In re Chewning & Frey Security, Inc.

• Decision Date: 09 August 2005
• Docket Number: No. 96-77872-CRM.,96-77872-CRM.
• Citation: 328 B.R. 899
• Parties: In re CHEWNING & FREY SECURITY, INC., f/k/a McLaughlin-Frey Security, Inc., Debtor.
• Court: U.S. Bankruptcy Court — Northern District of Georgia

328 B.R. 899

In re CHEWNING & FREY SECURITY, INC., f/k/a McLaughlin-Frey Security, Inc., Debtor.

No. 96-77872-CRM.

United States Bankruptcy Court, N.D. Georgia, Atlanta Division.

August 9, 2005.

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Tamara Miles Ogier, Ellenberg, Ogier & Rothschild, P.C., Atlanta, GA, for Debtor.

C. Brooks Thurmond, III, Atlanta, GA, Chapter 7 Trustee.

Leroy Culton, Office of the United States Trustee, Atlanta, GA, for U.S. Trustee.

ORDER

C. RAY MULLINS, Bankruptcy Judge.

THIS MATTER is before the Court on the Trustee's Final Report (the "Final Report") (Doc. No. 170), filed by the Chapter 7 Trustee (the "Trustee"); the Application for Compensation to [sic] Special Counsel (the "Application for Compensation") (Doc. No. 174), filed by Ellenberg, Ogier & Rothschild ("Special Counsel"); and the Ellenberg, Ogier & Rothschild Objection to Trustee's Final Report and Contingent Amendment to Its Fee Application (the "Objection to Final Report and Amendment to Application") (Doc. No. 177), filed by Special Counsel. The United States Trustee (the "U.S. Trustee") filed its Response to Ellenberg, Ogier & Rothschild Objection to Trustee's Final Report, Etc. (the "U.S. Trustee's Response") (Doc. No. 181).

On January 27, 2005, a hearing was held on the Final Report, the Application for Compensation, and the Objection to Final Report and Amendment to Application, and the Court permitted the parties to file supplemental briefs. On February 2, 2005, Special Counsel filed its Post-Trial Brief Supporting the Ellenberg, Ogier & Rothschild Objection to Trustee's Final Report and Contingent Amendment to Its Fee Application ("Special Counsel's Supplemental Brief") (Doc. No. 182). On February 4, 2005, the Trustee filed the Brief in Support of Trustee's Final Report and Proposed Distribution (the "Trustee's Supplemental Brief") (Doc. No. 183).

The Court has jurisdiction over this matter pursuant to 28 U.S.C. § 1334(b), as well as Rule 1070-1 of the Local Rules of Practice for the United States Bankruptcy Court for the Northern District of Georgia. This is a core proceeding under 28 U.S.C. § 157(b)(2)(A).

The issue before the Court is whether the administratively insolvent estate should pay Special Counsel's contingency fee in full pursuant to the contingent fee agreement, the Application to Employ Special Counsel, and the Application for Compensation, or whether the fee should be reduced by the requirement for pro rata distribution set forth in section 726(b) of the Bankruptcy Code. The Court holds that when Special Counsel seeks compensation at the time of the final distribution of an administratively insolvent estate, Special Counsel's contingency fee should be reduced to achieve a pro rata distribution in accordance with section 726.

I. FACTS

Chewning & Frey Security, Inc. (the "Debtor"), formerly known as McLaughlin-Frey Security, Inc., filed a petition for relief under chapter 11 of the Bankruptcy Code on November 8, 1996. The Debtor was represented by Ellenberg, Rothschild & Ogier in the main bankruptcy case. See Order granting Application of Debtor for Approval of Employment of Attorneys and Attorney's Rule 2014 Disclosure Statement (Doc. No. 12). On May 15, 1998, the chapter 11 case was converted to a case under chapter 7 pursuant to the Debtor's request. See Notice of Conversion to a Case Under Chapter 7 (Doc. No. 93). Mr. C. Brooks Thurmond was appointed as Trustee on May 18, 1998.

On September 26, 2001, the Trustee filed the Application to Employ Special Counsel (Doc. No. 144). The Trustee sought to employ counsel for the Debtor in the main bankruptcy case as Special Counsel to represent the estate in Chewning & Frey Security, Inc., v. Pearce Financial Group, Inc., Adversary Proceeding No. 98-6022 (the "Pearce Adversary Proceeding"), commenced by the Debtor against the Pearce Financial Group, Inc. ("Pearce") prior to conversion.¹ According to paragraph 5 of the Application to Employ Special Counsel,

Ellenberg Ogier & Rothschild, P.C., have agreed to provide the aforesaid services to this estate on a contingency fee basis of one-third (1/3) of all sums collected on behalf of the estate, plus reimbursement for out-of-pocket expenses. The out of pocket expenses to be reimbursed include those incurred by counsel prior to this employment in the prosecution of this action prior to conversion including, but not limited to, the costs of a deposition of a representative of the Defendant taken in Florida, said costs not to exceed $550.00.

Application to Employ Special Counsel, ¶ 5 (emphasis added). On October 10, 2001, the Court entered the Order approving the Application to Employ Special Counsel (Doc. No. 145). As noted in the Order, "payment of compensation as set forth in Trustee's Application is subject to allowance by the Court upon application, notice and hearing thereon." Order approving Application to Employ Special Counsel, ¶ 3.

On behalf of the Trustee, Special Counsel filed the Application to Compromise (Doc. No. 159) in the main bankruptcy case² on October 7, 2003. The Trustee proposed to compromise the estate's claims against Pearce upon the terms and conditions enumerated in the Agreement to Compromise with Pearce Financial Group, Inc., attached to the Application to Compromise. On November 18, 2003, the Court entered the Order Approving Compromise (Doc. No. 163), which settled the estate's claim against Pearce, as well as any claims by Pearce against the estate, for the total sum of $37,636.00. The monies were paid by Pearce to the estate, and the Pearce Adversary Proceeding was dismissed with prejudice on April 26, 2004.

On October 29, 2004, the Trustee filed the Final Report, which shows that the estate is administratively insolvent and has sufficient funds to pay only a percentage of the chapter 7 administrative expenses. The chapter 7 administrative claims totaling $56,561.10 exceed the funds in the amount of $48,286.47 remaining to be distributed. In conjunction with the Final Report, the chapter 7 administrative claimants including the Trustee, the Attorney for the Trustee, the Trustee's Accountant, and Special Counsel, filed applications for compensation. Special Counsel filed the Application for Compensation requesting $13,614.49, one-third of the recovery from the Pearce Adversary Proceeding in the amount of $12,545.33 plus reimbursement of expenses in the amount of $1,069.16, pursuant to the Application to Employ Special Counsel. According to the Application for Compensation, this contingency fee is less than the Special Counsel's $24,147.00 fee based on actual time billed.

Seeking the entire contingency fee of $12,545.33, Special Counsel objected to the Trustee's Final Report. Special Counsel argues that the estate should pay the total amount of the contingency fee out of the settlement proceeds before the remainder of the settlement is applied pro rata to the chapter 7 administrative expenses. In the alternative, should the chapter 7 administrative claimants share a pro rata distribution, Special Counsel prays for the allowance of a chapter 7 priority expense in the amount of $16,863.65 to receive payment of fees and expenses in the amount of $13,614.49. In response, the Trustee asserts that Special Counsel's contingent fee is a chapter 7 administrative expense which should be paid pro rata at a dividend of approximately 85.37%. Similarly, the U.S. Trustee recommends that Special Counsel's claim for legal fees be paid in accordance with the pro rata distribution of estate funds pursuant to section 726. To date, Special Counsel has yet to receive any compensation in connection with its employment on behalf of the Trustee.

II. ARGUMENTS

The Trustee's proposed distribution prorates the funds received and remaining to be distributed among chapter 7 administrative expenses, including Special Counsel's contingent fee. Special Counsel argues that it is entitled to receive compensation in full from the settlement pursuant to general principles of contract law, Georgia law, and equity. Relying on the Application to Employ Special Counsel and the order approving said application, Special Counsel contends that it agreed to provide services to the estate on a contingency fee basis of one third of all sums collected, not as an "`allowed expense' before discount for pro rata sharing." Special Counsel's Supplemental Brief, pp. 3. Special Counsel claims that the contingency fee "comes off the top" of the recovery. Transcript, pp. 10, lines 18-19. Acknowledging that it assumed the risk of the contingency fee arrangement, Special Counsel asserts that it "did not take the further risk that it would donate its work twice: once if the value of its work exceeded a third of the recovery; and then again, from [Special Counsel's] third, if the other professionals were not completely paid from the estate's two-thirds." Objection to Final Report and Amendment to Application, pp. 3. Since the Trustee reasons that the contingent fee should be reduced pursuant to the distribution scheme articulated in section 726, Special Counsel alleges that the Trustee's interpretation of the fee arrangement demonstrates that there was "no meeting of the minds" when the parties entered into the employment contract, or, perhaps, that there was a frustration of purpose of the initial employment contract. Consequently, Special Counsel petitions the Court to award reasonable compensation pursuant to section 330. In the alternative, Special Counsel contends that its services substantially benefitted the estate. In fact, a significant portion of the funds remaining to be distributed were brought into the estate from the settlement of the Pearce Adversary Proceeding. Special Counsel further argues that the Georgia Attorney's Lien Statute, section 15-19-14 of the Official Code of Georgia,...