Asarco, L. L.C. v. Barclays Capital, Inc. (In re Asarco, L.L.C.)

Decision Date11 December 2012
Docket NumberNo. 11–41010.,11–41010.
Citation702 F.3d 250
PartiesIn the Matter of ASARCO, L.L.C., Debtors. ASARCO, L.L.C.; ASARCO Incorporated; Americas Mining Corporation, Appellants Cross–Appellees, v. Barclays Capital, Incorporated, Appellee Cross–Appellant.
CourtU.S. Court of Appeals — Fifth Circuit

OPINION TEXT STARTS HERE

Maurice L. Brimmage, Jr. (argued), Akin, Gump, Strauss, Hauer & Feld, L.L.P., Lacy M. Lawrence, Benjamin Lee Mesches, Haynes & Boone, L.L.P., Dallas, TX, Charles A. Beckham, Jr., Haynes & Boone, L.L.P., Houston, TX, for Appellants Cross–Appellees.

Kevin James Terrazas, Scott A. Keller (argued), Yetter Coleman, L.L.P., Austin, TX, Janet Muriel Weiss, Gibson, Dunn & Crutcher, L.L.P., New York City, for Appellee Cross–Appellant.

Appeals from the United States District Court for the Southern District of Texas.

Before WIENER, ELROD, and SOUTHWICK, Circuit Judges.

JENNIFER WALKER ELROD, Circuit Judge:

In this fee dispute, we are asked to determine whether the bankruptcy court erred in: (1) awarding a $975,000 fee enhancement to Barclays Capital, Inc. (Barclays) pursuant to 11 U.S.C. § 328(a); and (2) denying Barclays's request for a $2 million “success fee” based on the successful outcome of ASARCO, L.L.C.'s Chapter 11 bankruptcy proceeding. For the following reasons, we REVERSE the $975,000 fee enhancement and REMAND to the district court for further proceedings consistent with this opinion.

I.

In August 2005, ASARCO, a mining company based in the United States and owned by Grupo Mexico S.A.B. de C.V., filed a voluntary Chapter 11 bankruptcy petition in the United States Bankruptcy Court for the Southern District of Texas. ASARCO's bankruptcy filing was precipitated by “a mounting labor crisis, billions of dollars in environmental and asbestos liability, and a decline in copper prices ....” ASARCO LLC v. Barclays Capital Inc. (In re ASARCO LLC), 457 B.R. 575, 578 (S.D.Tex.2011)( ASARCO II ).

Shortly after the petition date, ASARCO filed an application to retain Lehman Brothers (“Lehman”) as its financial advisor and investment banker during the course of the bankruptcy proceeding. In October 2005, the bankruptcy court approved ASARCO's application to retain Lehman pursuant to §§ 327(a) and 328(a) of the Bankruptcy Code. See 11 U.S.C. §§ 327(a) and 328(a).

ASARCO's engagement letter with Lehman (“Engagement Letter”) provided that Lehman would perform the following services:

a. Advise and assist [ASARCO] in formulating a plan of reorganization and/or analyzing any proposed plan, including assisting in the plan negotiation and confirmation process of a Restructuring Transaction under Chapter 11 of the Bankruptcy Code;

b. In connection therewith, provide financial advice and assistance to [ASARCO] in structuring any new securities to be issued in a Restructuring Transaction;

c. Participate in negotiations among [ASARCO] and its creditors, unions, suppliers, lessors and other interested parties relating to the Chapter 11 Case;

d. Participate in hearings before the bankruptcy court with respect to the matters upon which Lehman Brothers has provided advice, including, as relevant, coordinating with [ASARCO's] counsel with respect to testimony in connection therewith;

e. Provide expert witness testimony concerning any of the subjects encompassed by the other financial advisory services;

f. Upon request, review and analyze any proposals [ASARCO] receives from third parties in connection with a Transaction, including, without limitation, any proposals for debtor-in-possession (“DIP”) financing and/or exit financing;

g. Assist [ASARCO] in connection with [ASARCO's] liquidity analysis;

h. Review and analyze [ASARCO's] business, operations, properties, financial condition and prospects and financial projections (including business plans provided by [ASARCO] );

i. Evaluate [ASARCO's] debt capacity in light of its projected cash flows and assist in the determination of an appropriate capital structure for [ASARCO];

j. Analyze various restructuring scenarios and the potential impact of these scenarios on the recoveries of those stakeholders impacted by any Transaction;

k. Provide strategic advice with regard to restructuring or refinancing [ASARCO's] financial obligations;

l. Assist in the drafting, preparation and distribution of selected information and other related documentation describing [ASARCO] and the terms of a potential transaction;

m. Assist [ASARCO] in identifying, contacting and evaluating potential purchasers for any Sale Transaction; and n. Provide such other advisory services as are customarily provided in connection with the analysis and negotiation of a Restructuring Transaction or a Sale Transaction, as requested.

ASARCO II, 457 B.R. at 578–79. The Engagement Letter also listed services that were outside the scope of Lehman's engagement, including “accounting, audit, crisis management, or business consulting services,” and “designing or implementing operating, organizational, administrative, cash management or liquidity improvements, or any advice or opinions with respect to solvency in connection with any transaction.” Id. at 579 (internal quotation marks omitted).

As compensation for the aforementioned services, ASARCO agreed to pay Lehman a $100,000 monthly advisory fee for the first 24 months of service and $75,000 per month thereafter until the end of Lehman's engagement. ASARCO also agreed to pay Lehman a $4 million transaction fee; however, 100% of the advisory fees paid during the first 24 months and 50% of the advisory fees paid thereafter would be credited towards the $4 million transaction fee.

In August 2007, and again in January 2008, ASARCO applied to the bankruptcy court for permission to expand the scope of Lehman's engagement and augment Lehman's compensation package. ASARCO stated that it had originally anticipated that Lehman's role in the bankruptcy proceeding would be limited and thus had negotiated the Engagement Letter with that limited role in mind. After Lehman was retained, however, ASARCO regularly asked Lehman to undertake additional (and, at times, critical) responsibilities that fell outside the scope of the Engagement Letter. ASARCO wanted to compensate Lehman for these additional services and to redefine the terms governing its retention of Lehman for the remaining months of its engagement. With regard to compensation, ASARCO sought to increase Lehman's monthly advisory fee retroactively to $150,000 for the period between April 2007 and September 2008. In addition, Lehman asked the bankruptcy court for authority to apply for “an additional discretionary fee based [on] the successful outcome” of ASARCO's bankruptcy. In its January 2008 application, ASARCO also requested permission to pay Lehman a total of $1 million for specified services that it would render in connection with three pending fraudulent-transfer proceedings.

In May 2008, the bankruptcy court approved ASARCO's request to pay Lehman $1 million for services related to the fraudulent-transfer proceedings, but it declined to approve any of the other proposed revisions to the Engagement Letter. See In re ASARCO LLC, 2010 WL 4976937, at *3 (Bankr.S.D.Tex. Dec.2, 2010)( ASARCO I). According to the bankruptcy court:

Lehman was bound by the terms of its original engagement but could, under § 328(a), apply for additional compensation after the conclusion of its employment if it could prove that its original terms and conditions were “improvident in light of developments not capable of being anticipated at the time of fixing of such terms and conditions.”

Id. (quoting 11 U.S.C. § 328(a)).

Less than four months later, in September 2008, Lehman's parent company, Lehman Brothers Holdings Inc., filed its own Chapter 11 bankruptcy petition, commencing the largest bankruptcy proceeding in United States history. And, a week after that, Barclays acquired Lehman's investment banking and financial advisory businesses.1

Barclays informed ASARCO that it was not willing to proceed under the terms of the Engagement Letter. ASARCO subsequently agreed to increase Barclays's compensation and, in late November 2008, the bankruptcy court approved the revised terms of Barclays's engagement 2 (“Revised Engagement Letter”) in accordance with §§ 327(a) and 328(a) of the Bankruptcy Code.3 The Revised Engagement Letter provided that Barclays would receive a monthly advisory fee of $225,000 and a transaction fee of $5 million. Unlike the original Engagement Letter, the Revised Engagement Letter specified that ASARCO's monthly advisory fee payments would not be credited towards the $5 million transaction fee. In addition, the Revised Engagement Letter authorized Barclays to seek a “discretionary fee based upon the successful outcome of the case.” Barclays then proceeded to provide its services to ASARCO up to the point of plan confirmation.

In November 2009, the bankruptcy court approved the bankruptcy plan that was presented by Grupo Mexico, which provided for: (1) a 100% return to all of ASARCO's creditors; and (2) Grupo Mexico's reacquisition of ASARCO. The confirmed plan “result[ed] in one of the most successful bankruptcies in the United States in history.” ASARCO II, 457 B.R. at 580. The bankruptcy court praised Barclays for helping to make this outcome possible, remarking that [d]uring its more than four years of intensive service Lehman and then Bar[clays] played a critical role in achieving the successful reorganization of [ASARCO].” ASARCO I, 2010 WL 4976937, at *13.

After the plan's confirmation, Barclays submitted a final fee application requesting, inter alia, (1) $1,202,500 for “unanticipated services”; (2) a $2 million success fee (“Success Fee”) based on the overall outcome of ASARCO's reorganization; and (3) a $6 million auction fee (“Auction Fee”) for Barclays's assistance in marketing and auctioning one of the bankruptcy estate's largest assets.4 In December 2010, the bankruptcy court ruled that Barclays could recover an additional...

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