As previously reported in the article by Tina N. Moss and Yasamin N. Oloomi on March 31 of this year entitled “Nortel Court Rejects Noteholder Objection to Indenture Trustees’ Fees,” the United States Bankruptcy Court for the District of Delaware in In re Nortel Networks Inc., No. 09-10138(KG), 2017 WL932947 (Bankr. D. Del. Mar. 8, 2017) largely overruled certain noteholders’ objections to the indenture trustee fees.

Two hedge fund noteholders purporting to hold 90% of the outstanding 7.875% senior notes issued pursuant to an indenture qualified under the Trust Indenture Act of 1939, as amended, opposed the attorneys’ fees and sought to reduce the $8 million fee request roughly in half arguing that the indenture trustee did not properly discharge its duties. The two noteholders asserted that (1) the indenture trustee did not act prudently in assigning work to and supervising its attorneys, and (2) the attorneys’ fees charged were unreasonable.

The indenture trustee was a member of the Official Committee of Unsecured Creditors.1

Background

The Nortel Chapter 11 bankruptcy case ran for eight years and according to the indenture trustee was “unprecedented, complex and massive.”

Counsel for the noteholders argued that roughly $4 million in the indenture trustee fee request came from work connected to the defunct Unsecured Creditors Committee, the massive allocation dispute to decide how to divide $7 billion in sale proceeds among Nortel’s global units, fighting to protect its legal fees, or other duplicative efforts, none of which benefited the noteholders directly.

An important concern of the noteholders centered on how much money out of the recoveries might be taken for the indenture trustee fees.

Counsel for the indenture trustee stated, “The irony is that now that they [the noteholders] are receiving a 100 percent recovery, they now object to the amount of work done.” “These are the same holders who demanded we not sit on the sidelines.”

Professional fees throughout the case have been estimated to exceed $2 billion, making it one of the most expensive Chapter 11 cases in history.2

The Delaware Bankruptcy Court did reduce a portion of the fees based on certain other factors, including for times when the firms representing the indenture trustee had multiple lawyers participating on committee calls or attending meetings.

The Bankruptcy Court in the final part of its ruling distinguished the recent U.S. Supreme Court case of Baker Botts v. Asarco, and determined that the indenture trustee’s counsel could also recover from the charging lien (priority right to payment before debtholders) for its fees for defending against the 7.875% noteholders’ objection.  The Supreme Court in Baker Botts ruled that Bankruptcy Code provisions governing the payment of professionals entitled to compensation from a debtor’s bankruptcy estate do not provide an exception to the so-called “American Rule”, which states that each side in a dispute pays its own costs.  In contrast, the Bankruptcy Court held that a bond indenture “is a contract which qualifies for an exception to the American Rule.”  The Court cited the language of the indenture that expressly called for the issuer to indemnify the trustee for “the costs and expenses of defending itself against any claim or liability in connection with the performance of any of its powers or duties hereunder.”3

Conclusion

The Delaware Bankruptcy Court decision was correct in light of the complex nature of this eight year Chapter 11 bankruptcy. This is a very favorable and important ruling for the corporate trust industry in administering accounts in default and in bankruptcy.

An indenture trustee and its counsel provide critical and very valuable input as they  strive to succeed to protect the rights of the debtholders they represent in the recovery process. A lot of experience, research, study, and long hours are required and expended in the administration of these accounts. Payment of the fees and expenses of the indenture trustee and its counsel is an important component in this process.

Endnotes

  1. Moss, Tina N. and Yasamin N. Oloomi, “Nortel Court Rejects Noteholder Objection to Indenture Trustees’ Fees,” Perkins Coie, LLP, corporatetrustinsider.com, March 31, 2017.
  2. thenafla.org, National Association of Legal Fees Analysis, “Nortel Creditors Challenge $4M in Fees in Chapter 11 Case,” March 20, 2017.
  3. bankruptcylawinsights.com, Feder, Ben, “Nortel Judge Rejects Noteholders Challenge to Indenture Trustee’s Fees,” March 15, 2017.