Nixing Permissive Plan Payments Effectively Repeals § 1129(a)(4)

In a recent decision, Hon. Richard J. Sullivan vacated Hon. James M. Peck's memorandum decision approving the payment, pursuant to the Lehman Brothers chapter 11 plan, of the reasonable professional fees of members of the statutory committee of unsecured creditors in the Lehman case.2 Judge Sullivan's decision should raise eyebrows for two reasons. First, although the decision was limited to a dispute over "permissive plan payments" to statutory committee members, it raises significant questions concerning the continued viability of the widely accepted practice of paying the professional fees of other creditors under a plan (e.g., indenture trustees, administrative agents and ad hoc groups) without a prior court determination that such creditors made a substantial contribution to the case. Second, although it purports not to, the decision effectively renders § 1129 (a) (4) of the Bankruptcy Code surplusage.

Background

The Lehman Brothers plan included a provision providing that the reasonable professional fees incurred by statutory committee members and indenture trustees prior to the plan's effective date would be allowed as administrative expenses, and paid by the debtors upon application to the court and subject to court approval.3 Following plan confirmation, the statutory committee members and indenture trustees filed an application seeking payment of their respective professional fees in the aggregate amount of approximately $26 million, to which the U.S. Trustee objected on the grounds that such fees did not qualify as administrative expenses under § 503 (b) of the Bankruptcy Code.4

In a memorandum decision, the bankruptcy court granted the application, holding that § 503 (b) does not prohibit payment of the fees in question pursuant to a plan and that the relevant plan provision is permitted under § 1123 (b) (6) of the Bankruptcy Code, provided that the payments thereunder are subject to court approval as reasonable in accordance with § 1129(a)(4).5 The court further relied on Hon. Robert E. Gerber's Adelphia decision authorizing the payment, pursuant to a chapter 11 plan, of the professional fees of 14 ad hoc groups and certain individual creditors over the U.S. Trustee's objection.6

Several months later, the permissibility of paying statutory committee members' professional fees pursuant to a chapter 11 plan was litigated in American Airlines' chapter 11 cases, with the U.S. Trustee again opposing such payments. In a memorandum decision, Hon. Sean H. Lane approved the payments in question, following the reasoning of Adelphia and Lehman Brothers.7

The District Court's Decision

On appeal, the district court nixed the payment of statutory committee members' professional fees pursuant to the Lehman Brothers plan. At the out set, the court held that § 503 (b) is the exclusive "avenue" for paying allowed administrative expenses, and that neither § 503 (b) nor its "interstices" (i.e., other Code sections affording certain payments administrative-expense status) permit the payment of statutory committee members' professional fees as allowed administrative expenses.8

The court also held that the plan provision providing for the payment of statutory committee members' professional fees could not be justified as a "permissive plan payment" authorized by § 1123 (b) (6) for two reasons. First, chapter 11 plans may only provide for the payment of allowed "administrative expenses" and "claims."9 However, statutory committee members' professional fees do not fall within the scope of § 503 (b), as noted above, and statutory committee members' professional fees do not qualify as "claims" under the Bankruptcy Code.10 Second, authorizing the payment of such fees could result in debtors circumventing the Code's requirements, i.e., § 503 (b), which the Second Circuit...