Substantial Contribution Claim Denied Where Motivated By Self Interest
Ad Hoc Consortium of Senior Subordinated Noteholders v. Liquidating Landco Debtors (In re Tropicana Entertainment LLC), Case No. 08-10856 (KJC), Civ No. 09-771-SLR (September 22, 2010) (J. Robinson).
Tropicana Entertainment LLC and related entities (collectively “Tropicana”) encountered severe financial difficulty following the revocation of its gaming license in New Jersey and the threat of de-licensure in Indiana and Nevada, all of which was allegedly triggered by poor business decisions made by board member William J. Yung, III (“Yung”). The Ad Hoc Consortium of Senior Subordinated Noteholders (“Appellant”) urged Yung to step down from Tropicana’s board of directors, but Yung refused and Tropicana filed chapter 11 bankruptcy petitions on May 5, 2008 (the “Petition Date”).
The next day, Appellant filed an emergency motion for the appointment of a chapter 11 trustee (the “Trustee Motion”) in an effort to remove Yung from management. Several parties joined in the Trustee Motion, and the Trustee Motion was settled following the first day of trial when Yung agreed to resign from his management positions and Tropicana agreed to acknowledge Appellant’s substantial contribution to the bankruptcy estates by prosecution of the Trustee Motion. On July 31, 2009, Appellant filed its application for allowance of an administrative claim under 11 U.S.C. §§ 503(b)(3) and (b)(4) for $2,434,474 (the “Application”), representing the legal fees and expenses incurred by appellant in connection with the Trustee Motion. On September 10, 2009 the Bankruptcy Court held a hearing on the Application and orally denied the relief sought therein upon finding that the Appellant filed the Trustee Motion in its own self-interest. Appellant then filed the instant appeal to the District Court.
Appellant argued that the Bankruptcy Court erred in denying the Application despite finding that the prosecution of the Trustee Motion conferred a benefit to the estates and for all constituents concerned, a finding which Tropicana supported, and despite the fact that major creditor representatives supported the relief sought in the Trustee Motion. Citing Lebron, the District Court reasoned that the “substantial contribution test” ought to be applied in a manner which “excludes reimbursement in connection with activities of creditors and other interested parties which are designed primarily to serve their own interests and which, accordingly, would have been undertaken absent an expectation of reimbursement from the estate.” Appellant’s actions, though they resulted in a substantial contribution to the estate, were found to have been primarily undertaken in Appellant’s own self-interest and likely would have been undertaken absent an expectation of reimbursement. Accordingly, the District Court affirmed the Bankruptcy Court’s decision.
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