CHAPTER 11 OPERATIONS

Another controversial aspect of some carveout provisions is an attempt to restrict the kinds of services for which the surcharge may be used to pay the professional fees Ð lenders may attempt to make the carveout unavailable to pay for any attack on the lender's debt or lien. The

U.S. Trustee may object that committee professionals cannot properly fulfill their fiduciary duties under such a financial restriction. But at least one District Court has suggested that it is within a bankruptcy court's discretion to approve a cap on the amount of cash collateral that may be used to investigate and prosecute attacks on the validity or priority of the lender's liens.³⁶

If the negotiated carve out consists only of permitting the use of cash collateral to pay such fees, this raises the question of whether the secured creditor is required to disgorge funds to pay such fees after it has obtained stay relief and foreclosed on all of its collateral. Interpreting once such ambiguous carve out agreement, the Second Circuit held that the secured creditor was not required to disgorge because its rights to adequate protection payments was superior to the debtor's rights to use cash collateral for payment of fees.³⁷ Although the case is of limited significance because it turns on the language of the particular agreement, it highlights the need to consider such issues when negotiating the carve out.

Except for the agreed carve out, cash collateral agreements and DIP financing orders typically provide that the debtor and any subsequently appointed trustee specifically waive any right to seek a surcharge pursuant to § 506(c). Here the rights of third parties, including possibly persons not presently a party in interest in the case and therefore not capable of receiving

³⁶ Official Comm. Of Unsecured Creditors v. New World Pasta Co., 322 B.R. 560 (M.D. Pa. 2005).

³⁷ Harvis Trien & Beck, P.C. v. Federal Home Loan Mortgage Corp. (In re Blackwood Associates, L.P.), 153 F.3d 61 (2^nd Cir. 1998).

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