Filed: May 04, 2016
Latest Update: Mar. 02, 2020
Summary: Case: 15-50381 Document: 00513492310 Page: 1 Date Filed: 05/04/2016 IN THE UNITED STATES COURT OF APPEALS FOR THE FIFTH CIRCUIT No. 15-50381 United States Court of Appeals Fifth Circuit FILED In the Matter Of: May 4, 2016 Lyle W. Cayce VALENCE TECHNOLOGY, INCORPORATED, Clerk Debtor. VALENCE TECHNOLOGY, INCORPORATED, Appellant, v. KPMG CORPORATE FINANCE, L.L.C., Appellee. - Consolidated with Case No. 15-50384 In the Matter Of: VALENCE TECHNOLOGY, INCORPORATED, Debtor. VALENCE TECHNOLOGY, INCORPOR
Summary: Case: 15-50381 Document: 00513492310 Page: 1 Date Filed: 05/04/2016 IN THE UNITED STATES COURT OF APPEALS FOR THE FIFTH CIRCUIT No. 15-50381 United States Court of Appeals Fifth Circuit FILED In the Matter Of: May 4, 2016 Lyle W. Cayce VALENCE TECHNOLOGY, INCORPORATED, Clerk Debtor. VALENCE TECHNOLOGY, INCORPORATED, Appellant, v. KPMG CORPORATE FINANCE, L.L.C., Appellee. - Consolidated with Case No. 15-50384 In the Matter Of: VALENCE TECHNOLOGY, INCORPORATED, Debtor. VALENCE TECHNOLOGY, INCORPORA..
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Case: 15-50381 Document: 00513492310 Page: 1 Date Filed: 05/04/2016
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
No. 15-50381 United States Court of Appeals
Fifth Circuit
FILED
In the Matter Of: May 4, 2016
Lyle W. Cayce
VALENCE TECHNOLOGY, INCORPORATED, Clerk
Debtor.
VALENCE TECHNOLOGY, INCORPORATED,
Appellant,
v.
KPMG CORPORATE FINANCE, L.L.C.,
Appellee.
-------------------------------
Consolidated with Case No. 15-50384
In the Matter Of:
VALENCE TECHNOLOGY, INCORPORATED,
Debtor.
VALENCE TECHNOLOGY, INCORPORATED,
Appellant,
v.
ROTH CAPITAL PARTNERS, L.L.C.,
Appellee.
Case: 15-50381 Document: 00513492310 Page: 2 Date Filed: 05/04/2016
No. 15-50381 cons/w No. 15-50384
Appeals from the United States District Court
for the Western District of Texas
USDC Nos. 1:14-CV-595, 1:14-CV-596
Before PRADO, OWEN, and HAYNES, Circuit Judges.
PER CURIAM:*
While in bankruptcy, Debtor–Appellant Valence Technology, Inc.
(“Valence”) sought to retain Appellees KPMG Corporate Finance, LLC
(“KPMG”) and Roth Capital Partners, LLC (“Roth”) to arrange for a potential
private placement of Valence’s equity. The bankruptcy court subsequently
approved Valence’s employment of KPMG and Roth pursuant to Valence’s
engagement agreement with each Appellee. See 11 U.S.C. §§ 327(a), 328(a).
Section 3 of the engagement agreements detailed the parties’ fee
arrangement. Under this section, Valence “agree[d] to pay,” an “Engagement
Fee,” a “Retainer Fee,” and:
[a]n additional fee (the “Success Fee”) in an amount equal to 2.5%
of the Private Placement Value (as defined below) less the amount
of the previously paid Engagement Fee and Retainer Fee, but in
no event less than a minimum success fee of $500,000 (the
“Minimum Success Fee”).
The following sentence defines “Private Placement Value” to mean:
the aggregate amount of cash and the fair market value (on the
date of closing) of any other consideration received by the Company
in any Private Placement, excluding any consideration received by
the Company’s creditors in satisfaction of claims or debts existing
on the date hereof.
* Pursuant to 5TH CIR. R. 47.5, the court has determined that this opinion should not
be published and is not precedent except under the limited circumstances set forth in 5TH
CIR. R. 47.5.4.
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No. 15-50381 cons/w No. 15-50384
The next two sentences provide further conditions relating to the Success Fee:
Any consideration received from Berg & Berg, Carl Berg or any
other entity affiliated with Carl Berg, Johnson Controls, SAIF,
Enertech Capital, Via Motors or any of their respective affiliates
(collectively, the “Identified Parties”) will be subject to a Success
Fee of 1.25% (and not 2.5%), but still subject to the Minimum
Success Fee.
The Success Fee shall be payable with respect to the Private
Placement upon consummation of such Private Placement.
The sole issue on appeal is the amount of the additional fee, i.e., the
Success Fee, Valence owes based on one of the Identified Parties, Berg & Berg,
agreeing to convert $50 million of its prepetition debt to equity in a reorganized
Valence. 1 The bankruptcy court awarded KPMG and Roth each $595,000,
which amounted to 1.25% of the $50 million debt-to-equity conversion less the
$30,000 engagement and retainer fees that Valence had already paid. The
district court affirmed the fee awards, and Valence appealed.
“We review the bankruptcy court’s findings of fact for clear error and its
conclusions of law de novo, using the same standards that the bankruptcy court
and district court applied.” Hurt v. Fed. Nat’l Mortg. Ass’n & Home
Securitization Tr. 1 (In re Homeowners Mortg. & Equity, Inc.), 354 F.3d 372,
375 (5th Cir. 2003). The bankruptcy court held that the engagement
agreements were unambiguous, which is a question of law that we review de
novo. See McDermott, Inc. v. Clyde Iron,
979 F.2d 1068, 1072 (5th Cir. 1992),
rev’d in part on other grounds sub nom. McDermott, Inc. v. AmClyde,
511 U.S.
202 (1994).
In its ruling, the bankruptcy court explained that Section 3 initially
“defines [P]rivate [P]lacement [V]alue generally” to exclude “any consideration
1The parties do not dispute that Berg & Berg’s debt-to-equity conversion qualified as
a Private Placement under the engagement agreements.
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No. 15-50381 cons/w No. 15-50384
received by [Valence’s] creditors in satisfaction of [existing] debts.” However,
the next sentence “specifically carve[s] out Berg & Berg[, a creditor,] as one of
the number of parties to be treated differently.” The court held that this latter
sentence—which is the “more specific sentence” vis-à-vis the preceding
definition of Private Placement Value—“applies to Berg & Berg’s exchange of
debt for equity because it specifically carves out and addresses any
consideration received from Berg & Berg.” It also stated that this reading
aligns with the engagement agreements’ “overall purpose for employing
[KPMG and Roth] to procure equity or equity-linked financing.” It concluded
that the agreements entitled KPMG and Roth to a Success Fee of 1.25% of “that
$50 million exchange under the terms of the engagement [agreements] that
specifically addressed consideration received from Berg & Berg.”
We agree with the bankruptcy court’s reasoning, which comports with
the interpretive principle that a later, specific sentence in a contract controls
over an earlier, general sentence. See John Hancock Mut. Life Ins. v. Carolina
Power & Light Co., 717 F.2d 664, 669 n.8 (2d Cir. 1982) (applying New York
law). KPMG and Roth are each entitled to the fee of $595,000—that is, 1.25%
of the $50 million value of Berg & Berg’s debt-to-equity conversion minus the
previously paid fees totaling $30,000.
AFFIRMED.
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No. 15-50381 cons/w No. 15-50384
PRISCILLA R. OWEN, Circuit Judge, dissenting:
I respectfully dissent. KPMG and Roth were retained by the bankrupt
entity in this case, Valence, to attempt to secure an infusion of new capital.
KPMG and Roth made that attempt, but they were unsuccessful. No infusion
of new capital occurred. Instead, an existing creditor exchanged $50,000,000
of secured debt for equity in the bankrupt entity. For their unsuccessful efforts
to infuse new dollars, KPMG and Roth were paid the flat fee set forth in their
contracts. But they claim they are additionally entitled to a “Success Fee”
under the contracts. The contracts governing the engagement of Roth and
KPMG are unambiguous. The “Success Fee” is based on a percentage of “the
Private Placement Value” as defined in the contract. The definition of “Private
Placement Value” expressly excludes the exchange of existing debt for equity
that occurred. The majority opinion fails to give effect to the express terms of
the agreements and instead of concluding that no “Success Fee” was owed,
holds that $1,190,000 in fees are owed.
I
After filing for relief under Chapter 11 of the Bankruptcy Code, Valence
Technology, Inc. (Valence) retained KPMG Corporate Finance, LLC (KPMG)
and Roth Capital Partners, LLC (Roth) in an effort to secure investors to
acquire the entire company or to purchase stock from the company in exchange
for a capital infusion. The parties agreed in respective Engagement Letters
that Roth and KPMG were not being hired to provide “restructuring or
bankruptcy advice.”
The relevant portion of the Engagement Letter that delineates Roth and
KPMG’s compensation is as follows:
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2. Private Placement
For purposes of this Agreement, a “Private Placement” shall mean
the sale of Securities in exchange for cash or other consideration
not including a public offer. . . .
3. Private Placement Fees and Expenses
As compensation for the services to be provided by [KPMG and
Roth] hereunder, [Valence] agrees to pay to [KPMG and Roth]:
a) a nonrefundable engagement fee (the “Engagement
Fee”) of $15,000, payable promptly upon approval by
the Bankruptcy Court;
b) an initial retainer fee (the “Retainer Fee”) of
$15,000, payable in advance one month after the
execution of this Agreement; and
c) an additional fee (the “Success Fee”) in an amount
equal to 2.5% of the Private Placement Value (as
defined below) less the amount of the previously paid
Engagement Fee and Retainer Fee, but in no event
less than a minimum success fee of $500,000 (the
“Minimum Success Fee”).
For purposes of this Agreement, “Private Placement Value” shall
mean the aggregate amount of cash and the fair market value (on
the date of closing) of any other consideration received by the
Company in any Private Placement, excluding any consideration
received by the Company’s creditors in satisfaction of claims or
debts existing on the date hereof. Any consideration received from
Berg & Berg, Carl Berg or any other entity affiliated with Carl
Berg, Johnson Controls, SAIF, Enertech Capital, Via Motors or
any of their respective affiliates (collectively, the “Identified
Parties”) will be subject to a Success Fee of 1.25% (and not 2.5%),
but still subject to the Minimum Success Fee.
Roth and KPMG together contacted “over one hundred entities” in their
search for financing, and although they were unable to secure any offers for a
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No. 15-50381 cons/w No. 15-50384
capital contribution in exchange for newly issued equity, they did locate two
investors who proposed to acquire Valence’s entire business. Valence’s board
declined these offers and instead opted for a plan of reorganization, pursuant
to which its largest secured lender, Berg & Berg, agreed to contribute an
additional $20 million of new debt financing to Valence; extend the maturity
date of $19.1 million of the approximately $69.1 million in pre-petition secured
debt owed to it; and forgive the remaining $50 million of secured debt in
exchange for 100% of the new equity in the reorganized company.
After the reorganization was complete, Roth and KPMG applied to the
bankruptcy court for a Success Fee pursuant to the terms of the Engagement
Letter. The court awarded each 1.25% of the value of Berg & Berg’s exchange,
offset by the $30,000 of engagement and retainer fees already paid, for a total
award to each party of $595,000. The district court affirmed the awards, which
Valence appeals.
II
New York law, which governs the construction of the Engagement
Letter, directs that “[a] written agreement that is clear, complete and subject
to only one reasonable interpretation must be enforced according to the plain
meaning of the language chosen by the contracting parties.” 1 “Ambiguity is
determined within the four corners of the document,” but “[t]o determine
whether a writing is unambiguous, language should not be read in isolation
because the contract must be considered as a whole.” 2 “[E]xtrinsic evidence
‘may be considered only if the agreement is ambiguous.’” 3
1 Brad H. v. City of New York, 17 N.Y.3d 180, 185 (2011).
2 Id. at 185-86.
3
Id. at 186 (quoting Innophos, Inc. v. Rhodia, S.A.,
10 N.Y.3d 25, 29 (2008)).
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The parties dispute whether the fact that the Engagement Letter states
that “[a]ny consideration received from Berg & Berg . . . will be subject to a
Success Fee of 1.25%” means that Roth and KPMG are owed a Success Fee
even though they did not secure an injection of capital outside of restructuring.
The district court concluded that Berg & Berg’s debt-for-equity swap “qualified
as a Private Placement with Private Placement Value,” and therefore that
Roth and KPMG are each “entitled to a Success Fee of 1.25% of the $50 million
conversion of secured debt.”
But this conclusion, which the majority opinion adopts, ignores the
unambiguous requirements of the Engagement Letter. Even assuming,
arguendo, that the transaction with Berg & Berg qualifies as a “Private
Placement,” because it entailed the “sale of Securities”—100% of new Valence
stock—“in exchange for cash or other consideration”—cancellation of $50
million of secured debt—any “Success Fee” must still be calculated as a
percentage of “Private Placement Value.” The latter term is defined as “the
aggregate amount of cash and the fair market value . . . of any other
consideration received by the Company in any Private Placement, excluding
any consideration received by the Company’s creditors in satisfaction of claims
or debts existing on the date hereof.” Here, the aggregate amount of
consideration received by Valence—the $50 million of debt cancellation—is
entirely offset by the shares received by Berg & Berg as compensation in
satisfaction of the forgiven debt. The Private Placement Value of the Private
Placement completed with Berg & Berg thus was zero. As the district court
correctly stated in its analysis, “for KPMG [and Roth] to qualify for the [1.25%]
Success Fee . . . there must have been a private placement, with private
placement value, as those terms were defined in the Agreement.” Because
there was no Private Placement Value here, no Success Fee is owed.
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KPMG and the majority opinion disagree, relying on the sentence that
provides: “Any consideration received from Berg & Berg . . . will be subject to
a Success Fee of 1.25% (and not 2.5%), but still subject to the Minimum Success
Fee.” The majority opinion concludes that the term “Success Fee” as used in
this sentence does not draw its meaning from the definition set forth in the
preceding paragraph, but instead stands alone as an entirely separate concept.
This is implausible and an unreasonable construction of the agreements.
“Success Fee” is a defined term that retains its definition throughout the
contract, and any Success Fee owed to KPMG as a consequence of consideration
received from Berg & Berg must be defined as a percentage of Private
Placement Value, less the Engagement and Retainer Fees. Because the
Private Placement Value of the transaction with Berg & Berg is zero, the
applicable Success Fee is also zero.
Roth argues, and the majority opinion agrees, that the final paragraph
quoted above “contemplate[s] two ‘exit strategies’ for Valence,” one of which is
that a “Success Fee” would be owed if Valence received consideration in any
form from any of the identified Berg entities. But that interpretation reads
words into the paragraph, and more importantly, reads the immediately
preceding sentence entirely out of the definition of “Success Fee” as applied to
the Berg entities. The sentence establishing a 1.25% Success Fee for a
transaction with any of the “Identified Parties” is naturally read merely to
adjust the size of any Success Fee in the event of a qualifying transaction with
a known, identified Berg entity, as opposed to a new third party; it would be
anomalous to ignore the fact that the sentence uses a capitalized term that was
defined in the same section of the agreement without providing a new
definition or in any way indicating that the extant definition does not apply.
The sentence unambiguously refers to the already-provided definition of
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“Success Fee” and simply substitutes “1.25%” for “2.5%” in that definition.
Moreover, the fact that any consideration received from an Identified Party is
“subject to” the 1.25% Success Fee is consistent with a requirement that the
general definition of the term be applied to the amount of consideration in
question.
III
Because the relevant contractual terms are unambiguous, we need not
consider extrinsic evidence in construing those terms. However, to the extent
that there is ambiguity, the context and the available evidence do not render
the natural reading unreasonable or improbable.
KPMG makes much of the fact that Valence conceded in the disclosure
statement submitted with its plan of reorganization that the contribution it
sought to secure with Roth and KPMG’s assistance was “exit financing,” and
any such financing would not likely have redounded to the benefit of Valence’s
existing shareholders. But that does not change the fact that Valence pursued
such financing in part to fund “anticipated requirements for working capital
and for capital expenditures until [Valence] could achieve profitability.” Thus,
more so than a debt restructuring standing alone, an infusion of additional
financing was intended to maintain Valence as a viable going concern by
providing the company with additional working capital. KPMG’s argument
that Valence’s interpretation of the Letter of Engagement to allow for this
possibility is “absurd” is backward: if KPMG is correct that “the purpose[] of
the entire bankruptcy was to allow [Berg & Berg] to leverage its existing
position and become the sole shareholder,” irrespective of the need to secure
any additional capital, then the company would not have agreed to pay Roth
and KPMG over a million dollars to bring about that inevitable result. If
anything, KPMG’s argument on this point provides a rationale for a contract
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that would award no Success Fee pursuant to a debt restructuring, because in
such a case Roth and KPMG would have provided little of value.
Roth objects that Valence’s interpretation of the Engagement Letter
would require that the Letter contemplate the possibility that the Identified
Parties might accept new shares in the company in exchange for cash or other
consideration, rather than in exchange for a cancellation of indebtedness. This
is a sensible inference, because the sentence that establishes an alternate
1.25% Success Fee would be superfluous if the only feasible transaction
between Valence and the Identified Parties were one with a Private Placement
Value of zero. However, Roth further argues that “[i]t is nonsensical to think
that a creditor would provide tens of millions of dollars in new cash or new
equivalents and leave its prior debts outstanding.” But the Private Placement
Value formula accounts for this contingency by excluding only the amount of
consideration received by existing creditors “in satisfaction of claims or debts.”
Therefore, in the event of a debt restructuring coupled with an equity injection
from an existing creditor, the total value of consideration received by Valence
(i.e. the amount of the debt forgiven in the restructuring plus the value of the
equity injection) would only be reduced by the amount of forgiven debt. Roth
and KPMG would be owed a percentage of the value of the new money
contributed to the company. There is nothing outlandish about the proposition
that the contract explicitly provides for the possibility that existing creditors
would make an equity investment. But Berg & Berg did not make an equity
investment. It only forgave existing debt in exchange for equity.
* * *
For the foregoing reasons, I would reverse the district court and award
no Success Fee to Roth or KPMG.
11
