Alexandria, Va. — An article in the May edition of the ABI Journal warned of the troubling precedent that could result from the settlement in the Adelphia Communications Corp. case in which the debtors agreed to pay certain creditors their attorneys’ fees if the creditors dropped their objections to the company’s reorganization plan. “The Adelphia decision surely resulted from a genuine desire to conclude a contentious and difficult bankruptcy case under an unusual set of factual circumstances, but the practice of paying a creditor’s attorneys’ fees in exchange for plan support could quietly become more widespread after Adelphia,” John Sheahan writes in his article “You Support My Plan, I’ll Pay Your Attorneys: A Troubling Precedent.”

Adelphia was the fifth-largest cable company in the United States before filing for bankruptcy in 2002 as a result of internal corruption. On Nov. 18, 2010, the U.S. Bankruptcy Court for the Southern District of New York issued a decision on the payment of non-fiduciary professional fees in the case. The court allowed a number of distressed investors to be reimbursed for legal fees and other expenditures spent in competing for larger recoveries from the estate. Sheahan, a trial attorney in the Office of the General Counsel in the Executive Office for U.S. Trustees, said that the confirmed plan in the Adelphia case included a provision to pay the legal fees of certain creditors who had settled their plan objections and that the court subsequently approved those fees without requiring the creditors’ attorneys to prove that they had made a substantial contribution under §503 of the Bankruptcy Code.

“Before Adelphia, it would have been uncontroversial to hold that the Bankruptcy Code provides just two ways for a professional to be paid from a bankruptcy estate,” Sheahan writes. The first way would be for professionals who work for the estate or an official committee to be paid under §503(b)(2), which grants administrative priority to fees and expenses. Second, other professionals are paid under §503(b)(4), which permits the court to award “reasonable compensation” to the attorneys or accountants of entities who make substantial contributions to the bankruptcy case in specified ways. “The court reasoned that §503 ‘is [not] the only way’ that professional fees can be paid by the estate and relied on a little-used provision of chapter 11 to support its ruling: §1123(b)(6), a catch-all clause authorizing plans to contain ‘any other provision not inconsistent’ with the Bankruptcy Code,” Sheahan explains.

Sheahan writes that the authors of the Adelphia reorganization plan were seemingly motivated by a sincere desire to bring a bitterly divided bankruptcy case to its conclusion under an unusual set of factual circumstances. “Whatever the merits of this highly case-specific approach in Adelphia, it provides little guidance and less certainty in future cases that may follow Adelphia’s precedent,” according to Sheahan. While the decision may raise more questions than it answered, he said that the “U.S. Trustee Program views Adelphia as a narrow decision that should be conservatively applied in future cases.”

To obtain a copy of “You Support My Plan, I’ll Pay Your Attorneys: A Troubling Precedent,” published in the May edition of the ABI Journal, please contact John Hartgen at 703-894-5935 or via email at [email protected].

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