An indenture trustee’s counsel are entitled to fees for representing the trustee on an official unsecured creditor’s committee, even though the committee has its own counsel, according to Bankruptcy Judge Kevin Gross of Delaware.
Judge Gross decided in his March 8 opinion that the indenture trustee’s counsel fees were “prudent” based on the facts as they seemed at the time, without the benefit of hindsight. He also held that the indenture trustee’s counsel were entitled to recover fees incurred in defending their fees, despite the Supreme Court’s holding in Baker Botts LLP v. ASARCO LLC, 135 S. Ct. 2158 (2015).
Judge Gross wrote his opinion in the wake of the mammoth liquidation of Nortel Networks Inc., which entailed parallel proceedings in Canada, the U.S., the U.K. and elsewhere. The bankruptcy began in 2009 but did not conclude in the U.S. until January 2017, with confirmation of a chapter 11 plan based on a global settlement to distribute $7.3 billion in liquidation proceeds.
The indenture trustee for holders of about $150 million in senior guaranteed notes was a member of the unsecured creditors’ committee and a so-called Core Party in the allocation dispute.
Two holders with 90% of the notes objected to the payment of $4.4 million of the $8.1 million in fees requested by the indenture trustee and its counsel. The indenture trustee’s fees would be paid largely from the distribution that the noteholders are to receive.
The standards for calculating the indenture trustee’s counsel fees were somewhat different from the rules for retained professionals in chapter 11 cases. The general standard, a product of the indenture and New York law, calls for the indenture trustee to exercise the “care and skill” that a “prudent person would exercise or use under the circumstances in the conduct of his own affairs.”
To establish the amount of compensation, Judge Gross used the lodestar approach but pointed out that the noteholders did not object to the hourly rates charged by the indenture trustee’s counsel.
Primarily, the noteholders objected to the time the indenture trustee’s counsel spent on committee work. The noteholders contended that the indenture trustee did not need its own counsel when it could rely on the attorneys for the official committee. The noteholders also argued it would be unreasonable to charge them for the indenture trustee’s counsel’s services designed to benefit the entire unsecured creditor body.
Judge Gross rejected the argument. He said the indenture authorized the trustee to “act through agents or attorneys” and to “consult with counsel of its selection.”
Given the complexity of the case, Judge Gross said he would not “speculate” that the lawyers’ participation in committee meetings was “imprudent.” However, he did say it “was imprudent or unreasonable” to have more than one lawyer participate in meetings or review committee materials.
Significantly, Judge Gross differed with the 2005 decision by another Delaware bankruptcy Judge in In re Worldwide Direct Inc., 334 B.R. 112 (Bankr. D. Del. 2005). There, the court did not compensate an indenture trustee for work that duplicated the services performed by committee counsel.
Judge Gross said he was “not convinced that Worldwide Direct is controlling law because it does not allow for an indenture trustee’s forward thinking about issues in the case.”
In evaluating fees, Judge Gross said the court should not exercise “hindsight” because “[i]t simply was implausible” for the lawyers or the indenture trustee “to know whether at the time they were performing the work that the Noteholders’ interests did not need protection, or whether what they learned through the Committee would be of no benefit to the Noteholders.”
Focusing on the trustee’s duty to be prudent, Judge Gross said the “matters at hand were too important to leave to chance that the Committee Work would have no impact or significance to the Notes.”
Relying on Baker Botts, the noteholders objected to paying the lawyers for defending their fees.
Rejecting the argument, Judge Gross said that the indenture was a contract between the parties authorizing departure from the so-called American Rule requiring each side to pay its own fees. He pointed to provisions in the indenture that called for payment of the indenture trustee’s and its attorneys’ fees incurred in a fee dispute.