In re Oxford Homes, Inc.

United States Bankruptcy Court for the District of Maine · Corporations

CorporationsBankruptcyChapter 11 reorganizationAdministrative expensesDisclosure statements11 U.S.C. § 503(b)(3)(D)11 U.S.C. § 503(b)(4)substantial contribution

Facts

Connell was a former shareholder and prepetition creditor who, together with the Chapter 11 trustee, devised and proposed Oxford's reorganization plan. Connell's counsel, Steven E. Cope, performed extensive pre-confirmation legal work negotiating, structuring, and drafting the plan and disclosure statement, and Connell later sought administrative allowance for most of those fees and expenses. The plan and each version of the disclosure statement carefully described the administrative expense category and separately classified Connell's own claims, but nowhere mentioned that Connell might seek administrative payment of his attorney's fees. After the plan was confirmed and the case produced substantial proceeds for unsecured creditors, Connell applied for allowance of those previously undisclosed fees.

Issue

May a creditor and joint plan proponent who substantially contributed to a Chapter 11 reorganization obtain administrative allowance of his counsel's pre-confirmation fees under §§ 503(b)(3)(D) and 503(b)(4) when the confirmed plan and disclosure statement did not disclose any intention to seek that treatment? More specifically, does nondisclosure in the confirmation process bar the fee request despite the substantial contribution?

Rule

A creditor's counsel may recover under § 503(b)(4) only if the creditor first qualifies under § 503(b)(3)(D) by having made a substantial contribution. But where a plan proponent or principal author of the plan and disclosure statement intends to seek administrative reimbursement of fees and expenses, that intention and a good-faith estimate of those costs must be disclosed in the disclosure statement and plan as part of the adequate-information process; if not disclosed, the request will be disallowed, at least absent possible immateriality or unforeseeability exceptions.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

In a Chapter 11 case in Portland, Oregon, creditor Dana Mercer worked with the trustee to draft and sponsor the debtor's reorganization plan. After confirmation, Mercer filed a request to have 85% of her lawyer's pre-confirmation fees paid as an administrative expense, even though neither the plan nor the disclosure statement mentioned any such intent or estimated amount.

How should the bankruptcy court most likely rule?

Explanation. The majority held that even where the creditor clearly made a substantial contribution and counsel's work was necessary and reasonable, a plan proponent who intends to seek administrative reimbursement must disclose that intention and provide a good-faith estimate in the disclosure statement and plan. Failure to do so bars the request because allowing it would undermine the adequate-information and confirmation process and unfairly reduce creditor recoveries after they voted. (Derived from In re Oxford Homes, Inc. (n.d.).)