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In re Chicago

decided: March 16, 1988.


Appeal from the United States District Court for the Northern District of Illinois, Eastern Division, No. 77 8999 #66 -- Prentice H. Marshall, Judge.

Bauer, Chief Judge, and Cudahy and Posner, Circuit Judges.

Author: Cudahy

CUDAHY, Circuit Judge.

This is an appeal by Shearson Lehman Brothers, Inc. ("Shearson"), an investment banker, from the denial of an application for additional compensation by the district court sitting in reorganization proceedings. We reverse with respect to the denial of all additional compensation. We conclude that additional compensation may be awarded to the extent of the $1,000,000 earlier agreed upon by Shearson and the trustee in bankruptcy. In this connection, we do not accept the determination by the district court that Shearson deliberately misled a special master by withholding documents.


Shearson was retained by the trustee, Richard B. Ogilvie, in November 1979 as financial adviser in the reorganization of the Chicago, Milwaukee, St. Paul and Pacific Railroad Company (the "Railroad"). Shearson agreed, for a fee based on an hourly rate, to assist the trustee in implementing reorganization plans for the Railroad, in negotiating with creditors and in selling portions of the Railroad.

During the time that it was retained by the trustee, Shearson also assisted the trustee in preparing a 1979 plan of reorganization, advised him with respect to the abandonment of certain railroad lines, sought prospective purchasers for the remaining "core,"*fn1 made a successful tender offer for mortgage bonds and secured the retirement of debt owed the government on terms favorable to the Railroad. During this period, Shearson also assisted in the sale of the Railroad's timberlands, a transaction for which it was separately compensated. This sale contributed to the success of the Railroad's reorganization by providing it with much needed cash.

In the fall of 1981 the Grand Trunk Corporation (the "Grand Trunk") became interested in acquiring the core assets of the Railroad. The Grand Trunk made an offer for the core in May 1982, and it signed a purchase agreement in August 1982. According to the agreement, the Grand Trunk would assume $400,000,000 in liabilities of the Railroad but would pay no cash.

In early 1982, when it had become clear that the Grand Trunk would make an offer, Shearson sought to renegotiate its method of compensation.*fn2 In this connection, the trustee eventually agreed to change the basis of Shearson's compensation and, in September 1982, submitted to the district court a new written agreement with Shearson. The CMC Real Estate Corporation ("CMC"), the parent holding company of the Railroad, objected to this application for modification of the fee. Several hearings were held during the period September 1982 through January 1983. On December 29, 1982, Shearson executed a letter to the trustee describing its agreement with him (the "1982 agreement").

Under the terms of the 1982 agreement, the trustee engaged Shearson to review the Railroad's assets and capital structure, to assist in developing a reorganization plan and in negotiating the sale of the Railroad and to provide general financial advice and broker services.*fn3

In return for Shearson's services, the trustee agreed to pay $100,000 per quarter, retroactive to June 1, 1982, and to reimburse Shearson for its expenses. In addition,

[u]pon satisfactory conclusion of the [Shearson] engagement hereunder and in the event that the Court finds that the retainer compensation [of $100,000 per quarter] . . . does not fairly and adequately compensate [Shearson] for its services to the Estate during the course of the reorganization proceedings, the Trustee agrees to pay [Shearson] an additional fee, not to exceed $1,000,000, in an amount to be negotiated in good faith by the Trustee and [Shearson] and subject to approval by the Court. This further fee is intended to compensate [Shearson] for the benefit to the Estate from its services during the course of the reorganization proceedings but which is not reflected in the retainer compensation.

Appendix of Appellant at 90. Further, the agreement contained a provision that it could not be amended or modified except in writing and subject to court approval.

Following hearings on the issue whether Shearson was entitled to additional funds, the district court (Judge McMillen) approved the fee agreement by written order, finding the terms of the agreement "fair and reasonable and . . . in accordance with the normal practice of the investment banking industry." In re Chicago, Milwaukee, St. P. & Pac. R.R., No. 77 B 8999 (N.D. Ill. Jan. 10, 1983). Thereafter, the trustee proposed an amended plan of reorganization based on the agreement with the Grand Trunk. CMC objected and retained its own investment banker, First Boston Corporation ("First Boston"), to assist it in opposing the Grand Trunk proposal. While the plan was pending before the court, the Chicago and Northwestern Transportation Company (the "Northwestern") made a competing proposal, which was also opposed by CMC. In February 1984, the Soo Line Railroad Company (the "Soo Line") made an offer which included $40,000,000 in cash. The Northwestern responded with a similar offer including $60,000,000 in cash.

At this point, Shearson requested the trustee to reconsider its method of compensation claiming that, since the 1982 agreement was based on the Railroad's receiving no cash, the bidding war constituted changed circumstances. Shearson made two written proposals to the trustee. In both, Shearson asked for a percentage fee in connection with the sale of the core.

The trustee conceded that, in view of the changed circumstances, it might be appropriate to revise the 1982 agreement. However, he refused to present to the court a proposed revision of the compensation arrangement in the midst of the bidding process. The trustee promised to review Shearson's compensation at a later date.

Shearson continued to render services in connection with the ongoing bidding and with the ultimate sale. An offer by the Soo Line to assume $395,000,000 in liabilities and to pay ...

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