GREGORY M. SLEET, UNITED STATES DISTRICT JUDGE.
Presently before the court is the appeal (D.I. 1) of Leidos Engineering, LLC ("Leidos") from a Bankruptcy Court order (B.D.I. 793)
The court writes solely for the parties and will, therefore, only briefly recite the facts essential to the disposition. On November 9, 2014, KiOR, Inc. ("Debtor") filed a voluntary petition seeking relief under Chapter 11 of the Bankruptcy Code. Leidos was listed among the Debtor's twenty largest unsecured creditors with a scheduled claim of $121,893 on account of trade debt. (See B.D.I. 1 at 11.) Despite the efforts of the Office of the United States Trustee ("UST") to form a statutory committee of unsecured creditors in the Chapter 11 case, only two creditors (including Leidos) applied to serve on the committee. The UST determined that there were insufficient creditors to form an official creditors' committee, and none was appointed. (See B.D.I. 137.) The Debtor's proposed timeline contemplated an auction and sale process and emergence from the Chapter 11 case in less than four months. (See B.D.I. 2 at 14.) Consistent with this timeline, the Debtor filed its proposed plan of reorganization on December 15, 2014, which was amended and supplemented several times. (See B.D.I. 149, 219, 470, 564.)
During the Chapter 11 case, Leidos filed two objections. Three parties, including Leidos, filed objections to the Debtor's disclosure statement. (B.D.I. 244, 246, 316.) Leidos objected on the basis that the disclosure statement did not include adequate information to identify which creditors would qualify for more favorable
On August 14, 2015, Leidos filed its Application seeking allowance and payment of an administrative expense claim in the amount of $49,458.60 for professional fees and costs incurred in the Chapter 11 case pursuant to 503(b)(3)(D) and (b)(4). (See B.D.I. 755.) Section 503(b)(3) of the Bankruptcy Code provides that certain administrative expenses shall be allowed after notice and a hearing. 11 U.S.C. § 503(b). Administrative expenses may include expenses incurred by "a creditor ... in making a substantial contribution in a case under chapter ... 11 of this title." 11 U.S.C. § 503(b)(3)(D). Section 503(b)(4) provides for a related award of attorney's fees. 11 U.S.C. § 503(b)(4). The phrase "substantial contribution" is not defined in the Bankruptcy Code, but the appropriate inquiry under Third Circuit law is "whether the efforts of the applicant resulted in an actual and demonstrable benefit to the debtor's estate and the creditors." See Lebron v. Mechem Fin., Inc., 27 F.3d 937, 944 (3d Cir. 1994).
Leidos submitted no evidence in support of the Application other than its attorneys' time records. (B.D.I. 755.) Leidos argued in the Application that, in the absence of a statutory creditors' committee, it had served as the "de facto creditors' committee," as the "most active trade creditor" in the case, and provided "meaningful participation" by monitoring the case and filing its two objections, which "benefitted all trade and unsecured creditors." (See B.D.I. 755 at 1, 6.) Leidos argued that its objections had resulted in the disclosure of critical information and increased funding for the liquidating trust. (See id. at 7.)
Both the Debtor and the UST ("Appellees") objected to the Application on the basis of Leidos' limited involvement in the Chapter 11 case and a lack of evidence that Leidos made a substantial contribution. (See B.D.I. 774, 775.) According to Appellees, Leidos was merely an. interested creditor, did not take on any significant role in the case, filed only two limited objections, and did not meet its burden of establishing by a preponderance of the evidence that its limited actions had resulted in an actual and demonstrable benefit to the Debtor's estate and creditors. (See B.D.I. 774 at 1-2 (quoting Lebron, 27 F.3d at 944); B.D.I. 775 at 7-8.) While Leidos'
In reply, Leidos attached a two-paragraph declaration from its general counsel stating that Leidos "would not have taken actions it took in this case for which it seeks compensation (i) if an official committee of unsecured creditors had been appointed in this case and (ii) absent an expectation of reimbursement from the estate pursuant to [section 503(b)(3)(D)]." (See B.D.I. 790-1 at 1, ¶ 2.) Leidos also attached the transcript of an unreported Delaware Bankruptcy Court bench ruling, In re Hospitality Liquidating I, LLC, No. 13-12740 (BLS) (Bankr. D. Del. Feb. 24, 2014) (the "Bench Ruling"), in which a different judge granted a substantial contribution award in a case lacking a creditors' committee on the basis that the applicant's efforts in that case had been "functionally indistinguishable" from what would be expected of an official creditors' committee. (See B.D.I. 790-2.)
On October 16, 2015, the Bankruptcy Court held a hearing and oral argument on the Application and denied it. (See B.D.I. 796, 10/16/2015 Hr'g. Tr. at 16:15-20.) Leidos presented no witnesses testimony in support of the Application, and the Bankruptcy Court accorded zero weight to the declaration, determining that it was conclusory and failed to provide the facts underlying the conclusions it contained. (See id. at 16:17-20.) The Bankruptcy Court determined that the facts of the case did not bear out the position that Leidos had somehow acted as a committee or pseudo-committee in the case, and that Leidos' "honest recitation" of the actions it had undertaken did not support its position either. (See id. at 16:21-24; 17:6-11.) Rather, the Bankruptcy Court found that Leidos "focused on very narrow issues designed to protect [its] interests, which is fine, but that's not something the estate has to pay for." (See id. at 17:9-11.) The Bankruptcy Court found that Leidos had filed "two limited objections" that "were of little use to development of the case." (See id. at 17:12-13.) The Bankruptcy Court noted that Leidos' plan objections had been overruled except for its objection to the funding of the liquidating trust, and that the liquidating trustee's request for additional funds was the catalyst for the increased funding. (See id. at 17:12-19.) The Bankruptcy Court concluded that:
(Id. at 17:23-18:3.) Based on the lack of evidence presented by Leidos, and having taken judicial notice of the Chapter 11 proceedings, the Bankruptcy Court determined that Leidos' efforts did not rise to the standard that would support a finding of substantial contribution. (See id. at 16:15-17 (noting lack of evidence in support of the Application was "fundamental flaw"); 18:6-12 (denying relief.)) On October 16, 2015, the Bankruptcy Court entered the Order denying the Application "for the reasons set forth on the record at the [h]earing." (B.D.I. 793.) On October 30, 2015, Leidos filed a timely notice of appeal
On appeal, Leidos argues that the Bankruptcy Court erred in denying the Application because: (1) Leidos' activities resulted in a substantial contribution to the Chapter 11 case; (2) the case lacked a creditors' committee, and Leidos' actions were "the functional equivalent of actions that would be expected of an official [creditors' committee];" (3) Leidos' actions "provided tangible benefits to the case and creditors;" (4) Leidos' actions were reasonably tailored to the circumstances of the case; and (5) the Debtor's professional fees totaled approximately $10 million, 0.5% percent of Leidos' total request, while no other creditors' professional fees were paid by the estate. (D.I. 12 at 2-3.) Leidos further contends that the Bankruptcy Court's denial of the Application in a case where no creditors' committee was appointed is a "case of first impression," and the appeal will resolve "conflicting results" from the Bankruptcy Court allegedly evidenced by the Bench Ruling cited extensively in Leidos' pleadings. (See id. at 7.)
Appellees argue that denial of the Application was proper, as Leidos' participation in the case was limited and inconsequential; Leidos failed to present any evidence of substantial contribution; Leidos failed to establish a causal connection between any of its actions and a benefit to the estate or creditors; and Leidos failed offer any evidence overcoming the presumption that it was acting primarily in its own self-interest. (D.I. 13 at 4; D.I. 14 at 2.) Appellees further argue that the fact that no creditors' committee was appointed in the case has no relevance, as the applicant bears the same burden of proof, and section 503(b)(3)(D) contains no language suggesting any difference in its application based on whether a committee has been appointed. (See D.I. 13 at 4-5, 16-18; D.I. 14 at 3, 15-16.) According to Appellees, the Bankruptcy Court did not err by not following the Bench Ruling issued by another judge, which decision was unreported, not precedential, and factually distinguishable from this case. (See D.I. 13 at 18; D.I. 14 at 18-19.) Appellees further argue that the amount of compensation received by the Debtor's professionals had no bearing on whether Leidos carried its evidentiary burden to justify a substantial contribution award. (D.I. 13 at 19-20; D.I. 14 at 14 n.4.)
The court has appellate jurisdiction over all final orders and judgments from the Bankruptcy Court. See 28 U.S.C. § 158(a)(1). This court reviews a Bankruptcy Court's findings of fact for clear error and its conclusions of law de novo. Am. Flint Glass Workers Union v. Anchor Resolution Corp., 197 F.3d 76, 80 (3d Cir. 1999). In the context of this appeal, the Third Circuit has held that "[w]hether a creditor has made a substantial contribution within the meaning of section 503(b)(3)(D) is a question of fact, `and it is the bankruptcy court that is in the best position to perform the necessary fact finding task.'" In re Tropicana Entm't LLC, 498 Fed.Appx. 150, 152 (3d Cir. 2012) (quoting Lebron, 27 F.3d at 946). A court's factual finding is clearly erroneous only if it "either is completely devoid of minimum evidentiary support displaying some hue of credibility or bears no rational relationship to the supportive evidentiary data." Fellheimer, Eichen & Braverman, P.C. v. Charter Techs., Inc., 57 F.3d 1215, 1223 (3d Cir. 1995) (internal quotation marks omitted). When there are two permissible views of the evidence, the [Bankruptcy Court's] choice between them cannot be
Central to each of Leidos' arguments on appeal is the fact that an official committee of unsecured creditors was not appointed in the Chapter 11 case, and that the Bankruptcy Court failed to give proper consideration to this fact. However, as Appellees point out that the fact that a committee was not appointed in this Chapter 11 case, while unfortunate, is hardly a rare occurrence. (See D.I. 13 at 16-17 (citing statistical analyses concluding that in most Chapter 11 cases no official committee is appointed due to insufficient creditor interest.)) Regardless of whether a creditors' committee is appointed in a Chapter 11 case, a party seeking a substantial contribution award is required to meet its burden of proof with respect to its administrative expense claim. The statute requires a "substantial contribution" to the estate, and under Third Circuit law, the applicant must show an actual and demonstrable benefit to the debtor's estate and the creditors. See Lebron, 27 F.3d at 944. Here, the Bankruptcy Court determined Leidos failed to meet its burden of proof, and Leidos has cited no authority that the absence of statutory creditors' committee triggers a lesser burden of proof for administrative expense claimants. Leidos' arguments fail for the reasons set forth below.
Administrative expenses may include expenses incurred by "a creditor ... in making a substantial contribution in a case under chapter ... 11 of this title." 11 U.S.C. § 503(b)(3)(D). Section 503(b)(4) provides for a related award of attorney's fees. 11 U.S.C. § 503(b)(4). Section 503(b)(3)(D) has two purposes: (1) encouraging meaningful creditor participation in the reorganization process, and (2) minimizing fees and administrative expenses so as to preserve as much of the estate as possible for creditors. See Lebron, 27 F.3d at 944. As with all of the Bankruptcy Code's priority statutes, section 503(b)(3) is to be narrowly construed so that administrative expenses will be held to a minimum. See In re Worldwide Direct, 334 B.R. 112, 122 (Bankr. D. Del. 2005) (citing In re Granite Partners, L.P., 213 B.R. 440, 445 (Bankr. S.D.N.Y. 1997)).
Leidos is entitled to administrative status for related fees and expenses only if those activities made a "substantial contribution" to the Chapter 11 case. See 11 U.S.C. § 503(b)(3)(D). The phrase "substantial contribution" is not defined in the Bankruptcy Code, but the parties agree that the Third Circuit's decision in Lebron is binding and sets forth the correct inquiry. (See B.D.I. 796, 10/16/15 Hr'g. Tr. at 9:24-25.) The appropriate inquiry under Third Circuit law is "whether the efforts of the applicant resulted in an actual and demonstrable benefit to the debtor's estate and the creditors." Lebron, 27 F.3d at 944; see also, In re Consol. Bancshares, Inc., 785 F.2d 1249, 1253 (5th cir. 1986) ("Services which substantially contribute to a case are those which foster and enhance... the progress of reorganization.") (internal quotations omitted).
"The substantial contribution test is applied in hindsight, and scrutinizes the actual benefit to the case. "Accordingly, the applicant must show a `causal connection' between the service and the contribution." Granite Partners, 213 B.R. at 447. Finally, as the party seeking reimbursement, it was Leidos had the burden to prove that it was entitled to a substantial
As the Bankruptcy Court recently observed, while the phrase "substantial contribution" does not lend itself to a set of exacting criteria, "a well-developed body of case law teaches that the sort of contribution that reaches the substantial threshold is exceedingly narrow." In re RS Legacy Corp., 2016 WL 1084400 at *4 (Bankr. D. Del. Mar. 17, 2016). For example, courts have held that:
RS Legacy, 2016 WL 1084400 at *4. See also In re Summit Metals, 379 B.R. 40, 52 (Bankr. D. Del. 2007) (denying application where there was no evidence applicant's efforts increased the assets of the case or prevented them from diminishing). Thus, a substantial contribution award "is reserved for those rare and extraordinary circumstances when the creditor's involvement truly enhances the administration of the estate." See RS Legacy, 2016 WL 1084400 at *3 (quoting In re Dana Corp., 390 B.R. 100, 108 (Bankr. S.D.N.Y. 2008)); see also Columbia Gas, 224 B.R. at 548 (actions must be "unusual" or extraordinary" to justify substantial contribution award). To meet this heavy burden, "[c]orroborating testimony by a disinterested party attesting to a claimant's instrumental acts has proven to be a decisive factor in awarding compensation to activities which otherwise might not constitute a `substantial contribution.'" See In re Buckhead Am. Corp., 161 B.R. 11, 15 (Bankr. D. Del. 1993); Worldwide Direct, 334 B.R. at 123.
According to Leidos' pleadings and the time records submitted in support of its Application, the only actions undertaken were the monitoring of the Chapter 11 case and the filing of its two objections. (See B.D.I. 755.) Despite the evidentiary burden Leidos was required to meet, no other evidence was submitted in support of the Application. (See id.) Leidos offered no corroborating testimony from a disinterested party and did not claim to have undertaken "unusual" or "extraordinary" actions that typically provide the basis for an approved substantial contribution application.
The court agrees with Appellees. Even extensive participation in a Chapter 11 case, without more, is not a sufficient basis for 503(b) status. See Buckhead, 161 B.R. at 15. Rather, Leidos was required show an actual and demonstrable benefit to the debtor's estate and the creditors. See Lebron, 27 F.3d at 944. In absence of any other evidence, Leidos' best argument is that its plan objection led to an increase in initial funding for the liquidating trust. (See D.I. 12 at 16-17.) However, even if this could suffice to support some portion of Leidos' request, Leidos was required to "show a causal connection between the service and the contribution." Granite Partners, 213 B.R. at 447 (citation omitted). Here, Leidos has offered no corroborating evidence that its plan objection led to the funding increase, only conclusory statements to that effect, and it is insufficient to "reason[ ] from sequence to consequence, assuming a causal connection simply because one event follows another[, as that] is speculation not proof." See id. at 452. Moreover, Appellees attributed the funding increase to a request from the proposed liquidating trustee, and the Bankruptcy Court agreed with Appellees. (See B.D.I. 796, 10/16/15 Hr'g. Tr. at 17:14-22.) Given the dearth of evidence presented on the issue, the court cannot conclude that the Bankruptcy Court clearly erred in finding Leidos failed to carry its burden of proof in establishing that it made a substantial contribution or provided any tangible benefits to the case and creditors.
The court finds no error in the Bankruptcy Court's conclusion that Leidos failed to rebut the presumption that its actions were undertaken in its own self-interest. The Third Circuit has explained that "substantial contribution should be
Appellees argue that the Leidos' monitoring the case and filing of the objections are efforts that clearly would have undertaken absent an expectation of reimbursement from the estate, and that Leidos offered no evidence that its actions were designed to benefit other creditors. (See D.I. 13 at 15.) Appellees argue that time records demonstrate that Leidos' attorneys "simply monitored the case in the ordinary course of representing its interests, and acted in a few discrete matters of special interest to Leidos" — the kinds of actions typically taken by creditors to protect their own interests, even when an official unsecured creditors' committee has been appointed. (See id.) Conversely, Leidos argues that the existence of self-interest does not, in and of itself, preclude reimbursement. (See D.I. 12 at 14.)
Leidos is correct that the existence of self-interest does not bar recovery. As the Third Circuit has noted, most activities of an interested party that contribute to the estate will also, of course, benefit that party to some degree. See Lebron, 27 F.3d at 944. Nevertheless, the purpose of section 503(b)(3)(D) is to encourage activities by creditors that will benefit the estate as a whole. See Columbia Gas, 224 B.R. at 548. "Creditors are presumed to be acting in their own interests until they satisfy the court that their efforts have transcended self-protection." See Columbia Gas, 224 B.R. at 548 (quoting Lebron, 27 F.3d at 944). Because Leidos is presumed to be acting in its own self-interest, it was required to introduce "something more than self-serving statement regarding its involvement in the case" in order to carry its burden of demonstrating that its services provided a substantial contribution to the estate. Buckhead, 161 B.R. at 15 (internal citations omitted).
Leidos offered no evidence that its actions were undertaken on behalf of general unsecured creditors or that it intended its actions to benefit others. Leidos merely argues that since no official committee was appointed, it served as de facto creditors' committee and acted on behalf of general unsecured creditors as the Debtor's "most active trade creditor." (D.I. 12 at 15.) This conclusory statement is insufficient to rebut the presumption. Nor do the time records submitted support Leidos' argument. As Appellees point out, the time records reflect no consultation with other trade creditors and no attempts to negotiate with the Debtor regarding treatment of general unsecured claims. (See D.I. 13 at 15.) Beyond this, Leidos offered only the declaration by its general counsel that it would not have undertaken these actions if an official committee had been appointed and without an expectation of reimbursement from the estate. (See B.D.I. 790-1.) As the Bankruptcy Court noted, the declaration offers a mere conclusion and no facts supporting the conclusion. (See B.D.I. 796, 10/16/15 Hr'g. Tr. at 16:17-20.)
Based on the evidence available, it appears Leidos' limited activities in this
Leidos argues the Bankruptcy Court erred in denying the Application because the case lacked a creditors' committee, and Leidos' actions were "the functional equivalent of actions that would be expected of an official [creditors' committee]." (See D.I. 12 at 2-3.) Leidos argues that an official creditors' committee is appointed in most cases, and the Bankruptcy Court erred by "failing to adequately account for the structural deficiency created by the lack of a creditors' committee." (See id. at 12.) Leidos contends that this appeal presents "a case of first impression" because "there are few cases discussing" application of section 503(b)(3) where an official committee of unsecured creditors was not appointed, and this appeal will resolve "conflicting results" on the issue among the bankruptcy judges in this district. (See id. at 7 (referring to the Bench Ruling).) While conceding that the Bankruptcy Court was not bound by the Bench Ruling (see id. at 10), Leidos appears to argue that the Bankruptcy Court erred as a matter of law "in its application of the section 503(b)(3) policies and standards" examined in the Bench Ruling. (See id. at 12.)
Conversely, Appellees argue that the absence of a creditors' committee has no relevance to a determination of whether Leidos carried its burden of proof under Lebron. (See D.I. 13 at 16-18; D.I. 14 at 16.) As the Bench Ruling cited repeatedly by Leidos is not binding, and is factually distinguishable from this case, Appellees argue that the Bankruptcy Court could not have erred as a matter of law in failing to reach the same conclusion. Appellees point out that the fact that a committee was not appointed in this case is hardly a rare occurrence. (See D.I. 13 at 16-17 (citing analyses that have concluded that in most cases no official committee is appointed due to insufficient creditor interest.)) As such, Appellees argue this is not a case of first impression, but rather another in a long line of. cases in which a section 503(b)(3)(D) applicant failed to meet its burden of proof under Lebron. (See D.I. 13 at 16.)
Leidos' argument on this point fails for a number of reasons. Leidos' assertion that the Bankruptcy Court failed to consider the lack of a creditors' committee in the case is both irrelevant and incorrect. The assertion is irrelevant because section 503(b)(3)(D) contains no language suggesting any difference in its application based on whether a committee has been appointed. 11 U.S.C. § 503(b)(3)(D). The fact that no committee was appointed in this case does not change the relevant inquiry of whether a substantial contribution was made under Lebron. The assertion is also incorrect because the Bankruptcy Court clearly considered the absence of a statutory committee in evaluating whether there was any evidence of Leidos' substantial contribution. The Bankruptcy Court observed that "the Court lacks the normal adversary situation when there's not official committee of unsecured creditors in a case," and noted that "in certain circumstances[,] a creditor can step up ... to fill
Additionally, the Bench Ruling cited extensively in Leidos' pleadings had no binding effect, and the Bankruptcy Court followed well-established practice in declining to base its decision on a transcript ruling that necessarily lacks "the amount of time and careful study" of written opinions. (See id. at 15:17-16:7.) Even if Bench Ruling were binding, it is factually distinguishable from this case, and Leidos has misconstrued its holding. The Hospitality court did not base its decision, as Leidos contends, on a legal conclusion that section 503(b)(3)(D) awards are warranted as a matter of law when no creditors' committee has been appointed; instead, it correctly applied Lebron's substantial contribution test and based its decision on the factual record in that case. (See Bench Ruling at 32:2-7 ("the record reflects" that the applicant's actions were "functionally indistinguishable" from those which the court would have expected an official committee to have taken); id. at 33:17-19 ("based on the record before [the court,]" the applicant met its burden under Lebron.)) That the Bankruptcy Court determined Leidos had not carried its burden to support such an award in the instant case does not make it a "conflicting" decision or a "case of first impression," as Leidos contends.
Leidos contends that the amount of its section 503(b)(3)(D) claim is de minimis in relation to the fees paid to the Debtor's professionals during the Chapter 11 case, that Leidos "preemptively applied a generous discount" to account for services unique to Leidos' claim, and that its claim is "eminently proportionate, reasonable and feasible in this case." (D.I. 12 at 18.) Leidos further argues that no creditors' professional fees were paid by the estate, and because the estate did not bear the expenses typically incurred by a creditors' committee's professionals, it is therefore "appropriate under the Bankruptcy Code structure for the estate to reimburse Leidos." (Id.) Conversely, Appellees argue that whereas estate professionals may be awarded "reasonable compensation" under section 330(a) of the Bankruptcy Code to the extent they meet the standards of that provision, substantial contribution awards are subjected to the much stricter standard set forth in Lebron. (See D.I. 13 at 19
The court agrees with Appellees. The amount of compensation received by the Debtor's professionals has no bearing on whether Leidos carried its burden of proof under 503(b). Leidos' request was not denied because it was unreasonable in size, but rather because Leidos did not provide sufficient evidence to justify it. (See B.D.I. 796, 10/16/15 Hr'g.Tr. at 18:6-12.) The fact that the estate did not bear similar expenses from professionals on the creditor side of the Chapter 11 case is also irrelevant to this determination, and the Bankruptcy Code provides no such mandate.
The Debtor argues that the appeal is "wholly without merit" and "lacks any colorable support." (See D.I. 14 at 19 (citing Quiroga v. Hasbro, Inc., 943 F.2d 346, 347 (3d Cir. 1991); Hilmon Co. v. Hyatt Int'l, 899 F.2d 250, 253 (3d Cir. 1990.)) Accordingly, the Debtor has requested that this court find the appeal frivolous and reserves its rights to seek payment of fees and expenses. Despite the Debtor's compelling argument, the court declines to find the appeal is frivolous.
For the foregoing reasons, the court will AFFIRM the Order.
