Conventional Trustees Must Make Substantial Contribution to Qualify for Administrative Fees | Dechert LLP
The United States Bankruptcy Court for the Southern District of Texas recently clarified the administrative fee standard for conventional trustees by stating that they can only recover fees and expenses as an administrative fee when they bring a “substantial contribution”. This standard requires more demonstration than the “inheritance benefit,” which is the standard for general administrative costs. In re Sanchez Energy Corp., No. 19-34508 (Bankr. SD Tex. May 3, 2021).
Prior to filing a Chapter 11 application, Sanchez Energy Corporation (“Sanchez“) Has issued two deeds for certain senior notes for which Delaware Trust Company (“DTC”) Acted as Trustee of the Successor Trust Indenture. The confirmed Chapter 11 plan provided for full cash payment for holders of authorized administrative requests. The terms of the deeds of agreement stated that DTC would be entitled to payment of fees and expenses, and that these fees and expenses could be classified as administrative expenses in a bankruptcy case.
DTC filed its proof of claim requesting $ 928,345, or approximately $ 743,000 for fees and expenses incurred by attorneys and $ 185,974.27 for fees and expenses incurred directly by DTC. DTC argued that it was entitled to an administrative charge claim for those costs and expenses under Section 503 (b) (1) (A) because Sanchez “knowingly and willfully accepted” DTC’s services which benefited his estate. Mesquite Energy, Inc. (“MesquiteThe renamed reorganized debtor argued that DTC’s actions had failed to achieve the level of “substantial contribution” required under the applicable standard.
In discussing the applicable standard for administrative expenses, the Court began by emphasizing the general standard of Section 503 (b) (1) (A), which states that administrative expenses include “actual and necessary costs and expenses. to preserve the estate ”. The article goes on to state that to be considered an administrative expense, the expense “must have benefited the estate and its creditors”. The Court then noted that Section 503 (b) (3) – (5) sets a higher standard for expenses to be considered administrative expenses when conventional trustees and related professionals are involved. Under section 503 (b) (3) (D), conventional trustees and related professionals are authorized to recover “actual and necessary expenses”, when they make “a substantial contribution in a Chapter 9 matter. or 11. ” Further, Section 503 (b) (5) gives administrative priority to “reasonable remuneration for the services rendered by a conventional trustee in making a substantial contribution… depending on time, nature, extent and the value of those services. ” Finding that Congress had created a standard specifically for indemnifying trustees by trust deed, the Court ultimately concluded that the applicable standard for determining whether DTC could be paid on the basis of administrative costs was the substantial contribution standard.
In applying the standard to the present case, the Court noted that the substantial contribution standard is a high bar, requiring that the contribution be “substantial in amount, value or value” and that it be causally linked. with services. This enhanced standard, the Court found, gave effect to section 503 (b) in its entirety and ensured that provisions specifically directed at treaty trustees were not made redundant.
In considering the different categories of services provided by DTC, the Court rejected DTC’s arguments that it had substantially contributed to Sanchez’s estate by fulfilling the necessary role of conventional trustee, advising noteholders of the status of the reorganization. , by filing proof of claim on behalf of the Noteholders. , by choosing not to oppose the reorganization plan and by assuming the role of member of the Committee. The Court found, however, that DTC, as the noteholder notification agent, was entitled to administrative priority to the extent that it fulfilled Sanchez’s notification obligations. The Court noted that if DTC had not taken on the role of notification agent, Sanchez himself would have been entrusted with these obligations. As a result, DTC’s actions contributed significantly to Sanchez’s reorganization by directly sparing Sanchez a substantial real estate fund expense related to the notification.
To take away
Although the ruling does not have precedent value and does not cite any other authority on this matter, conventional trustees and noteholders should take note of the Sanchez Energy Corp. Carefully rule and structure and document the actions of the indenture trustee, so that it is well placed to establish that the actions meet the substantial contribution standard.