Opinion
CASE NO.: 02-16172, (Jointly Administered)
May 28, 2003
MEMORANDUM OF OPINION AND ORDER
The matter before the Court is a Motion For Entry of an Order Approving A Global Settlement Agreement ("Global Settlement" or settlement), filed by the Debtors, Debtors-in-Possession (hereinafter "Debtors"). The Court acquires core matter jurisdiction over the instant matter pursuant to 28 U.S.C. § 157 (a) and (b), 28 U.S.C. § 1334, and General Order Number 84 of this District.
I.
On April 28, 2003, the Debtors, the Bank Group (consisting of Deutsche Bank Trust Company Americas f/k/a Bankers Trust Company, LaSalle Bank National Association, Provident Bank, and BT Commercial Corporation, as lenders and agent for the Lenders, respectively), the Equipment Financiers, and the Official Committee of Unsecured Creditors entered into a Settlement and Distribution Agreement (the "Global Settlement Agreement") under which the Bank Group and the Equipment Financiers consented to a sale of the Debtors' propane assets free and clear of all liens, claims encumbrances and interests.
Essentially, the Global Settlement Agreement provides for (i) a going concern sale of the propane Debtors' assets free and clear of liens, claims and encumbrances pursuant to section 363 of the Bankruptcy Code; (ii) the consent to such a sale by the Bank Group and the Equipment Financiers; (iii) an allocation of the sale proceeds, including, the allocation of $500,000 for the Committee to benefit general unsecured creditors if certain releases were provided to the Bank Group, the Equipment Financiers and other specified parties; (iv) the resolution of all litigation and appeals among the Bank Group, the propane Debtors and the Equipment Financiers; and (v) mutual releases between the Propane Debtors, the Bank Group and the Equipment Financiers.
Objections to the settlement were filed by the investment banker, William Blair Company, L.L.C. (Blair) and the Certified Class of Ohio Residential Customers (Certified Class). Blair contends that, on June 28, 2002, it negotiated an engagement letter with co-Debtors, Level Propane Gases, Inc. (LPG) and Level Energy Group, Inc. (LEG), and the Bank Group. The objection notes that on July 23, 2002, Blair and the Creditor's Committee entered into an "agreement" to slightly modify certain of the terms of the June 2002 Engagement Letter. It is undisputed that the July 23, 2002 agreement was unexecuted. The June 28, 2002 Engagement Letter was executed. The modifications reduced Blair's fee from $1,200,000 to $1,150,000 and the notification period for termination of the agreement from thirty (30) days to seven (7) days. Since this "agreement" was unexecuted, it is of no consequence.
The objections filed by the Office of the United States Trustee, William and Nancy Briggs, and Information Leasing Corporation were resolved. The objection of William H. Maloof was overruled and entered under a separate Order.
Under said engagement letter, Blair agreed to render "certain investment banking services in connection with a possible disposition of all or substantially all of the integrated propane business of the LEG, LPG, and certain affiliates, whether through a plan or a 363 sale or otherwise (the `Possible Transaction'").
Paragraph 2 of the Engagement Letter provides in part:
2. Fees . The Company agrees to pay Blair a fee of $100,000 upon bankruptcy court approval of the retention of Blair. Starting November 1, 2002, the Company shall also pay Blair a monthly fee of $50,000 payable on the first of every month until a Possible Transaction is consummated. Additionally, the Company shall reimburse Blair for all expenses (including reasonable attorneys' fees as approved by the court) incurred in connection with this engagement on a monthly basis. In the event that the Possible Transaction is consummated, the Company will also pay or cause to be paid to Blair a success fee equal to 2.0% of the total consideration received by the Company and its stakeholders as a result of such consummation (the "Transaction Consideration"). Notwithstanding the foregoing, if any Possible Transaction is consummated, Blair will be paid a minimum success fee of $1,200,000. . . .
5. Termination . Blair's engagement hereunder may be terminated by either the Company or Blair at anytime, with or without cause, upon thirty (30) days written notice of the other party; provided however, that (a) no such termination will affect Blair's right to expense reimbursement under Section 3, the payment of any accrued and unpaid fees pursuant to Section 2, the indemnification contemplated by Section 4 or the Indemnity Agreement and (b) if the Company, directly or indirectly, consummates any Possible Transaction within eighteen (18) months following such termination with any party (i) which Blair has identified, (ii) in respect of which Blair has rendered advice, or (iii) with which the Company has directly or indirectly held discussions prior to such termination, then Blair will be entitled to the full amount of the fee contemplated by Section 2.
On July 5, 2002, the Debtors applied for an order authorizing the employment and retention of Blair, as Investment Banker for the Debtors, Debtors-in-Possession. On July 25, 2002, this Court entered a Final Order Authorizing Debtors in Possession to Enter Into Post-Petition Financing under section 364 of the Code. Paragraph 9 of that Order provides for an "Investment Banker Carve-Out". That section provides, in part:
(c) "Investment Banker Carve-Out (hereinafter defined), to the extent allowed, due and payable pursuant to an investment banker engagement letter duly executed by the Debtors' and consented to by the Post Petition Agent and this Court's Order approving the Debtors' retention of such investment banker ("Investment Banker").
DIP Order, at p. 19.
. . .
. . . For purposes of this Order, the "Investment Banker Carve-Out" shall mean an amount not to exceed the minimum success fee of an investment banker in the amount of $1,150,000, less the $100,000 paid upon this Court's approval of an investment banker's retention (the "Minimum Success Fee") plus any additional amount of any success fee above the Minimum Success Fee which is attributable to the cash proceeds upon which such success fee was calculated that is paid to the Prepetition Agent, the Prepetition Lenders, the Post-Petition Agent and the Post-Petition Lenders if applicable; provided, however, in the event the Debtors' estates receive proceeds of sale unencumbered by the liens and security interests of the Prepetition Agent, the Prepetition Lenders, the Post-Petition Agent and the Post-Petition Lenders, the Minimum Success Fee and any success fee in excess of this amount shall be paid by the Prepetition Lenders, the Post-Petition Agent and the Post-Petition Lenders, on one hand, and the Debtors' estates on the other, pro rata, based on the proportion the sale proceeds paid to the Prepetition Lenders, the Post-Petition Agent and the Post-Petition Lenders on account of the Prepetition Lenders' Liens and the Post-Petition Liens bears to the aggregate sale proceeds received by the Debtors. Nothing herein is intended to, or shall be construed to prohibit, condition or otherwise restrict the payment from the unencumbered assets of the Debtors' estates and the proceeds thereof of fees and expenses payable under section 330 and 331 of the Bankruptcy Code to professional persons retained pursuant to Court order by the Debtors or the Committee, after notice and court approval. . . .
DIP Order, at pgs. 20-21. On September 25, 2002, this Court entered an Order approving Blair's retention as the Debtors' investment banker pursuant to the terms of the June 2002 Engagement Letter.
Blair contends that it is entitled to collect its minimum success fee in the amount of $1,150,000 from the Debtors if the Debtors, directly or indirectly, consummate any Possible Transaction within eighteen (18) months from December 10, 2002 with any party: (i) which Blair has identified, (ii) in respect of which Blair has rendered advice to the Company, or (iii) with which the Company has directly or indirectly held discussions prior to such termination.
The prospective purchaser of the Debtors' assets is Eaglerock Propane, Ltd. (Eaglerock). Blair contends that it identified Eaglerock as a prospective purchaser for the Propane Debtor's assets prior to its termination by the Debtors on December 10, 2002. Blair also claims it rendered advice to the Debtors regarding Eaglerock and both it and the Debtors held direct discussions with Eaglerock prior to Blair's termination.
Lastly, Blair argues that the settlement is not fair or reasonable. In support, Blair references paragraph 5.2.4 of the Global Settlement which provides in relevant part:
"5.2.4. Professional Fees and Expenses. (a) An amount not to exceed $750,000 for payment of allowed claims under section 507(a)(1) of the Bankruptcy Code, incurred in respect of the period from and after April 15, 2003 (the "Fee Carveout"); provided, however, (1) $665,000 of the Fee Carve-Out shall be used to pay allowed claims of the Propane Debtors' professionals under sections 330 and 331 of the Bankruptcy Code, and (2) $50,000 of the Fee Carve-Out shall be used to pay allowed claims of the Committee's professionals under sections 330 and 331 of the Bankruptcy Code, and provided, further that no portion of the Fee Carveout shall be used to pay or satisfy any of the following:
. . .
5.2.4.4 Claims asserted by William Blair and Company.
Global Settlement, at pgs. 13 and 14 (Emphasis added). The second part of Blair's objection contends the Global Settlement constitutes an impermissible sub rosa plan, without notice and a hearing, because it:
1) Dictates the terms and distribution amounts to be paid under the proposed debtor's plan.
2) Provides for releases of all claims of the Bank Group and Tank Financiers against the
Debtors' officers and directors.
Debtors submit that the Global Settlement will enable the propane Debtors to assure prospective purchasers that' they have the present authority to transfer the propane assets free and clear of liens, claims, and interests. Furthermore, Debtors contend that approval of the settlement would enhance the possibility for competitive bidding and a higher and better purchase price for the propane assets.
In support of the proposed Global Settlement, BT Commercial asserts that none of the conditions to Blair's entitlement to the Investment Banker Carve-Out were satisfied. Specifically, BT Commercial states that (1) an engagement letter was never duly executed by the Debtors, nor (2) consented to by the Agent, and (3) approved by the Court. BT Commercial alleges that a revised engagement letter, dated July 23, 2002, was drafted, but was never executed and that the Lender nor the agent (BT Commercial) consented to the provisions of the engagement letter dated June 28, 2002.
II.
The dispositive issue here is whether the Global Settlement is reasonable and equitable under the applicable standards of Rule 9019.
III.
A review of the June 28th Engagement Letter reflects that it was signed by Samuel Tinnaglia on behalf of Blair and by Charles Sweet, Director, for LPG and LEG. The June 28th Engagement Letter was duly executed by the Debtors and, therefore, satisfies the first condition alleged by BT Commercial.
BT Commercial acknowledged at the hearing that it was primarily responsible for drafting the Final DIP Financing Order providing for a Carve-Out for the investment banker. It is undisputed that BT Commercial never objected to the retention of Blair as the investment banker for the Debtors at any point in the case. As noted in the Order granting Blair's retention, "the proposed retention of Blair is a negotiated result between Blair, the Debtors, and the Debtors' major secured and unsecured creditors." See Retention Order, entered September 25, 2002 at 4. The sole objectant to Blair's retention was the Office of the United States Trustee. The Final Order Authorizing the DIP Financing was signed by counsel for the Debtors, as well as counsel for BT Commercial Corp., as the agent on behalf of all the Lenders. Thusly, the Lenders and their agent consented to the Carveout in satisfaction of the second condition referenced above.
Lastly, on September 25, 2002, this Court approved Blair's retention. The United States Trustee's objection was sustained, in part, relative to an indemnification provision within the application. Ultimately, Blair was duly retained. Thusly, all three conditions asserted by B.T. Commercial were met by Blair. Bankruptcy Rule 9019 provides in part:
(a) Compromise
On motion by the trustee and after notice and a hearing, the court may approve a compromise or settlement. Notice shall be given to creditors, the United States trustee, the debtor, and indenture trustees as provided in Rule 2002 and to any other entity as the court may direct.
(b) Authority to compromise or settle controversies within classes After a hearing on such notice as the court may direct, the court may fix a class or classes of controversies and authorize the trustee to compromise or settle controversies within such class or classes without further hearing or notice.
F.R.Bankr.P. 9019. The standards to be applied in determining whether to approve a settlement were enunciated by the U.S. Supreme Court in Protective Committee for Independent Stockholders of TMT Trailer Ferry, Inc. v. Anderson, 390 U.S. 414, 88 S.Ct. 1157, 20 L.Ed.2d 1 (1968), which stated that the court must "form an educated estimate of the complexity, expense, and likely duration of such litigation, the possible difficulties in collecting on any judgment which might be obtained and all other factors relevant to a full and fair assessment of the wisdom of the proposed compromise" Id., at 424, 88 S.Ct. 1157. Courts have interpreted TMT to require that a proposed settlement is, first and foremost, fair and equitable, and in the best interests of the estate. See, e.g., Treinish, Trustee v. Topco Assoc., Inc. (In re AWF Liquidation Corp.), 208 B.R. 399 (Bankr. N.D. Ohio 1997). Secondary to those two elements are inquiries as to the probability of litigation success; potential difficulties in collection; complexity of the litigation; and the interests of the creditors. The proponent of the compromise bears the burden of proof. See, e.g., In re Goldstein, 131 B.R. 367, 369 (Bankr. S.D. Ohio 1991).
Despite the Debtors' contention that approval of the settlement would enhance the possibility for a higher and better purchase price from the sale of the Debtors' assets, the Debtors must satisfy the "fairness test" under Rule 9019. Herein, the proposed settlement specifically excludes the claim of William Blair for a minimum success fee. See 5.2.4.4. of the Global Settlement. The record reflects that the parties negotiated this fee in the June 28, 2002 Engagement Letter and provided a Carve-Out for the same in the Final DIP order entered on July 25, 2002. Moreover, this Court approved Blair's retention on September 25, 2002. Accordingly, the response of BT Commercial is without merit. Debtors' response explains a possible result from the proposed sale of its assets; but, the response does not satisfy the Rule 9019 "fairness test" as to Blair.
The language of the DIP Order which supports, in part, "if the Debtors, directly or indirectly, consummate any Possible Transaction within eighteen (18) months from William Blair's termination date of December 10, 2002 with any party" potentially justifies a minimum success fee. This, of course, is subject to final court approval upon the filing of an appropriate fee application. The fact that the Global Settlement excludes any payment to William Blair with the consummation of any "possible transaction" is unfair and inequitable under the standards of Rule 9019, especially since counsel for the Debtors nor counsel for BT Commercial refuted Blair's procurement of Eaglerock, the proposed stalking horse bidder, while other professionals are provided for by the Global Settlement.
The relief sought by the Debtors is for approval of a global compromise. Upon consideration of the motion and responsive pleadings, said motion is neither a settlement with certain affected entities, nor is it global in scope. A proposed settlement which purports to be "global" in scope should, at a minimum, address all matters in dispute between the parties in interest. The present motion fails to do so.
In the earlier stages of the case, Blair was retained through a consent order to serve as an investment banker for the jointly administered Debtors. The consent retention order provided, in part' that Blair could be eligible to receive a "success fee" in addition to other specified compensation for professional services it rendered to the Debtors' estates upon the satisfaction of certain conditions. The Debtors were a consenting party to the Order entered which retained Blair. It is quite obvious that the Debtors and Blair are involved in a heated dispute over the merits of eligibility of the success fee claimed by Blair. The proposed global settlement which the Debtors seek approval expressly provides that Blair is not to be paid a success fee. Having served as a consenting party to Blair's retention, Debtors were aware of Blair's potential claim in this regard.
The term "claim" under bankruptcy law is to be broadly construed. Ohio v. Kovacs, 469 U.S. 274, 279, 105 S.Ct. 705, 707-08, 83 L.Ed.2d 649 (1985) (. . . it is apparent that Congress desired a broad definition of a "claim"); In re M. Frenville Co., Inc., 744 F.2d 332, 336 (3d Cir. 1984). Herein, Blair is arguably entitled to a success fee if certain transactional events occur in the disposition of the Debtors' propane-related assets. The awareness by both the Debtors and Blair of this possible additional compensation is sufficient to constitute a claim for bankruptcy purposes. A settlement proposal which treats all classifications of claimants, without the statutory formalities of a formal plan, minimally, must treat the affected claimants and interest holders no less favorably than such would be treated under a plan of reorganizaton, unless otherwise consented to by the affected claimants and interest holders.
Herein, Debtors unilaterally choose to support a buy-out offer which proposes not to pay a success fee to Blair. Blair's claim is entitled to adjudication by the Court through the plan process upon proper presentment. Further, Blair is entitled to prosecute an application for its disputed compensation. Debtors proposed settlement, if approved, would circumvent this procedural process.
Blair further argues that the proposed settlement agreement amounts to a sub rosa plan. That argument is based primarily upon the case of Pension Benefit Guaranty Corp. v. Braniff Airways, Inc. (In re Braniff Airways, Inc.), 700 F.2d 935 (5th Cir. 1983). In Braniff, the Fifth Circuit disallowed a proposed settlement agreement, because it sought to distribute all of the debtor's assets, to restructure debt, and to release certain claims. The Braniff court found the settlement deficient for three reasons: (i) it effectively dictated the terms of any future reorganization; (ii) it required secured creditors to vote in favor of any future Plan; and (iii) it provided for the release of all claims against the debtor, its officers, and directors. Id., at 940; See also, In re Victoria Alloys, 261 B.R. 918, 920 (Bankr. N.D. Ohio 2001).
The three prong test to determine whether a proposed settlement agreement is, in fact, a sub rosa plan has been considered. Herein, the proposed Global Settlement dictates certain terms of a future plan of reorganization of the Debtors. It is undisputed that Blair was not a party to the negotiations involving the Debtors, the Bank Group, and the Equipment Financiers in formulating the proposed settlement. As structured, Blair is not due to be paid anything under the proposed settlement agreement. The proposed agreement dictates terms of a future plan, in that Blair, who was retained under Section 327 of the Bankruptcy Code, is a likely administrative claimant under a proposed plan of reorganization. Administrative claimants are to be paid in full under a plan of reorganization, unless it consents to different treatment. See 11 U.S.C. § 1129 (a)(9)(A). Furthermore, the mandatory plan content provisions of § 1123 dictate that the same treatment be accorded to each claimant of a particular class unless agreed upon otherwise.
As mentioned above, Blair is to receive nothing on its claim. The Debtors' support of this particular provision of the proposed settlement's negative treatment of Blair's putative claim constitutes an improper attempt to deny such claimant its statutory entitlement during the prosecution of a plan.
The Global Settlement proposes a sale as a going concern of all or substantially all of the Debtors' assets to Eaglerock or the highest bidder. When preconfirmation transactions, such as the sale of substantially all of the debtor's assets, have the effect of or dictate the terms of a future reorganization plan, some courts have required the debtor to provide creditors with the protection they would have received in the confirmation process. See, e.g., In re Continental Airlines, Inc., 780 F.2d 1223, 1226-28 (5th Cir. 1986). As set forth above, the subject settlement proposal fails in this regard. It is reflective of a sub rosa plan, is not fair and equitable to the objectant, and is not in the best interest of the Debtors' estates.
CONCLUSION
Accordingly, the Debtors' motion for entry of an order approving the Global Settlement is hereby denied. The objection of William Blair is sustained.
IT IS SO ORDERED.
JUDGMENT
At Cleveland, in said District, on this 28th day of May, 2003.
A Memorandum of Opinion And Order having been rendered by the Court in this proceeding,
IT IS THEREFORE ORDERED, ADJUDGED AND DECREED that the Debtors' motion for entry of an order approving the Global Settlement is hereby denied. The objection of William Blair is sustained. Each party is to bear its respective costs.