Delaware Bankruptcy Court Limits Issuer's Reimbursement Duty to Indenture Trustee
Business Restructuring, Creditors’ Rights & Bankruptcy Update
Date: August 13, 2021
Can an issuer avoid responsibility for an indenture trustee’s legal fees? While one might assume the answer to this question is a categorical no given the standard reimbursement mechanisms for legal expenses found in the typical indenture or trust agreement, a recent decision involving such a standard provision resulted in a dramatically reduced recovery for the indenture trustee’s attorneys’ fees of nearly $30 million incurred as part of these attorneys’ unsuccessful efforts to avoid the liens of senior creditors.
In the latest installment of the Tribune saga, Judge Shannon of the United States Bankruptcy Court for the District of Delaware ruled that, based on the language of the indenture, unless an indenture trustee has paid or is obligated to pay counsel, an indenture trustee has no independent claim against the debtor for attorneys’ fees incurred in efforts to recover on defaulted bonds. The court’s ruling in this case turned on only one word in the indenture – “incurred.”
The indenture in question involved an issue of approximately $1.25 billion in unsecured bonds. Based on the terms of the issuer’s chapter 11 plan, these bonds held a lower priority than almost all other claims against the issuer. Based on this classification and the limited funds available for distribution to unsecured claim holders, the bondholders received no distributions under the plan. However, the plan permitted the indenture trustee to seek allowance of its professional fees and costs as a general unsecured claim (in a higher priority class than the bonds), for which a roughly one-third recovery was available.
Normally, indentures provide that when bonds go into default or bankruptcy, the indenture trustee is not required to incur expenses without indemnification by the bondholders. In this case, a pair of bondholders had agreed to indemnify the indenture trustee for legal expenses the trustee incurred, up to $3 million. Any additional attorneys’ fees, however, were payable at the greater of counsel’s hourly rates or 10% of the bondholders’ recovery. The indenture trustee was not obligated to use its own funds to pay counsel; rather, as is typically the case, the trustee’s counsel would be compensated by a charging lien on the funds to be distributed to bondholders. Consequently, in this case, the indenture trustee’s liability to pay counsel was limited to the $3 million indemnification by the pair of bondholders. Thus, the engagement here, as is typical for indenture trustee’s counsel, was effectively contingent: other than what particular bondholders had expressly agreed to fund, counsel’s entitlement to payment for the legal services rendered depended entirely on the existence of recoveries from the issuer to the bondholders.
Over the course of the bankruptcy case, the indenture trustee accrued almost $30 million in attorneys’ fees attempting to challenge secured creditor liens. While not successful, and despite no recovery being made available to the bondholders, the indenture trustee filed a proof of claim for $30 million which, if allowed, would have resulted in an approximately $10 million obligation of the reorganized company to pay the trustee’s attorneys.
The Court’s Ruling
The debtor objected to the trustee’s claim based on, among other things, the language of the indenture. The indenture provided that the debtor must “reimburse the Trustee...for all reasonable expenses, disbursements and advances incurred or made by the Trustee...” The debtor argued, and the Court agreed, that the trustee had not “incurred” the professional fees because it had no obligation to pay the fees under the terms of the engagement with counsel.
The Court was also unconvinced by the indenture trustee’s argument that the issuer’s obligation to “pay...such further amount as shall be necessary to cover the costs and expenses of collection” saved the claim. Not only had the indenture trustee still not incurred any liability to pay the costs or expenses of collection, nothing had even been collected for the bondholders, so no costs could be attributed to “collection.”
Finally, the Court rejected the trustee’s assertion that “industry practice” and market expectations would be frustrated by disallowance of the claim. Rather, the Court viewed the greater risk to market participants as the uncertainty that would result from a holding that did not compel the parties to adhere to the express language in the indenture.
Given this decision – and we are unable to predict whether other courts will follow suit – indenture trustees and their counsel, when negotiating an indenture, will certainly want to carefully consider how to ensure its counsel will be paid by the issuer. Tribune’s holding underscores the heightened risk attendant to the trustee’s counsel for issuances where no recovery from the pursuit of third-party claims is a strong possibility.
FOR MORE INFORMATION
For more information, please contact:
Curtis L. Tuggle
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 In re Tribune Media Co., No. 08-13141-BLS (Bankr. D. Del., Jun. 25, 2021) [ECF 14797] available at: