Chapter VI Credit Bidding's Impact on Professional Fees

• Jurisdiction: United States

Chapter VI Credit Bidding's Impact on Professional Fees

A. Should the Amount of the Credit Bid Be Included as Consideration Upon Which a Professional's Fee Is Calculated?

Debtors often retain the services of professionals such as investment bankers to assist with a sale process. Absent clear contractual language, disputes can develop over the amount of compensation these professionals are entitled to, particularly when credit bids are part of an asset purchase and the professional's compensation is calculated based on the sale price for the debtor's assets. A debtor, or even other creditors, will sometimes seek to limit payments owed in a credit bidding scenario compared to a cash sale because the credit bid means less actual cash to the estate.

On the other hand, an investment banker will seek to have its compensation calculation include the amount of the credit bid because the secured creditor is reducing its secured claim by the amount of its bid, the same as if a third party purchased the debtor's assets and turned over the cash to its secured lender. Courts have tended to accept this view, holding that the presence of a credit bid is irrelevant when calculating compensation to a retained third-party professional because a credit bid is the functional equivalent of the secured creditor contributing cash to the estate and the debtor immediately paying said cash back in satisfaction or partial satisfaction of that creditor's secured claim.

For example, in In re HNRC Dissolution Company f/d/b/a Horizon Natural Resources Company,²²¹ investment banker Miller Buckfire sought $9.35 million in fees, plus reimbursement of approximately $173,000 in expenses, pursuant to a contract with the debtors that was approved by order of the bankruptcy court. The approved compensation arrangement included (1) a monthly advisory fee of $150,000; (2) a sale transaction fee based on the aggregate consideration paid for the assets, subject to a fee cap of $8 million; and (3) the reimbursement of Miller Buckfire's actual and necessary expenses. The debtor's assets were sold at auction, and the purchase price included as much as $304 million in cash, a credit bid of $482 million and assumed liabilities of $89 million. Miller Buckfire requested a sale transaction fee for the full $8 million based on the purchase price of the debtor's assets.

Various parties objected to Miller Buckfire's request, and the objections were overruled by the bankruptcy court. The court first cited the applicable standard, stating that once a court approves compensation under § 328 of the Bankruptcy Code, 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 the fixing of such terms and conditions."²²²

The bankruptcy court held that the objections, to the extent that 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. In reaching this conclusion, the court noted that modifications were made to the retention agreement at a hearing during which the issue of credit bidding for the assets was negotiated, agreed to by the parties, and factored into the calculation of the purchase price. Moreover, at a pre-auction meeting among the debtors, creditors and Miller Buck-fire, the full amount of the purchasers' price was reported, including the amount of the credit bid. Finally, the bankruptcy court reasoned 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.

Certain creditors appealed the order of the bankruptcy court, arguing that the credit bid should not have been included in the aggregate purchase price for purposes of the sale transaction fee because (1) the credit bid was not contemplated in the retention agreement as the credit bid had no value, (2) it was not anticipated that such a large portion of the sale transaction fee would be based on the credit bid, and (3) Miller Buckfire would earn a "windfall" if the terms of the retention agreement were 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 (1) § 363(k) of the Bankruptcy Code, 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";²²³ (2) the fact that the credit bid was consistently treated as the equivalent of cash; (3) 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 would pay and that all other bidders would have to exceed, and (4) 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.²²⁴The district court found that the bankruptcy court properly held that "the credit bid's inclusion in the fee calculation was contemplated...