In re: KiOR, Inc.
MEMORANDUM OPINION re 17 Request for Oral Argument and Bankruptcy Court's Order. Signed by Judge Gregory M. Sleet on 2/27/2017. (asw)
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF DELAWARE
IN RE: KIOR, INC.,
Banla. Case No. 14-12514 (CSS)
LEIDOS ENGINEERING, LLC,
Civ. No. 15-1009 (GMS)
KIOR, INC. and ANDREW R. VARA,
Acting United States Trustee,
Presently before the court is the appeal (D.I. 1) of Leidos Engineering, LLC ("Leidos")
from a Banlauptcy Court order (B.D.I. 793) 1 ("Order") denying its application for allowance and
payment of attorneys' fees and costs as an administrative expense under 11 U.S.C. §§ 503(b)(3)(D)
and (b)(4) (B.D.I. 755) ("Application") on the basis that Leidos did not carry its burden of proof
in establishing a substantial contribution to the Chapter 11 case. For the reasons that follow, the
court will affirm the Order.
A. The Chapter 11 Case
The court writes solely for the parties and will, therefore, only briefly recite the facts
essential to the dispositi.on. On November 9, 2014, Ki OR, Inc. ("Debtor") filed a voluntary petition
The docket of the Chapter 11 case, captioned Jn re KiOR, Inc., Case. No. 14-12514 (CSS) (Bankr. D. Del.), is cited
herein as "B.D.I. ."
seeking relief under Chapter 11 of the Bankruptcy Code. Leidos was listed ·among the Debtor's
twenty largest unsecured creditors with a scheduled claim of $121,893 on account of trade debt.
(See B.D.I. 1 at 11.) Despite the efforts of the Office of the United States Trustee ("UST") to form
a statutory committee of unsecured creditors in the Chapter 11 case, only two creditors (including
Leidos) applied to serve on the committee. The UST determined that there were insufficient
creditors to form an official creditors' committee, and none was appointed. (See B.D.I. 137.) The .
Debtor's proposed timeline contemplated an auction and sale process and emergence from the
Chapter 11 case in less than four months. (See B.D.I. 2 at 14.) Consistent with this timeline, the
Debtor filed its proposed plan ofreorganization on December 15, 2014, which was amended and
supplemented several times. (See B.D.I. 149, 219, 470, 564.)
During the Chapter 11 case, Leidos filed two objections. Three parties, including Leidos,
filed objections to the Debtor's disclosure statement. (B.D.I. 244, 246, 316.) Leidos objected on
the basis that the disclosure statement did not include adequate information to identify which
creditors would qualify for more favorable treatment under the plan. 2 (See B.D.I. 244.) Although
the Debtor's intent to disclose that information through the filing of a plan supplement was set
forth in the Disclosure Statement (see B.D.I. 150 at 24), Leidos objected to the timing of the
disclosure. Later in the case, six parties, including Leidos, filed objections to confirmation of the
plan. (B.D.I. 576, 580, 582, 583, 587, 593.) Leidos objected on the basis of (i) the plan's
. classification of the trade creditor class, (ii) the amount of funding for the liquidating trust, and
(iii) the selection of the liquidating trustee. (See B.D.I. 576.) While the Bankruptcy Court
overruled Leidos' objections regarding improper classification and selection of the liquidating
Leidos argued that, depending on how each trade creditor was categorized, it would either receive a 50% cash
payment of its claim plus a pro rat a distribution from the liquidating trust, or it would receive only the pro rata
distribution. (See B.D.l. 244 at 3-4.)
trustee, the plan was modified to increase the amount of funding for the liquidating trust from
$100,000 to $400,00 0. The Debtor contends that funding was increased in response to a direct
request made by the proposed liquidating trustee - not as a result of Lei dos' plan objection. (See
B.D.I. 774 at 5.) On June 9, 2015, the Bankruptcy Court confirmed the plan of reorganization,
and the effective date of the plan occurred on June 30, 2015. (B.D.I. 640.)
B. The Application
On August.14, 2015, Leidos filed its Application seeking allowance and payment of an
administrative expense claim in the amount of $49,458.60 for professional fees and costs incurred
in the Chapter 11 case pursuant to 503(b)(3)(D) and (b)(4). (See B.D.I. 755.) Section 503(b)(3)
of the Bankruptcy Code provides that certain administrative expenses shall be allowed after notice
and a hearing. 11 U.S.C. § 503(b). Administrative expenses may include expenses incurred by "a
creditor ... in making a substantial contribution in a case under chapter : .. 11 of this title." 11
U.S.C. § 503(b)(3)(D).
Section 503(b)(4) provides for a related award of attorney's fees. 11
U.S.C. § 503(b)(4). The phrase "substantial contribution" is not defined in the Bankruptcy Code,
but the appropriate inquiry under Third Circuit law is "whether the efforts of the applicant resulted
in an actual and demonstrable benefit to the debtor's estate and the creditors." See Lebron v.
Mechem Fin., Inc., 27 F.3d 937, 944 (3d Cir. 1994).
Leidos submitted no evidence in support of the Application other than its attorneys' time
records. (B.D.I. 755.) Leidos argued in the Application that, in the absence of a statutory creditors'
committee, it had served as the "de facto creditors' committee," as the "most active trade creditor"
in the case, and pro,vided "meaningful participation" by monitoring the case and filing its two
objections, which "benefitted all trade and unsecured creditors." (See B.D.I. 755 at 1, 6.) Leidos
argued that its objections had resulted in the disclosure of critical information and increased
funding for the liquidating trust. (See id. at 7.)
Both the Debtor and the UST ("Appellees") objected to the Application on the
Leidos' limited involvement in the Chapter 11 case and a lack of evidence that Leidos made a
substantial contribution. (See B.D.I. 774, 775.) According to Appellees, Leidos was merely an.
interested creditor, did not take on any significant role in the case, filed only two limited objections,
and did not meet its 'burden of establishing by a preponderance of the evidence that its limited
actions had resulted :in an actual and demonstrable benefit to the Debtor's estate and creditors.
(See B.D.I. 774 at 1-2 (quoting Lebron, 27 F.3d at 944); B.D.I. 775 at 7-8.) While Leidos' filing
of the two objections may have provided an incidental benefit to creditors, Appellees argued that
Leidos did not present evidence to overcome the presumption that it was acting primarily in its
own self-interest. (See id. at 2-3.) Because Leidos' assertions that it had facilitated the outcome
of the Chapter 11 case are were unsupported · by any evidence, Appellees argued that the
Application must be denied. (See B.D.I. 774 at 1-2.)
In reply, Leidos attached a two-paragraph declaration from its general counsel. stating that
Leidos "would not have taken actions it took in this case for which it seeks compensation (i) if an
dfficial committee. of unsecured creditors had been appointed ·in this case and (ii) absent an
expectation of reimbursement from the estate pursuant to [section 503(b)(3)(D)]." (See B.D.I.
790-1 at 1, ~ 2.) Leidos also attached the transcript of an unreported Delaware Bankruptcy Court
bench ruling, In re Hospitality Liquidating I, LLC, No. 13-12740 (BLS) (Bankr. D. Del. Feb. 24,
2014) (the "Bench Ruling"), in which a different judge granted a substantial contribution award in
a case lacking a creditors' committee on the basis that the applicant's efforts in that case had been
"functionally indistin~uishable" from what would be expected of an official creditors' committee.
(See B.D.I. 790-2.)
Denial of the Application
On October 16, 2015, the Bankruptcy Court held a hearing and oral argument on the
Application and denied it. (See B.D.I. 796, 10/16/2015 Hr'g. Tr. at 16:15-20.) Leidos presented
no witnesses testimony in support of the Application, and the Bankruptcy Court accorded zero.
weight to the declaration, determining that it was conclusory and failed to provide the facts
underlying the conclusions it contained. (See id. at 16:17-20.) The Bankruptcy Court determined
that the facts of the case did not bear out the position that Leidos had somehow acted as a
·committee or pseudo-committee in the case, and that Leidos' "honest recitation" of the actions it
had undertaken did not support its position either. (See id. at 16:21-24; 17:6-11.) Rather, the
Bankruptcy Court found that
interests, which is
"focused on very narrow issues designed to protect [its]
but that's not something the estate has to pay for." (See id. at 17:9-11.)
The Bankruptcy Court found that Leidos had filed "two limited objections" that "were oflittle use
to development of the case." (See id. at 17:12-13.) The Bankruptcy Court noted thatLeidos' plan
objections had been :overruled except for its objection to the funding of the liquidating trust, and
that the liquidating trustee's request for additional funds was the catalyst for the increased funding.
(See id. at 17:12-19.) The Bankruptcy Court concluded that:
Leidos simply did what any creditor might wish to do in a case. They monitored it
for their own purposes and protected their own interests. They did not go beyond
that, and they did not provide any additional tangible benefit to the estate or the
development of the case with the actions they did take. So in my mind, this isn't
even a close .call.
(Id. at 17:23-18:3.) !Based on the lack of evidence presented by Leidos, and having takenjudicial
notice of the
11 proceedings, the Bankruptcy Court determined that Leidos' efforts did
not rise to the standard that would support a finding of substantial contribution. (See id. at 16: 15-
17 (noting lack of +idence in support of the Application was "fundamental flaw"); ·1 s: 6-12
(denying relief.)) On October 16, 2015, the Bankruptcy Court entered the Order denying the
Application "for the reasons set forth on the record at the [h]earing." (B.D.I. 793.) On October
· 30, 2015, Leidos filed a timely notice of appeal of the Order. (D.I. 1.) The appeal has been fully
briefed by the parties. (D.I. 12; 13, 14, 16.)
On appeal, Leidos argues that the Bankruptcy Court erred in denying the Application
because: (1) Leidos' activities resulted in a substantial contribution to the Chapter 11 case; (2) the
case lacked a creditors' committee, and Leidos' actions were "the functional equivalent of actions
that would be expected of an official [creditors' committee];" (3) Leidos' actions "provided
tangible benefits to the case and creditors;" (4) Leidos' actions were reasonably tailored to the
circumstances of the case; and (5) the Debtor's professional fees totaled approximately $10
million, 0.5% percent of Leidos' total request, while no other creditors' professional fees were
paid by the estate. (D.I. 12 at 2-3.) Leidos further contends that ~he Bankruptcy Court's denial of
the Application in a case where no creditors' committee was appointed is a "case of first.
impression," and the appeal will resolve "conflicting results" from the Bankruptcy Court allegedly
evidenced by the Bench Ruling cited extensively in Leidos' pleadings. (See id at 7.)
Appellees argue that denial of the Application was proper, as Leidos' participation in the
case was limited and inconsequential; Leidos failed to present any evidence of substantial
contribution; Lei dos failed to establish a causal connection between any of its actions and a benefit
or credit.ors; and Leidos failed offer any evidence overcoming the presumption that it
was acting primarily:in its own self-interest. (D.L 13 at 4; D.I. 14 at 2.) Appellees further argue
that the fact that no creditors' committee was appointed in the case has no relevance, as the
applicant bears the same burden of proof, and section 503(b)(3)(D) contains no language
suggesting any difference in its application based on whether a committee has been appointed.
(SeeD.I. 13 at 4-5, 16-18; D.I. 14 at 3, 15-16.) According to Appellees, the Bankruptcy Court did
not err by not following the Bench Ruling issued by another judge, which decision was unreported,
not precedential, and factually distinguishable from this case. (See D.I. 13 at 18; D.I. 14 at 18-19.)
Appellees further argue that the amount of compensation received by the Debtor's professionals
had no bearing on whether Leidos carried its evidentiary burden to justify a substantial contribution
award. (D.I. 13 at 19-20; D.I. 14 at 14 n.4.)
JURISDICTION AND STANDARD OF REVIEW
The court has appellate jurisdiction over all final orders and judgments from the
Bankruptcy Court. See 28 U.S.C. § 158(a)(l). This court reviews a Bankruptcy Court's findings
of fact for clear error and its conclusions oflaw de nova. Am. Flint Glass Workers Union v. Anchor
Resolution Corp., 197 F.3d 76, 80 (3d Cir. 1999). In the context of this appeal, the Third Circuit
has held that "[w]hether a creditor has made a substantial contribution within the meaning of
section 503(b)(3)(D) is a question of fact, 'and it is the bankruptcy court that is in the best position
to perform the necessary fact finding task."' In re Tropicana Entm 't LLC, 498 F. App'x 150, 152
(3d Cir. 2012) (quoting Lebron, 27 F.3d at 946).
A court's factual fi.nding is clearly erroneous
only if it ''either is completely devoid of minimum evidentiary support displaying some hue of
credibility or bears no rational relationship to the supportive evidentiary data." Fellheimer, Eichen
& Braverman, P.C. v. Charter Techs., Inc., 57 F.3d 1215, 1223 (3d Cir. 1995) (internal quotation
marks omitted). Wh:en there are two permissible views of the evidence, the [Bankruptcy Court's]
choice between the111 cannot be clearly erroneous." Anderson v. City of Bessemer, 470 U.S. 564,
Central to eath of Lei dos' arguments on appeal is the fact that an official committee of
unsecured creditors was not appointed in the Chapter 11 case, and that the Bankruptcy Court
failed to give proper consideration to this fact. However, as Appellees point out that the fact that
a committee was not appointed in this Chapter 11 case; while unfortunate, is hardly a rare
occurrence. (See D.I. 13 at 16-17 (citing statistical analyses concluding that in most Chapter 11
cases no official committee is appointed due to insufficient creditor interest.)) Regardless of
whether a creditors' committee is appointed in a Chapter 11 case, a party seeking a substantial
contribution award is required to meet its burden of proof with respect to its administrative
expense claim. The statute requires a "substantial contribution" to the estate, and under Third
Circuit law, the applicant must show an actual and demonstrable benefit to the debtor's estate
and the creditors. See Lebron, 27 F.3d at 944. Here, the Bankruptcy Court determined Leidos
failed to meet its burden of proof, and Leidos has cited no authority that the absence of statutory
creditors' committee triggers a lesser burden of proof for administrative expense claimants.
Leidos' arguments fail for the reasons set forth below.
A. Leidos Failed to Meet Its Burden of Proof
1. Applicable Test
Administrative expenses may include expenses incurred by "a creditor ... in making a
substantial contribution in a case under chapter ... 11 of this titk" 11 U.S.C. § 503(b)(3)(D).
Section 503(b)(4) provides for a related award of attorney's fees. 11 U.S.C. § 503(b)(4).
Section 503(b)(3)(D) has two purposes: (1) encouraging meaningful creditor participation in the
. reorganization process, and (2) minimizing fees and administrative expenses so as to preserve as
much of the estate as pos.sible for creditors. See Lebron, 27 F.3d at 944. As with all of the
Bankruptcy Code's priority statutes, section 503(b)(3) is to be narrowly construed so that
administrative expen~es will be held to a minimum. See In re Worldwide Direct, 334 B.R. 112,
122 (Bankr. D. Del. 2005) (citing In re Granite Partners, L.P., 213 B.R. 440, 445 (Banla.
Lei dos is entitled to administrative status for related fees and expenses only if those
activities made a "substantial contribution" to the Chapter 11 case. See 11 U.S.C. §
503(b)(3)(D). The phrase "substantial contribution" is not defined in the Banlauptcy Code, but
the parties agree that the Third Circuit's decision in Lebron is binding an:d sets forth the correct
inquiry. (See B.D.I. 796, 10/16/15 Hr'g. Tr. at 9:24-25.) The appropriate inquiry un.der Third
. Circuit law is "whether the efforts of the applicant resulted in an actual and demonstrable benefit
to the debtor's estate and the creditors." Lebron, 27 F.3d at 944; see also, In re Consol.
Bancshares, Inc., 785 F.2d 1249, 1253 (Bankr. S.D.N.Y. 1981) ("Services which substantially
contribute to a case are those which foster and enhance ... the progress ofreorganization.")
(internal quotations omitted).
"The substantial contribution test is applied in hindsight, and scrutinizes the actual
benefit to the case. "Accordingly, the applicant must show a 'causal com1ection' between the
service and the contribution." Granite Partners, 213 B.R. at 447. Finally, as the party seeking
reimbursement, it was Leidos had the burden to prove that it was entitled to a substantial
contribution award by a preponderance of the evidence. In re Columbia Gas Sys., Inc.,. 224 B.R.
540, 548 (Bankr, D. Del. 1998); Calpine Corp. v. O'Brien Envtl. Energy, Inc., 181F.3d527, 533
(3d Cir. 1999) (holding burden of proof is on administrative expense claimant); Summit Metals,
379 B.R. at 50 (burden of persuasion is preponderance of the evidence).
As the Bankruptcy Courtrecently observed, while the phrase "substantial contribution"
does not lend itself to a set of exacting criteria, "a well-developed body of case law teaches that
the sort of contribution that reaches the substantial threshold is exceedingly narrow." In re RS
Legacy Corp., 2016'WL 1084400 at *4 (Bank.r. D. Del. Mar. 17, 2016). For example, courts.
have held that:
extensive and active paiiicipation alone does not qualify, In re Bayou Grp.,
431 B.R. [549, 557 (Bankr. S.D.N.Y. 2010)]; services that are duplicative of
other estate professionals are insufficient[, ] Worldwide Direct, 334 B.R. at
134~ activities that primarily further the movant's self-interest do not suffice,
Lebron, 27 F.3d at 944; and expected or routine activities in a chapter 11
case-such as encouraging negotiation among parties, commenting and
participating in successful plan negotiations, and reviewing documentsgenerally do not constitute a substantial contribution, In re American Plumbing
& Mech., Inc., 327 B.R. 279, 291 (Bai1kr. W.D. Tex. 2005); In re Columbia
Gas, 224 B.R. at 548. A substantial contribution is one that confers a benefit to
the entire estate and fosters the reorganization process. Lebron, 27 F.3d at 944.
RS Legacy, 2016 WL 1084400 at *4. See also In re Summit Metals, 379 B.R. 40, 52 (Bankr. D.
Del. 2007) (denying application where there was no evidence applicant's effo1is increased the
assets of the case or prevented them from diminishing). Thus, a substantial contribution award
"is reserved for those rare and extraordinary circumstances when the creditor's involvement trnly
enhances the administration of the estate." See RS Legacy, 2016 WL 1084400 at *3 (quoting In
re Dana Co1p:, 390 B.R. 100, 108 (Bankr. S.D.N.Y. 2008)); see also Columbia Gas, 224 B.R. at
548 (actions must be "unusual" or extraordinary" to justify substantial contribution award). To
meet this heavy bur.den, "[c]01Toborating testimony by a disinterested Party attesting to a
claimant's instrumental acts has proven to be a decisive factor in awarding compensation to
activities which otherwise might not constitute a 'substantial contribution."' See In re Buckhead
Am. Ccnp., 161B.R~11, 15 (Bankr. D. Del. 1993); WorldWide Direct, 334 B.R. at 123.
2. Evidence of Substantial Contribution and Causal Connection
According to ILeidos' pleadings and the time records submitted in Support of its
Application, the only actions undertaken were the monitoring of the Chapter 11 case and the
fiiing of its two objections. (See B.DJ. 755.) Despite the evidentiary burden Leidos was
required to meet, no other evidence was submitted in support of the Application. (See id.)
Leidos offered no corroborating testimony from a disinterested party and did not claim to have
undertaken "unusual" or "extraordinary" actions that typically provide the basis for an approved
substantial contribution application. 3 Rather, Leidos' attempt to establish substantial
contribution is based primarily on its claim that it functioned as a de facto creditors' committee,
"acting on behalf of general unsecured creditors," taking "appropriately tailored action to protect
creditor rights in the case" and "obtaining critical procedural and substantive improvements in
the Debtor's case." (See D.I. 12 at 12.) According to Leidos, its activities in monitoring the case
and filing objections "constituted a necessary and valuable counterbalance to the Debtor," which
benefitted all general unsecured creditors. (See id.) Specifically, Leidos argues that its
objections to the disclosure statement and plan led to additional disclosures and improvements in
both documents, and that this is evidence of its substantial contribution. (See id. at 4, 15-16.)
Conversely, Appellees argue that Leidos' participation in the case was limited and
inconsequential, that Leidos failed to offer any evidence to support a substantial contribution
award, and that the Order may be affinned on this basis alone. (See D.I. 13 at 4-5; D.I. 14 at 2.)
See e.g., In re Essential Therapeutics, Inc., 308 B.R. 170, 176 (Banl
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