The Bankruptcy Court for the District of Delaware recently held in the bankruptcy proceedings of Nortel Networks Inc., et al. (“Nortel”), Case No. 09-10138 (KG), that it would not second guess the work of an indenture trustee and its counsel on matters related to the trustee (i) in its capacity as indenture trustee on behalf of noteholders; (ii) in its capacity as a member of a creditors’ committee; and (iii) in defending its fees. In reaching his decision, Judge Gross employed a “forward-thinking” analysis based on the facts existing at the time the trustee acted. This decision should provide comfort to indenture trustees that their work in a Chapter 11 case should not be second guessed based on hindsight and that their professional fees, provided they are reasonable, can and should be compensated.
On January 14, 2009, Nortel and its affiliates filed for bankruptcy relief. The US Trustee appointed the Official Committee of Unsecured Creditors (the “Committee”), which included as a member the indenture trustee for certain notes (the “Indenture Trustee”). The Nortel case was inordinately contentious, lasted over eight years, and involved complex issues, including the allocation of $7.3 billion in sale proceeds of Nortel’s global business (the “Allocation Dispute”). The Allocation Dispute named the Indenture Trustee as a “core party” and was comprised of depositions, mediation sessions, trial, post-trial motion practice and an appeal. Ultimately, after seven years, the Allocation Dispute was resolved in the context of a global resolution of the entire case.
During the course of the case, the Indenture Trustee was represented by lead counsel, Patterson Belknap Webb & Tyler LLP (“Patterson Belknap”), Borden Ladner Gervais LLP and a law firm that served as predecessor counsel to Patterson Belknap, Dewey & LeBoeuf LLP (“Dewey”). These firms sought payment for a total of $8.1 million in fees incurred throughout Nortel’s eight-year case.
Certain noteholders (the “Noteholders”) objected to at least half of the $8.1 million in fees of the Indenture Trustee and its counsel for work that was performed in connection with (i) serving as a member of the Committee; (ii) certain aspects of the Allocation Dispute; (iii) the transition arising from Patterson Belknap’s replacement of Dewey (upon Dewey’s cessation of business); and (iv) Patterson Belknap’s defense of its fees in response to the Noteholders’ objections. This work, the Noteholders argued, was unnecessary and did not benefit the Noteholders.
As the Indenture contained a New York choice of law clause, Judge Gross applied New York law and analyzed the Indenture Trustee’s duties pursuant to what is known as the “prudent person” standard. This standard requires that the Indenture Trustee “exercise such diligence and such prudence as in general, prudent men of discretion and intelligence in such matters, employ in their own like affairs.” This standard, as the court explained, focuses on “the time the Trustee acted,” and not “hindsight.”
In applying this standard, Judge Gross framed the issue as “whether the Indenture Trustee acted prudently in assigning the Lawyers to their tasks, and whether the Lawyers' work was reasonable.” Based on the complex and contentious nature of the case, the intricacies of the Notes, and the evidence presented, the court concluded that, on balance, the Indenture Trustee acted prudently.
With respect to the Noteholders’ objection to the fees for the Indenture Trustee and its counsel’s work as a Committee member, Judge Gross recognized the common practice for indenture trustees to serve on creditors’ committees and found insufficient evidence that such work did not benefit the Noteholders. The Noteholders relied on In re Worldwide Direct, Inc. for the proposition that in order for indenture trustee fees to be deemed “reasonable,” the fees must relate to work performed on behalf of noteholders specifically and on matters peculiar to noteholders. In refusing to apply a hindsight analysis, the court found the Noteholders’ reliance on Worldwide to be misplaced, as (i) the ruling in Worldwide precluded a trustee from “forward thinking” in a case; and (ii) Nortel was a much lengthier and more complex case.
On the Noteholders’ objection to the fees for work on the Allocation Dispute, Judge Gross rejected the Noteholders’ argument that in hindsight, the work of the Indenture Trustee’s lawyers attending depositions, mediation sessions and trial is not compensable, while the work for the motion for reconsideration and the appeal is compensable. As the Indenture Trustee was named as a “core party” in the Allocation Dispute, the court found that the Indenture Trustee and its counsel were expected to fully participate and that they complied with their fiduciary duty to protect and to advance the interests of the Noteholders. Indeed, Judge Gross found odd “for the Noteholders to expect the Lawyers to ‘parachute in’ at the time for reconsideration and appeal of the Allocation decision, but ‘parachute out’ when depositions were taken, the trial was taking place and there was mediation.”
With respect to the Noteholders’ objection to the fees incurred by Dewey during the transition, the court found, as an evidentiary matter, that Patterson Belknap was compelled to do and bill for additional work as a result of Dewey's lack of cooperation at the conclusion of its representation and denied Dewey's fees related to the Allocation Dispute.
Finally, with respect to the Noteholders’ objection to the fees for the defense of Patterson Belknap’s fees, Judge Gross found that the Indenture contained sufficient language to qualify as an exception to the “American Rule,” which requires that each litigant pays his or her own attorney's fees, win or lose, unless a statute or contract provides otherwise. In distinguishing the recent US Supreme Court decision in Baker Botts L.L.P. v. ASARCO LLC, which ruled that the Bankruptcy Code does not carve out an exception to the “American Rule,” Judge Gross found that an indenture imposing express indemnification obligations on the part of the issuer to cover the costs and fees of a trustee in defending itself is a contract that does in fact qualify as an exception to the “American Rule.”
Conclusion and Best Practices
Based on this decision, it is clear that a court should not, in hindsight, second guess the work of an indenture trustee and its counsel, provided the fees are “reasonable,” as required under the indenture. As such, for “reasonableness” to be found and giving consideration to the decision, best practices to be considered by indenture trustees should include:
- Best efforts should be undertaken to have time entries recorded and completed when services are performed or rendered.
- Time entries should specify and separate the work performed and narratives should be detailed and descriptive.
- If there is a reasonable need for more than one attorney to prepare for or attend a committee meeting or court hearing, time entries should explain the need and justification.
- Counsel should provide invoices to the trustee on a monthly basis and provide an opportunity for review and questions.
- The trustee should undertake reasonable efforts to review the invoices provided.
- Counsel should regularly communicate with the trustee as to actions to be taken, strategies and approaches and, when necessary, document such actions, strategies and approaches.
- When appropriate, the trustee should provide notice to holders of material or important events in the bankruptcy proceedings, including the appointment of a committee and the trustee’s appointment to a committee.
- Upon a law firm transition, predecessor trustee should act promptly and efficiently in the transition and ensure counsel cooperates and facilitates the transition.
- The trustee should consider seeking a judicial finding as part of the confirmation order or specific language in a plan that the fees and expenses of the trustee are reasonable, as we successfully did in In re Halcón Resources Corporation and In re Sandridge Energy, Inc.
- If the case is lengthy and complex, and there are more than one indenture trustee, the trustees should contemplate filing a motion to seek to liquidate their indenture trustee fee claim, as we successfully did in In re Washington Mutual, Inc., to avoid waiting until the end of a lengthy case.
Arent Fox’s Bankruptcy group monitors issues involving indenture trustees. If you have any questions about the topic covered here or other matters, please contact Andrew Silfen, Leah Eisenberg, Sam Lawand, or the Arent Fox professional who normally handles your matters.
 Throughout most of the case, Law Debenture Trust Company of New York (“Law Debenture”) served as the Indenture Trustee. On December 6, 2016, as part of Law Debenture’s sale of its corporate trusts business to Delaware Trust Company, Delaware Trust Company succeeded Law Debenture as the Indenture Trustee.
 In its ruling, the court noted that the Noteholders waited until the near end of the case to question the Indenture Trustee’s service on the Committee and its work.
 The court did, however, find that it was not prudent for the Indenture Trustee or reasonable for its counsel to have more than one lawyer preparing for and attending Committee meetings and thus limited the Committee meeting and related preparation fees to fees for one lawyer.
 334 B.R. 112 (Bankr. D. Del. 2005).
 135 S.Ct. 2158 (2015).
 Findings of Fact, Conclusions of Law, and Order (I) Approving the Debtors’ (A) Disclosure Statement Pursuant to Sections 1125 and 1126(B) of the Bankruptcy Code, (B) Solicitation of Votes and Voting Procedures, and (C) Forms of Ballots, and (II) Confirming the Amended Joint Prepackaged Chapter 11 Plan of Halcón Resources Corporation, et al. Under Chapter 11 of the Bankruptcy Code, In re Halcón Resources Corporation, No. 16-11724 (BLS) (Bankr. D. Del. Sept. 8, 2016) [Docket No. 200].
 Amended Order Confirming the Amended Joint Chapter 11 Plan of Reorganization of Sandridge Energy, Inc. and its Debtor Affiliates, In re Sandridge Energy, Inc., No. 16-32488 (DRJ) (Bankr. S.D. Tex. Sept. 20, 2016) [Docket No. 901].
 No. 08-12229 (Bankr. D. Del. Oct. 6, 2011) (approving partial liquidation and payment of indenture trustee’s fees and expenses under a Bankruptcy Rule 9019 settlement); see also Amended Order Confirming Debtors’ Joint Plan of Reorganization Under Chapter 11 of the Bankruptcy Code, In re Arch Coal, No. 16-40120-705 (Bankr. E.D. Mo. Sept. 15, 2016) [Docket No. 1334] (approving payment of the indenture trustee’s fees and expenses pursuant to a restructuring agreement which the court found to be “an exercise of the Debtors’ business judgment” under section 363(b)).