UNITED STATES BANKRUPTCY COURT DISTRICT OF NEW HAMPSHIRE

Transcription

1 Case: JMD Doc #: 145 Filed: 10/27/11 Desc: Main Document Page 1 of 7 UNITED STATES BANKRUPTCY COURT DISTRICT OF NEW HAMPSHIRE In re: Kingsbury Corporation, Donson Group, Ltd., and Ventura Industries, LLC, Debtors Chapter 11 Case No JMD Case No JMD Case No JMD Jointly Administered Hearing: 10/31/11 at 9:30 a.m. UNITED STATES TRUSTEE S OBJECTION TO APPLICATION FOR ORDER AUTHORIZING RETENTION AND EMPLOYMENT OF DONNELLY PENMAN & PARTNERS AS INVESTMENT BANKER FOR KINGSBURY CORPORATION To the Honorable J. Michael Deasy, United States Bankruptcy Judge: Pursuant to 28 U.S.C. 586, 11 U.S.C. 327, 328, and Fed. R. Bankr. P. 2014, William K. Harrington, the United States Trustee for Region 1 ( United States Trustee ) objects to the Application for Order Authorizing the Retention and Employment of Donnelly Penman & Partners as Investment Banker for Kingsbury Corporation ( Application to Employ ). In support of his objection, the United States Trustee respectfully submits as follows: I. PROCEDURAL STATUS 1. On September 30, 2011, Kingsbury Corporation and Ventura Industries, LLC filed voluntary chapter 11 petitions with the Court. Donson Group, Ltd. filed a voluntary chapter 11 petition on October 3, The cases of the above-captioned debtors are jointly administered pursuant to an order entered by the Court on October 6, Kingsbury Corporation ( Debtor ) filed the Application to Employ on October 24, 2011, seeking to retain Donnelly Penman & Partners ( DP&P ) as an

2 Case: JMD Doc #: 145 Filed: 10/27/11 Desc: Main Document Page 2 of 7 investment banker to analyze, prepare and package financial information necessary to package and market the Debtor s assets for a potential sale and to identify, communicate and negotiate with potential purchasers. Application, The Debtor requests authority to pay DP&P non-refundable cash advisory fees of $17,500 upon approval of the retention agreement and $17,500 on the first day of each month thereafter. Application, 10(b). 5. In addition, the Debtor seeks authority to pay DP&P a minimum transaction fee of $250,000, payable in cash at closing on the sale of the Debtor s business assets. Application, 10(a),(b). 6. The proposed retention agreement for which the Debtor seeks approval contains an indemnification clause insulating DP&P from claims arising from its own breach of contract, arguably limiting DP&Ps liability to fees paid, and disclaiming the imposition of fiduciary obligations on DP&P. Id., Exhibit A. II. APPLICABLE LEGAL STANDARDS 7. Pursuant to 11 U.S.C. 328(a), a debtor with the court s approval, may employ or authorize the employment of a professional person under section 327 on any reasonable terms and conditions of employment. 11 U.S.C. 328(a). 8. The burden of establishing that the proposed terms and conditions of employment are reasonable rests with the moving party, and evidence, not conclusory statements, is required to satisfy that burden. In re High Voltage Eng g Corp., 311 B.R. 320, 333 (Bankr. D. Mass. 2004). See also In re C & P Auto Transp., Inc., 94 B.R. 682, 2

3 Case: JMD Doc #: 145 Filed: 10/27/11 Desc: Main Document Page 3 of (Bankr. E.D. Cal. 1988); In re Westbrooks, 202 B.R. 520, 523 (Bankr. N.D. Ala. 1996). The court must be persuaded that the terms and conditions are in the interest of the estate. The decision is a matter of discretion and is made against the background of the statutory compensation scheme of sections 330 and 331, which scheme is, as a matter of law, reasonable. In re C & P Auto Transp., Inc., 94 B.R. at Factors considered in the determination of whether employment should be approved subject to 11 U.S.C. 328(a) include the following: (1) whether terms of an engagement agreement reflect normal business terms in the marketplace; (2) the relationship between the Debtor and the professionals, i.e., whether the parties involved are sophisticated business entities with equal bargaining power who engaged in an arms-length negotiation; (3) whether the retention, as proposed, is in the best interests of the estate; (4) whether there is creditor opposition to the retention and retainer provisions; and (5) whether, given the size, circumstances and posture of the case, the amount of the retainer is itself reasonable, including whether the retainer provides the appropriate level of risk minimization, especially in light of the existence of any other risk-minimizing devices, such as an administrative order and/or a carve-out. In re High Voltage Eng g Corp., 311 B.R. at (quoting In re Insilco Tech., Inc., 291 B.R. 628, (Bankr. D. Del. 2003)). 10. Other pertinent criteria include: the scope and complexity of the assignment, its anticipated duration, expected results, required resources, the extent to which highly specialized skills may be needed and the extent to which they have them or may have to obtain them, projected salaries of participating professionals, billing rates and prevailing fees for comparable engagements, current retentions in bankruptcy by the retained firm, and any estimated lost opportunity costs due to time exigencies of the job. In re High Voltage Eng g Corp. 311 B.R. at (quoting In re Drexel Burnham Lambert Group, Inc., 133 B.R. 13, 27 (Bankr. S.D. N.Y. 1991)). 3

4 Case: JMD Doc #: 145 Filed: 10/27/11 Desc: Main Document Page 4 of 7 III. ARGUMENT A. The Debtor Has Not Demonstrated That the Proposed Employment Terms are Reasonable. 11. The Debtor bears the burden of demonstrating that the proposed terms of employment are reasonable. In re High Voltage Eng g Corp., 311 B.R. at 333; In re C & P Auto Transp., Inc., 94 B.R. 682 at 686. The United States Trustee objects that the Debtor has not met this burden with regard to the proposed terms and conditions of DP&P s employment. i. Pre-Approval of Fixed, Non-Refundable Fees and Superpriority Status 12. The United States Trustee objects to the proposed payment terms to the extent they: (1) provide for the pre-approval of fixed fees under 11 U.S.C. 328(a); (2) characterize such fees as non-refundable; and (3) provide for payment of fees ahead of other administrative and priority claims. No payments should be made to DP&P from the estate absent the filing and approval of an appropriate fee application under 11 U.S.C. 330, and any fees requested should be subject to a holdback and/or disgorgement until all other administrative expenses are paid. 13. The Debtor has not demonstrated that the pre-approval of minimum transaction fees of $250,000, and fixed advisory fees of $17,500 per month, is reasonable or appropriate under the circumstances of the case. The Debtor makes no effort to address the multiple factors considered by bankruptcy courts in determining the propriety of such pre-approved employment terms under 11 U.S.C. 328(a). See e.g. In re High Voltage Eng g Corp., 311 B.R. 320, 333 (Bankr. D. Mass. 2004) and cases cited therein. See also 4

5 Case: JMD Doc #: 145 Filed: 10/27/11 Desc: Main Document Page 5 of 7 In re Gillett Holdings, Inc., 137 B.R. 452, 459 (Bankr. D. Colo. 1991)(holding preapproval of fixed, automatic success fee coupled with fixed contracted-for monthly fee to be speculative and premature). 14. Further, the Debtor s treatment of DP&P s fees as non-refundable and its payment of fees to DP&P at closing ahead of other administrative and priority claimants violate the priorities established by the Bankruptcy Code. DP&P should be paid pro rata along with other administrative expenses, and only after the filing and allowance of an appropriate fee application under 11 U.S.C Professionals seeking compensation from the bankruptcy estate do so at the risk that the estate will not have sufficient funds to satisfy their claims. To hold otherwise would be to ignore the plain language of 726(b) and to unjustly award certain administrative claims of professionals a superpriority status that is not mandated by the Code. In re Kearing, 170 B.R. 1, 8 (Bankr. D. D.C. 1994). ii. Indemnification and Limitation of Liability 15. The United States Trustee objects to the indemnification provisions of the retention agreement to the extent they insulate DP&P from claims arising from its own breach of contract, and to the extent they attempt to limit DP&P s liability to fees paid. See Application, Exhibit A, Addendum A. Such terms are unreasonable and should not be approved in the present case. See, e.g., In re United Artists Theatre Co., 315 F.3d 271, 234 (3d. Cir. 2003)(invalidating portion of indemnity provision in retention agreement that extended to protection for breach of contractual obligations, as hardly an indemnityeligible activity ); and In re Glosser Bros., Inc., 102 B.R. 38, 42 (Bankr. W.D. Pa. 5

6 Case: JMD Doc #: 145 Filed: 10/27/11 Desc: Main Document Page 6 of )(denying approval of indemnification provision that limited liability to the amount of fees paid). 16. The United States Trustee also objects to the provision of the retention agreement that disclaims the imposition of fiduciary obligations on DP&P. See Application, Exhibit A-1 at 6(d). To the extent the DP&P contends it is not a fiduciary, such protections are unnecessary. To the extent the estate may argue fiduciary duties exist [see, e.g., In re Gillett Holdings, 137 B.R. at 458 ( Investment bankers and financial advisors hired by the Debtor are also fiduciaries. ), and In re Allegheny Int l, Inc., 100 B.R. 244, 246 (Bankr. W.D. Pa. 1989)( We now hold that the investment bankers/financial advisors hired by the debtor and the Creditors Committee are also fiduciaries )], the advance waiver of any potential claims as a term of employment is inappropriate. See, e.g., In re Allegheny Int l, Inc., 100 B.R. at (denying indemnification for breach of fiduciary duty). IV. CONCLUSION The Debtor has not met its burden under 11 U.S.C. 328 of demonstrating that the terms and conditions of the proposed employment are fair, reasonable or in the best interests of creditors. The Application to Employ DP&P should therefore be denied. WHEREFORE, the United States Trustee submits this Objection to the Application for Order Authorizing the Retention and Employment of DP&P as Investment Banker for 6

7 Case: JMD Doc #: 145 Filed: 10/27/11 Desc: Main Document Page 7 of 7 Kingsbury Corporation. Respectfully submitted, WILLIAM K. HARRINGTON, UNITED STATES TRUSTEE Dated: October 27, 2011 By: /s/ Ann Marie Dirsa Ann Marie Dirsa BNH# Office of the United States Trustee 1000 Elm Street, Suite 605 Manchester, NH (603) CERTIFICATE OF SERVICE I hereby certify that on this October 27, 2011, I caused to be served a copy of the foregoing by ECF/CM to: Christopher J. Allwarden Fred W. Bopp Joseph A. Foster Honor S. Heath Robert J. Keach Jessica A. Lewis Marc S. Pfeuffer Steven C. Reingold Jennifer Rood Peter C.L. Roth Daniel W. Sklar Mary T. Sullivan Mark F. Weaver /s/ Ann Marie Dirsa Ann Marie Dirsa 7