IN RE FIBREX, INC., (Bankr.S.D.Ind. 1998)

JAMES K. COACHYS, United States Bankruptcy Judge.

This matter comes before the Court on the Application for Compensation of Barnes Thornburg as Administrative Expense Pursuant to 11 U.S.C. § 503(b)(3)(D)-(4) (the "Application"), wherein Barnes Thornburg ("BT") seeks attorney fees in the amount of $16,538.80 as an administrative expense on the grounds that BT made a "substantial contribution" to the resolution of this case. Specifically, BT argues that it was instrumental in obtaining the stipulation which served as the foundation for the consensual plan confirmed by the Court on June 20, 2001. Debtor Fibrex, Inc. ("Fibrex"), has objected, insisting that the terms of the stipulation, at least in relevant part, had been agreed to long before BT's involvement in the case. The Court conducted a hearing on the Application and took the matter under advisement. Having considered the evidence and reviewed the record in this case, the Court concludes that BT's Application should be granted in part and denied in part.

A. Jurisdiction

This Court has jurisdiction over this matter pursuant to 28 U.S.C. § 1334. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(B).

B. Procedural Background

Fibrex and its holding company, FBX Holdings, Inc. ("FBX") each commenced a case under Chapter 11 of the United States Bankruptcy Code, 11 U.S.C. § 101, et seq. (the "Code") on February 13, 1998. The entities continued as debtors-in-possession throughout the pendency of their respective cases. Initially, Fibrex believed that a successful reorganization could be achieved by selling its manufacturing facility in Alexandria, Indiana. The sale generated approximately $1.5 million, the bulk of which was used to pay off Harris Trust Savings Bank, Fibrex's principal secured creditor and post-petition financier. Based upon the continued operation of its remaining facility located in Joplin, Missouri, Fibrex proposed a plan of reorganization on June 15, 1998, which was amended in November of 1998 and again in June of 1999 (the "Second Amended Plan"). However, the Court denied confirmation of the Second Amended Plan, finding that Fibrex's unsecured creditor class had rejected it and that the plan violated the absolute priority rule found at 11 U.S.C. § 1129(b)(2)(B).

FBX actually owned, as its principal assets, the real estate and much of the personal property associated with the Alexandria plant. However, upon the sale of the facility-consisting of the real property, personal property, good will and client base — the parties did not specifically allocate the sale proceeds between the two bankruptcy estates, but instead reserved that issue for a later resolution.

Based on the information provided to the Court at a December 5, 2000, status conference, it appears that 85% of those voting for the Second Amended Plan voted to approve it. However, all of the members of the Official Unsecured Creditors Committee (the "Committee") rejected the plan, despite the fact that the Committee had initially recommended approval of it.

On July 26, 1999, Fibrex filed a Plan of Liquidation and Disclosure Statement (the "Liquidation Plan"), which was proposed in response to an Offer of Purchase filed by American Rockwool Acquisition Corporation. The Court ultimately entertained competing bids for the Joplin facility. At a hearing on September 22, 1999, during which an auction was conducted, the property was sold to Mount Etna Partners, LLC, for $991,000. The Committee objected to the Liquidation Plan and, following a status conference, it appears that Fibrex and the Committee agreed to prepare and file a joint plan of liquidation by December 31, 1999. No joint plan was filed by that deadline.

In March of 2000, BT was retained by various unsecured creditors (the "Individual Creditors") of Fibrex in order to investigate and possibly pursue certain claims against E.Q. Sylvester ("Sylvester"), the president and principal shareholder of Fibrex and FBX, and certain entities owned by Sylvester (the "Related Entities"). In March of 2001, after over a year of inactivity, Fibrex, FBX, Sylvester, the Committee and the Individual Creditors entered into a stipulation (the "Stipulation"). According to the Stipulation, Sylvester waived his claim for compensation, as well as FBX's claim for unpaid rent, against Fibrex, ultimately saving the estate over $2.2 million. The Individual Creditors also waived whatever claims they might have against Sylvester and the "Related Entities." The Stipulation further provided that the parties would approve an amended plan of liquidation to be proposed by Fibrex and the Committee.

The Related Entities include Fibrex, FBX, Fibrex Installations, Inc., Fibrex Sales Ltd. and EQS Holdings, Inc.

Shortly thereafter, a consensual plan incorporating the Stipulation was tendered to the Court (the "Consensual Plan") and distributed to creditors. Ultimately, almost all of Fibrex's creditors accepted the Consensual Plan, and the Court confirmed it on June 20, 2001. At the confirmation hearing, the Court also entertained BT's Application for Compensation and took the matter under advisement.

C. Discussion and Decision

BT argues that it is entitled to receive, as an administrative expense, payment for its fees in representing the Individual Creditors because such representation made a substantial contribution to the case. BT maintains that its role in negotiating the Stipulation was instrumental in the proposal and confirmation of the Consensual Plan. Fibrex has objected to BT's Application, insisting that most of the significant terms of the Stipulation, i.e., Sylvester's waiver of both his own and FBX's claims against Fibrex, had already been agreed to and included in previous plans. According to Fibrex, BT has exaggerated its role in the confirmation of the plan and is instead seeking compensation from the estate for work that actually hindered a more prompt resolution of the case.

Section 503 of the Code provides that certain administrative expenses "shall be allowed" after notice and hearing, including those expenses incurred by "a creditor, an indenture trustee, an equity security holder, or a committee representative . . . in making a substantial contribution in a case under Chapter 9 or 11 of this title . . . ." 11 U.S.C. § 503(b)(3)(D). Section 503(b)(4) further provides for a related award of attorney fees. The Code does not define "substantial contribution" and, not surprisingly, there is a dispute among the courts as to whether a creditor's actions in providing a substantial contribution must arise from altruistic motives.

The Courts in In re DP Partners, Ltd., 106 F.3d 667 (5th Cir. 1997), and more recently in In re Celotex Corp., 227 F.3d 1336 (11th Cir. 2000), have both held that, given the plain language of § 503(b)(3)(D), a creditor's motivation is irrelevant in deciding whether there has been a substantial contribution. There is, however, case law to support a contrary interpretation of the statute, i.e., that a creditor's self-interest will defeat a claim under § 503(b)(3)(D) or (b)(4), notwithstanding an "incidental" benefit to the estate. See In re Lister, 846 F.2d 55 (10th Cir. 1988); In re Lebron, 27 F.3d 937 (3rd Cir. 1994).

Based on the plain language of the statute, this Court is persuaded that motivation is not dispositive in determining whether a creditor has made a substantial contribution to a case. It is hard to imagine a scenario in which a creditor is acting in anything other than its own self-interest. However, the Court disagrees with Celotex to the extent that it holds, or can be interpreted to hold, that motivation is completely irrelevant. See Celotex, 227 F.2d at 1339. The Court does not wish to rule out instances in which the creditor's motivation or adverse position to the estate sheds light on whether the creditor did, in fact, contribute to the administration or resolution of the case and, if so, whether the contribution is significant enough to merit an administrative expense claim.

Giving meaning to the Code's use of the word "substantial," courts generally agree that a creditor's expenses are only entitled to administrative priority if they "directly and materially contributed" to the case. Id. (quoting Lebron, 27 F.3d at 943-44 (original citation omitted)). Other courts have stated that the applicable test is whether the efforts of the applicant resulted in an actual and demonstrable benefit to the debtor's estate and the creditors. Lister, 846 F.3d at 57 (citing In re Consolidated Bancshares, Inc., 785 F.2d 1249 (5th Cir. 1986)). This Court agrees that a creditor's expenses should not be given administrative priority unless the creditor's participation played an integral role in reorganization or in the orderly resolution of the case.

At the hearing on the Application, counsel for Fibrex "conceded" that BT's claim for administrative expense priority should be either granted or denied in its entirety. However, in applying the standard set forth above, the Court cannot ignore the fact that the bulk of BT's billed time is attributable to the investigation, discussion and assertion of the Individual Creditors' alleged claims against Sylvester and the Related Entities. In fact, by the Court's calculations, $12,413.80 of the $16,538.80 requested by BT in its Application is attributable to this type of work.

More specifically, beginning in March of 2000, BT attorneys researched, discussed and prepared memoranda on such issues as standing, equitable subordination, piercing the corporate veil, and joint ventures in an effort to determine what claims the Individual Creditors may have had against Sylvester and the Related Entities. Some of the time entries indicate that BT incurred fees investigating claims to be brought outside of the bankruptcy case. Finally, there are several entries for time spent reviewing a proof of claim, presumably filed on behalf of an Individual Creditor.

With the exception of 3.1 hours of time billed by Mssrs. Powlen and Delaney on September 25, 2000, for $875.50 in fees, only the last two invoices, in the total amount of $3,249.50, indicate time and expenses spent in negotiating and/or preparing the Stipulation.

The Court cannot conclude that the fees incurred by BT in pursuing the Individual Creditors' claims substantially contributed to this case or to the creditors as a whole. BT's argument at the hearing on the Application focused exclusively on the benefits derived from the Stipulation, but did not explain why time spent specifically in pursuit of the Individual Creditors' claims should be treated as an administrative expense. While the Court presumes that the Individual Creditors had to understand the nature of their claims, at least to some extent, before waiving them in the Stipulation, there is simply no evidence to support a conclusion that this work "directly and materially" contributed to the resolution of the case. Thus, $12,413.80 of BT's requested fees are not entitled to administrative expense priority.

The Court's determination of whether BT's remaining fees of $4,125.00 are entitled to administrative priority is more problematic. As outlined above, the procedural history in this case indicates that Fibrex had reached an impasse in formulating a confirmable plan by late 1999. The case then languished for over one year due, at least in part, to the Individual Creditors' stalemate with Fibrex and Sylvester. It is also evident that the case was revived in early 2001 upon the Court's approval of the Stipulation, which then led to the proposal, acceptance, and confirmation of the Consensual Plan. However, it less than clear whether BT's efforts were instrumental in obtaining the Stipulation and formulating the Consensual Plan.

At the heart of BT's Application is the allegation that Sylvester's waiver of over $2.2 million in claims against the estate was conditioned upon the Individual Creditors' waiver of their causes of action against Sylvester and/or the Related Entities and that, as a facilitator of the Stipulation, BT made a substantial contribution to the case. However, as emphasized by Fibrex in its Objection to the Application, Sylvester had already agreed to this waiver in previous plans, beginning with the amended plan filed in November, 1998. According to Fibrex, BT's efforts were merely superfluous.

Nevertheless, it seems logical to assume that Sylvester conditioned his stipulated waiver on the Individual Creditors' waiver of their claims. After all, none of the previous plans were binding, and Sylvester's claims against the estate remained viable, giving him considerable leverage against Fibrex's unsecured creditors. Clearly, without Sylvester's cooperation, this case would have continued to languish. It follows that BT's facilitation of the Individual Creditors' waiver was necessary to the proposal and confirmation of the Consensual Plan and made a substantial contribution to the resolution of this case. The Court therefore concludes that BT is entitled to receive $4,125.00 in compensation for the fees it incurred in obtaining the waiver, see footnote 5, infra, as an administrative expense.

D. Conclusion

Admittedly, it is difficult for the Court at this stage in the proceedings to parse through the parties' dealings with one another and determine with any certainty their cause and effect. Given how long this case had remained pending and Fibrex's difficulty in proposing a confirmable plan, the assistance provided by BT in reaching a consensus among the parties substantially contributed to this case and should be rewarded through the payment of an administrative expense claim. However, the Court finds a significant difference between the work performed in obtaining the Stipulation and the work performed in pursuit of the Individual Creditors' claims. For that reason, while BT is entitled to an administrative claim in the amount of $4,125.00, the remaining $12,413.00 requested in the Application is not entitled to a similar treatment.