In re NETtel Corp.

• Decision Date: 28 April 2020
• Docket Number: Case No. 00-01771
• Parties: In re NETtel CORPORATION, and NETtel COMMUNICATIONS, INC., Debtors.
• Court: United States Bankruptcy Courts. District of Columbia Circuit

In re NETtel CORPORATION, and NETtel COMMUNICATIONS, INC., Debtors.

Case No. 00-01771

UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF COLUMBIA

April 28, 2020

(Chapter 7)

(Joint Administration)

MEMORANDUM DECISION AND ORDER DENYING TRUSTEE'S MOTION TO ALTER OR AMEND JUDGMENT

Wendell W. Webster is the trustee of the estates of the debtors in these jointly administered cases under Chapter 7 of the Bankruptcy Code (11 U.S.C.). Estate funds remaining on hand are not sufficient to pay in full the fees owed the United States Trustee¹ under chapter 123 of title 28 and the unpaid administrative claims incurred under 11 U.S.C. § 503(b) in these cases after they were converted to Chapter 7. Those unpaid administrative claims are the remaining claims of Webster; his law firm; his accountant (Arthur Lander C.P.A., LLC ("Lander")); and The Hartford Fire and Insurance Company ("The Hartford") (forThe Hartford's right to indemnification with respect to lease payments The Hartford made pursuant to a Lease Guaranty Bond respecting a lease of the debtors). Administrative claims and the U.S. Trustee's fee claims are entitled under what is now 11 U.S.C. § 507(a)(2) to priority over other unsecured claims in these cases. In turn, 11 U.S.C. § 726(b) requires pro rata distribution on such claims. Section 726(b) provides in relevant part:

Payment of claims of a kind specified in paragraph . . . (2) of section 507(a) of this title . . . shall be made pro rata among claims of the kind specified in each such particular paragraph, except that in a case that has been converted to this chapter under section 1112 . . . of this title, a claim allowed under section 503(b) of this title incurred under this chapter after such conversion has priority over a claim allowed under section 503(b) of this title incurred under any other chapter of this title . . . .

The U.S. Trustee's fee claims arose under chapter 123 of title 28 and are not treated as administrative claims under 11 U.S.C. § 503(b). They were incurred while the cases were in Chapter 11. However, because they were not administrative claims, 11 U.S.C. § 726(b) does not render them junior in priority to the administrative claims incurred in the Chapter 7 case. See In re MCO Wash, Inc., 555 B.R. 159, 164 (Bankr. E.D.N.Y. 2016) ("Any unpaid UST quarterly fees, which are assessed under chapter 123 of title 28, are not subordinated despite being incurred pre-conversion . . . .").

In a Memorandum Decision and Order Re the Pro Rata Distribution of the Debtor's Estate ("Memorandum Decision") (Dkt. No. 1324), I ordered Webster and his law firm to make a partial disgorgement of payments that had been made to them on their administrative claims in order to assure that there was a pro rata distribution under 11 U.S.C. § 726(b) on the U.S. Trustee's fee claim and the Chapter 7 administrative claims of Webster, his law firm, Lander, and The Hartford. In his Trustee's Motion to Alter or Amend Judgment ("Motion to Alter") (Dkt. No. 1327), Webster requests that the court reconsider the Memorandum Decision. For the reasons that follow, I will deny the Motion to Alter.

I

THE STANDARDS APPLICABLE TO A RULE 59 MOTION

Under Fed. R. Civ. P. 59(e), made applicable to bankruptcy by Fed. R. Bankr. P. 9023, a court may alter or amend a judgment if the "court finds that there is an intervening change of controlling law, the availability of new evidence, or to correct a clear legal error or prevent manifest injustice." Firestone v. Firestone, 76 F.3d 1205, 1208 (D.C. Cir. 1996). Such motions "are disfavored and relief from judgment is granted only when the moving party establishes extraordinary circumstances." Niedermeier v. Office of Baucus, 153 F. Supp. 2d 23, 28 (D.D.C. 2001). Moreover, a "Rule 59(e) motion is not a secondopportunity to present argument[s] upon which the Court has already ruled, nor is it a means to bring before the Court theories or arguments that could have been advanced earlier." W.C. & A.N. Miller Co.'s v. United States, 173 F.R.D. 1, 3 (D.D.C. 1997).

Webster does not show any change in the controlling law, the availability of new evidence, the need to correct a clear error, or the need to prevent manifest injustice to warrant altering or amending the Memorandum Decision. Webster's arguments are for the most part ones he made previously, albeit in slightly different clothing, and the Memorandum Decision already considered and rejected those arguments, and to the extent that there are new arguments, they ought to have been raised previously. As such, the Motion to Alter could be denied without reaching the merits. In any event, the arguments fail on the merits to show any error in the Memorandum Decision.

II

THE DISTRIBUTIONS ORDERED TO BE DISGORGED,

IF NOT DISGORGED, WOULD VIOLATE THE PRINCIPLE

OF EQUALITY OF DISTRIBUTION MANDATED BY 11 U.S.C. § 726(b)

Without the court's disgorgement order, the disparities in the percentage payment of administrative claims at issue would be extraordinary. Pursuant to prior distributions in the case:

• Webster has received $1,069,252.19 in payment of his administrative claim of $1,083,922.41 (98.65% of that claim);

• Webster's law firm has received $2,554,205.36 of its administrative claim of $2,627,516.60 (97.21% of that claim);

• The Hartford has received $250,000.00 of its administrative claim of $863,169.62 (28.96% of that claim);

• the U.S. Trustee has received no payment of its $500.00 fee claim (0% of that claim); and

• Lander has received $37,051.83 of his administrative claim of $59,685.00 (62.08% of that claim).

The Memorandum Decision directed Webster and his law firm to make a partial disgorgement of the amounts they had received so that Webster, his law firm, The Hartford, Lander, and the U.S. Trustee will all have received the same percentage payment of their claims, consistent with the command of § 726(b) that payment on their claims "shall be made pro rata."

As under the Bankruptcy Act, equality of distribution is a bedrock principle of the Bankruptcy Code. In Nathanson v. N. L. R. B., 344 U.S. 25, 29 (1952), the Court stated:

The theme of the Bankruptcy Act is "equality of distribution," Sampsell v. Imperial Paper & Color Corp., 313 U.S. 215, 219, 61 S.Ct. 904, 907, 85 L.Ed. 1293[(1941)]; and if one claimant is to be preferred over others, the purpose should be clear from the statute.

This principle continues under the Bankruptcy Code. See Howard Delivery Serv., Inc. v. Zurich Am. Ins. Co., 547 U.S. 651, 655 (2006) (noting that "preferential treatment of a class of creditors is in order only when clearly authorized by Congress"); Begier v. Internal Revenue Service, 496 U.S. 53, 58 (1990) ("Equality of distribution among creditors is a central policy of the Bankruptcy Code. According to that policy, creditors of equal priority should receive pro rata shares of the debtor's property."); Bentley v. Boyajian (In re Bentley), 266 B.R. 229, 240 (B.A.P. 1st Cir. 2001) ("The principle of equality of distribution has been carried forward as one of the guiding principles of the Bankruptcy Code.")

As recently as 2017, the Supreme Court upheld the principle that a bankruptcy court may not, "without the consent of the affected parties, deviate from the basic priority rules that apply under the primary mechanisms the Code establishes for final distributions of estate value in business bankruptcies." Czyzewski v. Jevic Holding Corp., ___ U.S. ___, ___, 137 S.Ct. 973, 978, 197 L.Ed.2d 398 (2017). The Court noted that unlike first-day wage orders or critical vendor payments, a final distribution that varies from the Bankruptcy Code's priority scheme does not preserve the estate as a going concern; make the disfavored creditors better off; promote the possibility of aconfirmed plan; restore the status quo ante; or protect reliance interests. Id. at 986. Notably, all of the funds in the proposed distribution in Jevic, like the funds in this case, were the cash collateral of one or more secured creditors. Id. at 981. Yet the Court still disapproved the proposed distributions that were at variance with the Bankruptcy Code's priority scheme, noting that "in Chapter 7 liquidations, priority is an absolute command." Id. at 983.

To paraphrase Jevic, 137 S.Ct. at 986, Webster has not identified "any significant offsetting bankruptcy-related justification" that would warrant violating "the ordinary priority rules" applicable here under § 726(b). Webster and his law firm have failed to show that disregard of the priority scheme will promote "a significant Code-related objective," Jevic, 137 S.Ct. at 985,² such as so-called "first-day" wage orders "permitting a business debtor to reorganize and restructure its debt in order to revive the business and maximize the value of the estate." In re Fryar, 570 B.R. 602, 609-10(Bankr. E.D. Tenn. 2017) (disapproving a settlement violating the Code's priority scheme in a case in which funds to pay creditors would have to come from the liquidation of assets, not reorganization).

"Creditors within a given class are to be treated equally, and bankruptcy courts may not create their own rules of superpriority within a single class." Matter of Saybrook Mfg. Co., Inc., 963 F.2d 1490, 1496 (11th Cir. 1992). "Had Congress wanted the bankruptcy courts to fashion their own priorities for distribution of assets, it might have omitted Sections 364, 507, and 726 from the Code. Instead, the Bankruptcy Reform Act of 1978, as each of its more recent predecessors, contained an elaborate scheme of priorities. The Court does not have the prerogative to flout those priorities." In re IML Freight, Inc., 52 B.R. 124, 137 (Bankr. D. Utah 1985). See also In re Chambers, 500 B.R. 221, 227 (Bankr. N.D. Ga. 2013) ("The statutory priority scheme is mandatory; Congress did not authorize the courts to exercise discretion and bankruptcy courts may not create priorities within classes."). In this case, nothing in the Bankruptcy Code alters the rule that administrative claims...