Case 17-36709 Document 1035 Filed in TXSB on 09/07/18 Page 1 of 12 IN THE UNITED STATES BANKRUPTCY COURT FOR THE SOUTHERN DISTRICT OF TEXAS HOUSTON DIVISION In re: COBALT INTERNATIONAL ENERGY, INC., et al. 1 Reorganized Debtors Chapter 11 Case No. 17-36709 (MI (Jointly Administered OBJECTION TO APPLICATIONS OF LYNN PINKER COX HURST AND THE GRANTLAWFIRM, PLLC, AS CO-COUNSEL TO EQUITY HOLDER IRA GAINES AS TRUSTEE FOR THE PARADISE WIRE AND CABLE DEFINED BENEFIT PENSION PLAN DATED 11/11/84, FOR ALLOWANCE OF ADMINISTRATIVE EXPENSES PURSUANT TO 11 U.S.C. 503(B(4 [Relates to Docket Nos. 848 & 849] Nader Tavakoli, solely in his capacity as the Lead Member and Chairman of the Plan Administrator Committee of Cobalt International Energy, Inc., et al. (the Plan Administrator, files this objection to (1 the Application of Lynn Pinker Cox Hurst, LLP, Counsel to Equity Holder Ira Gaines as Trustee for the Paradise Wire and Cable Defined Benefits Plan Dated 11/11/84, for Allowance of Administrative Expenses Pursuant to 11 U.S.C. 503(b(4 [Docket No. 848] (the LPCH Application, and (2 the Application of TheGrantLawFirm, PLLC, One of the Counsel to Equity Holder Ira Gaines as Trustee for the Paradise Wire and Cable Defined Benefits Plan Dated 11/11/84, for Allowance of Administrative Expenses Pursuant to 11 U.S.C. 503(b(4 [Docket No. 849] (the Grant Application, and collectively with the LPCH Application, the Applications, and states as follows: 1 The Reorganized Debtors in the Chapter 11 Cases, along with the last four digits of each Reorganized Debtor s federal tax identification number, are: Cobalt International Energy, Inc. (1169; Cobalt International Energy GP, LLC (7374; Cobalt International Energy, L.P. (2411; Cobalt GOM LLC (7188; Cobalt GOM # 1 LLC (7262; and Cobalt GOM # 2 LLC (7316.
Case 17-36709 Document 1035 Filed in TXSB on 09/07/18 Page 2 of 12 INTRODUCTION 1. The request for the estates to fund the fees and expenses incurred by LPCH and the Grant Firm (collectively, the Law Firms, acting in their own self-interest and in response to a subpoena served on them by the Debtors, should be denied because the Law Firms are unable to meet the stringent burden for the allowance of a substantial contribution claim. In particular, the Law Firms have the burden of establishing, inter alia, that: (i there was a benefit to the estates; (ii there was a direct causal connection between the actions of the claimant and the benefit allegedly received by the bankruptcy estate; and (iii the Law Firms efforts were not duplicative of those undertaken by statutory fiduciaries. In re Mirant Corp., 354 B.R. 113, 132-35 (Bankr. N.D. Tex. 2006. Specifically, the Application fails to (a demonstrate the requisite causal connection between the alleged actions of the Law Firms (in responding to a subpoena and any tangible economic benefit to the estates, (b show that the Law Firms participated in or directly negotiated with the Second Lien Noteholders or anybody else in connection with the $5 million settlement obtained by the Official Committee of Unsecured Creditors (the Official Committee for Class 6 creditors during the confirmation hearing, and (c show that the Law Firms efforts were not duplicative of the efforts undertaken by the Official Committee 2. Instead, the Application shows that the Law Firms complied with their legal obligations to respond to a subpoena served upon them by the Debtors in a manner that does not, upon information and belief, obligate their client (equity holder Ira Gaines to pay anything. In addition, the Law Firms acted out of their own self-interest because they were admittedly seeking to position themselves to represent the Official Committee in pursuing the Derivative Actions if it was successful in objecting to the Plan releases. While a law firm may accept the burden of going forward on the client s behalf, Mirant, 354 B.R. at 140, the Law Firms here are proceeding on their own behalf, as there is no underlying obligation of their equity holder client 2
Case 17-36709 Document 1035 Filed in TXSB on 09/07/18 Page 3 of 12 to pay the fees, as evidenced by the fact that the invoices are directed to Cobalt International Energy Inc., not Ira Gaines. To the extent the Law Firms were assisting the Official Committee and providing services to the estate, they should have been retained under Section 327, but cannot retroactively seek that relief now. The Law Firms are not entitled to shift their fees and expenses in responding to the subpoena, or in positioning themselves for an opportunistic future engagement, to the Debtors estates and their creditors. 3. The lack of a direct causal connection between the Law Firms actions in responding to the subpoena and the asserted benefits are evidenced by the Law Firms unsubstantiated assertions that had the Law Firms not acted (which they were legally obligated to do pursuant to the subpoena it is unlikely that the ultimate recovery for Cobalt s general unsecured creditors would have been as high. LPCH Application, at 34 (emphasis added. Such assertions do not meet the required direct causal connection between the actions of the claimant and the benefit received by the bankruptcy estate. 4. For these reasons, the Law Firms cannot meet their burden of proving that they made a substantial contribution to these Chapter 11 Cases justifying administrative expense payment of any portion of LPCH s and the Grant Firm s professional fees and costs in the amount of $95,897.58 and $18,305.28, respectively. The Court should therefore deny the Applications in their entirety. BACKGROUND A. The Bankruptcy Filing and the Plan 5. On December 14, 2017, Cobalt International Energy, Inc. and certain of its affiliates (collectively, the Debtors, and after the Effective Date, the Reorganized Debtors filed voluntary petitions for relief under chapter 11 of title 11 of the United States Code, 11 3
Case 17-36709 Document 1035 Filed in TXSB on 09/07/18 Page 4 of 12 U.S.C. 101 et seq. (the Bankruptcy Code in the United States Bankruptcy Court for the Southern District of Texas, Houston Division (the Court. 6. On April 5, 2018, the Court entered the Confirmation Order confirming the Plan. 2 Article VII of the Plan provides that on and after the Effective Date, the Plan Administrator shall have the sole authority to, inter alia: (1 file, withdraw, or litigate to judgment objections to Claims or Interests; (2 settle or compromise any Disputed Claim or Disputed Interest without any further notice to or action, Order, or approval by the Bankruptcy Court; and (3 administer and adjust the Claims Register to reflect any such settlements or compromises without any further notice to or action, Order, or approval by the Bankruptcy Court. Plan, Art. VII.B. 7. The Effective Date of the Plan occurred on April 10, 2018. ARGUMENT 8. Section 503 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, inter alia, expenses incurred by an equity security holder... in making a substantial contribution in a case under chapter 9 or 11 of this title.... Id. 503(b(3(D (emphasis added. To the extent that an entity satisfies section 503(b(3(D s test for a substantial contribution, section 503(b(4 provides for the ability of such entity to seek reimbursement of reasonable compensation for professional services rendered by an attorney or an accountant. Id. 503(b(4. Here, there is no allegation that the equity security holder, Ira Gaines, took any action that would entitle him to a substantial contribution, and there is likewise no allegation that Mr. Gaines is in any way obligated on the fees and costs incurred by the Law Firms in complying with the Law Firms independent obligations under the subpoena. 2 Capitalized terms not defined herein shall have the same meaning ascribed to such terms in the Plan. 4
Case 17-36709 Document 1035 Filed in TXSB on 09/07/18 Page 5 of 12 9. The Law Firms do not have standing to proceed on their own behalf, without an underlying obligation of their purported client, Ira Gaines, to pay anything. 3 The invoices submitted with the Applications were addressed to Cobalt International Energy Inc., not Ira Gaines, and suggest that the Law Firms were providing services to the estate, not Ira Gaines as equity holder. No application was ever filed to retain the Law Firms under Section 327, and such applications cannot be belatedly filed now. While a law firm may accept the burden of going forward on the client s behalf, Mirant, 354 B.R. at 140, the Law Firms here are proceeding on their own behalf, as there is no underlying obligation of their equity holder client to pay the fees. 10. Moreover, the Fifth Circuit has made it clear that no litigant should be able to recover fees in excess of what the litigant has actually paid. In re Energy Partners, Ltd., 422 B.R. 68, 87 (Bankr. S.D. Tex. 2009 (citing United States v. Claro, 579 F.3d 452, 462 (5 th Cir. 2009 ( In no event... should the litigant be awarded a fee greater than he is contractually bound to pay. ; Johnson v. Georgia Highway Express, Inc., 488 F.2d 714, 718 (5 th Cir. 1974 ( In no event, however, should the litigant be awarded a fee greater than he is contractually bound to pay, if indeed the attorneys have contracted as to amount.. In Energy Partners, the claimant sought reimbursement of $61,480.40, but the bankruptcy court determined that the maximum amount the equity security holder, Birch Run, could be reimbursed under Section 503(b(3(D was $50,000.00, because Birch Run was only obligated to pay $50,000.00. 422 3 The Applications reflect that the Law Firms were counsel for equity holder Ira Gaines, but are filed on their own behalf and do not seek any relief on behalf of Ira Gaines. The signature block and request for relief seek relief only on behalf of the Law Firms themselves, and do not reference Ira Gaines. 5
Case 17-36709 Document 1035 Filed in TXSB on 09/07/18 Page 6 of 12 B.R. at 87. Here, the Law Firms purported client, Ira Gaines, is not obligated to pay any fees, and the Law Firms are therefore not entitled to any reimbursement under Section 503(b(3(D. 4 11. Even assuming the Law Firms have standing and the ability to seek fees absent an underlying obligation from Ira Gaines, the Law Firms have not satisfied the heavy burden of establishing that the made a substantial contribution to the case. While there is no statutory definition of substantial contribution, the Fifth Circuit has defined substantial contribution to mean a contribution that is considerable in amount, value, or worth, giving the phrase its ordinary, everyday meaning. Hall Fin. Grp., Inc. v. DP Partners, Ltd. P ship (In re DP Partners, Ltd. P ship, 106 F.3d 667, 673 (5th Cir. 1997 (quoting Webster s Third New International Dictionary 2280 (4th ed. 1976. In contrast, [a]ctivities of a creditor or their counsel that are ordinary, expected, routine or duplicative do not constitute a substantial contribution to the debtor s estate. ASARCO, 2010 WL 3812642, at *8; see also In re Am. Plumbing & Mech., Inc., 327 B.R. 273, 291 (Bankr. W.D. Tex. 2005 ( [A]bsent some spectacular result, such as dramatically improving treatment of all creditors, expected and routine activities do not constitute substantial contribution. (citation omitted. The substantial contribution inquiry is a factual one. Pierson & Gaylen v. Creel & Atwood (In re Consol. Bancshares, Inc., 785 F.2d 1249, 1253 (5th Cir. 1986. 12. Section 503(b(3(D of the Bankruptcy Code is to be construed narrowly so that administrative expenses will be held to a minimum. See Worldwide Direct, 334 B.R. at 122 4 The Plan Administrator acknowledges that In re R.L. Adkins Corp., 505 B.R. 770, 778-79 (Bankr. N.D. Tex. 2014 holds to the contrary, and permitted a law firm to seek fees even absent an underlying obligation of the client to pay the fees. But the Plan Administrator submits that R.L. Adkins was wrongly decided, is contrary to the Fifth Circuit case law cited herein, and is not binding on this Court. Even the court in R.L. Adkins acknowledged that its reading of the statute does not square with what some courts have considered as the overarching scheme of 503(b(3-(4, which is to reimburse parties who have made a substantial contribution. Id. at 779 n. 3 (emphasis in original. 6
Case 17-36709 Document 1035 Filed in TXSB on 09/07/18 Page 7 of 12 (citing In re Granite Partners, 213 B.R. 440, 445 (Bankr. S.D.N.Y. 1997. As such, [m]ovants bear the burden to demonstrate, by a preponderance of the evidence, that they caused a substantial contribution if they wish to recover the fees and expenses associated with their making such a contribution. ASARCO, 2010 WL 3812642, at *7. Substantial contribution claims are only granted in rare and unusual circumstances, and such narrow construction is consistent with the general doctrine that priority statutes should be strictly construed to preserve the estate for the benefit of creditors. Id. at *8. To meet its burden of proof, an applicant must show that its services have a causal relationship to the contribution. Id. 13. Courts in the Fifth Circuit have identified various factors in weighing whether to award a substantial contribution claim, including: (1 whether there was a benefit to the estate; (2 whether the benefit incurred exceeds the cost the party seeks to assess against the estate; (3 whether the applicant s efforts were duplicative of those undertaken by statutory fiduciaries; and (4 whether the applicant had a negative effect on the case. Mirant, 354 B.R. at 132-35. 5 Merely hitting the marks set forth in Mirant does not ipso facto result in the allowance of a claim for substantial contribution. 14. Like claims under section 503(b(3(D, requests for compensation under section 503(b(4 are held to high standard. Applicants requesting compensation under [section] 503(b(4, unlike professionals employed with court approval by statutory fiduciaries, seek an exception to the general rule that unsecured creditors in a chapter 11 case must pay their own professional fees. Id. at 131. Put another way, while it is presumed that professionals 5 In Mirant, the Court considered certain other factors, as well, including whether the services were undertaken just for the applying creditor or for the benefit of all parties in the case and whether the applicant would have done the same thing absent an expectation of compensation from the estate. 354 B.R. 132-35. The Court also considered whether the applicant profited from post-petition acquisition of claims. 7
Case 17-36709 Document 1035 Filed in TXSB on 09/07/18 Page 8 of 12 employed by statutory fiduciaries will be paid by the estates, that presumption is reversed for applications under section 503(b(4. Id. Likewise, parties subject to a subpoena under Rule 45(b(1 of the Federal Rules of Civil Procedure, as made applicable by Bankruptcy Rule 9016, are entitled to no more than the fees for 1 day s attendance and the mileage allowed by law, and there is no allegation that such amounts were not already paid. In making an award determination under section 503(b(4, the the court should weigh the cost of the claimed fees and expenses against the benefits conferred upon the estate which flow directly from those actions. DP Partners, 106 F.3d at 673. Finally, to aid the district and appellate courts in the review process, bankruptcy judges should make specific and detailed findings on the substantial contribution issue. Id. 6 To enable the Court to make these findings, requests for reimbursement are required to be submitted in accordance with Bankruptcy Rule 2016. See In re Energy Partners, Ltd., 422 B.R. 68, 72 n.2 (Bankr. S.D. Tex. 2009 (holding requests for reimbursement of professional fees are governed by Bankruptcy Rule 2016(a; Fed. R. Bankr. P. 2016(a ( The requirements of this subdivision shall apply to an application for compensation for services rendered by an attorney or accountant even though the application is filed by a creditor or other entity. (emphasis added; BLR 2016-1; Court Procedures 8. A. The Law Firms Did Not Provide a Substantial Contribution to the Chapter 11 Cases 15. The Law Firms assert that they are entitled to a substantial contribution claim because of their efforts in providing the Official Committee with information and analyses concerning the status and value of the Derivative Actions, which the Debtors sought to release in 6 Claimants seeking an award under section 503(b(3(D must show that the claimed expenses were actual and necessary and that any fees are reasonable. DP Partners, 106 F.3d at 673. Bankruptcy judges are charged to scrutinize claimed expenses for waste and duplication to ensure that expenses were indeed actual and necessary and to distinguish between expenses incurred in making a substantial contribution to the case and expenses lacking a causal connection, the latter being noncompensable. Id. 8
Case 17-36709 Document 1035 Filed in TXSB on 09/07/18 Page 9 of 12 the Plan, and which the Law Firms contend assisted the Official Committee in obtaining a negotiated resolution of the Committee s objections to the Debtor s Plan, providing for a $5 million recovery for Class 6 creditors. See LPCH Application 1. The Law Firms role with respect to these matters falls far short of the stringent requirements for reimbursement under sections 503(b(3(D and 503(b(4. 16. Other than allegedly providing information and analyses regarding the Derivative Actions to the Official Committee, the Applications do not allege or assert that the Law Firms directly participated in negotiations concerning the Official Committee s settlement during the confirmation hearing. Rather, the Applications acknowledge that the Official Committee not the Law Firms negotiated and obtained the Plan settlement. The Applications do not assert that the Law Firms participated in such negotiations in any way, and certainly do not come close to meeting the causal connection between the information allegedly provided by the Law Firms and the Official Committee settlement required to establish a substantial contribution claim. As such, the Law Firms fail to establish that the settlement reached was in any way different as a result of their involvement. Even if the information provided by the Law Firms to the Official Committee was helpful, the Applications fail to demonstrate the direct causal connection required to sustain a substantial contribution claim. ASARCO, 2010 WL 3812642, at *9 ( Movants evidence on causal connection is wholly speculative. Such speculative evidence is nothing more than a conclusory and self-serving statement of what the Movants believe occurred. ; see also DP Partners, 106 F.3d at 673 ( At a minimum..., the court should weigh the cost of the claimed fees and expenses against the benefits conferred upon the estate which flow directly from those actions. (emphasis added. 9
Case 17-36709 Document 1035 Filed in TXSB on 09/07/18 Page 10 of 12 B. The Applications Fail to Establish that the Services Provided Were Not Duplicative of Statutory Fiduciaries 17. The Application should additionally be denied because the Law Firms fail to establish that their services were not duplicative of those performed by statutory fiduciaries, and in these Chapter 11 Cases, the Official Committee. Indeed, it was the Official Committee that prepared and filed the objection to the Plan, raising the issue regarding the Debtors proposed releases in the Plan. It was the Official Committee that investigated and argued these issues during these cases. And, it was the Official Committee that participated in and negotiated the Plan settlement during the confirmation hearing, which provided the $5 million settlement for the benefit of Class 6 creditors. To the extent the Law Firms allege that they provided services in connection with the objection to the Plan, such services were duplicative of the services that were provided by the Official Committee, as a statutory fiduciary in these Chapter 11 Cases, representing the interests of unsecured creditors. 18. The Plan Administrator reserves the right to supplement this Objection to the Application and to raise other objections to the Applications prior to or at the hearing on the Applications and the Objection. 10
Case 17-36709 Document 1035 Filed in TXSB on 09/07/18 Page 11 of 12 CONCLUSION 19. The Law Firms cannot meet their burden of demonstrating a substantial contribution that would entitle them to any compensation. For all the reasons set forth above, the Plan Administrator respectfully requests that this Court enter an order (i denying the Law Firms Applications in their entirety and (ii granting such other and further relief as is just and equitable. GREENBERG TRAURIG, LLP /s/ Shari L. Heyen Shari L. Heyen (SBN 09564750 Karl Burrer (SBN 24043584 1000 Louisiana, Suite 1700 Houston, Texas 77002 Telephone: (713 374-3564 Facsimile: (713 374-3505 HeyenS@gtlaw.com BurrerK@gtlaw.com Counsel for Nader Tavakoli, solely in his capacity as Lead Member and Chairman of the Plan Administrator Committee of Cobalt International Energy, Inc., et al. 11
Case 17-36709 Document 1035 Filed in TXSB on 09/07/18 Page 12 of 12 CERTIFICATE OF SERVICE The undersigned hereby certifies that on September 7, 2018, I caused a copy of the foregoing Objection Applications of Lynn Pinker Cox Hurst, LLP, and TheGrantLawFirm, PLLC, as Co-Counsel to Equity Holder Ira Gaines as Trustee for the Paradise Wire and Cable Defined Benefits Plan Dated 11/11/84, for Allowance of Administrative Expenses Pursuant to 11 U.S.C. 503(b(4 to be served on all parties eligible to receive service through the Electronic Case Filing System for the United States Bankruptcy Court for the Southern District of Texas by electronic mail. David R. Eastlake David R. Eastlake 12