Southeastern Grocers (operator of the Winn-Dixie, Bi Lo and Harvey’s supermarket chains) recently completed a successful restructuring of its balance sheet through a “prepackaged” chapter 11 case in the District of Delaware. As part of the deal with the holders of its unsecured bonds, the company agreed that under the plan of reorganization it would pay in cash the fees and expenses of the trustee for the indenture under which the unsecured bonds were issued. In an important ruling for indenture trustees, Judge Mary Walrath approved the plan and rejected a challenge to the payment, a decision that will help to blunt some of the uncertainty which has arisen around this issue. (Kelley Drye & Warren LLP represented the indenture trustee in this matter).
Payment by a debtor of an indenture trustee’s fees and expenses in cash is a significant business point in cases such as Southeastern Grocers, where bonds typically are surrendered in exchange for new common stock. Otherwise, the indenture trustee must recover its fees and expenses out of the distribution to the bondholders under a priority provision in the indenture known as the “charging lien.” Exercising the charging lien against newly-issued shares and then monetizing such shares can be a difficult and time consuming process, particularly where the new shares are not intended to be publicly traded. This reduces the bondholders’ recovery and delays the debtor’s emergence from chapter 11.
Under the Southeastern Grocers plan, the unsecured bondholders were the only impaired creditor class, and voted unanimously in favor. The office of the United States Trustee (“UST”) in Delaware nevertheless filed an objection to plan confirmation. It contended, among other issues, that payment of the indenture trustee’s fees and expenses contravened section 503(b) of the Bankruptcy Code. The objection by the UST (a representative of the U.S. Department of Justice that serves a watchdog function in large bankruptcy cases) in Southeastern Grocers is consistent with the stance USTs have been taking against the payment of indenture trustees’ fees and expenses in districts across the country.
The UST’s objection was that section 503(b) provides the only basis upon which the fees and expenses of an indenture trustee and other parties in interest can be paid in a chapter 11 case. Under that section, payments are permissible only upon a showing of “substantial contribution” in the case, a difficult standard to meet. Courts have held that the type of actions that satisfy the “substantial contribution” test is “exceedingly narrow,” and, among other things, the party seeking such payment must demonstrate that it was not merely protecting its own interests but that its actions were for the benefit of all parties.
Because the “substantial contribution” standard is so difficult to satisfy, the key issue is whether subsection 503(b)(3)(D) in fact provides the sole authority under the Bankruptcy Code for such payments.
In Southeastern Grocers, the debtor, the indenture trustee and the bondholders responded to the UST’s objection by arguing, as some courts have held, that subsection 503(b)(3)(D) is simply the means by which an indenture trustee or other party in interest can compel payment of its fees and expenses, and that there is nothing in that subsection which in any way prevents a debtor from agreeing to pay such fees and expenses as part of a settlement. Further, those courts have pointed out that section 1123(b)(6) of the Bankruptcy Code, which states that a plan of reorganization may include “any . . . appropriate provision not inconsistent with the applicable provisions of this title[,]” provides a bankruptcy court with a “broad grant of authority” to permit the payment of an indenture trustee’s reasonable fees and expenses without the need to find compliance with section 503(b).
Judge Walrath rejected the UST’s arguments. With respect to the payment of the indenture trustee’s fees and expenses, she expressly stated,
[Section] 503(b)(3)(D) is not the only way where such expenses can be approved and paid in a case. And I think it is perfectly appropriate to agree . . . to the payment of those expenses without the necessity of a court having to approve them after the fact in order to get the parties to come to the table and negotiate [a] successful reorganization . . . I think that the fact that [Southeastern Grocers] agreed to that . . . was perfectly appropriate, and that there is no necessity that I review those expenses or otherwise interfere with that agreement.
This is a favorable decision for indenture trustees and parties to negotiated settlements to cite in future cases as persuasive authority. Judge Walrath is a highly regarded jurist, and her summary rejection of the UST position and express statement that section 503(b)(3)(D) is not the only basis for payment of an indenture trustee’s fees and expenses should carry weight with other judges in Delaware and in other districts.