The United States Court of Appeals for the Third Circuit recently held that the Bankruptcy Code provision that authorizes reimbursement of expenses to a member of a creditors' committee also authorizes reimbursement of attorneys' fees incurred by a committee member in the performance of committee duties. In what is apparently a question of first impression in the courts of appeals, the Third Circuit addressed the issue of whether the 1994 amendment to section 503 of the Bankruptcy Code, which authorized reimbursement of expenses to a member of a creditors' committee, also serves as a basis for the reimbursement of attorneys' fees incurred by a committee member.
In First Merchants Acceptance Corp. v. J.C. Bradford & Co. (In re First Merchants Acceptance Corp.), the United States Trustee formed an official committee of unsecured creditors. Pursuant to section 1103(a) of the Bankruptcy Code, the committee employed attorneys whose retention was approved by the bankruptcy court. J.C. Bradford & Co., the holder of one of the largest claims against the debtor, was appointed to the creditors' committee and served as its chairman. Bradford retained its own law firm to assist Bradford in its capacity as both a creditor and a member and chairman of the creditors' committee.
After the bankruptcy court approved the debtor's chapter 11 plan, Bradford applied for reimbursement, as an administrative expense, of some of the attorneys' fees it had incurred as a member and chair of the committee. Bradford contended that some of its attorneys' services had been performed with the knowledge of, and at the request of, committee members and the committee's counsel. The bankruptcy court approved the applications for attorneys' fees of counsel to both the debtors and the creditors' committee, but denied Bradford's application for reimbursement of its attorneys' fees.
An Issue of Statutory Interpretation
The decision turns on the interpretation of the relevant statutory provisions. Bankruptcy Code section 503(b)(3)(F), which was added to the Bankruptcy Code by the Bankruptcy Reform Act of 1994, provides for the allowance as administrative expenses of the actual, necessary expenses, other than compensation and reimbursement specified in paragraph (4) of this subsection, incurred by - . . . a member of a committee appointed under section 1102 of this title, if such expenses are incurred in the performance of the duties of such committee.
Section 503(b)(4) allows as administrative expense reasonable compensation for professional services rendered by an attorney or an accountant 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 or accountant. (emphasis added).
Bradford contended that the meaning of the statute is clear on its face and expressly permits a member of a creditor's committee to recover reasonable compensation for professional services incurred in its capacity as a committee member. Bradford argued that because the meaning of the statute is unambiguous, the court should not look beyond the statutory text to attempt to discern legislative intent.
The bankruptcy court reasoned that the relevant statutory provisions are ambiguous as to whether an individual committee member may obtain reimbursement for professional fees. It found that although Bankruptcy Code section 504(b)(4) authorizes reimbursement of attorneys' fees of an "entity," a "member of a committee" is not included within the Bankruptcy Code's definition of an "entity." Therefore, the court looked beyond the statutory language and, based on the legislative history and the policies of the Bankruptcy Code, concluded that Congress intended to prohibit an individual committee member from recovering its attorneys' fees as administrative expenses.
The debtor echoed the bankruptcy court's reasoning and conclusion, and argued that Bradford was not entitled to reimbursement for its attorneys' fees. The Third Circuit found the bankruptcy court's reasoning unpersuasive and concluded that the term "entity" in the statute is unambiguous, as it includes both a corporation and a creditor and, therefore, a member of a committee as well.
The U.S. Trustee urged the Third Circuit to affirm the bankruptcy court's ruling, emphasizing that Bradford's reading of the statute is contrary to the purpose of the Code and the legislative history. The Trustee contended that under the statute, reimbursement to a committee member is limited to "formal committee work . . ., not a member's informal or personal response to its formal committee appointment." The Third Circuit observed that, according to the Trustee's interpretation, work done by a committee member's personal lawyer that inured to the benefit of the committee would not be entitled to compensation because the lawyer had not been authorized to represent the committee. Ironically, if the same service were performed by the committee's lawyer, it would be compensable as having been incurred in the performance of committee duties.
The Third Circuit rejected the notion that the nature of the service depends on the identity of the actor. In its view, there is no principled way to read the language of section 503(b)(4) that allows recovery of professional fees "of an entity whose expense is allowable under paragraph (3)" to include those "entities" enumerated in subsections (A) through (E) but to exclude the entity covered by subsection (F) - "a member of a committee appointed under section 1102" of the Bankruptcy Code. Accordingly, the Third Circuit concluded that a straightforward reading of the statute permits committee members to recover attorneys' fees for work performed in connection with the member's service on the committee.
The debtor urged the court to disregard the plain language of the statute and, instead, to effectuate congressional intent. The court responded that, even assuming, for the sake of argument, that it was justified in resorting to legislative history when there is no ambiguity in the statutory language, the legislative history did not resolve the issue of Congress's intent when it added subsection (F) to section 503(b)(3). Moreover, the court explained that "only absurd results and 'the most extraordinary showing of contrary intentions' justify a limitation on the 'plain meaning' of the statutory language."
Tension with Statutory Scheme for Retention of Professionals by a Committee
Section 1103(a) of the Bankruptcy Code establishes a procedure for a creditors' committee to employ counsel. That procedure includes the requirement of prior court approval for the hiring of committee counsel. The court expressed some concern that the plain language of section 503(b)(4) creates an unreconciled tension with the statutory scheme of prior court approval for retention of professionals by a committee. The requirement of prior court approval was intended to ensure that the court could monitor the integrity, experience, and competency of attorneys engaged in bankruptcy cases. The court pointed out that Bradford's plain reading of the statute would allow committee members to retain counsel privately, without court review or notice to the committee or other creditors. Since the only review would come "after the fact," when reimbursement of compensation was requested, "the potential for the abuses that ' 1103 was designed to eliminate is a real concern." Accordingly, the court stated that it could not lightly dismiss the argument that the plain reading of section 503(b)(4) conflicts with the statutory purpose of section 1103.
The debtor and the U.S. Trustee urged the court to exclude the entire category of attorneys' fees for committee members because of the inherent conflict between awarding them compensation under section 503(b)(4) and the Bankruptcy Code's separate provisions in section 1103 pertaining to employment of counsel. Although the Third Circuit acknowledged the statutory tension, it did not find that to be sufficient reason for ignoring the statute's plain language.
In the Third Circuit's view, this conclusion did not mean that creditors' committee members must automatically receive compensation for the lawyers' fees they incurred in connection with their duties as committee members. However, the court concluded that, until such time as Congress might amend the statute to clarify its intent, bankruptcy courts must apply the existing statute and exercise their sound discretion to ensure that the statutory standards are maintained. That is, courts must ensure that "only fees that are demonstrably incurred in the performance of the duties of the committee . . . are reimbursed," that the fees requested are reasonable, and that the services performed were necessary.
The Third Circuit's ruling is binding only on courts within the Third Circuit. Therefore, it remains to be seen whether courts outside the circuit will follow the Third Circuit's opinion, or whether they will find some justification for avoiding the application of the statute's plain meaning, particularly in light of the tension it brings to bear on the provisions for judicial oversight of professional retention set forth in section 1103.
First Merchants Acceptance Corp. v. J.C. Bradford & Co. (In re First Merchants Acceptance Corp.), 198 F.3d 394 (1999).