United States: Court Allows Asset Sale Fees Based Upon Credit Bid Amount

The U.S. District Court for the Eastern District of Kentucky has affirmed the allowance of fees and the reimbursement of expenses for an investment banker retained by the debtors pursuant to the sale of the debtors’ assets (the "Assets") in an arrangement that provided for fees and expenses to be based, in part, on the amount of the successful credit bid.

In In re HNRC Dissolution Company f/d/b/a Horizon Natural Resources Company, 340 B.R. 818 (E.D.Ky. 2006), investment banker Miller Buckfire ("MB") sought fees and reimbursement under Sections 327 and 328 of the Bankruptcy Code.

The investment banker sought $9.35 million in fees, plus reimbursement of approximately $173,000 in expenses, pursuant to a contract (the "Retention Agreement") between MB and the debtors approved by order of the bankruptcy court. The approved compensation included: (i) a monthly advisory fee of $150,000; (ii) a sale transaction fee (the "Sale Transaction Fee") based on the aggregate consideration paid for the Assets, subject to a fee cap of $8 million; and (iii) the reimbursement of MB’s actual and necessary expenses. The Assets were sold at auction, and the purchase price included as much as $304 million in cash, a credit bid of $482 million (the "Credit Bid"), and assumed liabilities of $89 million.

MB requested a fee of $8 million based upon the purchase price.

Various parties objected to MB's request, and the objections were overruled by the bankruptcy court. The bankruptcy court first cited the applicable standard, stating that once a court approves compensation under Bankruptcy Code section 328, it cannot be altered unless the "terms and conditions prove to have been improvident in light of developments not capable of being anticipated at the time of fixing such terms and conditions."

The bankruptcy court held that the objections, to the extent they were based on the inclusion of the Credit Bid in the aggregate consideration upon which the Sale Transaction Fee was based, were not "unanticipated" and thus failed to meet the standard for altering the terms of the Retention Agreement. The court relied on the fact that modifications were made to the Retention Agreement at a hearing at which the issue of credit bidding for the Assets was negotiated, agreed to by the parties, and factored into calculation of the purchase price.

The bankruptcy court also noted that at a pre-auction meeting among the debtors, creditors and MB, the full amount of the purchasers’ price was reported, including the amount of the Credit Bid. In addition, MB argued, and the bankruptcy court agreed, that the Credit Bid was the same as if the purchasers had paid that amount in cash and then immediately reclaimed it through distributions on their secured notes.

The bankruptcy court also rejected the argument that the Credit Bid was valueless, because the Credit Bid was included in the calculation of the $8 million cap on MB’s fees. Finally, the bankruptcy court approved reimbursement of $142,554.06 of the expenses requested by MB, finding such amount to be "reasonable."

Certain creditors (the "Appellants") appealed the order of the bankruptcy court, arguing that the Credit Bid should not have been included in the aggregate purchase price for the purpose of the Sale Transaction Fee, because (i) the Credit Bid was not contemplated in the Retention Agreement as the Credit bid had no value; (ii) it was not anticipated that such a large portion of the Sale Transaction Fee would be based upon the Credit Bid, or that the sale could not have taken place absent unforeseen concessions by the Appellants and other parties; and (iii) MB will earn a "windfall" if the terms of the Retention Agreement are enforced.

The district court disagreed with the Appellants’ arguments and affirmed the decision of the bankruptcy court. The district court first found that the Credit Bid was properly included as aggregate consideration for the Assets because it represented an assumption of liabilities and therefore had value.

The district court further found that the bankruptcy court properly determined that the Credit Bid had value, based on (i) Bankruptcy Code Section 363(k), which "treats credit bids as a method of payment—the same as if the secured creditor has paid cash and then immediately reclaimed that cash in payment of the secured debt"; (ii) the fact that the Credit Bid was consistently treated as payment; (iii) the fact that all parties at the auction agreed to the inclusion of the full amount of the Credit Bid in calculating the purchase price that the purchasers agreed to pay and that all other bidders would have to exceed; and (iv) the fact that the bankruptcy court order approving the sale stated that the consideration provided by the purchasers, which included the Credit Bid and other assumed liabilities, constituted "fair and reasonable" consideration for the Assets.

The district court rejected the Appellants’ arguments that it was not anticipated that such a large portion of the Sale Transaction Fee would be based on the Credit Bid, or that the sale could not have taken place absent unforeseen concessions by the Appellants and other parties. The court noted that even when unforeseeable circumstances are present, the bankruptcy court is not required to modify a professional’s approved fee structure.

The district court flatly rejected the Appellants’ argument that inclusion of the Credit Bid in the aggregate sale price was not anticipated, finding that the bankruptcy court properly held that "the [C]redit [B]id’s inclusion in the fee calculation was contemplated, discussed in open court, and a motivating factor in the imposition of a cap."

Likewise, the district court found "simply untenable" the Appellants’ argument that absent unforeseen concessions by them and others, the sale would not have occurred. The court indicated that there was no substance behind this argument, and noted that the Appellants provided no evidence that MB failed to fulfill any of its obligations under the Retention Agreement.

The district court also rejected the Appellants’ argument that MB would receive a windfall if the terms of the Retention Agreement were enforced. The court found this argument "hyperbolic and unpersuasive," and "not supported by any stretch of the law or facts." The court concluded that the fee structure was an arm’s-length transaction approved by the bankruptcy court, and that there is a "need to protect the professional’s expectation of compensation and ensure that the most highly qualified professionals remain willing to participate in the bankruptcy process."

Finally, the district court rejected the appellants’ argument that the bankruptcy court erroneously approved expenses requested by MB, based on the record of detailed statements supporting the request, the bankruptcy court’s review of same, and the bankruptcy court’s disallowance of nearly $27,000 requested.

This case demonstrates that the courts and the bankruptcy code recognize that a credit bid has inherent value, as an assumption of a liability that is tantamount to cash. In addition, courts will enforce the terms of a professional’s retention agreement that was negotiated at arms’ length, on notice to parties in interest, and approved by the bankruptcy court.

This article is presented for informational purposes only and is not intended to constitute legal advice.