Court Opinion

ID: 9859395
Source: CourtListenerOpinion
Date Created: 2023-09-24 21:25:37.350452+00
Date Added: 2024-06-11T10:46:03.103563
License: Public Domain

On Motion for Rehearing; Motion to Estimate Claim; Objections to Claim; and Application for Allowance of Administration Expense
Following entry of the foregoing memorandum opinion, Debtor filed its “Fourth Amendment and Supplement to Debtor’s First Amended Plan of Reorganization” (the “Fourth Modification”) and sought reconsideration based upon such modification of the court’s determination that the Plan was not confirmable pursuant to
*553Code § 1129(a)(ll). The central feature of the Fourth Modification is a capital infusion from Davis into Debtor19 of $400,000.20 Based (in part, at least) on indications from the court that the proposed capital infusion would resolve the court’s concerns respecting feasibility of the Plan,21 Sanchez withdrew his objection to confirmation of the Plan; Sanchez also filed his “Motion for Estimation and Allowance of Unsecured Claim of Mr. Esequiel Juan Sanchez, III, for Distribution Purposes” (the “Estimation Motion”), as a result of which Debtor and Sanchez agreed to a procedural order (the “Estimation Order*’) which the court entered on February 6, 2007. In addition to procedures established by the Estimation Order, pursuant to which the court was to determine the amount of Sanchez’s claim based on appeal (and, potentially, remand) of the Judgment, Debtor filed its “Debtor’s Objection to Amended Proof of Claim of Esequiel Sanchez III” (the “Claim Objection”), by which Debtor urged objections to Sanchez’s claim on various bases independent of its appeal of the Judgment. Finally, Sanchez filed “Esequiel Sanchez, Ill’s Application for Allowance and Payment of Administrative Expenses” (the “§ 503(b) Application”), pursuant to which Sanchez, under Code § 503(b), seeks payment of a part of his attorneys’ fees incurred in this case.
The court heard argument respecting the Estimation Motion and received evidence on the Claim Objection and the § 503(b) Application on April 17, 2007. Having determined that the Plan, as modified, should be confirmed, the court, by letter ruling, resolved the Estimation Motion and Claim Objection22 by allowing Sanchez’s claim in the amount of $811,070 (including $22,000 in prepetition attorneys’ fees).23 As directed in the Judgment, interest shall be calculated on that amount *554from January 20, 2006 to the date of the commencement of Debtor’s chapter 11 case.24
Turning next to the § 503(b) Application, Debtor presents numerous arguments why that application should be denied or substantially reduced. Several of these arguments turn on the necessity that Sanchez show he has made in “substantial contribution” in the case25: Debtor denies that the “contributions” by Sanchez were substantial or benefited anyone but Sanchez.
To begin with, Debtor argues that Sanchez acted as he did not for the benefit of creditors but merely in furtherance of his own claims. The trouble here is that Debt- or fails to distinguish between the case where the “benefit” conferred redounds only, or overwhelmingly, to the applying creditor (and only incidentally benefits other creditors or constituencies)26 and a more general benefit that is in the interests, to a greater or lesser degree, of all stakeholders in a debtor’s reorganization.
In the case at bar, Sanchez relies on, in broad terms, three types of contribution. First, there is, of course, Davis’s $400,000 commitment of capital to Debtor post-confirmation. Second, Sanchez points to other changes to the Plan (since its initial iteration) which either provide limitations on GEC’s post-confirmation conduct or require GEC to take affirmative action to protect the stream of payments to creditors. Finally, Sanchez argues he has contributed by providing the monitoring and investigative functions normally performed by a committee appointed under section 1102 of the Code.27
The court holds that any of these accomplishments, attributable to the efforts of a *555party in interest, will, absent other factors, amount to a “substantial contribution in a case.” See Code § 503(b)(3) (the prerequisite of which is adopted by Code § 503(b)(4)). It is self-evident that a significant increase in Debtor’s available capital (here $400,000 in letters of credit) is a substantial improvement (and, hence, contribution) in the Plan which, through enhancing feasibility, makes return to all creditors more certain.
Likewise, if the protections added to the Plan benefit Sanchez, they also serve the interests of creditors generally. Because the limitations placed on GEC, Davis and others make it more likely that the Plan will be carried out, the benefit from the limitations will be realized by all who look to the Plan for satisfaction of their claims.
As to Sanchez’s contribution as a surrogate creditors’ committee, Debtor argues that Sanchez was not a statutory fiduciary, the oversight performed should have been left to the United States trustee (the “UST’) or the examiner and none of the irregularities cited by Sanchez led to any recovery for the benefit of creditors. In the absence of a creditors’ committee, a chapter 11 case lacks the congressionally intended governor that would police a debtor’s performance of its fiduciary obligations — yet the importance to the court and the system of monitoring and ensuring the performance by the debtor in possession of its fiduciary duties is no less in a case in which creditors do not organize a formal committee. Looking to the UST to fulfill that role is unreasonable. With limited resources and a great many cases to monitor, the UST is in no position to substitute for a creditors’ committee. As in the case at bar, the UST at most can respond to concerns identified in the first instance by interested parties like Sanchez.
As to the examiner, first, there would have been no examiner but for Sanchez. Second, the examiner’s duties and authority were severely constricted by court order. Finally, the examiner’s two reports gave substantial support to the fears expressed by Sanchez.
As for Debtor’s contention that no recoveries resulted from Sanchez’s policing efforts,28 section 503(b)(4), when incorporating section 503(b)(3)(D), unlike section 503(b)(3)(B), does not require a recovery “for the benefit of the estate [of] any property” (§ 503(b)(3)(B)) to justify compensation. Rather, section 503(b)(4), turning on section 503(b)(3)(D), requires a showing of “a substantial contribution in a case” (§ 503(b)(3)(D)). In the case at bar, identification of potentially voidable transfers to insiders may well have played a role in Debtor’s decision to propose a plan providing for 100% satisfaction of all claims- — and the possibility that failure to confirm a plan would result in pursuit of recovery of such transfers may have helped persuade Davis to enhance GEC’s post-confirmation capital and so make the Plan feasible and confirmable. Moreover, because the Plan provides 100% recovery to creditors, pursuit of voidable transfers is, at best, likely to be uneconomic; at worst, complaints to recover voidable transfers in such a case might be subject to dismissal.29 In any *556event, the benefit of any recoveries would inure to Debtor, not (directly at least) its creditors. Finally, potential causes of action based on voidable transfers will be preserved pending Debtor’s performance of the Plan thanks to Sanchez.
In sum, for all these reasons Sanchez’s policing of Debtor qualifies as a substantial contribution.
Debtor, however, argues that Sanchez’s contributions are not compensable because they fail to meet the standards set by the Court of Appeals in In re DP Partners, Ltd., 106 F.3d 667 (5th Cir.1997). Debtor argues that Sanchez has not shown a causal connection between his counsel’s work and any benefit. But as set out above, the court finds that Sanchez’s efforts at least contributed to (1) Debtors’ proposal of a 100% plan; (2) various protections and a capital infusion that make the Plan feasible; and (3) Debtor’s attendance to its fiduciary duties. Debtor seems to be of the view that the causal connection of counsel’s work to any benefit must be facially apparent, proximate and exclusive. The court does not find section 503(b) to be so restrictive, but even by that standard, many changes in the Plan can be traced to specific objections made by Sanchez.30
It is also unlikely the court would have identified the Plan’s infeasibility without the adversarial conduct of the confirmation hearing; thus, it was Sanchez’s efforts that proximately caused Davis to put up additional capital, making Debtor’s successful performance of the Plan much more likely. Finally, the court has been concerned throughout this case that Debtor lacked any great enthusiasm for the strictures imposed on its operations by chapter 11. For the court to insist on evidence directly proving that Sanchez caused Debtor to abide more carefully by the rules would essentially require Sanchez to prove a negative. Rather, the court is prepared to infer from the record before it that Debt- or’s conduct was better for Sanchez’s monitoring.
Debtor’s contention that Sanchez’s efforts did not provide general benefit is similarly without merit. In this regard Debtor’s argument that the court should consider acceptance of the Plan by all other creditors as proof that Sanchez acted only for himself is particularly misguided. That other creditors were apparently will*557ing to run a significant risk that the Plan would prove infeasible does not mean those creditors were not benefited by changes to the Plan that greatly reduced that risk.
Debtor next argues that Sanchez has failed to show that the benefits he has brought to the case are worth the charges he now seeks to impose on Debtor’s estate. See In re DP Partners, Ltd., 106 F.3d 667 (5th Cir.1997). The court does not agree. The product of this case is a feasible plan that will provide a 100% recovery to all creditors over a realistic time period. Sanchez played an important role in bringing about this result.31 The amount sought by Sanchez — $194,644—is reasonable,32 especially in light of the costs of Debtor’s counsel (in excess of $500,000). Further, total debt in this case exceeds $2,000,000; $194,644 is not an unreasonable charge for the role Sanchez played in ensuring that debt’s full satisfaction.
Debtor further argues that much of the time of Sanchez’s attorneys was spent on “routine” tasks. Routine work, Debtor maintains, citing In re American Plumbing & Mechanical, Inc., 327 B.R. 273 (Bankr.W.D.Tex.2005), should not be compensated under section 503(b)(4). However, what is “routine” legal work varies depending on the representation: “routine” work for a lawyer representing an unsecured creditor like Sanchez would include filing a proof of claim and resisting any objection to that claim. The services for which Sanchez seeks payment might have been “routine” if performed by counsel to a committee, trustee or indenture trustee. Undertaken by attorneys representing a single unsecured creditor, counsel’s work was not routine.
For all the foregoing reasons, the § 503(b) Application should be granted. However, a review of the time records attached to the application persuades the court that the amount awarded Sanchez (or, as he has not paid them, more aptly his counsel; see Mirant, 354 B.R. at 140; In re Western Asbestos Co., 318 B.R. 527, 580 (Bankr.N.D.Cal.2004)) should be reduced.
First, some categories of charges do not represent work done in aid of any of Sanchez’s substantial contributions.33 Time spent on Sanchez’s proof of claim and the claim estimation process benefited only Sanchez. Likewise, correspondence between counsel and Sanchez was not helpful to creditors generally and brought to the estate — and the case — no value or advantage. Finally, review of other claims and analysis of the Plan’s classification scheme was work that benefited only Sanchez.
Second, some of the charges included in the § 503(b) Application appear to be incorrectly calculated. For example, 2.3 hours billed by Clay Taylor on September 27, 2006, are charged at $963.50, or a rate of $418.91 per hour. The next day (September 28) 4.1 hours are billed for Mr. *558Taylor at a charge of (again) $963.50 — or $235 per hour.
The court has therefore recalculated the amount to be paid by Debtor by reason of the § 503(b) Application by, first, deducting time spent on noncompensable categories and, second, multiplying the total hours for each attorney by that attorney’s correct hourly rate.34 The § 503(b) Application shall be granted to the extent of the resulting, lodestar amount: $172,900.50.35
The court’s rulings as set out herein will be embodied in a separate order. However, the court understands there is no longer any need to maintain its original memorandum opinion under seal. The clerk of the court is accordingly ORDERED to unseal the court’s original opinion as well as to docket and file that opinion as herein modified.

. The modification also provides certain other protections for Sanchez and (arguably) other creditors.

. Davis will make the infusion by one or more irrevocable letters of credit.

. The court’s concerns respecting sections 1129(a)(1) and 1129(b)(2)(B) of the Code were tied to feasibility and so are also resolved by the Fourth Modification. The court thus can now find that the Plan (1) meets all tests under sections 1129(a) except that of section 1129(a)(8); and, (2) with respect to Sanchez (the sole dissenting class), satisfies section 1129(b)(1).

. Pursuant to the Estimation Order, the parties also asked that the court resolve their dispute respecting Davis's liability on the Judgment. The court (as reflected in its letter ruling) determined that there is no reason to revise any term of the Judgment respecting Davis.

. With the acquiescence of the parties, except as discussed below, the court determined that it would be counterproductive to provide its reasoning respecting disposition of the Estimation Motion or the Claim Objection. However, with regard to the contention in the Claim Objection that Sanchez’s claim should benefit the creditors in his bankruptcy, as the court noted during the April 17 hearing, Sanchez’s chapter 7 trustee is expected to reopen his case (over which this court has jurisdiction) pursuant to Code § 350 and then ensure that creditors (1) are noticed, as appropriate, pursuant to Fed. R. Bankr.P. 2002(f) and (h) and 3002(c)(5); and (2) receive distributions to the extent provided by Code § 726(a)(1)-(5).
The court does deem it appropriate to address one of the other grounds for the Claim Objection. Debtor contends that a claim it asserted in a suit by it against Sanchez and certain of his affiliates should be offset against Sanchez's claim. The claim asserted by Debtor, however, should have been pleaded as a counterclaim in the suit in which Sanchez obtained the Judgment (Sanchez was severed from the suit filed by GEC after he sought relief in this court). There is no question but that Debtor’s claims against Sanchez arise from the same facts as those underpinning the Judgment and that, therefore, Debtor’s potential counterclaims are compulsory. See Tex.R. Civ. P. 92(a); Jack H. Brown & Co., Inc. v. Northwest Sign Co., Inc., 718 S.W.2d 397, 398 (Tex.App.—Dallas 1986, writ refused n.r.e.) (and cases cited therein). Even if San*554chez's bankruptcy interposed a stay that inhibited their assertion in the suit leading to the Judgment, relief from the stay could have been sought. Because the allegedly offsetting claims could and should have been urged in the state court, they are now precluded. See, e.g., Jones v. First Nat. Bank of Anson, 846 S.W.2d 107 (Tex.App.—Eastland 1992).

. Debtor asserts (and Sanchez does not contest) that Sanchez's claim should not bear interest from the date of case commencement to the effective date of the Plan.

. This court has recently had occasion to address the law under Code § 503(b)(4). See In re Mirant Corp., 354 B.R. 113, 131-42 (Bankr.N.D.Tex.2006). In that case the court cited the following factors which should be considered in evaluating whether a party has made a substantial contribution: (i) whether the applying party conferred a benefit on the estate, (ii) whether the services involved in the contribution were undertaken just for the applying creditor or for the benefit of all parties in the case, (iii) whether the applying party would have done the same thing absent the expectation of compensation from the bankruptcy estate, (iv) whether the benefit conferred exceeds the cost the party seeks to assess against the estate, (v) whether the services of the applying party are duplicative of those that were undertaken by statutory fiduciaries, (vi) whether the party profited from post-petition acquisition of claims, and (vii) whether the party engaged in improper conduct in the case. Id. Of these the present case does not present the factor related to the party's post-petition acquisition of claims. As to the other prerequisites of section 503(b)(4) (besides proof of a "substantial contribution”), the court finds Sanchez’s claim meets the requirements of being (1) for attorneys’ services; (2) reasonable compensation (subject to reductions in amount detailed below); and (3) allowable pursuant to Code § 330. Thus, the court need principally address the question of substantial contribution.

. In re Lister, 846 F.2d 55 (10th Cir.1988); In re Big Rivers Elec. Corp., 233 B.R. 739 (W.D.Ky.1998).

. There was no committee in this case; thus the "duplication” present in Mirant (354 B.R. at 137) does not weigh against Sanchez here. Indeed, as discussed below, Sanchez's performance of functions that in another case might be duplicative weighs here, in the absence of any actual or potential duplication, in favor of granting the § 503(b) Application.

. Although Debtor insists any reversal of any transfers during the case (e.g., return of money paid to Nordic and so reflected in Debtor’s monthly operating reports) was not brought about by their identification by Sanchez, the court does not consider that contention any better proven than its converse.

. Clearly, there is a question whether a preference may be recovered if creditors are satisfied in full. See 11 U.S.C. § 547(b)(5). While the trend in fraudulent transfer law favors permitting recovery in cases where creditors receive 100% satisfaction under a plan (see, e.g., Acequia, Inc. v. Clinton (In re Acequia, Inc.), 34 F.3d 800, 809-10 (9th Cir.1994); *556Stalnaker v. DLC, Ltd. (In re DLC, Ltd.), 295 B.R. 593, 605 (8th Cir. BAP 2003), aff'd 376 F.3d 819 (8th Cir.2004)), the contrary view continues to receive support (see, e.g., Gray Carlson, Bankruptcy's Organizing Principle, 26 Fla. St. U.L.Rev. 549, 580-83 (1990)). Moreover, the problem of proving a transfer to be fraudulent in a case of marginal insolvency, as presumably would exist in any chapter 11 where creditors receive full recovery, militates against pursuing such actions, especially where, as here, recovery would only indirectly benefit creditors. Finally, the possibility that the defendant in a fraudulent transfer action will have a claim back against the estate (11 U.S.C. § 502(d); Fed. R. Bankr.P. 3002(c)(3)) discourages prosecution of such actions in cases where a recovery of a transfer might lead only to a claim in like amount.

. Paragraph ten of the Fourth Modification responds to Sanchez by preserving causes of action against the officers and directors or any insiders of the Debtor. Moreover, Sanchez's objections led to earlier changes in the Plan including: (1) monies taken from GEC for the benefit of Davis will be contributed back to the Debtor; (2) Debtor’s ability to export business opportunities to affiliates is now limited; (3) the amount of compensation to Davis from the Debtor during the Plan payout period is now limited; (4) there will be borrowing controls on the Debtor during the payout period; and (5) Debtor must now provide regular accounting to outside parties. Also, Sanchez insisted on stronger default provisions in the Plan and increased jurisdictional oversight by this court during the payout period.

.It is unlikely that a plan could have been confirmed if Sanchez did not receive 100% satisfaction. The absolute priority rule of Code § 1129(b)(2)(B)(ii) would ordinarily bar confirmation of such a plan that left equity in place over Sanchez's dissent. While Bank of America Nat. Trust and Sav. Ass’n v. 203 North LaSalle Street P’ship, 526 U.S. 434, 119 S.Ct. 1411, 143 L.Ed.2d 607 (1999) leaves open the possibility of retention of equity in exchange for new value, that route was fraught with risk, especially given Sanchez’s repeated expressions of interest in proposing his own plan. As Debtor had to satisfy Sanchez’s claim in full, lest it risk facing the issue of unfair discrimination (section 1129(b)(1)), it had to satisfy all unsecured creditors in full.

. As discussed below, the fees sought by Sanchez must be reduced somewhat.

. The court appreciates the efforts of Sanchez’s counsel to cull the § 503(b) Application. It means no criticism by further reducing the time included in the application.

. Those rates, are as follows: For Michael McConnell, $350/hour from the Petition Date through August 31, 2006, and $365/hour from September 1, 2006 through the date of this Memorandum Opinion; for Clay Taylor, $ 185/hour from the Petition Date through March 31, 2006, $225/hour from April 1, 2006 through August 31, 2006, and $235/hour from September 1, 2006 through the date of this Memorandum Opinion; for paraprofessionals, $ 125/hour and $ 140/hour; and a law clerk was billed at $150/hour. C.W. "Dub” Stocker, III, billed at a rate of $375/hour.

. In reviewing the time entries submitted by Kelly Hart Hallman LLP {"KHH”) and Whitaker, Chalk, Swindle & Sawyer ("WCSS”), and talcing into consideration the factors identified by the court above, the court determines that KHH should be awarded $113,200.50 and WCSS should be awarded $59,700 in connection with their respective § 503(b) Applications.