District Court Strikes Down Plan Provision Providing for Payment of Individual Committee Member Professional Fees

The District Court for the Southern District of New York recently issued an opinion in Davis v. Elliot Management Corp. (In re Lehman Brothers Holdings Inc.), 2014 U.S. Dist. LEXIS 48102 (S.D.N.Y. Mar. 31, 2014) that will have important implications for individual members of official creditor committees in future cases. 

In its decision, stemming from the Lehman Brothers bankruptcy case, the District Court forbid members of the unsecured creditors’ committee from being paid their individual legal fees under a plan absent a showing of substantial contribution to the estate.  The decision does not address payment of professionals of official committees; rather, the issue is whether professionals retained by individual members of official committees may be paid from the bankruptcy estate.

The plan provision at issue permitted the payment of the legal fees incurred by committee members (totaling $26 million), subject only to a finding by the Bankruptcy Court that those fees were reasonable.  The Bankruptcy Court acknowledged that while the Bankruptcy Code does not provide for payment of committee member professional fees, it does not prohibit such payment and, therefore, permitted the payments under section 1123(b)(6), which provides that a plan may include appropriate provisions not inconsistent with the Bankruptcy Code.

The Office of the United States Trustee appealed.  District Judge Richard Sullivan granted the U.S. Trustee’s appeal based on the statutory history of section 503(b), which provides for administrative priority for certain types of expenses.  Specifically, the Court noted that following the enactment of the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) in 2005, section 503(b)(4) of the Bankruptcy Code, which provides administrative expense priority for compensation to attorneys or accountants of certain interested parties, was amended to exclude professional fee expenses of official committee members.  Accordingly, the Court refused to allow payment of the individual committee member professional fees as part of the plan, noting that plans exist to pay prepetition claims and postpetition expenses, and that the fees did not fall within either category but, rather, were an attempted “backdoor to administrative expense that § 503 has clearly excluded.”

Importantly, however, the District Court did not foreclose payment of the professional fees of individual committee members, instead inviting the Bankruptcy Court on remand to consider whether the fees constitute a “substantial contribution” under sections 503(b)(3)(D) and 503(b)(4) of the Bankruptcy Code.

The District Court’s decision serves as an important caution to official committees and their members.  To address issues raised by the decision, drafters of consensual plans should consider incorporating a finding that the professional fees of individual committee members constitute a substantial contribution to the estate.

 

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