In a 10 page opinion released January 5, 2016 in the Tropicana Entertainment bankruptcy (Bank. D. Del. 08-10856), Judge Carey of the Delaware Bankruptcy Court provided a critical opinion concerning the handling of a dispute arising from two debtors’ division of professional payments. Judge Carey’s opinion is available here (the “Opinion”).
In May of 2009 both the OpCo and LandCo debtors in the Tropicana bankruptcy had their plans confirmed. The plans became effective June 30, 2009. The two entities cases were procedurally consolidated, but not substantively consolidated. Because they were unable to reach an agreement on the issue it became necessary for the Court to decide what percentage of professional fees should be charged to each estate. In his Allocation Decision, Judge Carey determined that “professional fees incurred through June 30, 2009 should be allocated 75% to the OpCo Debtors and 25% to the LandCo Debtors.” Opinion at *2. As the bankruptcy cases had been jointly handled through OpCo’s bankruptcy case, and all payments of professional fees had been made with funds OpCo understood to be part of its bankruptcy estate, it sought reimbursement from LandCo for 25% of all professional fee payments. LandCo argued that the Allocation Decision was narrower than OpCo’s interpretation, and only provided that 25% of fees unpaid at the time of the effective dates would be paid by LandCo. Opinion at *2-3.
Judge Carey’s Ruling
While the dispute between the two entities is real, this issue is not in touch with reality. If LandCo was required to pay 25% of all the profession fees in the Tropicana bankruptcy, it would be required to pay approximately $11.3 million to OpCo. Opinion at *9. Thus, LandCo alleges, it would have been cash flow insolvent on the day its plan became effective. Opinion at *9.
The last thing any bankruptcy judge wants to see happen is for a recently reorganized debtor to immediately slip back into bankruptcy. As he has had a front-row seat to the entirety of the Tropican restructuring, with regular information about the liquidity and budget of the debtors, this is not a result Judge Carey would have approved. As the Opinion makes clear, the Allocation Decision was meant to address a split only of those professional fees unpaid as of the effective date. Opinion at *3. In what I would think is an act of impressive restraint, Judge Carey limits his criticism to a short statement that “the OpCo Debtors’ inclusion of a claim for Professional Fees under the post-confirmation Intercompany Agreement is overreaching, inequitable and inconsistent with the confirmed Plans.” Opinion at *9.
Judge Carey finishes his critique by stating that “there is no reason to allow the OpCo Debtors to drive a truck through the small back door that they argue the LandCo Debtors left open.” Opinion at *9. While the Tropicana bankruptcy is nearing the end, after the irritation Judge Carey doubtless feels with this dispute, I would not envy the Debtors’ principals if they have to appear before Judge Carey again in the near future.