In re Amfin Fin. Corp.

• Decision Date: 28 February 2012
• Docket Number: No. 09–21323.,09–21323.
• Citation: 56 Bankr.Ct.Dec. 41,468 B.R. 827
• Parties: In re AMFIN FINANCIAL CORPORATION, et al., Reorganized Debtors.
• Court: U.S. Bankruptcy Court — Northern District of Ohio

468 B.R. 827

56 Bankr.Ct.Dec. 41

In re AMFIN FINANCIAL CORPORATION, et al., Reorganized Debtors.

No. 09–21323.

United States Bankruptcy Court, N.D. Ohio, Eastern Division.

Feb. 28, 2012.

OPINION TEXT STARTS HEREChristine M. Pierpont, St. Johnsbury, VT, G. Christopher Meyer, Squire, Sanders, and Dempsey, L.L.P., Cleveland, OH, Peter R. Morrison, Cleveland, OH, Richard Gurbst, Scott J. Kelly, Sherri Lynn Dahl, Cleveland, OH, Stephen D. Lerner, Cincinnati, OH, Thomas W. Coffey, Tucker Ellis LLP, Cleveland, OH, for Debtors.

MEMORANDUM OF OPINION AND ORDER

PAT E. MORGENSTERN–CLARREN, Chief Judge.

The Senior Noteholders ¹ move to have $950,000.00 of their fees and expenses allowed as an administrative expense under 11 U.S.C. § 503(b) based on their having made a substantial contribution in these chapter 11 cases.² The debtors support the motion,³ while the Federal Deposit Insurance Corporation, as Receiver of AmTrust Bank (FDIC), and the United States trustee (UST) object.⁴ For the reasons stated below, despite the outstanding cooperation shown by the Senior Noteholders throughout these cases, their motion must be denied.

I. JURISDICTION

Jurisdiction exists under 28 U.S.C. § 1334 and General Order No. 84 entered by the United States District Court for the Northern District of Ohio. This is a core proceeding under 28 U.S.C. § 157(b)(2)(B) and (O), and it is within the court's constitutional authority as analyzed by the United States Supreme Court in Stern v. Marshall, ––– U.S. ––––, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011).

II. THE MOTION

The Senior Noteholders move under Bankruptcy Code § 503(b)(3) and (4) for the allowance of $950,000.00 as reasonable compensation which they paid or will pay for services rendered by their counsel and for amounts paid or to be paid by collateral agent Bank of New York Mellon to its counsel. They state that they incurred charges greater than $1,154,460.62, of which $1,015,353.62 was incurred in making a substantial contribution to these cases. They limit their application, though, to the $950,000.00 provided for in the confirmed plan.

A. The Facts ⁵

The debtors filed their chapter 11 cases ⁶ at the point in time when they concluded that the Office of Thrift Supervision (OTS) would likely seize control of AmTrust Bank—the debtor AFC's federal savings bank subsidiary. At filing, the debtor AFC had approximately $100 million of principal debt attributable to the Senior Notes, with those creditors representing a very substantial portion ⁷ of the debt in the case. On the day the debtors filed the cases, they also filed an adversary proceeding against the Senior Noteholders seeking to avoid about $12 million in payments, guarantees, and liens as preferential transfers and constructively fraudulent transfers. ⁸ The debtors dismissed the adversary proceeding one month later, and eventually compromised the issues with the Senior Noteholders.

Early on in the cases, the OTS took control of the bank subsidiary and appointed the FDIC as receiver. The FDIC has two major disputes with the debtors. First, it initially contended that it had a $2 billion plus claim, all or substantially all of which was entitled to priority under the Bankruptcy Code based on AFC's alleged commitment to maintain the capital of the bank subsidiary. The parties filed several contested matters related to that issue (Capital litigation). The District Court tried the matter on withdrawal of the reference, entering judgment in favor of the debtors. The case is on appeal.

The second major dispute stems from a 2009 tax refund of about $194 million; the FDIC claims the refund is its property, while the debtors claim that it is their property. The FDIC filed a complaint for a declaratory judgment on that issue, the District Court withdrew the reference, and the matter is pending (Refund litigation). The debtors' plan, confirmed consensually on November 4, 2011 with the FDIC litigation unresolved, necessarily poses a question as to the debtors' ability to make the contemplated distributions. If the FDIC prevails in the Capital litigation, its priority claim exceeds the projected value of the debtors' assets. The debtors cannot, therefore, make any distribution to unsecured creditors until the Capital litigation is resolved.

From the first hearings in this case forward, the Senior Noteholders took the position that it made economic sense to reach agreement on their disputes, in lieu of heated litigation. This approach was successful. The confirmed plan incorporates the settlement terms, including these: (1) each holder of a Senior Note Claim is treated as the holder of a single unsecured claim in the aggregate amount of $100,763,414.93 against the substantively consolidated debtors; (2) any lien, guarantee, mortgage, or security interest which was granted under the Senior Notes Agreement is disregarded; and (3) a settlement amount of $2 million will not be distributed to the holders of Senior Note claims, but will instead be distributed to holders of other unsecured claims (other than Subordinated Note Claims) on a pro rata basis. This $2 million redistribution resolved the debtors' claim to recover the approximately $12 million paid by the debtors to the holders of the Senior Note Claims in September 2009, and the debtors believed it reasonably approximated the net benefit which the adversary proceeding would have yielded had it been successfully prosecuted. Additionally, the debtors agreed not to object to the Senior Noteholders' claim for substantial contribution up to a total of $950,000.00.

B. 11 U.S.C. § 503(b)(3) and (4)

Bankruptcy Code § 503(b)(3) and (4) provide in relevant part:

(b) After notice and a hearing, there shall be allowed administrative expenses ... including—

* * *

(3) the actual, necessary expenses, other than compensation and reimbursement specified in paragraph (4) of this subsection, incurred by—

* * *

(D) a creditor ... in making a substantial contribution in a case under chapter 9 or 11 of this title ...

(4) reasonable compensation for professional services rendered by an attorney or an accountant of an entity whose expense is allowable under subparagraph (A), (B), (C), (D), or (E) of 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 incurred by such attorney or accountant[.]

11 U.S.C. § 503(b)(3)(D) and (4).⁹ These provisions are an accommodation between the two objectives of encouraging meaningful creditor participation in the reorganization process and keeping administrative expenses and fees at a minimum to maximize the estate for creditors. Lebron v. Mechem Fin. Inc., 27 F.3d 937, 944 (3d Cir.1994); Pacificorp Ky. Energy Corp. v. Big Rivers Elec. Corp. (In re Big Rivers Elec. Corp.), 233 B.R. 739, 746 (W.D.Ky.1998). “Accordingly, ‘the integrity of section 503(b) can only be maintained by strictly limiting compensation to extraordinary creditor actions which lead directly to tangible benefits to the creditors, debtors, or estate.’ ” In re Bayou Grp., LLC, 431 B.R. 549, 560 (Bankr.S.D.N.Y.2010) (quoting In re Best Prods. Co., 173 B.R. 862, 866 (Bankr.S.D.N.Y.1994)); see also In re Sentinel Mgmt. Grp., Inc., 404 B.R. 488, 494 (Bankr.N.D.Ill.2009) (stating that substantial contribution is narrowly defined and limited to extraordinary creditor actions which lead directly to tangible and significant benefits to creditors). This approach is consistent with the Sixth Circuit's position that § 503(b) claims are to be strictly construed. City of White Plains, New York v. A & S Galleria Real Estate, Inc. (In re Federated Dep't Stores, Inc.), 270 F.3d 994, 1000 (6th Cir.2001).

The issues, then, are whether the creditor made a substantial contribution to the chapter 11 process and, if so, whether the requested fees and expenses are reasonable. Gorski v. Eisen (In re Henrick's Commerce Park, LLC), 347 B.R. 115, at *5 (6th Cir. BAP 2006) (unpublished opinion), aff'd 313 Fed.Appx. 740 (6th Cir.2007) (unpublished opinion). The moving party has the burden of proof. Hall Fin. Grp., Inc. v. DP Partners, Ltd. (In re DP Partners, Ltd.), 106 F.3d 667, 671 (5th Cir.1997); Haskins v. United States (In re Lister), 846 F.2d 55, 57 (10th Cir.1988); In re Gurley, 235 B.R. 626, 631 (Bankr.W.D.Tenn.1999).

“[T]he principal test of substantial contribution is the extent of benefit to the estate.” Cellular 101, Inc. v. Channel Commc'ns, Inc. (In re Cellular 101, Inc.), 377 F.3d 1092, 1096 (9th Cir.2004) (quotation marks and citations omitted). The focus is on “whether the efforts of the applicant resulted in an actual and demonstrable benefit to the debtor's estate and the creditors.” In re Lister, 846 F.2d at 57. The Bankruptcy Code does not define the term substantial contribution, but there is general agreement that “services which make a substantial contribution are those which ‘foster and enhance, rather than retard or interrupt the progress of reorganization.’ ” In re DP Partners, Ltd., 106 F.3d at 672 (quoting In re Consol. Bancshares, Inc., 785 F.2d 1249, 1253 (5th Cir.1986)); see also In re Lebron, 27 F.3d at 944; In re Big Rivers Elec. Corp., 233 B.R. at 746.

More specifically—

Factors which the courts have considered in determining whether an applicant has made a substantial contribution in a chapter 11 case include: whether the services were provided to benefit the estate itself or all of the parties in the bankruptcy case; whether the services conferred a direct, significant and demonstrably positive benefit upon the estate; and whether the services were duplicative of services performed by others.

In re Best Prods. Co., 173 B.R. at 865. As one court noted, “extensive participation in a case, without more, does not constitute substantial contribution.” In re Alumni Hotel Corp., 203 B.R. 624, 631 (Bankr.E.D.Mich.1996). Courts have found that a...