The Bankruptcy Hotline

The Court based this ruling on its earlier decision in Brown v. Felsen, 442 U.S. 127 (1979), where a state court action alleging fraud resulted in a consent decree embodying a stipulation (which did not indicate the payment was for fraud). The stipulation was breached and the debtor filed for bankruptcy. The court in Brown ruled that claim preclusion did not prevent the bankruptcy court from looking past the state court record in order to decide whether the debt was a debt for money obtained by fraud. By analogy, the Court in the instant matter stated that 'Brown's holding means that the Fourth Circuit's novation theory cannot be right.' The Court reasoned that '[i]f the Fourth Circuit's view were correct-if reducing a fraud claim to settlement definitively changed the nature of the debt for dischargeability purposes-the nature of the debt in Brown would have changed similarly, thereby rendering the debt dischargeable.' The only difference between the instant case and Brown, the Court observed, was that the relevant debt was embodied in a settlement, not a stipulation and consent judgment, but that this difference was not determinative.

'Exemplary Results' Help Justify $1 Million Fee Enhancement

The US District Court for the District of Delaware over-ruled an objection by the United States Trustee to a fee enhancement requested by counsel for the debtor in a successful Chapter 11 reorganization case involving approximately $3 billion in claims. The district court held that debtor's counsel was entitled to the $1 million enhancement of their fee, based not only on the exemplary results that counsel obtained, but because no creditor or equity interest holder objected. In re Covad Communications Group, Inc., 2003 WL 1818185 (April 2).

The court rejected the assertion by the Trustee that the efforts of debtor's counsel were 'routine.' In fact, the court categorized the debtor's reorganization as 'remarkable.' Faced with certain failure, the court noted that the debtor 'was able to reorganize with sufficient liquidity to execute its business plan, with the various creditor and equity constituencies receiving a substantial recovery'a true 'win-win' under the circumstances.' Consequently, the court found that 'the requested enhancement is warranted by virtue of the witness testimony presented at the hearing, the circumstances of [the] reorganization, the lack of objection by interested constituencies, and the Court's assessment of the results achieved by virtue of the skill and expertise of [debtor's counsel].'

'Evergreen Retainer' for Professional Services Approved

The Bankruptcy Court for the District of Delaware approved the use of an 'evergreen retainer' by attorneys and financial advisers for a Chapter 11 debtor they had negotiated through arms-length bargaining, noting that this was an issue of first impression in the Third Circuit. In re Insilco Technologies, Inc., 2003 WL 1918237 (April 18).

Similar to a security retainer, a so-called evergreen retainer secures payment of fees for future professional services. With an evergreen retainer, however, an attorney does not look to the retainer for payment of fees until the approval of the final fee application, and counsel will be paid interim fees and expenses out of operating cash. The court remarked that the use of such retainers was a common practice in the marketplace, and approval of the retention arrangements enabled the debtors to maintain relationships established pre-petition with their professionals. In approving the retainer over the objection of the U.S. Trustee, the court noted that no creditor had objected to the terms of the proposed retentions. In addition, the court opined that the retainers provided a reasonable mechanism for minimizing risk in a Chapter 11 case filed by debtors whose liabilities far exceeded their assets.

In re Covad Communications Group, Inc.

The court rejected the assertion by the Trustee that the efforts of debtor's counsel were 'routine.' In fact, the court categorized the debtor's reorganization as 'remarkable.' Faced with certain failure, the court noted that the debtor 'was able to reorganize with sufficient liquidity to execute its business plan, with the various creditor and equity constituencies receiving a substantial recovery ' a true 'win-win' under the circumstances.' Consequently, the court found that 'the requested enhancement is warranted by virtue of the witness testimony presented at the hearing, the circumstances of [the] reorganization, the lack of objection by interested constituencies, and the Court's assessment of the results achieved by virtue of the skill and expertise of [debtor's counsel].'The Bankruptcy Court for the District of Delaware approved the use of an 'evergreen retainer' by attorneys and financial advisers for a Chapter 11 debtor they had negotiated through arms-length bargaining, noting that this was an issue of first impression in the Third Circuit. In re Insilco Technologies, Inc., 2003 WL 1918237 (April 18).

Similar to a security retainer, a so-called evergreen retainer secures payment of fees for future professional services. With an evergreen retainer, however, an attorney does not look to the retainer for payment of fees until the approval of the final fee application, and counsel will be paid interim fees and expenses out of operating cash. The court remarked that the use of such retainers was a common practice in the marketplace, and approval of the retention arrangements enabled the debtors to maintain relationships established pre-petition with their professionals. In approving the retainer over the objection of the U.S. Trustee, the court noted that no creditor had objected to the terms of the proposed retentions.

In addition, the court opined that the retainers provided a reasonable mechanism for minimizing risk in a Chapter 11 case filed by debtors whose liabilities far exceeded their assets.

Fraud Claim under Settlement Agreement Is Non-dischargeable

The U.S. Supreme Court has resolved a circuit split by ruling that where a settlement agreement releases an underlying fraud claim in exchange for a promissory note, the note does not act as a novation that creates a new debt. Therefore, the underlying fraud claim may still be applied to the promissory note, thus rendering it a non-dischargeable debt under '523(a)(2)(A) of the Bankruptcy Code. Archer v. Warner, No. 01-1418 (March 31).

Ruling that the promissory note signed by the debtors served as a novation replacing an original potential debt for money obtained by fraud with a new debt, the Fourth Circuit held that the note was dischargeable because it was for money promised in a settlement contract and not obtained through fraud. On appeal, the Supreme Court reversed.

The Court based this ruling on its earlier decision in Brown v. Felsen , 442 U.S. 127 (1979), where a state court action alleging fraud resulted in a consent decree embodying a stipulation (which did not indicate the payment was for fraud). The stipulation was breached and the debtor filed for bankruptcy. The court in Brown ruled that claim preclusion did not prevent the bankruptcy court from looking past the state court record in order to decide whether the debt was a debt for money obtained by fraud. By analogy, the Court in the instant matter stated that 'Brown's holding means that the Fourth Circuit's novation theory cannot be right.' The Court reasoned that '[i]f the Fourth Circuit's view were correct-if reducing a fraud claim to settlement definitively changed the nature of the debt for dischargeability purposes-the nature of the debt in Brown would have changed similarly, thereby rendering the debt dischargeable.' The only difference between the instant case and Brown, the Court observed, was that the relevant debt was embodied in a settlement, not a stipulation and consent judgment, but that this difference was not determinative.

'Exemplary Results' Help Justify $1 Million Fee Enhancement

The US District Court for the District of Delaware over-ruled an objection by the United States Trustee to a fee enhancement requested by counsel for the debtor in a successful Chapter 11 reorganization case involving approximately $3 billion in claims. The district court held that debtor's counsel was entitled to the $1 million enhancement of their fee, based not only on the exemplary results that counsel obtained, but because no creditor or equity interest holder objected. In re Covad Communications Group, Inc., 2003 WL 1818185 (April 2).

The court rejected the assertion by the Trustee that the efforts of debtor's counsel were 'routine.' In fact, the court categorized the debtor's reorganization as 'remarkable.' Faced with certain failure, the court noted that the debtor 'was able to reorganize with sufficient liquidity to execute its business plan, with the various creditor and equity constituencies receiving a substantial recovery'a true 'win-win' under the circumstances.' Consequently, the court found that 'the requested enhancement is warranted by virtue of the witness testimony presented at the hearing, the circumstances of [the] reorganization, the lack of objection by interested constituencies, and the Court's assessment of the results achieved by virtue of the skill and expertise of [debtor's counsel].'

'Evergreen Retainer' for Professional Services Approved

The Bankruptcy Court for the District of Delaware approved the use of an 'evergreen retainer' by attorneys and financial advisers for a Chapter 11 debtor they had negotiated through arms-length bargaining, noting that this was an issue of first impression in the Third Circuit. In re Insilco Technologies, Inc., 2003 WL 1918237 (April 18).

Similar to a security retainer, a so-called evergreen retainer secures payment of fees for future professional services. With an evergreen retainer, however, an attorney does not look to the retainer for payment of fees until the approval of the final fee application, and counsel will be paid interim fees and expenses out of operating cash. The court remarked that the use of such retainers was a common practice in the marketplace, and approval of the retention arrangements enabled the debtors to maintain relationships established pre-petition with their professionals. In approving the retainer over the objection of the U.S. Trustee, the court noted that no creditor had objected to the terms of the proposed retentions. In addition, the court opined that the retainers provided a reasonable mechanism for minimizing risk in a Chapter 11 case filed by debtors whose liabilities far exceeded their assets.

In re Covad Communications Group, Inc.

The court rejected the assertion by the Trustee that the efforts of debtor's counsel were 'routine.' In fact, the court categorized the debtor's reorganization as 'remarkable.' Faced with certain failure, the court noted that the debtor 'was able to reorganize with sufficient liquidity to execute its business plan, with the various creditor and equity constituencies receiving a substantial recovery ' a true 'win-win' under the circumstances.' Consequently, the court found that 'the requested enhancement is warranted by virtue of the witness testimony presented at the hearing, the circumstances of [the] reorganization, the lack of objection by interested constituencies, and the Court's assessment of the results achieved by virtue of the skill and expertise of [debtor's counsel].'The Bankruptcy Court for the District of Delaware approved the use of an 'evergreen retainer' by attorneys and financial advisers for a Chapter 11 debtor they had negotiated through arms-length bargaining, noting that this was an issue of first impression in the Third Circuit. In re Insilco Technologies, Inc., 2003 WL 1918237 (April 18).

Similar to a security retainer, a so-called evergreen retainer secures payment of fees for future professional services. With an evergreen retainer, however, an attorney does not look to the retainer for payment of fees until the approval of the final fee application, and counsel will be paid interim fees and expenses out of operating cash. The court remarked that the use of such retainers was a common practice in the marketplace, and approval of the retention arrangements enabled the debtors to maintain relationships established pre-petition with their professionals. In approving the retainer over the objection of the U.S. Trustee, the court noted that no creditor had objected to the terms of the proposed retentions.

In addition, the court opined that the retainers provided a reasonable mechanism for minimizing risk in a Chapter 11 case filed by debtors whose liabilities far exceeded their assets.