Letter to the Editor

Letter to the Editor

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Tom Salerno provided a thought-provoking piece in last month's "Last in Line" column, criticizing the decision of the Third Circuit in In re First Merchants Acceptance Corp., 198 F.3d 394 (3d Cir. 1999), in which the court held that a member of an official committee may apply for reimbursement of professional fees incurred in the performance of the members' duties). Joel Applebaum has presented another, less critical column on the same subject for this issue [see p. 32]. However, I think that trade creditors, the constituency to whom the "Last in Line" column is addressed, have an interest here that is not really considered in either piece.

Tom's critique suggests that it is inappropriate for professionals to be paid from the bankruptcy estate without prior approval and disclosure. This ignores two facts. First, all professionals paid under §503(b)(4) are paid without prior approval of their employment. For example, the attorney for a petitioning creditor in an involuntary case is compensated from the estate. Second, it also ignores the fact that an oversecured creditor recovers attorney fees under §506(b) without prior approval of its attorneys' employment. There is logic behind allowing attorney fees to these kinds of creditors without prior approval. For example, their professionals' role in the case may be more limited than that of counsel for debtors and for official committees, who appear regularly before the court. In any event, these creditors' professionals will still be limited to a reasonableness standard in the review of the applications that they must still file for review by the court.

Tom also suggests that the reimbursement request of the committee chair in First Merchants took everyone "by surprise." However, it was not a surprise to the Office of the U.S. Trustee, which has known since 1994 that this issue exists. It was the U.S. Trustee's announced intention to fight the plain meaning of the 1994 amendment. Indeed, this effort met with some success, not only in the lower court in Wilmington, but also in In re County of Orange, 179 B.R. 195 (Bankr. C.D. Cal. 1995).

I take particular issue with the suggestion that this claim for fees is somehow contrary to the committee's fiduciary duty. Since its enactment in 1978, the Bankruptcy Code has required the creditor community to carry a heavy burden in the administration of a chapter 11 case and oversight of management by the debtor-in-possession. "[T]he role of the committee is considered of extreme importance. It is intended that the committee (and the U. S. trustee...) oversee the debtor and the reorganization process, as distinguished from the court involving itself in the everyday affairs of the debtor." King, Chapter 11 of the 1978 Bankruptcy Code, 53 AM. BANKR. L.J. 107, 112 (1979). Congress, in its 1994 amendment of §503(b)(3), responded appropriately to the concerns of this constituency. Paying reasonable fees and expenses incurred in performing these duties no more violates public policy or a committee's fiduciary duty than any other proper cost of administration. To the contrary, it promotes effective administration through the committee process.

So, the Third Circuit was correct in First Merchants. There is no reason to discriminate among people who get their expenses under §503(b)(3). Perhaps more important, Congress was right in 1994. A "technical amendment" now pending before Congress would reverse First Merchants and deny professional fees to committee members while other §503(b)(3) entities would continue to recover them. As it considers this issue, which received very little notice in the drafting process, Congress should not now reverse itself and the Third Circuit by taxing the creditors who carry the burden of chapter 11 administration with the cost of reasonable fees that relate only to their committee duties.

Lawrence R. Ahern III

Gullett, Sanford, Robinson & Martin PLLC

Journal Date: 
Saturday, April 1, 2000