Contributed by Conray C. Tseng
In In re Tronox Incorporated Inc., Case No. 09-10156 (ALG) (September 23, 2010 Bankr. S.D.N.Y.), Judge Allan L. Gropper of the United States Bankruptcy Court for the Southern District of New York considered whether an official committee of equity security holders may require a debtor to enter into a backstop agreement and, in turn, pay for a backstop fee to parties that agreed to backstop a rights offering under a plan of reorganization proposed by the court-appointed equity committee.  In an oral ruling, Judge Gropper held that, absent certain limited circumstances, the court did not have the authority to order the debtor to expend its assets without the debtor’s consent.

In support of its motion, the equity committee argued that an official committee is an entity created by the Bankruptcy Code and that, upon expiration of exclusivity, the Bankruptcy Code permits any party in interest, including a committee, to propose a plan.  The equity committee argued that, in furtherance of such authority, the Bankruptcy Code must also be read to provide an official committee with the means to support and effectuate a plan by authorizing the use of estate assets pre-confirmation to, among other things, secure funding for the plan.
The equity committee also analogized its proposed use of estate assets to an official committee obtaining standing to pursue litigation.  In both cases, the court authorizes a third-party to use or pursue estate assets where the debtor is inherently conflicted.  In Tronox, the equity committee suggested that the debtors were conflicted by the existence of their own competing plan.
In denying the equity committee’s motion, Judge Gropper reasoned that section 363(b) of the Bankruptcy Code authorized only the debtor to use estate assets outside the ordinary course of business, and nothing in the Bankruptcy Code authorizes the court to compel a debtor in possession to use estate assets at the request of a third-party absent the debtor’s consent.  The Court caveated its ruling by noting that an exception could be made if the debtor in possession or trustee neglected its duties to propose a plan, but found such circumstances did not exist in the case at bar.  During oral arguments, Judge Gropper also acknowledged that, if a non-debtor plan provided for payment of a backstop fee and such plan was confirmed, the backstop fee could be paid in accordance with the terms of the plan.
Bottom Line – While the Bankruptcy Code provides for the compensation of legal and other advisory fees for official committees, non-debtor plan proponents will need to bear all other pre-confirmation costs of proposing a chapter 11 plan in light of this recent decision.  Non-debtor plan proponents may get compensated for their efforts under the terms of their plan or, even if unsuccessful, might be able to assert a claim for substantial contribution under section 503(b) of the Bankruptcy Code, but in each case they will need to await the conclusion of the chapter 11 case.