An admitted campaign by the Office of the United States Trustee to bar indemnity and exculpation provisions in retention agreements for financial advisors hired by trustees, debtors and committees is yielding some results in recent reported decisions. The attempt to generate a per se rule against a bankruptcy professional’s obtaining, as a term of his or her employment, indemnity or exculpation from the estate for his or her acts of negligence has been unsuccessful. In re Metricom Inc., 275 B.R. 364 (Bankr. N.D. Cal. 2002); In re DEC International Inc., 282 B.R. 423 (W.D. Wisc. 2002); In re Comdisco Inc., 2002 WL 31109431 (N.D. Ill.); In re Thermadyne Holdings Corp., 283 B.R. 749 (8th Cir. B.A.P. 2002). However, two courts have refused to approve retention where indemnity or exculpation was a term of employment based upon the facts and circumstances of the case, and practitioners may be hard pressed to distinguish these decisions from a per se rule. Metricom, supra; Thermadyne Holdings, supra.
In Metricom, the court agreed with the U.S. Trustee that “the weight of authority rejects indemnity/contribution provisions and/or exculpation provisions for financial advisors in bankruptcy cases.” 275 B.R. at 369. In doing so, the court rejected unpublished decisions from Delaware and the Southern District of New York as “of no precedential value.” Id. at 370. The court agreed that there was no per se prohibition against such clauses; the “issue is whether particular terms are reasonable under given circumstances, and such a determination can only be made on a case-by-case basis.” Id at 371. The proponent of the application bears the burden of establishing that indemnity, contribution and exculpation clauses are reasonable in the context of the case under §328(a). Id. The court found that the applicant bondholders' committee and the advisor had failed to meet that burden because, inter alia, (1) they had not established that the advisor could not be protected by insurance; and (2) they had not established that similar services could not be obtained without the provisions, since other advisors in the case had been retained in the case without the same protections and the bondholder committee advisor had continued to work despite the U.S. Trustee’s objection. Id. at 371-72. The court was also unimpressed with the argument that the terms were the product of arms-length negotiations with the committee, since the estate was providing the indemnity and there had been no negotiation with the estate (although the debtor did not object) and notice had not been given to all creditors. Id. at 373. The court was equally unimpressed with the argument that there was little risk that the provisions would be utilized. Id. at 374. It was the proponent’s “burden under §328(a) to show that it is reasonable for the estate to be exposed to any risk at all, and that showing has not been made.” Id.
In Thermadyne Holdings, the Eighth Circuit Bankruptcy Appellate Panel went to great lengths to say that the lower court had not used a per se rule in denying employment of a financial advisor on terms including exculpation and indemnity clauses. 283 B.R. at 755-56. Again, the burden was on the proponent to establish that the terms were reasonable terms of employment under §328(a) under the facts and circumstances of the case. Id. at 756. The court upheld the lower court’s “findings” that prevailing terms and conditions of employment in the market are not determinative, that litigation risk in the case is a reason not to provide the protection, and that any risk should be borne by the party providing the service. Id. at 757. In addition, the evidence presented did not establish that insurance was not available, that the services could not be obtained without offering the protection, or that the estate would not be better off paying more for the services but not providing the protection. Id. at 758. Again, the court pointed out that the firm had continued to work despite the dispute over the clauses as evidence that the provisions were not necessary. Id.
Based on these cases, proponents of employment agreements including indemnity/contribution and/or exculpation provisions should be prepared to introduce evidence supporting the reasonableness of the provisions, including availability of insurance, cost of insurance, risk factors in the case (shortened time frames, access to information, etc.), availability of services without the protection, etc. However, given the approach taken in the Metricom and Thermadyne Holdings cases, what evidence will suffice is subject to some question.