Court Declines to Approve Settlement of Plan Administrator's Objection to Indenture Trustee's Claim for Fees and Expenses, Finding Evidence of Reasonableness of Claim to Be Lacking
In re RNI Wind Down Corp., Case No. 06-10110 (CSS), 2007 WL 949647 (Bankr. D. Del. March 29, 2007) (Judge Christopher S. Sontchi)
The Plan Administrator in the bankruptcy case of RNI Wind Down Corporation and its affiliated debtors objected to a request for payment of fees and expenses pursuant to the debtors’ plan of reorganization by the indenture trustee of pre-petition notes of the debtors. The parties agreed to a settlement and moved for approval of the agreement. The Delaware Bankruptcy Court refused to approve the settlement, finding that the legal invoices and request for fees were so heavily redacted and inspecific as to make it impossible for the court to determine whether they were reasonable, and thus whether the settlement was equitable and fair. The court also determined that the plan did not modify the indenture agreement, which was a pre-petition contract among non-debtors, and that it lacked jurisdiction over claims arising under the indenture.
In the bankruptcy case of RNI Wind Down Corporation and its affiliated debtors, the United States Bankruptcy Court for the District of Delaware was presented with two related motions concerning the payment of legal fees incurred by U.S. Bank National Association as the indenture trustee under certain pre-petition notes of the debtors. The motions presented the following questions: (i) whether the court should approve a settlement of a claim objection where approximately 50% of the indenture trustee’s legal fees would be borne by the debtors’ estates; and (ii) whether the court should interpret the terms of debtors’ confirmed plan of reorganization to limit the indenture trustee’s legal fees to those recoverable from the debtors’ estates when the terms of indenture provide otherwise.
With respect to the first question, the court did not approve the settlement, finding that the legal invoices underlying the indenture trustee’s claims were so heavily redacted that the court could not determine the likelihood of success on the merits of the claims. As to the second question, the court held that the plan did not modify the indenture, including its terms providing the indenture trustee with a charging lien against the proceeds of the notes. Moreover, whether such a charging lien might properly have been asserted under the terms of the indenture was outside the court’s jurisdiction.
Prior to the petition date, the debtors raised cash through the issuance of certain subordinated notes for which U.S. bank acted as indenture trustee. The notes matured following the petition date. Pursuant to the debtors’ plan, the indenture trustee was eligible for payment of its fees and expenses by the estate subject to documenting such fees and expenses to the plan administrator, and agreement that they were reasonable.
In total, the indenture trustee sought reimbursement for approximately $607,000 in fees and expenses, to which the plan administrator filed objections. The indenture trustee and plan administrator agreed to settle the claim for $300,000. The indenture trustee had withheld approximately $600,000 from payments to the noteholders in reliance on its right under the indenture to assert a charging lien against such funds because of non-payment in the bankruptcy case.
In deciding whether to approve the settlement, the court was required to determine whether the settlement was “fair and equitable” applying the test prescribed by the United States Court of Appeals for the Third Circuit: (i) the probability of success in litigation; (ii) the likelihood of success in collection; (iii) the complexity of the litigation involved, and the expense, inconvenience and delay necessarily attending it; and (iv) the paramount interest of the creditors.
The likelihood of success in collection was not at issue, as the plan administrator had reserved funds sufficient to pay in full. However, the analysis of the probability of success in litigation was made all but impossible because the indenture trustee’s legal invoices were so heavily redacted for privilege. Accordingly, it was impossible for the court to assess what services were provided, and whether they were reasonable. The court also noted that the most heavily-redacted items were those connected with the highest billing rates. Finally, U.S. Bank sought payment of almost $64,000 in internal fees, but provided no description for the basis of those fees, rendering it impossible for the court to assess the reasonableness of those fees.
The inquiry into the complexity of the litigation involved, and the expense, inconvenience, and delay necessarily attending it, weighed in favor settlement, as it almost always would because settlement reduces the complexity and inconvenience of litigation. The interest of creditors test also weighed in favor of approving the settlement, subject to two complicating factors. The first was that unsecured creditors had already received payment in full, so the distribution was for the benefit of equity holders, and not creditors. The second was that, if the indenture trustee were to successfully assert its charging lien with respect to unreimbursed fees and expenses, the note holders would suffer a reduction in payments, albeit a de minimis one. However, this risk did not outweigh the benefits.
Thus, although it was only the probability of success in litigation factor that weighed against the settlement, its weight was so great that the court was unable to determine that the settlement was equitable and fair.
The second motion before the court was the motion of certain note holders to compel U.S. Bank to remit the $600,000 that was held back and for damages, costs and expenses incurred by the note holders in bringing the motion to compel. U.S. Bank argued that the court lacked subject matter jurisdiction over the question of whether it could properly assert a charging lien. The court agreed, finding that it lacked related to jurisdiction over this dispute, as its outcome would have no effect on the debtors’ estates because no further payments out of the estate on account of such claims remained to be made. However, the court proceeded to analyze whether the plan modified the indenture, which would vest the court with jurisdiction to enforce the plan confirmation order. The note holders argued that the plan modified the indenture to limit the payment to U.S. Bank of fees and expenses paid from the estates. If the note holders were subject to the charging lien, they argued, they would receive less than 100% on their allowed claim, which would be inconsistent with the plan and disclosure statement.
The court determined that it lacked authority to modify the indenture, which was a private contract between non-debtors, except pursuant to applicable law. However, the note holders pointed to no such law permitting the court to modify the indenture. Also, the note holders did not allege that the indenture was modified by its own terms. Interestingly, the court expressed that it was not troubled that the provision for payment in full would be rendered superfluous, stating that plans often contain provisions that have little or no effect, such as provisions for the retention of jurisdiction, even where no such jurisdiction might exist. Accordingly, the court found that it lacked subject matter jurisdiction over the charging lien dispute, and that the plan did not modify the indenture.
