A recent Law 360 story by Jeff Montgomery, “Del. Judge Urged to OK New Kiddle-Fenwal Ch. 11 Atty Fees”, reports that an attorney for bankrupt fire protection company Kidde-Fenwal Inc. urged a Delaware judge to approve debtor payment of counsel fees for an ad hoc group of governmental claimants to help speed and streamline the huge and costly, mass tort-driven Chapter 11.  Brian D. Glueckstein of Sullivan & Cromwell LLP, counsel to Kidde-Fenwal, told U.S. Bankruptcy Judge Laurie Selber Silverstein that the unusual request was driven in part by prohibitions against government entity membership on regular unsecured creditor committees.

The restriction, Glueckstein said, threatens to complicate and delay Kidde's reorganization and handling of billions in pollution and personal injury claims tied to company sales of aqueous film-forming foam, or AFFF.  Chemical foams have been long and widely used to smother fires quickly, but they have also given rise to thousands of lawsuits asserting lingering pollution of public waterways and aquifers and billions of dollars in toxic exposure claims tied to cancers, thyroid diseases, elevated liver enzymes and decreased fertility among those exposed.

Kidde-Fenwal filed for Chapter 11 protection in May, saying it was facing more than $1 billion of liability tied to claims arising from a former subsidiary's manufacturing and sale of AFFF.  "We have a situation here where we have a vast number of lawsuits pending in the tort system.  A number of those cases were filed by governmental units.  A substantial number of those cases have issues that impact the governmental claims," Glueckstein said.

The debtor company, its unsecured creditor committee and its present 23-member "ad hoc" governmental creditor committee all argued that the law allows retention of counsel for the government panel, at Kidde's expense, based on anticipated "substantial contribution" to the litigation.  James S. Carr of Kelley Drye & Warren LLP, counsel to the ad hoc committee, told the judge that the debtors themselves sought clearance to pay the ad hoc committee's fees, based on the debtor's business judgment.

Carr observed that the debtors need the government ad hoc group's participation in negotiations, and is concerned that "they won't [participate] if their fees aren't paid."  The ad hoc group already has played an important role in getting states to "back down and let this case proceed," without waiting on government claim resolution, in order to reach some agreements without further litigation, Carr said.  "If we didn't have this cease-fire," he said, "the fees and expenses of this case would have continued to dramatically increase."

Judge Silverstein cited concerns about limitations on the ability of debtors to deviate from bankruptcy restrictions on estate payments of non-debtor legal fees, and at one point described the arguments as pointing to a "Frankenstein kind of standard.".  But the judge also said: "Quite frankly, I'm more persuaded that the government's voice is an important voice, because it's not on the committee.  That's the beauty of a [creditor] committee — you bring the voices together."

The Office of the U.S. Trustee argued that the Bankruptcy Code prohibits payments from estate for creditors outside regular unsecured creditor panels or by claims of future, prospective contributions to the case.  Fees can be sought based on claims of documented substantial contributions afterward, said Timothy J. Fox Jr., trial attorney for the U.S. Trustee's Office.  But he said seeking the payments prospectively, based on business judgment, "is inconsistent with the statutory scheme" under bankruptcy.

"You're suggesting that the debtor can use its business judgment on the operational aspects of its business, but not on its strategy for exiting the case," Judge Silverstein asked.  Fox said that while the ad hoc committee fee issue had largely surfaced in mass tort cases, it could turn up in other bankruptcies, eroding safeguards.  "If it was done at the appropriate time on a substantial contribution application at the conclusion of the case, you would have this back-and-forth and have concerns about the appropriateness of the fee," Fox said.