In re Minnesota Distillers, Inc.
| Decision Date | 12 December 1984 |
| Docket Number | Bankruptcy No. 4-84-363. |
| Citation | 45 BR 131 |
| Parties | In re MINNESOTA DISTILLERS, INC., Debtor. |
| Court | U.S. Bankruptcy Court — District of Minnesota |
James Baillie, John Koneck, Fredrickson & Byron, Minneapolis, Minn., for debtor.
Chris Elliott, Fabyanske, Svoboda & Westra, St. Paul, Minn., for respondent BarclaysAmerican/Business Credit, Inc.
The above-entitled matter came on for hearing before the Honorable Margaret A. Mahoney, Judge of Bankruptcy Court, on November 2, 1984. Specifically, the Debtor objects to fees claimed by the secured creditor BarclaysAmerican/Business Credit, Inc. (Barclays), pursuant to 11 U.S.C. § 506(b). This Court has jurisdiction to hear and determine this matter pursuant to 28 U.S.C. §§ 1334 and 157.
By its motion, the Debtor in this case raises an interesting and somewhat unusual objection to claimed attorneys fees and expenses incurred by Barclays. In fact, the Debtor concedes at the very outset that: (1) all claimed fees and expenses are within the scope of the loan agreement between the Debtor and Barclays;1 (2) the reasonableness of the hourly rates charged by counsel for Barclays is not at issue; and (3) the efficiency and competency of counsel for Barclays is not at issue. Moreover, the Debtor does not appear to contest the reasonableness of the actual amounts of expenses incurred by Barclays. Instead, the Debtor's objection to Barclays' fees and expenses is grounded solely in the contention that certain actions taken on behalf of Barclays were unnecessary and unreasonable in light of Barclays' secured status.
To better understand the Debtor's objection in this case, a brief review of the relevant facts is in order.2 On March 6, 1984, the Debtor filed its voluntary petition commencing this case under chapter 11 of the Bankruptcy Code. On that same day, the Debtor also filed a motion for use of cash collateral and moved for an expedited hearing on such motion. Two days later, on March 8, 1984, Barclays moved for modification of the automatic stay and similarly requested an expedited hearing. As a result of interim negotiations by the parties, the Debtor and Barclays reached agreement as to their respective motions, as evidenced by a stipulation filed three days later on March 12, 1984. The stipulation, as approved by the Court, provided in part for limited use of cash collateral by the Debtor as well as authorization to Barclays to advance funds from the Debtor's chapter 11 accounts to pay reasonable expenses and reasonable attorneys' fees. Pursuant to the stipulation and upon Court approval, the parties ultimately extended the April 13 termination date provided for in the stipulation to June 22, 1984, at which time a continued hearing for use of cash collateral, as well as a hearing upon Barclays' motion for modification of the automatic stay, was set to be heard.
On July 3, 1984, the District Court entered an order allowing further use of cash collateral and denying Barclays' motion to lift the automatic stay. In its order, the District Court held that Barclays was adequately protected in that the Debtor (1) was providing to Barclays monthly interest on the amount owed to Barclays, and (2) was keeping an equity cushion at all times of 10 percent of the accounts receivable and 35 percent of the inventory in which Barclays held a security interest. In inventory and accounts receivable alone, the District Court found that Barclays was oversecured in the amount of $366,691.89. Moreover, the District Court found that in Barclays' second secured position in the Debtor's real estate and equipment, Barclays had an interest in such collateral in the amount of approximately $300,000. The District Court's findings therefore indicate that for the purposes of that Order, Barclays was oversecured in the approximate amount of $666,691.89.
Subsequent to the cash collateral hearings, but prior to the District Court's July 3 Order, Barclays filed a motion to convert. Allen R. Meier, loan officer of Barclays, explains in an affidavit submitted on behalf of Barclays that the conversion motion was brought in light of the Debtor's intent to seek judicial authority to use cash collateral rather than entering into further stipulations. Ten days after the District Court's cash collateral order, on July 13, Barclays appealed that order.
In his affidavit, Mr. Meier indicates that Barclays had great difficulty in obtaining the requisite financial information and operating statements with which to monitor the operations of the Debtor and Barclays' collateral position. In light of the condition of the Debtor's books and records, Mr. Meier further indicates that it was beyond Barclays' expertise to determine whether the Debtor could, in fact, effect a successful reorganization. Apparently subsequent to the filing of its conversion motion, Barclays contacted International Finance Management Group, Inc., and requested that they prepare a management report on the operations of the Debtor. That report concluded that as to the viability of the Debtor's business and its prospect for continued operation under present conditions and capitalization, the Debtor has little chance to reverse the losses it has incurred in the past and to operate profitably in the future. The report listed as the primary reasons for its conclusion: (1) low gross profit margin on sales; (2) generally low volume of sales; (3) inadequate capitalization; (4) a negative net working capital position resulting in a need for the company to borrow a great deal of working capital; (5) a disadvantage in location as compared to major competitors; (6) a lack of reliable operating financial information; and (7) an operating position in the industry where only the narrowest of margins appear possible. The report explicitly did not take into account the possibility of the sale of the Debtor's assets and any relocation of the Debtor in the State of Iowa.
Mr. Meier further indicates that wildly disparate evaluations between the parties as to the value of real estate and equipment secured by Barclays prompted a need for expert appraisal of the properties. An evaluation of the equipment by Edward Bilbruck, Inc. yielded an appraised auction value of $214,125, and an appraised fair market value of $427,700. In contrast, the District Court's July 3 cash collateral order valued the Debtor's equipment at approximately $650,000. An evaluation of the real property by American Appraisal Associates yielded an appraised liquidation value of $400,000 and an appraised fair market value of $475,000. The District Court's July 3 cash collateral order valued the Debtor's real estate at approximately $710,000.
Terrence Clavin, president of the Debtor, submitted an affidavit wherein he criticizes the market report prepared by International Finance and Management Group, Inc. Specifically, Clavin indicates that the Debtor's inadequate capitalization, negative working capital position creating a borrowing need, and lack of reliable operating financial information were so obvious that both Barclays and Mr. Clavin already knew of them. Moreover, Mr. Clavin attacks the report as being prepared with little knowledge of the rectifying industry. For example, Mr. Clavin indicates that the Debtor's "generally low volume of sales" has recently been substantially higher than in past years when the Debtor operated successfully. He further indicates that the report's reference to "low gross profit margin on sales" is the standard in the industry. As to any "disadvantage in location as compared to other major competitors," Clavin cites comparably low shipping costs and a local monopoly on sales of distilled spirits to bottlers and wholesalers as indicative of a major advantage in location.
By settlement agreement dated September 5, 1984, Barclays withdrew its motion to convert. That agreement provided in relevant part for an apparently accelerated payment schedule by which the $630,000 plus interest owed Barclays, in addition to Barclays' reasonable expenses and attorneys' fees, would be paid in full by December 15, 1984. Mr. Clavin indicates in his affidavit that as of November 2, 1984, the Debtor's loan balance to Barclays was $105,000. He estimates that Barclays will have been completely repaid by approximately November 16, 1984.
A secured creditor's right to payment of attorneys' fees and expenses out of the bankrupt estate is governed by 11 U.S.C. § 506(b).3 That section allows reasonable fees and expenses to the extent that the value of the secured property, less any recovery by the trustee pursuant to 11 U.S.C. § 506(c),4 exceeds the amount of the secured claim, if such fees and expenses are provided for under the agreement giving rise to the secured claim. In this case the facts clearly establish that the parties' loan agreement and court-approved stipulations provide for reasonable attorneys' fees and expenses. The only issue remaining to be decided is whether the fees and expenses sought by Barclays were reasonable.
As to the reasonableness of attorneys' fees and expenses under section 506(b), the ultimate burden of persuasion is on the secured creditor seeking payment. See Matter of Kennedy Mortgage Co., 23 B.R. 466 (Bktcy.D.N.J.1982) (secured creditor's failure to provide documentation pursuant to former Bankruptcy Rule 219(a) (currently Bankruptcy Rule 2016) held to preclude award of fees); In re H.P. Tool Manufacturing Corp., 12 B.R. 600 (Bktcy. E.D.Pa.1981) (absent evidence of reasonableness of fees as required by former Bankruptcy Rule 219(a), award of fees pursuant to section 506(d) not possible). Cf. Matter of DeLorean Motor Co., 39 B.R. 157 (Bktcy.E.D.Mich.1984) (burden of persuasion on claimant once claim objector meets burden of going forward with evidence sufficient to rebut claimant's proof of claim); In re WHET, Inc., 33 B.R. 424 (Bktcy.D.Mass.1983) (burden of proof as opposed...
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