In re MiniScribe Corp., Bankruptcy No. 90 B 00001 E.

• Decision Date: 24 November 1999
• Docket Number: Bankruptcy No. 90 B 00001 E.
• Citation: 241 BR 729
• Parties: In re MINISCRIBE CORPORATION, a Delaware corporation, Debtors. Tom H. Connolly, Chapter 7 Trustee, Claimant, v. Harris Trust Company of California, Indenture Trustee, and the United States Trustee, Respondents.
• Court: U.S. Bankruptcy Court — District of Colorado

241 B.R. 729 (1999)

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

Bankruptcy No. 90 B 00001 E.

United States Bankruptcy Court, D. Colorado.

November 24, 1999.

COPYRIGHT MATERIAL OMITTED

Gregory L. Williams, Donald J. Quigley, Block Markus Williams, L.L.C., Denver, Colorado, for Tom H. Connolly, Trustee.

A. Bruce Campbell, David P. Hutchinson, Otten, Johnson, Robinson, Neff & Ragonetti, P.C., Denver, Colorado, for Harris Trust Company of California, as Indenture Trustee.

Jane E. Frey, Denver, Colorado, for the United States Trustee.

OPINION AND ORDER ON CHAPTER 7 TRUSTEE'S FINAL APPLICATION FOR COMPENSATION

CHARLES E. MATHESON, Chief Judge.

I. INTRODUCTION

During the 1980's, MiniScribe Corporation ("MiniScribe" or the "Debtor") was a successful manufacturer of computer disc drive systems. Eventually, competition began to impact the company's sales and the threat of declining profits had the prospect of adversely impacting the company's stock prices. Seeking to avoid this calamity, certain of the members of the company's management elected to engage in the inventive practice of shipping boxes of bricks and booking the shipments as sales. While this practice had some short term advantages, it inevitably failed bringing certain financial ruin. The financial distress brought on shareholder litigation seeking damages for the fraud.

MiniScribe filed a petition under chapter 11 on January 1, 1990. At that time, Standard Chartered Bank ("SCB") was its principal secured creditor. The company also had significant equipment lease agreements with ELLCO Leasing ("ELLCO"). It had $97.5 million of outstanding debt represented by subordinated debentures issued under an indenture with Harris Trust ("Harris"). It also had other significant unsecured debt outstanding, principally with trade suppliers (all collectively hereafter referred to as "Trade" debt). Rehabilitation in chapter 11 was unavailing, and the company engaged in a sale of its business to Maxtor, one of its competitors. The sale did not realize sufficient proceeds to pay all of the secured debt, much less the costs of administration of the chapter 11 or any of the unsecured debt. There being no further purpose to be served by the chapter 11, the case was converted to chapter 7 and Tom H. Connolly, Esq., was appointed as the trustee ("Trustee") on April 26, 1991.

During his administration, the Trustee disbursed $101,492,332 through his accounts. Of this, $84.1 million represented proceeds from the settlement of an action seeking recovery related to the fraud perpetrated at MiniScribe. The balance came principally from preference and fraudulent transfer cases. Harris and the U.S. Trustee dispute whether such funds were all property of the estate or should be counted for purposes of the cap established by 11 U.S.C. § 326. This Court has already decided the section 326 issue in its Order Granting Trustee's Motion for Partial Summary Judgment. Regardless, the payments made were sufficient to pay SCB and ELLCO the agreed amounts of their compromised claims, to pay the Trade claims in full, to pay all of the costs of administration of the chapter 11 and the chapter 7 and, if the Trustee's fee is paid in full, to return a total of $9.735 million to the debenture holders. For his services, Mr. Connolly seeks a fee of $3,044,953, which is the maximum that could be allowed under section 326. Both Harris and the U.S. Trustee (collectively referred to as the "Objectors") object.

II. THE LEGAL STANDARDS FOR FEE ALLOWANCE.

The Trustee in this case seeks compensation under sections 326 and 330 of the Code. The version of section 330¹ which applies to this case provides:

After notice to any parties in interest and to the United States trustee and a hearing, and subject to sections 326, . . ., the court may award to a trustee, . . .

(1) reasonable compensation for actual, necessary services rendered by such trustee, . . . and by any paraprofessional persons employed by such trustee, . . . based on the nature, the extent, and the value of such services, the time spent on such services, and the cost of comparable services other than in a case under this title; and

(2) reimbursement for actual, necessary expenses.

The applicable section 326² provides:

(a) In a case under chapter 7 or 11, the court may allow reasonable compensation under section 330 of this title of the trustee for the trustee\'s services, payable after the trustee renders such services, not to exceed fifteen percent on the first $1,000 or less, six percent on any amount in excess of $1,000 but not in excess of $3,000, and three percent on any amount in excess of $3,000, upon all moneys disbursed or turned over in the case by the trustee to parties in interest, excluding the debtor, but including holders of secured claims.

The Trustee urges an interpretation of the those two sections which would begin and end with the percentages set forth in section 326. The Trustee argued during closing argument that he is "entitled" to the cap under the extraordinary facts of this case. There is case law which supports the Trustee's interpretation. In re Guyana Development Corp., 201 B.R. 462, 483 (Bankr.S.D.Tex.1996).

In Guyana, the chapter 11 trustee sought the maximum compensation under section 326 under circumstances in which a strict lodestar, even with an enhanced hourly rate, would yield a substantially lower fee than the statutory maximum. In its findings, the court describes a complex case involving multiple litigation in five different countries; seizing or freezing estate property both domestically and in several foreign countries; preserving value and minimizing contingent liabilities in the estate's rapidly expiring oil and gas interests; coordination of settlement negotiations among the various major parties-in-interest and coordination of the litigation over allowance or priority of more that $900 million of claims asserted against the estate. The trustee had only $300,000 in cash when he was appointed and raised over $60,000,000 in gross proceeds from the sales of estate assets resulting in a payout to the general unsecured creditors, including the objecting creditor, of over 88% of their claims.

The Guyana court conducted an extensive analysis of the legislative history behind section 326 and concluded that it was designed as an incentive to a trustee to collect assets. The court observed that the Fifth Circuit, following its pronouncement in Johnson v. Georgia Highway Express, Inc., 488 F.2d 714 (5th Cir.1974), affirmed an award of the maximum statutory percentage allowed under the Bankruptcy Act without considering the Johnson factors.³Rose Pass Mines, Inc. v. Howard, 615 F.2d 1088 (5th Cir.1980). In the same decision, however, the circuit looked to the bankruptcy court's application of the Johnson factors to the trustee's attorney's fees. The Guyana court concludes that the circuit recognized a distinction in compensation available to trustees under section 326 and that available to attorneys. Guyana at 478. "Indeed, in the context of maximum local caps on attorney compensation, the Fifth Circuit held in In re U.S. Golf Corp., 639 F.2d 1197, 1206 (5th Cir.1981). `It is simply not possible to seriously weigh the Johnson factors in the face of an absolute maximum fee'." Id. at 478-479. From there, the court drew an analogy between bankruptcy cases and common fund cases in which it describes an increased use of percentage based compensation "as a backlash" to Johnson.⁴ Ultimately, the Guyana court concludes, based on its knowledge of the case and upon the time records submitted by the trustee, that seven of the Johnson factors supported the reasonableness of the trustee's proposed maximum statutory percentage compensation.⁵

The Guyana court's analysis is thorough, grounded, in part, in Fifth Circuit authority and appealing on some levels, but this Court believes it goes too far in its pronouncement regarding section 326. While it does not explicitly reject what is stated in the legislative history, and in fact acknowledges generally that section 326 is not an entitlement provision, Guyana at 474, it nevertheless starts with the section 326 cap and conducts a reasonableness analysis from there using the Johnson factors. This Court rejects such an interpretation as contrary to the statute and the legislative history behind section 326.

This Court earlier addressed the interplay between these two provisions in the context of the Trustee's Motion for Partial Summary Judgment on the question of whether the $65.5 million amount paid to SCB and ELLCO out of the settlement proceeds from the fraud case should be included for the purpose of calculating the statutory cap of section 326. In answering the question in the affirmative, the Order Granting Trustee's Motion for Partial Summary Judgment ("Order") relied on and recited the critical portions of the legislative history of section 326. The applicable portion upon which this Court again relies bears repeating here:

This section is derived in part from section 48c of the Bankruptcy Act. It must be emphasized that this section does not authorize compensation of trustees. This section simply fixes the maximum compensation of a trustee. Proposed 11 USC § 330 authorizes and fixes the standard of compensation. Under section 48c of current law, the maximum limits have tended to become minimums in many cases. This section is not intended to be so interpreted. The limits in this section, together with the limitations found in section 330, are to be applied as outer limits, and not as grants or entitlements to the maximum fees specified. . . . H.R.Rep. No. 595, 95th Cong., 1st Sess. 327 (1977); S.Rep. No. 989, 95th Cong., 2d Sess. 37-38 (1978). (Emphasis added).

The legislative history is...