Affirming the bankruptcy court following confirmation of the Boy Scouts’ chapter 11 plan, Delaware’s District Judge Richard G. Andrews held that a debtor alone has standing to prosecute a motion under Section 363(b) to use estate property outside of the ordinary course of business.

In his January 13 opinion, Judge Andrews upheld the decision where Bankruptcy Judge Laurie Selber Silverstein had denied $21 million in compensation for bankruptcy lawyers who had been retained to advise the claimants’ personal injury lawyers. Judge Silverstein concluded that the bankruptcy lawyers had not shown entitlement to an administrative claim for having made a “substantial contribution in” the chapter 11 case.

Bankruptcy Lawyers Assist Tort Lawyers

The Boy Scouts filed a chapter 11 petition to deal with sexual abuse claims. The bankruptcy court appointed two official committees, one to represent trade creditors and a second, called the Official Tort Committee, to represent abuse tort claimants.

In addition to the official tort committee, a group of personal injury lawyers formed what they called the Coalition. The personal injury lawyers on the Coalition represented tens of thousands of sexual abuse victims. The Coalition hired a financial advisor and five prominent bankruptcy law firms.

The engagement agreement with the Coalition provided that the personal injury law firms would pay the bankruptcy lawyers for their services. The Coalition’s disclosure required by Bankruptcy Rule 2019(b) stated that the tort victims would not be responsible for the Coalition’s fees “in any way.”

Judge Andrews’ opinion contains a detailed description of the unsuccessful efforts by the Coalition during the case to arrange for the Boy Scouts’ estate to pay the fees for the Coalition’s bankruptcy professionals. We will focus on the debtor’s fifth amended plan, which was ultimately confirmed with support from the Coalition.

The plan provided that the Coalition’s professionals’ fees would be capped at $21 million and that payment would be subject to an order from the bankruptcy court approving payments of the fees under Sections 363(b), 1129(a)(4) and 503(b).

The bankruptcy court’s opinion confirming the plan said that the debtor’s “agreement” regarding the Coalition’s fees “will be brought separately.” However, Judge Andrews said that “the Debtors never filed a separate motion requesting that their bankruptcy estates be authorized to pay the Coalition’s professionals’ fees.”

After confirmation, though, the Coalition filed a motion for payment of $21 million in professionals’ fees. The motion contended that the fees should be allowed as administrative expenses under either Section 363(b) or Section 503(b). Judge Andrews noted that the debtor filed no pleadings or arguments in support of the Coalition’s motion.

The U.S. Trustee objected to the motion, which Bankruptcy Judge Silverstein denied. The Coalition appealed.

Standing for Section 363(b)(1) Motions

Judge Andrews first dealt with Section 363(b)(1), which provides that the “trustee, after notice and a hearing, may use, sell, or lease, other than in the ordinary course of business . . . .” Given the statutory reference to a trustee, he examined whether an ad hoc committee like the Coalition was “statutorily authorized to file a section 363 motion.” He explained that the statutory reference to a trustee includes a chapter 11 debtor in possession.

In Hartford Underwriters Ins. Co. v. Union Planters Bank N.A., 530 U.S. 1, 6-7 & n. 3 (2000), Judge Andrews characterized the Supreme Court as having said that statutory language saying that a “trustee may” means that “only the trustee (or a debtor in possession) may do so.” He therefore held that “the power to request court authorization to use bankruptcy estate property outside of the ordinary course of business can only be invoked by a trustee or debtor in possession.”

Even if Section 363(b) were applicable, Judge Andrews said that Bankruptcy Judge Silverstein had ample support in the record to find that the estate’s funds should not be used to pay the Coalition’s professionals.

No Substantial Contribution

With regard to the Coalition’s allegedly “substantial contribution,” Judge Andrews said that Section 503(b) contains “the only Bankruptcy Code provisions that address payment of creditors’ and ad hoc committees’ fees and expenses.”

In making a decision on substantial contribution, Judge Andrews said that the bankruptcy judge “considered multiple factors.” He described Judge Silverstein as having evaluated whether the Coalition’s professionals duplicated services rendered by the committee or the debtor and whether the “services transcended self-interest.”

Judge Andrews said that substantial contribution awards are only made in rare and exceptional circumstances and that ad hoc committees are presumed to be acting in their own interest until they satisfy the court that their actions have transcended self-protection. The “key inquiry,” he said, is whether the services primarily served the interests of the tort lawyers or benefited the bankruptcy estate.

Judge Andrews said that the record supported the bankruptcy court’s findings that the services did not transcend self-interest and that the Coalition failed to show that the services primarily benefited the estates.

Finding no reversible error and concluding that Bankruptcy Judge Silverstein acted within her discretion, Judge Andrews affirmed the denial of a $21 million fee award to the Coalition’s bankruptcy professionals.