In re American Motor Club, Inc., Bankruptcy No. 887-70763-260.
| Decision Date | 26 March 1991 |
| Docket Number | Bankruptcy No. 887-70763-260. |
| Citation | 125 BR 79 |
| Parties | In re AMERICAN MOTOR CLUB, INC., Debtor. |
| Court | U.S. Bankruptcy Court — Eastern District of New York |
Philip Irwin Aaron, Syosset, N.Y. by Michael D. Brofman, for the Official Creditors' Committee.
Rosner & Goodman, New York City by Andrew J. Goodman, for Nicholas Neu.
Dreyer & Traub, New York City by Edward M. Tillinghast, III, for Winfield Sec. Corp.
DECISION
Winfield Security Corporation ("Winfield") moves pursuant to Title 11 of the United States Code (the "Code") Section 503(b)(3)(E) for an order declaring that it's claim of $44,093.20 be allowed as an administrative expense of the estate under § 503(b)(3)(E) of the Bankruptcy Code.1 An objection to the motion was interposed by the Official Committee of Unsecured Creditors (the "Committee") and also by Nicholas Neu, a former director of American Motor Club ("AMC" or the "Debtor"). For the reason set forth below the motion is denied.
AMC was in the business of selling automobile pre-paid collision service contracts to New York residents and maintained places of operations at: 133-25 37th Avenue, Flushing, New York; 32-27 Downing Street, Flushing New York; and, 19-11 38th Street, Astoria New York.
On or about October 18, 1985, an action was commenced against AMC by the State of New York (the "State") in the Supreme Court of the State of New York, New York County (the "State Court") on the grounds that the Debtor's business constituted an illegal and unlicensed collision and comprehensive insurance business. By a decision of the State Court dated January 14, 1987, it was determined that AMC's sale of automobile pre-paid collision service contracts was indeed an illegal insurance business. By order and judgment, dated April 8, 1987, AMC was permanently enjoined from engaging in the business of repairing or compensating consumers for motor vehicles damaged as a result of accident or theft, and was assessed a penalty of $5,001,000 for its violation of New York State Insurance Law.
During the course of the State Court action, the State moved to restrain AMC from disposing of its assets and for the appointment of a temporary receiver, with all powers to function for and as AMC. The State's relief was granted by order dated March 16, 1987, and James W. Randolph ("Randolph"), in his official capacity as Deputy Superintendent of Insurance for the State of New York, was appointed as temporary receiver.
Randolph hired Winfield to provide guard and security services to AMC at its three locations. Shortly thereafter, Randolph requested that he be removed from his position as temporary receiver because it interfered with his duties at the New York State Insurance Department. By order of the State Court, entered on March 30, 1987 Randolph's relief was granted, he was removed as temporary receiver and Maria Alaznaki, Esq. was appointed as temporary receiver in his place.
AMC initiated this bankruptcy case by filing a petition for relief under Chapter 11 of the Code on May 19, 1987.
In the Objection to Winfield's Motion interposed by the Committee, it is stated "there was no custodian actually in place just prior to the filing of the petition in bankruptcy." This Court is unaware of any State Court order removing Ms. Alaznaki. Nonetheless, as this Court has not been presented with any motions to remove Ms. Alaznaki, compel her to render an accounting or turn over property of the estate, it is only logical to assume that the statement of the Committee is correct and that the receivership came to an end sometime prior to the commencement of this case.
Prior thereto and on April 10, 1987, an order was entered by the State Court directing Philip Plaksin, as president of AMC to: (1) continue to pay Winfield; (2) unlock AMC's facilities for the purpose of allowing consumers to recover their automobiles; and (3) to take all steps necessary to enable AMC to write court authorized checks on corporate accounts. It is to be noted that this order of April 10 directed Plaksin to pay Winfield, as opposed to requiring Randolph or Ms. Alaznaki to satisfy the debt as part of the receivership proceedings.
Plaksin had also been authorized, by a separate order of the State Court, dated April 10, 1987, to retain P.B.R. Group to provide services enabling AMC to release to their rightful owners the automobiles it had in its possession. P.B.R. Group inventoried and moved all consumer vehicles, personal property, and trade fixtures in which AMC had any interest from the Debtor's premises at 32-27 Downing Street, and 19-11 38th Street to its 37th Avenue, Flushing location, thus obviating the need for Winfield's services at those two sites. Plaksin also chose to replace Winfield and use another security company to provide services at AMC's 37th Avenue location. By stipulation and order of the State Court dated and filed May 8, 1987, AMC was authorized to terminate Winfield's services at 32-27 Downing Street and 19-11 38th Street immediately and terminate its services at 133-25 37th Avenue as of May 11, 1987.
On May 19, 1987, by stipulation and order of the State Court, the AMC and Winfield acknowledged that there existed an outstanding balance of $44,093.20 due to Winfield for services rendered for the period April 19, 1987 through May 11, 1987 and authorized and directed Plaksin, as president of AMC to write three checks to Winfield in the amounts of $5,811.00, $5,512.00 and $32,770.20 in full satisfaction of Winfield's claim. Later that same day the Debtor filed its petition for relief under Chapter 11 of the Bankruptcy Code.
The Debtor failed to comply with the order of May 19 in that it did not pay Winfield. However, in June of 1987, the Debtor made an application to Hon. C. Albert Parente, the Bankruptcy Judge then assigned to this case, for an order pursuant to § 105 of the Bankruptcy Code authorizing it to pay Winfield $44,093.20 upon confirmation of a plan of reorganization in its Chapter 11 case, or in the event this case were converted to a Chapter 7 case by the trustee only after all administrative expenses had been satisfied in full. The docket sheet entry for July 2, 1987 states that this motion was denied and directed an order be settled. However no such order was ever signed.
On February 11, 1988 this case was reassigned to me due to the retirement of Judge Parente.
Now before the court is Winfield's Application for Allowance and Payment of Administrative Expense. Winfield argues that its within application differs from the Debtor's motion of June 1987 in that it requests that its claim be paid upon confirmation of a plan or by a trustee in a Chapter 7 case, whereas the Debtor's motion asked that Winfield's claim not be paid until all administrative claims were paid in full.
Winfield argues that it's claim is entitled to treatment as an administrative expense pursuant to § 503(b)(3)(E) of the Bankruptcy Code on the grounds that its claim arises out of actual, necessary expenses incurred by the receiver.
Winfield maintains that inasmuch as it was hired by a receiver appointed by the State Court and performed services which enhanced the preservation of the estate, its claim represents an actual, necessary claim incurred by a custodian, hence its claim qualifies for an administrative expense under § 503(b)(3)(E). Winfield also argues it is entitled to an administrative priority because the State Supreme Court directed AMC to pay Winfield.
The Committee objects to the treatment of Winfield's claim as an administration claim for several reasons. First the Committee contends that an application for this relief has already been made and denied, hence the application must be denied as moot. Second, both objectants argue that § 503(b)(3)(E) only authorizes the actual and necessary expenses of a custodian superseded under § 543, and that in the instant case, there is no evidence that a custodian was in place just prior to the filing of the petition for relief and therefore the receiver was not superseded by the initiation of this bankruptcy case. Third, the Committee points out that although Winfield had been hired by Randolph, Winfield requested payment directly from AMC, not from the receiver, and that the Stipulation dated May 19, 1987, signed by Plaksin, as president of AMC, and the Attorney General authorizes the Debtor and not the receiver to make payment to Winfield. Hence Winfield is neither a custodian nor a beneficiary of a custodian and is not entitled to any priority.
"Section 503(b)(3)(E) codifies present law in cases such as Randolph v. Scruggs, 190 U.S. 533, 23 S.Ct. 710, 47 L.Ed. 1165 (1903) which accords administrative expense status to services rendered by a prepetition custodian or other party to the extent such services actually benefit the estate." 124 Cong.Rec. H 11094-95 (daily ed., Sept. 28, 1978) (remarks of Rep. Edwards); S 17411 (daily ed., Oct. 6, 1978) (remarks of Sen. DeConcini). See In re Kenval Marketing Corp., 84 B.R. 32, 34 (Bankr.E.D.Pa.1988); In re Valley Isle Broadcasting, Ltd., 56 B.R. 505, 506 (Bankr.D.Hawaii 1985).
In Randolph the Supreme Court stated the principle that costs of a superseded assignment for the benefit of creditors, including attorney\'s fees for representation of the assignee, were entitled to first payment out of the bankrupt estate as an equitable lien. This equitable lien would be imposed provided that the costs were beneficial and tended to preserve the assets. The Court reasoned that reimbursement and/or allowances were due not as costs of administration or provable claims, but based on the theory that the assignee was entitled to deduct the expenses before being required to surrender the balance of the assets to the bankruptcy court. Thus, if the receiver turned over all the assets, the deductible expenses should be reimbursed to him. In re Orchid Island Hotels, Inc., 18 B.R. 926, 932 (Bankr.D....
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