Substantial Contribution Claims A New Perspective

Journal Issue

May 2001

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Recovery of professional fees is a subject that is always near and dear to every
bankruptcy attorney's heart. This is especially true when the recovery of fees is related
to the representation of an unsecured creditor in a complex or difficult chapter 11
case. Pursuant to §503(b)(3)(D) and (b)(4), a creditor is entitled to
have the actual and necessary expenses, including attorneys' fees, that it incurred "in
making a substantial contribution" in a case under chapter 11 treated as an
administrative expense.

The Eleventh Circuit Court of Appeals in <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… & Runyan v. Celotex Corp.
(In re Celotex Corp.), 227 F.3rd 1336 (11th Cir. 2000)</a>,
recently ruled on an emerging significant issue in this area. Specifically, the court
in Celotex adopted the view of the Fifth Circuit that a creditor's motive in taking
actions that benefit the estate has little relevance in determining whether to allow a
substantial contribution claim of the creditor. This view departs from the historic view
adopted by the Third and Tenth Circuits, which requires an altruistic motive before
allowing a substantial contribution claim. This article will take a closer look at the
Eleventh Circuit's ruling and its possible ramifications.

<h3>General Background</h3>

The present statutory provisions governing substantial contribution claims reflect an
accommodation between the twin objectives of the Bankruptcy Code of (a) encouraging
meaningful creditor participation in the reorganization process and (b) keeping fees
and administrative expenses at a minimum so as to preserve as much of the estate as
possible for creditors.

Congress did not define the term "substantial contribution." Courts too have
refrained from defining with specificity what constitutes substantial contribution, leaving
the matter to a case-by-case analysis. Because the inquiry concerning the existence
of a substantial contribution is one of fact, the bankruptcy court is in the best
position to make such a determination. The circuit courts agree that a party confers
a substantial benefit, and therefore may compel the debtor's estate to fund their
attorney's fees, only when the applicant establishes that the services significantly
foster and enhance, rather than retard or interrupt, the progress of reorganization.

At a minimum, an applicant's efforts must result in an actual and demonstrable
benefit to the bankruptcy estate. The mere pursuit of an applicant's own interests in
the case is insufficient if the applicant cannot demonstrate a direct benefit to the
estate. The benefit received by the estate must be more than incidental to activities
the applicant has pursued in protecting its own interest. Moreover, the contribution
must be considerable in amount, value or worth. Finally, the services cannot be a
duplication of services rendered by attorneys for a committee or the debtor. Based
on these universally accepted criteria, an award of fees for a substantial contribution
is generally reserved for those rare and extraordinary circumstances where the creditor
and its attorney truly enhance the administration of the estate.

<h3>Conflict Among Circuits</h3>

The unsettled controversy relating to substantial contribution awards revolves around
the issue of whether a selfish motive of the applicant precludes an award under
§503(b), even though the other criteria supporting an award have been established.
Prior to the Fifth Circuit's analysis in <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re DP Partners Ltd., 106 F.3d
667 (5th Cir.), cert. denied, 118 S.Ct. 63 (1997)</a>, the
established view was that the purpose of §503(b)(3)(D) was to encourage
activities that benefit the estate as a whole, and should only be applied in a manner
that excludes reimbursement in connection with activities of creditors and other interested
parties that are designed primarily to serve their own interests, and that accordingly
would have been undertaken without any expectation of reimbursement from the estate. See
<a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… v. Mecham Fin. Inc., 27 F.3d 937 (3rd Cir. 1994)</a>; <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…
v. United States (In re Lister), 846 F.2d 55 (10th Cir. 1988)</a>.

The circuit courts in Lebron and Lister determined that creditor motivation was a
primary factor to be considered in the substantial-contribution analysis. See <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…; 27 F.3d at 943</a> (citing historical interpretation of §503(b)(3)(D) and
its predecessor statutes); <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…; 846 F.2d at 57</a>. Generally, these circuit
courts followed the reasoning that creditors are presumed to be acting in their own
interest and not for the benefit of the estate as a whole until they satisfy the
court that their efforts have transcended self-protection. These circuit courts recognize
that most activities of interest to the parties that contribute to an estate will
also, of course, benefit that party to some degree, and therefore the existence of
self interest cannot in and of itself preclude reimbursement.

The Fifth Circuit in DP Partners created a split among the circuits on the issue
of whether the motivation behind a creditor's actions in a chapter 11 case should
disqualify the creditor from recovery of fees where a substantial contribution has been
made to the successful resolution of the chapter 11 case. The Fifth Circuit held
that creditor motivation was irrelevant to the "substantial contribution" analysis. The
Fifth Circuit specifically noted that the plain language of the statute does not
require "a self-deprecating, altruistic intent as a prerequisite to recovery..." <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…
Partners, 106 F.3d at 673</a>.

<h3>Celotex Factual Background</h3>

The applicant in Celotex was a law firm that represented, on a contingent-fee
basis, a number of asbestos property-damage claimants in a lengthy and complex chapter
11 case involving, among other things, claims for asbestos property damage and
asbestos personal injury competing for limited resources. The evidence in support of the
applicant's substantial contribution claim was compelling. Specifically, the debtor
supported the application and represented to the bankruptcy court that the applicant
provided significant tangible and demonstrative benefits to the debtor's estate, its
creditors and shareholders and that the services of the applicant were not duplicative
of services rendered by other professionals. The applicant's claim was also supported
by other parties in interest in the case. The only objections to the
substantial-contribution claim were asserted by the U.S. Trustee and the asbestos
settlement trust that was created under the confirmed plan of reorganization and that
would essentially bear the expense of any award.

The bankruptcy court denied the claim in part because the services of the applicant
were conducted on behalf of its clients and not for the particular benefit of the
estate. The bankruptcy court recognized that the successful efforts to reach a
consensual plan unquestionably benefitted the applicant and its clients and were undertaken
without any expectation of compensation from the estate. The applicant appealed this
decision. The district court affirmed the decision, finding that the bankruptcy court
did not abuse its discretion in refusing to award the fees.

<h3>Eleventh Circuit Ruling in Celotex</h3>

The applicant argued on appeal to the Eleventh Circuit that DP Partners correctly
held that nothing within the text of §503(b) supports the altruism requirement
mistakenly imposed by the bankruptcy court. The essence of the applicant's position was
that nothing within the plain meaning of the text suggests that an applicant must
"transcend self-protection" to render a compensable substantial contribution. The statutory
provisions reflect that a creditor's attorney—who by definition acts on behalf of his
or her clients' interests—shall be allowed fees for efforts in making a substantial
contribution to the bankruptcy reorganization.

The Eleventh Circuit agreed with the foregoing arguments and adopted the holding
of the Fifth Circuit in DP Partners. Specifically, the court in Celotex ruled that
the degree of benefit conferred or contribution made by an applicant for a substantial
contribution claim is not diminished by selfish or shrewd motivations. Accordingly, the
Eleventh Circuit reversed the bankruptcy court's denial of fees on the grounds that
the wrong legal principle had been applied in examining the facts.

<h3>Conclusion</h3>

Courts considering substantial-contribution claims will undoubtedly be mindful of the
balance required between the need to interpret the provisions of §503 broadly enough
to effectuate its goal of stimulating, encouraging and promoting meaningful creditor
participation in reorganization proceedings, and the need to keep administration expenses
to a minimum. Compensation cannot be freely given to all creditors who take an active
role in bankruptcy proceedings. The recent decisions in DP Partners and Celotex could
be interpreted as creating the possibility of opening the door to §503(b)(3) claims
too far. In any event, the effect of these decisions will likely be to refocus the
analysis of substantial contribution claims from the motives of the creditor seeking
compensation to whether the applicant has carried the heavy burden of establishing that
extraordinary actions actually occurred that led directly to significant and tangible
benefits to the creditors, the debtor and the estate. Only when that strict test is
met should and will compensation be awarded.

Journal Authors

Jeffrey W. Warren

Journal Date

Tuesday, May 1, 2001 - 12:00

Bankruptcy Rule

2001