Houlihan, Lokey, Howard & Zukin Capital, Inc. v. Northwestern Corp. (In re Northwestern Corp.)

Citations: 332 B.R. 534; 2005 U.S. Dist. LEXIS 26995Docket: Bankruptcy No. 03-12872-JLP; No. CIV.A. 05-396-JJF

Court: District Court, D. Delaware; November 7, 2005; Federal District Court

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An appeal has been filed by Houlihan, Lokey, Howard, Zukin Capital Inc. regarding a May 5, 2005 Fee Order issued by the United States Bankruptcy Court for the District of Delaware, which involved their role as a financial advisor to the Official Committee of Unsecured Creditors of Northwestern Corporation during its Chapter 11 bankruptcy. Houlihan argues that the Bankruptcy Court erred by sua sponte reducing their monthly fee by 50%. The Court has decided to reverse the Bankruptcy Court's reduction of the monthly fee while affirming the award of a transaction fee and the reimbursement of necessary expenses.

Initially, in October 2003, the Committee sought approval to retain Houlihan as a financial advisor, which the Bankruptcy Court granted in December 2003, establishing a monthly fee of $175,000. The Retention Order deemed the Engagement Letter's terms reasonable but stated that all fees and expenses were subject to court approval under Section 328(a) of the Bankruptcy Code. Houlihan's final fee application totaled $2,275,000 for 13 months of service, including a transaction fee of $2,018,750 and expenses of $108,541.42. During hearings on the application, no objections were raised.

The Bankruptcy Court's Fee Order ultimately awarded the full transaction fee but cut the monthly fee to $1,137,500 and reduced expenses to $93,109.40. The Court reviews the Bankruptcy Court's fee awards under an abuse of discretion standard. Houlihan asserts that the Bankruptcy Court applied the wrong legal standard and wrongly deemed their services duplicative of those provided by Lazard Freres & Co., thus rendering the monthly fee improvident. Northwestern supports the Bankruptcy Court’s decision but does not present additional arguments.

The Bankruptcy Court's discretion was examined regarding its review of Houlihan's fees under Section 330(a) of the Bankruptcy Code. Section 330(a) permits courts to award less than the total requested compensation based on reasonableness. After initially determining the terms of Houlihan’s engagement, including a monthly fee of $175,000, were reasonable, the court could only reduce compensation if it found the terms to be improvident based on unforeseeable developments per Section 328(a). The court’s reduction of Houlihan’s fee based on a reasonableness analysis constituted an abuse of discretion, as it applied an improper legal standard.

Additionally, the Bankruptcy Court found Houlihan's fee improvident due to duplication of services with Lazard. However, this duplication was foreseeable based on the engagement agreements, leading to the conclusion that the court abused its discretion by making this finding. Although the court did reduce Houlihan's requested reimbursement of expenses from $108,541.52 to $93,109.40 without dispute from Houlihan, it was affirmed. The court upheld the transaction fee of $2,018,750.00.

Ultimately, the court reversed the Bankruptcy Court's decision on the reduction of Houlihan’s monthly fee, approving a total of $2,275,000.00 for professional services, while affirming the transaction fee and expense reimbursement. An order was issued directing Northwestern Corporation to make the necessary payments.