February 10, 2011 Articles

ASARCO Decisions Elucidate Requirements for "Substantial Contribution" Claims

Two recent decisions denied substantial contribution requests by two different groups of creditors.

By Christopher Castillo and Brooks Hamilton

Sections 503(b)(3)(D) and (b)(4) of the Bankruptcy Code authorize bankruptcy courts to allow, as administrative expenses, the “actual, necessary expenses” incurred by a creditor in making a “substantial contribution” to a Chapter 11 bankruptcy case, including “reasonable compensation” for professional services rendered by the creditor’s attorneys.

In two recent decisions arising from the ASARCO LLC bankruptcy case, Judge Richard S. Schmidt of the U.S. Bankruptcy Court for the Southern District of Texas, Corpus Christi Division, denied substantial contribution requests by two different groups of creditors.

ASARCO and the “Full-Payment” Plan of Reorganization
When it sought bankruptcy protection in August 2005, ASARCO, LLC (ASARCO), an Arizona-based copper miner, smelter, and refiner, faced a litany of problems including significant environmental and asbestos liabilities, a prolonged downturn in the market for copper, a striking workforce, and approximately $440 million in bond debt. After four years, ASARCO emerged from bankruptcy protection in December 2009 under a “full-payment” plan of reorganization proposed by its corporate parents, ASARCO Inc. and Americas Mining Corp. (collectively the parent). The parent’s plan of reorganization offered consideration in excess of $2.2 billion, sufficient to return full principal and interest to all of ASARCO’s creditors.

After consummation of the parent’s full-payment plan of reorganization, two groups that had been active participants in ASARCO’s bankruptcy case each filed applications for administrative expenses on the basis of substantial contribution pursuant to sections 503(b)(3)(D) and (b)(4) of the Bankruptcy Code. The first group consisted of some of ASARCO’s environmental creditors, including the U.S. Department of Justice, the Texas Attorney General’s Office, the State of Washington’s Office of Attorney General, and the State of Montana (collectively the governmental movants). The second group included certain holders of ASARCO’s bond debt, namely Harbinger Capital Partners Master Fund I, Ltd.; Harbinger Capital Partners Special Situations Fund, L.P.; and Citigroup Global Markets, Inc. (collectively the majority bondholders).

The Governmental Movants’ Substantial Contribution Request
As a result of ASARCO’s significant environmental liabilities, the governmental movants played an active role in ASARCO’s bankruptcy proceedings. The governmental movants each filed separate applications in the bankruptcy case seeking recovery of their actual, necessary expenses, including attorney fees, totaling over $6 million dollars as administrative expenses under sections 503(b)(3)(D) and (b)(4) of the Bankruptcy Code based on their alleged substantial contributions to ASARCO’s bankruptcy case. The governmental movants argued that they had provided a substantial contribution to ASARCO’s bankruptcy case by, among other things, organizing a de facto environmental governmental regulatory committee, supporting the plan of reorganization proposed by ASARCO and sponsored by Sterlite (USA), Inc., participating in plan negotiations and obtaining modification of the competing, and ultimately successful, plan proposed by the parent, and participating in the settlement of environmental claims and obtaining bankruptcy court approval of the settlements over objections.

The Bankruptcy Court denied each of the governmental movants’ substantial contribution applications in their entirety, finding that none of the governmental movants had made a substantial contribution to ASARCO’s bankruptcy case and the legal fees and expenses associated with each governmental movant’s alleged contribution were already included in the settlements of environmental claims approved during the bankruptcy case.

The Governmental Movants Did Not Make a Substantial Contribution
In finding that the governmental movants failed to make a substantial contribution to ASARCO’s bankruptcy case, the court reasoned that to qualify as a substantial contribution under section 503(b)(3)(D), a creditor’s actions must provide “tangible, clearly demonstrable benefits to the estate.” In re ASARCO LLC, No. 05–21207, Mem. Op. at 4 (Bankr. S.D. Tex. Sept. 29, 2010. In elucidating the standard for determining whether a creditor has made a substantial contribution to a bankruptcy case, the court followed a line of cases that construe section 503(b)(3)(D) narrowly, granting substantial contribution applications only in “unusual or rare circumstances.” The court also relied on other bankruptcy cases from the Fifth Circuit that required substantial contribution applicants to demonstrate that their services have “some causal relationship to the contribution.” Citing In re Fortune Natural Res. Corp., 366 B.R. 549, 554 (Bankr. E.D. La. 2007) and In re Am. Plumbing & Mech., Inc., 327 B.R. 273, 279–80 (Bankr. W.D. Tex. 2005).

Judge Schmidt acknowledged that the attorneys for the governmental movants had provided exemplary representation for their clients, resulting in settlement of the myriad environmental claims facing ASARCO, and ultimately in confirmation of the Parent’s plan of reorganization that paid all creditors in full with interest. The court observed, however, that:

Section 503(b)(3)(D) of the Bankruptcy Code is not meant simply to reward outstanding legal representation. In fact, lawyers are expected to perform at a high level. Settlement and cooperation among attorneys in a Chapter 11 case is not only common, but encouraged.

The court went on to characterize the actions relied upon by the governmental movants in support of their substantial contribution applications as “routine actions to enhance recovery on a claim, which would be expected of any large creditor in a bankruptcy case. The court was not persuaded that the governmental movants’ role in compromising their environmental claims against ASARCO constituted a substantial contribution. Distinguishing them from other “extraordinary behavior that brings benefit to the estate for all creditors,” the court found the governmental movants’ actions to be nothing more than “ordinary creditor conduct” ineligible for compensation as substantial contribution. Expounding upon the purpose behind this distinction, Judge Schmidt noted that using section 503(b)(3)(D) to:

extract additional consideration from a debtor’s bankruptcy estate both diverts the benefit to the estate arising from such a compromise in the first place and violates the fundamental precept that administrative priorities are narrowly construed in bankruptcy and [the court’s] mandate that “extraordinary circumstances” must be associated with warranting the allowance of a substantial contribution claim.

Nor did the court find the governmental movants’ participation in the plan process justified a substantial contribution claim. The court reasoned that reviewing, commenting on, supporting, or objecting to plans of reorganization is de riguer for large creditors in complex bankruptcy cases. In fact, the court observed “it would be extraordinary if such a creditor did not actively participate in the plan process.”

Finally, the court rejected the governmental movants’ argument that their role as a “voice of reason” during ASARCO’s bankruptcy case constituted a substantial contribution. Instead, the court reiterated that section 503(b)(3)(D) requires that the services relied upon have some “causal relationship” to the contribution. In so ruling, the court expressly declined to follow part of the holding of In re American Plumbing & Mechanical, Inc., 327 B.R. 273 (Bankr. W.D. Tex. 2005), to the extent that case allowed a substantial contribution claim withouta direct and nonspeculative benefit to the estate.

Amounts Claimed as Substantial Contribution already in the Settlement
In addition to rejecting the governmental movants’ requests for administrative expenses on the basis of bankruptcy law, the court concluded that environmental law prohibited the governmental movants from recovering any of their fees and expenses as well. The Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) imposes liability on responsible parties for all response costs incurred by federal and state governments stemming from the release or threatened release of hazardous substances. See 42 U.S.C. §§ 9607(a)(4)(A) and 9601(25). CERCLA imposes liability for both direct and indirect response costs, including, notably, attorney fees and costs incurred by the government in enforcing and responding to CERCLA violations. United States v. Dico, 266 F.3d 864, 878 (8th Cir. 2001). Recoverable attorney costs include both litigation and non-litigation related costs and expenses. United States v. Northernaire Plating Co., 685 F. Supp. 1410, 1418 (W.D. Mich. 1988); United States v. E.I. du Pont de Nemours & Co., 341 F. Supp. 2d, 215, 241 (W.D.N.Y. 2004).

In light of the statutory framework of CERCLA, and relying upon on the Dico, Northernaire Plating and du Pont decisions, the court reasoned that all of the fees and expenses the governmental movants sought in their substantial contribution applications could have been recovered in connection with their underlying environmental claims. Under the environmental settlement agreements approved during the bankruptcy case, the governmental movants received allowed claims in full satisfaction of their past and future response costs. Because the legal fees and expenses the governmental claimants now sought were related to their environmental claims and the underlying environmental sites, and because the governmental movants’ claims related to those sites had been fully resolved and satisfied through the environmental settlements, the court held that the legal fees and expenses had been fully resolved and satisfied as well.

The Majority Bondholders Substantial Contribution Request
Holding anywhere from $257 to $298 million (on a combined basis) of ASARCO’s bonds at various points throughout the bankruptcy case, the majority bondholders actively involved themselves in ASARCO’s reorganization process in a number of different ways. They submitted an ultimately unsuccessful bid for ASARCO’s operating assets during the auction process held April–May 2008, submitted a competing plan of reorganization for ASARCO in May 2009, and also objected to various iterations of the parent’s plans of reorganization for ASARCO. The majority bondholders filed a substantial contribution application seeking recovery of up to the full amount––approximately $16.7 million––of the fees and expenses incurred in connection with their participation in ASARCO’s bankruptcy case. The majority bondholders premised their request on three arguments:

  • that their May 2009 plan of reorganization for ASARCO caused the bidding war between Sterlite (USA), Inc., the sponsor/purchaser under ASARCO’s 2009 proposed plan of reorganization, and the parent, which ultimately resulted in the confirmation and consummation of the parent’s full-payment plan;
  • that their objections to an earlier iteration of the parent’s plan of reorganization caused the parent to amend its plan, to the benefit of all creditors; and
  • that “virtually every action” the majority bondholders took, from the beginning of ASARCO’s bankruptcy case to the date on which the parent’s full-payment plan was confirmed, constituted substantial contributions to ASARCO’s bankruptcy case.

The court denied the majority bondholders’ substantial contribution application in its entirety, finding that the majority bondholders failed to establish that their purported substantial contributions primarily caused the benefits they claimed ASARCO’s bankruptcy case received; and the success of ASARCO’s reorganization was driven by factors independent of the majority bondholders’ actions in the bankruptcy case.

The Majority Bondholders’ Actions Did Not Result in a Substantial Contribution
Similar to its opinion on the governmental movants’ substantial contribution applications, the court cited, in its discussion of the majority bondholders’ substantial contribution application, a number of bankruptcy cases in the Fifth Circuit holding that applicants for substantial contribution must show a “direct, significant and demonstrable benefit to the estate” caused by their actions. In re ASARCO LLC, No. 05-21207, Mem. Op. at 13 (Bankr. S.D. Tex. Sept. 28, 2010). Judge Schmidt, citing bankruptcy opinions from the U.S. Bankruptcy Court for the Southern District of New York, further held that this requirement precludes “[m]ere conclusory statements regarding the causation or provision of a substantial contribution,” and the award of a substantial contribution claim where “the asserted contribution would have occurred without the claimant’s involvement.” Citing In re United States Lines, Inc., 103 B.R. 427, 430 (Bankr. S.D.N.Y. 1989) and In re Alert Holdings, 157 B.R. 753, 759 (Bankr. S.D.N.Y. 1993).

Rebuking the majority bondholders’ contention that their May 2009 plan of reorganization resulted in the parent’s full-payment plan, the court found that the majority bondholders’ plan “had little to no impact” on the bidding war process between Sterlite and the parent and provided, at best, “only potential benefit” to ASARCO’s bankruptcy estate. Judge Schmidt also concluded that the majority bondholders failed to establish that the actions they took “directly caused” the benefits their substantial contribution application claimed and characterized the majority bondholders’ evidence as “wholly speculative” and nothing more than a “conclusory and self-serving statement of what the Movants believe occurred.” While the court noted the “temporal proximity” of the actions taken by the majority bondholders to the amendments in the competing Sterlite and parent plans of reorganization, the mere fact that “certain events chronologically occurred after other events” did not persuade the court that there was a “direct causal relationship” sufficient to support a finding of substantial contribution.

Independent Factors Responsible for the Benefits Claimed
Aside from finding the evidence proffered by the majority bondholders’ unpersuasive, the court also held that several factors independent of the existence or actions of the majority bondholders drove the parent’s decision to submit its full-payment plan. The court emphasized a number of factors, including:

  • the SCC judgment (an $8 billion fraudulent transfer judgment obtained by ASARCO against the parent in 2008);
  • the rise in copper prices during the 2009 plan negotiation and confirmation process,
  • the parent’s long-held desire to maintain its ownership of ASARCO and bring the U.S. assets and operations back into the fold of its global mining business,
  • the parent’s strong desire to bring an end to the costly, time-consuming, and distracting litigation involving environmental and asbestos claims, and
  • the amended competing plans filed by the debtor (sponsored by Sterlite).

Citing Alert Holdings and In re New Power Co., 311 B.R. 118, 124 (Bankr. N.D. Ga. 2004) for the proposition that a creditor cannot recover on account of a substantial contribution when the asserted contribution would have occurred even without the claimant’s involvement, the court held that the majority bondholders were nothing more than “large and expectedly active” creditors in ASARCO’s bankruptcy case. Because the majority bondholders were not the “primary forces” that caused the parent or Sterlite to undertake any action, the court concluded that they were not allowed to recover their fees and expenses from ASARCO under the substantial contribution statute.

Lessons from the ASARCO Substantial Contribution Decisions
Judge Schmidt’s opinions denying the governmental movants’ and the majority bondholders’ substantial contribution applications hold important lessons for those creditors thinking about asserting substantial contribution claims in the Fifth Circuit going forward. To successfully recover the fees and expenses incurred in connection with their participation in a bankruptcy case as administrative expenses under sections 503(b)(3)(D) and (b)(4) of the Bankruptcy Code, the ASARCO substantial contribution decisions emphasize that creditors should be able to establish the following.

  • A direct causal relationship between the creditor’s actions and a demonstrable and significant benefit to the bankruptcy estate. (Speculative and/or conclusory evidence, including mere temporal proximity of a creditor’s actions to its claimed benefits, will not suffice; neither unsuccessful bidders in bankruptcy auctions (especially unsuccessful auctions) nor unsuccessful competing plan proponents are eligible to receive a substantial contribution claim merely for putting forth a bid or competing plan.)
  • Rare or unusual circumstances, including some extraordinary conduct on the part of the creditor. (Routine actions to enhance recoveries, including compromising claims, assisting in obtaining court approval of such compromises, reviewing, commenting, supporting or objecting to a Chapter 11 plan, and/or providing the “voice of reason” are insufficient.

Keywords: litigation, bankruptcy, ASARCO, substantial contribution claims

Christopher Castillo and Brooks Hamilton – February 10, 2011


Copyright © 2011, American Bar Association. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or downloaded or stored in an electronic database or retrieval system without the express written consent of the American Bar Association. The views expressed in this article are those of the author(s) and do not necessarily reflect the positions or policies of the American Bar Association, the Section of Litigation, this committee, or the employer(s) of the author(s).