In re Mechem Financial Inc., Bankruptcy No. 90-00193E.

• Decision Date: 24 March 1993
• Docket Number: Bankruptcy No. 90-00193E.
• Citation: 152 BR 57
• Parties: In re MECHEM FINANCIAL INC., Debtor. W. James SCOTT, Jr., Movant, v. MECHEM FINANCIAL INC. and Robert G. Dwyer, Esq., Trustee, Respondents.
• Court: U.S. Bankruptcy Court — Western District of Pennsylvania

152 B.R. 57 (1993)

In re MECHEM FINANCIAL INC., Debtor.

W. James SCOTT, Jr., Movant, v. MECHEM FINANCIAL INC. and Robert G. Dwyer, Esq., Trustee, Respondents.

Bankruptcy No. 90-00193E.

United States Bankruptcy Court, W.D. Pennsylvania.

March 24, 1993.

James R. Walczak, Erie, PA, for W. James Scott, Jr.

John O. Dodick, Erie, PA, for trustee.

James E. Blackwood, Erie, PA, for Michael Q. Lebron and Michael C. Lebron.

Mark L. Glosser, Pittsburgh, PA, for Campbell Community Funeral Homes.

OPINION

WARREN W. BENTZ, Bankruptcy Judge.

Introduction

Mechem Financial, Inc. ("Debtor") filed a voluntary Petition under Chapter 11 of the Bankruptcy Code on March 23, 1990. A Chapter 11 Trustee was appointed five days later on March 28, 1990. The case was converted to a case under Chapter 7 on May 22, 1990. Presently before the Court is a Motion for Allowance of Administrative Expense Pursuant to § 503(b) ("Motion") filed by W. James Scott, Jr. ("Scott").

Scott asserts that he incurred actual, necessary charges of $48,805.12 in attorney's fees and $10,207.88 in expenses in preserving or recovering property of the bankruptcy estate and in making a substantial contribution to the case. Scott requests payment of $59,013.00 from the bankruptcy estate as an administrative expense pursuant to § 503 of the Bankruptcy Code.

Robert G. Dwyer, Esq. ("Trustee"), the Chapter 7 Trustee, requests that the Court grant the Motion to the extent that Scott incurred fees and expenses for postpetition services which substantially contributed to the bankruptcy estate and that the Court grant such a fee enhancement as appropriate. Although the Trustee would allow a fee enhancement for postpetition fees and expenses, he understands the law to require denial of fees and expenses for prepetition services.

Michael Q. Lebron and Michael C. Lebron (collectively "Lebron") object to the Motion. Lebron asserts that it is inequitable to compensate Scott, one of the Debtor's principals, for doing no more than what he should have done to mitigate the Debtor's fraud while victims of the Debtor's fraud (the unsecured creditors) will suffer substantial losses. Lebron further alleges that Scott is not eligible to proceed under § 503 as he was not a creditor of the Debtor at the time the Debtor's Petition was filed and that Scott did nothing which directly resulted in the recovery of property of the estate.

Campbell Community Funeral Homes ("Campbell") also objects to the Motion. Campbell asserts that § 503 does not permit payment for prepetition services as a postpetition administrative expense; that the prepetition fees and expenses were not incurred for the benefit of all creditors; that Scott fails to qualify for recovery of postpetition fees and expenses under § 503; and that it is unfair to unsecured creditors for Scott, as a shareholder and insider, to be paid for rendering services which he was statutorily required to perform.

Facts

This case involves corrupt and illegal activities of a magnitude rarely seen before this Court. The Debtor corporation was engaged in the business of managing trust funds advanced from individuals through funeral directors for funeral goods and services under preneed funeral contracts.

The Debtor's President, John R. Copple ("Copple"), lived a lavish lifestyle — siphoning off the trust funds for his personal use to the tune of millions of dollars which he used for luxury vehicles, spectacular jewelry, furs and a magnificent home furnished with the best furnishings money could buy. Copple's wife took weekend buying trips to New York City spending thousands of dollars each trip on clothing, crystal and jewelry — all paid for with funds which the Debtor supposedly held in trust.

Copple operated in several states. Mechem Financial of Ohio, Inc. filed an earlier bankruptcy case in Ohio in 1988. Allegations of misallocated assets arose in that case, but there, the Debtor was able to skirt the allegations — we suspect by transferring a portion of this Debtor's assets to Ohio. See In re Mechem Financial of Ohio, Inc., 92 B.R. 760 (Bankr.N.D.Ohio 1988).

On February 28, 1990, Scott, who was a minority shareholder of the Debtor, filed a Complaint in Equity in the Court of Common Pleas of Erie County, Pennsylvania against the Debtor, its officers, directors and majority shareholders and certain holders of trust funds, whereby Scott sought the following relief:

(a) appointment of a custodian to prevent further mismanagement, waste and dissipation of trust funds and further illegal, oppressive and fraudulent actions toward minority shareholders by directors, officers and shareholders;

(b) an accounting of the assets held by the Debtor, including pre-need trust funds in the possession and control of all defendants;

(c) an injunction against all defendants enjoining disbursement, transfer or other disposition of pre-need trust funds and the proceeds thereof; and

(d) a declaration that certain transfers and issues of corporate stock by John R. Copple were void.

The Complaint in Equity filed by Scott against the Debtor resulted from facts Scott learned through discovery initiated pursuant to a separate action in mandamus filed by Scott against the Debtor in 1988 in the Court of Common Pleas of Erie County, Pennsylvania.

At the behest of Scott, the walls started closing in on Copple and the Debtor. By Order dated March 6, 1990, the Honorable Roger M. Fischer ("Judge Fischer") of the Court of Common Pleas directed the Debtor and Copple to file inventories of all assets, investments and accounts held by them or in which they had an ownership interest on or before March 12, 1990. When the Debtor and/or Copple failed to file a satisfactory listing, Scott, on March 16, 1990, filed a Motion to Compel Filing of Proper Inventories.

By Order dated March 19, 1990, Judge Fischer directed the Debtor and Copple to file, on or before 4:30 p.m. on March 26, 1990:

(a) amplified inventories identifying the full name and address of any persons or entities listed on any asset or liability;

(b) the location of each asset and liability;

(c) the nature and location of the documentation, if any, to support each asset and liability; and

(d) a statement as to how the value of each asset or liability was determined.

The Order further required a complete and detailed listing of each gem or rare coin owned or held by the Debtor and/or Copple and directed that the Debtor and/or Copple file, on or before 4:30 p.m. on April 2, 1990, copies of all documents which substantiate any of the assets or liabilities listed on the inventories.

Feeling the grasp of the blockade around him, Copple sought to escape Scott's clinch by putting the Debtor into a voluntary Chapter 11 on March 23, 1990.

Scott relentlessly pursued. On March 27, 1990, Scott filed a Motion for Appointment of Trustee, for Expedited Accounting, and for Partial Relief from Stay which this Court granted on March 28, 1990. The Trustee was appointed on March 28, 1990.

Scott delivered to the Trustee all of the information obtained through its prepetition legal actions against the Debtor. The information provided by Scott contributed to the Trustee's report of investigation filed promptly with this Court on April 24, 1990 identifying various assets and summarizing the history of questionable financial transactions between the Debtor and:

(a) the Debtor\'s president, John R. Copple, and his wife, Mary Copple;

(b) the Debtor\'s affiliates, which were also under the control and management of John R. Copple;

(c) separate corporations of which John R. Copple was the majority shareholder and person

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