Analysis District Court Judge Reverses Lehman Bros. Decision Allowing Reimbursement of Creditors Attorneys Fees

ABI Bankruptcy Brief | April 1, 2014

April 3, 2014

NEWS AND ANALYSIS

ANALYSIS: DISTRICT COURT JUDGE REVERSES LEHMAN BROS. DECISION ALLOWING REIMBURSEMENT OF CREDITORS' ATTORNEYS' FEES

by George Klidonas of BakerHostetler (New York), co-chair of ABI's Taxation Committee

Until now, there had been a trend emerging in chapter 11 bankruptcy cases where unsecured creditors were successful in obtaining reimbursement of their attorneys' fees pursuant to a plan of reorganization. That trend drastically shifted this week with a Southern District of New York decision in the In re Lehman Bros. case. In this case, Judge Richard Sullivan held that individual members of the official committee cannot seek reimbursement of attorneys' fees under a chapter 11 plan using a "reasonable" standard, but rather the creditors must show that they "substantially contributed" to the bankruptcy estate.

The In re Lehman Bros. case was an historic bankruptcy case that required, in the words of Judge James Peck, "professional excellence and creative problem solving." During the course of the case, a number of issues were litigated, including substantive consolidation and re-characterization of debt. Judge Peck indicated that, presumably in recognition of unsecured creditors' efforts to settle these issues, Lehman Brothers agreed to pay all of the reasonable fees and expenses (including attorneys' fees) incurred by the individual members of the official creditors' committee.

The U.S. Trustee filed an objection with the bankruptcy court, arguing that unsecured creditors cannot seek reimbursement of attorneys' fees under a "reasonable" standard, but rather they must make a showing that they "substantially contributed" to the bankruptcy estate. The bankruptcy court disagreed with the U.S. Trustee, holding that reasonable legal fees and expenses of unsecured creditors may be paid in the absence of a showing of substantial contribution where the provision for fees is an element of a chapter 11 reorganization plan. The district court, however, disagreed with the individual committee members and with the bankruptcy court.

Click here to read the full summary.

REPORT: SOME AMERICANS PAID OFF CREDIT CARDS WHILE AWAITING FORECLOSURE

Research from the Federal Reserve Bank of Philadelphia found that the sheer number of foreclosures during the recession may have helped some Americans pay off other debts, such as credit card bills, the Wall Street Journal reported today. Foreclosures rose sharply during the recession, peaking around 2009, and the timeline for processing them stretched out in some states to as long as three years. That allowed people to remain in their homes longer without making mortgage payments, freeing up money for other expenses, according to research from the Federal Reserve Bank of Philadelphia. "Our findings indicate that households do not consume all the benefits from temporary relief from housing expenses; instead, they use that temporary relief to cure their bad non-mortgage debts and improve their balance sheets," wrote Paul Calem, Julapa Jagtiani and William W. Lang, all economists at the Philadelphia Fed, in a recent working paper. The economists looked at data from U.S. households that were already delinquent on at least one credit card before falling behind on mortgage payments and going into foreclosure from 2004 through 2010. Their analysis of more than 27,500 loans found that people whose foreclosures took longer to process were more likely to pay off non-mortgage debt like credit cards. Read more. (Subscription required.)

Click here to read the working paper.

GM HEARINGS REVIVE DEBATE ON CORPORATE FRAUD PENALTIES

Higher fines and jail time are being considered by U.S. lawmakers who grilled General Motors Co. Chief Executive Officer Mary Barra over why it took years to recall 2.6 million cars for faulty ignition switches, Bloomberg News reported today. The questions of what GM and regulators knew and when are bringing together members of Congress who, while agreeing on little else, are united in seeking some form of restitution for constituents who died in the defective cars. Congress passed laws in 2000 and 2010 after the Firestone tire and Toyota Motor Corp. unintended-acceleration recalls that toughened sanctions while stopping short of broad criminal penalties. "Is $35 million enough?" asked U.S. Senator Claire McCaskill (D-Mo.), referring during a hearing yesterday to the largest civil fine allowed for not reporting defects. "I mean, is that really a deterrent to companies like General Motors or Toyota or Chrysler, or any of the companies?" Henry Waxman, the top Democrat on the U.S. House Energy and Commerce Committee, introduced legislation that would increase penalties for failing to disclose defects. It would impose new fees on automakers starting at $3 per vehicle to boost funding for the U.S. National Highway Traffic Safety Administration. Senate legislation introduced by Democrats Edward Markey of Massachusetts and Richard Blumenthal of Connecticut, who said yesterday that GM could face "criminal liability," would also mandate greater disclosures of industry data. The prospects for criminal penalties increased after the Justice Department last month won an agreement from Toyota to pay $1.2 billion to settle a four-year criminal investigation into whether it hid safety defects related to uncontrolled acceleration. Read more.

New GM shielded itself from liability for crashes that happened before its 2009 bankruptcy. Victims are left to sue a shell company that has few assets. Congressional pressure is building for GM to establish a victim compensation fund notwithstanding the limit on liability. For further analysis, make sure to attend the "Large Complex Trusts: A General Motors Case Study" panel at ABI's Annual Spring Meeting. This panel will discuss the General Motors bankruptcy case with an in-depth look at the issuance of public units in a major bankruptcy. The session will also include the challenges addressed by the trust, such as liability claims. For more information or to register, please click here.

ANALYSIS: WALL STREET CUTS SWAPS EXPOSURE

Banks are seeking to tear up as many derivatives trades as they can to meet new, tougher rules on capital requirements, the Wall Street Journal reported yesterday. Derivatives have become a key battleground in the regulatory effort to avoid a repeat of the financial turmoil of 2008. Since that crisis, U.S. and international regulators have pushed to raise the amount of capital banks must hold against securities and other assets on their books. The proposals have left the largest financial firms scrambling to shrink their balance sheets by reducing, or "compressing," their overall derivatives holdings valued in the tens of trillions of dollars. As of June 30, banks and other securities dealers held derivatives with a combined underlying value of $693 trillion, according to the Bank for International Settlements. Morgan Stanley, Goldman Sachs Group Inc., JPMorgan Chase & Co., Citigroup Inc. and Deutsche Bank AG are among the banks that have stepped up efforts to reduce their piles of derivatives. In January, Morgan Stanley executives said that a push to cut its exposures and shed riskier assets would add 0.3 to 0.4 percentage points to its leverage ratio, which the company expects to exceed 5 percent by 2015. The firm's ratio stood at about 4.2 percent at the end of 2013. U.S. regulators at the Federal Reserve and elsewhere have proposed that the largest banks should hold capital totaling at least 5 percent of assets, a higher leverage ratio than the 3 percent minimum required now. Read more. (Subscription required.)

EXPLORE CHALLENGES THAT LIE AHEAD FOR UNITS AND TRUSTS ESTABLISHED FROM GM'S BANKRUPTCY AT SPECIAL PRESENTATION AT ABI'S ANNUAL SPRING MEETING

Watch below to find out more about what is on tap for ABI's 32nd Annual Spring Meeting at the JW Marriott in downtown Washington, D.C. The conference, taking place April 24-27, 2014, features a roster of the best national speakers, while the depth and scope of topics offer something for everyone.

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ABI IN-DEPTH

NEW CASE SUMMARY ON VOLO: PETTAWAY V. DEPARTMENT OF EDUCATION (4TH CIR.)

Summarized by Suzanne Jett Trowbridge of Goodwin & Goodwin LLP

The Fourth Circuit affirmed the decision of the district court for the Eastern District of Virginia upholding the bankruptcy court's denial of the chapter 7 debtor's request for a hardship discharge of her student loan debt.

For more on the student debt crisis and bankruptcy, be sure to attend ABI's Student Debt Crisis Symposium on May 30 at Georgetown University Law Center. For more information and to register for this important day-long program, please click here.

There are more than 1,200 appellate opinions summarized on Volo, and summaries typically appear within 24 hours of the ruling. Click here regularly to view the latest case summaries on ABI's Volo website.

NEW ON ABI'S BANKRUPTCY BLOG EXCHANGE: NEW GM'S EXPOSURE FOR OLD GM IGNITION DEFECT LIABILITY

A recent blog post explains the bankruptcy law issues pertaining to the extent of "New GM's" liability, if any, "for at least 31 crashes and 13 deaths" resulting from an ignition defect that may have been concealed from the outside world until well after the government-controlled New GM's purchase of General Motors' operating business in 2009.

Be sure to check the site several times each day; any time a contributing blog posts a new story, a link to the story will appear on the top. If you have a blog that deals with bankruptcy, or know of a good blog that should be part of the Bankruptcy Exchange, please contact the ABI Web team.

ABI Quick Poll

Even though the federal government ended up over $10 billion in the hole on the General Motors bankruptcy, the bailout was a necessary evil.

Click here to vote on this week's Quick Poll. Click here to view the results of previous Quick Polls.

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