Delaware Business Bankruptcy Report: Morris James LLP Lawyers and Attorneys

In re Armstrong World Indus, Inc., No. 00-4471, 2007 WL 1138824, -- B.R. – (D. Del. Apr. 17, 2007)

A fee auditor was appointed to review all requests for fees and expenses incurred in connection with the preparation for and hearing on debtor Armstrong World Industries, Inc.’s Fourth Amended Plan of Reorganization. To the extent that the fee auditor recommended reductions of fees and expenses of certain professionals, there were no objections to most of those recommendations. However, objections to certain fees and expenses of a consultant to the debtor and one law firm were presented at a hearing in the United States District Court for the District of Delaware. The court adopted the fee auditor’s recommendations, finding that the consultant’s fees for the attendance of a testifying witness and four non-testifying professionals at the plan confirmation hearing were unreasonable, and disallowed the fees of two supporting professionals. The court also disallowed the fees of two supporting professionals incurred in connection with deposition preparation. Finally, the court disallowed certain food expenses requested by the future claimants’ counsel, finding that the expenses were exorbitant.

The United States District Court for the District of Delaware appointed a fee auditor to review professional fees incurred in connection with the preparation of and hearing on debtor Armstrong World Industries, Inc.’s Fourth Amended Plan of Reorganization. After a hearing on the various fee applications submitted by the professionals, and objections to certain of those applications, the District Court ruled. 

Although most applications resulted in fee auditor recommendations with no objections, or at least consensual resolutions, by the time of the hearing on the fee applications, two applications remained in contention. The first fee application was for a consultant which provided claims consulting services to the Official Committee of Unsecured Creditors. The fee auditor’s recommended fee reductions of $17,876.00 concerned (i) what the auditor contended was the unnecessary attendance of two professionals at the plan confirmation hearing and (ii) a deposition preparation session. The consultant sent one testifying witness and four supporting professionals to the hearing. The auditor objected to the fees for two of the four supporting professionals. The two professionals in questions were, respectively, a senior analyst and a project manager. The court held that their presence was unnecessary, and overruled the consultant’s objection to the fee auditor’s report, pointing out that none of the non-testifying professionals could assist the testifying witness during the course of her testimony. Although they did assist in preparing the witness to testify, their attendance was not a necessary service.

With respect to the deposition preparation fees, the consultant applied for reimbursement for fees for the testifying witness and four supporting professionals. The court endorsed the fee auditor’s finding that the consultant did not carry its burden of proof that the attendance of two of these professionals was required at the depositions preparation sessions. It was unclear to the court whether the deposition preparation session included one meeting among all the participants, or a series of meetings with separate participants. This suggests that the relevant fee application was not sufficiently detailed, and serves as a reminder to professionals of the importance of providing fee applications that adequately detail the work for which compensation is sought.

Also before the court at the hearing was a proposed reduction of $2,075.08 in expenses sought by future claimants’ counsel for expenses incurred for meals and snacks while its teams worked in war rooms in preparation for the confirmation hearing. For example, the court pointed to pots of coffee costing $65 each for which the firm sought reimbursement as an example of “exorbitant” food prices that pushed the firm above the recommended ceilings of $15 for breakfast, $25 for lunch and $50 for dinner. The court also overruled the firm’s objection to the fee auditor’s recommendation that charges for mid-afternoon snacks be disallowed as unnecessary, noting that “[l]awyers and supporting staff were already being provided two to three meals a day at first class establishments.”

The court held that this reduction of expenses was proper to give effect to 11 U.S.C. § 330(a)(1)(B)’s mandate that only “actual” and “necessary” expenses be reimbursed. The court found these expenses to be exceedingly high and, therefore, unreasonable.

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Hayes v. Genesis Health Ventures, Inc. (In re Genesis Health Ventures, Inc.), Civ. A. No. 06-397 (JJF), Case No. 00-2692 (PJW) (D. Del. Jan. 26, 2007)

The appellant filed a notice of appeal from an order of the Bankruptcy Court imposing sanctions against the appellant. However, although the notice of appeal was dated eight days after the date of entry of the order, it was not filed until fifteen days after the date of entry of the order appealed from. Because the ten day deadline to file a notice of appeal under Federal Rule of Bankruptcy Procedure 8002(a) was jurisdictional, the District Court found that it lacked jurisdiction to adjudicate the appeal.

Appellant James J. Hayes filed a number of motions and pleadings in the bankruptcy case of Genesis Health Ventures, Inc. The debtors sought, and the court entered on May 15, 2006, an order imposing sanctions against Hayes in connection with the filings. On May 30, 2006, Hayes filed a notice of appeal of the bankruptcy court’s order. The debtors filed a motion to dismiss Hayes’ appeal, contending that his notice of appeal was untimely under Fed. R. Bankr. P. 8002.

Under Rule 8002(a), a “Notice of Appeal shall be filed within the clerk within 10 days of the date of entry of the judgment, order or decree appealed from.” Rule 8002 is jurisdictional, and the court cannot waive it. The order appealed from was entered on May 15, 2006. Because, under the Federal Rules of Bankruptcy Procedure, intervening Saturdays and Sundays are included when calculating the ten-day time period for filing a notice of appeal, the notice of appeal in this matter was to be filed no later than May 25, 2006. However, Hayes’ notice of appeal was filed on May 30, 2006, although dated May 23, 2006.

Although Hayes acted pro so, the Court held that the Supreme Court’s holding in Houston v. Lack, which provides that the date indicated on filings by pro se prisoners is presumptively the date of filing, did not extend to this case. There was no indication in the record that Hayes was incarcerated. In addition, Hayes did not file a motion to extend the time to file the notice of appeal under Rule 8002(c). Accordingly, the court held that the appeal was untimely, and that the court lacked jurisdiction to adjudicate the appeal.

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In re Aurora Foods, Inc., C.A. No. 04-166 (GMS), 2006 WL 3747306 (D. Del. Dec. 19, 2006)

W Top Hat, Ltd. was one of several lenders entering into a credit agreement with the Aurora Foods Inc. debtors prior to Aurora’s bankruptcy. The credit agreement was modified several times prior to the bankruptcy. W Top Hat commenced an adversary proceeding against the debtors, contending that the final pre-petition modification to the credit agreement was improperly made. The bankruptcy court granted the debtors’ motion to dismiss the adversary proceeding. W Top Hat also objected to confirmation of the debtors’ plan, contending that the debtors failed to make required payments under the credit agreement. The bankruptcy court overruled W Top Hat’s objection, and confirmed the plan.

W Top Hat appealed both the dismissal of the adversary proceeding and the decisions overruling its objection to the confirmation order. Those appeals were consolidated on W Top Hat’s motion.

On November 1, 1999, the debtors entered into a credit agreement with various lenders, including W Top Hat. According to section 10.6A of the credit agreement, modifications or amendments thereto could only be made with the written consent of the “Requisite Lenders,” provided, however, that any modifications or amendments decreasing the amount of fees payable could only be made by the written consent of all lenders.

On June 27, 2002, the credit agreement was amended to allow the debtors additional time to make certain principal payments under the agreement, as well as to impose an excess leverage fee. The excess leverage fee would be imposed if the debtor failed to make the required payment by September 30, 2003, or committed other events of default.

On February 21, 2003, the credit agreement was amended again. This amendment increased the excess leverage fee and added an asset sale fee. This fee required the same payment to each of the lenders if the debtors failed to meet certain increased targets of proceeds received from asset sales.

On October 13, 2003, the debtors entered into a further amendment to the credit agreement with a majority of the lenders; W Top Hat, however, was not a party to that negotiation and amendment. This amendment combined the excess leverage fee and the asset sale fee into one “Excess Leverage and Asset Sale Fee,” thereby reducing the aggregate amount of each fee. The combined fee was also capped at $15 million if payment of all principal, interest, and fees was paid to the senior secured lenders by March 31, 2004.

The debtors filed voluntary Chapter 11 petitions on December 8, 2003, and proposed a plan shortly thereafter. W Top Hat objected to the plan, arguing that the October 2003 Amendment was improperly entered into without W Top Hat’s participation and consent as it required the consent of all lenders, not just the Requisite Lenders, and that W Top Hat was entitled to a full share of the excess leverage fee. The bankruptcy court overruled the objection, holding that October 2003 Amendment was controlling, and that it limited the payments of fees occurring under the plan before March 31, 2004.

The debtors argued that the appeal should be dismissed because of equitable mootness, citing the Third Circuit’s 1996 In re Continental Airlines opinion, which provided that an appeal could be dismissed, even though some relief could be granted, when granting that relief would be inequitable. The court rejected this argument, finding that although the debtors’ plan was substantially consummated, W Top Hat sought a payment of $6.85 million out of total assets of some $930 million. Accordingly, if W Top Hat were to prevail, having to make this payment would be unlikely to cause the plan of reorganization to unravel. The court then, having decided that the appeal could proceed, addressed the merits of W Top Hat’s appeal.

The main issue in the appeal as to both the plan objection and adversary proceeding was whether section 10.6A of the credit agreement controlled, or whether the October 2003 Amendment controlled. The district court agreed with the bankruptcy court’s conclusion that this decision concerned which provision was specific, and which was general, bearing in mind that no provision should be rendered meaningless. Analyzing this question under the applicable New York law, the bankruptcy court had concluded that the provisions could be read together, with the specific provisions of the October 2003 Amendment trumping the general provisions of section 10.6A of the credit agreement. Under this reading, the general language of the credit agreement did not apply to the Excess Leverage and Asset Sale Fee governed by the October 2003 Amendment. The district court upheld this reading.

The district court also upheld the bankruptcy court’s finding that the prior course of performance among the parties showed that they understood that the credit agreement could be modified by a majority of the lenders, as opposed to all the lenders.

The district court also reviewed W Top Hat’s contention that the bankruptcy plan violated the best interests test of 11 U.S.C. § 1129(a)(7), and found it meritless. Having decided that the October 2003 Amendment controlled as between W Top Hat and the debtors, the district court agreed with the bankruptcy court that the creditors would do as well under the plan as they would have in a hypothetical Chapter 7 liquidation.

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In re Stone & Webster, Inc., 354 B.R. 686 (D. Del. 2006)

This was a case of contract interpretation and choice of law issues, in connection with a determination of damages owed by a guarantor to a lender. The lender argued that the law to be applied was the Bankruptcy Code and Delaware law, because of the venue of the case; the guarantor argued in favor of the Saudi Arabian law selected in the underlying credit agreement. The court found that New York law, the law chosen in the guaranty, applied.

After receiving a six million dollar judgment, the plaintiff, Saudi American Bank (“SAMBA”) claimed entitlement to prejudgment interest under Delaware law. SAMBA claimed that a guaranty and credit agreement (on which the underlying judgment was based) both provided that interest was to be paid but did not apply an applicable interest rate. The Delaware legal rate of interest that would have been applicable was 11%.

The defendant claimed that Saudi Arabian law governed the credit agreement and guaranty as well as a Payment Letter executed between the parties. The credit agreement contained a choice of law provision which expressly provided that Saudi Arabian law governed the agreement. The Payment Letter contained no choice of law provision but, because the agreement was executed in Saudi Arabia, and payment was to incur in Saudi Arabia, the defendant claimed that the Payment Letter also was governed by Saudi Arabian law. Finally, though the guaranty expressly stated that it was to be governed by New York law, the defendant argued that the guaranty was derivative of the rights granted under the credit agreement and Payment Letter and thus Saudi Arabian law should apply to the guaranty as well.

Noting that the parties did not dispute that the guaranty allowed SAMBA to recover its interest and expenses incurred in enforcing SAMBA’s rights under the guaranty, the court likewise held that the issue of whether SAMBA was entitled to prejudgment interest could be determined expressly under the guaranty without reference to the Payment Letter or the credit agreement.

The court held that the guaranty was to be governed solely by New York law. The court noted that it was obligated to apply the conflict of laws rules of the state of Delaware, the state in which the court was sitting. Under Delaware law, express choice of law provisions are generally given effect absent some jurisdiction having a materially greater interest in the subject matter. The court found that Delaware, as the site of the bankruptcy, had “some, albeit diminimus,” interest in the matter. However, the interest that Delaware might have was not a materially greater interest than the state of New York. Consequentially, the court determined that New York law should apply to the calculation of prejudgment interest under the guaranty. The court also believed that the application of New York’s rate was more equitable than applying the Delaware rate, which was higher.

UPDATE:  In connection with the decision above, the District Court ordered SAMBA to provide an accounting of the attorneys' fees it was seeking to recover.  SAMBA provided an itemization of some $2.1 million in fees and an additional $195,000 in expenses.  However, SAMBA conceded that it was unable to account for and carve out all the fees related to the grant of summary judgment and that associated litigation.  SAMBA argued that much litigation arose out of the same facts and that it was therefore unable to (and should not be required to) break out its accounting directly related to the Shaw litigation.  The Court disagreed and, in its February 13, 2007 Memorandum Opinion and Order awarded SAMBA $345,714.50 in fees and no expenses.  The $345,714.50 was the amount identified by plaintiff as being attributable solely to the recovery action against Shaw.

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Magten Asset Mngmnt. Corp. v. Northwestern Corp. (In re Northwestern Corp.), 352 B.R. 32 (D. Del. 2006)

The appellant, a creditor in the debtors’ bankruptcy case, appealed from a Bankruptcy Court decision denying approval under Federal Rule of Bankruptcy Procedure 9019 of the appellant’s motion to approve a global settlement of litigation and claims with the debtors. The District Court affirmed the Bankruptcy Court decision, holding that the express terms of the settlement agreement required that it be approved by the Court prior to becoming effective, and that the settlement agreement could not be approved because it was inconsistent with the debtors’ plan of reorganization. Because the plan had been substantially consummated, it could not be amended.

Appellant Magten Asset Management Corporation, a creditor of the debtors, appealed from an order of the Bankruptcy Court denying appellants’ motion under Federal Rule of Bankruptcy Procedure 9019 seeking approval of a global compromise and settlement with the debtors of litigation and claims among the parties in the debtors’ Chapter 11 case.

The appellant contended that the Bankruptcy Court erred in concluding that the settlement agreement negotiated by appellant and the debtors was not a binding contract upon its execution. First, the appellant contended that, because the debtors’ plan of reorganization had already been confirmed, 11 U.S.C. § 363 no longer applied, and the settlement agreement did not require the approval of the Bankruptcy Court to be effective. The appellant also contended that the plain language of the settlement agreement showed that it was meant to be binding upon execution, and did not require Bankruptcy Court approval to be effective. The appellant had only filed the 9019 motion because the Bankruptcy Court ordered it to do so.

The appellant also contended that the Bankruptcy Court erred in concluding that the settlement agreement was inconsistent with the debtors’ plan of reorganization because, it alleged, the debtors drafted both the plan and the settlement agreement and represented to the Bankruptcy Court that the settlement agreement was consistent with the terms of the Plan. Finally, the appellant also contended that the settlement agreement provided the non-accepting holders of the Series A 8.45% Quarterly Income Preferred Securities, of which the appellant was one, with a recovery that was less than the amount that QUIPS holders would receive under their Class 9 treatment under the plan, and, therefore, an amendment to the plan was not required to implement the settlement agreement.

The debtors countered that they still believed a settlement of the instant litigation would have been in the best interests of the estate, but that they could not pursue the settlement agreement with the appellant once objections were filed by representatives of the Class 7 and Class 9 claimants. Because of the objections, the debtors contended that the settlement agreement required the approval of the Bankruptcy Court, as well as the execution of additional documents to become effective. The debtors also contended that the terms of the settlement agreement were inconsistent with the plan, because the plan gives non-accepting QUIPS holders the option of either (1) accepting the Plan and receiving a Class 8(b) distribution, or (2) rejecting the Plan and receiving only a Class 9 claim. The Debtors contended that the proposed settlement agreement would have provided non-accepting QUIPS holders with both types of recoveries. Therefore, amendment of the plan or the consent of the Class 7 and Class 9 claimants was required. However, the debtors pointed out that the plan had been confirmed and substantially consummated by the debtors, and therefore, amendment to the plan was not feasible.

The District Court affirmed the Bankruptcy Court’s decision. First, the District Court reviewed the settlement agreement, and determined that the express terms of the settlement agreement required that it be approved by the Bankruptcy Court, and that an order be entered, before the settlement agreement could be implemented. Accordingly, the Court rejected the appellant’s arguments that section 363 and the debtors’ reorganized status obviated the need for Bankruptcy Court approval.

Next, the Court considered the appellant’s contentions regarding harmony between the plan and the settlement agreement. Under the Plan, QUIPS holders could select one of two options; they could either select Option 1, which was a pro rata share of 505,591 shares of new common stock, plus warrants exercisable for an additional 2.3% of new common stock, or Option 2, which was a pro rata share of recoveries, if any, upon resolution of the QUIPS litigation.

The plan also provided that, to the extent shares allocated to Class 8(b) claimants were not distributed to Option 2 holders, those shares were to be distributed to Class 7 and Class 9 claimants. However, the settlement agreement diluted the distributions to which Class 7 and Class 9 claimants are entitled, and conflicted with the plan’s disbursement scheme, by providing QUIPS holders electing Option 2 with the full amount of stock set aside for them in the disputed claims reserve and the stock they would have received if they elected Option 1, stock which was to be divided among the Class 7 and Class 9 claimants. Therefore, an amendment to the Plan would have been necessary for the settlement agreement to be consistent with the plan. However, such an amendment was not feasible because the plan had been substantially consummated, and in any event, such an amendment would have been opposed on behalf of Class 7 and Class 9 claimants. Accordingly, the District Court concluded that the Bankruptcy Court's decision to deny the appellants’ Rule 9019 motion was not erroneous.

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