In re US Lines, Inc.

• Decision Date: 21 July 1989
• Docket Number: Bankruptcy No. 86B-12240.
• Parties: In re UNITED STATES LINES, INC., Debtor.
• Court: U.S. Bankruptcy Court — Southern District of New York

103 B.R. 427 (1989)

In re UNITED STATES LINES, INC., Debtor.

Bankruptcy No. 86B-12240.

United States Bankruptcy Court, S.D. New York.

July 21, 1989.

Wisehart & Koch by Arthur M. Wisehart, New York City, for Employee Service Bureau.

Milbank, Tweed, Hadley & McCloy, by Alan Kornberg, New York City, for debtor.

Harold Jones, by Neil Mann, New York City, U.S. Trustee.

DECISION AND ORDER

HOWARD C. BUSCHMAN, III, Bankruptcy Judge.

Before this court is an application for compensation and/or reimbursement from the Chapter 11 estate of United States Lines, Inc. ("U.S.L.").

Applicant Wisehart & Koch ("Wisehart"), as counsel to the Employee Service Bureau ("ESB") and certain other former non-union employees of U.S.L., seeks an order pursuant to 11 U.S.C. § 503(b)(3) and (4) (1986) and section 502(g) of the Employee Retirement Income Security Act of 1974 (ERISA), 29 U.S.C. § 1132(g)(1) (1974), awarding it compensation of $287,642.07 consisting of $283,740.00 for attorney fees and an additional $3,902.07 for costs and expenses from the U.S.L. estate.

I.

Section 503(b)(3) and (4) of the Bankruptcy Code, 11 U.S.C. § 503(b)(3) and (4) (1986), permit the court to allow as administrative expenses the actual and necessary expenses incurred by a creditor or his attorney in making a "substantial contribution" to a Chapter 9 or 11 estate.

The threshold test to be met by any section 503 claimant is having made a "substantial contribution in a case under Chapter 9 or 11 . . ." This phrase is derived from sections 242 and 243 of the former Bankruptcy Act, 11 U.S.C. §§ 642, 643 (repealed). The principal test under these former sections was the production of a direct benefit to the debtor's estate, and the legislative history pertaining to section 503 indicates that Congress intended that this benefit test would remain the touchstone of awards. In re Jensen-Farley Pictures, Inc., 47 B.R. 557, 565-69, 12 Bankr.Ct. Dec. (CCR) 978 (Bankr.D.Utah 1985).

The "substantial contribution" test is thus satisfied where the services rendered have substantially contributed to an actual and demonstrable benefit to the debtor's estate, its creditors, and to the extent relevant, the debtor's shareholders. See In re McLean Industries, Inc., 88 B.R. 36, 38, 17 Bankr.Ct.Dec. (CCR) 1248, 19 Collier Bankr.Cas.2d (MB) 191 (Bankr.S.D. N.Y.1988); In re Rockwood Computer Corp., 61 B.R. 961, 965, (Bankr.S.D.Ohio 1986); Jensen-Farley, 47 B.R. at 565-73, In re Calumet Realty Co., 34 B.R. 922, 926, 11 Bankr.Ct.Dec. (CCR) 361, Bankr.L. Rep. (CCH) ¶ 68489 (Bankr.E.D.Pa.1983). Broadly speaking, "services which substantially contribute to a case are those which foster and enhance, rather than retard or interrupt the progress of reorganization." In re Richton International Corp., 15 B.R. 854, 855 (Bankr.S.D.N.Y. 1981).

While the policy aim behind these provisions is to promote meaningful creditor participation in the reorganization process, In re General Oil Distributers Inc., 51 B.R. 794, 805 (Bankr.E.D.N.Y.1985); Calumet Realty, 34 B.R. at 926, tension exists between this aim and the contrasting policy that administrative expenses of the estate be kept to a minimum. In the Matter of Baldwin-United Corp., 79 B.R. 321, 338 (Bankr.S.D.Ohio 1987). That tension gives rise to the well settled rule that these statutory provisions are to be narrowly construed, Manufacturers Hanover Trust Co. v. Bartsh (In re Flight Transportation Corp. Securities Litigation), 874 F.2d 576, 581 (8th Cir.1989); In re Hanson Industries, Inc., 90 B.R. 405, 409 (Bankr.D. Minn.1988); In re O.P.M. Leasing Services, Inc., 23 B.R. 104, 121 (Bankr.S.D.N.Y. 1982), and that any recovery is subject to strict scrutiny by the court, In re D.W.G.K. Restaurants, Inc., 84 B.R. 684, 689 (Bankr. S.D.Cal.1988); McLean, 88 B.R. at 39. The burden of proof as to the substantial benefit rendered to the estate is on the applicant, and the entitlement to an award must be established by a preponderance of the evidence. Hanson Industries, 90 B.R. at 409; In re 1 Potato 2, Inc., 71 B.R. 615, 618, Bankr.L.Rep. (CCH) ¶ 71764 (Bankr.D. Minn.1987).

As a result, benefits which have been found to be insubstantial under § 503(b)(3) and (4) include those services which would merely deplete the assets of an estate without providing a corresponding greater benefit. Accordingly, services found to be duplicative of duties of the debtor or other court-appointed officers, absent proof that the appointed officer is either unable or unwilling to act, are not to be compensated since they would entail an excessive and undue burden upon the estate. In re Texaco, Inc., 90 B.R. 622, 632 (Bankr.S.D.N.Y.1988); In re Ace Finance Co., 69 B.R. 827, 831 (Bankr.N.D.Ohio 1987); Baldwin-United, 79 B.R. at 344. Services that do not actually increase the size of the estate may similarly be denied compensation. In re Contract Marine Carriers, Inc., 85 B.R. 390, 392, 17 Bankr. Ct.Dec. (CRR) 649 (Bankr.E.D.Va.1988). Most importantly, compensation for services which potentially pass the "substantial contribution" test might nevertheless be found to retard the reorganization process if recovery by creditors is materially diminished. Surface Transit, Inc. v. Saxe (In re Estate of Third Avenue Transit Corporation), 266 F.2d 862 (2d Cir.1959) (dicta) (Burden that the estate can safely bear is a factor in the granting of awards); In the Matter of Multiponics Inc., 436 F.Supp. 1072, 1074-75 (E.D.La.1977), aff'd, 622 F.2d 731 (5th Cir.1980) (Funds on hand being able to satisfy only a fraction of the unsecured claims requires court to approve only a fraction of sum sought as a charge against the estate); Richton, 15 B.R. at 855-56 (dicta) (Burden that the estate can safely bear and impairment of other creditors is a factor in the granting of allowances).

Creditors face an especially difficult burden in passing the "substantial contribution" test since they are presumed to act primarily in their own interests. Jensen-Farley, 47 B.R. at 571. Attorneys must generally look to their own clients for payment. E.g. McLean, 88 B.R. at 38; Jensen-Farley, 47 B.R. at 569. In order to avoid the liberal granting of compensation to the many creditors who necessarily must take an active role in bankruptcy proceedings it is given that extensive participation in a case alone is insufficient to compel compensation. McLean, 88 B.R. at 38. Similarly, legal services which are provided solely in order to benefit the client-as-creditor are not compensable, even where they confer an incidental benefit upon the estate. In re Flight Transportation Corp. Securities Litigation, 78 B.R. 562, 564 (D.Minn.1987), aff'd, 874 F.2d 576 (8th Cir. 1989); General Oil, 51 B.R. at 805; Richton, 15 B.R. at 856. Correspondingly, services that confer a significant and demonstrable benefit upon the reorganization process which have not been rendered solely on behalf of a creditor's own interest should be compensated. GATX Terminals Corp. v. Tarricone (In re Tarricone), 83 B.R. 253, 255, 17 Bankr.Ct.Dec. (CCR) 425 (Bankr.S.D.N.Y.1988); McLean, 88 B.R. at 38; General Oil, 51 B.R. at 806; Richton, 15 B.R. at 856.

Such services generally take the

"form of constructive contributions in key reorganizational aspects, when but for the role of the creditor, the movement towards final reorganization would have been substantially diminished. The 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. Restaurants, 64 B.R. at 690.

Furthermore, something more than mere conclusory statements regarding one's involvement in an act's resulting "substantial contribution" must be tendered in order to for such involvement to be deemed compensable. Corroborating testimony by a disinterested party attesting to a claimant's instrumental acts has proven to be a decisive factor in awarding compensation to activities which otherwise might not constitute a "substantial contribution." Compare Baldwin-United, 79 B.R. at 340 (Debtor's former management testified as to attorney's instrumental acts in mediating disputes between senior and subordinated and equity security holders) and General Oil, 51 B.R. at 807 (Without representation by major unsecured creditors as to attorney's services performed over and above representation of client-as-creditor court would be inclined to deny compensation) with Baldwin-United, 79 B.R. at 342 (No corroborating testimony to support claim that opposition to substantive consolidation of estates was "substantial contribution")

Absent, or in addition to, such corroborating testimony, a court's own first-hand observance of the services provided may be a sufficient basis on which to find a "substantial contribution" See Baldwin-United, 79 B.R. at 343 (Based upon evidence, as well as Court's knowledge of case, award granted); McLean 88 B.R. at 39 (Clear to the Court at the hearing that had price issue not been raised by applicant others would not have been prompted to assert their position concerning propriety of sale of stock which ultimately resulted in higher sale price).

With these standards in mind, we turn to the application before us.

II.

Wisehart's alleged contributions to the estate include:

1) Enhancing Wisehart's own ability to represent the former employees through knowledge obtained in the process of assisting ESB members in completing individual proofs of claims. (Amended Fee Application ¶ 17);

2) Participation in a consensual resolution respecting the ESB claims leading to a court approved settlement agreement whereby, inter alia, U.S.L. agreed to share one-half the surplus in the U.S.L pension fund, or $3,150,000, with the beneficiaries of the plan, and the employees dropped their claims to the remainder. (The "Settlement Agreement") (Amended Fee Application ¶¶ 15, 49, 50);

3) Making a cross-motio...