By: Nicolas Berg
St. John’s Law Student
American Bankruptcy Institute Law Review Staff
In certain instances, a professional, such as a financial advisor, may contract the right to receive a “success fee” from a debtor in bankruptcy. The courts have established different tests for awarding a success fee. In In re Valence Technology , the United States District Court in the Western District of Texas held that KPMG was entitled to a success fee from Valence Tech for closing a $50 million dollar debt-equity conversion, but it was not entitled to a similar fee for closing a $20 million capital loan. After filing for chapter 11 bankruptcy, Valence Tech hired KPMG to assist with necessary financial restructuring advice. Pursuant to their agreement, if KPMG’s work resulted in “any consideration” from Valence Tech’s primary financier, Berg & Berg, KPMG would be entitled to a “success fee” of 1.25% of the value of that consideration or no less than $500,000. Valence Tech received two payments from Berg & Berg: (1) a $50 million debt-to-equity conversion and (2) a $20 million capital loan. While KPMG contended that it was entitled to the 1.25% success fee for both payments, Valence Tech argued that it should not have to pay the success fee for either payment. The bankruptcy court concluded that under the agreement KPMG was entitled to the success fee for the debt-to-equity conversion. The court, however, denied KPMG’s request for the success fee for the capital loan. Valence Tech appealed the bankruptcy court’s ruling to the district court maintaining that KPMG was not entitled to a success fee for either transaction while KPMG cross-appealed to argue for payment of the success fee in connection with the capital loan. To settle the dispute, the district court analyzed the agreement to determine whether the capital loan should be included in the meaning of “any consideration.” Noting the sophistication of the parties, the district court found the contract described two potential scenarios: (1) a “Private Placement” coming from any party other than Berg & Berg resulting in a 2.5% fee for KPMG, and (2) a “Private Placement” coming from Berg & Berg reducing KPMG’s fee to 1.25%. The district court reasoned that either way the contract defined “Private Placement” as having “Private Placement Value,” which necessarily included equity linked financing. Therefore, according to the district court, the $50 million debt-equity conversion qualified as a “Private Placement,” which entitled KPMG to the agreed upon 1.25% “success fee.” The $20 million capital loan did not qualify because it was not linked to any equity.