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would be free and clear pursuant to § 552(a)), there are no funds available to pay professionals engaged by the debtor or creditors' committee. This is because a secured creditor's collateral may only be charged administrative expenses that directly benefit the creditor, pursuant to § 506(c). Merely keeping the debtor alive as a going concern is probably not a sufficiently direct benefit to support such a surcharge. Consequently it is necessary to negotiate and include in the DIP financing order a "carveout" for such professional fees, permitting a surcharge that is usually expressly limited in amount.
Lenders and debtors can anticipate an objection from the U.S. Trustee's office if the carveout does not also include the committee's professionals, or is not of sufficient size to permit them adequately to represent the committee. The Delaware new local rules suggests hostility to any attempt to provide disparate treatment for debtor's and committee's professionals in such carveout provisions.
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 - 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.
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. 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 adequate notice, may be profoundly affected. Even prior to the Supreme Court's holding in Hen House that only a debtor in possession or trustee may seek a surcharge pursuant to § 506(c), the Massachusetts Bankruptcy Court held that other third parties' rights are wholly derivative of the rights of the debtor in possession or trustee, so that they would lack any right to seek a surcharge if that right was waived by the debtor
