STEPHEN RASLAVICH, Chief Judge.
Before the Court is the Administrative Claim Request of Bruce Toll Pursuant to 11 U.S.C. § 503(a) and (b) (the "Claim"). Toll seeks the allowance of an administrative claim in the amount of $65,947.34 for attorneys' fees and costs. The Acting United States Trustee (the "Trustee") and the Official Committee of Unsecured Creditors (the "Committee") filed objections ("Objections") to the Claim. The steering group of prepetition secured lenders (the "Steering Group") and Citizens Bank of Pennsylvania, in its capacity as the administrative and collateral agent for the Steering Group, filed a Joinder in the Objections. A hearing on the Claim was held on July 29, 2010. At the close of the hearing, the Court took the matter under advisement. Upon consideration, the Court shall grant the Claim in the reduced amount of $24,000.
On February 22, 2009, Philadelphia Newspapers, LLC and its related debtor-entities (the "Debtors")
Prior to filing their cases, the Debtors knew that they would need a debtor-in-possession loan ("DIP loan").
From sometime prior to the Debtors' bankruptcy filings until mid-August of 2009, Toll owned approximately 20 percent equity in PMH. In re Philadelphia Newspapers, LLC, 599 F.3d 298, 301 (3d Cir. 2010). In addition, from June of 2007 through mid-August of 2009, he was the Chairman of PMH. In re Philadelphia Newspapers, LLC, 2009 WL 3242292, at *10 (Bankr.E.D.Pa. Oct. 8), rev'd in part on other grounds, 418 B.R. 548 (E.D.Pa. Nov.10, 2009), aff'd, 599 F.3d 298 (3d Cir.
In response to the Debtors' request, Toll agreed to provide a DIP loan to the Debtors and he retained the law firm of Klehr, Harrison, Harvey, Branzburg & Ellers LLP (the "Klehr, Harrison Firm") to negotiate and document it. Tr. 7/29/10 at 18. A commitment letter, dated February 10, 2009, contains an attachment which summarizes the terms and conditions at which the DIP loan, through Toll, was being offered.
At the hearing on the Claim, McMichael was asked on direct examination to testify regarding the benefit which the DIP loan from Toll provided to the Debtors' estates and their creditors. He stated: "From our perspective, the presence of an alternative DIP loan was the key leverage that the debtors had to get into ultimately a mediation, and make a deal with our incumbent pre-petition lenders." Tr. 7/29/10 at 18. Expounding further on this point, McMichael testified:
Id. at 19.
While the Debtors were negotiating with Toll for a DIP loan, they were also trying to put "together a transaction by which Mr. Toll and others would put up cash to act as a stalking horse." Tr. 7/29/10 at 22. As a result of the negotiations, the Debtors entered into an asset purchase agreement, dated August 20, 2009 (the "Asset Purchase Agreement"), with Philly Papers, LLC (the "Stalking Horse Bidder"). In re Philadelphia Newspapers, LLC, 2009 WL
The Debtors subsequently decided to pursue a DIP loan with a bank instead of Toll. Tr. 7/29/10 at 23. McMichael explained the reasoning behind this decision, stating as follows:
Id. at 25. See also Transcript, dated 8/17/10, at 17
The bank with which the Debtors ended up negotiating for a DIP loan was Republic First Bank. One of the requirements included in the draft commitment or term sheet for the DIP loan from Republic First Bank was that "there be a major participant for a significant portion" of the DIP loan to the Debtors. Tr. 7/29/10 at 24. The fund that agreed to partner with Republic First Bank to fund the DIP loan was Tennenbaum Capital Partners, LLC ("Tennenbaum"). Tr. 7/29 at 7, 24-25. Both Republic First Bank and Tennenbaum incurred out-of-pocket fees and expenses in connection with the due diligence which they had performed in connection with the DIP loan.
Ultimately, the Debtors resolved matters with the Lenders and obtained a commitment from them for a DIP loan. The Lenders agreed to extend a DIP loan to the Debtors without the condition upon which the Lenders originally had been insisting, namely that they have the right to pre-approve any reorganization plan before the Debtors filed it. See Docket Entry No. 1006. At that point, the Debtors no longer needed a financing commitment from Republic First Bank and Tennenbaum. Tr. 7/29/10 at 24; see also Docket Entry No. 1223 at ¶ 4 (explaining that, on or about August 26, 2009, the Debtors reached an agreement in principle with the Lenders concerning the terms of a DIP loan). On August 28, 2009, a stipulation (the "DIP Loan Stipulation") was filed by and between the Debtors, Citizens Bank, the Steering Group and the Official Committee for Unsecured Creditors stating, inter alia, that Citizens had agreed to provide
In anticipation of Republic First Bank incurring fees and expenses in connection with the process of entering into a DIP Loan, the Debtors filed a motion, on July 30, 2009, seeking reimbursement of such fees and expenses for the bank. Docket Entry No. 822 (Motion for the Entry of an Order Pursuant to 11 U.S.C. § 105 and 363(b) Authorizing Payment of Fees and Expenses for Prospective Debtor-in-Possession Financing). The Debtors based the motion on §§ 105 and 363 of the Code, asserting that their request for the reimbursement of fees and expenses sought in the motion "represent[ed] a sound exercise of business judgment." Id. ¶ 14. In the motion, the Debtors sought Court approval to reimburse "their prospective lender for reasonable, documented, out-of-pocket third party fees and expenses ... up to a total of $300,000 in connection with the Debtors' efforts to obtain a $15 million debtor-in-possession financing ... commitment." Id. In the motion, the Debtors stated in relevant part:
Id. ¶¶ 2-4 (bolding added). Following a hearing, the Court issued an Order, dated August 11, 2009, granting the motion but limiting the reimbursement of fees and expenses to a total amount of $100,000. Docket Entry No. 903.
On August 21, 2009, the Debtors filed a motion for reconsideration of the aforementioned $100,000 cap. Docket Entry No. 954. The Debtors asked the Court to increase the cap to $200,000. See id. However, before the hearing was held on the motion for reconsideration, the Debtors and the Lenders reached the agreement mentioned above regarding the DIP loan and other issues. See Docket Entry No. 1006. In the DIP Loan Stipulation, the parties specifically addressed the Debtors' motion for reconsideration of the $100,000 cap. See id. at pg. 15. The stipulation provided that the Debtors' motion for reconsideration of the $100,000 cap "shall be deemed withdrawn," but that Republic First Bank "may file a motion and seek allowance of an administrative expenses" in addition to the $100,000 already
Tennenbaum also incurred out-of-pocket expenses in performing its due diligence in connection with the DIP loan. On October 7, 2009, Tennenbaum filed an application, based on Code § 503(b), requesting the allowance of an administrative claim in the amount of $14,012.50 for the out-of-pocket expenses which it incurred in the form of attorneys' fees in connection with the DIP loan. Docket Entry No. 1223. By Order, dated October 30, 2009, the Court granted the application.
Toll filed his Claim on October 15, 2009. After the Trustee filed his objection to the claim, a hearing on the claim and objection was scheduled for December 21, 2009. Docket Entry No. 1539. That hearing was continued to February 1, 2010 but, prior to that date, the Debtors filed a notice stating that the hearing on Toll's Claim and the objections thereto was "continued generally" and that notice of the rescheduled hearing would be "filed when a new hearing date has been scheduled." Docket Entry No. 1660 ("Notice of Adjournment of Hearings Scheduled for February 1, 2010 at 2:00 P.M.").
Toll asserts that he is entitled to the allowance of an administrative claim in the amount of $65,947.34 because: (1) he incurred reasonable costs and attorneys' fees in the aforementioned amount in connection with the DIP loan; and (ii) the availability of the DIP loan from him "conferred a material benefit upon the Debtors and their estates and constituted a substantial contribution to [the Debtors'] cases within the meaning of § 503(b)(3)(D)." Claim ¶¶ 2-6. The Trustee contends that Toll's claim should be disallowed for the following reasons: (1) Toll is an "insider" as that term is defined in 11 U.S.C. § 101(31); (2) Toll made no substantial contribution to the Debtors' cases but "merely engaged in negotiations to arrange for DIP financing for his own benefit" and to "protect his own interests and/or the interests of insiders." Trustee Objection at ¶¶ 5-7. The Committee argues, inter alia, that Toll's claim should be disallowed because: (1) the "proposed, non-consensual" DIP loan for which he seeks an administrative claim for his fees and expenses "was never presented to the Court and never had a realistic chance of approval." Committee Objection ¶ 1. The Committee further argues that the Court authorized a payment of $100,000 for fees and expenses related to the Debtors' proposed DIP financing with First Republic Bank and that it is "highly inappropriate" for Toll to seek fees in addition to this amount particularly since the unsecured creditors will receive only a minimal distribution on their claims. Committee's Objection ¶ 2.
Toll seeks allowance of his claim pursuant to § 503(b)(3)(D). Claim ¶ 6. However, the fees and expenses for which he seeks compensation are fees and expenses for professional services rendered by his attorneys. Therefore, his Claim technically falls within the scope of § 503(b)(4) which works in tandem with § 503(b)(3)(D). These subsections provide, in pertinent part:
11 U.S.C. § 503(b)(3)(D) & (b)(4). As these statutory provisions reveal, a prerequisite to the allowance of an administrative claim under § 503(b)(4) is a finding of "substantial contribution" by an entity coming within the scope of § 503(b)(3)(D). See Lebron v. Mechem Financial, Inc., 27 F.3d 937, 943 (3d Cir.1994) (observing that § 503(b)(4) "authorizes awards of legal and accounting fees only in situations coming within the scope of § 503(b)(3)[.]"); see also In re ASARCO, LLC, 2010 WL 3812642, at *10 (Bankr.S.D.Tex. September 28, 2010) (ruling that movants were not entitled to recover legal fees or expenses under § 503(b)(4) absent a finding that they made a substantial contribution pursuant to § 503(b)(3)(D)); In re Oxford Homes, Inc., 204 B.R. 264, 267 (Bankr. D.Me.1997) ("A finding under § 503(b)(3)(D) that Connell, as a creditor, made a substantial contribution to [the debtor's] reorganization is a prerequisite to administrative allowance of his counsel's fees under § 503(b)(4)."). Consequently, the Court must find that Toll made a substantial contribution to the Debtors' cases for him to be entitled to recover any amount on his Claim.
According to the Third Circuit, the test for "`determining whether there has been a "substantial contribution" pursuant to § 503(b)(3)(D)'" 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 (quoting In re Lister, 846 F.2d 55, 57 (10th Cir. 1988)). In Aerosmith, Inc. v. Carco Electronics (In re Carco Electronics), 346 B.R. 377 (Bankr.W.D.Pa.2006), the Court stated:
Id. at 387 (citations omitted). See also Lebron, 27 F.3d at 943-44 (explaining that "[t]he services engaged by creditors, creditor committees and other parties interested in a reorganization are presumed to be incurred for the benefit of the engaging party and are reimbursable if, but only if, the services `directly and materially contributed' to the reorganization.").
Importantly, a bankruptcy court "has wide discretion to determine the amount of expenses to be awarded under
As noted above, Toll owned approximately 20 percent equity in and was Chairman of PMH when he incurred the fees and expenses for which he is seeking payment in his Claim. Consequently, at the relevant time, Toll was an insider of PMH as that term is defined in Code § 101(31)(b). Because of his positions as an equity holder and Chairman of PMH, Toll had a significant self-interest in promoting a reorganization of the Debtors that was not encumbered by the condition which the Lenders sought to impose on them in connection with a DIP loan (i.e., that any Chapter 11 plan which the Debtors proposed had to be approved in advance by the Lenders). Therefore, in seeking to provide the Debtors with a DIP loan other than that initially being offered by the Lenders, Toll was acting, to a large extent, to further his own self-interest and that of the other insiders. This conclusion is buttressed by the undisputed fact that, at the same time that he was negotiating the DIP loan, he was also negotiating with the Debtors to act as the Stalking Horse Bidder and negotiating the terms of the Asset Purchase Agreement.
As an insider, Toll also had much of the information at his fingertips or his disposal that he needed to negotiate and reach an agreement regarding the DIP loan. Because of this, he had no need to engage in the same type or degree of due diligence as Republic First Bank or Tennenbaum. Therefore, his fee and expenses with regard to the DIP loan should be significantly less than the fees and expenses incurred by Republic First Bank or Tennenbaum.
It is also evident that, to a large extent, Toll was acting in his own self-interest when he incurred the $65,947.34 in attorneys' fees and expenses in connection with the DIP loan. Indeed, the extent of his legal fees undercuts any argument to the contrary. He expended significant legal fees to have the terms of the DIP loan negotiated and documented in a manner that was favorable to him. He did so without imposing any requirement on the Debtors ahead of time, or requiring them to make any request to the Court, for the reimbursement of his professional fees. In this regard, his actions are in stark contrast to those of Republic First Bank, a non-insider, which required the Debtors to seek Court approval of its fees as a condition precedent to performing due diligence
Further, and of critical importance, is the fact that the likelihood that any DIP loan involving Toll would be approved by this Court was nearly non-existent. Firstly, the standard for obtaining authorization for a postpetition loan with a superpriority priming lien under the Third Circuit's decision in Resolution Trust Corporation v. Swedeland Development Group, Inc. (In re Swedeland Development Group, Inc.), 16 F.3d 552 (3d Cir.1994), is very difficult to satisfy. Nothing in the record before the Court suggests that the Debtors or Toll were in any way capable of meeting the Swedeland standard. Secondly, the fact that Toll was an insider made it even less likely that a DIP loan funded by him could be approved. Therefore, while Toll may have provided some benefit to the Debtors' estates and their creditors by "getting the ball rolling" to enable the Debtors to ultimately obtain a DIP loan that would be approved by the Court, there was never a realistic chance that Toll's DIP loan would be the loan that would carry the Debtors through their reorganization. Even the Debtors recognized this fact as shown by their decision to seek a DIP loan with a non-insider bank rather than Toll.
For these reasons, the Court concludes, in the exercise of its discretion, that Toll conferred a substantial benefit on the Debtors' estates and their creditors in providing an alternative, at the beginning of the Debtors' cases, to a DIP loan with the Debtors' Lenders. However, the value of that benefit does not equate to the $65,947.34 he seeks.
Exhibit "A" to Toll's Claim is an invoice from the Klehr, Harrison Firm to Bruce Toll for legal services for "Debtor-in-Possession Financing." See Exhibit "A" to Claim. The entries on the invoice date from February 5, 2009 through August 6, 2009. There are no entries between April 1, 2009 and July 12, 2009. Since the Debtors had undoubtedly commenced their discussions with Republic First Bank for a DIP Loan by July 13, 2009, any services which the Klehr Harrison Firm may have provided to Toll after that date are unlikely to have had any value to the estate.
In light of the deficiencies in the invoice which Toll has submitted with his Claim and bearing in mind the Court's determination as set forth above that the benefit which Toll conferred on the Debtors' estates
Based on the Court's conclusion that Toll conferred a substantial benefit on the Debtors' estates and their creditors, but that Toll's request for an allowed administrative expense in the amount of $65,947.34 is excessive and unreasonable, the Court shall grant Toll's Claim in the reduced amount of $24,000.00.
Tr. 7/29/10 at 20 (underlining added).
Docket Entry No. 1006, at pg. 15.
The Third Circuit subsequently issued its decision. On June 28, 2010, a confirmation hearing was held on the Debtors' Fourth Amended Joint Plan of Reorganization and the plan was confirmed. See Docket Entry No. 2253 ("Order Confirming Fourth Amended Joint Chapter 11 Plan as of June 28, 2010").
Date Description Hours 02/05/09 review debtor's restated term 1.25 loans term sheet and management incentive proposals/confer with J. Kurtzman/confer with M. Rittinger/prepare mandate letter and summary of terms and conditions for proposed DIP financing 02/06/09 telephone calls and letter to S. 1.75 Baker and B. Tierney/telephone calls with B. Toll re: DIP loan issues 02/06/09 telephone calls with Borrower 2.90 and investor group/comment on term sheet 02/09/09 office conference with R. 1.50 Roisman and J. Kurtzman/telephone calls with working group/revise and distribute proposed term sheet
Exhibit "A" to Claim. When multiple tasks are lumped into one entry, the Court cannot determine the time and, therefore, the value of the individual tasks contained in the entry.
Date Description Hours 02/12/09 confer with J. Kurtzman and M. 0.50 Rittinger 02/13/09 meeting with L. McMichael and 1.25 K. Pappas 02/16/09 conference with J. Kurtzman, 0.30 L. McMichael, et al. 02/16/09 telephone call with Al Ciardi 0.25 02/16/09 confer with J. Kurtzman and M. 0.75 Rittinger 02/19/09 conference call with Inquirer/ 0.75 telephone call with B. Toll 02/25/09 follow up with open issues/ 0.30 review bankruptcy pleadings 02/26/09 telephone calls with J. 0.50 Schwarts and B. Toll 02/26/09 review bankruptcy pleadings 0.50 02/27/09 confer with J. Kurtzman/telephone 0.50 call to L. McMichael 03/03/09 conference call with Judge 1.50 FitzSimon and counsel 03/04/09 emails from and to D. 0.25 Abernathy/telephone call with C. Cummerford 03/09/09 attend meetings with bank 8.25 group/telephone calls with B. Toll, B. Gross and J. Schwartz
Exhibit "A" to the Claim. The lack of detail in these entries makes it impossible for the Court to determine whether the tasks performed therein related to Toll's proposed DIP loan, whether the time billed for the task was reasonable or excessive, and whether the task conferred any benefit on the Debtors' estates and their creditors.