By now, both indenture trustees and offices of the U.S. Trustee around the country are undoubtedly familiar with the Southern District of New York’s 2014 opinion in the case of In re Lehman Brothers Holdings, Inc., 508 B.R. 283 (S.D.N.Y. 2014) (Lehman II), finding that individual committee members must establish a “substantial contribution” to the case under Section 503 of the Bankruptcy Code before the payment of their fees will be approved as part of a Chapter 11 plan. In the years since the Lehman II decision, however, U.S. Trustees and/or other parties have tried to extend this ruling beyond merely limiting committee members’ right to reimbursement of fees and expenses to also limiting the payment of indenture trustee fees under a plan. But the unique position of indenture trustees — who are generally able to assert a charging lien for fees and expenses incurred pursuant to the terms of the governing indenture — creates tension with the applicability of Lehman II: if indenture trustee fees are not paid by the debtors, their fees will be paid out of distributions that otherwise would be made to noteholders. A finding by the court that payment of such fees is unauthorized under Lehman II (and therefore may need to be deducted from distributions to noteholders) may create serious risks for the plan and any plan settlements, especially in a circumstance where noteholders’ recoveries are negotiated pursuant to a settlement premised upon the payment of indenture trustee fees by the debtor.
The Evolution of Lehman
The issues in Lehman II and related cases stem primarily from whether Section 503(b) of the Bankruptcy Code — which governs the payment of administrative expenses — is the exclusive means by which individual creditors’ fees and expenses may be paid under a plan.1
Until the Lehman II decision in 2014, multiple decisions in the Bankruptcy Court for the Southern District of New York analyzed the issue of whether individual creditors could have their professional fees paid under a plan, and each found that such payments were appropriate and not inconsistent with the Bankruptcy Code. The first of those cases was In re Adelphia Commc’ns Corp., 441 B.R. 6, 19 (Bankr. S.D.N.Y. 2010), in which Judge Gerber homed in on a key distinction between Section 503(b) and other provisions of the Bankruptcy Code in finding that the plan could provide for the payment of reasonable fees and expenses of ad hoc committee members and individual creditors. According to the court, payments under section 503(b) are distinguishable from plan-based payments because, unlike a plan provision to which a debtor consents, Section 503(b) governs nonconsensual administrative expenses that must be paid even if the debtor (or any other party) does not consent. Because nothing in Section 503(b) provides that it is the exclusive means for paying fees and expenses of creditors (see, e.g., 11 U.S.C. 1129(a)(4) and 11 U.S.C. 1123(b)(6)), the court found that the consensual payment of fees and expenses was not inconsistent with the Bankruptcy Code. Likewise, in the Lehman decision before the Bankruptcy Court, Judge Peck followed the reasoning of Adelphia in overruling the U.S. Trustee’s objection to the payment of committee members’ fees as part of the plan.2 In so holding, the court reasoned: “Section 1123(b)(6) is a broadly-worded, open-ended invitation to the creativity of those who are engaged in drafting plan language ... [j]ust about anything can be included [in a plan], provided that the terms of the plan do not run afoul of applicable bankruptcy law.”3
Even with multiple cases in the Southern District Bankruptcy Court finding these plan provisions permissible, the District Court in Lehman II overturned Judge Peck’s bankruptcy court decision, instead holding that professional fees of individual members of an official committee were administrative expenses exclusively governed by Section 503(b). Parsing the language of Sections 503(b)(3)(F) and 503(b)(4), the court found that the only means for payment of committee member professionals fees was upon a showing of “substantial contribution.”4
While the evolution of Lehman II is interesting, it does not squarely address the issue of whether the payment of indenture trustees (regardless of whether they are members of an official committee) is appropriate pursuant to a plan.5 Nevertheless, U.S. Trustees presented with a plan that purports to pay such fees as administrative expenses have recently sought to apply Lehman II to prevent the payment of such fees absent a showing of “substantial contribution” by the indenture trustees. But unlike non-trustee committee members, the role and duties of indenture trustees (and the payment of their fees) are governed by an indenture that usually provides such trustees with a “charging lien” for the collection of their fees — allowing indenture trustees to deduct their fees from any distributions made on the underlying notes. To avoid a deduction from noteholders’ distributions, it has become standard practice for parties to negotiate for the debtors to pay indenture trustee fees through a plan.
Recent Ruling: Payment of Indenture Trustee Fees Pursuant to Global Settlement in Plan
Where the payment of indenture trustee fees is a component of a larger, comprehensive series of plan settlements, a successful challenge to the debtor’s payment of those fees has the potential to change the parties’ agreed economic terms through the application of a charging lien, thereby jeopardizing a proposed reorganization. This precise issue was recently raised in the Bankruptcy Court for the Eastern District of Missouri in In re Arch Coal, Inc., et al. (No. 16-40120).6 After months of hard-fought negotiations, the debtors, the unsecured creditors’ committee, the indenture trustees and the secured lenders crafted a global settlement that resolved numerous case issues and avoided multiple significant litigations. Among the settled issues were (i) the debtors’ and the secured lenders’ (as majority holders of the reorganized equity) agreement to pay the indenture trustee fees subject to certain caps, and (ii) an agreed distribution to unsecured creditors and the allocation of that distribution among funded debt and nonfunded debt creditors.
At confirmation, unsecured creditors voted overwhelmingly to accept the plan, and no economic party in interest was challenging confirmation. However, the U.S. Trustee objected to, among other things, the payment of the indenture trustee fees under the plan. Relying on Lehman II, the U.S. Trustee argued that payment of these fees violated the Bankruptcy Code, and suggested that “sound bankruptcy policy” required that additional funds go to general unsecured creditors to compensate for the payment of the trustee fees. In essence, the U.S. Trustee was asking the parties to recut the negotiated deal, a request that could have required renegotiation and resolicitation of a different plan.7
The U.S. Trustee’s position was opposed by each of the major constituencies who negotiated and supported the settlement on which the plan was based. After hearing oral argument from all parties, Judge Rendlen overruled the U.S. Trustee’s objection and confirmed the Chapter 11 plan. The court understood that the payment of the indenture trustee fees was part of a comprehensive deal, and found it compelling that (i) “none of the other 40,000 individuals” with a direct interest in the fee issue had objected to these payments, and (ii) the plan did not provide that these payments were “administrative expense claims.”
Contrast Caesars: Proposed Payments Outside Plan Context
As a means to avoid a Lehman II-based objection at plan confirmation, some debtors have attempted to argue that indenture trustee fees can be paid as an exercise of the debtors’ business judgment pursuant to Section 363(b) of the Bankruptcy Code.8 Most recently, in In re Caesars Operating Entertainment Company, Inc., et al., No. 15-B-01145 (Bankr. N.D. Ill. Oct. 31, 2016),9 Judge Goldgar denied a request by the debtors to pay fees and expenses of an indenture trustee, which were negotiated as part of a comprehensive deal, outside of a plan pursuant to Section 363(b) of the Bankruptcy Code. While the U.S. Trustee in its objection attempted to rely on Lehman II, the court specifically declined to rule on the applicability of Lehman II or any related cases on the grounds that the requested fees were not being paid pursuant to a plan. Despite the inapplicability of Lehman II, however, the court found that the “specific” provisions for payment of professional fees under Section 503(b) should govern over the “general” provisions for payments made by a debtor under Section 363(b).10 The court distinguished the two cases relied upon by the movants (both Bethlehem Steel and Asarco) on the grounds that they did not appropriately take this principle into account. Because Section 503(b) governed the indenture trustee’s fee payment, the court found it could not authorize such fees without a showing of “substantial contribution.” Ultimately, to avoid litigating this issue at confirmation, the non-debtor parent agreed to pay the indenture trustee’s fees, thereby removing any question of the applicability of section 503(b). The Chapter 11 plan was confirmed on Jan. 17, 2017.
Though it has been but a few years since the Lehman II decision, its scope continues to evolve as U.S. Trustees and other parties continue to attempt to expand the decision's applicability to additional parties like indenture trustees. But because indenture trustees have unique contractual rights with their holders that ensure the payment of their fees regardless of whether they are approved by the Bankruptcy Court, a debtors’ agreement to pay these fees can be a key point in plan negotiations among noteholder principals. To protect such a negotiated plan structure that has broad consensus from economic stakeholders, plan proponents must be creative in finding means to ensure payment. This creativity may come in the form of carefully drafted plan provisions ensuring that payments of indenture trustee fees are not being paid as administrative claims, but instead are part and parcel with the negotiated distributions to the underlying holders, to be distributed in accordance with the governing indenture. In fact, such plan provisions have been implemented in Chapter 11 plans in recent cases, and may become more prevalent in the future.11