Restructuring

Contributed by Marvin Mills
The United States Bankruptcy Court for the Eastern District of New York recently determined that a non-creditor unsuccessful bidder had standing to seek allowance of a “substantial contribution administrative expense,” but ultimately found insufficient evidence of a substantial contribution.
Background
In S&Y Enterprises, Bedford JV, LLC, which had unsuccessfully bid on certain estate property, filed an administrative expense application, pursuant to sections 503(b)(3) and 503(b)(4) of the Bankruptcy Code, to recover fees and expenses attributable to its counsel and counsel for the debtors’ two equity holders.
In its application, Bedford asserted that it made a substantial contribution to the debtors’ bankruptcy cases by, among other things, increasing the sale price of the debtors’ properties through its participation in the debtors’ chapter 11 cases.  Bedford also asserted that the fees and expenses it paid on behalf of the debtors’ two equity holders benefitted the chapter 11 cases by allowing the equity holders to obtain legal representation.
Multiple parties objected to Bedford’s application.  The objectors argued that Bedford, a non-creditor, lacked standing to seek a substantial contribution administrative expense.  The objectors also argued that Bedford failed to provide any evidence of a substantial contribution.
A Low Bar for Standing
In its opinion, the bankruptcy court first considered whether Bedford had standing to seek allowance of a substantial contribution administrative expense.  Section 503(b) governs the allowance of administrative expenses.  Section 503(b)(3)(D) specifically provides for the allowance of administrative expenses incurred by “a creditor, an indenture trustee, an equity security holder, or a committee representing creditors or equity security holders . . . in making a substantial contribution in a [chapter 11] case.”  Section 503(b)(4) provides, in relevant part, that such expenses may include “reasonable compensation for professional services rendered by an attorney or an accountant of an entity whose expense is allowable” pursuant to section 503(b)(3)(D).
The bankruptcy court observed that the potential applicants listed in section 503(b) were illustrative but not exclusive.  According to the bankruptcy court, section 503(b)(3)(D) “opens the door to the possibility that where the estate as a whole directly benefits from an entity’s participation in a [c]hapter 11 case, that entity’s counsel and expenses may be paid as an administrative expense.”  The bankruptcy court explained that setting a low bar for standing to seek allowance of a substantial contribution administrative expense was warranted because (1) the Bankruptcy Code’s list of prospective applicants is not exhaustive, and (2) it would not be possible to formulate a comprehensive list that would include every entity that may make a substantial contribution in a chapter 11 case.  The bankruptcy court concluded that Bedford’s asserted contributions were sufficient to establish that it had standing to apply for a substantial contribution administrative expense.
Insubstantial Contributions
According to the bankruptcy court, to recover a substantial contribution administrative expense under section 503(b)(3), an applicant must show that its (1) services during the bankruptcy process “yielded a direct and significant benefit to the bankruptcy estate or the parties as a whole,” and (2) efforts advanced the entire bankruptcy process and moved the chapter 11 cases towards a successful reorganization.
Applying this two-part test, the bankruptcy court found that Bedford had not shown by a preponderance of the evidence that the first prong was satisfied.  The bankruptcy court observed that Bedford’s participation in the case was principally in furtherance of its efforts to acquire the debtors’ properties, and that the primary goal of these activities was to advance Bedford’s own interests.  The bankruptcy court rejected Bedford’s argument that its efforts resulted in the increased purchase price paid for the debtors’ properties and that such efforts qualified as a substantial contribution.  An indirect benefit, explained the bankruptcy court, is not enough.
The bankruptcy court also found that the second prong of the test was not met because Bedford had not established that its efforts advanced the entire bankruptcy process and moved the cases toward a successful reorganization.  The bankruptcy court explained that, although Bedford actively participated in the bankruptcy cases, it did so solely as a prospective acquirer of the debtors’ assets.  Accordingly, the bankruptcy court concluded that Bedford had not established that it was entitled to a substantial contribution administrative expense for its counsel’s legal fees and expenses.
Additionally, the bankruptcy court ruled that Bedford failed to establish that it was entitled to a substantial contribution administrative expense for the counsel fees and expenses that it paid on behalf of the debtors’ equity holders.  The bankruptcy court explained that the allowance of the fees and expenses incurred on behalf of the equity holders turned on whether the equity holders made a substantial contribution as determined by the same two-part test.  The bankruptcy court found that there was insufficient evidence that the equity holders played a role in the bankruptcy process that yielded a direct and significant benefit to the bankruptcy estate or the parties as a whole.  The bankruptcy court also found that, like Bedford, the two equity holders had not advanced the entire bankruptcy process and moved the cases toward a successful reorganization.  Accordingly, the bankruptcy court concluded that the services of the equity holders’ counsel benefitted principally the equity holders, and Bedford was not entitled to reimbursement for fees and expenses incurred on behalf of the equity holders.
Although the decision may allow parties not expressly identified in section 503(b) to attempt to jump over the “substantial contribution” hurdle, the decision also reminds us that the bar over which such parties must jump to have their administrative expense allowed remains high.