In re Leatherland Corp., No. 03-31195.

• Decision Date: 15 August 2003
• Docket Number: No. 03-31195.
• Citation: 302 B.R. 250
• Parties: In re LEATHERLAND CORP., d/b/a/ Leather Limited Debtor and Debtor in Possession.
• Court: U.S. Bankruptcy Court — Northern District of Ohio

302 B.R. 250

In re LEATHERLAND CORP., d/b/a/ Leather Limited Debtor and Debtor in Possession.

No. 03-31195.

United States Bankruptcy Court, N.D. Ohio, Western Division.

August 15, 2003.

COPYRIGHT MATERIAL OMITTED

Jerome Cox, Roetzel Andress, Akron, OH, Mardi Harrison, Doylestown, PA, Patricia B. Fugee, Toledo, OH, for Debtor.

Derrick Rippy, Office of the United States Trustee, Cleveland, OH, U.S. Trustee.

Christopher A. Jarvinen, Lawrence C. Gottlieb, Kronish Lieb Weiner and Hellman LLP, New York City, Drew T. Parobek, Matthew E. Albers, William E. Schonberg, Cleveland, OH, Raymond J. Pikna, Jr., Cincinnati, OH, for Creditor Committee.

MEMORANDUM OF DECISION REGARDING UNSECURED CREDITORS' COMMITTEE'S LIMITED OBJECTION TO APPROVAL OF $280,000 PAYMENT

MARY ANN WHIPPLE, Bankruptcy Judge.

This case is before the Court on the Unsecured Creditors' Committee's Limited Objection to Approval of $280,000 Payment to Huntington National Bank [Doc. # 73], the responses filed by Huntington National Bank [Doc. # 104] and Debtor [Doc. # 98] and the Unsecured Creditors' Committee's reply [Doc. # 110]. At issue is a provision in a revolving credit agreement between Debtor and Huntington National Bank ("Huntington") for payment of a "Success Fee" equal to two percent of the highest principal sum due under the note during the period from May 31, 2002, to January 31, 2003. The agreement provides that the "Success Fee" shall be waived if by December 31, 2002, and January 31, 2003, the outstanding principal amount due is reduced as required in the agreement.

The Unsecured Creditors' Committee ("the Committee") objects to payment of the "Success Fee," contending that (1) it represents an invalid penalty under Ohio law, and (2) under 11 U.S.C. § 506(b), the fee is unreasonable. Huntington contends that the "Success Fee" is consideration for an increase in the maximum revolving credit agreed upon in a third amendment to the amended credit and security agreement and, as such, is not a fee under § 506(b) and is not subject to a reasonableness determination.

On June 30, 2003, the Court heard oral argument on the issues raised by the parties as well as on issues the Court raised, including whether the § 506(b) reasonableness standard applies to fees that mature prepetition and the applicability of Ohio Rev.Code §§ 1109.18 and 1109.20 in determining the validity of the "Success Fee" provision. Based on the reasons and authorities set forth below, the Court will grant the Committee's objection.

FACTS

The parties stipulated to the admission of six documents constituting the agreement between Debtor and Huntington. [Doc. # 105]. The following facts are set forth in those documents.

Debtor executed and delivered to Huntington a revolving note in the original principal amount of $21 million dated October 26, 2001 (the "Note"), payable in full on or before April 1, 2002. The interest rate was a variable rate equal to the London Inter-Bank Offered Rate ("LIBO") plus a LIBO rate margin of 2.25% if the outstanding principal sum was less than or equal to $15 million or 3% if the outstanding principal sum was greater than $15 million.¹ The default rate was the LIBO rate plus the applicable LIBO rate margin plus an additional 3%. Note, p. 2. The Note also provided that "[a]ny installment payment or other payment not made within 10 days of the date such payment is due shall be subject to a late charge equal to 5% of the amount of the payment." Note, p. 3.

The actual principal amount Debtor was eligible to borrow under the Note was conditioned upon the terms of a related Amended and Restated Credit and Security Agreement ("Loan Agreement") also dated October 26, 2001. Under the Loan Agreement, the maximum principal amount that Debtor was eligible to borrow under the Note was reduced contractually in specific increments from $21 million in 2001 to $4 million on March 25, 2002, until the maturity date on April 1, 2002. Loan Agreement, ¶ 1.31. Also pursuant to the Loan Agreement, Huntington obtained a security interest in Debtor's accounts, inventory, equipment, investment property and general intangibles. Loan Agreement, ¶ 5.1.

On April 22, 2002, Debtor and Huntington entered into the First Amendment to Note and Amended and Restated Credit and Security Agreement ("First Amendment"). On that date, the unpaid principal balance due under the Note and Loan Agreement was $12 million. First Amendment Recitals D. The First Amendment fixed the maximum revolving credit under the Note and Loan Agreement at the credit balance and extended the maturity date to May 15, 2002. First Amendment, ¶¶ 2, 4. The contract interest rate was changed from a rate based upon the LIBO rate to the "Prime Commercial Rate" plus 1%. The default rate was amended to equal the contract rate (Prime Commercial Rate plus 1%) plus an additional 3%. First Amendment, p. 2. Huntington charged Debtor $500.00 for the First Amendment, plus all attorney fees incurred in connection with the amendment. First Amendment, p. 3.

On June 27, 2002, Debtor and Huntington entered into the Second Amendment to Note and Amended and Restated Credit and Security Agreement and Forbearance Agreement ("Second Amendment"). Debtor was in default under the terms of the Note and Loan Agreement and still owed a principal balance of $12 million. Second Amendment, Recitals G, H. The Second Amendment extended the maturity date to July 15, 2002. No changes in the interest rate were made. See Second Amendment, Article I. Article II of the Second Amendment contained the terms of the forbearance agreement.

On July 9, 2002, Debtor and Huntington entered into the Third Amendment to Note and Amended and Restated Credit and Security Agreement and Forbearance Agreement ("Third Amendment"). At that time, Debtor still owed a principal balance of $12 million. The Third Amendment incorporated by reference the Note, Loan Agreement and all previous amendments and provided that Ohio law would govern the agreement. Third Amendment, Article II, ¶¶ 21, 27. Article II of the Third Amendment contained the terms of the forbearance agreement. In consideration of the bank's forbearance, Debtor agreed to pay Huntington "a non-refundable forbearance fee of $10,000," as well as the attorney fees related to negotiation and preparation of the amendment. Third Amendment, Article II, ¶ 5. In Article I, the Third Amendment extended the maturity date to March 15, 2003, and increased the contract interest rate to the Prime Commercial Rate plus 3% and the default interest rate to the contract rate (Prime Commercial Rate plus 3%) plus an additional 6%. Third Amendment, Article I, ¶¶ 1B, 2A. Huntington also agreed to amend the available maximum revolving credit to (i) $14 million until December 30, 2002, (ii) $4 million from December 31, 2002, until January 30, 2003, and (iii) $3 million until the maturity date. Third Amendment, Article I, ¶ 2B. Debtor agreed to incrementally reduce the principal balance due under the Note on a monthly basis beginning September 30, 2002, with the option of foregoing certain of those reductions by paying a $50,000 "non-refundable fully earned fee." Id. However, Article I, paragraph 2B further provided that if the unpaid principal sum was not reduced to $4 million or less by December 30, 2002, or if the unpaid principal sum was not reduced to $3 million or less by January 30, 2003, "the failure to make such Reduction[s] shall be a Default under this Agreement."

In addition, the Third Amendment provided that, in consideration of the $2 million increase in the maximum revolving credit, Debtor would pay a "line increase fee (`LIF') which shall be fully earned when paid." Third Amendment, Article I, ¶ 2G. The agreement provided that "[t]he initial draw under the Revolving Credit Facility which, after giving effect to the requested draw, increases the Maximum Revolving Credit from $12,000,000 up to $12,500,000 (or less) shall require the payment of a [line increase fee] in the amount of $70,000." Id. Similarly, for each increment of $500,000 (or less) which increased the Maximum Revolving Credit from $12,500,001 up to $14,000,000, Debtor was required to pay an additional $70,000. Id.

The Third Amendment also provided for payment of a "Success Fee." Specifically, the agreement provided as follows:

Success Fee. In consideration of the increase in the Maximum Revolving Credit, Borrower shall pay to Lender on January 31, 2003, a Success Fee equal to two percent (2%) of the highest principal sum due under the Note during the period from May 31, 2002 and January 31, 2003. The Success Fee shall be waived by Lender and shall not be required to be paid if (i) at December 31, 2002, the outstanding principal sum due under the Note is $4,000,000 or less, and (ii) at January 31, 2003, the outstanding principal sum due under the Note is $3,000,000 or less.

Third Amendment, Article I, ¶ 2H.

The highest principal sum due under the Note between May 31, 2002, and January 31, 2003, was $14 million. Reeves Aff., ¶ 3.² Debtor failed to reduce the outstanding principal balance to $4 million by December 31, 2002, or to $3 million by January 31, 2003, as required under the Third Amendment. Id. ¶ 4.

Debtor filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code on February 25, 2003. As Huntington and Debtor stipulated in the Interim Cash Collateral Order entered on March 5, 2003, Debtor's prepetition indebtedness to Huntington was an amount not less than $6,319,393.10, consisting of the unpaid principal in the amount of $5,957,304.89, plus the "Success Fee" in the amount of $280,000, plus accrued but unpaid interest in the amount of $82,088.21. [Doc. # 47]. Huntington filed its proof of claim for this amount on June 30, 2003. Under the Court's cash collateral orders, Huntington has been paid its claim, except for the "Success Fee." The Court ordered Debtor to pay $280,000 into an escrow account at Huntington...