Insider's Hurdles When Seeking Compensation for Services

In In re ID Liquidation One, Case No. 11-11046 (D. Del. Nov. 5, 2013), an insider of the debtors sought allowance of an administrative expense claim for services rendered pursuant to a prepetition management agreement signed by insiders on behalf of the debtors. Under the unique facts of the case, U.S. District Judge Brendan L. Shannon of the District of Delaware allowed the claim in an amount less than the contract rate, after rejecting the testimony of two expert witnesses and arriving at his own conclusion with regard to reasonableness. The case illustrates the hurdles insiders must overcome in seeking compensation for services rendered to the debtors’ estates post-petition.

The debtors were owned and operated by entities created to manage the assets of the Oliver family. Ross J. Mangano managed many of these entities. Both pre- and post-petition, Mangano held the title of chairman of the board of managers and CEO of one of the debtors, Indianapolis Downs. Certain of the Oliver parties had entered into financing arrangements with the debtors post-petition. Under a 2010 written agreement, the debtors agreed to compensate the Oliver parties $2.2 million annually for credit and consulting services. Immediately before filing for Chapter 11, the Oliver parties and the debtors entered into a letter agreement, which provided that the Oliver parties would continue to provide services to the debtors, including Mangano’s services, for an annual fee of $2.2 million. Mangano signed the compensation notice on behalf of both the Oliver parties and Indianapolis Downs. In the context of an adversary proceeding, payments under the compensation notice were stayed and the compensation notice was neither rejected nor assumed.