A Cash Collateral Carveout Doesn’t Automatically Make a Bank Liable for Fees

A bankruptcy court in Kentucky limited a recent Sixth Circuit opinion to its facts in ruling that professionals cannot compel a secured lender to pay fees from a cash collateral carveout when there was no provision making the bank liable.

In a corporate chapter 11 case, a series of cash collateral orders carved out $40,000 a month to pay professionals for the debtor and the creditors’ committee. The orders provided that the bank’s liens were “subject and subordinate to payment of the Carve-Out.”

However, the cash collateral orders went on to say that the “Debtor shall pay the Carve-Out as funds permit without causing an overdraft.”

The confirmed chapter 11 plan provided that professional fees would be paid first from the carveout, and second, if the carveout was exhausted, the fees would be payable “as soon as practicable.”

After confirmation, the bankruptcy court granted the professionals almost $500,000 in final compensation.

In view of cash flow constraints, the debtor was only able to pay about half of the carveout during the chapter 11 case. After confirmation and the final fee allowance, the case converted to chapter 7. The professionals filed motions asking Bankruptcy Judge Joan A. Lloyd of Louisville, Ky., to compel the bank to pay them about $300,000 in fees that remained unpaid.

In her March 13 opinion, Judge Lloyd denied the motion, saying, among other things, that there was nothing in the plan making the bank liable for professional fees.

The professionals relied on Licking River Mining, LLC v. Nixon Peabody LLP (In re Licking River Mining, LLC), 911 F.3d 806 (6th Cir. 2018), where the appeals court ruled, in substance, that the cash collateral order was an agreement by the lender to pay professionals from its own property, not from estate property. To read ABI’s report on Licking River, click here.

Judge Lloyd distinguished Licking River on its facts. The Sixth Circuit, she said, applied normal rules of contract interpretation in concluding that “the lender was responsible for the professional fees.” She did not read the case “to stand for the blanket proposition that all carve-out provisions in Chapter 11 cases apply in the event of insolvency. It is only where the language of the document plainly sets forth such terms.”

Employing “basic rules of contract construction,” Judge Lloyd found nothing in the cash collateral orders, the plan, or the confirmation order requiring payment directly by the bank. Indeed, she said the plan “placed the responsibility for the payments squarely on the Debtor.”

The professionals are appealing to the Bankruptcy Appellate Panel.