of a substantial contribution to the case by such Committee members. This decision is not good news for Indenture Trustees and may require some innovative strategy to insure the payment of fees and expenses in future chapter 11 cases.

The Lehman plan of reorganization (the “Plan”), provided for payment of professional fees and expenses, including attorney’s fees (the “Fees”) incurred by all members (the “Members”) of the official committee of Unsecured Creditors (the “Committee”), which included two indenture trustees.

The United States Trustee (the “Trustee”) objected to the Plan on the grounds that Fees did not qualify as administrative expenses under § 503(b) of the Bankruptcy Code and, therefore, could not be paid by Lehman under the Plan. The Committee argued that the Bankruptcy Code did not specifically prohibit such a payment and that while § 503(b) described categories of administrative claims allowed by statute it did not prohibit a debtor from agreeing to pay specific fees and expenses under a plan.

The Bankruptcy Court overruled the Trustee’s objection, finding that the Bankruptcy Code did not prohibit the payment of the Fees, and that § 1123(b)(6) permitted Lehman to agree to pay the Fees, so long as they were reasonable in accordance with § 1129(a)(4). The Trustee appealed the Bankruptcy Court’s decision to the District Court.

On appeal, the District Court overturned the Bankruptcy Court’s decision, holding that “§ 503(b) is the exclusive avenue for payment of administrative expenses and § 503(b) excludes official committee members’ professional fee expenses”. The District Court did not accept the Committee’s argument that a debtor can agree to pay amounts that do not qualify as administrative expenses pursuant to § 1123(b)(6)’s “broad grant of authority” to include provisions in a plan that meet the needs of a particular case. The Court found that permitting a debtor to agree to pay amounts that do not qualify as “claims”, i.e. amounts owed pre-petition, or administrative expenses “could lead to serious mischief.” The District Court stated that the “Bankruptcy Code is meant to be a comprehensive federal scheme to govern the bankruptcy process. Although flexibility is necessary, the federal scheme cannot remain comprehensive if interested parties and bankruptcy courts in each case are free to tweak the law to fit their preferences.”

The District Court did find that Committee Members could seek allowance of their professional fees as administrative expenses if they could establish that they made a substantial contribution to the case pursuant to § 503(b)(3)(D) and remanded to the Bankruptcy Court for a determination whether the Members had made a substantial contribution to the Lehman Case.

The District Court recognized that two of the members of the Committee were Indenture Trustees. However, since no arguments were presented as to why the Indenture Trustees should be treated differently from other Committee members, the District Court found “that the legal analysis for Committee members applies equally to the Indenture Trustees.” The District Court Opinion is an unfortunate precedent for Indenture Trustees and the remand to the Bankruptcy Court could create additional problems since the existing case law regarding substantial contribution is not favorable to Indenture Trustees.

We have had significant experience over the years in negotiating and litigating issues relating to the payment of Indenture Trustee fees and expenses with the Office of the U.S. Trustee. We believe that there were a number of arguments that could have been presented to the District Court to support the payment of the Indenture Trustee’s fees and expenses which were not made due to the circumstances in Lehman. We would be happy to discuss with any interested party our analysis of the District Court’s opinion in this case and our ideas and strategy to maximize the potential for recovery of these fees and expenses in future cases.