In re Jensen-Farley Pictures, Inc.

CourtUnited States Bankruptcy Courts. Tenth Circuit. U.S. Bankruptcy Court — District of Utah
Citation47 BR 557
Docket NumberBankruptcy No. 83A-03391.
PartiesIn re JENSEN-FARLEY PICTURES, INC., Debtor.
Decision Date14 February 1985

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Gary E. Jubber, Fabian & Clendenin, Salt Lake City, Utah, for debtor.

Carolyn Montgomery, Van Cott, Bagley, Cornwall & McCarthy, Salt Lake City, Utah, for Arthur Young & Co.

William G. Fowler, Salt Lake City, Utah, for the unsecured creditors' committee.

MEMORANDUM OPINION

JOHN H. ALLEN, Bankruptcy Judge.

CASE SUMMARY

This matter is before the Court on the verified applications for allowance of interim compensation filed by co-counsel for the creditors' committee, the accountant for the debtor, and the accountant for the creditors' committee. The Court is called upon to decide (1) whether compensation for prepetition services rendered by the attorney for an unofficial creditors' committee and the accountant for the debtor is allowable as an administrative expense of the Chapter 11 case; (2) whether professional persons employed pursuant to the authorization of this Court are limited to hourly rates charged by professionals in the Salt Lake City, Utah area; (3) whether the accountant for the creditors' committee represents an interest adverse to the debtor's estate such as to warrant denial of all compensation sought; and (4) whether the fees and costs sought are otherwise allowable.

FACTUAL AND PROCEDURAL BACKGROUND

The debtor, Jensen-Farley Pictures, Inc., is a Utah corporation engaged in the business of producing and distributing motion pictures. In the Fall of 1983, the debtor's financial situation had deteriorated to a critical point. On October 12, 1983, the debtor's principals and financial advisors held a meeting at the debtor's New York City office with its largest creditors to seek their cooperation while it attempted to restructure its business. The creditors present organized themselves into an unofficial committee and employed Teitelbaum & Gamberg, P.C., a New York City law firm, as its counsel. The debtor paid Teitelbaum & Gamberg a retainer of $10,000.1

The debtor requested that the committee recommend a temporary moratorium on debt collection by individual creditors while it attempted a nonbankruptcy workout. Members were informed that the Salt Lake City, Utah, law firm of Fabian & Clendenin had been retained and would file a Chapter 11 petition if necessary in order to forestall creditor action.

At the same time as the meeting with its largest creditors, the debtor employed Arthur Young & Company, certified public accountants, to conduct an audit of its books and records, and an expanded review of its assets and liabilities in connection with the effort to restructure and reorganize the business.2 As a concession for recommending the moratorium, the debtor agreed to furnish the committee with all information produced by Arthur Young & Company. To this end the debtor instructed Arthur Young & Company to communicate and work directly with the unofficial committee.

During the uneasy truce with its creditors, the committee and Teitelbaum & Gamberg were involved in negotiations concerning possible acquisitions of or mergers with the debtor. The debtor's efforts toward accomplishing a nonbankruptcy workout were unsuccessful. On December 30, 1983, the debtor filed a voluntary petition for relief under Chapter 11.3

On January 3, 1984, upon application of the unofficial creditors' committee, the Court appointed a 16-member creditors' committee, consisting exclusively of the former members of the unofficial committee. On January 3, 1984, the Court also approved the employment of Teitelbaum & Gamberg and Roe & Fowler as co-counsel for the creditors' committee and Ernst & Whinney as its accountant. On January 5, 1984, the Court approved the employment of Arthur Young & Company as accountant for the debtor. An Examiner was appointed in the case on April 24, 1984, to "investigate the acts, conduct assets, liabilities, and financial condition of the debtor, the operation of the debtor's business, and the desirability of the continuation of such business, and any other matter relevant to the case or to the formulation of a plan." On October 24, 1984, the Examiner filed a report with the Court based on his investigation of the business and financial affairs of the debtor. The Examiner's report concluded that "the continuation of the debtor's business is impossible."4

Verified applications for interim compensation and reimbursement of cases were filed by Teitelbaum & Gamberg, Roe & Fowler, Arthur Young & Company, and Ernst & Whinney in May, 1984.5 In support of their application each applicant attached an itemization setting out the time spent and services rendered. After notice to parties in interest, the Court received an objection from the debtor to the applications of Teitelbaum & Gamberg, Ernst & Whinney, and Arthur Young & Company. The debtor objects (1) to the allowance of compensation for prepetition services performed by Teitelbaum & Gamberg and Arthur Young & Company; (2) to compensation to Teitelbaum & Gamberg, Ernst & Whinney and Arthur Young & Company in excess of the rates charged in the Salt Lake City area; (3) to the allowance of any fees to Ernst & Whinney upon the grounds that the accounting firm represents an interest adverse to the estate; (4) to the reasonableness of the fees sought by Teitelbaum & Gamberg, even when applying New York rates; (4) to the allowance of full compensation to attorneys for routine services such as telephone calls and correspondence; (6) to allowance for duplicative services by attorneys and accountants; (7) to the "overuse" of senior counsel by Teitelbaum & Gamberg; and (8) to the allowance of certain "overhead" items as reimbursable expenses.

On June 14, 1984, a hearing was held to consider the four applications. No evidence was presented in support of or against the applications but the Court heard the arguments of counsel. The Court took the matter under advisement and invited the parties to submit simultaneous memoranda. The Court has reviewed the applications and documentary evidence of record, the pleadings and papers on file herein, the memoranda of the parties in support of their respective positions, the transcript of oral argument, and the pertinent statutes, rules and case authorities, and now renders its decision.

DISCUSSION
Prepetition Attorneys' and Accountants' Fees

The majority of the services for which compensation is sought by Teitelbaum & Gamberg, P.C., co-counsel for the creditors' committee, and Arthur Young & Company, accountant for the debtor, was performed prior to the commencement of the Chapter 11 case. Nonetheless, these applicants contend that their prepetition fees may be allowed as an administrative expense under 11 U.S.C. ? 503(b)(3) and (4).6 To understand this provision it is necessary to consider administrative expenses in their historical context.

The Language and Legislative History of Section 503 and the "Substantial Contribution" Test

Section 503 deals with administrative expenses allowable in a bankruptcy case. It describes six kinds of claims that are entitled to a first priority status under Section 507(a). Section 503(b)(3) and (4) permits the bankruptcy court to allow as an administrative expense reasonable compensation for professional services rendered by an attorney or accountant employed by a creditor, to the extent the expense falls within the guides described in that section. Section 503(b)(3) and (4) read as follows:

(b) After notice and a hearing, there shall be allowed administrative expenses, other than claims allowed under Section 502(f) of this title, including?€”
* * * * * *
(3) the actual, necessary expenses, other than compensation and reimbursement specified in paragraph (4) of this subsection, incurred by?€”
(A) a creditor that files a petition under Section 303 of this title;
(B) a creditor that recovers, after the court\'s approval, for the benefit of the estate any property transferred or concealed by the debtor;
(C) a creditor in connection with the prosecution of a criminal offense relating to the case or to the business or property of the debtor;
(D) a creditor, an indenture trustee, an equity security holder, or a committee representing creditors or equity security holders other than a committee appointed under section 1102 of this title, in making a substantial contribution in a case under chapter 9 or 11 of this title; or
(E) a custodian superseded under section 543 of this title, and compensation for the services of such custodian;
(4) reasonable compensation for professional services rendered by an attorney or an accountant of an entity whose expense is allowable under paragraph (3) of this subsection, based on the time, the nature, the extent, and the value of such services, and the cost of comparable services other than in a case under this title, and reimbursement for actual, necessary expenses incurred by such attorney or accountant;

Subsection (b) is derived mainly from section 64a(1) of the Bankruptcy Act, with some changes. S.Rep. No. 95-989, 95th Cong., 2d Sess. 66 (1978), 1978 U.S.Code Cong. & Admin.News, p. 5787, 5852. The language is relatively clear; it permits certain creditors, indenture trustees, or unofficial committees to receive as an administrative expense their actual, necessary expenses for a "substantial contribution" to a case under Chapter 9 or Chapter 11. See 3 COLLIER ON BANKRUPTCY ? 503.04, at 503-36 (15th ed. 1984). Subsection (b) also contemplates that certain qualifying expenses incurred prepetition receive an administrative priority. See 11 U.S.C. ? 503(b)(3)(E); Matter of Pride Foods Inc., 22 B.R. 356, 9 B.C.D. 480, 6 C.B.C.2d 1412 (Bkrtcy.D.Neb.1982); 124 Cong.Rec. H11094-95 (daily ed. Sept. 28, 1978) (remarks of Rep. Edwards); 124 Cong.Rec. S17411 (daily ed. Oct. 6, 1978) ...

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