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Committee Professionals’ Carve-Out in DIP Financing Order Not Per Se Limit on Fees

In re Molycorp, Inc., No. 15-11357(CSS), 2017 WL 56703 (Bankr. D. Del. Jan. 5, 2017)

In this Opinion, Judge Sontchi found, among other things, that an unambiguous carve-out provision of a debtor-in-possession financing order (the “DIP Financing Order”) did not cap the professional fees and expenses of the Official Committee of Unsecured Creditors (the “Committee”) given that a plan of reorganization was confirmed.  Moreover, because the Committee’s professional did not agree to different treatment, its fees and expenses were administrative expenses that must be paid in full.

In Molycorp, the Committee, the debtor Molycorp, Inc. (the “Debtor”), and the DIP lender Oaktree Capital Management, L.P. (“Oaktree”), among others, entered into a global settlement agreement after months of extensive discovery and litigation by the Committee of certain claims against Oaktree and the Debtor’s directors and officers.  The global settlement paved the way for consensual confirmation of a plan.  However, after the Committee’s professional filed its second interim fee application for over $8.5 million of fees and expenses incurred investigating and prosecuting the ultimately settled claims, Oaktree lodged an objection.  Oaktree argued that the application violated a provision of the DIP Financing Order, often called a carve-out.  More specifically, paragraph 4(b) of the DIP Financing Order stated that “up to $250,000 in the aggregate proceeds of the DIP Loans, the DIP Collateral, the Prepetition Collateral, and the Carve-Out may be used to pay fees and expenses of the professionals retained by the Committee that are incurred in connection with investigating (but not prosecuting any challenge to) [among other things, Oaktree’s claims and liens].”  According to Oaktree, this language permitted the Committee professionals to receive payment only up to $250,000 for claim investigation.  It argued that any excess amount incurred for investigation and any amount incurred to prosecute claims against Oaktree are not compensable.

The Court frames the question before it as follows: “does the DIP Financing Order set an absolute limit on fees incurred by the Committee’s professionals?”  Op. at *9.  To answer the question, the Court examines the purpose of a carve-out provision in a DIP order.  Ordinarily, professionals’ fees are entitled to administrative expense priority, but where there are insufficient unencumbered assets to pay administrative claims, the professionals (and other administrative claimants) cannot look to secured creditors’ collateral for payment.  This risk is alleviated by negotiating a “carve-out” with the secured creditor(s) to allow the professionals to look to the secured creditor’s collateral when the professionals would otherwise not be able to do so.  Id. at *12.  The Court states that “when there are insufficient unencumbered assets to pay professionals’ fees and no plan has been confirmed, professionals’ only recourse is the carve-out.”  Id.

Under this backdrop, the Court holds that the DIP Financing Order carve-out imposed limits on Committee professional fees only in the event that a plan was not confirmed and the estate became insolvent.  Id. at *13.  But a plan was confirmed in the case, and the Bankruptcy Code mandates that all allowed administrative claims be paid in full in cash unless the claimant agrees otherwise.  In essence, confirmation of the plan rendered the carve-out and its limitations on Committee professionals’ fees irrelevant.  While the parties suggested that it is possible for a DIP order to contain a “per se disallowance” provision for professionals’ fees, the Court did not find such language in the Molycorp DIP Financing Order and declined to provide an advisory opinion on whether such language would be appropriate.  Staying within the unambiguous words of the DIP order before it, the Court held that the cap was not intended to come into play if a Chapter 11 plan was confirmed and overruled Oaktree’s objection.