Substantial Contribution Claims A New Perspective

Substantial Contribution Claims A New Perspective

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Recovery of professional fees is a subject that is always near and dear to every bankruptcy attorney's heart. This is especially true when the recovery of fees is related to the representation of an unsecured creditor in a complex or difficult chapter 11 case. Pursuant to §503(b)(3)(D) and (b)(4), a creditor is entitled to have the actual and necessary expenses, including attorneys' fees, that it incurred "in making a substantial contribution" in a case under chapter 11 treated as an administrative expense.

The Eleventh Circuit Court of Appeals in Speights & Runyan v. Celotex Corp. (In re Celotex Corp.), 227 F.3rd 1336 (11th Cir. 2000), recently ruled on an emerging significant issue in this area. Specifically, the court in Celotex adopted the view of the Fifth Circuit that a creditor's motive in taking actions that benefit the estate has little relevance in determining whether to allow a substantial contribution claim of the creditor. This view departs from the historic view adopted by the Third and Tenth Circuits, which requires an altruistic motive before allowing a substantial contribution claim. This article will take a closer look at the Eleventh Circuit's ruling and its possible ramifications.

General Background

The present statutory provisions governing substantial contribution claims reflect an accommodation between the twin objectives of the Bankruptcy Code of (a) encouraging meaningful creditor participation in the reorganization process and (b) keeping fees and administrative expenses at a minimum so as to preserve as much of the estate as possible for creditors.

Congress did not define the term "substantial contribution." Courts too have refrained from defining with specificity what constitutes substantial contribution, leaving the matter to a case-by-case analysis. Because the inquiry concerning the existence of a substantial contribution is one of fact, the bankruptcy court is in the best position to make such a determination. The circuit courts agree that a party confers a substantial benefit, and therefore may compel the debtor's estate to fund their attorney's fees, only when the applicant establishes that the services significantly foster and enhance, rather than retard or interrupt, the progress of reorganization.

At a minimum, an applicant's efforts must result in an actual and demonstrable benefit to the bankruptcy estate. The mere pursuit of an applicant's own interests in the case is insufficient if the applicant cannot demonstrate a direct benefit to the estate. The benefit received by the estate must be more than incidental to activities the applicant has pursued in protecting its own interest. Moreover, the contribution must be considerable in amount, value or worth. Finally, the services cannot be a duplication of services rendered by attorneys for a committee or the debtor. Based on these universally accepted criteria, an award of fees for a substantial contribution is generally reserved for those rare and extraordinary circumstances where the creditor and its attorney truly enhance the administration of the estate.

Conflict Among Circuits

The unsettled controversy relating to substantial contribution awards revolves around the issue of whether a selfish motive of the applicant precludes an award under §503(b), even though the other criteria supporting an award have been established. Prior to the Fifth Circuit's analysis in In re DP Partners Ltd., 106 F.3d 667 (5th Cir.), cert. denied, 118 S.Ct. 63 (1997), the established view was that the purpose of §503(b)(3)(D) was to encourage activities that benefit the estate as a whole, and should only be applied in a manner that excludes reimbursement in connection with activities of creditors and other interested parties that are designed primarily to serve their own interests, and that accordingly would have been undertaken without any expectation of reimbursement from the estate. See Lebron v. Mecham Fin. Inc., 27 F.3d 937 (3rd Cir. 1994); Lister v. United States (In re Lister), 846 F.2d 55 (10th Cir. 1988).

The circuit courts in Lebron and Lister determined that creditor motivation was a primary factor to be considered in the substantial-contribution analysis. See Lebron, 27 F.3d at 943 (citing historical interpretation of §503(b)(3)(D) and its predecessor statutes); Lister, 846 F.2d at 57. Generally, these circuit courts followed the reasoning that creditors are presumed to be acting in their own interest and not for the benefit of the estate as a whole until they satisfy the court that their efforts have transcended self-protection. These circuit courts recognize that most activities of interest to the parties that contribute to an estate will also, of course, benefit that party to some degree, and therefore the existence of self interest cannot in and of itself preclude reimbursement.

The Fifth Circuit in DP Partners created a split among the circuits on the issue of whether the motivation behind a creditor's actions in a chapter 11 case should disqualify the creditor from recovery of fees where a substantial contribution has been made to the successful resolution of the chapter 11 case. The Fifth Circuit held that creditor motivation was irrelevant to the "substantial contribution" analysis. The Fifth Circuit specifically noted that the plain language of the statute does not require "a self-deprecating, altruistic intent as a prerequisite to recovery..." DP Partners, 106 F.3d at 673.

Celotex Factual Background

The applicant in Celotex was a law firm that represented, on a contingent-fee basis, a number of asbestos property-damage claimants in a lengthy and complex chapter 11 case involving, among other things, claims for asbestos property damage and asbestos personal injury competing for limited resources. The evidence in support of the applicant's substantial contribution claim was compelling. Specifically, the debtor supported the application and represented to the bankruptcy court that the applicant provided significant tangible and demonstrative benefits to the debtor's estate, its creditors and shareholders and that the services of the applicant were not duplicative of services rendered by other professionals. The applicant's claim was also supported by other parties in interest in the case. The only objections to the substantial-contribution claim were asserted by the U.S. Trustee and the asbestos settlement trust that was created under the confirmed plan of reorganization and that would essentially bear the expense of any award.

The bankruptcy court denied the claim in part because the services of the applicant were conducted on behalf of its clients and not for the particular benefit of the estate. The bankruptcy court recognized that the successful efforts to reach a consensual plan unquestionably benefitted the applicant and its clients and were undertaken without any expectation of compensation from the estate. The applicant appealed this decision. The district court affirmed the decision, finding that the bankruptcy court did not abuse its discretion in refusing to award the fees.

Eleventh Circuit Ruling in Celotex

The applicant argued on appeal to the Eleventh Circuit that DP Partners correctly held that nothing within the text of §503(b) supports the altruism requirement mistakenly imposed by the bankruptcy court. The essence of the applicant's position was that nothing within the plain meaning of the text suggests that an applicant must "transcend self-protection" to render a compensable substantial contribution. The statutory provisions reflect that a creditor's attorney—who by definition acts on behalf of his or her clients' interests—shall be allowed fees for efforts in making a substantial contribution to the bankruptcy reorganization.

The Eleventh Circuit agreed with the foregoing arguments and adopted the holding of the Fifth Circuit in DP Partners. Specifically, the court in Celotex ruled that the degree of benefit conferred or contribution made by an applicant for a substantial contribution claim is not diminished by selfish or shrewd motivations. Accordingly, the Eleventh Circuit reversed the bankruptcy court's denial of fees on the grounds that the wrong legal principle had been applied in examining the facts.


Courts considering substantial-contribution claims will undoubtedly be mindful of the balance required between the need to interpret the provisions of §503 broadly enough to effectuate its goal of stimulating, encouraging and promoting meaningful creditor participation in reorganization proceedings, and the need to keep administration expenses to a minimum. Compensation cannot be freely given to all creditors who take an active role in bankruptcy proceedings. The recent decisions in DP Partners and Celotex could be interpreted as creating the possibility of opening the door to §503(b)(3) claims too far. In any event, the effect of these decisions will likely be to refocus the analysis of substantial contribution claims from the motives of the creditor seeking compensation to whether the applicant has carried the heavy burden of establishing that extraordinary actions actually occurred that led directly to significant and tangible benefits to the creditors, the debtor and the estate. Only when that strict test is met should and will compensation be awarded.

Journal Date: 
Tuesday, May 1, 2001