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Court Rules That Professional Fees May Not Be Capped by Standard Carve-Out Provisions

By John C. Tishler and Tyler N. Layne
April 01, 2017

Secured creditors and debtor-in-possession (DIP) lenders that rely on standard carve-out provisions to limit the impact of bankruptcy professional fees on their collateral would be well-advised to take notice of a U.S. Bankruptcy Court decision from earlier this year. Judge Christopher S. Sontchi of the United States Bankruptcy Court for the District of Delaware (the Court) issued an opinion in In re Molycorp, Inc. (Case No. 15-11357) on Jan. 5, 2017 that serves as both a cautionary tale and an instruction manual.

Background

In the case, Molycorp, Inc. and a number of its subsidiaries (collectively, the Debtors) filed for bankruptcy without pre-arranged DIP financing. Approximately one week into the bankruptcy cases, the Debtors filed a motion to approve DIP financing from Oaktree Capital Management, L.P. (Oaktree). The Court approved the DIP financing and the DIP Order contained a commonplace carve-out provision (the Carve-Out) establishing the amount (in this case, $250,000) of the proceeds of the DIP loans, the collateral securing the DIP loans, and the collateral securing Oaktree's prepetition loans (collectively, the Restricted Sources) that could be used to pay the professional fees of the official committee of unsecured creditors (the Committee) in connection with investigating the validity, priority, enforceability, and extent of Oaktree's liens and the Debtors' adequate protection obligations (collectively, the Carve-Out Matters). The DIP Order expressly excluded fees incurred in connection with the prosecution of any challenge related to the Carve-Out Matters from the Carve-Out.

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