UNITED STATES BANKRUPTCY COURT
EASTERN
DISTRICT OF KENTUCKY
PIKEVILLE
DIVISION
IN RE:
BLACK DIAMOND MINING
COMPANY, LLC, et al.
DEBTORS CASE
Nos. 08-70066, 08-70067, and 08-70069 through 08-70073
Jointly
Administered
MEMORANDUM
OPINION
This
matter is before the court on the Fourth and Final Fee Application for
Allowance and Payment of Fees and Expenses of Houlihan Lokey Howard & Zukin
Capital, Inc. as Financial Advisor to the Official Committee of Unsecured
Creditors for the Period of July 5, 2008 Through July 31, 2009 (“the
Application”)(Doc. #1624). Houlihan
Lokey Howard & Zukin Capital, Inc. (“Houlihan Lokey”) seeks $1,387,096.77
in fees and $28,648.57 in expenses. BD
Acquisition, LLC (“BD Acquisition”) has filed an Objection (Doc. #1641) and
Houlihan Lokey has filed a Response (Doc. #1659). This matter was heard on October 29, 2009,
and taken under submission for decision.
1. Factual and procedural background
The
Official Committee of Unsecured Creditors selected Houlihan Lokey as its
financial advisor in June 2008. The
court approved Houlihan Lokey’s employment by an order entered on August 7,
2008, nunc pro tunc to July 5, 2008 (“the Retention Order”)(Doc.
#735). On July 23, 2009, the court
entered the Order Confirming the Third Amended Joint Plan of Liquidation of
Black Diamond Mining Company, LLC and its Affiliated Debtors, as Modified (“the
Confirmation Order”)(Doc. #1562). The
effective date of the Plan (Doc. #1458) was July 31, 2009, and the Committee
was dissolved on that date pursuant to Section XIII.A of the Plan.
Pursuant
to Houlihan Lokey’s Engagement Letter and the terms of the Retention Order,
compensation to be paid included: (a) monthly fees of $75,000.00 for each of
the first six months of the engagement and $100,000.00 for each month
thereafter (“the monthly fees”); (b) an Initial Transaction Fee of $250,000.00;
©) a Percentage Transaction Fee equal to 1% of recoveries received by the
unsecured, non-priority creditors in this case; and (d) the payment of
reasonably incurred out-of-pocket expenses.
Under the terms of the Engagement Letter, as modified by the Retention
Order, Houlihan Lokey’s Transaction Fees are due and payable upon payment in
full in cash, other consideration or treatment acceptable to CIT Capital USA
Inc. (“CIT Capital”) of the claims of CIT Capital and the other lenders for
whom it is agent pursuant to the Senior Credit Agreement, Subordinated Credit
Agreement and Subordinated Loan Amendment.
The Debtor’s pre-existing senior lenders purchased all of the Debtors’
stock and assets through BD Acquisition.
Houlihan
Lokey states that it has determined that no Percentage Transaction Fee is due
and payable to it. As of the date of the
Application, Houlihan Lokey had been paid monthly fees of $950,000.00 and
reimbursed for $26,320.91 in expenses.
The Initial Transaction Fee has not been paid.
2. Discussion
Compensation
of professionals is governed by Bankruptcy Code section 328 which provides in
pertinent part:
(a) The trustee, or a committee appointed
under section 1102 of this title, with the court’s approval, may employ or
authorize the employment of a professional person under section 327 or 1103 of
this title, as the case may be, on any reasonable terms and conditions of
employment, including on a retainer, on an hourly basis, on a fixed or
percentage fee basis, or on a contingent fee basis. Notwithstanding such terms and conditions,
the court may allow compensation different from the compensation provided under
such terms and conditions after the conclusion of such employment, if such
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.
11 U.S.C.
§ 328(a). BD Acquisition contends
that Houlihan Lokey is not entitled to the Transaction Fee because payment of
the Transaction Fee is subject to a condition precedent that has not been
satisfied, and it is inequitable and improvident in light of unanticipated
circumstances. BD Acquisition further
contends that Houlihan Lokey’s request
for fees and expenses for June and July 2009, taken together with fees of other
Committee professionals, exceeds the fee cap in place in this case for those
months per the terms of the Order Extending Cash Collateral Usage Through July
31, 2009 (“the Cash Collateral Order”)(Doc. # 1452). BD Acquisition states that the Application
should be reduced by any amount which exceeds the fee cap and by the full
Transaction Fee.
a. The
Initial Transaction Fee
Houlihan
Lokey contends that it has earned the Initial Transaction Fee under the terms
of the Retention Order which provides that it “shall be due and payable only
upon payment in full in cash, other consideration or treatment acceptable to
[the pre-existing senior lenders].” BD
Acquisition has asserted that the language of the Retention Order requires
payment in full, whether in cash, other consideration, or acceptable treatment
under the Plan. It contends that the
phrase “payment in full” modifies each of the three choices set out in the
Retention Order. Houlihan Lokey
disagrees, stating that phrases stated in the disjunctive and separated by a
comma are to be treated independently.
It cites several cases in support of its position, including Quindlen
v. Prudential Ins. Co., 482 F.2d 876 (5th Cir. 1973), in which
the court stated:
First, under the doctrine of the last antecedent,
relative and qualifying words, phrases, and clauses are to be applied to the
works or phrases immediately preceding, and are not to be construed as
extending to or including others more remote.
Second, as a general rule, the use of a
disjunctive . . . indicates alternatives and requires that those alternatives
be treated separately.
Id. at
878 (internal quotations and citations omitted). Houlihan Lokey states that BD Acquisition’s
argument that payment in full of all senior lender claims is required to earn
the Initial Transaction Fee is not credible in light of the unanimous consent
to the Debtors’ Plan. The court agrees
with Houlihan Lokey’s reading of the language.
Houlihan
Lokey also addresses BD Acquisition’s argument that payment of the Initial
Transaction Fee would be inequitable and improvident in light of current
economic conditions, especially the collapse of the coal market. BD Acquisition contends that the magnitude of
the “economic disruption” was “entirely unforeseeable.” Houlihan Lokey counters that the proper
inquiry under section 328(a) is not whether subsequent developments were
anticipated at the time compensation was fixed, but whether they were “not
capable of being anticipated” at such time.
11 U.S.C. §328(a). As stated by
the court in F.V. Steel and Wire Co. v. Houlihan Lokey Howard & Zukin
Capital, L.P., 350 B.R. 835 (Bankr. E.D. Wisc. 2006),
The § 328 standard is a demanding
one. See In re Yablon, 136 B.R.
88, 92 (Bankr. S.D. N.Y. 1992) (stating that “the requirement of ‘improvidence
in light of developments not capable of being anticipated at the time’ makes it
difficult, as a practical matter, for a court to vary compensation even when it
thinks that it was improvident at the outset”) (quoting In re C & P Auto
Trans., 94 B.R. 682, 686 n. 5 (Bankr. E.D. Cal. 1988)); see also In re
Barron, 325 F.3d 690, 693 (5th Cir. 2003) (noting the
limitations on bankruptcy courts’ ability to revise pre-approved fee
arrangements and stating that it is not enough that the developments that made
the plan improvident were merely unforeseen, they had to have been incapable of
being anticipated).
Id. at
841. The court agrees with Houlihan
Lokey that BD Acquisition has not met the section 328(a) standard for showing
that the pre-approved compensation arrangement was improvident, and that
Houlihan Lokey is entitled to the Initial Transaction Fee.
b. Monthly
fees and expenses
The Application requests monthly fees in
the amount of $100,000.00 for services rendered from June 5, 2009 through and
including July 4, 2009 and $87,096.77 (amount pro-rated through the effective
date of the Plan) for services rendered from July 5, 2009 through and including
July 31, 2009. Houlihan Lokey states
that the fee cap set forth in the Cash Collateral Order was never intended to
include its fees and expenses. It points
out that in previously entered orders imposing a fee cap, its fees and expenses
were never “lumped in” with those of the Committee’s other professionals. Houlihan Lokey cites the Order Extending Cash
Collateral Usage Through June 1, 2009 (Doc. # 1164), which budgeted $175,000.00
per month for the Committee’s professionals plus monthly amounts payable
to Houlihan Lokey pursuant to the Retention Order.
Houlihan
Lokey further contends that reducing its fees and expenses for June and July
would be contrary to the terms of the Retention Order, which approved Houlihan
Lokey’s compensation arrangement pursuant to Code section 328(a). As set out above, the terms and conditions of
compensation approved under that section can only be disturbed upon a finding
of improvidence. BD Acquisition has not
alleged any facts that would support a finding that payment of the monthly fees
requested would be improvident. The
court agrees with this assertion, and finds, especially in light of the history
of Houlihan Lokey’s treatment in prior cash collateral orders, that BD
Acquisition’s objection to Houlihan Lokey’s requested fees and expenses for the
months of June and July 2009 should be overruled.
3. Conclusion
In
consideration of all of the foregoing the court concludes that Houlihan Lokey
should be awarded $1,387,096.77 in fees and $28,648.57 in expenses, as set out
in the Application. An order in
conformity with this opinion will be entered separately.
Copies
to:
Geoffrey
S. Goodman, Esq.
Robert
J. Brown, Esq.
U.S.
Trustee