Hall Financial Group v. DP Partners Ltd Part, et a ( 1997 )

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.
12