Allegiance Coal USA Limited

IN THE UNITED STATES BANKRUPTCY COURT

FOR THE DISTRICT OF DELAWARE

Chapter 11

In re:

Case No. 23-10234 (CTG)

ALLEGIANCE COAL USA LIMITED, et

al.,

(Jointly Administered)

Debtors. Related Docket Nos. 372, 693-696, 698

AMENDED MEMORANDUM OPINION

The debtors were coal mine operators. The debtors’ relationship with its

prepetition secured lender, Collins St, has been highly contentious. And these

chapter 11 cases have not been successful.1 The debtors were unable either to

reorganize their business or find a going-concern buyer. In the end, the proceeds from

the liquidation of the debtors’ mining equipment brought in less than the cost of

administering the estate in bankruptcy. As a result, the cases are administratively

insolvent.

The Court entered an order providing for the dismissal of the case, with the

remaining cash to be distributed in accordance with the statutory waterfall.2 The

Court previously ruled, in an adversary proceeding brought by Collins St, that the

fees owed to the estate professionals that fall within the carve out to the DIP loan –

not the fees owed to Collins St’s counsel – are at the top of that waterfall. The cash

1 Collins St Convertible Notes Pty Ltd, as trustee for The Collins St Convertible Notes Fund

and in its capacity as both the DIP Lender and Prepetition Noteholder, is referred to as

“Collins St”.

2 D.I. 687.

in the estate, however, is insufficient to pay the estate professionals’ fees in full even

if they are allowed.

Collins St has objected to the allowance of those fees. Collins St’s principal

argument is that the DIP Order permitted the debtors to make payments only as set

forth in an agreed budget. And while the agreed budget contains an accrual of

professional fees, the amount it shows as actually being paid on those fees is zero.

Collins St therefore says that no amount may be paid in professional fees.

The debtors argue that Collins St is precluded from making that argument

because it was or could have been decided in the adversary proceeding. The Court

disagrees and will consider Collins St’s argument on its merits. But on its merits,

the Court rejects the argument. Relying only on the language of the DIP Order, and

not on extrinsic evidence, the absence of any amount being shown as cash to be paid

to estate professionals in any budget period means only that company’s cash could

not be used to pay professionals in the period in question. The DIP Order is otherwise

clear, however, that the repayment of the DIP loan is subordinated to the payment of

amounts protected by the carve out, which includes the professional fees shown as

being accrued.3 Accordingly, at this stage of the case, when the only remaining issue

is to address fee applications and close the case, the DIP Order does not preclude the

payment of professional fees.

Alternatively, even if the Court were to consider extrinsic evidence in

construing the DIP Order, the Court would conclude that the parties’ agreement was

3 D.I. 308 ¶ 17.

that the estate professionals would be paid at the end of case, to the extent the debtors

then had sufficient cash, up to the amounts protected by the carve out.

Finally, the Court is satisfied that the amounts sought by the estate

professionals are for fees and expenses that are “reasonable compensation for actual,

necessary services” within the meaning of § 330 of the Bankruptcy Code.4

Factual and Procedural Background

These bankruptcy cases were filed on February 21, 2023.5 They began with a

contested hearing, held on February 23, 2023, over the debtors’ use of cash collateral.

Payroll was due on the next day.6 Based on the evidence presented at that first-day

hearing, the Court concluded that the debtors had demonstrated that they were able

to provide adequate protection to Collins St sufficient to permit the debtors to use

cash collateral for nine days – until March 4, 2023.7

The parties thereafter agreed to extend the debtors’ right to use cash

collateral.8 Ultimately, Court entered agreed orders, first on an interim and then on

a final basis, under which Collins St first consented to the use of cash collateral and

4 On May 7, 2024, the Court conducted an evidentiary hearing on the fee applications. On

May 10, 2024, the Court issued a bench ruling in which it determined it would allow the fees

in question. That bench ruling was incorporated into an order [D.I. 734] entered on May 20,

2024. On May 31, 2024, Collins St filed a notice of appeal from that order. [D.I. 741].

Pursuant to this Court’s Local Rule 8003-2, this Court issues this Memorandum Opinion to

supplement the Court’s bench ruling.

5 D.I. 1.

6 Feb. 23, 2023 Hr’g Tr. at 6.

7 D.I. 27 (authorizing the use of cash collateral through March 4, 2023 and granting Collins

St replacement liens as adequate protection).

8 D.I. 56, 150, 297.

later agreed to provide post-petition financing.9 The terms of the final DIP Order

were heavily negotiated between the parties.

The present dispute between the parties turns, at least in part, on the terms

of that order. It bears note that by the time the Court entered the final DIP Order in

May 2023, it was clear that the debtors’ bankruptcy case was faring poorly.10 The

debtors were not going to be able to reach a going concern sale, the mines had been

scaled down to care and maintenance mode, and most of the employees had been laid

off. The agreed DIP loan was intended to provide the debtors with the financing

necessary to conduct an orderly liquidation.11

The debtors were able to realize some value from the sale of some mining

equipment.12 Once the debtors had liquidated those assets for which they were able

to find a buyer, the debtors moved to dismiss the bankruptcy.13 The motion to dismiss

proposed the payment of all administrative claims that were subject to the carve out

in the DIP Order, with the return of any remaining value to Collins St, followed by

the dismissal of the case.

A week later, Collins St filed an adversary proceeding. In that action, it sought

a declaration that its own fees, which it was entitled to recover under the terms of

9 D.I. 283 (interim DIP Order), 308 (final DIP Order).

10 May 7, 2024 Hr’g Tr. at 58 (Collins St’s financial advisor testified that, at the time of the

DIP loan, “we just want to fund the minimum amount to allow for the completion of that sale

process and then make a call on where we go from there.”).

11 Id.

12 Id. at 79.

13 D.I. 614.

the DIP loan, had priority over those of the estate professionals who are the

beneficiaries of the DIP loan’s carve out.14 And in an opposition to the debtors’ motion

to dismiss the bankruptcy, Collins St’s principal argument was the one advanced in

its adversary proceeding. It said that while it was not opposed to a dismissal of the

bankruptcy case, the distribution of proceeds should reflect the order of priority

required under the theory advanced in its adversary proceeding, with the payment of

its fees and expenses coming ahead of the carve out.15

In their reply, the debtors argued that Collins St’s adversary proceeding was

meritless, and in any event urged the Court effectively to moot the dispute by

granting its motion to dismiss.16 In its sur-reply, Collins St reiterated that it “did not

oppose dismissal of these cases as long as the claims asserted in the Adversary

Proceeding are resolved by the Court prior to entry of the Final Dismissal Order.”17

The Court concluded that Collins St was entitled to the opportunity to be heard

on its adversary proceeding before permitting funds to be distributed in a manner

that would effectively moot Collins St’s case. The Court accordingly made the

following entry on its docket:

The Court heard argument today on the debtor’s motion to dismiss the

bankruptcy case [D.I. 614]. That motion sought the entry of an interim

dismissal order that would, among other things, establish procedures for

considering final fee applications, followed by the subsequent entry of

14 Collins St Convertible Notes Pty Ltd v. Allegiance Coal USA Ltd, et al., Bankr. D. Del. Adv.

Proc. No. 24-50016 (CTG), D.I. 1 (Feb. 14, 2024). Citations to materials on the docket of this

adversary proceeding are cited as “Adv. Proc. No. 24-50016, D.I. __.”

15 D.I. 623.

16 D.I. 644.

17 D.I. 662.

an order providing for the dismissal of the bankruptcy case. For the

reasons set forth on the record, the Court determined that it would not

enter the interim order sought by the motion, as such relief would

effectively moot the claims asserted by Collins St., as plaintiff, in the

adversary proceeding docketed as Adv. Proc. No. 24-50016. The Court

accordingly set a briefing schedule on a motion to dismiss the adversary

proceeding under which the motion will be fully briefed by March 27,

2024. If the Court grants the motion to dismiss the adversary

proceeding, it will take up the motion to dismiss the bankruptcy at a

hearing set for April 2, 2024 at 2:00 pm. If the Court denies the motion

to dismiss the adversary proceeding, the hearing on April 2, 2024 at 2:00

will go forward as a status conference in both the adversary proceeding

and the main bankruptcy case.18

On March 28, 2024, the Court issued a letter ruling indicating that it would

grant the debtors’ motion to dismiss the adversary proceeding. The Court concluded

as a matter of law, based on the language of the order approving the DIP financing,

that obligations that fell within the carve out to the DIP lien were effectively the

senior-most obligations in the debtors’ capital structure. Nothing in paragraph 10 of

the DIP Order, the Court concluded, rendered the obligation to pay Collins St’s

attorneys’ fees senior in priority to the obligations that were protected by the carve

out.19

It is true that paragraph 10 required the debtors to pay Collins St’s fees. But

the fact that the order created such an obligation does not say anything about the

priority of that obligation. As the letter opinion explained, “[s]tanding alone,

language in a court order requiring a debtor to pay creates a post-petition obligation

of the debtor that is entitled to administrative priority. To the extent the obligation

18 D.I. 668.

19 Adv. Proc. No. 24-50016, D.I. 20.

to pay these fees also fall within the grant of super-priority status under § 364(c)(i)

or are secured by the DIP liens (a point the parties here dispute), they would be

entitled to a still higher level of priority.”20 But the protections afforded to a DIP

lender in a post-petition lien and superpriority claim are the greatest protections

contemplated by the Bankruptcy Code. Accordingly, claims that are “carved out”

from the DIP lien are the very first obligations paid out of a bankruptcy estate.

Because nothing in paragraph 10 of the DIP Order could conceivably be read to

suggest that the obligation to pay Collins St’s fees came ahead of the carve out, the

Court granted the debtors’ motion to dismiss the adversary proceeding.21 That order

has since become final and non-appealable.

After dismissing the adversary, the Court then entered an initial dismissal

order, dated April 8, 2024, that provided a mechanism for the filing of final fee

applications and objections thereto and set a final hearing with respect to dismissal

of the case for May 7, 2024.22 The order made clear that it did not

affect (a) the rights of [Collins St] to object to any of the Final Fee

Applications on any grounds and to seek (i) the disallowance of the

Retained Professionals’ fees and expenses, (ii) a prohibition against the

Debtors from making any payments to the Retained Professionals, and

(iii) the disgorgement of any fees and expenses the Debtors have already

paid the Retained Professionals, or (b) the Debtors’ and the Committee’s,

and their professionals’, rights, remedies, defenses, counterclaims, or

claims.23

20 Id. at 10.

21 Adv. Proc. No. 24-50016, D.I. 25.

22 D.I. 687.

23 Id. at 2.

The various debtor and committee professionals filed their final fee

applications.24 On April 30, 2024, Collins St filed its omnibus objection to those

applications.25 The committee and the debtors replied to the objections.26 The Court

held an evidentiary hearing on May 7, 2024 and issued a bench ruling on May 10,

2024. This Memorandum Opinion sets forth the same basic rationale that the Court

sought to articulate in the bench ruling. But because that ruling was drafted

primarily for the benefit of the parties, this Memorandum Opinion is intended to

provide additional context so that the Court’s rationale will be more readily

understandable to a reviewing court that will necessarily lack the background in

these disputes.27

Jurisdiction

The dispute now before the Court relates to the allowance of professional fees

under § 330 of the Bankruptcy Code. Accordingly, these are matters that “arise

under” the Bankruptcy Code within the meaning of 28 U.S.C. § 1334(b) and are thus

within the district court’s jurisdiction. These matters have been referred to this Court

under 28 U.S.C. § 157(a) and the district court’s standing order of reference dated

24 D.I. 372, 693-696, 698.

25 D.I. 703.

26 D.I. 711, 713.

27 Indeed, upon review of the original Memorandum Opinion it occurred to the Court that a

point was left implicit that should have been set forth more expressly. This Amended

Memorandum Opinion revises part I.A. to add that additional context.

February 29, 2012. This is a core matter under 28 U.S.C. § 157(b)(2)(B), such that

this Court may “hear and determine” it under 28 U.S.C. § 157(b)(1).

Analysis

Broadly speaking, Collins St offers two categories of objections. First, it argues

that the DIP Order precludes the payment of professional fees out of the DIP proceeds

because the fees sought were never reflected in any Approved Budget (which term is

defined in the DIP Order), and thus cannot be paid under the DIP Order. Second, it

objects to the allowance of the fees on the ground that they are unreasonable. Neither

of those arguments is persuasive.

I. The DIP Order and terms of the Approved Budget do not preclude the

payment of professional fees.

Collins St’s principal argument is that the DIP Order prohibits the payment of

these fees. In response, the debtors argue that Collins St should be precluded from

advancing that argument here, having made essentially the same argument (and

lost) in the adversary proceeding. The debtors similarly contend that once the Court

granted the initial dismissal order, the only remaining issues were ones about

whether the fees sought were necessary and reasonable. On this view, Collins St’s

objection, that is premised on the DIP Order, might have been a basis to oppose the

entry of the initial dismissal order. Now that the initial order has been entered,

however, the debtors argue that the only remaining issue is whether the fees are

necessary and reasonable and that everything else is now water over the dam.

As described more fully below, the Court concludes that the arguments Collins

St seeks to advance regarding the effect of the DIP Order are properly before it –

neither barred by preclusion nor the entry of the initial dismissal order, though the

question on the latter point is a close one. Despite being properly preserved, however,

Collins St’s argument fails on the merits.

To that end, the Court concludes, in the first instance, that relying only on the

DIP documents themselves, not on any extrinsic evidence, that the DIP documents

unambiguously subordinate the repayment of the DIP loan to the carve out.

Accordingly, while the refusal to agree on a budget can give Collins St the ability to

prevent the debtors from making a cash payment in any given period, it does not

provide a basis, at the end of the case, to deny the estate professionals an award of

fees that are otherwise appropriately awarded under § 330 of the Bankruptcy Code.

Alternatively, if one were to consider extraneous evidence to determine the terms on

which the parties agreed, the Court finds that the agreement of the parties was

exactly the same – that at the end of the bankruptcy case, whatever cash the debtors

had, up to the amount of the carve out, would be available to pay the professional

fees.

A. Neither principles of preclusion nor the doctrine of waiver

prevents Collins St from arguing that the DIP Order requires

the disallowance of the estate professionals’ fees.

The debtors first contend that the arguments Collins St advances in opposition

to the payment of professional fees are all points that either were or could have been

raised in connection with the adversary proceeding, and that principles of preclusion

accordingly prohibit Collins St from raising these points as a reason to disallow the

professionals’ fees.28

To that end, it bears note that Collins St’s principal argument against the

allowance of the professional fees is not an argument about allowance under § 330 of

the Bankruptcy Code. Rather, the argument is (even if Collins St did not put it in

quite these terms) that if the DIP Order bars the payment of these fees out of the

proceeds of the DIP loan or its cash collateral, then an order providing for the

payment of these fees would be inconsistent with the otherwise applicable payment

waterfall. The Supreme Court held in Jevic that one may enter an order providing

for the structured dismissal of a bankruptcy case, so long as the dismissal order does

not alter the otherwise applicable priority scheme.29 And the point that Collins St is

making is that – even accepting the Court’s conclusion in the adversary proceeding

that Collins St’s own fees do not have special priority – that the DIP Order still bars

the payment of the estate professionals ahead of repaying the DIP loan because the

fees sought are not reflected in an approved budget. So the substantive point Collins

St is making is that regardless of whether the fees are reasonable ones for actual and

necessary services within the meaning of § 330, an order that authorized their

payment would still deviate from the priority scheme and thus violate Jevic. The

debtors contend that it is now too late for Collins St to make that argument.

28 See Duhaney v. Att’y Gen. of U.S., 621 F.3d 340, 348 (3d Cir. 2010).

29 Czyzewski v. Jevic Holding Corp., 580 U.S. 451, 466 (2017) (court lacks authority, upon

“ordering a dismissal to [authorize the debtor to] make general end-of-case distributions of

estate assets to creditors” that “would be flatly impermissible in a Chapter 7 liquidation or a

Chapter 11 plan because they violate priority without the impaired creditors' consent”).

First, the debtors assert that argument is precluded by virtue of the final and

non-appealable order the Court entered in the adversary proceeding. Claim

preclusion (or res judicata), however, is limited to circumstances in which a party

seeks to relitigate a claim that has already been litigated. It is true that the question

of what is the “same claim” is often viewed through the lens of asking whether the

second claim arises out of the same transaction or occurrence as the first. But the

problem with invoking res judicata is that the doctrine is designed to prevent a party

from improperly engaging in claim splitting. In the current motion, however, Collins

St is not asserting a “claim.”30 The debtors are seeking relief, and Collins St is simply

opposing it.

It is, of course, true that res judicata also applies to a “defense.” That point,

however, is best understood to apply to affirmative defenses.31 Here, Collins St is just

arguing that the debtors cannot establish their entitlement to the relief they seek.

Otherwise put, res judicata is about the assertion of claims or defenses, and that is

not what Collins St is doing here. Under the analytically distinct doctrine of issue

preclusion (or collateral estoppel), one cannot make an argument in a second case on

which one previously had a fair opportunity to be heard, fully litigated the issue, and

lost.32 But no one suggests that issue preclusion applies here because the issue that

Collins St is raising is, in fact, different from the one decided in the adversary

30 See generally Restatement (Second) of Judgments § 24.

31 See In re Ameriserve Food Distrib., Inc. 315 B.R. 24, 35 (Bankr. D. Del. 2004) (addressing

application of res judicata to an affirmative defense).

32 Restatement (Second) of Judgments § 27; see also Doe v. Hesketh, 828 F.3d 159, 171 (3d

Cir. 2016).

proceeding. Accordingly, traditional doctrines of preclusion do not operate to prevent

Collins St from objecting to the allowance of the estate professionals’ fees on the

ground that such allowance is prohibited by the terms of the DIP Order.

Second, the debtors suggest that even if preclusion does not apply, the

argument was nevertheless forfeited by virtue of Collins St failing to raise it in

opposition to the initial dismissal order. Recall that the debtors’ original motion to

dismiss proposed a two-part process. First, the Court would determine that dismissal

of the case was appropriate, with the remaining cash to be distributed in accordance

with the applicable waterfall. And then second, the Court would address the

allowance of the professionals’ fees under § 330.

To the extent that Collins St contended that the initial order should leave open

anything beyond claims allowance under the standards set forth in § 330 of the

Bankruptcy Code (like the argument it is now making that the fees cannot be paid

ahead of the DIP loan because they are not reflected in an approved budget), it was

required to make that argument in its opposition to the entry of the initial order.

Whether Collins St in fact made the argument in that opposition is a debatable

question.33 Fairly read, the principal point made in that brief was that the relief

sought was improper because it was inconsistent with the position that Collins St

advanced in the adversary proceeding. And the brief makes no mention of the

provision of the DIP Order that is central to its current position – paragraph 2 –which

33 Collins St’s brief in opposition is docketed at D.I. 623.

authorizes the debtors to make payments “only as and to the extent authorized by

the Approved Budget.”34

Collins St’s sur-reply brief goes even further, noting that Collins St “did not

oppose dismissal of these cases as long as the claims asserted in the Adversary

Proceeding are resolved by the Court prior to entry of the Final Dismissal Order.”35

For that reason, a case could certainly be made that the point was forfeited.36

It is true that the April 8, 2024 order in which the Court granted the initial

motion to dismiss subject to the resolution of the fee applications stated that the order

did not “affect … the rights of Collins St … to object to any of the Final Fee

Applications on any grounds.”37 But if the argument had already been forfeited as of

that time, there is no suggestion that anything in the order would operate to

resuscitate an argument that had been forfeited by virtue of Collins St’s prior

litigation conduct.

That said, the Court concludes that Collins St has done enough to preserve the

issue. For example, the brief Collins St originally filed in opposition to the debtors’

motion does make the argument that the amounts previously paid to estate

professionals should be clawed back.38 And the basis for that argument was that the

debtors were only authorized to make payments to the extent they were included in

34 D.I. 308 ¶ 2.

35 D.I. 662 at 2.

36 See United States v. Dowdell, 70 F.4th 134, 140-141 (3d Cir. 2023).

37 D.I. 687 at 2.

38 D.I. 623 at 16-17.

an Approved Budget.39 Because that contention is the foundation for the argument

that Collins St is making now, the Court believes that the better view is that the issue

is sufficiently preserved, even if the question is a close one. The Court will

accordingly proceed to address the merits of the argument.

B. The unambiguous language of the DIP Order and approved

budgets does not preclude, at the conclusion of the bankruptcy

case, the estate professionals from being paid for otherwise

allowed fees and expenses out of cash held in the bankruptcy

estate.

Collins St contends that paragraphs 2 and 3 of the DIP Order operate to

prohibit the payment of any professional fees out of either the DIP proceeds or

Collins St’s cash collateral. Paragraph 2 addresses the use of the proceeds of the DIP

loan. It states that:

[a]vailable financing and advances under the DIP Term Sheet shall be

made to fund, in accordance with the DIP Documents and the Approved

Budget, working capital and general corporate requirements of the

Debtors, adequate protection to the Prepetition Noteholder, bankruptcy-

related professional fees, costs, and expenses (including interest, fees,

and expenses in accordance with this Final Order and the DIP

Documents), and any other amounts required or allowed to be paid in

accordance with this Final Order, but only as and to the extent

authorized by the Approved Budget and the DIP Documents.40

Paragraph 3 addresses the use of cash collateral. It states that the “Debtors

are authorized to use Cash Collateral subject to and in accordance with the terms,

conditions, and limitations set forth in this Final Order, the Approved Budget, and

the DIP Documents, without further approval by the Court.”41

39 Id.

40 D.I. 308 ¶ 2 (emphasis added).

41 Id. ¶ 3 (emphasis added).

The DIP Order included an approved budget covering the one-week period

ending on May 19, 2023.42 The debtors subsequently filed (on May 24, 2023) a later

approved budget covering the six-week period ending on June 30, 2023.43 Both of

these budgets have a portion in the middle of the page showing the projected

cashflows during the applicable period. In both budgets, the amount of cash shown

as going out to pay professional fees is zero. Both budgets also have a section showing

the estimated accrued but unpaid professional fees. For the period ending May 19,

2023, this amount is $3,832,425. And for the period ending June 30, 2023, the amount

is $5,736,839.

42 D.I. 308-2.

43 D.I. 330-1.

A portion of the final budget (filed on May 24, 2023) is set forth below.

Lenses T= Tas bon

Ek - Critica! Equipment Leases -

pS □□

Operating bars: obs. BTO.000 420 4136. 34 233,509 215.56: 962 2569 938

F eer

FA - - Haury Fees - - + = □

16 - - Fined Monthly Fen - - - □

- MAAT - - 7 - 2 =

Sanetin : i i :

UCC Professional Freon

□□ □□ nnn nnn

US Fees.

Fees

eee □□□□□□□

= - - = =

570,000 420801 136,314. 235,500. 215,982 66958 3

Flow ja O05) yor (220 aor Pi (36, HH ih 1.055.299 ai iz 15.962). 962) [266 938) 938) i

30000 269 5a 23 25 4,289,174. 4,073,212

Summary

DIP Balance 6,057.428 7207 ae 7 SGT ae S220 S.3MLOga a,520,003 ay

P =: = =

- - 7 = =

113,265

tl _1750,000_ _ 150,000 150,000 _-1501000 __ 150.000 150000, 2

DIP 7.BoT 77 ars 57700 aaTosag 4570699 a.67a893 5.

and ane baie! devel ort Te ial ee ae Te.

bet Proveasicral Fics

FA - Capsions Fem ‘66? Pag a2 8 1,000 1.000 5.000 000

A - Cacsions - Monthy Fen ahs 72. 24,3e) 2a 35 A333 □□□□□

Legal -MMAT 2 ges 154,69 1750cay 175.000 175.000 775,000 □□

Agent - aM 5,669 5a 5a Saad □□□□□

Foes ‘BS GS OT. TT od Tod 71a, 1.

ee □□□□□

ber Unpaid Obligations.

1h 4.0 18,000 6.000 Ve □□□

PTO Sick Leave SO 62.000 62,000 S000 52.000 -

(Mow Elk 147.500 Ta,7sa 147, So 21.000 #2000 21.000

Mew Elk Sticke Lina 151,000 151,000 151,000: 120,000: 120,000 -

Total Employee 36 500 312,750 368 Soa) 22000 232.000 57,000

BAM Unpaid AP 12500060 1350,000 1250000 1250000 1250000 1250,000

(New Elk AP 1 00ND 1.280.000 12a). 2M) Ze) 12000

aa a aed ae Tania sian

The Court has circled in blue the portion of the budget under the header “Net

Operating Cash Flow.” And it has circled in red the portion headed “Estimated

Accrued but Unpaid Professional Fees.” The ultimate question is whether the

payment of the approximately $5.75 million in fees circled in red, upon conclusion of

the bankruptcy case, is permitted by the DIP Order.

The debtors’ argument that the fees may be paid relies on paragraph 17 of the

DIP Order, which is the provision that establishes the carve out. It does so by

17

providing that the DIP liens are subordinate to “the payment of … (iii) up to the

amounts set forth in the Approved Budget, including the amounts in the professional

accrual schedule attached to the Approved Budget, to the extent allowed at any time,

whether by interim order, procedural order, or otherwise [any unpaid expenses of

estate professionals].”44

This language is important for two separate reasons. First, the express

reference to the accrual schedule makes clear that the carve out, as of June 30, was

the $5.75 million (circled in red) reflected in the approved budget as of that date. And

consistent with the basic operation of a carve out as described in the letter opinion in

the adversary proceeding, the DIP lender’s recovery on its DIP loan is subordinated

to the payments that are protected by the carve out.

Second, paragraph 17 says that the repayment of the DIP loan is subordinated

to the repayment of “the amounts set forth in the Approved Budget, including the

amounts in the professional fee accrual schedule.”45 The key word for current

purposes is “including.” As a matter of ordinary English, this language means that

the accrual schedule is “included” in the Approved Budget. Accordingly, when the

defined term “Approved Budget” is otherwise used in the DIP Order, there is at least

a reasonable argument that the term also “includes” the amounts set forth in the

accrual schedule (circled in red).

44 D.I. 308 ¶ 17 (emphasis added).

45 Id.

The consequence of this literal reading of the document would be that the

debtors prevail. Paragraph 2 authorizes payments “to the extent authorized by the

Approved Budget.”46 If one reads the defined term “Approved Budget” to “include”

the accrual schedule, as paragraph 17 states, then the debtors are authorized to pay

the amounts reflected in the accrual schedule at any time.

But that reading of the DIP Order is not without some difficulties. The

problem with this reading is that the Approved Budget also has a section (the one

circled in blue) that shows the projected cashflows during each period. And Collins St

has a fair point that there would be something odd about reading an approved budget

that, for any given period, expressly states that $0 will be paid to estate professionals,

to authorize the cash payment of millions of dollars of fees to estate professionals in

that very period. Otherwise put, the problem with the debtors’ reading of the

documents is that it renders meaningless the portion of the agreed budget that is

circled in blue.

The debtors, however, have a strong response to this point. They argue that

whatever one might think about the payments that are authorized in a given period,

one thing is clear from the structure of the DIP Order as a whole – the repayment of

the DIP obligations is subordinated to the carve out. As the debtors’ point out in their

reply brief, in addition to the language of paragraph 17, there is other language to

this effect that permeates the DIP Order, including paragraph 21(g), which says that

even in an event of default, the DIP Lender can sweep the available cash “provided

46 Id. ¶ 2.

that sufficient funds are (or have been) set aside to fund the Carve-Out,” and

paragraph 27, which makes Collins St’s right to realize on its collateral “subject to

the payment of the Carve-Out.”47

In the Court’s view, there is a way to reconcile all of these provisions so that

each of them has meaning. In a period that is covered by an approved budget, the

fact that the budget for that period shows no cash payments going out must mean

that no cash payment is authorized in that period. In this sense, the fact that the

accrual schedule is “included” in the Approved Budget does not mean that it is

included for the purpose of authorizing a cash payment. That reading would render

meaningless the fact that the parties agreed on a budget under which no cash would

be paid to the professionals in that period. So for any period for which there is an

agreed budget, the only cash payments authorized in that period are those reflected

in the (blue-circled) cashflow portion of the budget.

But in a period in which the parties are unable to agree on a budget, there is

no such express understanding that nothing will be paid. Rather, in such a period,

there simply is not an agreement at all. Does that mean (as Collins St suggests) that

fees protected by the carve out are never paid to the parties who are the beneficiaries

of the carve out? Notwithstanding paragraph 2 of the DIP Order, the answer to that

must be no. The parties obviously hoped and expected that they would be able to

reach an agreed budget. But where they cannot – and particularly at a point when

the case is otherwise complete and set to be dismissed – one is left to decide where

47 Id. ¶¶ 21(g), 27.

the proceeds should go. And it bears emphasis that no one suggests that those funds

should stay where they are. The only question is to whom they should be distributed.

Principles of contract law typically govern the construction of orders like the

current DIP Order, which was extensively negotiated between the parties.48 And

under ordinary contract principles, the obvious touchstone is that when confronted

with a specific circumstance that is not expressly addressed by the agreement, one

should look to the overall structure of the agreement to ascertain how the parties

intended to address it.49 Here, that requires one to look at the broader structure of

the DIP Order to determine where the funds should be distributed at the end of the

case in the absence of an approved budget. The overall structure of the DIP Order

clearly provides that as between the beneficiaries of the carve out and the DIP lender,

the repayment of the DIP loans is subordinated to the carve out.

Note that this reading leaves unanswered the question whether the debtors

were authorized, by the DIP Order, to make interim payments to professionals earlier

in the case. The debtors argue that such payments were authorized by paragraph 17,

which states that the DIP liens are subordinate to “the payment of [professional fees]

48 In re Trico Marine Services, Inc., 450 B.R. 474, 482 (Bankr. D. Del. 2011) (“When construing

an agreed or negotiated form of order, such as the Sale Order in this case, the Court

approaches the task as an exercise of contract interpretation rather than the routine

enforcement of a prior court order.”).

49 See In re American Home Mortg. Holdings, Inc., 388 B.R. 69, 79 (Bankr. D. Del. 2008)

(focusing on the structure of agreement to determine whether the agreement was a

“repurchase agreement” under the Bankruptcy Code).

up to the amounts set forth in the Approved Budget … to the extent allowed at any

time, whether by interim order, procedural order, or otherwise.”50

But one can also read this language to mean only that the repayment of the

DIP loan does not become subordinated to the obligation to pay professional fees

unless and until there is a court order authorizing the payment of the fees. On that

reading, this provision of paragraph 17 would not override the provision of paragraph

2 that prohibits actual payments except as authorized by an approved budget.

But even if the interim payments the debtors made were unauthorized at the

time, the result now would be the same. Because the documents make plain that in

the end, the repayment of the DIP loan is subordinated to the carve out, those

proceeds would ultimately be paid to the professionals rather than to Collins St. And

while Collins St has a fair argument that those fees were perhaps paid too soon, the

premature payment of those funds to the parties who are ultimately entitled to

receive them caused Collins St no injury.

As noted, these conclusions follow from the language of the DIP Order itself,

without reliance at all on any of the testimony that was offered in the evidentiary

hearing about the parties’ understanding of the deal at the time it was negotiated.

This Court’s principal holding is that this is the unambiguous meaning of the

agreement without reliance on any parol evidence. For that reason, a case can be

made that the Court need not and should not have permitted testimony to be elicited

50 D.I. 308 ¶ 17.

at the evidentiary hearing about the parties’ subjective intentions.51 As described

below, however, that turns out to be of little moment, as the testimony confirmed that

the intent of the parties was fully consistent with the language of the DIP Order.

C. The testimony elicited at the evidentiary hearing regarding the

parties’ subjective intent was fully consistent with the

construction of the DIP Order set forth above.

During the evidentiary hearing, the witness testimony suggested that, in

effect, the parties had reached an impasse in their efforts to agree on a budget. The

record indicates that Collins St had lost faith in the debtors’ efforts to conduct a sale

process, and essentially took the view that by refusing to agree on a budget, Collins St

could effectively require the estate professionals to work on a contingency, such that

they would be paid only if the sale process ultimately yielded favorable results.

Even as far as it goes, that argument does not hold together. There is no

evidence to suggest that the parties ever discussed the terms of a contingency under

which the professionals would be paid some amount based on the results of the sale

process. And on Collins St’s theory, regardless of the results of the sale process,

Collins St would have been entitled to block any payment to the professionals by

refusing to agree on an approved budget, at least unless and until Collins St was paid

in full on all obligations secured by the liens granted in the DIP Order.

Rather, based on the evidence adduced at the hearing, the Court concludes that

the professionals’ decision to continue work in the face of Collins St’s refusal to agree

on a budget was premised on the parties’ understanding of the DIP Order. And that

51 Mellon Bank, N.A. v. Aetna Bus. Credit, Inc., 619 F.2d 1001, 1011 (3d Cir. 1980).

understanding was that the estate professionals would be entitled to receive, at the

end of the case, whatever cash the debtors held, up to the amounts of the carve out.

That is reflected in a May 21, 2023 email from Matthew Hart of Capstone, the

debtors’ investment banker and financial advisor, in which he described a

conversation with FTI (which was the financial advisor to Collins St). That email

was admitted into evidence as debtors’ exhibit 1. Hart stated in that email that FTI

said that “Collins St is not going to fund any further DIP draws for the time being”

and that the “professionals will need to have faith in the DIP carveout.”52

Based on that email and the other evidence adduced at the hearing, the Court

concludes as a matter of fact that the parties’ understanding at the time is precisely

the one described above as the best reading of the DIP Order itself. That is, that

Collins St had the right, by refusing to agree on an Approved Budget, to prevent cash

payments from being made in any given period. But even the indefinite exercise of

that right would not mean that Collins St would recover ahead of the carve out. To

the extent the debtors found themselves at the end of the bankruptcy case in the

possession of cash, the professionals were entitled to rely on the carve out to ensure

that they were paid from those funds ahead of Collins St. So even if there were

ambiguity in the DIP Order, and as described above, the Court concludes that there

is not, the parties’ contemporaneous understanding of their respective rights and

duties under the DIP Order in any event leads to the same result.

* * *

52 May 7, 2024 Hr’g Tr. at 137.

For those reasons, the order dismissing the case should provide that the

distribution of the debtors’ remaining cash should be paid, up to the amount of the

carve out, to the debtors’ professionals (to the extent those professionals’ fee

applications are allowed under § 330 of the Bankruptcy Code) before any such

proceeds are paid to Collins St.

II. The fees sought should be allowed under § 330 of the Bankruptcy

Code.

That leaves the question whether the fees at issue should be allowed under

§ 330. In arguing that they should not be, Collins St relies primarily on its contention

that Capstone did not have the requisite expertise to run an effective sales process

and on the overall disappointing results of that process.

The case law is, of course, clear that the professionals involved in a case are

not guarantors of the result. And the caselaw also stands for the related proposition,

which is just a commonsense point, that one must view the reasonableness of a

professional’s work based on the circumstances present at the time the professional

undertook to perform the work, not with the benefit of hindsight.53

At the May 7, 2024 hearing, David Beckman of FTI testified that Capstone and

its personnel that were working on the Allegiance sale process had far more limited

experience in distressed coal transactions than Beckman did.54 While Beckman’s

extensive experience in distressed coal company sales is impressive, that does not

mean that Capstone was not qualified or that the work it did was not reasonable.

53 See generally In re Hospital Partners of Am., Inc., 597 B.R. 763, 766 (Bankr. D. Del. 2019).

54 May 7, 2024 Hr’g Tr. at 78.

Finally, Collins St argues that certain fees should be disallowed because the

time entries were “lumped.”55 In this Court’s view, the better practice is for a

professional’s time entries to indicate how much time is spent performing each of the

tasks being billed, rather than combining multiple tasks in a single entry. Such

detailed time records, as most of the professionals in the case have submitted,

certainly facilitate the Court’s review of the reasonableness of the time spent on each

task. That said, in the circumstances of this case, the Court is satisfied that the

billing records submitted contained enough detail to permit the Court to form a

judgment with respect to the reasonableness of the tasks performed and the fees

being charged. Based on that review, the Court concludes that the work performed

by each of the estate professionals was reasonable in light of the circumstances

presented and that the fees sought are in the range of what one would expect in a

case of comparable size and complexity. So based on the whole record, the Court

believes it appropriate to enter an order that allows each of the fee applications at

issue.

Conclusion

The Court appreciates that this case did not end well. The Court also

understands Collins St’s frustration. Its view from the outset was that the effort to

reorganize the debtors was a fool’s errand and that the value of its collateral would

have been better preserved had the case had proceeded differently. In retrospect,

Collins St may well have been right about that. Nevertheless, the Bankruptcy Code

55 D.I. 703 at 37.

allocates the rights between a chapter 11 debtor and its secured creditors as it does.

secured creditor is entitled to adequate protection against the risk that its collateral

may diminish in value over the course of a bankruptcy case. But a debtor that can

meet its evidentiary burden of showing its ability to provide adequate protection (as

the Court found the debtors had here — at least for nine days at the very beginning of

the bankruptcy case) is entitled in the first instance to manage the business affairs

of the estate.

At bottom, even if Collins St’s frustration is justified, it does not provide a basis

for re-writing the terms of the DIP Order. The basic work of a carve out is to ensure

that the allowed fees of estate professionals are paid, up to the amount of the carve

out, ahead of the repayment of the DIP loan. Nothing in the documents in this case

provides an exception to that usual principle. For that reason, an order providing

that whatever cash is in the estate be paid, upon dismissal, in that order, is

appropriately entered here.

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Dated: June 7, 2024

CRAIG T. GOLDBLATT

UNITED STATES BANKRUPTCY JUDGE

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