Payment of Indenture Trustees’ Fees in Bankruptcy
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Indenture trustees (ITs) perform key roles in bankruptcy cases, ensuring that their holders speak with a unified voice and protecting the holders’ interests. However, ITs are not estate professionals whose fees and expenses (including fees of professionals)1 are paid as a matter of course directly from the debtor’s estate. Even though IT fees are often paid at one stage of the bankruptcy process – the days in which ‘the fees of the indenture trustees [are] always paid’2 appear to have passed. Indeed, experienced lawyers who may previously have ‘know[n] not to expend any energy fighting them’ are increasingly taking a second look at IT fees.3 The rise of activist holders has further complicated matters for ITs and counsel seeking payment of fees in bankruptcy cases. This article examines how ITs can ensure that they are paid for services rendered during a bankruptcy case.
Payment under the charging lien
ITs seeking payment of their fees and expenses in bankruptcy have several options at their disposal. The simplest option relies on recourse to the trustee’s charging lien established under the indenture. Most indentures provide for reimbursement of an IT’s reasonable fees and expenses, as well as those of counsel. Such indentures further provide the IT with a lien on trust funds or distributions that it holds that secure the obligations to reimburse the IT’s fees. When an IT seeks to exercise its lien rights to recover reasonable fees and expenses in connection with a bankruptcy case, the exercise can occur only after distributions have been made under a plan or Chapter 7 liquidation.
An IT’s exercise of lien rights is generally a non-controversial process. However, this process becomes significantly more difficult in certain contexts, notably in Chapter 7 cases where debt exists that is contractually senior to the debt held by the IT’s holders. In this situation, the IT and counsel will need to be proactive in asserting entitlement to fees and expenses by exercising their charging lien.
One approach to realising fees and expenses that has proven successful is as follows. The standard form indenture recognises that debt may exist senior to that of the IT’s holders (‘senior indebtedness’). The subordination to such senior indebtedness is generally also outlined in the indenture. Sometimes, however, indentures contain a provision fencing off a trustee’s fees and expenses from subordination. Where such language is present, the IT should argue that before subordination occurs, the trustee is first entitled to receive its reasonable fees and expenses from the subordinated distribution.4
Despite the simplicity and ostensible appeal of reliance on the charging lien to obtain payment, at least two attendant drawbacks exist.
First, the charging lien is generally ineffective to secure payment in cases where the estate has insufficient assets to make a distribution to the trustee’s holders or where the trustee is contractually subordinated to another creditor.
Second, even if funds are available for distribution to the trustee’s holders, such holders will fare better if the payment of the trustee’s fees is made by the estate as a supplement to, rather than a deduction from, the distribution to be made to holders.
Payment pursuant to a plan
Because of the inherent problems regarding payment under the charging lien, ITs have looked for other avenues to obtain payment.
Arguably the most desirable means for ITs to be compensated is under a plan. Under this option, the IT’s fees are designated as administrative expenses to be paid in full under the plan. When successful, this approach allows the fees of the IT and its professionals to be paid subject to, at most, a reasonableness review by the court.
However, the availability of this option has been called into question in recent years by an opinion from the Lehman bankruptcy case. Whereas prior opinions, such as in Adelphia and unpublished orders in other cases, had recognised payment through the plan process as an option for ITs and non-fiduciary creditors, the Lehman decision muddied the waters.
Whether fees incurred by creditors and ad hoc committees not retained by the estate – which are treated similarly to ITs in evaluating payments under a plan – could be paid under a plan was addressed as a matter of first impression in Adelphia. The plan in Adelphia was premised on a global settlement among certain ‘settlement parties’, which included certain members of the official committee of unsecured creditors. Under the global settlement, the plan provided for payment of the parties’ fees and expenses as administrative expenses.5 The bankruptcy court confirmed the plan but imposed additional procedures with respect to the award of such fees, deferring consideration of whether creditors seeking payment of fees must satisfy sections 503(b)(3) and (b)(4) of the Bankruptcy Code.6
The parties later filed applications for their fees, arguing that such fees should be approved because: payment thereof was provided for in the plan; and the parties made substantial contributions to the estates. The Office of the US Trustee for Region 2 objected to payment of these fees arguing, inter alia, that the parties could not use the global settlement to circumvent section 503(b).
Faced with these objections, the bankruptcy court issued an opinion leaving behind its initial reservations regarding the need to make a showing of compliance with section 503(b)(3) or (4). Instead, the court concluded that reasonable fees and expenses of creditors, including attorneys’ fees, may be paid where the provision for fees is an element of a Chapter 11 plan.7 Specifically, the court considered the interplay among sections 1129(a)(4), 1123(b)(6) and 105(a). Taken together, it concluded, these provisions permitted no conclusion other than that fees may be paid under a consensual plan. Having concluded that section 503(b) was not the exclusive basis for granting fees of creditors in Chapter 11 cases, the Adelphia II court went on to describe the factors relevant to the ‘reasonableness’ analysis and approved the fees it deemed ‘reasonable’.8
Several years later, litigation ensued over a similar procedure in Lehman. In that case, the plan provided for payment of ‘reasonable compensation for legal services rendered to the individual members of ... [the] committee’, including two ITs, ‘by their own attorneys when those fees, subject to findings of reasonableness, have been awarded under Lehman’s [plan].’9 The US Trustee objected, citing section 503(b) as the ‘exclusive pathway’ for payment of a committee member’s legal fees.10
The court sided with the plan proponents. ‘The flaw in the [US Trustee]’s argument is the embedded assumption that the administrative claim formulation of Section 503(b) functions as a trump card that extends across the Bankruptcy Code to block the formulation of a plan that proposes independent grounds for granting comparable payment rights.’11 Section 1123(b)(6) acts as ‘a broadly-worded, open-ended invitation to the creativity of those who are engaged in drafting plan language’,12 and section 1129(a)(4) is easily read together with this section.13 Accordingly, a plan proponent could provide professional fees to a committee member, including an IT.14
The US Trustee appealed Lehman I and the district court reversed.15 In reaching this conclusion, Lehman II rejected Adelphia II and Lehman I in favour of an approach under which section 503(b) is the exclusive basis for committee members to recover such fees as administrative expenses. This decision, although not binding on any court, nonetheless constitutes persuasive authority that the professional fees of ITs incurred as members of official committees may not be paid as administrative expenses under a plan.
As framed by Lehman II, the key issue was whether the provision was ‘appropriate’ and ‘not inconsistent with’ applicable Bankruptcy Code provisions.16 The court first looked to section 503(b) and concluded that this section constituted the exclusive avenue to recover administrative professional fee expenses.17 Specifically, the court held that section 503(b) covers all administrative expenses and that ‘while there can be some administrative expenses that are not listed in § 503(b), they must nonetheless fall within § 503(b)’s interstices’.18 Committee members’ professional fee expenses, however, were ‘glaringly exclude[d]’ from section 503(b)(3) and (4) and therefore not available for payment as administrative expenses.19
The court next turned to whether the relevant fees could be justified as plan payments and held that they could not. First, the court noted, plans exist to pay pre-petition claims and post-petition expenses. The appellees’ expenses were not pre-petition claims, so if they were not actually administrative expenses – as previously concluded – they could not be paid under the plan.20 Second, viewing the provision as an effort to circumvent section 503(b)(3) and (4) – which the court had found precluded payment of professional fees incurred by committee members for committee work – the court held that allowing the contemplated payment could give rise to ‘serious mischief’.21 Third, the court held that the Bankruptcy Code, as a comprehensive statutory scheme, could not remain comprehensive if parties could ‘tweak the law to fit their preferences’.22 Finally, in a footnote, the court concluded that section 1129(a)(4) did not redeem the appellees’ arguments because it applied to disclosure of ‘payments made in connection with the plan, but not written into the plan’.23
Although Lehman II represents a rebuttal of Adelphia II and Lehman I, several facts regarding the opinion bear noting.24 First, the entities seeking compensation in Lehman appear to have been committee members, and the reasoning of the opinion is specific to such entities. Moreover, it is unclear under Lehman II whether a plan can provide for payment of the fees and expenses of an IT who either did not sit on an official committee or incurred fees and expenses in its non-committee member capacity without having to make a ‘substantial contribution’ showing under section 503(b).
Payment for making a substantial contribution
As demonstrated above, where available, payment under a plan is generally the preferred method for ITs to recover their fees and expenses from the estate. In cases where this option is unavailable, ITs may seek recovery under section 503(b) before resorting to their charging lien.
The Bankruptcy Code authorises the recovery of reasonable fees and expenses (including professional fees) of an IT whose participation provided a substantial contribution.25 Thus, if an IT can demonstrate that it made a substantial contribution, its fees and expenses are generally compensable as administrative expenses. This would include professional fees of committee members under Lehman II.
The Bankruptcy Code does not define what constitutes a substantial contribution, but courts have developed certain principles. First, substantial contribution applications are typically granted only in rare circumstances.26 Second, the party asserting that it has made a substantial contribution must show a causal (often, a ‘but-for’) connection between its actions and the contribution.27 Third, the contribution must generally provide a demonstrable benefit to the estate.28
Therefore, simply performing the trustee’s fiduciary duties may not qualify.29 These commonalities notwithstanding, courts have been divided over a major issue that is central to the substantial contribution determination: whether a creditor’s motivations matter.30
Payment during the bankruptcy case
Recently, a number of ITs have attempted a new approach towards obtaining their fees: petitioning the bankruptcy court for interim payments during the pendency of the bankruptcy case. These attempts have been met with mixed results.
In re Magnum Hunter Resources
In In re Magnum Hunter Resources, the Bankruptcy Court for the District of Delaware was presented with a unique approach to the payment of IT fees.31 In Magnum Hunter, the debtors moved for authority to secure post-petition financing, designated the ‘DIP Financing Facility’, in an aggregate amount of US$200 million. As part of the DIP Financing Facility, certain of the debtors’ noteholders agreed to backstop the debtors’ DIP Financing Facility. Pursuant to this backstop agreement, the debtors sought authorisation for payment of the ‘actual, reasonable, and documented fees, costs, and expenses incurred by the Prepetition Indenture Trustee’.32 The Bankruptcy Court for the District of Delaware ultimately granted this motion, allowing for payment to the IT 14 days after presentment of an invoice to the debtors, the US Trustee and the official committee of unsecured creditors.
While the facts of this case are unique, the case demonstrates the new approach that ITs are taking in seeking payment of fees during bankruptcy cases. ITs are increasingly striking deals with debtors whereby the debtors will seek, through presentation of a mutually-agreed motion, authorisation to pay the IT during the administration of the bankruptcy case. While this approach proved successful in Magnum Hunter, this approach is not universally approved.
In re Caesars Entertainment Operating Company, Inc
In In re Caesars Entertainment Operating Company Inc, one of a number of ITs sought authorisation, through a motion by the debtors, for pre-confirmation payment of more than US$11 million dollars in fees, plus authorisation for monthly payments capped at $500,000 moving forward in the case.33 In presenting this motion, the debtors relied solely on section 363(b) of the Bankruptcy Code and its provision allowing for the debtor to ‘use, sell, or lease, other than in the ordinary course of business, property of the estate’. The debtors and IT appear to have relied solely on section 363 because the IT seeking payment was also a member of the official committee of unsecured creditors and section 503(b) would therefore be unavailable for such payment under Lehman II and its progeny.
The US Trustee recognised this manoeuvre on the part of the debtors and the IT and objected to the motion. The US Trustee’s argument in opposition to the payment rested solely on tenants of statutory interpretation; primarily the tenant of construction that when one broad statutory provision is limited by a narrower provision, the narrower statutory provision prevails as an exception to the broader provision.34 Accordingly, the US Trustee asserted, the narrower provisions of section 503(b) regarding the payment of administrative expenses and the priorities associated therewith take precedence over the broader provisions of section 363 when determining if and when payments may be made to an IT.
The Bankruptcy Court for the Northern District of Illinois sided with the US Trustee and, in an opinion announced on 31 October 2016, denied the debtors’ motion seeking pre-confirmation payment to the IT. In ruling in favour the US Trustee, the court noted that section 503 is the appropriate vehicle through which the IT must be paid, and because the IT in this case was a member of the official committee of unsecured creditors, the IT could not obtain payment as a priority administrative expense under this provision. Accordingly, the IT was denied interim payment of its fees.
The Caesars case exemplifies a narrow approach to payment of IT fees during the pendency of the bankruptcy case. Because the IT in that case was limited to section 363 as the sole source of authority to seek payment, the argument was somewhat hindered from the outset. Indeed, ITs who are able to fall within the ambit of section 503(b) administrative claim priority have a better chance of obtaining approval of pre-confirmation payment of IT fees.
In re Nortel Networks Inc
In re Nortel Networks Inc 35 provides a unique wrinkle on the discussion of payment of IT fees: can an IT collect payment under its charging lien for fees associated with activities performed while a member of the official committee of unsecured creditors and for fees associated with proceedings regarding the allocation of the IT’s fees? In a somewhat surprising decision, the Bankruptcy Court for the District of Delaware held that not only could the IT recover for certain fees associated with performance on the committee, the IT could also collect for fees incurred in the fee allocation dispute, a departure from the Supreme Court’s holding in Baker Botts LLP v ASARCO LLC.36
In ASARCO, the Supreme Court of the United States of America determined that the bankruptcy code was not a statutory exception to the American Rule regarding the payment of attorneys’ fees, thereby holding that bankruptcy attorneys could not recover fees incurred defending their fees in a bankruptcy case. Despite this holding, the Nortel court recognised that, whereas the Supreme Court in ASARCO was addressing an argument regarding a statutory exception to the American Rule, the court in Nortel was addressing a contractual exception in the form of the indenture, and more specifically the charging lien contained therein. This distinction proved dispositive, and the bankruptcy court awarded payment of the IT’s fees for both the work performed on the committee as well as for the fees incurred defending its fees as reasonable.
In sum, there are a number of options available to ITs to collect their fees in a bankruptcy case. Although such fees are no longer automatically paid out, ITs are increasingly seeking creative solutions to obtain payment for their services. While the charging lien remains the most reliable means of obtaining payment in cases in which sufficient funds are present, it is not the sole avenue through which ITs can obtain their fees. Although apportioning IT fees into a plan of reorganisation or pressing debtors to seek confirmation for mid-case payments are not guaranteed, these options are becoming increasingly viable options for ITs to attempt to recoup their fees. As more ITs seek new methods of payment, bankruptcy courts will continue to grapple with whether such methods are available under the Bankruptcy Code – and the results are anything but predictable.
- All references herein to IT fees include fees of the IT and its professionals.
- See Douglas A Baird and Robert K Rasmussen, ‘Antibankruptcy,’ 119 Yale L J 648, 688 n.186 (2010).
- For a successful implementation of this strategy, see Kerr v Wilmington Trust Co, Adv Pro No. 12-05299-MGD [ECF No. 7] (Bankr ND Ga 21 September 2012).
- In re Adelphia Commc’ns Corp, 368 B.R. 140, 269-70 (Bankr SDNY 2007) (Adelphia I).
- Id. at 270-71.
- In re Adelphia Commc’ns Corp, 441 BR 6, 9 (Bankr SDNY 2010) (Adelphia II).
- Id. at 19-22.
- In re Lehman Bros Holdings Inc, 487 B.R. 181, 183 (Bankr SDNY 2013) (Lehman I).
- Id. at 186. Since section 503 (b) (3) (F) provides for payment of expenses of official committee members, the issue in Lehman concerned primarily fees of the committee members’ professionals. A similar issue arose in the AMR Corp. case and the bankruptcy court, citing extensively to both Adelphia II and Lehman I, concluded that the individual members of the committee could bargain for and obtain payment of their professional fees under the plan. In re AMR Corp, 497 BR 690, 696 (Bankr SDNY 2013.
- Id. at 186 (noting that argument discounts sections 1123(b)(6) and 1129 (a)(4)).
- Id. at 190.
- Id. at 191.
- Id. at 192-93.
- See Davis v Elliot Mgmt Corp (In re Lehman Bros Holdings, Inc), No. 13 Civ. 2211(RJS), 2014 WL 1327980 (SDNY 31 March 2014) (Lehman II).
- See 11 U.S.C. section 1123(b)(6).
- Lehman II, 2014 WL 1327980, at *3-4.
- Id. at *3.
- Specifically, Lehman II held that although section 503(b)(3)(F) provides for ‘payment of the expenses incurred by official committee members in performing committee work,’ section 503(b)(3) explicitly excludes professional fee expenses, which are instead covered by section 503(b)(4). Moreover, section 503(b)(4) authorises professional fee expenses for any entity that qualifies for expenses under section 503 (b)(3)(A) - (E), but conspicuously excludes entities eligible under section 503(b)(3)(F). The court concluded that this omission was intentional, since the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 amended section 503(b)(4) to exclude professional fee expenses for official committee members.
- Id. at *6.
- Id. at *7, n.9.
- Other courts have taken different approaches to these issues. See, eg, In re Washington Mutual Inc, 442 BR 314, 365 (Bankr D Del 2011).
- See 11 USC sections 503(b)(3)(D), 503(b)(4) and 503(b)(5).
- See, eg, In re Am Plumbing & Mech Inc, 327 BR 273, 279 (WD Tex 2005).
- See, eg, Hall Fin Grp Inc v DP Partners LP (In re DP Partners LP), 106 F3d 667, 673 (5th Cir 1997).
- See, eg, In re Nw Corp, 365 B.R. 453, 457 (D Del 2007).
- Id. at 457.
- Compare Speights & Runyan v Celotex Corp (In re Celotex Corp), 227 F3d 1336, 1338-39 (11th Cir 2000), with Lebron v Mechem Fin Inc, 27 F3d 937, 944 (3d Cir 1994).
- Case No. 15-12533 (Bankr D Del 2015), Docket No. 264.
- Id.at p. 61.
- Case No. 15-01145 (Bankr ND Ill 2016) (Docket No. 4587).
- See, eg, RadLAX Gateway Hotal, LLC v Amalgamated Bank, 132 S Ct 2065, 2070 (2012).
- 2017 WL 932947 (Bankr D Del 8 March 2017).
- 135 S Ct 2158 (2015).