In re Thermadyne Holdings Corp.

• Decision Date: 03 October 2002
• Docket Number: No. 02-6031EM.,02-6031EM.
• Citation: In re Thermadyne Holdings Corp., 283 B.R. 749 (B.A.P. 8th Cir. 2002)
• Parties: In re THERMADYNE HOLDINGS CORPORATION, et al., Debtors. Unsecured Creditors' Committee, Houlihan, Lokey, Howard & Zukin Financial Advisors, Inc., Appellants, v. Joel Pelofsky, United States Trustee, Appellee.
• Court: U.S. Bankruptcy Appellate Panel, Eighth Circuit

283 B.R. 749

In re THERMADYNE HOLDINGS CORPORATION, et al., DebtorsUnsecured Creditors'Committee, Houlihan, Lokey, Howard & Zukin Financial Advisors, Inc., Appellants, v.Joel Pelofsky, United States Trustee, Appellee.

No. 02-6031EM.

United States Bankruptcy Appellate Panel of the Eighth Circuit.

Submitted September 17, 2002.

Filed October 3, 2002.

COPYRIGHT MATERIAL OMITTED

Richard A. Chesley, argued, Chicago, IL (David A. Warfield, on the brief, St. Louis, MO), for appellants.

Leonore S. Long, argued, St. Louis, MO, for appellee.

Before KOGER, Chief Judge, KRESSEL and DREHER, Bankruptcy Judges.

KRESSEL, Bankruptcy Judge.

The Creditors' Committee and Houlihan, Lokey, Howard & Zukin Financial Advisors, Inc., appeal from the bankruptcy court order¹ denying the approval of indemnification and exculpation provisions within the appellants' letter of engagement.The Creditors' Committee and Houlihan Lokey also appeal the denial of their "motion for reconsideration."Because we believe the bankruptcy judge did not abuse his discretion, we affirm.

BACKGROUND

The material facts are not in dispute.On November 19, 2001, Thermadyne Holdings, Inc.² and twenty of its subsidiaries filed petitions for relief under Chapter 11.Thereafter, the U.S. Trustee appointed an unsecured creditors' committee.On December 21, 2001, the committee filed its application for retention of Houlihan Lokey.Through the application, the committee sought approval to retain Houlihan Lokey to provide an array of financial advisory services.³For such services Houlihan Lokey requested compensation of $125,000 per month and a transaction fee.

The application attached and referred to an engagement letter dated December 14, 2001.This letter contained indemnification and exculpation provisions which stated the following:

the Estates shall indemnify and the Committee (including its individual members and advisors) and the Estates (and its affiliates and advisors) shall hold harmless Houlihan Lokey and its affiliates, and their respective past, present and future directors, officers, shareholders, employees, agents and controlling persons within the meaning of either Section 15 of the Securities Act of 1933, as amended, or Section 20 of the Securities Exchange Act of 1934, as amended(collectively, the "Indemnified Parties"), to the fullest extent lawful, from and against any and all losses, claims, damages or liabilities, (or actions in respect thereof), joint or several, arising out of or related to the Agreement, any actions taken or omitted to be taken by an Indemnified Party in connection with Houlihan Lokey's provision of services to the Committee and/or Committee Counsel, the Debtors and/or Debtors' Counsel, or any Transaction (as defined herein) or proposed Transaction contemplated thereby.In addition, the Estates shall reimburse the Indemnified Parties for any legal or other expenses reasonably incurred by them in respect thereof at the time such expenses are incurred; provided, however, there shall be no liability under the foregoing indemnity and reimbursement agreement for any loss, claim, damage or liability which is finally judicially determined to have resulted from the willful misconduct or gross negligence of any Indemnified Party.

To resolve numerous objections⁴ from the U.S. Trustee and the debtors⁵ regarding the indemnity and exculpation provisions, Houlihan Lokey agreed to modify the scope of the disputed provisions within the engagement letter by including the following in a proposed order:

(a)Houlihan Lokey shall not be entitled to indemnification, contribution or reimbursement pursuant to the Engagement Letter for Services other than the financial advisory and investment banking services provided under the Engagement Letter, unless such services and the indemnification, contribution or reimbursement therefore are approved by the Court;

(b) The Debtors shall have no obligation to indemnify Houlihan Lokey, or provide contribution or reimbursement to Houlihan Lokey, for any claim or expense that is either (i) judicially determined (the determination having become final) to have arisen solely from Houlihan Lokey's gross negligence, willful misconduct, breach of fiduciary duty, or bad faith or self-dealing; or (ii) settled prior to a judicial determination as to Houlihan Lokey's gross negligence, willful misconduct, breach of fiduciary duty, or bad faith or self-dealing but determined by this Court, after notice and a hearing to be a claim or expense for which Houlihan Lokey should not receive indemnity, contribution or reimbursement under the terms of the Engagement Letter as modified in this Order;

(c) If, before the earlier of (i) the entry of an order confirming a chapter 11 plan in these cases(that order having become a final order no longer subject to appeal), and (ii) the entry of an order closing these chapter 11cases, Houlihan Lokey believes that it is entitled to the payment of any amounts by the Debtors on account of the Debtors' indemnification, contribution and/or reimbursement obligations under the Engagement Letter (as modified by this Order), including without limitation the advancement of defense costs, Houlihan Lokey must file an application therefore with this Court, and the Debtors may not pay any such amounts to Houlihan Lokey before the entry of an order by this Court approving the payment.This subparagraph (c) is intended only to specify the period of time under which the Court shall have jurisdiction over any request for fees and expenses by Houlihan Lokey for indemnification, contribution or reimbursement, and not a provision limiting the duration of the Debtors' obligation to indemnify Houlihan Lokey.Notwithstanding this subparagraph, the United States Trustee shall retain the right to object to any demand by Houlihan Lokey for indemnification, contribution and reimbursement; and

(d) The limitation on any amounts to be contributed by all Indemnified Persons in the aggregate shall be eliminated.

By the time of hearings, the U.S. Trustee was the only party that continued to object to the indemnification and exculpation provisions, arguing that the provisions were per se inconsistent with the notions of professionalism, they placed creditors at risk of financial injury, and they could not be considered reasonable under the standards of 11 U.S.C. § 328(a).The application was heard by the bankruptcy court on January 29, 2002.On February 12, 2002the bankruptcy court issued its memorandum opinion and order allowing the employment of Houlihan Lokey, but disapproving the indemnification and exculpation provisions in the engagement agreement.⁶The committee and Houlihan Lokey filed a "motion for reconsideration of the order" which was denied by the bankruptcy court on April 29, 2002.Houlihan Lokey filed a timely appeal.

DISCUSSION

Standard of Review

We review the bankruptcy court's findings of fact for clear error and review its legal conclusions de novo.Fed.R.Bankr.P. 8013;First Nat'l Bank of Olathe, Kan. v. Pontow,111 F.3d 604, 609(8th Cir.1997);Hartford Cas. Ins. Co. v. Food Barn Stores, Inc.(In re Food Barn Stores, Inc.),214 B.R. 197, 199(8th Cir. BAP1997).We review for clear error the bankruptcy court's factual finding that under 11 U.S.C. § 328(a), the indemnification and exculpation provisions were not reasonable under the circumstances.We review the bankruptcy court's discretionary decision to deny the application under the proposed terms pursuant to 11 U.S.C. § 1103(a)⁷ for abuse of discretion.Matters committed to the bankruptcy court's discretion will be reversed only if the court abused its discretion.City of Sioux City, Iowa v. Midland Marina, Inc.(In re Midland Marina, Inc.),259 B.R. 683, 686(8th Cir. BAP2001).An abuse of discretion occurs if the bankruptcy court fails to apply the proper legal standard or fails to follow proper procedures in making its determination, or if the court bases an award upon findings of fact that are clearly erroneous.Chamberlain v. Kula(In re Kula),213 B.R. 729, 735(8th Cir. BAP1997);Agate Holdings, Inc. v. Ceresota Mill, L.P.(In re Ceresota Mill, L.P.),211 B.R. 315(8th Cir. BAP1997);Mathenia v. Delo,99 F.3d 1476, 1480(8th Cir.1996), cert. denied,477 U.S. 909, 106 S.Ct. 3286, 91 L.Ed.2d 574(1986).A finding of fact will not be reversed as clearly erroneous unless the reviewing court is left with a definite and firm conviction that a mistake has been committed.Wintz v. American Freightways, Inc.(In re Wintz Cos.),230 B.R. 840 844 (8th Cir. BAP 1999)(citingWaugh v. Eldridge(In re Waugh),95 F.3d 706, 711(8th Cir.1996)).Finally, we review a bankruptcy court's denial of a "motion to reconsider"⁸ for abuse of discretion.Kocher v. Dow Chem. Co.,132 F.3d 1225, 1229(8th Cir.1997);Kansas Pub. Employees Ret. Sys. v. Reimer & Koger Assoc., Inc.,194 F.3d 922, 925(8th Cir.1999);Crofford v. Conseco Fin. Servicing Corp.(In re Crofford),277 B.R. 109, 111(8th Cir. BAP2002).

Per Se Rule

The appellants argue that the bankruptcy court adopted a per se rule and made a legal determination that the indemnification and exculpation provisions are, as a matter of law, unreasonable under 11 U.S.C. § 328(a).⁹Although the U.S. Trustee did argue that indemnification and exculpation are unreasonable as a matter of law, the bankruptcy court neither adopted nor rejected a per se rule.Furthermore, though the bankruptcy court, in isolated statements, expressed strong views on indemnification and exculpation of professionals employed in a bankruptcy case in general, it did not apply a per se rule in this case.Reading the bankruptcy court's opinion in totality, we find that the opinion definitely discusses reasons why the indemnity and exculpation provisions were not reasonable under the circumstances of this case.

The bankruptcy judge considered and discussed factors such as market conditions, current economic...