In Re: Asarco LLC, Case No. 05-21207

Decision Date29 September 2010
Docket NumberCase No. 05-21207
PartiesIn re: ASARCO LLC, et al., Debtors.
CourtUnited States Bankruptcy Courts. Fifth Circuit. U.S. Bankruptcy Court — Southern District of Texas
MEMORANDUM OPINION ON APPLICATION OF THE UNITED STATES

AND THE STATES OF TEXAS, MONTANA AND WASHINGTON UNDER 11

U.S.C. SECTIONS 503(B)(3)(D)

AND (B)(4) FOR PAYMENT OF FEES AND REIMBURSEMENT

OF EXPENSES FOR SUBSTANTIAL CONTRIBUTION

On this day came on for consideration: (i) the Environment and Natural Resources Division of the United States Department of Justice's Motion and Application for an Allowed Administrative Expense for Its Substantial Contribution to the Case Pursuant to Bankruptcy Code § 503(b) [Docket No. 13893] (the "U.S. Application"); (ii) the Motion and Application of Texas Attorney General's Office for an Allowed Administrative Expense Claim for Its Substantial Contribution to Bankruptcy Case Pursuant to 11 U.S.C. § 503(b) [Docket No. 13872] (the "Texas Application"); (iii) the State of Montana Motion and Application for Allowance of an Administrative Expense Claim for Substantial Contribution Pursuant to 11 U.S.C. § 503(b) [Docket No. 13916] (the "Montana Application"); and (iv) the State of Washington, Office of the Attorney General's Motion and Application for Allowance of an Administrative Expense Claim for Substantial Contribution Pursuant to 11 U.S.C. § 503(b) [Docket No. 13912] (the "Washington Application") (collectively, the motions are referred to as the "Substantial Contribution Claims" and the movants as the "Governmental Movants"), seeking recovery of attorneys fees and expenses in the amounts of $3,834, 399.05; $873,200.00; $1,372, 254.00 and $113,677.64, respectively. The Court, having heard the evidence and arguments of counsel, finds that the Substantial Contribution Claims should be denied in their entirety. In support thereof, the Court makes the following Findings of Fact and Conclusions of Law.

BACKGROUND

On August 9, 2005, ASARCO LLC ("ASARCO") filed its voluntary petition for relief under chapter 11 of title 11 of the United States Code (the "Bankruptcy Code") in this Court. Thereafter, ASARCO's wholly owned direct or indirect subsidiaries filed their voluntary petitions in this Court. On August 31, 2009, this Court issued its report and recommendation on plan confirmation to the District court, recommending that the District Court confirm the plan put forth by the Debtors' Parent, ASARCO). On November 13, 2009, the District Court confirmed the Parent's Plan, which became effective on December 9, 2009. A detailed history of the case is set forth in this Court's Report and Recommendation on Plan Confirmation and is adopted herein. Among the significant issues in the Asarco Bankruptcy were the Governmental Movants' environmental claims.

Through a series of settlements among the Governmental Movants and the Debtors during the pendency of the bankruptcy cases, the Governmental Movants fully settled and resolved their rights to response costs under CERCLA and other applicable law. The governmental Movants' attorney's fees and expenses in this bankruptcy case are included in the settled response costs. Under the confirmed plan in the Debtors' bankruptcy cases, the Governmental Movants received payment and full satisfaction on account of their response cost legal services and expenses. The Governmental Movants cannot receive satisfaction twice on account of the same costs and expenses.

Thus, to recover additional fees and expenses, the Governmental Movants must prove by a preponderance of evidence that they made a substantial contribution to the estate and that the legal fees and expenses associated with that alleged contribution were not included in the settled environmental claims. As more fully set forth below, the Court finds that the Governmental Movants did not meet their burden and therefore the Substantial Contribution Claims should be denied.

DISCUSSION

1. The Governmental Movants' Claims

The United States asserts that it provided a substantial contribution to the Debtors' bankruptcy cases in three major areas: (i) coordinating with state creditors and resolving claims, (ii) supporting the Debtors' asset sale process, and (iii) supporting the Debtors' plan proposals while opposing the Parent's plan.

The State of Texas asserts five bases for its claim that Texas made a substantial contribution to the Debtors' bankruptcy cases: (i) the asset liability transfer of the Federated Metals state superfund site allegedly saving the estate (as asserted by Texas) an estimated $52 million dollars; (ii) the Debtors' voluntary conversion of the Encycle Chapter 11 to a Chapter 7; (iii) helping organize an ad hoc, de facto environmental governmental regulatory committee and serving as bankruptcy co-counsel to the ad hoc, de facto committee; (iv) obtaining the Parent's agreement to modify its initial plan(s) of reorganization to incorporate wholesale without condition the environmental settlements previously reached with the Debtors, which allowed for the plan to meet the feasibility test under 11 U.S.C. §1129; and (v) helping the de facto committee reach consensus on not exercising the states' police and regulatory exception to the automatic stay under 11 U.S.C. § 362(b)(4).

The State of Montana asserts five bases for its claim that Montana made a substantial contribution to the Debtors' bankruptcy cases: (i) acting as liaisons with other states and the United States; (ii) formulating a global settlement of environmental claims; (iii) participating in negotiations of an overall global settlement which formed the basis of a plan of reorganization; (iv) participating in negotiations with other plan proponents to ensure there was full and fair competition in the plan process; and (v) formulating, advancing, and defending custodial trust agreements in which the non-operating real property assets could be placed to allow the valuable operating assets to be marketed unencumbered by the non-operating sites as part of the plan of reorganization.

The State of Washington asserts three bases as constituting a substantial contribution to the Debtors' bankruptcy cases: (i) work performed at the request of the Debtors in defending Washington's 9019 settlements that were challenged by the Parent; (ii) mediation sessions attended in New Orleans and Houston in 2008, and the plan proceedings (sometimes referred to as an "auction") held in Dallas in May of 2008; and (iii) telephone conferences with parent and the governments, internal discussion among the governmental environmental creditors aimed at advancing plan proceedings in a manner that would benefit all creditors, and discussions involving Washington, the Debtors, the United States, and other creditor groups related to advancing the plan confirmation process.

2. The Governmental Movants Failed to Prove Substantial Contribution

Section 503(b)(B)(D) grants an administrative expense priority to the actual necessary expenses incurred by a creditor in making a substantial contribution to a case under Chapter 11. Nothing in the Code defines "substantial contribution, however nearly all cases have held that the contribution must provide tangible, clearly demonstrable benefits to the estate. Vol. 4 Colliers on Bankruptcy If 503.10[5]. [5th Ed.].

A creditor's active participation in a case, even if positive to the overall outcome, will not be sufficient, unless the creditors can demonstrate that its actions provided a direct, significant and demonstrable benefit to the estate. Hall Fin. Group, Inc. v. DP Partners, L.P. (In re DP Partners, L.P.), 106 F.3d 667 (5th Cir. 1997), cert. denied, 522 U.S. 815 (1997); In re Buttes Gas & Oil Co., 112 BR 191, 194 (Bankr. S.D.Tex. 1989).

In this case the attorneys for the Governmental Movants provided exemplary representation for their clients. They demonstrated exceptional expertise in both bankruptcy and environmental law. In addition, they negotiated in good faith with the Debtor, the case fiduciaries and other parties in the case. The net result of the attorneys' actions, as well as many others in the case, was settlement of the many environmental claims and ultimately the confirmation of a plan of reorganization which paid all creditors 100% of the claims with interest. However, Section 503 (b)(3)(D) of the Bankruptcy Code is not meant simply to reward outstanding legal representation. In fact, lawyers are expected to perform at a high level. Settlement and cooperation among attorneys in a Chapter 11 case is not only common, but encouraged.

All of these activities by the Governmental Movants, however, constitute routine actions to enhance recovery on a claim, which would be expected of any large creditor in a chapter 11 case. Accordingly, these activities fall short of the extraordinary conduct needed to establish a substantial contribution under section 503(b)(3)(D) of the Bankruptcy Code.

A "substantial contribution" is "a contribution that is considerable in amount, value or worth." In re DP Partners, L.P., 106 F.3d at. Therefore, a substantial contribution claim requires a showing of a "direct, significant and demonstrable benefit to the estate." In re Buttes Gas & Oil Co, 112 B.R. 191, 194 (Bankr. S.D. Tex. 1989). "[C]ourts... narrowly construe the substantial contribution statute granting applications in only unusual or rare circumstances." Eldercare, 2007 Bankr. LEXIS 879 at *4; In re Am. Plumbing & Mech., Inc„ 327 B.R. 273, 279 (Bankr. W.D. Tex. 2005). "That narrow construction is also consistent with the general doctrine that priority statutes, such as § 503(b), should be strictly construed to preserve the estate for the benefit of creditors." In re Am. Plumbing, 327 B.R. at 279 (citing In re FederatedDep't Stores, Inc., 270 F.3d 994, 1000 (6th Cir. 2001); In re Commercial Fin. Servs., Inc., 246 F.3d 1291, 1293 (10th Cir. 2001)). "The burden of proof is on the movant or applicant in establishing their entitlement to an award...

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