Summary
The Sixth Circuit held that a "carve-out" provision in a final cash collateral order, which allowed payment of professional fees from the secured lenders' prepetition cash collateral, remained enforceable after the Chapter 11 case converted to Chapter 7. Applying contract interpretation principles to the bankruptcy court order, the court rejected the lenders' argument that the carve-out could only be funded from postpetition adequate protection liens, finding that the plain language of the order and the lenders' conduct demonstrated their intent to subordinate their prepetition liens to the professionals' fees. The court further ruled that nothing in the Bankruptcy Code prohibits secured creditors from voluntarily agreeing to use their collateral to pay professionals, as the Code's priority scheme governs only distributions of estate property, not creditors' contractual arrangements.
Topics
Practice areas
Questions Presented
- Whether the Carve-Out provision in the Final Cash Collateral Order allows payment of professionals' fees from cash collateral derived from prepetition liens after conversion to Chapter 7.
Holdings
- Yes, the Carve-Out extends to prepetition liens and the professionals can be paid from cash collateral, including post-conversion proceeds.
Key quotations
“The Carve-Out. For purposes hereof, the 'Carve-Out' shall mean, with respect to the Debtors, collectively, the sum of (i) all fees required to be paid to the clerk of this Court and to the U.S. Trustee under section 1930(a) of title 28 of the United States Code plus interest at the statutory rate (without regard to the notice set forth in (v) below); (ii) fees and expenses of up to $25,000 incurred by a trustee under section 726(b) of the Bankruptcy Code (without regard to the notice set forth in (v) below); (iii) to the extent allowed at any time, whether by interim order, procedural order or otherwise, all fees, costs, and expenses (the 'Professional Fees') incurred by persons or firms retained by the Debtors or the Creditors’ Committee pursuant to section 327, 328, or 363 of the Bankruptcy Code (collectively, the 'Professional Persons') at any time before or on the first business day following delivery by the Pre-Petition Lenders of a Carve-Out Trigger Notice (as defined herein), whether allowed by this Court prior to or after delivery of a Carve-Out Trigger Notice (the 'Pre-Trigger Date Fees'); and (iv) after the first business day following delivery by the Licking River Lenders of the Carve-Out Trigger Notice (the 'Trigger Date'), to the extent allowed at any time, whether by interim order, procedural order or otherwise, the payment of (x) all Professional Fees of Professional Persons retained by the Debtors; and (y) all Professional Fees of Professional Persons incurred by the Creditors’ Committee, in an aggregate amount for clauses (x) and (y) not to exceed $500,000 incurred on and after the Trigger Date (the amount set forth in clauses (x) and (y) being the 'Post-Carve Out Trigger Notice Cap'); provided that nothing herein shall be construed to impair the ability of any party to object to the reasonableness of the fees, expenses, reimbursement or compensation described in clauses (iii) and (iv) referred to above . . . .” (806-07)
Factual background
This case arises from the involuntary bankruptcy of U.S. Coal Corporation. Licking River Mining, a subsidiary, operated in Kentucky. The Lenders (appellants) asserted liens on substantially all assets of the debtor, including cash collateral. Professionals were hired under Chapter 11 and a Final Cash Collateral Order was entered, including a carve-out provision for professional fees. The case converted to Chapter 7, and professionals sought payment of approximately $2.5 million from the carve-out. The Lenders objected, arguing the carve-out did not extend to their prepetition liens.
Procedural history
The bankruptcy court overruled the Lenders' objections to the final fee applications of the professionals. The district court affirmed. The Lenders appealed.