United States: River Road: A Cautionary Tale For Chapter 11 Financial Advisors

Last Updated: February 2 2015
Article by Leon R. Barson and Brandon S. Shemtob

Action Item: In order to avoid potentially costly economic ramifications, financial advisory firms engaged in Chapter 11 bankruptcy cases must take care to avoid any inconsistencies between the terms of their engagement letter and the form of retention order ultimately entered by the Bankruptcy Court.

The United States Bankruptcy Court for the Northern District of Illinois recently handed down an opinion, In re River Road Hotel Partners LLC, 2014 WL 5488259 (Bankr. N.D. Ill. 2014), dealing with the issue of a financial advisory firm's entitlement to a $2.6 million "restructuring fee" following confirmation of a Chapter 11 plan of reorganization proffered by the Debtors' secured creditor. The opinion sheds light on the importance of clear drafting in engagement letters as well as the need to closely monitor a debtor's proposed retention application for its financial advisor.

This Chapter 11 case concerned River Road Hotel Partners LLC and its affiliates in connection with their ownership of the Intercontinental Hotel at Chicago's O'Hare Airport. After filing for bankruptcy in 2009, the Debtors sought to retain FBR Capital Markets & Co. to perform financial advisory services in the bankruptcy case. The parties negotiated an engagement letter, which provided for, among other things, a "restructuring fee" that compensated FBR in the event of a successful reorganization of the Debtors. The term "restructuring" was broadly defined in the engagement letter in order to encompass "any restructuring, reorganization and/or recapitalization...that involves all or a significant portion of the [Debtors'] outstanding obligations...."

After entering into the engagement letter, the Debtors filed a retention application with the Court seeking authorization to employ FBR. The initial application provided that FBR's compensation would be determined based upon the terms of the engagement letter. However, the proposed form of order approving the retention application was modified prior to its approval by the Court to address an issue raised by the creditor's committee. The revised order stated: "the 'restructuring fee' described ... in the application is expressly contingent upon the consummation of a restructuring contemplated by the engagement letter." The Court approved the modified form of order.

The Debtors were ultimately unsuccessful in their attempts to confirm a plan of reorganization. The secured lender, however, proposed and obtained confirmation of its own plan of reorganization. Following confirmation, FBR sought payment of the restructuring fee. The plan transferee (successor to the Debtors) objected, claiming that when read together, the engagement letter and retention order were ambiguous and parol evidence proved that FBR was only entitled to a restructuring fee if a debtor-sponsored plan was confirmed.

FBR filed a motion for summary judgment in which it argued that the engagement letter and the retention order were unambiguous and therefore created a clear entitlement to payment of the restructuring fee. The Bankruptcy Court, relying in large part on the declaration of Debtors' counsel,1 denied FBR's motion and instead granted summary judgment sua sponte for the plan transferee. FBR appealed the decision to the District Court, which affirmed in part, reversed in part and remanded the matter for trial.

On remand, the Bankruptcy Court was tasked with determining whether FBR was entitled to the restructuring fee despite the fact that the confirmed plan was sponsored by a third party. The Court's first hurdle involved the propriety of consideration of parol evidence in the matter sub judice. The Court concluded that, while the engagement letter was unambiguous on its face, the language of the retention order created a latent ambiguity and therefore necessitated consideration of parol evidence. Specifically, the Court found that this latent ambiguity arose when trying to square the engagement letter with the modified language in the retention order. Because the retention order made the restructuring fee "contingent upon the consummation of a restructuring contemplated by the Engagement Letter," the Court concluded that it was entirely possible that a form of restructuring existed which would fall outside the purview of the engagement letter.

In considering parol evidence, the Bankruptcy Court next sought to ascertain the intent of the parties. Against this backdrop, the Court found that there was no evidence indicating the Debtors had ever advised FBR that the modification to the retention order was intended to change the definition of a restructuring from what was negotiated in the engagement letter (indeed, the financial advisor's position was that the modification effected no substantive change to the terms of its engagement letter). Ultimately, the Court concluded that no credible evidence existed to show that the retention order materially changed FBR's right to receive a restructuring fee. In view of this, the Court upheld FBR's entitlement to payment of the restructuring fee, notwithstanding the fact that the confirmed plan was sponsored by a third party.

The takeaway from FBR's battle to recover its multi-million dollar restructuring fee is two-fold. First, it is imperative that financial advisors' engagement letters are carefully drafted so as to avoid any potential ambiguity in terms of the entitlement to any form of compensation. Second, advisory firms must take care to monitor the debtor's proposed retention order to ensure that it reflects, and is consistent with, the terms of their engagement. To be sure, a heightened attention to detail may serve to prevent post hoc disagreements as to the proper interpretation of what otherwise should have been viewed as a customary provision in a professional's engagement letter.


1 Interestingly, counsel for the Debtors (who drafted the modified retention order) testified that it was his understanding that FBR would only be entitled to a restructuring fee if the Debtors' plan was confirmed.

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