March 15, 2021Alerts

Delaware Bankruptcy Court Finds Qualified Limitation of Liability Provision in Investment Banker’s Engagement Letter “Perfectly Appropriate”; Overrules UST Objection

On March 11, 2021, Judge Mary F. Walrath of the U.S. Bankruptcy Court for the District of Delaware issued an oral ruling in the Knotel, Inc. bankruptcy approving the qualified limitation of liability provision in Moelis & Company’s engagement agreement, overruling the objection lodged by the U.S. Trustee. In so doing, Judge Walrath found that the language in question was “perfectly appropriate” under the Third Circuit’s United Artists decision.

The dispute arose over language included in many retained professionals’ engagement letters which limits liability for claims which may be asserted on account of such professionals’ ordinary negligence. Moelis’ engagement letter, together with a revised proposed form of order, did not limit liability for Moelis on account of claims arising from gross negligence, willful misconduct, or bad faith, consistent with market practice. The Office of the United States Trustee, however, objected to Moelis’ engagement, arguing that the front-end exculpation was inappropriate under the Bankruptcy Code and certain prior rulings by the Court.

A Moelis representative testified at the hearing regarding, among other things, the critical importance of the qualified liability limitation and the independence and security it provided to investment banking professionals which allows them to make difficult decisions and recommendations that may, ultimately, dictate case trajectory.  In addition, the Debtors and Moelis provided the Court with a significant number of retention orders and engagement letters from various jurisdictions to demonstrate market practice for investment bankers and financial advisors.

After hearing extensive oral argument, Judge Walrath noted that Moelis’ testimony was “very compelling” and further found that the qualified limitation of liability provision was “concomitant” with the indemnity provisions of the engagement letter and “perfectly appropriate under the United Artists decision”.