Recent Case Benefits Chapter 11 Debtors with Over-Secured Creditors Seeking to Recover Legal Fees
A recent case rendered by the Bankruptcy Court in the Northern District of West Virginia highlights one of the most costly issues facing Chapter 11 debtors, and comes out in the debtor’s favor this time.
Chapter 11 debtors with over-secured lenders will end up paying the lenders in full, as the value of the collateral exceeds the amount of the indebtedness. (11 U.S.C. Section 506). In addition, under all standard loan documents, the amount of the “allowed” claim will include reasonable attorneys’ fees to the extent that they are provided for in the underlying loan documents. Many courts including our courts have long required as a matter of local practice that the over-secured lender’s counsel file papers akin to a fee application to verify and obtain approval of the amount of the fees, which will include a copy of the detailed time and expenses requested.
In the recent case of In re Emerald Grande, LLC, 2019 WL 1421429 (Bankr. N.D.W.Va 2019), the bankruptcy court denied a portion of the requested fees which totaled around $155,000 on two secured bank loans, one around $1.5 million and the other approximately $350,000. The court parsed through the detail and ultimately denied certain categories of tasks, setting a follow up hearing to obtain further detail on the billing. The ultimate holding was that the “fees incurred for generally ‘policing’ a case do not… fall within the purview of enforcing loan documents,” which was the exact language in the underlying documents. The court noted that the debtor did not object to the entire invoice, and did not object to amounts incurred for a number to issues: negotiating use of cash collateral, filing a proof of claim, the disclosure statement and plan process, issues involving the insurance on the lender’s collateral, along with some general monitoring of the case. However, time spent objecting to other creditors’ claims, monitoring a related party case, clerical work, and seeking conversion or dismissal were disallowed. The court noted that “the nature and substance of its participation is the crucial focus.”
Participating in any Chapter 11 case can be a modest fee if the case is less contested, or can become very costly if there are numerous contested hearings, whether the secured lender’s counsel is actively involved or merely attending meetings, hearings, settlement conferences and otherwise actively engaging in the case.
Secured lenders should know that it is not a given that 100% of incurred legal fees will be charged to and allowed for a Chapter 11 debtor to be required to repay. Some over-secured lenders monitor and participate without being overly litigious, while others are more aggressive, often unnecessarily and without allotting any “breathing room” for a case to progress. The Emerald Grande opinion is a reminder that not every fee will be allowed. Lenders should make sure they instruct their counsel accordingly, and understand that some of the fees may end up being paid out of pocket as opposed to paid from the borrower.
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