IN RE 3DFX INTERACTIVE, INC. (Bankr.N.D.Cal. 2005)

JAMES GRUBE, Bankruptcy Judge

I. INTRODUCTION

Before the court is Carlyle Fortran Trust's motion for allowance and payment of an administrative claim for substantial contribution. Carlyle seeks to recover $1,847,644.81 in fees and costs under Bankruptcy Code § 503(b)(3) and (4). For the reasons herein stated, Carlyle's motion will be denied in part and granted in part.

The debtor, 3dfx Interactive Inc., filed bankruptcy on October 15, 2002. Prior to the bankruptcy filing, Carlyle Fortran Trust, a former landlord of the debtor, initiated a lawsuit against Nvidia, Nvidia directors and officers, and the debtor's directors and officers. The litigation stemmed from Nvidia's purchase of the assets of the debtor in 2001. Carlyle alleged theories of successor liability, tortious interference with contract, conspiracy, and other tort-related theories. In January 2003, Nvidia removed Carlyle's lawsuit to the bankruptcy court.

Carlyle's action was pending as an adversary proceeding in the bankruptcy court. However, on May 9, 2005, the reference was withdrawn and Carlyle's action is now pending in the district court.

The court appointed a Chapter 11 Trustee in the debtor's bankruptcy on January 23, 2003. On February 24, 2003, the Trustee filed an adversary proceeding against Nvidia. The Trustee asserted two theories of recovery: (1) fraudulent conveyance; and (2) defacto merger. The Trustee's lawsuit stemmed from the same transaction, Nvidia's purchase of the debtor's assets in 2001.

In addition, on September 17, 2003, the Trustee filed a complaint in state court against the directors and officers of the debtor, alleging breach of fiduciary duty, among other causes of action. The Trustee settled with the 3dfx directors and officers. On November 19, 2004, the court approved the settlement resulting in the estate recovering $5.5 million.

Prior to the settlement, it is undisputed that the estate's resources were limited. Once the settlement was approved and additional funds came into the estate, Carlyle filed a motion seeking to recover $1,847,644.81 in fees under Bankruptcy Code § 503(b)(3) and (4) for substantial contribution. Carlyle asserts that it is entitled to be reimbursed for the benefit conferred upon the debtor's estate and its creditors as a result of its efforts in the litigation against Nvidia.

Carlyle's motion met with substantial opposition from the Trustee, the Creditors' Committee, and the United States Trustee. The bases for the objections include arguments that Carlyle has been acting in its own best interest and that Carlyle's actions in this case have caused the Trustee to incur additional attorney's fees and costs. As examples of Carlyle's activity, the parties cite to Carlyle's appeal of the court's denial of its motion to dismiss the Chapter 11 bankruptcy case, Carlyle's objection to the Trustee's application to employ special counsel in the 3dfx officer litigation, and Carlyle's opposition to the settlement of the 3dfx officer litigation that resulted in the $5.5 million coming into the estate. The opposition argues that Carlyle should not be entitled to recover for substantial contribution when it has been acting solely to benefit itself and its actions have caused the estate to incur additional attorney's fees and costs.

At the hearing on the motion, Carlyle retreated from its position that it was entitled to approximately $1.8 million in fees and costs for substantial contribution. Carlyle's counsel argued that at the very least, Carlyle should be entitled to recover costs it incurred at the request of the Trustee who lacked the funds to cover such costs.

Carlyle specifically asked that it recover as a substantial contribution its advances for the retainer of experts jointly retained by Carlyle and the Trustee, costs for depositions taken at the request of the Trustee, and costs in connection with documents obtained as part of the Nvidia litigation. In addition, Carlyle requested that one-half of its fees for the depositions taken at the request of the Trustee be reimbursed. Carlyle's counsel stated that Carlyle is seeking an interim award and that it does not expect to be awarded the $1.8 million requested in its motion.

At the hearing on this motion, the Trustee informed the court that requests for Carlyle to take deposition were made because the estate was short on funds. In addition, on May 18, 2005, the court received a faxed letter from the Trustee. The letter was sent to all parties in interest. In the letter the Trustee outlined the available funds in the estate and potential payouts with respect to fee requests.

As part of the letter the Trustee also included statements concerning Carlyle's request. While the Trustee stated that "the Estate takes no position other than what has earlier been filed with respect to . . . the Motion for Substantial Contribution brought by [Carlyle]," the Trustee goes on to state the following:

[I]n trying to find a middle ground with respect to all of this, I have tried to compute what the Trustee would consider to be a fair payment to Carlyle at this point. To do this I have pulled from the affidavits filed by Carlyle and from the Court transcript itself the figures for the various sums that Carlyle proposed, at the very least, be reimbursed to them for their direct costs to date in this matter.

These direct costs were composed primarily of three items. First are Carlyle's costs for retention of experts (some, indeed, which have been retained jointly with the Trustee). The sum for the retentions of these experts is, according to the transcripts at page 13 and 14 of Carlyle's Substantial Contribution Motion, a figure of $122,255.19. Secondly, from page 13 of the same Motion, there are the direct deposition costs that Carlyle paid in connection with the litigation totaling $74,116.07. Finally, and for the third component of these costs, are the sums expended in connection with document duplication and retrieval, and from page 12 of their Motion one can discern that this figure was $64,474.93.

[Carlyle's counsel], in her recitation to the Court at the recent hearing on fees, offered a round approximation of these numbers. . . . In order that the calculations be exact, I have pulled these numbers from the Motion on Substantial Contribution and summed the three figures. They total $261,146.19.

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

(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 . . . 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 . . . of an entity whose expense is allowable under 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. . . .

To be entitled to payment under § 503(b), a creditor must have made a "substantial contribution" to the reorganization of the debtor. In re Cellular 101, Inc., 377 F.3d 1092, 1096 (9^th Cir. 2004). The principal test of substantial contribution is "the extent of the benefit to the estate." Id. (citing In re Christian Life Ctr., 821 F.2d 1370, 1373 (9^th Cir. 1987);In re Consol. Bancshares, Inc., 785 F.2d 1249, 1253 (5^th Cir. 1986)).

The Ninth Circuit recognizes that "services which substantially contribute to a case are those which foster and enhance, rather than retard or interrupt the progress o[f] reorganization." Id. at 1096-97 (quoting In re Consol. Bancshares, Inc., 785 F.2d at 1253). "[A] creditor's attorney must ordinarily look to its own client for payment, unless the creditor's attorney rendered services on behalf of the reorganization, not merely on behalf of his client's interest, and conferred a significant and demonstrable benefit to the debtor's estate and the creditors."In re Consol. Bancshares, Inc., 785 F.2d at 1253 (citation omitted).

While much is made of Carlyle's actions during this case, which it is argued have caused serious detriment to the estate, Carlyle has fronted some costs in this case at the request of the Trustee. Without Carlyle's participation, the Trustee's continued involvement in the Nvidia litigation would have been seriously hampered due to a lack of funds. Thus, the costs in the three categories outlined by Carlyle, which the Trustee agreed were not unreasonable, were rendered in part for the benefit of the estate. These cost outlays have facilitated the continuance of the Nvidia litigation. However, because the services jointly benefitted Carlyle, these costs for joint experts, direct depositions costs, and document reproduction and retrieval, should be split between the two parties. Thus, Carlyle is entitled to recover $130,573.10 of the $261, 146.19 in costs requested.

Carlyle also seeks to recover one-half of its attorney's fees for depositions and asserts that $597,713.99 in attorney's fees were incurred in preparing for and participating at depositions. In reviewing the evidence submitted by Carlyle, the court is unable to discern the exact amount of reasonable attorney's fee associated with the depositions that may have been taken at the Trustee's request when the estate was short on funds. The court does not believe that Carlyle's request of one-half of all deposition fees is reasonable since Carlyle admits that there were depositions in which the Trustee took the lead in questioning witnesses. Thus, the court will deny without prejudice Carlyle's request to recover one-half of its attorney's fees related to depositions because Carlyle has not met the burden of demonstrating substantial contribution to the estate.

As for all other fees and costs that Carlyle seeks to recover as part of its substantial contribution motion, the court will deny them without prejudice. At the hearing Carlyle reduced its request to only those fees and costs which were borne at the request of the Trustee. Given the oppositions and the posture of the case, the court finds Carlyle's remaining request to be premature at this time in terms of substantial contribution to the estate.

For the reasons herein stated, the court concludes Carlyle is entitled to recover $130,573.10, related to one-half of the costs which have directly facilitated the Trustee's involvement in the Nvidia litigation. All other fees and costs are denied without prejudice.