In re Sentinel Management Group, Inc., Bankruptcy No. 07 B 14987.

• Decision Date: 05 May 2009
• Docket Number: Bankruptcy No. 07 B 14987.
• Citation: 404 B.R. 488
• Court: U.S. Bankruptcy Court — Northern District of Illinois
• Parties: In re SENTINEL MANAGEMENT GROUP, INC., Debtor.

404 B.R. 488

In re SENTINEL MANAGEMENT GROUP, INC., Debtor.

Bankruptcy No. 07 B 14987.

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

May 5, 2009.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

Geofrrey S. Goodman, Esq. and William J. McKenna, Esq., Attorneys for Movant.

Vincent E. Lazar, Esq. and Christine L. Childers, Esq., Attorneys for Respondent.

MEMORANDUM OPINION

JOHN H. SQUIRES, Bankruptcy Judge.

This matter comes before the Court on the motion for allowance and payment of fees by an unofficial ad hoc committee of a specific class of creditors, the SEG 1 customers (the "Ad Hoc Committee")¹ pursuant to 11 U.S.C. §§ 503(b)(3)(D) and 503(b)(4). Frederick J. Grede, the Liquidating Trustee (the "Trustee") and estate representative for the estate (the "Estate") of Sentinel Management Group, Inc. ("Sentinel"), objects to the Ad Hoc Committee's motion. For the reasons set forth herein, the Court sustains the Trustee's objection and denies the Ad Hoc Committee's motion in its entirety. The Ad Hoc Committee failed to prove that it provided a substantial contribution in this case.

I. JURISDICTION AND PROCEDURE

The Court has jurisdiction to decide this matter pursuant to 28 U.S.C. § 1334 and Internal Operating Procedure 15(a) of the United States District Court for the Northern District of Illinois. The matter of whether the Ad Hoc Committee provided a substantial contribution in this case is a core proceeding under 28 U.S.C. § 157(b)(2)(A), (B), and (O).

II. BACKGROUND

On August 17, 2007, Sentinel filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code. (Docket No. 1.) On August 29, 2007, the Court appointed Frederick J. Grede as the Chapter 11 trustee for Sentinel's estate under 11 U.S.C. § 1104. (Docket No. 105.) On September 6, 2007, the Office of the United States Trustee appointed the Official Committee of Unsecured Creditors (the "Official Committee") pursuant to 11 U.S.C. § 1102(a)(1). (Docket No. 156.) At the time of the appointment, the Official Committee consisted of BC Capital Fund A, LLC, Discus Master Ltd., JEM Commodity Relative Value Fund LP, Jump Trading, LLC, and Rotchford Barker (who were primarily SEG 3 creditors), and Kottke Associates LLC, Penson GHCO, Vision Financial Markets LLC, and FC Stone, LLC (who were primarily SEG 1 customers). Id.; Disclosure Statement at p. 16 (Docket No. 592.) Thereafter, the Ad Hoc Committee formed and FC Stone, LLC resigned from the Official Committee. See Rule 2019 Verified Statement of Attorney (the "Rule 2019 Statement") (Docket No. 192); Amended Notice of Appointment of Committee of Unsecured Creditors (Docket No. 495.) At the time of the filing of the Rule 2019 Statement, the Ad Hoc Committee's counsel listed the following parties in interest as a part of their multiple representation in this case: FC Stone, LLC, Rand Financial Services, Inc., Frontier Futures, Inc., Alaron Trading Corporation, Alaron FX, Inc., Alaron Holdings Corporation, and Alaron Clearing, LLC.²

On May 13, 2008, the Official Committee and the Trustee (collectively, the "Plan Proponents") filed a joint disclosure statement and an accompanying plan of liquidation. (Docket No. 501.) The Ad Hoc Committee objected to the disclosure statement. (Docket No. 531.) Their objection argued, among other things, that the plan violated 11 U.S.C. § 541, Federal Rule of Bankruptcy Procedure 7001, and principles of due process because it attempted to treat the purported property of the SEG 1 customers as property of Sentinel's Estate without a ruling in an adversary proceeding on this issue.

The Court conducted a hearing on the Ad Hoc Committee's objection to the disclosure statement on June 16, 2008. After the hearing, the Plan Proponents filed an amended disclosure statement (the "Amended Disclosure Statement") along with an amended plan of liquidation (the "Amended Plan") on June 18, 2008. The Court entered an order approving the Amended Disclosure Statement the following day. Thereafter, in July 2008, the Ad Hoc Committee served discovery on the Trustee and certain other customers of Sentinel related to the Amended Plan. The Ad Hoc Committee also defended numerous depositions that the Trustee conducted on officers of the Ad Hoc Committee.

On August 1, 2008, the Ad Hoc Committee filed an objection to the Amended Plan (Docket No. 903), and the Court held a hearing on confirmation of the Amended Plan on August 12 and 13, 2008. At the confirmation hearing, the Ad Hoc Committee presented arguments in opposition to the Plan Proponents and cross-examined the Trustee. On December 8, 2008, the Court issued a Memorandum Opinion confirming the Amended Plan with one modification. In re Sentinel Mgmt. Group, Inc., 398 B.R. 281 (Bankr.N.D.Ill.2008). The modification of the Amended Plan was a minor revision with respect to when the Trustee could charge interest against certain SEG 1 customers with regard to the August 2007 Transfers, defined infra.

By way of its motion, the Ad Hoc Committee seeks administrative expense payment for a portion of its legal fees pursuant to §§ 503(b)(3)(D) and 503(b)(4) of the Bankruptcy Code. The portion of the fees that the Ad Hoc Committee seeks reimbursement does not include all of the Ad Hoc Committee's efforts in this case. Rather, the motion seeks administrative expense reimbursement for the fees of counsel to the Ad Hoc Committee regarding: (1) review of the Disclosure Statement; (2) discovery requests regarding the Amended Plan; and (3) review of the Amended Plan and drafting their objection thereto.

III. DISCUSSION

Section 503(b) of the Bankruptcy Code authorizes the bankruptcy court to award compensation to creditors for their legal and other expenses incurred in making a "substantial contribution" in a case. The section, in pertinent part, provides as follows:

(b) After notice and a hearing, there shall be allowed administrative expenses, other than claims allowed under section 502(f) of this title, including—

...

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

...

(D) a creditor, an indenture trustee, an equity security holder, or a committee representing creditors or equity security holders other than a committee appointed under section 1102 of this title, 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) & (b)(4).

The policy aim behind these provisions of § 503(b) is to promote meaningful creditor participation in the reorganization process. See generally In re Jartran, Inc., 732 F.2d 584, 586-87 (7th Cir.1984). However, tension exists between this aim and the contrasting policy that administrative expenses should be kept to a minimum. In re United States Lines, Inc., 103 B.R. 427, 429 (Bankr.S.D.N.Y.1989), aff'd, Nos. 90 CIV 3823(MGC), 90 CIV 4491(MGC), 1991 WL 67464 (S.D.N.Y. Apr. 22, 1991). As a result, bankruptcy courts narrowly construe the availability of the remedy afforded by §§ 503(b)(3) and (b)(4). In re Glickman, Berkowitz, Levinson & Weiner, P.C., 196 B.R. 291, 294 (Bankr.E.D.Pa.1996); In re Stoecker, 128 B.R. 205, 208 (Bankr.N.D.Ill.1991).

Subsections 503(b)(3) and (b)(4) provide a statutory mechanism for awarding administrative expenses to informal or unofficial committees, such as the Ad Hoc Committee, and bankruptcy courts have wide discretion to determine the amount of expenses to award under § 503, if any. Haskins v. United States (In re Lister), 846 F.2d 55, 56 (10th Cir.1988) (citing In re Consolidated Bancshares, Inc., 785 F.2d 1249, 1252 (5th Cir.1986)). Generally, whether to allow administrative expenses under § 503(b)(3)(D) is a question of fact left to the bankruptcy court's discretion. Lebron v. Mechem Fin. Inc., 27 F.3d 937, 946 (3d Cir.1994) (a determination of whether or not a substantial contribution to a reorganization has been made is a question of fact). In this regard, the burden of proof is on the applicant to demonstrate by a preponderance of the evidence that it has made a substantial contribution in the case. In re Dana Corp., 390 B.R. 100, 108 (Bankr.S.D.N.Y.2008); Cargill Fin. Servs. Corp. v. Envirodyne Indus., Inc., No. 94 C 6950, 1995 WL 461854, at *3 (N.D.Ill. July 12, 1995) (citing In re Sinclair, 92 B.R. 787, 788 (Bankr.S.D.Ill. 1988)); Stoecker, 128 B.R. at 208.

The central issue before the Court is whether the Ad Hoc Committee's efforts in this case amounted to a substantial contribution to Sentinel, the Estate, or its creditors. The term "substantial contribution" is not defined in the Code. Generally, substantial contribution is narrowly defined given "[t]he integrity of § 503(b) can only be maintained by strictly limiting compensation to extraordinary creditor actions which lead directly to significant and tangible benefits to the creditors, debtor, or the estate." In re D.W.G.K. Rests., Inc., 84 B.R. 684, 690 (Bankr.S.D.Cal. 1988). Courts have found that an applicant satisfies the test for providing a substantial contribution when it has provided "an actual and demonstrable benefit to the debtor's estate, its creditors, and to the extent relevant, the debtor's shareholders." United States Lines, 103 B.R. at 429.

"Inherent in the term `substantial' is the concept that the benefit received by the estate must be more than an incidental one arising from activities the applicant has pursued in protecting his or her own interests." Lebron, 27 F.3d at...