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In re Molycorp, Inc.: Bankruptcy Court Holds Committee Fee Cap Provision in DIP Financing Order is Inapplicable if a Plan is Confirmed
Practical Law Legal Update w-005-3508 (Approx. 5 pages)
In re Molycorp, Inc.: Bankruptcy Court Holds Committee Fee Cap Provision in DIP Financing Order is Inapplicable if a Plan is Confirmed
by Practical Law Bankruptcy & Restructuring
| Published on 24 Jan 2017 • USA (National/Federal) |
In In re Molycorp, Inc., the US Bankruptcy Court for the District of Delaware held that a creditors' committee counsel's fees were allowed as administrative expenses to be paid in full in cash on confirmation of the plan under section1129(a)(9)(A) of the Bankruptcy Code, and were not capped by the carve-out provision in the DIP financing order.
On January 5, 2017, in In re Molycorp, Inc., the US Bankruptcy Court for the District of Delaware held that a creditors' committee counsel's fees were allowed as administrative expenses to be paid in full in cash on confirmation of the plan under section 1129(a)(9)(A) of the Bankruptcy Code, and were not capped by the carve-out provision in the DIP financing order ( (Bankr. D. Del. Jan. 5, 2017)).
Background
On June 25, 2015, Molycorp, Inc. (Debtors) filed voluntary Chapter 11 petitions and entered negotiations to obtain postpetition financing. The Debtors then entered into a DIP financing facility with Oaktree Capital Management, L.P. (Oaktree), which the Bankruptcy Court approved on July 24, 2015 (DIP Order). The DIP Order contained a $250,000 carve-out for any committee professional fees "incurred in connection with investigating (but not prosecuting any challenge to)" claims by or against the lender.
On August 13, 2015, the Bankruptcy Court approved Paul Hastings as lead counsel for the creditors' committee (Committee). The Committee launched an investigation into the potential claims that could be asserted by the Debtors. Based on the results of its investigation, the Committee commenced an adversary proceeding against the Debtors and Oaktree. After negotiations and mediation, the Debtors, Oaktree, and the Committee entered a settlement agreement, paving the way for a plan of reorganization which the Bankruptcy Court approved on April 8, 2016.
After plan confirmation, Paul Hastings sought the Bankruptcy Court's approval of its second interim fee application for fees in the amount of $8,491,064.75 and expenses in the amount of $226,170.96. Oaktree objected, arguing, among others, that the DIP Order included a cap that prohibits payment of committee professional fees beyond $250,000.
Outcome
The Bankruptcy Court held that Paul Hastings' fees were allowed as administrative expenses to be paid in full under the confirmed plan and section 1129(a)(9)(A) of the Bankruptcy Code.
The Bankruptcy Court determined that:
- Paragraph 4(b) of the DIP Order, which provides a $250,000 carve-out for committee professional fees as an exception to the prohibition against use of Oaktree's collateral, operates in a Chapter 11 case that fails to result in a confirmed plan. The Bankruptcy Court rejected Oaktree's arguments that the DIP Order prevented payment of the fees requested by Paul Hastings. Since the Debtors' case has an approved plan, the cap was not invoked (see The DIP Order Does Not Cap All Instances of Professional Fees).
- The confirmed plan and section1129(a)(9) of the Bankruptcy Code govern payment of administrative expenses (see Without an Agreement, the Confirmed Plan and Bankruptcy Code Govern Administrative Expenses).
- The Committee's compensation of Paul Hastings was reasonable, benefited the Debtors' estate, and advantaged the Committee's constituents (see Paul Hastings' Fees are Allowed Administrative Claims).
The DIP Order Does Not Cap All Instances of Professional Fees
The Bankruptcy Court determined that the carve-out language in paragraph 4(b) of the DIP Order capped the amount of secured collateral available to pay professionals' fees only if a plan failed to be confirmed.
In paragraph 4(b) of the DIP Order:
"up to $250,000.00 in the aggregate proceeds of the DIP Loans, the DIP Collateral, the Prepetition Collateral, and the Carve-Out may be used to pay fees and expenses of the professionals retained by the Committee that are incurred in connection with investigating (but not prosecuting any challenge to) the matters…"
Relying on In re American Resources Management Corp., the Bankruptcy Court noted that:
- A secured creditor's interest in its collateral has priority over any administrative claims.
- Administrative claimants may not ordinarily look to secured creditors' collateral for payment.
- Bankruptcy professionals run the risk of non-payment when the estate is administratively insolvent.
Here, the Bankruptcy Court determined that the carve-out language of the DIP Order capped Oaktree's liability to pay certain administrative expenses from its collateral if no reorganization plan was executed.
Without an Agreement, the Confirmed Plan and Bankruptcy Code Govern Administrative Expenses
The Bankruptcy Court noted that section 1129(a)(9) of the Bankruptcy Code elevates allowed administrative expenses to a dominant priority unless holders agreed to a different treatment, and further held that the DIP Order did not explicitly cap administrative expenses after confirmation of a plan.
The Bankruptcy Court noted that both parties agreed that a DIP order could include a provision that automatically disallows or precludes compensation for professional costs over a certain amount, but the parties disagreed on whether paragraph 4(b) of the DIP Order constitutes such a per se disallowance provision.
Relying on a basic cannon of construction providing that a provision is ambiguous only when it is reasonably susceptible to at least two different interpretations, the Bankruptcy Court ruled the DIP Order was not ambiguous and did not compel an automatic disallowance of Paul Hastings' fees. In its analysis, the Bankruptcy Court noted:
- Paragraph 4(b) of the DIP Order was not different from a standard carve-out provision.
- Paragraph 4(b) of the DIP Order did not connote that the cap would completely prohibit the allowance of administrative claims following a plan confirmation.
- The existence of explicit language in the confirmed plan, which capped fees incurred by creditors' committee professionals, made a clear distinction between the period before and after the settlement agreement. The failure to include similar disallowance language in the DIP Order reinforced the Bankruptcy Court's decision that the DIP Order lacks language that can be interpreted as an absolute cap on the allowance of administrative claims.
Paul Hastings' Fees are Allowed Administrative Claims
The Bankruptcy Court awarded Paul Hastings' fees because it satisfied the requirements under section 330(a)(1) of the Bankruptcy Code that its fees be reasonable compensation for actual and necessary services. The Bankruptcy Court determined Paul Hastings' services:
- Would have been performed by a reasonable professional representing the Committee.
- Benefited the Debtors' estate and advantaged the Committee's constituents.
Further, except for a few minor reductions, Paul Hastings' fee application was reviewed and cleared by a court-appointed fee examiner, whose report significantly undercut Oaktree's objections.
The Bankruptcy Court approved Paul Hastings' fees in the amount of $8,461,396.25 and reimbursement of expenses in the amount of $225,820.83.
Practical Implications
This decision serves as a reminder to secured lenders to seek explicit language in DIP financing orders that imposes an automatic or absolute cap on the allowance of administrative claims, if they wish to limit the carve-out for committee professional fees following plan confirmation. A lender's failure to do so will elevate the priority of allowed professional fees over its liens, as section 1129(a)(9)(A) requires that administrative claims be paid in full in cash, even if this means invading the lender's collateral.