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Bankruptcy Court Awards Substantial Contribution Only to Spansion’s Ad Hoc Committee of Convertible Noteholders

In re Spansion Inc., No. 09-10690 (KJC) (Bankr. D. Del. May 14, 2014)

In this long-awaited Memorandum Order, the Honorable Kevin J. Carey recognized that the Ad Hoc Committee of Convertible Noteholders (the “Ad Hoc Convert Committee”) assisted the Court in determining the enterprise value of Spansion Inc. and its affiliated debtors (the “Debtors”) and thus, allowed a substantial contribution award for the committee’s directly attributable professional fees and expenses.  In the same Order, the Court held that the Ad Hoc Committee of Equity Security Holders of Spansion Inc. (the “Ad Hoc Equity Committee”) was not entitled to an award of substantial contribution and denied its request for payment of approximately $1.8 million.

Awards for substantial contribution under sections 503(b)(3) and (4) are limited.  While substantial contribution remains undefined in the Bankruptcy Code, Judge Carey is not without experience in its interpretation and application.  His Honor’s Opinion in In re Summit Metals, Inc., 379 B.R. 40 (Bankr. D. Del. 2007) aff’d 406 F. App’x 634 (3d Cir. 2011), is a must read for any practitioner advocating on behalf of a creditor seeking payment from an estate for its efforts during a reorganization proceeding.  While an actual and demonstrable benefit to a debtor’s estate and creditors is required, the Court in Summit Metals makes clear that several other factors are weighed by courts, e.g., “whether the services were provided to benefit the estate itself or all of the parties in the bankruptcy case; whether the services conferred a direct benefit upon the estate; and whether services were duplicative of services performed by others.”  379 B.R. at 51.  Importantly, “applicants who act ‘primarily to serve their own interests and . . . [who would have acted] absent an expectation of reimbursement from the estate’ cannot be compensated[.]” Id.

In Spansion, the Court found that both committees “engaged in conduct ‘unmistakably aimed at . . . gaining leverage to enhance or create recoveries’ for their constituents.”  However, the Court ruled that the Ad Hoc Convert Committee contributed a benefit to the Debtors’ estates during the confirmation process by aggressively questioning the Debtors’ enterprise valuation methodology and presumptions, and by presenting its own versions of the same.  These efforts, along with those of the Debtors and the ad hoc committee of senior noteholders, led to the Court’s determination of enterprise value.*  Without them, the Court found it might have assigned a lower value to the estates’ enterprise and thus, awarded substantial contribution to the Ad Hoc Convert Committee.

While the Ad Hoc Equity Committee argued that it too added value to the estates by contesting valuation, the Court disagreed.  Its efforts were held by the Court to play “virtually no role in determining the value of the assets or of the enterprise value” and “were almost completely duplicative” of those made by the Ad Hoc Convert Committee.  As such, the Court denied the Ad Hoc Equity Committee any award of substantial contribution.

* A comprehensive background of the proceedings can be found in the Court’s OpinionIn re Spansion, Inc., 426 B.R. 114 (Bankr. D. Del. 2010), which denied confirmation of the Debtors’ proposed second amended joint plan of reorganization.