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Houlihan Lokey Howard & Zukin Capital v. High River Limited Partnership

April 20, 2007


The opinion of the court was delivered by: Barbara S. Jones United States District Judge


Appellant Houlihan Lokey Howard & Zukin Capital ("Houlihan") appeals from the March 9, 2005 Memorandum Decision of U.S. Bankruptcy Judge Arthur J. Gonzalez awarding Houlihan approximately $4 million in fees related to financial restructuring services it provided to Appellee XO Communications ("XO"), less approximately $2 million in monthly payments already paid, for a net fee award of approximately $2 million. For the reasons stated herein, the decision of the Bankruptcy Court is AFFIRMED.*fn1

Background & Procedural History

XO is a holding company whose subsidiaries provide telecommunications services. In the years prior to 2002, XO raised approximately $2.5 billion in equity capital through stock offerings, and it incurred approximately $5.7 billion in secured and unsecured debt. Houlihan is an investment banking firm which engages in financial restructuring services and other lines of business. High River Limited Partnership and Meadow Walk Limited Partnership (the "Icahn Entities") are affiliates of Carl Icahn. The Icahn Entities, also Appellees in this action, held substantial quantities of XO's unsecured debt and eventually purchased approximately 85% of the secured lenders' claims against XO.

XO, along with much of the telecommunications industry, encountered severe financial difficulties in 2001. On October 31, 2001, XO countersigned a letter (the "Engagement Letter") pursuant to which Houlihan agreed to serve as XO's restructuring financial advisor. (Houlihan App. 2.) The Engagement Letter provided that Houlihan was to be paid a monthly fee of $250,000 and, in the event that certain restructuring transactions occurred, a transaction fee calculated as a percentage of XO's outstanding debt, reduced by the total amount of monthly fees. (See id.) The Engagement Letter also provided that, if XO became a Chapter 11 debtor, XO would seek an order authorizing Houlihan as a professional under Section 328(a) of the Bankruptcy Code. Houlihan attempted without success to secure the capital necessary to complete the restructuring transactions, and on June 17, 2002, XO filed a Chapter 11 petition.

That same day, XO moved for permission to retain Houlihan as its financial restructuring advisor, as it had agreed in the Engagement Letter. The Bankruptcy Court approved this petition by order entered August 14, 2002 (the "Retention Order") (See Houlihan App. 9.) XO also filed a proposed plan of reorganization that day. The plan addressed two different possible outcomes: the consummation of a restructuring transaction involving the influx of new capital from certain investors ("Plan A"), or the implementation of a stand-alone restructuring without raising any additional capital ("Plan B"). Plan A was significantly more favorable to both the secured and unsecured creditors than Plan B. Under Plan A, each of the secured creditors would recover 100 cents on the dollar, and each of the unsecured creditors would receive its pro rata share of approximately $200 million, or approximately 8.5 cents on the dollar. Under Plan B -- the plan that was eventually consummated -- secured creditors were to receive only around 88 cents on the dollar, and unsecured creditors were to receive their pro rata share of certain warrants and nontransferable rights worth only 1.5 cents on the dollar. This represented a reduction in value for unsecured creditors of more than 80%. The Retention Order modified the Engagement Letter with regard to Houlihan's fee, granting Houlihan a transaction fee of $20 million if Plan A were consummated, and deferring decision as to the appropriate fee amount if Plan B were consummated. The Bankruptcy Court never confirmed a specific fee for Plan B --instead, the reasonableness of a fee for Plan B was to be determined at a subsequent hearing. By the time the Bankruptcy Court issued the Retention Order, there was no "realistic expectation" that the new financing contemplated under Plan A would actually take place. (Icahn App. 4, Begeman Dep. 245-46; see Icahn App. 5, Kraus Dep. 286; Icahn App. 6, Horbach Dep. 47-52; Mem. Decision 21 & n.15.) Plan A was neither confirmed nor consummated. After amendments, Plan B was confirmed by the Bankruptcy Court on November 15, 2002 and consummated in mid-January 2003.*fn2

On February 20, 2003, Houlihan filed its First and Final Application for the Allowance of Compensation and Reimbursement of Expenses (the "Fee Application"). (See Houlihan App. 21.) Houlihan sought a net payment of approximately $18 million, arguing that it was owed a percentage of the total outstanding debt of $5.7 billion, which included both secured and unsecured debt, less approximately $2 million in monthly fees already paid. (See Id.) The Icahn Entities filed an objection to the Fee Application on April 4, 2003. (See Icahn App. 22.) XO, which by this time was owned by the Icahn Entities, joined in that objection. (See Icahn App. 23.) The Bankruptcy Court held a hearing about the Fee Application on June 13, 16 and July 7, 2003. The Bankruptcy Court heard live testimony from three witnesses and reviewed three depositions and various exhibits. The Bankruptcy Court issued a Memorandum Decision on March 9, 2005 and an Order on March 21, 2005 approving a gross transaction fee of approximately $4 million. The Bankruptcy Court employed a fee rate of 40 basis points on XO's secured debt of approximately $1 billion, less the $2 million in monthly fees already paid, for a net transaction fee of approximately $2 million. Houlihan filed a timely motion for reconsideration on March 31, 2005, which the Bankruptcy Court denied by order entered May 13, 2005. Houlihan filed a timely notice of appeal on May 23, 2005.


I. Standard of Review

This Court reviews a bankruptcy court's conclusions of law de novo and its findings of fact under a clearly erroneous standard. In re Ionosphere Clubs, Inc., 922 F.2d 984, 988-89 (2d Cir. 1990); Enron Power Mktg. v. Nev. Power Co. (In re: Enron Corp.), 2004 U.S. Dist. LEXIS 20351, at *2 (S.D.N.Y. 2004) (Jones, J.). The Court will accept a bankruptcy court's findings of fact unless the Court is "left with the definite and firm conviction that a mistake has been committed." In re Schubert, 143 B.R. 337, 341 (S.D.N.Y. 1992). Reversal is only justified where "there is no evidence whatsoever to sustain [the bankruptcy court's] findings . . . ." In re Nine Associates, Inc., 76 B.R. 943, 944 (S.D.N.Y. 1987). A bankruptcy court's decision with regard to compensation for services performed during bankruptcy proceedings deserves great deference. Tenzer Greenblatt, LLP v. Silverman (In re Angelika Films 57th, Inc.), 246 B.R. 176, 178 (S.D.N.Y. 2000). Accordingly, this Court reviews awards of compensation for abuse of discretion. See In re Arlan's Dep't Stores, Inc., 615 F.2d 925, 943 (2d Cir. 1979).

II. The Market-Driven Approach to Fee Awards

A. Applicable Law

The parties and the Court agree that the Second Circuit has established a "market-driven" approach to fees awarded to professionals under the controlling statute at issue here, Section 330 of the Bankruptcy Code.*fn3 In re Ames Dept. Stores, Inc. 76 F.3d 66, 71 (2d Cir. 1996) (Congress decided that "compensation in bankruptcy matters [is to] be commensurate with the fees awarded for comparable services in non-bankruptcy cases"), rev'd in irrelevant part Lamie v. United States, 540 U.S. 526 (2004); In re Bennett Funding Group, Inc., 213 B.R. 234, 250 (Bankr. N.D.N.Y. 1997) (same). The applicant --Houlihan -- bears the burden of proof on its claim for

(A) reasonable compensation for actual, necessary services rendered by the . . . professional person . . . .; and

(B) reimbursement for actual, necessary expenses.

(2) The court may . . . award compensation that is less than the amount of compensation that is requested.

(3) In determining the amount of reasonable compensation to be awarded to . . . [a] professional person, the court shall consider the nature, the extent, and the value of such services, taking into account all relevant factors, including--

(A) the time spent on such services;

(B) the rates charged for such ...

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