Benchnotes May 2000
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<h3>Trustee Compensation Reduced</h3>
<p>In <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re C. Keffas & Son Florist Inc.,</i> 240 B.R. 466 (Bankr. E.D.N.Y. 1999)</a>, Bankruptcy Judge <b>Stan
Bernstein</b> addressed a chapter 7 trustee's application for allowance of compensation. The court found that
under the totality of the facts and circumstances of this chapter 7 case, the base compensation under
§326(a)(ii) should be addressed. The court noted that if the trustee's commission and applications for final
compensation for professionals for the trustee were approved, priority unsecured creditors would receive
a 47 percent distribution of their allowed unsecured claims, while nothing would be distributed to the
estate's unsecured creditors. The court noted that under any theory, a 65 percent cost to collect would
"represent an extraordinary surcharge to priority creditors." The court also recognized that this was a
"garden-variety" chapter 7 business case, in which any experienced chapter 7 trustee could efficiently
liquidate within three to four months and close within 60 days thereafter. Unfortunately for the trustee, the
final report was filed two-and-one-half years from the date of the trustee's appointment. Judge Bernstein
addressed the very sensitive issue for trustees of whether to keep an estate open in order to continue
collection or to close the estate. The court noted that for 27 months not a single dollar of additional funds
were collected. In addition, the court found that the trustee failed to supervise his attorney in the overall
litigation strategy for collecting receivables. With the exception of one account, the majority of the accounts
owed an average of $300, yet the trustee incurred substantial transaction costs by attempting to collect
receivables through litigation. After it was "very clear" there would not be any distribution to unsecured
creditors, the trustee directed the estate's accountants to incur professional fees by reviewing claims and
assisting in the preparation of objections to claims. More than two years after being appointed, the trustee
filed objections to three unsecured claims—"hardly evidence of an expeditious case administration." Under
§704(1), a trustee has the obligation to "close such estate as expeditiously as is compatible with the best
interests of the parties in interest." A trustee who fails to make this necessary cost-benefit analysis will
"necessarily breach the statutory mandate under §704(1) and incur a liability for the damages unjustifiably
imposed upon the creditors who would be 'in the money.'" The court also found the trustee breached a
statutory duty under §704(5) by objecting to claims under the facts and circumstances of this case. Citing
<a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Gorski,</i> 766 F.2d 723 (2nd Cir. 1985)</a>, the court found that a trustee may be held personally liable for
such breaches of its fiduciary duty. The aggregate net opportunity cost to the creditors from significant
delay in distribution would be offset against the funds on deposit in the estate that would otherwise be
payable to the trustee as a statutory commission. The court found that opportunity costs should be
calculated at the rate of 10 percent per annum. The court found the trustee owed in excess of $5,000 to the
estate that may be offset against the fees and reimbursable costs otherwise payable to the trustee's
successive firms as counsel.
</p><h3>Trustee Compensation When Case Converted to Chapter 7</h3>
<p>In <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Lan Associates XI L.P.,</i> 192 F.3d 109 (3rd Cir. 1999)</a>, the court considered the request of a
chapter 11 trustee for compensation in a case that was later converted to chapter 7 and the same trustee was
reappointed. The court addressed two issues with regard to the trustee's request for compensation; the first
was whether a credit bid could be considered in the base under which a trustee's compensation was
calculated under §326(a). The court found that §326(a) is ambiguous; thus, it looked at the legislative
history. Having reviewed the legislative history and recognizing there may be cases in which the trustee's
arrangement and negotiation of a credit bid transaction may prove to be "as complex and time-consuming"
as liquidating estate assets by selling them to third parties, the court found that if Congress had intended
to include property or other considerations in the trustee's base compensation, it "certainly knew how to
do so." As a result, the court concluded that Congress did not intend to include credit bids in the trustee's
compensation. The court then went on to consider the amount of the trustee's compensation and held that,
as a matter of law, consideration of the maximum fees set forth in §326(a) should not be an element in
determining the reasonableness of fees required by §330(a). The court noted that while Congress intended
§330 to prescribe the standard pursuant to which trustee compensation is to be awarded, §326 merely "caps
the fees awarded pursuant to §330."
</p><h3>Converting Pre-conversion Claims</h3>
<p>In <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Troutman Enterprises Inc.,</i> 244 B.R. 106 (Bankr. S.D. Ohio 2000)</a>, two years after confirmation
of debtor's plan, the IRS successfully moved to convert the chapter 11 case to one under chapter 7 on the
grounds that the debtor had defaulted in its obligations under the confirmed chapter 11 plan. Three years
later, creditors filed an involuntary chapter 7 petition against the debtor. All of the claims asserted by the
petitioning creditors were pre-conversion claims provided for in the debtor's confirmed chapter 11 plan.
In interpreting §348(d) and its effect on the facts of the case, the court held that, "by relegating all
post-petition, pre-conversion claims, including those arising from the confirmation of a chapter 11 plan, to
the status of pre-petition claims upon conversion to chapter 7, §348(d) leaves the petitioning creditors
without claims against the reorganized debtor and, accordingly, unable to satisfy the requirements for (the)
filing of an involuntary petition pursuant to §303(b)." Thus, the involuntary chapter 7 petition was
dismissed.
</p><h3>Declaratory Judgment Proceedings</h3>
<p>In <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re U.S. Lines Inc.,</i> 197 F.3d 631 (2nd Cir. 1999)</a>, the plan established a reorganization trust, which
became the successor in interest with respect to insurance policies. The creditors included 12,000
employees who had filed more than 18,000 claims alleging asbestos-related injuries. The trust asserted that
the employees' claims were covered by several insurance policies covering different years. The proceeds
of those policies were the only funds potentially available to cover the personal injury claims. Each of the
policies had a "pay-first" provision, pursuant to which the insurer's liability was not triggered until the
insured paid the claim of the personal-injury victim, but the deductibles varied. The trust filed an adversary
proceeding seeking a declaratory judgment pursuant to <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… U.S.C. §2201</a> attempting to define the party's
respective rights under the various insurance policies. Two questions arose: Is the action core or non-core,
and does the bankruptcy court have the discretion to deny a motion to compel arbitration filed by some of
the insurance companies? The Second Circuit determined that it had jurisdiction to determine both whether
the proceedings were core and whether the bankruptcy court had jurisdiction to enjoin arbitration. The court
first addressed the core vs. non-core jurisdictional question and determined that "...the declaratory judgment
proceedings brought by the trust in this case directly affect the bankruptcy court's core administrative
function of asset allocation among creditors, and for that reason they are core." The court next considered
the question of whether the bankruptcy court could deny an effort to send the matter to arbitration.
Observing that the bankruptcy court has "broad, well-established powers premised upon <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… U.S.C. §§1334</a>
and 157 to preserve the integrity of the reorganization process...," in this case, the "declaratory judgment
proceedings are integral to the bankruptcy court's ability to preserve and equitably distribute the trust's
assets..." Thus, it is "within the bankruptcy court's discretion to refuse to refer the declaratory judgment
proceedings, which it properly found to be core, to arbitration." Thus, the real issue of interpreting the
pay-first provisions is now firmly in the hands of the bankruptcy court.
</p><h3>Health Insurance Claims as Receivables</h3>
<p><a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re East Boston Neighborhood Health Center Corp.,</i> 242 B.R. 562 (Bankr. D. Mass. 1999)</a>, involved
a trust indenture purporting to grant liens and security interests in receivables, and the issue was whether
the term "receivables" was broad enough to include health insurance claims that the debtor had under both
government programs, such as Medicare and Medicaid, and its contract with private health
insurers—medical services provided to patients of the debtor. The court held that the federal statutes that
prohibit a governmental insurer from making any payment under Medicare or Medicaid programs to
anyone other than a health service provider do not invalidate a creditor's security interest in the health
provider's insurance reimbursement claim. Further, these statutes do not reduce such security interests to
a nullity. Bankruptcy Judge <b>Carol J. Kenner</b> held that there is nothing in the statute that prohibits the
debtor, as the health provider, from granting a security interest in its receivables under the programs or that
would invalidate such a security interest.
</p><h3>Miscellaneous</h3>
<ul>
<li><a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… Merchants Acceptance v. J.C. Bradford & Co.,</i> 198 F.3d 394 (3rd Cir. 1999)</a> (§503(b) permits
members of the creditors' committee to apply for and obtain reimbursement of attorneys fees incurred in
connection with service on the committee);
</li><li><a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Poybras Manor Inc.,</i> 242 B.R. 603 (Bankr. E.D. La. 2000)</a> (the chapter 11 debtor may designate
that its payments to taxing authorities under a plan are to be applied first to trust-fund taxes, even if the plan
is a non-liquidating plan);
</li><li><a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Iowa Coal Min. Co. Inc.,</i> 242 B.R. 661 (Bankr. S.D. Iowa 1999)</a> (three separate bonding
companies, whose claims arose under one reclamation, had filed an involuntary petition and were held to
be a single claimant);
</li><li><a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Management Control Systems Inc.,</i> 242 B.R. 658 (Bankr. S.D. Ind. 1999)</a> (bankruptcy court
does not have jurisdiction over a corporate chapter 7 debtor's secretary's motion for determination of his
responsibility party's tax liability);
</li><li><a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Schwarzwalder,</i> 242 B.R. 734 (Bankr. M.D. Fla. 1999)</a> (bankruptcy court did not have related
jurisdiction to determine a dispute between third parties over property abandoned by the chapter 7 trustee);
</li><li><a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Jamesway Corp.,</i> 242 B.R. 130 (Bankr. S.D.N.Y. 1999)</a> (while a successful claim under the
Worker Adjustment and Retraining Notification Act was not entitled to priority under either §§503(a)(1)(A)
or 507(a)(1) of the Bankruptcy Code, attorneys' fees awarded under <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… U.S.C. §2104(a)(6)</a> are entitled to
administrative priority expense status under §§503(b)(1)(A) and 507(a)(1));
</li><li><a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Harris,</i> 244 B.R. 556 (Bankr. D. Conn. 2000)</a> (a secured creditor's lack of consent to a
§1325(a)(5)(C) provision surrendering collateral to the creditor is not, by itself, a barrier to plan
confirmation); and
</li><li><a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Dubrowsky,</i> 244 B.R. 560 (Bankr. E.D.N.Y. 2000)</a> (debtor could not rely on advice of counsel
as a defense in an action to deny discharge when the debtor failed to disclose assets and it was transparently
clear that the advice of counsel was improper).</li>
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