The Right to Reimbursement of a Committee Member's Professional Fees: Yes and No.

INTRODUCTION

Prior to 1994, the courts were divided on whether members of a chapter 11 creditors' committee were entitled to reimbursement of out-of-pocket expenses arising from their participation on the committee, including, in particular, attending committee meetings. The Bankruptcy Code was silent on this question.

Most courts had approved reimbursing committee members' out-of-pocket expenses, such as travel, lodging and meals. The courts were concerned that any contrary decision would discourage creditors from participating on committees in bankruptcy cases and that it would be unfair and burdensome to creditors willing to serve. Other courts denied reimbursement of committee members' out-of-pocket expenses because it was not authorized by the Bankruptcy Code.

The passage of the Bankruptcy Reform Act of 1994 added Section 503(b)(3)(F) to the Bankruptcy Code. This section permits the payment of committee members' actual and necessary expenses incurred in the performance of their duties while serving on the committee. This section has been regularly relied upon for court approval of the reasonable travel, lodging and meal expenses of committee members for attending committee meetings.

Recently, there have been a number of conflicting court decisions on the issue of whether the attorney fees or other professional fees of a committee member are reimbursable. For example, the United States Court of Appeals for the Third Circuit, in In re First Merchants Acceptance Corp., recently held that a committee member's legal fees are reimbursable if they were incurred in the performance of the member's duties. The United States Bankruptcy Court for the Northern District of Texas, in In re Firstplus Financial, Inc., rejected the Third Circuit's holding and denied the reimbursement of a committee member's attorneys' fees. The court also stated that courts following the First Merchants view on the reimbursement of a committee member's professional fees should condition that such relief will only be granted if the member can prove that the fees were necessary and justified.

THE FIRST MERCHANTS DECISION

In First Merchants, a creditors' committee was formed, and they retained counsel that was approved by the bankruptcy court. The committee chair also retained counsel to assist on committee matters and on matters unrelated to the committee. Following approval of the debtor's chapter 11 plan, the committee's professionals filed applications for the approval and payment of their fees. So too did the attorneys hired by the committee chair, and they consequently sought reimbursement of the fees they charged the chair on all matters relating to the performance of his duties as a chairman and as a member of the committee.