So What Does a Bankruptcy Carve-Out Clause Really Mean? Delaware Bankruptcy Court Concludes It is Not a Cap on Fees After All

Murtha Cullina

In chapter 11 bankruptcy cases, it is not uncommon for secured parties/lenders to provide a “carve-out” for various professional fees.  Frequently there may be a “carve-out” for “all chapter 11 professionals” or the “carve-out” may be broken out in different amounts for the debtor’s professionals as opposed to, for example, Creditors’ Committee professionals.  These “carve-outs” can often be in a Cash Collateral Order (assuming the debtor is using the secured party’s collateral) or in a DIP Order (debtor-in-possession financing). So what does a carve-out mean?

In a recent Delaware bankruptcy case, In re Molycorp, Inc., 2017 WL 56703 (Bankr. Del. Jan. 5, 2017), the DIP Lender agreed to a $250,000 “carve-out” for the fees and expenses of the professionals retained by the Creditors’ Committee.  The Committee professionals filed a fee application far in excess of the “carve-out” amount, and as a result the DIP Lender objected to the fee application.

In overruling the objection, the Bankruptcy Judge concluded that the language in the DIP Order was not a “cap” on allowed fees.  Moreover, the Judge distinguished the current case, which was a successful reorganization, from a failed reorganization.  Had the case been a failed chapter 11, then the Judge agreed that the “carve-out” presented a limitation on how much money the Committee professionals would be entitled to out of the Lender’s collateral or money, but not so, at least not as written, in a successful reorganization.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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