Court Opinion

ID: 11329
Source: CourtListenerOpinion
Date Created: 2010-04-25 06:03:36+00
Date Added: 2024-06-11T12:05:07.284179
License: Public Domain

United States Court of Appeals,

                             Fifth Circuit.

                              No. 95-11110.

        In the Matter of DP PARTNERS LTD. PARTNERSHIP, Debtor.

                HALL FINANCIAL GROUP, INC., Appellant,

                                      v.

     DP PARTNERS, LTD. PARTNERSHIP;        Sussex Properties, Inc.,
Appellees.

                             Feb. 28, 1997.

Appeal from the United States District Court for the Northern
District of Texas.

Before POLITZ, Chief Judge, and JOLLY and BARKSDALE, Circuit
Judges.

     POLITZ, Chief Judge:

     This appeal requires the determination of the appropriate

procedures     for    granting    a    creditor    administrative      fees,

specifically    attorney's   fees,    under   11   U.S.C.   §   503   of   the

Bankruptcy Code.      Concluding that the courts a quo erred in their

construction of that section we vacate the judgment appealed and

remand for further proceedings consistent herewith.

                                 Background

     DP Partners Limited Partnership in 1993 filed a Chapter 11

petition after defaulting on note payments on real estate in Texas

and Arizona.1        DP filed its first plan of reorganization in

    1
     According to DP it filed for bankruptcy, with the approval of
the creditor holding the notes, to modify the terms of
approximately $65,000,000 in loans. A Chapter 11 proceeding was
required for modification because certain loan restrictions
prevented voluntary changes.

                                      1
February 1994, providing for approximately $37,000,0002 in payments

to its creditors.             Hall Financial Group, recognizing that the

proposed plan undervalued DP's property holdings, acquired three

small           unsecured   claims,   thus       becoming   a   creditor.3     HFG

subsequently proposed a competing plan, setting off a bidding war.

After several amendments the DP plan prevailed.                   Due in part to

HFG's participation the final amended plan provided approximately

$3,000,000 more for the creditors than the previous version.4                   In

the process, however, HFG incurred $150,700 in attorney's fees.

     On September 15, 1994, after plan confirmation but before the

administrative claim deadline, HFG moved for attorney's fees under

11 U.S.C. § 503(b)(3)-(4).             DP timely objected.         The bankruptcy

court held a hearing and determined that HFG was entitled to only

$12,500. The court stated that HFG would have been entitled to all

of its fee claim had it given DP a "warning" before confirmation

that it intended to seek such reimbursement.                    In the absence of

such notice, the court reasoned, DP properly relied on the lack of

a large administrative claim in formulating its plan.                        In so

holding, the bankruptcy court relied on two New Hampshire cases

        2
      At or near the time Hall Financial Group joined the bidding
DP amended its plan to provide for approximately $46,700,000 in
payments.
        3
      DP contends that HFG bought into the bankruptcy so that it
could bid on the apartment properties at bargain prices. According
to DP, HFG "bought a ticket to an auction."
            4
       This figure conceivably might be as high as $12,500,000.
Originally, the DP plan provided for $37,300,000 in payments. HFG
responded with a plan providing for approximately $46,500,000 in
payments.   The DP plan that was finally confirmed provided for
$49,800,000 in payments.

                                             2
which implied a notice requirement in 11 U.S.C. § 503.5                       Both HFG

and DP appealed to the district court which summarily affirmed. On

appeal to this court DP contends that the district court erred in

affirming the $12,500 fee award because HFG waived its right to

claim expenses and failed to make a substantial contribution

warranting an award of fees and expenses.                    HFG contends that the

district court erred in holding that 11 U.S.C. § 503 requires

advance warning of administrative claims.

                                    Analysis

            Generally, 11 U.S.C. § 503 provides that "[a]fter notice and

a hearing, there shall be allowed administrative expenses" for

entities        falling   into   certain       categories.6         In   interpreting

statutes, a court's function "is to construe the language so as to

give effect to the intent of Congress."7                      The most compelling

demonstration       of    congressional        intent   is    the   wording    of   the

statute.8        Use of the word "shall" connotes a mandatory intent.9

The court is bound by the plain language of the statute especially

where, as here, there is nothing in the statute or its legislative

        5
      In re Diberto, 164 B.R. 1 (Bankr.D.N.H.1993);                      In re Public
Serv. Co., 160 B.R. 404 (Bankr.D.N.H.1993)
     6
        11 U.S.C. § 503(b) (1993 & Supp.1996) (emphasis added).
    7
     United States v. American Trucking Ass'ns, 310 U.S. 534, 542,
60 S.Ct. 1059, 1063, 84 L.Ed. 1345 (1940).
     8
        Id.
     9
        Sierra Club v. Train, 557 F.2d 485 (5th Cir.1977).

                                           3
history to indicate a contrary intent.10 Therefore, under the plain

language of the statute, if HFG meets the requirements of section

503, it shall recover administrative expenses.                         This statutory

mandate permits of no discretionary calls by the courts.

     Section 503 first requires that HFG file a timely request for

administrative         expenses    or   be        excused   therefrom    for   cause.11

Thereafter, following notice and a hearing, HFG must prove that its

claimed expenses         and   fees     are       compensable   under    one   or   more

subsections in section 503(b).                    Specifically at issue in this

appeal         are   subsections    (b)(3)(D)         and    (b)(4).      Those     two

subsections, read in conjunction with section 503(b), provide that

compensable administrative expenses include "the actual, necessary

expenses ... incurred by ... a creditor ... in making a substantial

contribution in a case under chapter 9 or 11 of this title"12 and

"reasonable compensation for professional services rendered by an

attorney or an accountant of an entity whose expense is allowable

under paragraph (3) of this subsection."13                    Thus, if HFG files a

timely motion for administrative expenses falling into the above

categories, the bankruptcy judge should determine the expenses that

were actual, necessary expenses under subsection (b)(3)(D), and the

          10
        Id.;   see also Louisiana Credit Union League v. United
States, 693 F.2d 525 (5th Cir.1982); cf. Demarest v. Manspeaker,
498 U.S. 184, 111 S.Ct. 599, 112 L.Ed.2d 608 (1991) (noting that
where terms in a statute are unambiguous, courts must apply them as
written).
     11
          11 U.S.C. § 503(a).
     12
          11 U.S.C. § 503(b)(3)(D).
     13
          11 U.S.C. § 503(b)(4).

                                              4
amount      of   reasonable        fees    for       professional     services         under

subsection (b)(4).

Timely Filing for Administrative Expenses.

           The question of the appropriate timing of a request for

administrative fees and expenses is res nova for this court.                            Both

the bankruptcy and district courts determined that HFG was required

to   give     advance     warning       that     it    would   seek     a    substantial

administrative claim prior to confirmation,14 relying primarily upon

In re Public Serv. Co.15           That case involved facts somewhat similar

to   the     instant    appeal     in     that   a    losing   bidder       in   the    plan

confirmation process sought reimbursement for administrative fees

incurred during the confirmation dispute. Initially the bankruptcy

court denied the motion for fees, holding that the creditor failed

to make a substantial contribution to the Chapter 11 proceedings.

As an alternative holding, the bankruptcy judge determined that to

be entitled to fees the creditor had to give advance warning of its

intent to seek expenses to the court and the debtor "prior to the

bidding      process     by   an    appropriate         motion,"16    reasoning         that

nondisclosure of large claims can potentially wreak havoc in the

bidding process by making otherwise competitive plans economically

     14
      This novel, implied notice requirement is not to be confused
with the notice required in 11 U.S.C. § 1129(a)(4). That provision
requires a plan proponent to disclose its intent to recover fees
and expenses through the plan it proposes. 11 U.S.C. § 1125(b)
requires the plan proponent to disclose this intent in both its
plan and the disclosure statement.      HFG, as a plan proponent,
complied with both of these statutes.
      15
           160 B.R. 404 (Bankr.D.N.H.1993).
      16
           Id. at 455.

                                             5
unfeasible after confirmation.            The court observed that scheming

litigants might artificially inflate their bids in an attempt to

escalate bidding, knowing that, at a minimum, their fees for the

inflated, unrealistic bid would be reimbursed.                In essence, the

court apparently was impressed that the risk of noncompensation for

administrative fees would provide a desirable check on fees and

expenses and would keep bidding honest.

        We find this well-intentioned attempt at equity to be at odds

with     the       clear   statutory   language.    Section     503    makes   two

references to the timing of requests for administrative fees.

First, section 503(a) states that "[a]n entity may timely file a

request for payment of an administrative expense, or may tardily

file such request if permitted by the court for cause."                        This

provision appears intentionally vague and broad.                      Legislative

history reveals that Congress intended to leave the setting of

specific filing deadlines to the Rules of Bankruptcy Procedure.17

The Rules of Bankruptcy Procedure, in turn, largely defer that duty

to the bankruptcy judges.18            As a result, bankruptcy judges have,

for         some     time,    been     accorded    discretion     in     setting

       17
      See S.Rep. No. 989, 95th Cong., 2d Sess. 66 (1978) (stating
that "the Rules of Bankruptcy Procedure will specify the time, the
form, and the method of such a filing"), reprinted in 1978
U.S.C.C.A.N. 5787, 5852; H.R.Rep. No. 595, 95th Cong., 1st Sess.
355 (1977) (same), reprinted in 1978 U.S.C.C.A.N. 5963, 6311.
       18
      3 Collier on Bankruptcy ¶ 503.1, at 503-4 n. 2c (Lawrence P.
King ed., 15th ed. 1994) (noting that the Bankruptcy Reform Act of
1994 sets no time limit for filing administrative claims).

                                          6
administrative-claim bar-dates.19 In the present case that deadline

was 60 days after the effective date of the plan.

     The second reference to the timing of requests for fees is

found in     section   503(b)   which       provides,   "After   notice   and a

hearing, there shall be allowed, administrative expenses...." This

notice requirement does not mandate "advance warning" of intent to

file a claim for fees before plan confirmation processes begin.

Rather, "after notice" merely refers to sending notice of the

application and hearing on fees so that interested parties can

contest their reasonableness.               Succinctly stated, the section

503(b) notice requirement proscribes ex parte fee determinations—it

does not require preconfirmation warning of intent to seek fees and

expenses.

     In the present case, no one disputes that HFG requested

administrative fees and expenses well within the 60-day bar date

for such claims.       The Bankruptcy Code and Rules require nothing

more.     Further, nothing in the Bankruptcy Code and Rules suggested

to HFG that after it made a substantial contribution, its claim for

administrative fees and expenses would be barred by some implied

advance warning requirement.

     19
      Id. (noting that because nothing in the Bankruptcy Rules or
Code sets deadlines for filing administrative claims, bankruptcy
judges "may set such deadlines on a case by case basis").
Administrative expense claims are to be distinguished from other
claims against the estate for which a creditor must timely file a
proof of claim under 11 U.S.C. § 501. See NL Indus., Inc. v. GHR
Energy Corp., 940 F.2d 957 (5th Cir.1991) (holding that an
administrative expense claimant need not file a proof of claim
under section 501 to be entitled to reimbursement of expenses
incurred to benefit the debtor's estate), cert. denied, 502 U.S.
1032, 112 S.Ct. 873, 116 L.Ed.2d 778 (1992).

                                        7
Substantial Contribution.

            "[T]he policy aim of authorizing fee awards to creditors is

to promote meaningful creditor participation in the reorganization

process."20 Thus, a claimant is entitled to administrative fees and

expenses if these costs are incurred in making a substantial

contribution to a Chapter 9 or 11 case.                  Generally, services which

make        a    substantial    contribution     are    those   which    "foster   and

enhance,          rather   than    retard   or    interrupt      the    progress    of

reorganization."21             Beyond that general statement, however, the

concept of substantial contribution is not defined in this circuit.

Though legislative history is of little help in divining a precise

measure of substantial contribution, decisions from other circuits

appear           to   distinguish     between          creditors'      actions     that

"incidentally" benefit the estate and creditors' actions that

directly and demonstrably benefit the estate.22                     In essence, these

cases examine a creditor's motivation in expending the time and

fees at issue:          if a creditor is actively and exclusively pursuing

its own self interest, any benefits accruing to the debtor's estate

or other creditors are merely incidental benefits;                      these are not

       20
     In re Consolidated Bancshares, Inc., 785 F.2d 1249, 1253 (5th
Cir.1986) (internal quotation marks omitted) (citations omitted).

       21
            Id. (internal quotation marks omitted) (citations omitted).

            22
        See, e.g., Lebron v. Mechem Fin., Inc., 27 F.3d 937 (3d
Cir.1994); In re Lister, 846 F.2d 55, 57 (10th Cir.1988) (holding
that "[a]dministrative expenses ... are compensable under 11 U.S.C.
§ 503(b)(3)(D), if those expenses are incurred in efforts which
were intended to benefit, and which did directly benefit, the
bankruptcy estate").

                                            8
deemed substantial. DP relies heavily upon this theory in opposing

HFG's request for additional fees.          Indeed, HFG concedes that its

actions were motivated by economic self interest.

         Initially, we note that nothing in the Bankruptcy Code

requires a self-deprecating, altruistic intent as a prerequisite to

recovery of fees and expenses under section 503.            Rather, section

503 patently states that a creditor is entitled to actual and

necessary      expenses   "incurred   ...     in   making   a   substantial

contribution in a case under chapter 9 or              11."     Finding no

statutory definition and nothing in the entire statutory scheme or

legislative history to indicate a contrary intent, we abide by the

canon that words in a statute are to be given their "ordinary,

everyday" meaning.23      Thus, the phrase "substantial contribution"

in section 503 means a contribution that is "considerable in

amount, value or worth."24     The benefits, if any, conferred upon an

    23
      Crane v. Commissioner, 331 U.S. 1, 6, 67 S.Ct. 1047, 1050-51,
91 L.Ed. 1301 (1947).
         24
        Webster's Third New International Dictionary 2280 (4th
Ed.1976). Legislative history, albeit scant, also supports this
construction:

              The phrase "substantial contribution in the case" is
              derived from Bankruptcy Act §§ 242 and 243. It does not
              require a contribution that leads to confirmation of a
              plan, for in many cases, it will be a substantial
              contribution if the person involved uncovers facts that
              would lead to a denial of confirmation, such as fraud in
              connection with the case.

     H.R.Rep. No. 595, 95th Cong., 1st Sess. 355 (1977), reprinted
     in 1978 U.S.C.C.A.N. 5963, 6311. In the present case, HFG
     uncovered a fraudulent transfer, and its other actions led
     directly to the confirmation of a plan. HFG admits that these
     actions were motivated by self interest.        Certainly, if
     Congress intended to withhold reimbursement for administrative

                                      9
estate are not diminished by selfish or shrewd motivations.                          We

therefore hold that a creditor's motive in taking actions that

benefit the estate has little relevance in the determination

whether the creditor has incurred actual and necessary expenses in

making a substantial contribution to a case.

         The development of a more concrete standard of substantial

contribution is best left on a case-by-case basis.                     At a minimum,

however, the court should weigh the cost of the claimed fees and

expenses against the benefits conferred upon the estate which flow

directly from those actions. Benefits flowing to only a portion of

the estate or to limited classes of creditors are necessarily

diminished in weight.            Finally, to aid the district and appellate

courts    in    the    review    process,        bankruptcy   judges    should     make

specific and detailed findings on the substantial contribution

issue.

      In the present case, the bankruptcy court specifically found

that HFG made a substantial contribution in DP's Chapter 11 case,

stating that "HFG's participation in the case did benefit the

Estate    and    make      a   substantial       contribution   in    terms   of   (a)

discovery of the fraudulent conveyance potential litigation and its

benefit    going      to   the    secured    creditor;        (b)    termination     of

exclusivity;          and (c) causing the Debtor to change its plan."

These findings are supported by the evidence and were not clearly

erroneous.      HFG's participation in the confirmation fight resulted

     expenses under these circumstances, at least some indication
     of that intent would appear in the statute or its legislative
     history.

                                            10
in at least a $3,000,000 benefit to all creditors of the estate.

Determining Whether Claimed Expenses are Actual and Necessary, and
Whether Professional Fees are Reasonable

       Finally, claimants successfully complying with the foregoing

requirements will have to prove that claimed expenses were actual

and   necessary       and   that   any    fees   are   reasonable.      Section

503(b)(3)(D) provides that compensable administrative expenses

include "the actual, necessary expenses ... incurred by ... a

creditor ... in making a substantial contribution in a case under

chapter 9 or 11."25         This provision requires the bankruptcy judge

to scrutinize claimed expenses for waste and duplication to ensure

that expenses were indeed actual and necessary.             It also requires

the judge to distinguish between expenses incurred in making a

substantial contribution to the case and expenses lacking that

causal connection, the latter being noncompensable.              Necessarily,

the bankruptcy court enjoys broad discretion in making these

determinations.26

           A    closely-related    but   separate   provision   is   subsection

(b)(4), authorizes an administrative fee award for professional

services as follows:

      reasonable compensation for professional services rendered by
      an attorney or an accountant of an entity whose expense is
      allowable under paragraph 3 of this subsection, based on the
      time, the nature, the extent, and the value of such services,
      and the cost of comparable services other than in a case under
      this title, and reimbursement for actual, necessary expenses

      25
           11 U.S.C. § 503(b)(3)(D).
           26
        In re Lister;    see also In re Consolidated Bancshares
(holding that substantial contribution is a question of fact).

                                         11
     incurred by such attorney or accountant.27

This provision is expressly dependent upon a claimant qualifying

for an administrative expense award in subsection (3), which

requires that expenses, other than professional fees, be actual and

necessary. Whether Congress intended to impose different standards

by using the words "actual and necessary" in one provision and

"reasonable" in another is unclear.        The import of subsection (4),

however, is clear. Congress intended for the judge to evaluate the

listed factors in setting a reasonable fee.        Because all of these

factors are subsumed in the Johnson v. Georgia Highway Express28

attorney's fees analysis, Johnson and progeny govern an award of

fees in the present case.29        This determination, like the inquiry

in subsection (3), is a matter committed to the sound discretion of

the bankruptcy court.30

                                 Conclusion

          HFG filed its claim by an appropriate motion before the

administrative claim bar date.            It is entitled to actual and

necessary expenses incurred in making a substantial contribution to

DP's Chapter 11 reorganization, including reasonable professional

fees. We therefore VACATE the $12,500 fee award and REMAND for the

setting of a fair and reasonable fee herein.

     27
          11 U.S.C. § 503(b)(4).
     28
          488 F.2d 714 (5th Cir.1974).
     29
          In re Lawler, 807 F.2d 1207 (5th Cir.1987).
     30
          Id.;   In re Lister.

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