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The Threshold Necessary for a “Substantial Contribution” Finding under Bankruptcy Code Section 503(b)(3)(D) is “Exceedingly Narrow” in Delaware

In re RS Legacy Corp., No. 15-10197, 2016 WL 1084400 (Bankr. D. Del. Mar. 17, 2016) (BLS)

In this Opinion, Judge Shannon denied an individual’s request for allowance and payment of an administrative expense claim for his substantial contribution to the case under Bankruptcy Code section 503(b)(3)(D) in the amount of $203,105.51, which consists of his counsel’s fees and expenses.  In so holding, the Court followed a well-developed body of case law showing that the threshold necessary for a contribution to be “substantial” is exceedingly narrow and such efforts cannot be self-interested.

The issue before the Court arose from a dispute concerning unredeemed gift cards (the “Gift Card Claims”) of RadioShack Corporation and its affiliates (the “Debtors”).  The Texas Attorney General’s Office (“Texas”) commenced an adversary proceeding (the “Texas Action”) seeking, among other things, a declaration that Gift Card Claims were entitled to priority status under section 507(a)(7) of the Bankruptcy Code.  The Texas Action was opposed by the Debtors’ creditors’ committee (the “Committee”), which intervened in the action.  Mark Haywood (the “Movant”), an individual holding unused gift card claims, also intervened in the Texas Action.  Additionally, he commenced his own action seeking substantially similar relief and therein filed a motion for class certification.  The Debtors, Committee, Texas, and certain other attorney generals reached a global settlement resolving the Texas Action.  The Movant was involved in the settlement discussions, but objected to the settlement and filed a motion to estimate his class claim.  The Court overruled the Movant’s objection, denied both of his motions, and approved the settlement.  The Court subsequently confirmed the Debtors’ joint plan of liquidation.  It was against this backdrop that the Movant filed the instant motion seeking an administrative expense claim for his “substantial contribution.”

In order to receive administrative expense priority under section 503(b)(3)(D), a creditor must show that its actual and necessary expenses provided a substantial contribution to the entire bankruptcy case.  Op. at *7.  “Substantial contribution” is not defined in the Bankruptcy Code, so courts have sought to strike a balance between the two controlling policies—encouraging meaningful creditor participation and minimizing administrative expenses to enhance creditor recoveries.  Id.  The Court conducted a two-part analysis to determine whether the Movant provided a substantial contribution to the case.  As an initial matter, the Movant must show that its efforts went beyond self-protection or self-preservation.  Id. at *8.  Case law dictates that extensive participation alone, duplicative services, and self-interested, routine, or expected activities do not generally constitute a “substantial contribution.”  If the Movant overcomes the presumption that all creditors act in a self-interested manner, the Movant must show that it provided an actual and demonstrable benefit to the Debtors’ estate and creditors.  The Court noted that compensation under this provision is reserved for the extraordinary circumstances.

The Court held that the Movant did not overcome his burden of showing that his efforts were not primarily self-interested.  Case-in-point, the Court noted that even if successful in his efforts to obtain priority treatment for the Gift Card Claims, it would have come at the detriment of general unsecured claims, and thus, the Movant’s actions did not seek to enhance recoveries to the entire creditor body.  As a secondary holding, the Court also held that assuming arguendo the Movant overcame the presumption, the Movant presented no evidence that his efforts resulted in an actual and demonstrable benefit to the Debtors’ estate.  The Court noted that simply because a settlement followed his involvement does not create the causal connection between his involvement and the settlement being reached, also citing that there were “many cooks around the pot.”  Id. at *11.  Moreover, the Court stated that his services were largely duplicative.  For these reasons, the Court denied the Movant’s request.