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Substantial Contribution Claims

By Steven B. Smith and Jennifer A. Muller
February 23, 2010

In order to encourage active and meaningful participation by creditors in a Chapter 11 bankruptcy case, the drafters of the Bankruptcy Code included a provision therein which grants creditors an administrative expense claim for the actual and necessary expenses incurred in making a substantial contribution in a Chapter 11 case. In other words, where a creditor retains a professional to advance a particular position in a Chapter 11 case whose efforts result in the making of a substantial contribution to the case, such creditor can potentially get reimbursed for all of its out-of-pocket expenses, including for reasonable compensation for professional services rendered.

As with other important concepts found in the Bankruptcy Code, its drafters purposely refrained from defining the phrase “substantial contribution,” thereby leaving courts with the ability to exercise their discretion on a case by case basis. This discretion, however, has given rise to uncertainty as to whether, and to what extent, the intent of the creditor seeking a substantial contribution claim is factored into a court's consideration. This article: 1) discusses the standards that govern substantial contribution claims; 2) highlights several examples of substantial contribution claim requests that have either succeeded or failed, with a focus on the recent failed substantial contribution claim in the Tropicana case; and 3) explores how courts have considered the element of intent in adjudicating such substantial contribution claims.

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