Good News for Committees… Standard Carve Out Provisions Do Not Limit Fee Awards

Over and over again the same story plays out.  A case files.  A lender carves-out a small amount from its collateral to fund Committee professionals and an investigation of the lender’s position.  That amount is inadequate, and the Committee blows past the carve-out amount.

That’s just what happened in Molycorp, where the DIP financing agreement contained a typical $250,000 carve-out provision for the Committee’s investigation of claims.

 After an extensive discovery process resulting in asserted claims, mediation, and a global settlement, the court confirmed a consensual plan and the Committee’s counsel requested payment of $8.5 million in fees.

The lender objected, arguing that the $250,000 carve-out was an absolute cap on fee payments.  The Committee responded that while the carve-out may have limited its fees in an administratively insolvent case, it was irrelevant in a case with a confirmed chapter 11 plan.  The Delaware court agreed.

The court explained that “[t]he carve-out is . . . 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, a plan was confirmed. In that context, Bankruptcy Code section 1129(a)(9)(A) requires that allowed administrative claims be paid in cash (or as otherwise agreed) on the plan’s effective date.  And nothing in the carve-out language suggested that the fee cap would prohibit the allowance of administrative fees upon plan confirmation.

“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.”

A World of Caution….

 The court contrasted the carve-out at issue with one in a DIP financing order entered in another case that stated: “[n]otwithstanding anything to the contrary therein, and absent further Order of the Court, (i) in no event during the course of the Chapter 11 Cases will actual payments in respect of the aggregate fees and expenses of all professional persons retained pursuant to an Order of the Court by the Creditor’s Committee exceed $450,000 in the aggregate (the ‘Creditors’ Committee Expense Cap’) … (iii) any and all claims (A) incurred by the Creditor’s Committee in excess of the Creditor’s Committee Expense Cap or (B) incurred by any professional persons or any party on account of professional fees and expenses that exceed the applicable amounts set forth in the Budget shall not constitute an allowed administrative expense claim for purposes of section 1129(a)(9)(A) of the Bankruptcy Code.”  At the same time, the court offered “no opinion as to whether it would approve a DIP order containing [such] provisions” had it been presented ….

See In re Molycorp, Inc., 562 B.R. 67 (Bankr. D. Del. 2017).

 

Advertisements

BCBG Creditors’ Committee Organizational Meeting: March 9, 2017

Shortly before midnight on February 28, 2017, BCBG Max Azria Global Holdings, LLC and affiliates filed for Chapter 11 bankruptcy protection in the Southern District of New York. The United States Trustee has scheduled a meeting to form an unsecured creditors’ committee on March 9, 2017 in New York.

Store Closings and “Right Sizing”

The Bankruptcy Court has entered an interim order authorizing store closing sales at 120 BCBG locations, predominantly retail and factory stores. Each of the stores to be closed has historically operated at a loss. Collectively, the stores generated $10.3 million in losses in 2016, representing 63% of BCBG’s total losses from stores with a negative contribution margin. BCBG estimates the store closings will generate $20.1 million.  The liquidation sales commenced before the bankruptcy filing and are expected to continue through the end of April. It appears that, at least in the short term, about 50 of BCBG’s stores will remain open, together with a significant number of its partner shops located inside major department stores.

A Bankruptcy Sale…. Maybe?

BCBG has also filed a draft plan with a “toggle” feature, allowing for either (a) the sale of BCBG’s assets to a third party; or (b) a debt for equity conversion on terms to be negotiated.

BCBG says that it has begun marketing its assets, and it has filed a motion to approve bidding procedures. The motion includes a request to allow BCBG to provide a stalking horse bidder-if one is found-with break-up fees and expense reimbursements.  The proposed procedures, if approved, would require potential bidders to submit preliminary bid documents to BCBG and its investment banker, Jeffries, in order to receive due diligence information. They would also require interested bidders to provide non-binding indications of interest by March 30, 2017, with an auction tentatively to follow by May 22, 2017.  But the procedures proposed by BCBG and its lenders also grant them wide latitude to move forward, instead, with a debt for equity conversion… the terms of which have yet to be negotiated.

More Information

Additional information about the case, including a list of stores scheduled to be closed and the company’s proposed sale procedures and plan, can be found on the website maintained by BCBG’s claim agent, Donlin Recano.

 

Golfsmith Proposes $1 Million Employee Retention Program

Golfsmith has asked the Delaware Bankruptcy Court to approve a $1 million retention program for some of its key employees.  The retention program, it says, is needed to implement its recently approved bankruptcy sale and to complete the wind down of its remaining business. The plan, if approved, will provide retention bonuses so some 127 non-insider employees.

The motion [Docket #483] is available for download here.

 

Got Interest? You May Not Be Able to Protect It from Preference Exposure Under Section 546(e)

31614456_l.jpg

“Settlement payments,” e.g., the transfer of cash or securities to complete a securities transaction, are given safe harbor and protected from disgorgement as preferences under the Bankruptcy Code.

 

SCOTUS Sets Oral Argument in Jevic For Nov. 28, 20016

For those of you watching for a ruling from the Supreme Court in In re Jevic, mark your calendars! Oral argument has been set for Monday, November 28, 2016.

44303734_l.jpgIf you haven’t been tracking the case, this is an excellent time to get up to speed.

Simply put, the Supreme Court granted certiorari in Czyzewski v. Jevic Holding Corp. to decide whether “structured dismissals” can be used to wrap up a Chapter 11 bankruptcy case.  A structured dismissal is a creative (or, depending on your perspective, inappropriate) solution that bankruptcy lawyers have come developed to resolve a case–often following a sale of substantially all of the company’s assets–without the delay and expense of a formal chapter 11 plan process but with more elegance and closure than creditors would have if the case were simply dismissed. The problem? Nothing in the Bankruptcy Code contemplates “structured dismissals.” And often they include “gifting” of assets from a secured creditor’s collateral to various unsecured creditors. Unhappy creditors who are left empty-handed have complained that these agreements violate the priority of creditor distributions called for under Section 507 of the Bankruptcy Code.

For a more detailed discussion, you might want to read Rochelle’s Daily Wire, published by the American Bankruptcy Institute.  Or if you want to go really crazy, you can read all the pleadings on the Supreme Court’s blog.

Mette H. Kurth