911 F.3d 806
6th Cir.2018Background
- Debtors: U.S. Coal (parent) and Licking River Mining (operator in eastern Kentucky) entered Chapter 11; Lenders (East Coast Miner LLC, East Coast Miner II LLC, Keith Goggin, Michael Goodwin) held prepetition blanket liens including on cash collateral.
- Parties negotiated and the bankruptcy court approved a Final Cash Collateral Order granting the Lenders superpriority and adequate protection liens but containing a carved-out priority payment (“Carve-Out”) for professionals’ fees.
- Debtor could not reorganize; cash-collateral use continued for asset sales with the Lenders’ acquiescence until conversion to Chapter 7 on April 24, 2015.
- After conversion, professionals submitted final fee applications (~$2.5 million) seeking payment from the Carve-Out; Lenders objected, arguing the Carve-Out could not be funded from prepetition collateral/post-conversion estate assets.
- Bankruptcy court overruled Lenders’ objections (and district court affirmed); Sixth Circuit reviews the bankruptcy court’s interpretation of its own order with deference on order interpretation but applies de novo review to any underlying statutory questions.
Issues
| Issue | Lenders' Argument | Professionals/Debtors' Argument | Held |
|---|---|---|---|
| Whether the Carve-Out permits payment of professionals from prepetition cash collateral after conversion to Chapter 7 | Carve-Out cannot be funded from prepetition liens or post-conversion estate property; priority rules of the Code require secured creditors be paid before unsecured professionals | Carve-Out language and order text make professionals’ fees payable from cash collateral and survive conversion; parties agreed Lenders’ liens are subordinate to Carve-Out | Court held Carve-Out covers fees allowed at any time and survives conversion; professionals may be paid from cash collateral tied to Lenders’ prepetition liens |
| Whether the Carve-Out is limited to payments from adequate-protection/postpetition liens only | Paragraph structure shows Carve-Out funds should come from adequate-protection/postpetition sources, not prepetition liens | The order expressly makes Lenders’ claims, liens, rights, and benefits subject and subordinate to the Carve-Out; entire order construed as integrated document | Court rejected Lenders’ reading as inconsistent with whole-order language and contract principles |
| Whether Bankruptcy Code prohibits parties from contracting to pay professionals ahead of secured creditors | Code priorities apply to distributions of estate property, but creditors may contract to transfer nonestate property or otherwise allocate proceeds; Code does not bar Lenders’ voluntary carve-outs | Carve-Out is a contractual allocation; nothing in Code forbids Lenders from consenting to use of their collateral to pay professionals | Court held Code does not prevent enforcement of agreed carve-out; Lenders cannot undo agreed allocation post hoc |
| Whether Lenders’ conduct during proceedings affects interpretation | N/A (argument) | Lenders previously represented they consented to use of collateral to fund costs and carve-out and reaffirmed support during asset sales | Court relied on Lenders’ prior statements and conduct as confirming intent that prepetition collateral fund Carve-Out |
Key Cases Cited
- McMillan v. LTV Steel, Inc., 555 F.3d 218 (6th Cir.) (direct appellate review of bankruptcy-court order; deference rules)
- Terex Corp. v. Metro. Life Ins. Co. (In re Terex Corp.), 984 F.2d 170 (6th Cir.) (standard: nature of action below determines review)
- Dow Corning Corp. v. [sic] (In re Dow Corning Corp.), 456 F.3d 668 (6th Cir.) (cash-collateral orders construed as integrated contracts)
- Enodis Corp. v. Emp’rs Ins. of Wausau (In re Consol. Indus. Corp.), 360 F.3d 712 (7th Cir.) (deference where bankruptcy court interprets its own prior orders)
- Harper v. The Oversight Comm. (In re Conoco, Inc.), 855 F.3d 703 (6th Cir.) (interpretation of bankruptcy orders; deference principles)
- In re Nuclear Imaging Sys., Inc., 270 B.R. 365 (Bankr. E.D. Pa.) (carve-outs enforceable post-conversion; professionals’ protection rationale)