A claims agent for a chapter 11 debtor cannot earn extra income by uploading the claims docket to a claims trader in return for a cut of the fees earned by the claims trader, according to an August 18 opinion by Bankruptcy Judge Sean H. Lane of Manhattan.
In the Southern District of New York, local rules require a chapter 11 debtor to retain a claims and noticing agent whenever there will be more than 250 claims. The claims agents are retained by court order, and their fees are paid by the debtor as administrative claims. The claims agent maintains a docket of filed claims.
In its retention application in a mass-tort chapter 11 case in Manhattan, the claims agent disclosed that it had an agreement with a claims trader under which the claims agent would upload the claims docket to the trader in a form compatible with the trader’s software.
In return for the upload and updates, the trader would pay the claims agent 10% of the fees it received for effecting trades in claims against the debtor.
At the first day hearing, Judge Lane approved the claims agent’s retention on an interim basis but asked for briefing on the propriety of the arrangement with the trader. In response, the claims agent filed the full text of the agreements with the trader and contended that the arrangement was not inappropriate. More particularly, the claims agent said that the agreement was not in its capacity as an agent for the court clerk but was “in its capacity as a private, for-profit enterprise.”
Judge Lane did not leave the reader in suspense. “Because [the claims agent] is acting in its capacity as an agent of the Clerk,” he said on the first page of the opinion that the claims agent “may not enter into this business arrangement with [the claims trader] because the Clerk of Court would not be permitted to enter into such a relationship or receive such fees.”
Judge Lane justified his conclusion by the statutes and local rules.
Claims agents may be retained under 28 U.S.C. § 156(c), which says:
Any court may utilize facilities or services, either on or off the court’s premises, which pertain to the provision of notices, dockets, calendars, and other administrative information to parties in cases filed under the provisions of title 11, United States Code, where the costs of such facilities or services are paid for out of the assets of the estate and are not charged to the United States.
In other words, Judge Lane said, “a claims agent may be retained in a bankruptcy case to assist the Clerk with certain administrative tasks and be compensated by the bankruptcy estate.” He added that the activities of a claims agent “are further governed” by the bankruptcy court’s “Protocol,” which “provides that the claims agent’s activities should not extend beyond the notice and processing tasks that the Clerk of Court may perform.” To read the Protocol, click here.
As agent for the court clerk, Judge Lane said that the claims agent was also bound by the Code of Conduct for Judicial Employees, which says, among other things, that “a judicial employee should not . . . appear to advance the private interests of others. A judicial employee should not use public office for private gain.”
Judge Lane said that the clerk, and by extension the claims agent, is limited to accepting fees authorized by 28 U.S.C. § 1930. In turn, Section 1914(b) allows the Judicial Conference to authorize additional fees. Those fees, he said, “are set forth in extensive and painstaking detail in the Bankruptcy Court Miscellaneous Fee Schedule.” However, those fees are paid to the U.S. Treasury.
Having laid out the governing law, Judge Lane said that the claims agent’s “authority to act is derivative of the Clerk’s authority” and is limited to the duties that would be performed by the clerk.
By uploading the claims docket to the trader’s platform, Judge Lane said that “the [claims agent’s] obligations and duties under the [contract with the trader] clearly go beyond the 156(c) Activities.” The clerk, he said, “cannot engage in a for-profit relationship solely to benefit” the trader.
If the clerk were to share fees generated by the trader, Judge Lane said that the clerk would violate the rule against using public office for private gain. Since the clerk can only collect fees permitted under Section 1930, he said that the claims agent cannot make an agreement that the clerk would be prohibited from making.
Judge Lane rejected five additional arguments by the claims agent. He ended his opinion by approving retention of the claims agent, with the proviso that the claims agent may not have “any file sharing” agreement with the trader.
Observations
Consider the results had Judge Lane allowed the agent to sell the claims docket and profit in return.
Were the claims agent not prohibited from profiting on the side from the claims docket, the claims agent presumably could put advertising on the docket. The advertising could include the names of law firms for creditors to hire. The appearance of law firms on the docket would seem like an endorsement by the court.
A claims agent for a chapter 11 debtor cannot earn extra income by uploading the claims docket to a claims trader in return for a cut of the fees earned by the claims trader, according to an August 18 opinion by Bankruptcy Judge Sean H. Lane of Manhattan.
In the Southern District of New York, local rules require a chapter 11 debtor to retain a claims and noticing agent whenever there will be more than 250 claims. The claims agents are retained by court order, and their fees are paid by the debtor as administrative claims. The claims agent maintains a docket of filed claims.
In its retention application in a mass-tort chapter 11 case in Manhattan, the claims agent disclosed that it had an agreement with a claims trader under which the claims agent would upload the claims docket to the trader in a form compatible with the trader’s software.
In return for the upload and updates, the trader would pay the claims agent 10% of the fees it received for effecting trades in claims against the debtor.