United States Court of Appeals

FOR THE EIGHTH CIRCUIT

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No. 03-3335

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In re: Farmland Industries, Inc., *

*

Debtor. *

------------------------------------------------ *

Official Committee of Unsecured *

Creditors, * Appeal from the United States

Appellant, * Bankruptcy Appellate Panel

* for the Eighth Circuit.

v. *

*

Farmland Industries, Inc., et al., *

*

Appellees. *

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Submitted: September 13, 2004

Filed: February 10, 2005

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Before LOKEN, Chief Judge, BEAM and GRUENDER, Circuit Judges.

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LOKEN, Chief Judge.

Farmland Industries, Inc. and its affiliates (“Farmland”) filed voluntary

petitions for Chapter 11 bankruptcy relief. Because Farmland had two large groups

of unsecured creditors with competing claims, the United States Trustee used the

authority conferred by 11 U.S.C. § 1102(a) to appoint two creditors’ committees, the

Official Committee of Unsecured Creditors to represent trade creditors (the

“Unsecured Creditors Committee”), and the Official Committee of Bondholders to
1

The Honorable JERRY W. VENTERS, United States Bankruptcy Judge for the

Western District of Missouri.

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represent bondholders (the “Bondholders Committee”). Each committee employed

its own financial advisor, Houlihan Lokey Howard & Zukin Financial Advisors

(“Houlihan Lokey”) for the Unsecured Creditors Committee, and Ernst & Young

Corporate Finance (“Ernst & Young”) for the Bondholders Committee. Each advisor

negotiated a flat monthly fee plus a contingent or “success” fee based upon the

amounts ultimately recovered by the members of the employing committee. 

The Bondholders Committee agreement provided that Ernst & Young’s

contingent fee would be paid from amounts recovered by the bondholders. Acting

pursuant to 11 U.S.C. §§ 328(a) and 1103(a), the bankruptcy court1

 approved that

agreement. But the Unsecured Creditors Committee agreement provided that

Houlihan Lokey’s contingent “transaction fee” would be paid by all creditors as a

general administrative expense. Farmland and the Bondholders Committee objected

to this term of the engagement. The bankruptcy court ruled that Houlihan Lokey’s

transaction fee must be paid from amounts recovered by members of the Unsecured

Creditors Committee. That Committee appealed to the Eighth Circuit Bankruptcy

Appellate Panel (“BAP”), which affirmed the bankruptcy court. The Committee now

appeals the BAP’s decision. We affirm.

I. Court of Appeals Jurisdiction

Once again, experienced bankruptcy attorneys have ignored the fact that

Congress has conferred broader appellate jurisdiction on the BAP than on this court.

Compare 28 U.S.C. § 158(b) with § 158(d). The bankruptcy court’s order was issued

prior to confirmation of Farmland’s Chapter 11 plan of reorganization. Although the

BAP’s jurisdiction is not limited to final orders, the BAP concluded that the ruling

was a final order because it finally determined one issue -- the manner in which
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Houlihan Lokey’s transaction fee would be paid. This court construes the final order

doctrine more flexibly in bankruptcy cases than in other contexts. But we have never

suggested that any interlocutory order that resolves a single issue is final for purposes

of 28 U.S.C. § 158(d). Rather, “an order entered before the conclusion of a complex

bankruptcy case is not appealable under § 158(d) unless it finally resolves a discrete

segment of that proceeding,” that is, a “relevant judicial unit” of the proceeding. In

re Woods Farmers Co-op. Elevator Co., 983 F.2d 125, 127 (8th Cir. 1993). To decide

that pragmatic question, we examine three factors, “the extent to which (1) the order

leaves the bankruptcy court nothing to do but execute the order; (2) the extent to

which delay in obtaining review would prevent the aggrieved party from obtaining

effective relief; (3) the extent to which a later reversal on that issue would require

recommencement of the entire proceeding.” In re Koch, 109 F.3d 1285, 1287 (8th

Cir. 1997) (quotation omitted). 

In December 2003, some three months after the Unsecured Creditors

Committee filed this appeal, the bankruptcy court approved Farmland’s Chapter 11

plan of reorganization effective May 1, 2004. The plan provides for payment of

Houlihan Lokey’s transaction fee in accordance with the order being appealed. The

confirmation order recites that this appeal is pending and provides that the plan “shall

automatically be deemed amended and modified as necessary” to reflect a contrary

decision by this court. Thus, even if the ruling on appeal was not final when issued,

it is now incorporated in the plan of reorganization, which is a final order. In these

circumstances, we conclude we have jurisdiction “because the bankruptcy proceeding

is on the verge of being completed pending the resolution of the dispute before this

Court [and] a delay in review [of this dispute] would serve no purpose.” First Nat’l

Bank v. Allen, 118 F.3d 1289, 1294 (8th Cir. 1997). Accord In re Broken Bow

Ranch, Inc., 33 F.3d 1005, 1008 (8th Cir. 1994): In re Interwest Business Equipment,

Inc., 23 F.3d 311 (10th Cir. 1994); 14 CHARLES ALAN WRIGHT, ARTHUR R. MILLER

&EDWARD H.COOPER,FEDERAL PRACTICE AND PROCEDURE § 3926.2, at pp. 290-91

n.28 (2d ed. 1996).
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The plan of reorganization also dissolved the Unsecured Creditors Committee

and the Bondholders Committee on the plan’s effective date, May 1, 2004. Just prior

to oral argument in September 2004 (long after counsel were aware of the potential

problem), counsel raised the question whether the appeal to this court now lacked one

or more requisite parties. We canceled argument and called for additional

memoranda by interested parties. Counsel for the Unsecured Creditors Committee

and counsel for the Liquidating Trustee urged us to decide the appeal because the

merits were fully briefed before the plan’s effective date and trade creditors and

bondholders continue to have the same financial interest in the issue. As we have

explained, confirmation of the plan conferred rather than divested us of jurisdiction.

The confirmation order specifically provides that the affected portion of the plan may

be modified by our resolution of the issue presented. This provision demonstrates

that the bankruptcy court did not intend to affect this appeal by “dissolving” the

creditors’ committees that were conducting it on behalf of their respective members.

We therefore proceed to the merits.

II. The Merits

Like the BAP, we review the bankruptcy court’s interpretation of the

Bankruptcy Code de novo and its findings of fact for clear error. In re Quality

Processing, 9 F.3d 1360, 1363 (8th Cir. 1993). We review issues committed to the

bankruptcy court’s discretion for an abuse of that discretion. In re Jones Truck Lines,

Inc., 63 F.3d 685, 686 (8th Cir. 1995). The bankruptcy court abuses its discretion

when it fails to apply the proper legal standard or bases its order on findings of fact

that are clearly erroneous. Stalnaker v. DLC, Ltd., 376 F.3d 819, 825 (8th Cir. 2004).

A. No abuse of discretion. Without objection, the bankruptcy court first

entered an interim order approving the retention of Houlihan Lokey as the Unsecured

Creditors Committee’s financial advisor but reserving decision on the transaction fee

dispute. Following extensive briefing and argument, the court ruled that, as a matter
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of fairness, the contingent portion of Houlihan Lokey’s total fee should be paid out

of the recovery by members of the Unsecured Creditors Committee. Noting that

bondholder estimated claims were substantially larger and the Bondholders

Committee agreement with Ernst & Young “is fairer and more equitable to all

creditors,” the court reasoned that bankruptcy success fees are customarily paid by

those who contract for them, Houlihan Lokey was engaged to work specifically for

the benefit of the trade creditors, and the Unsecured Creditors Committee should not

be able to impose this expense on all creditors over the objections of Farmland and

the Bondholders Committee. 

The BAP concluded that the bankruptcy court did not abuse its discretion in

ruling that the transaction fee “should be paid from any distributions made to the

unsecured creditors represented by” Houlihan Lokey because that advisor “is working

specifically for the benefit of those creditors,” the fee was negotiated by a committee

representing those creditors, and the bondholders should not be required to pay a

portion of the transaction fee because they are paying the contingent portion of Ernst

& Young’s fee. The Unsecured Creditors Committee does not appeal this portion of

the BAP’s decision. Rather, the Committee argues that the bankruptcy court’s order

was based on clearly erroneous findings of fact because there was insufficient

evidence that (a) Houlihan Lokey was working solely for the benefit of the trade

creditors, and (b) the fee agreement between the Bondholders Committee and Ernst

& Young “is fairer and more equitable to all creditors.” After careful review of the

record, we conclude these contentions are without merit because they address only

tangential issues. The bankruptcy court needed no evidentiary hearing to conclude

that, as a matter of fairness, it should exercise its discretion by treating on the same

basis the contingent portions of the fees to be paid to the financial advisors retained

by two competing classes of creditors. 

B. No Bankruptcy Statute Bars This Ruling. The Bankruptcy Code expressly

authorizes a creditors committee, with the court’s approval, to employ “a professional
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person . . . on any reasonable terms and conditions of employment.” 11 U.S.C.

§ 328(a). When applicable, § 330 sets forth standards for compensating professionals

who have been retained under § 328. Among other criteria, § 330(a)(4)(A)(ii)

provides that the court shall not allow compensation for services that are neither

beneficial to the debtor’s estate nor “necessary to the administration of the case.”

Section 503(b)(2) provides that compensation awarded under § 330(a) “shall be

allowed administrative expenses.” Section 507(a)(1) grants “first” priority to

“administrative expenses allowed under section 503(b).” See generally Hartford

Underwriters Ins. Co. v. Union Planters Bank, N.A., 530 U.S. 1, 4-5 (2000).

Before the bankruptcy court, the parties agreed that Houlihan Lokey’s

transaction fee would be treated as an administrative expense under § 503 and be

subject to review by the bankruptcy court under § 330. Starting with that proposition,

the Unsecured Creditors Committee argues that, because § 330 and § 503 require that

compensated services benefit the Farmland estate, all payments for those services

must come from the estate’s general funds. Any other conclusion, the Committee

adds, would violate the first priority accorded administrative expenses in § 507. The

Unsecured Creditors Committee bases these contentions entirely on the purported

plain meaning of these statutes, citing no supporting case law. 

Like the bankruptcy court and the BAP, we disagree with the Committee’s

interpretation of these statutes. Neither § 330 nor § 503 provides that payments to

professionals that qualify as administrative expenses must be paid from any specific

funds of the debtor. We do not doubt that, in the typical Chapter 11 proceeding

where only one financial advisor is employed, the advisor’s administrative expense

claims are paid from the general funds of the debtor’s estate. But that is simply a

sensible way to proceed. The practice does not suggest that, when the bankruptcy

court determines that two advisors representing two competing classes of creditors

are “necessary to the administration of the case,” § 330(a)(4)(A)(ii) precludes the

court from providing at the outset that the contingent portion of each advisor’s fees
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will be paid out of the creditors’ recovery that was enhanced by that advisor’s

services. In our view, the discretion to impose such a provision (or to refuse approval

of an agreement that lacks such a provision) is clearly consistent with the bankruptcy

court’s statutory authority under § 328(a) to approve the employment of a

professional “on any reasonable terms and conditions of employment.” 

The Unsecured Creditors Committee further argues that the concept of fairness

invoked by the bankruptcy court would lead to absurd results “when applied broadly

in these cases.” But that is an argument addressed to the court’s exercise of

discretion, not to its statutory authority. Even if it would be unwise or inequitable in

many cases to decide that particular creditors should bear a disproportionate share of

an administrative expense claim, that does not mean that Congress has denied

bankruptcy courts the discretion to do so. Sections 330 and 503 are silent on this

question; reading their silence in conjunction with § 328(a) strongly suggests that the

Bankruptcy Code confers the discretion the bankruptcy court here exercised. 

We agree with the Unsecured Creditors Committee that § 507 must also be

considered in deciding this issue. It provides that administrative expense claims are

entitled to a higher “priority” than unsecured claims. Priority in a Chapter 11 case

means that the bankruptcy court may not confirm a plan unless it provides that the

holder of each administrative expense claim “will receive on account of such claim

cash equal to the allowed amount of such claim.” 11 U.S.C. § 1129(a)(9)(A); see In

re Hechinger Inv. Co., 298 F.3d 219, 224 (3d Cir. 2002). Here, there is no doubt that

the entire administrative expense claim will be paid because Houlihan Lokey is only

entitled to a transaction fee if the debtor’s estate has sufficient funds to permit a

recovery by the trade creditors, the recovery from which the transaction fee will be

paid. Thus, in confirming Farmland’s plan of reorganization, the bankruptcy court

found that the plan “provides for treatment of Administrative Expense Claims . . . in

the manner required by Section 1129(a)(9).” In these unusual circumstances, the

priority requirements of § 507 have been satisfied. Claim priority means that
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administrative claims must be paid in their entirety before lower priority claims may

be paid. It does not mean that the amounts to be paid to lower priority claimants may

not be calculated before the administrative expense claims are paid.

The Unsecured Creditors Committee further argues that the bankruptcy court’s

order results in a surcharge on certain unsecured creditors that is contrary to 11

U.S.C. § 506(c). We agree with the bankruptcy court and the BAP that the order does

not effect a surcharge.

Finally, the Unsecured Creditors Committee argues that the BAP erred in

failing to reverse the bankruptcy court for violating the “binding mandate” contained

in a footnote in an unrelated BAP opinion, In re Thermadyne Holdings Corp., 283

B.R. 749, 754 n.6 (8th Cir. BAP 2002). The Committee does not ask us to review the

merits of the legal rule suggested in the Thermadyne footnote nor the unsettled

question whether BAP decisions are binding precedent. See In re Carrozzella &

Richardson, 255 B.R. 267, 272-73 (D. Conn. 2000). Taking this contention as the

Committee frames it, we conclude it is without merit because the BAP’s analysis in

this case is entirely consistent with its prior decision in Thermadyne for the reasons

stated in the BAP opinion. 

The order of the BAP filed August 7, 2003 is affirmed.

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