In re 29 Brooklyn Ave., LLC

• Decision Date: 27 April 2016
• Docket Number: Case No. 12–40279–cec
• Citation: 548 B.R. 642
• Parties: In re: 29 Brooklyn Avenue, LLC, Debtor.
• Court: U.S. Bankruptcy Court — Eastern District of New York

548 B.R. 642

In re: 29 Brooklyn Avenue, LLC, Debtor.

Case No. 12–40279–cec

United States Bankruptcy Court, E.D. New York.

Signed April 27, 2016

David Carlebach, Esq., The Carlebach Law Group, 55 Broadway, Suite 1902, New York, New York 10006, Counsel for the Debtor

Michael Cohen, Esq., Tenenbaum Berger & Shivers LLP, 26 Court Street, Penthouse, Brooklyn, New York 11242, Counsel for Stephen R. Chesley, Receiver

OPINION

CARLA E. CRAIG, Chief United States Bankruptcy Judge

This matter comes before the Court on the motion of Stephen R. Chesley (the "Receiver") who operated property located at 29 Brooklyn Avenue, Brooklyn, New York (the "Property") belonging to 29 Brooklyn Avenue, LLC (the "Debtor") prior to the filing of this bankruptcy case, for attorney's fees under §§ 503(b)(3)(E) and 503(b)(4).¹ For the reasons stated below, the motion is granted in part and denied in part.

JURISDICTION

This Court has jurisdiction of this matter pursuant to 28 U.S.C. § 1334(b), the Eastern District of New York standing order of reference dated August 28, 1996, as amended by order dated December 5, 2012, and Article 6 of the confirmed chapter 11 plan in this case. This matter is a core proceeding under 28 U.S.C. § 157(b)(2)(B),(C), and (O). This decision constitutes the Court's findings of fact and conclusions of law to the extent required by Federal Rule of Bankruptcy Procedure 7052.

BACKGROUND

For purposes of this decision, familiarity with the factual background is assumed. The relevant facts may be summarized as follows:²

On January 18, 2012 (the "Filing Date"), the Debtor filed a voluntary petition for relief under chapter 11 of title 11 of the United States Code (the "Bankruptcy Code"). Prior to the Filing Date, New York Community Bank initiated a foreclosure action with respect to the Property.³ The Receiver, appointed in the foreclosure action, came into possession of the Property in October 2010, and managed the Property from that point up until the Filing Date. Yisroel Barron was the principal of the Debtor and the owner of 100% of the equity interests. (Ch. 11 Plan ¶ 2.7, ECF Doc. No. 73).⁴

A. The Plan

On December 19, 2012, the Debtor filed a chapter 11 plan, which did not provide for payment of the Receiver's outstanding expenses or commissions. On January 30, 2013, the Receiver filed an objection to confirmation of the plan. On February 6, 2013, the Receiver withdrew his objection to confirmation after the Debtor agreed to escrow funds sufficient to pay his claim. The plan was confirmed by order entered February 14, 2013. According to records filed by the Debtor, the Property was sold for $3,056,194.00, and after payment of sale expenses and secured creditors, the Debtor retained $1,367,454.00. (Ch. 11 Statement of Quarterly Disbursements Post Confirmation, ECF Doc. No. 172.) The unsecured claims against the Debtor were less than $70,000.00 (Ch. 11 Plan ¶ 2.5, ECF Doc. No. 73.) The Plan provided for 100% payment of all administrative expenses and all allowed claims.

B. The Receiver's Claim

After the Filing Date, the Receiver turned over possession of the Property and filed a proof of claim in the amount of $80,757.22 (the "Proof of Claim"). The Proof of Claim represented pre-petition paid and unpaid expenses of the Property as well as the Receiver's commission and legal fees incurred up to that point. The Debtor filed an objection to the Proof of Claim on June 1, 2012 (the "Objection"). The Receiver filed his final accounting on March 15, 2013. Both before and after the final accounting was filed, the parties engaged in extensive discovery relating to the Proof of Claim and the Objection. After an eight-day trial, the Court allowed the Receiver's Proof of Claim in the amount of $72,449.35. The Receiver was surcharged $225.49 for a total award of $72,223.86. The order awarding fees to the Receiver was entered on August 24, 2015. (Order, ECF Doc. No. 207.)

On September 3, 2015, the Receiver filed a motion seeking allowance of attorney's fees incurred in the bankruptcy case in the amount of $355,953.25 (the "Fee Application"). (Application for Compensation, ECF Doc. No. 209.) On October 9, 2015, the Debtor filed an objection to the Fee Application (the "Fee Objection"). (Objection to Professional Fees, ECF Doc. No. 222.) On October 19, 2015, the Receiver filed a reply to the Fee Objection (the "Reply Brief"). (Brief, ECF Doc. No. 224.) On October 21, 2015, the Debtor filed a reply to the Reply Brief. (Reply, ECF Doc. No. 228.) A hearing was held on October 21, 2015 on the Fee Application and the Court reserved decision.

DISCUSSION

The fees requested in the Fee Application are for services rendered by the Receiver's counsel, Tenebaum Berger & Shivers, LLP, to the Receiver in this case. The vast majority of these fees relate to the defense of the Proof of Claim and to defense of the Debtor's application to surcharge the Receiver. The Proof of Claim was substantially allowed, and the Debtor's motion to surcharge the Receiver was denied except for $225.49. See In re 29 Brooklyn Ave., LLC, 535 B.R. 36 (Bankr.E.D.N.Y.2015). Whether the Fee Application can be granted depends on whether the services rendered are compensable under the Bankruptcy Code and whether the amounts requested are reasonable.

A. Compensable Services

The Bankruptcy Code prescribes a receiver's responsibilities and duties following commencement of bankruptcy case involving property the receiver is administering. The Bankruptcy Code defines a receiver as a "custodian." 11 U.S.C. § 101(11). Section 543 governs what a custodian must do when the custodian learns of the bankruptcy. First, the custodian must cease all administration activities and cannot make any disbursements from property of the debtor except when such action would be necessary to preserve property in the custodian's control. 11 U.S.C. § 543(a); see, e.g., S.E.C. v. Churchill Securities, Inc., 223 B.R. 415, 417–18 (S.D.N.Y.1998). Second, the custodian must perform two duties: (1) turn over all property of the debtor in the custodian's control to the trustee (or debtor in possession), and (2) file an accounting of any property of the debtor that came into the possession, custody, or control of the custodian.⁵ 11 U.S.C. § 543(b); see e.g., In re 245 Associates, LLC, 188 B.R. 743, 748 (Bankr.S.D.N.Y.1995), corrected (Nov. 9, 1995).

Custodians are also entitled to be reimbursed for their expenses and to receive compensation for their services from the bankruptcy estate. Section 543(c)(2)states that the court "shall ... provide for payment of reasonable compensation for services rendered and costs and expenses incurred by such custodian." 11 U.S.C. § 543(c)(2). This compensation is entitled to administrative priority under § 503(b)(3)(E), which provides for an allowed administrative expense for "the actual, necessary expenses ... incurred by ... a custodian superseded under § 543of this title, and compensation for the services of such custodian." 11 U.S.C. § 503(b)(3)(E).

This section of the Bankruptcy Code codifies previous common law regarding the compensation of custodians. In Randolph & Randolph v. Scruggs, 190 U.S. 533, 23 S.Ct. 710, 47 L.Ed. 1165 (1903), the Supreme Court held that a pre-petition custodian could seek compensation as an administrative expense for services that benefitted the estate. Id. at 538–39, 23 S.Ct. 710. The legislative history shows that § 503(b)(3)(E)was specifically designed to codify the rule articulated in Randolph. 128 Cong. Rec. 32398 (1978) (statement of Rep. Edwards) ("Section 503(b)(3)(E)codifies present law in cases such as Randolph v. Scruggs, 190 U.S. 533, 23 S.Ct. 710, which accords administrative expense status to services rendered by a prepetition custodian or other party to the extent such services actually benefit the estate.") Under the Bankruptcy Code and under pre-Code law, the custodian's services must provide a benefit to the estate to be entitled to administrative expense priority. See Szwak v. Earwood (In re Bodenheimer, Jones, Szwak, & Winchell L.L.P.), 592 F.3d 664, 674 (5th Cir.2009)(collecting cases).

In addition to the expenses and compensation that may be awarded to a custodian under § 503(b)(3)(E), § 503(b)also allows compensation for a custodian's attorney. Section 503(b)(4)grants an allowed administrative expense for "reasonable compensation for professional services rendered by an attorney or an accountant of an entity whose expense is allowable under subparagraph (A), (B), (C), (D), or (E) of paragraph (3) of this subsection." 11 U.S.C. § 503(b)(4).

The general rule with regard to payment of attorneys' fees is the American Rule, under which each party is responsible for payment of its own attorney's fees. Alyeska Pipeline Serv. Co. v. Wilderness Soc'y, 421 U.S. 240, 247, 95 S.Ct. 1612, 1616, 44 L.Ed.2d 141 (1975). Responsibility for fees may be shifted to another party only where a statute or contract provides for such shifting. Hardt v. Reliance Standard Life Ins. Co., 560 U.S. 242, 253, 130 S.Ct. 2149, 2157, 176 L.Ed.2d 998 (2010). Section 503(b)(4)is unquestionably a fee-shifting statute; it provides for the bankruptcy estate to pay "reasonable compensation for professional services rendered by an attorney or an accountant of an entity whose expense is allowable under subparagraph (A), (B), (C), (D), or (E) of paragraph (3) of this subsection," which includes a superseded custodian, such as the Receiver. 11 U.S.C. § 503(b)(4). The attorney's fees requested by the Receiver's counsel can be allowed to the extent they fall within the ambit of § 503(b)(4).

There is no question that the Receiver's counsel is entitled to fees under § 503(b)(4)for services directly related to the process of turning over property of the estate in the Receiver's control and providing the required accounting. The plain language of § 503(b)(4)provides for compensation for services rendered by an attorney of an entity with an allowed expense under § 503(b)(3)(E). 11 U.S.C. §...