After a significant amount of litigation including an appeal, remand and trial over a two-year period, the bankruptcy court overseeing In re River Road Hotel Partners LLC[1] ultimately determined that FBR Capital Markets & Co., located in Arlington, Va. (FBR), was entitled to payment of its restructuring fee of $2,666,965.73 and expenses of $12,179.01. FBR’s engagement letter with the debtors from 2009 called for a restructuring fee based on the percentage of indebtedness involved in any restructuring. The proverbial match that started the “bonfire of the ambiguities” was that the debtors’ plan failed while a third-party plan was confirmed, but the FBR engagement letter was ambiguous as to its entitlement to a restructuring fee in the event that a third-party plan was confirmed. Professionals entering into engagement letters that contemplate a restructuring fee may learn valuable lessons from FBR’s battle.
Background
The River Road bankruptcy cases were filed in 2009 after the debtors had built and financed the Hotel Intercontinental at O’Hare Airport in Chicago at the start of the 2008 recession. FBR was retained as a financial advisor in order to market and assist with the restructuring of the estates’ debt. The FBR retention order noted that approval of FBR’s fees was subject to review pursuant to the standards of § 328(a), while expense reimbursement was subject to § 330 review. The retention order also provided that “[a]ll aspects of the relationship created by the Engagement Letter shall continue to be governed and construed in accordance with the laws of the State of Illinois, applicable to contracts made and to be performed therein.”[2]
Subsequently, the debtors sought to confirm a plan premised upon a sale, the bid procedures for which denied the secured lenders the ability to credit-bid. On the objection of the secured lenders, the bankruptcy court denied the bid procedures and subsequently terminated exclusivity. Thereafter, Amalgamated Bank filed its own plan of reorganization, which was confirmed and consummated. Bletchley Hotel (the plan transferee) was the entity that emerged upon confirmation.
FBR filed a fee application seeking approval of a restructuring fee of approximately $2.4 million based on the lenders’ confirmed plan. Bletchley opposed the fee application, arguing that “FBR did nothing to earn the fees that it now seeks[.]”[3] Bletchley asserted that § 4(a) of the FBR retention order provided that the restructuring fee was “payable only upon a Restructuring achieved by the Debtors.”[4] FBR responded that Bletchley was seeking “to impose new terms making FBR’s Restructuring Fee payable ‘only if FBR had a role in the restructuring or it was Debtors-sponsored,’ a substantial new condition nowhere found in the Engagement Letter or [the] Court’s Retention Order.”[5]
The bankruptcy court sustained the Bletchley objection as to the restructuring fee but allowed FBR’s monthly fees and expenses already paid.[6] As to the restructuring fee, the bankruptcy court found that the dispute was narrow: The parties agreed that FBR was hired pursuant to § 328 and that Illinois law governed, but the retention order was ambiguous requiring consideration of the parol evidence offered by the objectors, which convinced the court that Bletchley’s position was correct.[7]
FBR appealed this decision to the U.S. District Court for the Northern District of Illinois. After completing a de novo review and applying Illinois rules of contractual interpretation, the district court concluded that the parol evidence was barred.[8] The court found that because the contract language remained a disputed material fact, summary judgment was inappropriate; it then reversed and remanded the matter to the bankruptcy court.[9]
On remand, the bankruptcy court conducted a three-day bench trial on the issue of whether FBR was entitled to the restructuring fee.[10] The bankruptcy court found that the FBR principals testified that they would not have agreed to take on the engagement if the restructuring fee had been contingent upon the identity of the party that successfully restructured the debtors. The court also considered FBR testimony that the overall compensation and the structure of the compensation in the engagement letter were consistent with market rates when the engagement letter was initially prepared, but that the ultimate retainer and monthly fee were below market rates for this type of engagement.[11]
The bankruptcy court considered both sides’ evidence (in the form of competing emails and documents) (including parol evidence) as to the drafting of the engagement letter, but concluded that the “evidence was confusing and did not clarify anything regarding the terms under which FBR would be entitled to the Restructuring Fee.”[12] The parties then tried to persuade the court as to how ¶ 4(a) of the retention order was drafted between the movant and objecting parties; the court once again opined that “the parol evidence was confusing and unhelpful.”[13] Bletchley argued that the retention order and the engagement letter were both ambiguous, that the extrinsic evidence supported the conclusion that the restructuring fee was a success fee, and that FBR was unsuccessful. FBR argued that the engagement letter was unambiguous, and as a result the court should not consider any extrinsic evidence, so that FBR was entitled to the restructuring fee pursuant to the broad definition of "restructuring" set forth in the engagement letter.[14]
The bankruptcy court considered the parol evidence and concluded that “the contradictory subjective testimony cancels itself out.”[15] The record indicated that there was no evidence to suggest that the parties ever agreed that the restructuring fee was contingent on confirmation of a debtor-sponsored plan; the phrase "debtor-sponsored plan" was never used during negotiations with FBR; and the revised retention order did not contain that phrase, nor did the revised retention order state that the restructuring fee was to be based on the results of FBR’s efforts.[16]
The court concluded that it could find “no clear evidence” that the language of the retention order was meant to limit FBR to a restructuring fee based on the confirmation of a debtor-sponsored plan or on a restructuring that was the result of FBR's efforts. The court found that the ambiguity created by the retention order should be construed as being against Bletchley and in favor of FBR under the doctrine of contra proferentem,[17] noting that the rule is not interpretive, but rather, “instead of seeking to divine the intent of the parties, ... merely assigns the risk of an unresolvable ambiguity to the party responsible for creating it."[18] The court noted that if the debtors had wanted the restructuring fee to be expressly contingent on the results of FBR's efforts or on the confirmation of a debtor-sponsored plan, there were ways they could have drafted the retention order to accomplish that goal. The court concluded that “[f]or whatever reason, [the debtors] did not” include their intentions in the drafting of the retention order.[19]
Subsequently, FBR filed its Amended Second Final Application for Compensation seeking the approval of a restructuring fee of $256,145.89, “necessary” expenses of $1,846,838.32 and attorneys’ fees (for the compensation litigation) of $1,773,331. Bletchley has once again raised a variety of objections to the Amended Fee Application (generally the same objections were raised previously); this contested matter has not yet been set for hearing.
[1] In re River Road Hotel Partners LLC, Case No. 09-30029 (Bankr. N.D. Ill.). All of the following docket references are to this case.
[2] See Order Authorizing the Debtors’ Retention and Employment of FBR Capital Markets & Co. as Financial Advisor to the Debtors Nunc Pro Tunc to the Petition Date (“FBR Retention Order”), at 4 (Sept. 21, 2009) [Docket No. 79].
[3] See Plan Transferees’ Mem. of Law in Opp’n to the Mot. for Summ. J. of FBR Capital Markets (“Objection”), at 1 ((Sept. 21, 2009) [Docket No. 1112].
[4] Id. at 4.
[5] See FBR’s Reply In Supp. of Mot. for Summ. J. (“Reply”), at 1-2 (Nov. 21, 2012) [Docket No. 1118].
[6] See Mem. Op (“Opinion”), at 3 (Oct. 30, 2014) [Docket No. 1214].
[7] Id. at 5.
[8] FBR Capital Mkts. & Co. v. Bletchley Hotel at O'Hare LLC, No. 13 C 746, 2013 WL 5408848, at *3 (N.D. Ill. Sept. 24, 2013) (citing Air Safety Inc. v. Teachers Realty Corp., 706 N.E.2d 882, 884 (Ill. 1999)).
[9] Id. at 8.
[10] See Opinion at 1.
[11] Id. at 6.
[12] Id. at 6-7.
[13] Id.
[14] Id. at 11.
[15] Id. at 17.
[16] Id. at 7.
[17] Contra proferentem requires any ambiguities in a contract to be resolved against its drafter. This is a secondary rule of interpretation that should be invoked "only after 'ordinary interpretive guides have been exhausted.’” Id. at 19.
[18] Opinion at 19 (citing Premier Title Co. v. Donahue, 765 N.E.2d 513, 517 (Ill. App. Ct. 2002)).
[19] Id. at 19.