Letter to the Editor
Web posted and Copyright ©
April 1, 2000, American Bankruptcy
om Salerno provided a thought-provoking piece in last month's "Last in Line" column, criticizing
the decision of the Third Circuit in In re First Merchants Acceptance Corp., 198 F.3d 394 (3d Cir. 1999),
in which the court held that a member of an official committee may apply for reimbursement of
professional fees incurred in the performance of the members' duties). Joel Applebaum has presented
another, less critical column on the same subject for this issue [see p. 32]. However, I think that trade
creditors, the constituency to whom the "Last in Line" column is addressed, have an interest here that
is not really considered in either piece.
Tom's critique suggests that it is inappropriate for professionals to be paid from the bankruptcy estate
without prior approval and disclosure. This ignores two facts. First, all professionals paid under
§503(b)(4) are paid without prior approval of their employment. For example, the attorney for a
petitioning creditor in an involuntary case is compensated from the estate. Second, it also ignores the fact
that an oversecured creditor recovers attorney fees under §506(b) without prior approval of its attorneys'
employment. There is logic behind allowing attorney fees to these kinds of creditors without prior
approval. For example, their professionals' role in the case may be more limited than that of counsel for
debtors and for official committees, who appear regularly before the court. In any event, these creditors'
professionals will still be limited to a reasonableness standard in the review of the applications that they
must still file for review by the court.
Tom also suggests that the reimbursement request of the committee chair in First Merchants took
everyone "by surprise." However, it was not a surprise to the Office of the U.S. Trustee, which has
known since 1994 that this issue exists. It was the U.S. Trustee's announced intention to fight the plain
meaning of the 1994 amendment. Indeed, this effort met with some success, not only in the lower court
in Wilmington, but also in In re County of Orange, 179 B.R. 195 (Bankr. C.D. Cal. 1995).
I take particular issue with the suggestion that this claim for fees is somehow contrary to the
committee's fiduciary duty. Since its enactment in 1978, the Bankruptcy Code has required the creditor
community to carry a heavy burden in the administration of a chapter 11 case and oversight of
management by the debtor-in-possession. "[T]he role of the committee is considered of extreme
importance. It is intended that the committee (and the U. S. trustee...) oversee the debtor and the
reorganization process, as distinguished from the court involving itself in the everyday affairs of the
debtor." King, Chapter 11 of the 1978 Bankruptcy Code, 53 AM. BANKR. L.J. 107, 112 (1979).
Congress, in its 1994 amendment of §503(b)(3), responded appropriately to the concerns of this
constituency. Paying reasonable fees and expenses incurred in performing these duties no more violates
public policy or a committee's fiduciary duty than any other proper cost of administration. To the
contrary, it promotes effective administration through the committee process.
So, the Third Circuit was correct in First Merchants. There is no reason to discriminate among people
who get their expenses under §503(b)(3). Perhaps more important, Congress was right in 1994. A
"technical amendment" now pending before Congress would reverse First Merchants and deny
professional fees to committee members while other §503(b)(3) entities would continue to recover them.
As it considers this issue, which received very little notice in the drafting process, Congress should not
now reverse itself and the Third Circuit by taxing the creditors who carry the burden of chapter 11
administration with the cost of reasonable fees that relate only to their committee duties.
Lawrence R. Ahern III
Gullett, Sanford, Robinson & Martin PLLC