Professional Fee Carve-Out

Professional advisors to a bankrupt company (or debtor) face a risk that they will not be paid their fees and expenses because the debtor estate’s only assets will be encumbered by a secured creditor’s (or DIP lender’s) first-priority lien. To deal with this risk, professionals frequently negotiate a “carve-out” to provide for the “super-priority” treatment of their allowed fees. The carve-out is essentially an agreement by the secured creditor to subordinate its lien and claim to certain allowed professional fees. This agreement thus permits those fees to come first in line in terms of payment from the estate’s assets.  Carve-outs are normally subject to a dollar-amount cap and sometimes provide for limits regarding the services that can be paid from the carve-out.