In re MiniScribe Corp., 90 B 00001 E.

• Decision Date: 16 November 2000
• Docket Number: No. 90 B 00001 E.,90 B 00001 E.
• Citation: 257 BR 56
• Parties: In re MINISCRIBE CORPORATION, a Delaware corporation, Debtor. Tom H. Connolly, Chapter 7 Trustee, Claimant, v. Harris Trust Company of California, Indenture Trustee, and the United States Trustee, Respondent.
• Court: U.S. Bankruptcy Court — District of Colorado

257 B.R. 56 (2000)

In re MINISCRIBE CORPORATION, a Delaware corporation, Debtor Tom H. Connolly, Chapter 7 Trustee, Claimant, v. Harris Trust Company of California, Indenture Trustee, and the United States Trustee, Respondent.

No. 90 B 00001 E.

United States Bankruptcy Court, D. Colorado.

November 16, 2000.

COPYRIGHT MATERIAL OMITTED

Glen E. Keller, Jr., Denver, CO, for debtor.

Phillip D. Barber, Douglas W. Jessop, Gregory L. Williams, Denver, CO, for Tom H. Connolly.

OPINION AND ORDER ON FEE APPLICATION

CHARLES E. MATHESON, Bankruptcy Judge.

Once again before the Court is the question of the fee that should properly be allowed to the Trustee for his services in this Chapter 7 case. This Court previously heard extensive testimony and entered its order allowing the Trustee a fee of $3,044,953.69. That opinion and order can be found at In re MiniScribe Corp., 241 B.R. 729 (Bankr.D.Colo.1999). The facts and background that pertain to this case are fully set forth in that opinion and are incorporated herein by reference.

Harris Trust, in its role as Indenture Trustee, opposed the allowance of the fee sought by the Trustee in this case and appealed this Court's order. The district court has now entered its opinion and order reversing this Court's fee allowance and remanding the matter for further proceedings.

In its earlier opinion this Court utilized two alternative approaches in evaluating the fee that might properly be allowed. One approach was the so-called "common fund" approach. The other was the traditional "lodestar" analysis.

Using the common fund approach, and the percentage of recovery that was approved by the Tenth Circuit in the parallel shareholder class action proceedings (see, Gottlieb v. Barry, 43 F.3d 474 (10th Cir. 1994) (hereafter "Gottlieb")), the Court concluded that the total administrative costs in this Chapter 7 estate could be something in excess of $23,000,000 (based on 22.5% of a $101 million estate). By comparison, the total administrative costs for this estate, based on a fee to the Trustee of $3,044,953, would be less than $11 million, or approximately 10.7% of the bankruptcy estate.

In using the lodestar analysis the Court chose to allow the Trustee an hourly rate of $500 for his services. Then, considering the factors identified in Johnson v. Georgia Highway Express, Inc., 488 F.2d 714 (5th Cir.1974), as adopted in Ramos v. Lamm, 713 F.2d 546, 557 (10th Cir.1983), the Court applied a multiple of 3.5. That approach resulted in a fee of $3,113,250.

The Trustee's fees in this case are subject to the cap mandated in 11 U.S.C. § 326. The maximum fee allowable under that cap is the amount allowed as a fee to the Trustee, to wit, $3,044,953.69.

The district court has rejected this Court's reasoning and has remanded the matter to this Court for further consideration. In its opinion and order the court made the following points:

1. The use of the common fund approach, in the manner in which it was done by this Court, was clear error.

2. This Court\'s finding that a $500/hour rate would not be unreasonable was not supported by the record.

3. In picking a multiplier of 3.5 to adjust the lodestar, this Court failed to consider or give proper weight to, or erroneously considered, a variety of factors. Specifically, the district court took issue with this Court\'s use of the $101.5 million figure as the measure of the results achieved by the Trustee and the district court believed that this Court erroneously concluded that the Trustee in this case had been subject to any real risk as to the payment or non-payment of his fee.

After remand this Court convened further hearings to give the parties the opportunity to present their arguments on the issues presented by the order of remand.¹ Not surprisingly, the conclusions of the parties remain as they were at the close of the evidentiary hearings. The Trustee asserts that his fee should be exactly as it was awarded by this Court. Harris asserts that the proper fee is in the range of $555,800 to $819,700. Neither offered any assistance to this Court in addressing the question of the size of estate that can properly be attributed to the Trustee's efforts, something that the district court has directed is larger than $31.5 million but smaller than the $101.5 million that this Court has determined is the size of the bankruptcy estate for purposes of section 326 of the Code.

It is difficult to come to grips with the issue posed by the district court concerning the measure of the results achieved by the Trustee, or to quantify that figure. The gross estate was $101.5 million. Of that, in round figures, $17 million was recovered by the Trustee in the various recovery actions and should properly be considered to be part of the results achieved by the Trustee. The balance relates to the settlement fund. Out of that fund, $4.1 million was disbursed to the "non-signing Plaintiffs." The amount paid out to the non-signing Plaintiffs ought not be considered as part of the results achieved herein by the Trustee, although it is included in calculating the "cap" on the Trustee's compensation under section 326 of the Code.

The apparent concern of the district court is that it was not only the Trustee that contributed to the settlement that was achieved in the fraud litigation. Contribution was also made by separate counsel for Standard Chartered Bank ("SCB") and ELLCO, as well as by all of the attorneys representing the plaintiffs in the parallel shareholder class action suits and by the efforts of the magistrate judge who nurtured the settlement negotiations.

The concerns of the district court about fees related to the MiniScribe fraud litigation are not new. They were previously expressed by that court in Gottlieb v. Wiles, 150 F.R.D. 174 (D.Colo.1993) (hereafter "Wiles"), rev'd, Gottlieb, when the district court rejected the common fund approach in allowing fees to class counsel in the MiniScribe class action litigation. There the court said:

The settlement was facilitated by the efforts of Magistrate Judge Bruce D. Pringle in settlement conferences. Counsel for the plaintiffs in all of the cases in the global agreement were participants in the negotiations and settlement process as, of course, were counsel for the settling defendants. The pendency of the other coordinated cases and the efforts of the lawyers representing those other plaintiffs contributed significantly to the resolution of this action. There is no way to measure the contribution of class counsel relative to the other lawyers in achieving the global settlement. It is simplistic to say that a settlement fund of $44,000,000 was created through the efforts of class counsel. Wiles, 150 F.R.D. at 178.

This Court concludes that a reasonable, if imperfect, approach to evaluate the Trustee's contribution is to reduce the size of the settlement fund (net after distribution to the non-signing plaintiffs) by the pro rata share of that fund that would have been allocable to the "senior debt" in the absence of any inter-creditor settlement agreement. That amount can be determined as a percentage of the total debt, as finally allowed, without reduction for the claims of SCB and ELLCO. This is:

                    SCB                           65.5 million
                    ELLCO (senior)                  .5 million
                    ELLCO (unsecured)              6.0 million
                    Other unsecured                8.4 million
                    Debentures                    97.5 million
                                                ______________
                          Total                 $177.9 million
                

The percent, then, allocable to Senior Debt is 66/177.9, or 37%. Thus, 63% of the settlement fund of $80 million, or $50.4 million, is fairly allocable to the efforts of the Trustee, plus the $17 million recovered in the various other actions, or a total of $ 67.4 million. The Court finds that this is a fair measure of the contribution made to this estate by the Trustee's efforts.

In ruling that this Court had improperly applied the common fund approach as one measure for compensation in this case it appears that the district court was once again voicing the concerns previously voiced by it in Gottlieb, that being that the efforts of other counsel and, indeed, the magistrate judge all contributed to the results achieved. The reduction in the portion of the settlement fund attributable to the Trustee to the $50.4 million figure should alleviate that concern and should act to more fairly measure the Trustee's contribution to this estate.

The other factor pointed to by the district court was a concern that the subordinated debenture holders are being asked to "unfairly" bear a disproportionate share of the administrative costs in this bankruptcy estate. If this concern is related to the size of the recovery attributable to the efforts of the Trustee, the reduction already made should speak to that concern. As to the "unfair" allocation, if it is unfair, that unfairness arises out of the agreement made by the debenture holders by reason of the subordination agreement.

It is instructive for the Court to examine the allocation in this estate of the administrative expense burden in the absence of the distribution agreement and the settlement agreement that was entered into as a part of the resolution of the Trustee's fraud case.² Again, the total debt would be as described above, to wit, $177.9 million. In making distributions out of the estate there would first be paid the costs of administration (whatever they are.) The balance would be allocated pro rata among the creditor classes, i.e.:

                    Senior Debt (SCB and ELLCO)       $66.0 million = 37%
                    General unsecured (including
                      the Balance of ELLCO)            14.4 million =  8%
                    Subordinated debentures            97.5 million = 54%
                

Because the total estate available for distribution, regardless of the amount allocable pro rata for administrative expenses, was less than the total amount of the debt, the Senior Debt...