In re Leedy Mortg. Co., Inc.

• Decision Date: 21 March 1990
• Docket Number: Bankruptcy No. 83-03502S.
• Citation: 111 BR 488
• Parties: In re LEEDY MORTGAGE COMPANY, INC. (Jointly Administered with Phila. Mortgage Trust Bankr. No. 83-03504S Investment Corp. of America Bankr. No. 83-03503S), Debtor.
• Court: U.S. Bankruptcy Court — Eastern District of Pennsylvania

111 B.R. 488 (1990)

In re LEEDY MORTGAGE COMPANY, INC. (Jointly Administered with Phila. Mortgage Trust Bankr. No. 83-03504S Investment Corp. of America Bankr. No. 83-03503S), Debtor.

Bankruptcy No. 83-03502S.

United States Bankruptcy Court, E.D. Pennsylvania.

March 21, 1990.

David S. Fishbone, Philadelphia, Pa., for trustee.

Mary F. Walrath, Clark Ladner Fortenbaugh & Young, Philadelphia, Pa., for claimants.

Myron A. Bloom, Philadelphia, Pa., for debtor.

OPINION

DAVID A. SCHOLL, Bankruptcy Judge.

A. INTRODUCTION

The instant consolidated contested matters are Objections filed by the Trustee of a mortgage service company which is presently a Chapter 7 Debtor mortgage service company to administrative and secured Proofs of Claim filed by lending institutions whose mortgages the Debtor serviced. Applying the precept that preferences or priorities to creditors should be carefully assessed and allowed only when legally or equitably justified, we decline the claimants' requests to (1) allow them, as administrative or any lesser status of claim, recovery of sums which they agreed to advance to the Trustee's Accountant to have him assemble the Debtor's disordered records; or (2) categorize the sums which the Debtor misappropriated from their respective accounts as secured because they should be excluded from property of the Debtor's estate or found to be as funds held in trust. We also find that, since the Trustee's reliable Accountant provided the only testimony as to the amount of the claims, we have no basis to alter the Accountant's bottom-line figures. We therefore conclude that the Claimants are entitled to unsecured claims in the amounts recited by the Accountant, i.e., San Antonio Savings Association (hereinafter "San Antonio") —$5,000; Union Central Life Insurance Co. ("Union")—$8,604.38; and Carteret Savings & Loan Association ("Carteret") —$15,945.16 (collectively San Antonio, Union, and Carteret are referred to as "the Claimants").

B. UNDERLYING FACTS

A general history of this case and a description of the pervasive pre-petition improprieties by the Debtor are set forth in a previous Opinion of July 24, 1987, granting in part and denying in part the defendants' motion for summary judgment in a suit by the Trustee against underwriters on fidelity bonds covering certain high-level employees of the Debtor, In re Leedy Mortgage Co., 76 B.R. 440, 441-44, 451-59 (Bankr.E.D.Pa.1987). The case was converted to Chapter 7 on August 10, 1988, with JOHN P. JUDGE, the Chapter 11 Trustee appointed on September 16, 1983 ("the Trustee"), remaining as Chapter 7 Trustee. At a hearing on a motion filed September 29, 1989, by the United States Trustee to remove the Trustee for cause for delaying completion of administration of the estate, an Order was entered, on November 1, 1989, requiring the Trustee to file all appropriate Objections to Proofs of Claim on or before November 22, 1989. Among the filings on November 22, 1989, pursuant to that Order, were Objections to the following Proofs of Claim, all of which had been filed on behalf of the Claimants by the same counsel on August 7, 1985:

                   Claim No.   Claimant      Amount (Status)       Basis
                    123        San Antonio   $ 1,731.28            Share of expenses paid to
                                                 (Administrative)  Accountant
                    124        San Antonio   $15,465.59 (Secured)  Shortages in accounts and
                                                                   reimbursement for payments
                                                                   to Accountant to
                                                                   service account
                

                    Claim No.      Claimant    Amount (Status)          Basis
                        125        Union       $ 3,920.31               Share of expenses paid to
                                                    (Administrative)    Accountant and cost of locating
                                                                        & retrieving loan
                                                                        documentation from Accountant
                        127        Cartaret    $ 1,976.86               Share of expenses paid to
                                                    (Administrative)    Accountant and cost of locating
                                                                        & retrieving loan
                                                                        documentation from Accountant
                        128        Cartaret    $19,914.81 (Secured)     Shortages in accounts and
                                                                        reimbursement for payments
                                                                        to Accountant to
                                                                        service account
                

After several continuances, the matters were heard on a must-be-tried basis on February 28, 1990. The only witness at the hearing was George L. Miller, the court-appointed accountant for the Trustee ("the Accountant"). The Claimants and the Trustee submitted Briefs on March 12, 1990, and March 16, 1990, respectively.

The parties basically agree with the following synopsis of the Accountant's testimony included in the Claimants' Brief.

At the time of the filing of its bankruptcy petition, the Debtor was a party to servicing contracts with various mortgagees, including the Claimants. The Debtor had, on occasion, misapplied certain funds of Claimants and other mortgage holders. As the result of a pre-petition Alabama state court action, all mail, including payments sent by mortgagors to the Debtor, was, for an indeterminate time, directed to the court house, resulting in a complete inability of the Debtor to service or post payments submitted to it.

At the time of the appointment of the Trustee, the Debtor had no funds on hand except payments received on account of the mortgages being serviced by it which had been sent to the court house. Under loan agreements with the mortgagees, those funds were to be held in trust by the Debtor and remitted to the mortgagees. The Trustee filed an Application with this court seeking authority to use the trust funds for payment of the Trustee's administrative expenses. Several mortgagees objected to that Application. The ultimate resolution was a Stipulation, Order and Joinder ("the Stipulation") approved by the Bankruptcy Court on or about October 31, 1983, joined by the Claimants, which provided that the Trustee would hire the Accountant, who would reassemble the Debtor's records, with each claimant to pay its pro rata share of these costs as allowed by the bankruptcy court. The Stipulation also provided that the Accountant would turn over to the mortgage holders their respective loan documents and mortgages, as well as all funds in the Trustee's possession posted on account of their respective mortgages. The mortgagees expressly reserved their rights to proceed against the debtor or any other parties arising out of the Debtor's performance of its services.

The final accounting was not submitted to this court by the Accountant until March, 1984, along with a request for compensation of $107,921.85. Individual reconciliation statements were also prepared for each mortgage holder, including the three Claimants, by the Accountant, in which the Debtor's misappropriations of funds in the amounts of $5,000 (San Antonio), $8,604.38 (Union), and $15,945.16 (Cartaret) were recited. No objections were raised to this accounting at that time, although none of the Claimants affirmatively expressed approval or waiver of disputes of the accuracy of same.

C. THE CLAIMANTS FAILED TO MEET THEIR BURDEN OF REBUTTING THE TRUSTEE'S EVIDENCE RELATING TO THE VALIDITY AND AMOUNT OF THEIR CLAIMS

Since the Trustee presented, through the Accountant, evidence which supported his Objections for the most part, the burden of proving the validity, amount, and proper classification of their claims was clearly thrust upon the Claimants. See, e.g., In re Railroad Dynamics, Inc., 97 B.R. 239, 243-44 (Bankr.E.D.Pa.1989); In re Franks, 95 B.R. 346, 350 (Bankr.E.D. Pa.1989); In re Jordan, 91 B.R. 673, 682-84 (Bankr.E.D.Pa.1988); In re Celona, 90 B.R. 104, 109 (Bankr.E.D.Pa.1988), aff'd sub nom. Celona v. Equitable National Bank, 98 B.R. 705 (E.D.Pa.1989); and In re Lewis, 80 B.R. 39, 40-41 (Bankr.E.D.Pa. 1987). The Claimants are therefore incorrect when they assert that the presumption of the validity of their Claims arising from Bankruptcy Rule 3001(f) remained intact after the completion of the hearing. See Celona, supra, 90 B.R. at 109. Since the Trustee's credible expert was the only witness at the hearing, no better than the fifth (both parties appear and present evidence), and arguably the fourth (only the objector appears and presents evidence), of the scenarios set forth in Lewis, id. at 41, were presented. The Accountant testified that the Claimants had no basis for asserting administrative or secured status for their claims and reaffirmed that each was entitled to an unsecured claim for the amounts which he calculated that the Debtor had misappropriated from each of them. In the absence of any evidence to the contrary, there is no basis to question the indisputably competent and independent conclusions of the Accountant. We therefore shall allow the Claimants only amounts consistent with the Accountant's testimony.

D. THE CLAIMS ARE NOT ENTITLED TO ADMINISTRATIVE STATUS BY REASON OF SUBROGATION NOR ON THE GROUND THAT THE CLAIMANTS MADE PAYMENTS TO THE ACCOUNTANT FOR SERVICES WHICH WERE NECESSARY TO PRESERVE THE DEBTOR'S ESTATE

The Claimants contend that two types of expenditures should be accorded administrative status: (1) Reimbursement for their pro rata share of the payments for compensation advanced by each of them to the Accountant for assembling the Debtor's records; and (2) Additional costs incurred by Union and Cartaret to retrieve certain documents from the Accountant.

We start from the premises that the focus of 11 U.S.C. § 503(b)(1)(A), which the creditors implicitly invoke as the basis for their contention...