In re Cummins Utility, L.P., 01-47558-DML-11.

• Citation: 279 B.R. 195
• Decision Date: 05 June 2002
• Docket Number: No. 01-47558-DML-11.,01-47558-DML-11.
• Parties: In re CUMMINS UTILITY, L.P., Debtor.
• Court: United States Bankruptcy Courts. Fifth Circuit. U.S. Bankruptcy Court — Northern District of Texas

Page 195

279 B.R. 195

In re CUMMINS UTILITY, L.P., Debtor.

No. 01-47558-DML-11.

United States Bankruptcy Court, N.D. Texas, Fort Worth Division.

June 5, 2002.

COPYRIGHT MATERIAL OMITTED

John D. Penn, Haynes and Boone, LLP, Fort Worth, TX, for debtor.

MEMORANDUM OPINION

DENNIS MICHAEL LYNN, Bankruptcy Judge.

Before the Court is the Joint Motion of JPMorgan Chase Bank, Fleet Capital Corporation and Key Corporate Capital, Inc. for Allowance of Post Petition Interest, Fees and Expenses Under 11 U.S.C. § 506(b) (the "Motion"; the joint movants will hereafter be referred to, respectively, as (1) "Chase" or "Agent"¹, (2) "Fleet"² and (3) "Key" and collectively as "Banks"). The Motion was objected to by the above-named debtor ("Debtor" or "Cummins"), the Official Committee of Unsecured Creditors (the "Committee") and the United States Trustee. The Court conducted hearings on the Motion on May 7 and May 24, 2002, during which it heard testimony proffered in support of the Motion from H. Michael Wills ("Wills"), an officer of Fleet assigned to Debtor's loan; Billie Prue ("Prue"), a workout officer of Chase assigned to Debtor's loan; John Koskiewicz ("Koskiewicz"), a manager of PricewaterhouseCoopers, LLP ("PWC"); Robert Starzyk ("Starzyk"), a principal of Morris-Anderson & Assoc. ("MAA"); Chris Capriotti ("Capriotti")³, the "line" officer of Chase assigned to Debtor's loan; and Tom Connop ("Connop"), a partner at Locke Liddell & Sapp, LLP ("LLS"). Numerous Exhibits were also introduced into evidence in support of the Motion.

Debtor presented by proffer the testimony of Michael Lawrence, its Chief Reorganization Officer, and, through designated portions of his deposition, the testimony of Stephen M. Hitt ("Hitt"), past president of the Debtor.⁴ Debtor also introduced several Exhibits. Chase (as Agent for the Banks), Fleet, Debtor and the Committee have provided the Court with points of authority, and Chase, Fleet and Debtor presented oral argument at the close of the May 24th hearing.

This matter is a core proceeding over which this Court has jurisdiction pursuant to 28 U.S.C. §§ 1334 and 157(b)(2). This Memorandum Opinion constitutes the Court's findings of fact and conclusions of law. Fed. R. Bankr.P. 7052 and 9014.

I. Background

Though this case was commenced under Chapter 11, from the outset it was Debtor's plan — in which the Banks concurred — to use the Chapter 11 process to liquidate the Debtor's assets in a going-concern mode.⁵ It was the hope of the parties that more might be realized through a sale of assets in an operating configuration than if the business were shut down and the assets sold through a traditional liquidation. Though the Court had serious concerns about the use of Chapter 11 to effect a sale of all assets pursuant to 11 U.S.C. § 363,⁶ it was persuaded by the parties that Debtor's business was rapidly deteriorating. In view of support for the Debtor's sale strategy from the Banks and, after its organization, the Committee, the Court determined that the strategy best served creditor interests. Accordingly, it approved sale procedures on October 25, 2001, just nine days after the filing of the Chapter 11 petition. The procedures required initial bids by November 7th and provided for an auction on November 9th. The auction was held as planned, but approval of the sale, originally set for November 21st, was continued to November 28th, at which time the Court approved sale of all Debtor's assets other than cash, causes of action, accounts receivable and a few other items.⁷

On December 28, 2001, the Court authorized payment of all principal and contract rate prepetition interest owed to the Banks. On January 4, 2002, the Court entered an order which, inter alia, set aside $950,000, representing cash proceeds of collateral of the Banks, to be held as provision against the Banks' claims under section 506(b) of the Bankruptcy Code.⁸

The Court, based on its experience and the evidence, is convinced, and finds, that the liquidation procedure followed by Debtor resulted in substantially greater return to the estate than if the Debtor had attempted to continue its business in the face of deteriorating revenues or if the Debtor had elected to liquidate under Chapter 7 of the Bankruptcy Code. The Court further finds the first and principal beneficiaries of the Debtor's strategy were clearly the Banks.

Payment of the Banks through an exceptional (vis-a-vis Braniff) use of Chapter 11 was only the final act in a lengthy and profitable relationship with Debtors. That relationship predates the December, 1998, Amended and Restated Credit Agreement (the "Credit Agreement"), which (as thereafter amended and subject to forbearance agreements hereafter described), together with applicable law, governs the disposition of this matter. Under the Credit Agreement, the Banks made both a term loan and a revolving loan to Debtor. See Credit Agreement, § 2.1. The revolving loan was secured by Debtor's inventory and accounts receivable.

During the relationship with the Banks, Debtor never was in default of payment until the commencement of this case. However, in mid 2000, Debtor defaulted under substantially all its loan covenants. These defaults led the Banks to involve workout officers as well as LLS⁹ and PWC to monitor the loans to Debtor. During the period between the initial defaults and the filing of Debtor's Chapter 11 petition, the loans to the Banks were reduced by payments in excess of $10,000,000.¹⁰ During the same period the Banks forbore (pursuant to serial forbearance agreements)¹¹ from exercising their rights under the Credit Agreement, including the charging of default rate interest, while Debtor worked with its lenders to restructure its indebtedness.

Nonetheless, especially in the deteriorating economic environment of 2001 and particularly following the events of September 11, 2001, Debtor's business became progressively less viable. Pursuant to the reports required of Debtor by the Credit Agreement and the forbearance agreements, the Court finds that the Banks were or should have been fully aware of the decline in Cummins' operating results in September and October, 2001.¹²

The Debtor's schedules reflect debt to the Banks at filing of approximately $24,000,000. The schedules also reflect debt to unsecured creditors of approximately $28,500,000 (excluding priority debt of over $1,900,000).¹³

II. The Banks' Claims Under 11 U.S.C. § 506(b)

In the Motion the Banks sought payment under 11 U.S.C. § 506(b) of $846,547.82. This total consisted of (1) interest of $315,161.95; (2) a collateral monitoring fee of $35,000.00 (see § 2.3(b) of the Credit Agreement); (3) an audit charge of $9,474.36; (4) wire charges of $1,828; (5) attorneys fees and expenses¹⁴ of $320,632.89 incurred by (a) LLS as Agent's counsel ($231,410.91), (b) Fleet's counsel Vinson & Elkins ("V & E") ($87,971.98), and (c) Key's in-house counsel ($1,125.00)¹⁵; (6) Consultant fees of $146,088.79 incurred by PWC ($24,975.00) and MAA ($121,113.79); and (7) travel expenses of bank employees from Chase and Key of $18,486.83. The Banks filed a Correction and Supplement to the Motion on May 3, 2002 and further corrected and amended the amounts sought at the May 7th and 24th hearings and thereafter to account for additional fees and errors made in prior computations. The Banks currently seek a total of $872,776.44, some of which was incurred prepetition.

It is the position of the Banks that the fees and expenses sought are "reasonable" within the meaning of section 506(b). The collateral monitoring fee, they say, is an annual fee accruing in total on November 1st of each year — and 2001-2002 should be no different than any other year. They claim they are entitled to interest at the default rate because in the forbearance agreements they specifically preserved the right to charge it (see Letter Forbearance Agreement of February 12, 2001, §§ 6 and 9). The Banks argue that applicable case law sets a three part test for charging interest at the default rate (that the charge will not harm other creditors; that the difference between the default and the regular rate is not punitively great; and that the over-secured creditor has not obstructed the bankruptcy process). The Banks assert they meet this three part test and that the default rate is appropriate to compensate "for the uncertainty of bankruptcy" (Motion, p. 9) and for the added work required of the Banks' internal staffs (testimony of Capriotti on May 24th).

Debtor, joined by the Committee and United States Trustee, disagree about the proper interest rate. Seeing the Banks as obstructive¹⁶ and pointing to the prospect of little return on unsecured claims, they urge the Court to authorize only the contract rate. As to fees and expenses, Debtor, joined by the Committee and United States Trustee, argues the amounts sought are not reasonable and should be disallowed or substantially reduced. As to the collateral monitoring fee, it should be prorated or off-set against any fees awarded for the services of MAA.

III. Discussion

A. Scope of 11 U.S.C. § 506(b)

Section 506(b) of the Code¹⁷ is subject on its face to two limitations in its application. First, because it refers to interest and "reasonable fees, costs or charges" which may be added to an "allowed secured claim," it relates only to postpetition accretions. See Rake v. Wade, 508 U.S. 464, 469-470, 113 S.Ct. 2187, 124 L.Ed.2d 424 (1993). Prepetition interest and fees are allowable (if at all) as part of the underlying secured claim. In fact, the standard for allowance of interest, fees and expenses under section 506(b) is established by federal law, while like items charged prepetition are tested by applicable state law. See In re Trinity Meadows Raceway, Inc., 252 B.R. 660, 669 (Bankr.N.D.Tex.2000) (default rate chargeable until order for relief, contract rate thereafter required by equities); See Blackburn-Bliss Trust v. Hudson...