Delaware Court Grants Substantial Contribution Award to Mechanic’s Lien Creditors

Patterson Belknap Webb & Tyler LLP

Patterson Belknap Webb & Tyler LLP

Delaware Bankruptcy Judge Brendan Shannon granted mechanic’s lien claimants $1.6 million for making a substantial contribution in a case by “demonstrably and materially facilitating the process of reorganization.”  In re M & G USA Corp., No. 17-12307, 2019 Bankr. LEXIS 1398 (Bankr. D. Del. May 6, 2019).[i]

The debtors filed chapter 11 after delays and budget problems kept them from finishing the construction of an industrial production facility.  The plant was to produce components used to manufacture plastic bottles and packaging. The forecasted costs of building the plant had increased over four years from $1.4 billion to almost $2.4 billion.  The project was plagued by higher than anticipated labor costs, design problems, and damage inflicted by Hurricane Harvey.  And hundreds of millions of dollars of mechanic’s liens were filed by engineering, procurement, and construction firms.

Soon after the bankruptcy case began, some lien holders formed an ad hoc committee known as the Construction Lienholder Group (“CLG”).  They made it known right away that they would be heard in the case.  One of the first things they did was to ask Judge Shannon to appoint an official committee of lien holders, but he refused.  He said they hadn’t satisfied the “heavy burden imposed by 11 U.S.C. § 1102(a)” and he doubted the “propriety or wisdom” of allowing “a group of putatively secured creditors” to have an official committee in the case.  2019 Bankr. LEXIS 1398, at *5.  Had the motion been granted, the group’s professional fees would have been paid by the debtors’ bankruptcy estate.  Instead, the group’s members had to assume throughout the case that they would pay their own fees.

But that didn’t stop them from filing multiple papers in the case or from being heard on many key issues through confirmation.  They retained counsel and a financial advisory firm; they took an active role in a Bankruptcy Code section 363 sale of the production plant; they objected to the debtors’ plan and disclosure statement; and they ultimately reached certain compromises with the debtors that helped enable the sale to succeed and the case to confirm.

After confirmation, the CLG filed a motion for payment of an administrative expense claim and a finding that they had made a substantial contribution in the case, citing 11 U.S.C. § 503(b)(3) and (4).  The CLG sought full payment from the M & G Litigation Trust that was formed upon confirmation of the fees incurred by the CLG’s attorneys and financial advisors.

The Trust opposed the request, arguing that the lien creditors were likely to receive full payment on their claims, that an award of $1.6 million would amount to a “windfall,” that their actions in the case were motivated to protect their own interests, that the motion practice they undertook was costly, and that their ultimate compromise was not necessary for the plan to confirm.

Judge Shannon noted that “substantial contribution” is a high bar to satisfy. Parties-in-interest are presumed to be “‘self-interested unless they establish that their actions are designed to benefit others who would foreseeably be interested in the estate.’”  2019 Bankr. LEXIS 1398, at *10 (quoting Lebron v. Mechem Fin. Inc., 27 F.3d 937, 946 (3rd Cir. 1994)).  The Bankruptcy Code doesn’t define “substantial contribution” but the contribution must provide “‘tangible, clearly demonstrable benefits to the estate.’”  Id. at *11 (quoting 4 Collier on Bankruptcy, ¶ 503.10[5][a] (Alan Resnick & Henry J. Sommer eds., 15th ed. 2015)).  The actions of those asking for an award must “‘directly and materially contribute[] to the reorganization.”  Id. (quoting Lebron, 27 F.3d at 944).

Judge Shannon cited two specific actions the CLG undertook in the case to justify granting the award sought.  First, he noted that the CLG had “negotiated for an additional $32 million DIP cushion in the DIP Facility’s lienholder reserve.”  2019 Bankr. LEXIS 1398, *15-16.  This reserve allowed the debtors to sell the plant free and clear of the claims of the mechanics’s lienholders.  Otherwise, according to Judge Shannon, the “pre-bankruptcy liens may have served to discourage potential purchasers who were interested in reaping the benefits of a bankruptcy sale.”  Id., *16.  In addition, the lienholders played a meaningful role in the negotiations that produced a consensual plan.  They “facilitated and encouraged the negotiations that led to a settlement between he mechanic’s lienholders and other economic stakeholders . . . .”  Id., *16-17

Beyond these two factors, the CLG had identified and contacted all of the lien claimants, something Judge Shannon described as an “arduous task.”  Id., *17.  And he further emphasized that the CLG did its work in the case “without expectation of compensation.”  Id., *18.

These factors led Judge Shannon to conclude CLG had provided a “substantial contribution” under Bankruptcy Code section 503(b)(3)(D).  He further ruled that the CLG’s professionals could be compensated under section 503(b)(4) based on the “time, the nature, the extent, and the value” of the services provided,” particularly given the extensive participation by the CLG’s professionals in the case.  Id., *19-20.

[i] A mechanic’s lien is a security interest in the title to real or personal property for the benefit of those who supply labor and material to the property.  Creditors in bankruptcy cases who show they have a made a “substantial contribution” in a case (as discussed more fully below in this post) can have their actual and necessary expenses and sometimes the fees of their professionals paid by the bankruptcy estate.  Based on the facts below, the mechanic’s lien creditors applied for and received payment of their expenses and their professionals’ fees because, Judge Shannon concluded, they had made a substantial contribution.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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