In the recent decision of In re Molycorp, Inc., 562 B.R. 67 (Bankr. D. Del. 2017), Judge Sontchi held that a carve-out provision in a DIP financing order did not act as an absolute limit on the fees and expenses payable to counsel to the creditors committee in a case with a confirmed chapter 11 plan.
The DIP financing order contained a 250K carve-out for committee fees incurred in investigating claims against the lender. After its investigation, the committee filed a motion seeking standing to pursue certain causes of action against the lender. The parties then mediated and reached a global settlement agreement that paved the way for a consensual plan of reorganization.
After confirmation, the committee’s counsel requested $8.5 million in fees and 226K in costs. The lender argued that the 250K carve-out in the DIP financing order constituted an absolute cap on fee payments. The committee’s counsel responded that while the carve-out cap may have been relevant in an administratively insolvent case, it was irrelevant in a case with a confirmed chapter 11 plan. The court agreed.
The court explained that “[t]he carve-out is essentially an agreement by the secured creditor to subordinate its liens and claims to certain allowed administrative expenses, permitting such professionals’ fees to come first in terms of payment from the estate’s assets. . . . [W]hen there are insufficient unencumbered assets to pay professionals’ fees and no plan has been confirmed, professionals’ only recourse is the carve-out.”
Here, however, because a plan was confirmed, Bankruptcy Code Section 1129(a)(9)(A) required that, unless agreed otherwise, each holder of an administrative claim will receive cash equal to the allowed amount of such claim on the effective date of the plan. Hence, “if the secured parties desire confirmation, the administration claims must be paid in full in cash at confirmation even it if means invading their collateral.”
The Court found that the carve-out language was “not different than a standard carve-out provision. It does not connote in any way that the dollar-amount cap would operate as a complete bar against the allowance of administrative claims following plan confirmation. In this respect, the dollar-amount cap was going to come into play if the attempts to confirm a reorganization plan had failed; it was not intended to come into play if a Chapter 11 plan was confirmed.”
Because the Court’s appointed fee examiner recommended (with minor adjustments) approval of the $8.5 million in fees and 226K in costs requested as reasonable compensation for actual and necessary services, the Court ordered their payment.
Carl D. Neff is a partner with the law firm of Fox Rothschild LLP. You can reach Carl at (302) 622-4272 or at firstname.lastname@example.org.