MEMORANDUM DECISION REGARDING SUBSTANTIAL CONTRIBUTION APPLICATIONS
Sеctions 503(b)(3)(D) and 503(b)(4) authorize a bankruptcy court to award legal fees and reimburse expenses incurred by creditors who make a substantial contribution to the case. Three law firms have applied for compensation and reimbursement under these provisions. For the reasons that follow, the law firm of Berlack, Israels & Liber-man (“Berlack”) is entitled to an award, but the determination of the actual amount must await further proceedings. The other requests are denied.
BACKGROUND
The background to these cases is described in
Goldin v. Primavera Familienstiftung (In re Granite Partners, L.P.),
In early 1994, interest rates rose and the value of the debtors’ CMO investments dropped. The debtors had pledged a substantial amount of their securities as collateral for margin loans made by the brokers, and when the value of the collateral fell, the lending brokers made margin calls. The debtors could not meet these margin calls, and the brokers liquidated the collateral. Eventually, the debtors’ businesses collapsed in late March and early April 1994, and they ceased to operate.
The debtors filed these chapter 11 eases on April 7, 1994. The United States Trustee appointed an official committee of unsecured creditors (the “Committee”) consisting of six brokers. The six included Kidder, Peabody & Company, Inc. (“Kidder”) and Donaldson, Lufkin & Jenrette Securities Corporation (“DLJ”), two brokers singled out as bearing some responsibility for the debtors’ demise. The United States Trustee declined a request, however, to appoint an official committee of equity interest holders.
Shortly after the commencement of the case, I appointed Harrison J. Goldin, Esq. as chapter 11 trustee to conduct an investigation and render a report.
1
See
11 U.S.C. § 1106(b). He had several obvious targets. Some charged that David Askin and Askin Capital Management, L.P. (“ACM”), insiders of the debtors, engaged in inappropriate trading strategies and mismanaged the debtors and their assets. Others alleged that the brokers created and sold inappropriate securities to the debtors, improperly loaned the debtors the money to buy these securities, improperly liquidated the collateral pledged by the debtors and aided and abetted the wrongful acts committed by the debtors’ insiders. Many, particularly the debtors’
The trustee eventually confirmed a joint plan of liquidation in March, 1997, garnering the acceptance of the diverse and often antagonistic constituencies. The road to confirmation was not a smooth one. The substantial contribution claimants take some degree of credit for the ultimate success of these cases, and now seek to recover their legal fees and expenses. 3 Before considering the nature of their contributions, it is worthwhile to review the principles that govern substantial contribution claims.
DISCUSSION
A. The Substantial Contribution Award
1. The Nature of Substantial Contribution
Section 503 of the Bankruptcy Code authorizes the bankruptcy court to award compensation to creditors for their legal and other expenses incurred in making a substantial contribution to the case. The section provides, in pertinent part, as follows:
(b) After notice and a hearing, there shall be allowed administrative expenses, other than claims allowed under section 502(f) of this title; including—
(3) the actual, necessary expenses, other than compensation and reimbursement specified in paragraph (4) of this subsection, incurred by—
(D) a creditor, an indenture trustee, an equity security holder, or a committee representing creditors or equity security holders other than a committee appointed under section 1102 of this title, in making a substantial contribution in a case under chapter 9 or 11 of this title.
(4) 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.
Compensation based on substantial contribution is designed to promote meaningful participation in the reorganization process, but at the same time, discourage mushrooming administrative expenses.
In re Best Products Co.,
Extensive participation alone is insufficient to justify an award.
In re Best Products Co.,
Conversely, insubstantial services include those that do not actually increase the size of the estate,
In re United States Lines, Inc.,
The concept of substantial contribution awards originated under chapter X of the former bankruptcy act,
In re United States Lines, Inc.,
In addition, some courts have gone beyond these traditional limits. They have granted substantial contribution awards, without regard to the plаn process, where the creditor’s activities have led to a concrete, measurable monetary benefit,
In re McLean Industries, Inc.,
2. Burden of Proof
The applicant bears the burden of proving, by a preponderance of the evidence, that he has rendered a substantial contribution.
In re Lister,
3. A Comparison Between Sections 330 and 503
Bankruptcy law views substantial contribution and ordinary fee applications by court-authorized counsel under 11 U.S.C. § 330(a)
4
quite differently. The substantial contribution test is applied in hindsight, and scrutinizes the actual benefit to the case. Accordingly, the applicant must show a “causal connection” between the service and the contribution.
In re DP Partners Ltd. Partnership,
B. Primavera Familienstiftung and Hubert Looser
Gold, Bennett
&
Cera LLP (the “Gold Firm”) and Bernstein, Litowitz, Berger & Grossman LLP, are the attorneys who represented Primavera Familienstiftung (“Primav-era”) and Hubert Looser.
5
The firms seek
1. The Adversary Proceeding
Sometime after Primavera commenced its district court action against the debtors’ insiders and the brokers, the trustee sued Primavera in this Court. He sought an injunction against the continued prosecution of Primavera’s district court action, eontend-ing that it violated the automatic stay, but in any event, should be enjoined under 11 U.S.C. § 105(a). 7 In Granite I, I enjoined the continued prosecution of certain claims that belonged to the estate, and refused to enjoin the continued prosecution of other claims either because they belonged personally to Primavera and the proposed members of the class or because the doctrine of in pari delicto prevented the trustee from asserting them.
The applicants devoted $34,265.00 in billable time defending the adversary proceeding, Application of Gold Bennett & Cera LLP and Bernstein Litowitz Berger & Grossman LLP for Compensation for Services Rendered and Reimbursement of Expenses, dated April 21,1997 {“Primavera App.”), at 5 n. 7, and now seek an award of substantial contribution for these services. 8 They state that the Granite I decision provided a “benchmark” for determining estate and non-estate claims, and conclude that their work “substantially contributed to the estates by clarifying for them and all other interested parties the scope of the Trustee’s ability to sue on behalf of the estates,” {id. at 5-6), and “by identifying for the benefit of all creditors and all shareholders of the debtors the extent of the rights оf the estate and the shareholders to litigate claims arising out of the collapse of the Granite Funds.” (Id. at 6 n. 10.)
This is like maiming a person, losing the ensuing lawsuit, and then demanding kudos for clarifying the law of battery. Primav-era’s assertion of estate claims violated the automatic stay.
See In re Crysen/Montenay
2. The Disclosure Statement and Plan
The applicants assert that they made substantial contributions to the processes leading to the approval of the disclosure statement and the confirmation of the plan. These’ services accounted for $45,-311.25 in billable time. (Primavera App. at 6 n. 11.) The applicants argue that their objections to the proposed disclosure statement led to clarifications concerning the formation of the Unofficial Investors Committee (“UIC”) and the interests of its members, the provenance, scope and impact of the Investors’ Settlement, the computation of distributions under certain contingencies and the effect of the plan on the Primavera district court class action. The plan objections alerted the Court and the parties to potential internal conflicts in the Litigаtion Advisory Board (the “LAB”) 9 and its attorneys, and led to greater judicial oversight. Further, their unsuccessful objection to the settlement between Kidder and the trustee nevertheless clarified the scope of the release the trustee intended to deliver to Kidder. (Primavera App. at 6-8.)
Mere participation in the negotiation, drafting and confirmation of the plan is not sufficient.
In re Baldwin-United Corp.,
Further, certain of the applicants’ objections involved efforts to improve their own position. The Gold Firm unsuccessfully insisted that the disclosure statement advise investors that they could contact the firm for information about the Primavera litigation. This appeared to be little more than an effort to recruit clients. In addition, its attempt to clarify the effect of thе plan on the Primav-era litigation was also motivated by self-interest and contributed nothing. None of the parties ever maintained that confirmation would extinguish the investors’ personal claims.
3. The Claims Objection
The applicants billed $21,946.25 to the trustee’s claims objection, and contend that they are entitled to a substantial contribution award. The trustee had filed a pleading objecting to all investor claims on the merits, or alternatively, seeking to subordinate the claims under 11 U:S.C. § 510(b). In Granite II, I granted the motion to the extent of subordinating the investor claims.
The applicants submitted their fee request before I decided the subordination motion. As with the trustee’s adversary proceeding, they argue that their opposition- to the trust
Based on the foregoing, the application made on behalf of Primavera’s and Looser’s attorneys for a substantial contribution award is denied.
C. The UIC
The UIC, first organized in December, 1994, consists of a group of thirty-eight shareholders and limited partners in the debtors. The UIC asked the United States Trustee to appoint an unofficial equity committee, but the United States Trustee declined. The UIC never applied to the Court, pursuant to 11 U.S.C. § 1102(a)(2), 10 to compel the appointment of an equity committee.
At the same time that the UIC purported to act as a
de facto
equity committee, it pursued its private interests, often through its participation in these cases. It sued ACM for breach of fiduciary duty and fraud, and Kidder, DLJ and Bear, Stearns for aiding and abetting ACM’s breaches of fiduciary duty and fraud.
See ABF Capital Management v. Askin Capital Management, L.P.,
B.R. 508. In all of these matters, it was represented by the Berlack Firm.
The UIC has filed an application on behalf of the Berlack Firm seeking $1,498,497.00 in fees and $188,859.78 in expenses in support of the UIC’s substantial contribution claim. 11 The application seeks compensation for all of Berlack’s legal servicеs except for two areas: the ABF Capital litigation and the equitable subordination action. While I agree that Berlack did an excellent job representing the UIC, and the UIC facilitated the confirmation of the trustee’s joint plan, I disagree that Berlack is, therefore, entitled to a substantial contribution award for virtually every service that it performed in these bankruptcy cases.
1. The Trustee’s Support
Before considering Berlack’s application, I must consider the weight to accord the trustee’s support for the requested award. Prior to the fee hearing, the Court received the Statement of Harrison J. Gol-din, Trustee, in Support of Application of Unofficial Investors’ Committee for Reimbursement of Professional Fees and Expenses Pursuant to Bankruptcy Code Section 503(b), dated May 12, 1997 (“Goldin Statement ”). 12 Berlack describes this statement as “[c]orroborating testimony by a disinterested party.” (Reply to Objections to the Unofficial Investors’ Committee’s Application for the Reimbursement of Professional Fees and Expenses, dated May 12,1997, at tin. 2.)
As the title indicates, the
Goldin Statement
supports the Berlack application, but in the main, lacks specificity. For example, it describes the UIC’s (and hence, Berlack’s) role as a “counterweight,”
(id.
at ¶¶ 13, 14) and an “aggressive gadfly,”
(id.
at ¶ 15), but provides few examples of concrete benefits. Aside from the UIC’s contributions to the
I must view the trustee’s statement in the light of the circumstances that induced him to tender it. In negotiating the plan, the trustee and the UIC struck a bargain: at first, the trustee undertook to support the UIC’s “reasonably documented” substantial contribution application, and the UIC agreed to support the “reasonably documented” applications submitted by the trustee and his professionals.
Disclosure Statement for the Trustee’s Joint Plan of Liquidation for the Debtors,
dated Dec. 18, 1996, at 48-49. This proposed pledge met with criticism. It seemed that the trustee was promising to support an application, sight unseen and without regard to whether the UIC had made a substantial contribution, in violation of his fiduciary duty.
See In re United States Lines, Inc.,
In response, the trustee and the UIC modified their agreement. In an amendment to thе disclosure statement, the trustee stated that he had determined that the UIC had made a substantial contribution, and agreed to support a “reasonably documented” application, “but only for work done by the Unofficial Investors’ Committee that satisfies the requirements of such provision.” Disclosure Statement for the Trustee’s Third Amended Joint Plan of Liquidation for the Debtors, dated Jan. 27,1997, at 54.
Berlack got what it bargained for. It received the trustee’s endorsement with few specific concessions regarding actual and demonstrable benefits conferred on the estates. No other fee applicant procured a similar promise from the trustee, and consequently, the trustee deemed it inappropriate to comment on any of the several other substantial contribution applications. (Goldin Statement at ¶ 3.) I therefore аccord the trustee’s support little weight.
In any event, I must independently examine the fees and expenses, and determine their reasonableness.
In re Oxford Homes, Inc.,
2. The Scope of Berlack’s Substantial Contribution
With the possible exception of DLJ, everyone involved in these bankruptcies agrees that the UIC made a substantial contribution. The Berlack Firm lent its expertise to the goal of resolving many obstacles to confirmation, and thereby facilitated the successful liquidation of the three debtors. Working with the trustee, the Berlack Firm’s efforts led to the Investor Settlement which paved the way for confirmation and established the postconfirmation administration of the estates and control over the various claims asserted by the debtors against certain brokers. In connection with the confirmation process, the Berlack Firm and the trustee worked jointly on the disclosure statement which I approved, and also facilitated settlements between the trustee and John Polk, Lionel Sterling, the Whitehead entities and Whitehead Institute for Biomedical Research.
Given this undisputed substantial contribution, the Berlack Firm reasons that it is entitled to an award for all of the services it rendered except for the
ABF Capital
and equitable subordination lawsuits that it admits were solely for the benefit of its clients.
13
The Berlack Firm states its
Berlack’s argument founders on a fallacy of logic. It maintains that because the UIC — through Berlaek — made a substantial contribution to confirmation, it follows that all of Berlack’s services preceding confirmation substantially contributed to the cases. The fallacy of
logic
— post
hoc, ergo propter hoc
— reasons from sequence to consequence, assuming a causal connection simply because one event follows another.
See Edward J. Sweeney & Sons, Inc. v. Texaco, Inc.,
3. Berlack’s Nonbeneficial Services
It has been difficult to categorize or identify Berlack’s specific services. Consistent with its “all or nothing” approach, Ber-lack’s application divides its time into two billing categories, but includes most of its time in one category. This category, denominated “Chapter 11 Cases,” consists of 185 pages of billing records accounting for $1,276,520.50 in billable time. 16
It would require a herculean task on my part to segregate the compensable from non-eompensable services, assuming that I could even do so based simply upon the descriptions in the time records. I should not be obliged to pick apart the fee application tо explain which services are not compensable; the Berlaek Firm is required to prove, by a preponderance of the evidence, which services are. Accordingly, the following discussion does not provide an exhaustive list of noncompensable services, but nevertheless highlights the problem with Berlack’s approach to this matter.
a. Disputes with the trustee
The UIC frequently found fault with the direction and pace of these cases, and until the end, was antagonistic to the trustee. The trustee often followed a conciliatory route, trying to reach consensual resolutions to various disputes with broker-creditors. The UIC, on the other hand, lobbied for a bolder and more aggressive approach. For example, at a time when the trustee was
Finally, the UIC attempted to assert estate claims in collateral litigation in violation of the automatic stay. In the
ABF Capital
action pending in district court, the UIC alleged and Judge Sweet ultimately dismissed two claims that, the district court concluded, only the trustee could bring: damages based on ACM’s breach of its fiduciary duties to the debtors,
ABF Capital,
The UIC’s efforts to wrest control over claims that the trustee was administering did not contribute substantially to these cases.
See In re Best Products Co.,
b. Client-related services
Berlack’s application seeks an award based upon services it rendered solely to its clients for their exclusive benefit. Obvious examples include a motion to extend the bar date for its clients only, helping the UIC members prepare and file their proofs of claim, recruiting clients and preparing Rule 2019 statements, billing clients, communicating with clients and responding to requests sent by their clients’ auditors.
In addition, Berlack seeks to charge the estate for the fees it incurred oppоsing the trustee’s motion to expunge or subordinate the investors’ claims. As noted earlier, I granted the alternative relief, and subordinated the claims under 11 U.S.C. § 510(b).
Granite II,
Berlack’s application also includes substantial time devoted to monitoring and participating in the case. During the case, the UIC took an active role in attempting to influence the scope and execution of the trustee’s investigation, while simultaneously conducting its own. Often critical of the trustee’s efforts, the UIC spent substantial time ferreting out claims which the trustee supposedly missed or ignored. 18 In particular, the UIC conducted Rule 2004 exams, commented on the trustee’s reports and met with the trustee to assist his factual investigation and identify claims.
The creditor, even one who makes a substantial contribution, cannot recover for the servicés his attorney devoted to case administration, monitoring and education; such services are deemed to be performed for the client.
See In re 9085 E. Mineral Office Bldg., Ltd.,
In fact, the UIC said it would when it asked me to permit Berlaek to conduct discovery. After the UIC became actively involved, and while the trustee was conducting his investigation, the UIC sought authority to conduct its own examinations pursuant to Federal Bankruptcy Rule 2004. Its request met with opposition. In addition, I expressed concern that since the trustee was already conducting an investigation, the Ber-lack Firm’s own investigation would be unnecessarily duplicative. To quell these concerns, Edward S. Weisfelner, Esq., the UIC’s counsel, assured me that the estates would not bear any of the costs of a parallel investigation:
Under certain circumstances Your Hon- or may be right. I will tell you what they are because they don’t apply here.
If I were counsel to an official committee and I were submitting to Your Honor invoices for payments of my fees out of this Debtor’s estate, you might have a point.
We are funding this investigation ourselves.
(Transcript of hearing, held September 28, 1995, at 21.)
Weisfelner repeated this argument a few moments later:
I suggest circumstances ought to dispel that allusion. We are going to pay for this, the estate is not bearing the expenses, that ought to be a compelling issue. I mean, think about it.
(Id. at 39.)
This argument convinced me to authorize the parallel investigation. Moreover, as it turns out, the UIC had good reason to conduct its own investigation: it intended to sue the brokers and ACM. Yet it now seeks an award of nearly $60,000.00 in fees and expenses for conducting an investigation it said it would not charge to the estates. In addition, it rendered these services on behalf of its clients and used the information to sue ACM and the brokers, sometimes usurping the estates’ claims in the process. Any benefit to the estates is conjectural, and the UIC is not entitled to a substantial contribution award for duplicating the trustee’s investigation.
c. Noncompensable services
Berlaek seeks to recover $136,890.00 that it paid to Barry M. Levine for professional services rendered as the UIC’s expert on capital markets and CMOs. By its terms, however, section 503(b)(4) applies only to attorneys and accountants. Financial advisors, such as Levine, cannot be compensated on a substantial contribution basis.
In re Baldwin-United Corp.,
d. Other services
Some of the services that Berlaek rendered neither hindered nor advanced the cases. For example, Berlaek seeks an award based upon its participation in the proceedings relating to the trustee’s lawsuit against Primavera. The UIC was not even a party to that lawsuit, and Berlack’s services duplicated those of the trustee.
The Berlaek Firm also seeks fees for preparing and prosecuting its fee application. Some eases have included these services as part of the substantial contribution award. They reason that the substantial contribution attorney must apply for fees in the same manner as the court-approved attorney, and nothing justifies treating the two differently.
In re 9085 E. Mineral Office Bldg., Ltd.,
This reasoning does not extend to substantial contribution applications. The creditor’s attorney does not have to keep meticulous records or apply to the court for any compensation in order to get paid. He looks, instead, to his client. If the creditor wants to shift the fee burden to the estate through a substantial contribution application, the creditоr benefits but the estate does not. This is particularly true where, as here, the applicant spills so much ink preparing an application with so little merit. Accordingly, the time spent by the Berlack Firm preparing their fee application did not confer a substantial benefit in the case, and must be borne by its clients.
CONCLUSION
Based on the foregoing, I conclude that Berlack is entitled to a substantial contribution award for the services it rendered in connection with its work on the disclosure statement, the plan and the related settlements discussed above. In light of the Gol-din Statement, Berlack may also be entitled to an award to the extent that its review of the Kidder liquidations led the trustee to discover additional bonds and assert corresponding claims. Berlack must first identify its services, and explain how and to what extent the assertion of these claims led to a reduction in Kidder’s allowable claims under its settlement with the trustee. In all other respects, its application is denied. Berlack Firm may submit a revised application which presents the time records that correspond to those services and expenses that are allowable on a substantial contribution basis as outlined above.
Notes
. Mr. Goldin rendered his final report on April 18, 1996.
. The investors’ claims are described and were considered in
Granite I,
. Since the claimants only seek legal fees and expenses, and the applications were submitted by the attorneys, I sometimes refer to the claimants and their counsel interchangeably.
. The pre-Bankruptcy Reform Act version of 11 U.S.C. § 330(a), which continues.to apply to this case, states:
After notice to any parties in interest and to the United States trustee and a hearing ... the court may award to a ... professional person employed under section 327 or 1103 of this title, or to the debtor’s attorney—
(1) reasonable compensation for actual, necessary services ... based on the nature, the extent, and the value of such services, the time spent on such services, and the cost of comparable services other than in a case under this title; and
(2) reimbursement for actual, necessary expenses.
. Primavera invested $1 million in Granite Corporation, and Looser invested $1.4 million in Quartz.
Granite II,
. The firms, rather than the clients, filed these fee applications. Under the statute, however, the creditor rather than the attorney must file the substantial contribution application.
In re Oxford Homes, Inc.,
. Section 105(a) provides:
The court may issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title. No provision of this title providing for the raising of an issue by a party in interest shall be construed to preclude the court from, sua sponte, taking any action or making any determination necessary or appropriate to enforce or implement court orders or rules, or to prevent an abusé of process.
. The Applicants have not billed or collected these sums from their client, and are essentially contingent fee attorneys who hope to recover a court-approved award upon the successful completion of the class action. One party has objected to the current application, arguing that a substantial contribution claimant cannot recover an award if he has not actually paid legal fees and expenses. In light of the disposition of the request, it is unnecessary to consider this issue.
. Under the plan, the LAB succeeded to the estates’ causes of action.
.Section 1102(a)(2) of the Bankruptcy Code provides:
On request of a party in interest, the court may order the appointment of additional committees of creditors or of equity security holders if necessary to assure adequate representation of creditors or of equity security holders. The United States trustee shall appoint any such committee.
. In response to certain objections, the Berlack Firm agreed to reduce its fee request by $33,-274.50.
. The Goldin Statement is unsworn. In a subsequent affidavit, sworn to May 22, 1997, the trustee incorporated his unsworn statement by reference.
. Berlack also implies that the UIC should be rewarded for investing its time and money participating in these cases. Its application stales that given the financial condition of the estates,
. At another point, Berlaek declares: "[s]taled simply, the Plan would not exist had the UIC not engaged in each of its prior activities.” (Weisfelner Supp. Aff. at ¶ 15) (footnote omitted.)
. The authorities on which Berlaek relies do not support its argument that it is entitled to all of its preconfirmation expenses. Berlaek cites
AM. Int'l, Inc.,
.The absence of project billing ignores the 1991 Guidelines for Fees and Disbursements for Professionals in Southern District of New York Bankruptcy Cases. Under section B.4 of the Guidelines, the professional must separate the time billed to a discrete activity which can reasonably be expected to last more than three months and account for approximately 10% to 20% or more of the fees sought for an interim period. In practice, attorneys involved in large cases like these establish separate billing categories for discrete activities without regard to the anticipated time that will bе spent. The categorization of services in this matter facilitates review of the fee application.
. The UIC points out that although I denied the removal motion, I granted its alternative request to compel immediate consideration of the Kidder settlement which the trustee had reached but did not intend to submit for approval until confirmation. Subsequently, the UIC agreed that consideration of the Kidder settlement should be deferred until confirmation, and it was. Consequently, any benefit that the UIC claims it obtained it immediately surrendered.
. The trustee states that he and his professionals pursued the factual and legal theories independent of the UIC's urging. Goldin Statement ¶ 14. In any event, the UIC must demonstrate a direct and substantial benefit from its investigative input. Although it hypothesizes and boasts about the value of its assistance, the true value, if any, is simply a matter of speculation.