Written by: Gregory J. Flasser

In the latest opinion in the saga of the Tribune bankruptcy, Judge Shannon ruled that due to the language of (i) an engagement letter between counsel and an indenture trustee, (ii) the terms of the indenture, and (iii) a chapter 11 plan, that the indenture trustee’s general unsecured claim is limited to $3 million for amounts actually incurred.

By way of background, on December 8, 2008, Tribune Company and its affiliates (collectively, the “Debtors” and, after the effective date of the Plan, the “Reorganized Debtors”) filed petitions for relief under Chapter 11 of the Bankruptcy Code.  Wilmington Trust Company (“WTC”) served as the indenture trustee for unsecured bonds known as the PHONES Notes that were issued by Tribune Company and that were subordinated to virtually all of Tribune’s other debt.  On July 23, 2012, the court entered an order confirming the Debtors’ fourth amended joint plan of reorganization (the “Plan”).  The Plan allows WTC to seek allowance of its professional fees and costs as a general unsecured claim as a “Class 1F Other Parent Claim” under the Plan.

Throughout the case, WTC submitted requests for payment of professional fees and expenses from the bankruptcy estate and was paid on certain of such claims, including (i) a paid claim for fees and expenses incurred as a member of the Official Committee of Unsecured Creditors, (ii) a paid claim for its work in obtaining a court-appointed examiner as a substantial contribution, and (iii) a remaining general unsecured claim for fees and expenses in the amount $29,790,038.61 (the “WTC Fee Claim”).  If the WTC Fee Claim was allowed as a Class 1F Other Parent Claim under the Plan, WTC would receive a cash payment equal to 32.73% in the amount of $9,750,279.64.

The Reorganized Debtors objected to the WTC Fee Claim and it was negotiated, mediated, and litigated up to the Third Circuit and back.  In 2015, Judge Carey sustained the Reorganized Debtors’ objection to the WTC Fee Claim, deciding as a matter of law that an unsecured creditor cannot recover postpetition attorney fees and costs as part of its allowed claim against a bankruptcy estate.  On appeal, the District Court reversed, noting that all of the appellate courts considering the issue since the United States Supreme Court 2007 opinion in Travelers[1] have “‘unanimously rejected [Tribune’s] position and have allowed unsecured claims for contractual attorneys’ fees that accrued post-filing of the bankruptcy petition.’”[2]  The matter came before Judge Shannon on remand from the District Court.

The Plan defined “General Unsecured Claims” to include “any Allowed Claim by [WTC] for fees and expenses arising under Section 6.07 of the PHONES Indenture.”  WTC’s right to payment of professional fees and costs were governed by the PHONES Indenture.  Section 6.07 of the PHONE Indenture provides that Tribune will “reimburse the Trustee . . . for all reasonable expenses, disbursements and advances incurred or made by the Trustee in accordance with any provision of this Indenture (including reasonable compensation and the expenses and disbursements of its agents and counsel).”  Two PHONES noteholders agreed to pay WTC up to $3 million for professional fees and expenses related to WTC’s exercise of rights under the PHONES Indenture.  WTC had only paid that $3 million to its professionals and—pursuant to the terms of the engagement agreement with counsel—was not obligated to pay any further amount.  Thus, the Reorganized Debtors argued that WTC had not incurred the professional fees and expenses that make up the remainder of the WTC Fee Claim because WTC had no obligation to pay those amounts under the engagement letter.  Accordingly, the Reorganized Debtors asserted that the WTC Fee Claim should be limited to reimbursement of the $3 million of professional fees that WTC actually incurred.

Judge Shannon agreed with the Reorganized Debtors and held that the PHONES Indenture does not require Tribune to reimburse WTC for amounts that WTC is not obligated to pay (i.e., amounts that were not incurred).  In his analysis, Judge Shannon noted that other courts have looked to Black’s Law Dictionary to determine the definition of the word “incurred” and “have concluded that to ‘incur’ means to ‘suffer or bring on oneself,’ as in a ‘liability or expense,’ and . . . this definition does not ‘leave any room for debate on this proposition: one who has ‘incurred’ an expense is liable for it.’”[3]  The White court concluded that “[a]bsent a demonstration that White is obligated to reimburse his attorney for the time spent in preparing and arguing the motion, he is not entitled to relief under Rule 37(a)(5)(A).”[4]  Because the PHONES Indenture only required Tribune to reimburse WTC for fees and costs that were incurred, and WTC’s letter agreement with counsel made clear that WTC was not responsible to pay any professional fees and costs greater than the amount paid by the Noteholders, Judge Shannon limited WTC’s general unsecured claim to $3 million—the amount actually incurred by WTC.

[1] Travelers Cas. & Surety Co. v. Pacific Gas & Elec. Co., 549 U.S. 443 (2007).

[2] In re Tribune Media Co., 2018 WL 6167504, *2 (D. Del. Nov. 26, 2018).

[3] White v. Larusch, 2021 WL 1263885, *3 (W.D.N.Y. Apr. 5, 2021) (quoting In re Dawes, 652 F.3d 1236, 1239 (10th Cir. 2011) (emphasis in original).

[4] White, 2021 WL 1263885 at *4.

A copy of the opinion can be found here.