Sixth Circuit Enforces a ‘Carveout’ for Professionals after Conversion to Chapter 7

The Sixth Circuit nixed a plethora of arguments advanced by secured lenders aiming to nullify a cash collateral carveout to which the lender had agreed on several occasions before conversion to chapter 7. In his December 28 opinion, Circuit Judge Gilbert S. Merritt, Jr. explained that the appeal was an effort by the lenders “to renegotiate the terms of the cash collateral order because payment of the $2.5 million in professional fees substantially impacts what they will recover under their already-diminished-in-value prepetition liens.” In a final cash collateral order in the chapter 11 case, the lenders agreed to a carveout allowing the use of some of their cash collateral to pay fees earned by counsel for the debtor and the official creditors’ committee. When it became clear that confirming a plan was impossible, the lenders filed a conversion motion but agreed to the selling of assets in chapter 11. They also confirmed that cash collateral budgets would be modified to ensure payment to professionals working on the sales. After conversion to chapter 7, counsel for the debtor and the committee filed fee applications seeking payment from the $2.5 million carveout. Over the lenders’ objection, Chief Bankruptcy Judge Tracey N. Wise of Ashland, Ky., allowed the fees and directed payment from the lenders’ cash collateral. The lenders appealed to the district court and lost. Ruling on the lenders’ second appeal to the Sixth Circuit, Judge Merritt upheld the lower courts, describing the cash collateral order as containing a typically comprehensive cash collateral carveout for professionals to remain binding in chapter 7 by its terms.

If you filed a chapter 7 bankruptcy, look into filling IRS form 982 When you…

BEWARE OF USING MONEY FROM YOUR IRA OR 401(K) TO PAY DEBTS This can be…

How to Spot Student Loan Scams. Things you can do to protect yourself. “Enroll now…