July 07, 2021

Debtor’s Obligation to Reimburse Indenture Trustee Limited to Incurred Fees and Costs

On June 25, 2021, Judge Shannon issued the Memorandum Opinion in In re Tribune Media Company, Chapter 11 Case No. 08-13141 (BLS), U.S. Bankruptcy Court for the District of Delaware, on remand from the U.S. District Court for the District of Delaware, allowing the indenture trustee a claim for reimbursement of fees and costs in the amount of $3 million, reduced from the alleged amount of $29,790,038.61. According to Judge Shannon, contract language matters.

After review and consideration of the contractual provisions in the indenture, the fee provision in the engagement agreement, case law and industry practice, the court determined the indenture trustee incurred $3 million, not $30 million, of fees and costs in the Tribune Chapter 11 case and allowed the claim in that amount. Specifically, the court held:

The Court is not requiring an indenture trustee to advance payment of fees and costs, but it is requiring that an indenture trustee be liable to pay those costs either out of its pocket or from distributions received. Asking Tribune to pay more than the amount that WTC is obligated to pay — that is, the amount of fees that WTC incurred — is tantamount to giving WTC’s professionals a blank check.

As always, the facts of the case are important. The indenture trustee engaged counsel and agreed to pay counsel “the higher of: (i) its fees and expenses accrued and incurred in connection with this representation; or (ii) 10% of all recoveries obtained by the Trustee or the holders on account of the PHONES, with no ceiling or maximum (the “Shared Compensation”).” Pursuant to a separate agreement, certain noteholders advanced $3 million for payment of subsection (i) of the Shared Compensation. No additional amounts were advanced by noteholders.

The plan confirmed in the case permits the indenture trustee to submit a claim for fees in costs arising under Section 6.07 indenture as a general unsecured claim in Class 1F Other Parent Claim. The indenture trustee submitted a claim in the amount of $29,790,038.61 based on the contingency fee; however, the plan provided no recovery for these subordinated notes. So, the contingency component of the Shared Compensation did not trigger.

Section 6.07 of the indenture specifically required Tribune to “reimburse the Trustee … for all reasonable expenses, disbursements and advances incurred or made by the Trustee in accordance with any provision of this Indenture (including reasonable compensation and the expenses and disbursements of its agents and counsel).”

Tribune and the indenture trustee argued over the meaning of “reimburse” and “incur.” The indenture trustee cited to case law from fee-shifting statutes, which the court did not find analogous, and industry practice and impact to the bond market, which the court found overstated.

Ultimately, the court reverted to contractual basics, focused on the fees incurred by the indenture trustee and determined that, because there was no recovery on these subordinated notes, the 10% contingency fee was not triggered or incurred. Since the indenture trustee was not required to pay the contingency fee itself or from recoveries on the subordinated notes, the court found it could not justify allowing such amount as a claim against Tribune. The court limited the indenture trustee’s claim for fees and costs to the $3 million of incurred fees and costs.1

The court’s decision is a reminder to all parties to closely review the indemnity language contained in an applicable indenture in a default situation, and to ensure that any engagement letter with trustee professionals accurately reflects the understanding of the parties and, ultimately, the requirements of the governing indenture.

  1. At the outset of the Memorandum Opinion, the court made clear, to avoid any confusion, that this is not a request for (a) a substantial contribution administrative expense claim under Bankruptcy Code Section 503(b)(3) or (b)(4); or (b) payment of a priming lien against the distribution to the noteholders (i.e., the indenture trustee’s charging lien), and in fact, the subordinated notes did not receive any distribution in the Tribune case.
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