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In re KiOR, Inc.

United States District Court, D. Delaware

February 27, 2017

IN RE KIOR, INC., Debtor.
v.
KIOR, INC. and ANDREW R. VARA, Acting United States Trustee, Appellees. LEIDOS ENGINEERING, LLC, Appellant, Bankr. No. 14-12514 (CSS)

          MEMORANDUM OPINION

         I. INTRODUCTION

         Presently before the court is the appeal (D.I. 1) of Leidos Engineering, LLC ("Leidos") from a Bankruptcy 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.

         II. BACKGROUND

         A. The Chapter 11 Case

         The court writes solely for the parties and will, therefore, only briefly recite the facts essential to the disposition. On November 9, 2014, KiOR, Inc. ("Debtor") filed a voluntary petition 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 of reorganization 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 trustee, the plan was modified to increase the amount of funding for the liquidating trust from $100, 000 to $400, 000. The Debtor contends that funding was increased in response to a direct request made by the proposed liquidating trustee - not as a result of Leidos' 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 provided "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 basis of 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 • i 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 official 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 indistinguishable" from what would be expected of an official creditors' committee. (See B.D.I. 790-2.)

         C. 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 Leidos "focused on very narrow issues designed to protect [its] interests, which is fine, 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 of little use to development of the case." (See Id. at 17:12-13.) The Bankruptcy Court noted that Leidos' 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 taken judicial. notice of the Chapter 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 evidence in support of the Application was "fundamental flaw"); 18:6-12 (denying relief.)) Oh 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.)

         III. PARTIES' CONTENTIONS

         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 the Bankruptcy Court's denial of the Application in a case where no creditors' committee was appointed is a "case of ...


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