In re NWFX, Inc.

• Citation: 267 BR 118
• Decision Date: 22 June 2001
• Docket Number: No. 86-15148F.,86-15148F.
• Parties: In re NWFX, INC., Northwest Financial Express, Inc., and Gold Financial Express, Inc., Debtors.
• Court: United States Bankruptcy Courts. Eighth Circuit. U.S. Bankruptcy Court — Western District of Arkansas

267 B.R. 118 (2001)

In re NWFX, INC., Northwest Financial Express, Inc., and Gold Financial Express, Inc., Debtors.

No. 86-15148F.

United States Bankruptcy Court, W.D. Arkansas, Fayetteville Division.

June 22, 2001.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

Isaac A. Scott, Jr. and Charles T. Coleman, Wright, Lindsey & Jennings, LLP, Little Rock, AR, for Trustee.

Thomas A. Creekmore III and Steven W. Soulé, Hall, Estill, Hardwick, Gable, Golden & Nelson, P.C., Tulsa, OK, for Equity Security Holder.

MEMORANDUM OPINION

ROBERT F. FUSSELL, Bankruptcy Judge.

I. BACKGROUND OF THE CASE AND APPLICATIONS, MOTIONS, AND OBJECTIONS PENDING BEFORE THE COURT

NWFX, Inc. NWFX, Gold Financial Express, Inc. Gold, and Northwest Financial Express, Inc. Northwest, together referred to as the Debtor Corporations, were incorporated by Larry Shaffer in the early 1980s for the purpose of selling money orders. NWFX and Gold sold money orders in a number of states in the United States. Northwest sold money orders in the Commonwealth of Puerto Rico. Shaffer gained expertise in the money order business while employed with the American Express Company, and is the sole shareholder of the Debtor Corporations.

Generally speaking, the Debtor Corporations conducted business by entering into contracts with convenience stores, grocery stores, and other retail concerns that acted as agents in selling money orders on behalf of the Debtor Corporations. Pursuant to their contract agreements with the Debtor Corporations, the retail businesses sold the money orders to their customers, retained a small fee for their services, and remitted the balance of the money order proceeds to the Debtor Corporations. After sale by the retail businesses to their customers, the money orders were processed through the Federal Reserve System and ultimately ended up for payment at the banks where the Debtor Corporations had accounts.

During 1986, the Debtor Corporations began experiencing financial difficulties. Their bank account balances became overdrawn and the money orders began to be returned for insufficient funds. In 1986, the State of Arkansas Security Commissioner issued a cease and desist order that had the effect of closing down the Debtor Corporations' operations.

On August 1, 1986, the Debtor Corporations filed voluntary petitions under chapter 11 of the bankruptcy code. On August 5, 1986, the Debtor Corporations filed a "Motion For Appointment of Trustee" pursuant to 11 U.S.C. § 1104(a)(2). On August 11, 1986, John Folgeman, a former Chief Justice of the Supreme Court of Arkansas, was appointed trustee. He subsequently disqualified himself from the position. On August 12, 1986, Allen W. Bird, II Bird or Trustee was appointed trustee in the three cases. The cases were consolidated for purposes of administration on September 5, 1986. There has been ongoing litigation in the consolidated case for the past fourteen years.

Pending before the Court are the following applications and motions filed by the Trustee:

(1) "Final Report and Account and Application For Final Decree," filed on July 29, 1999;

(2) "Motion for Final Approval of All Professional Fees and Expenses," filed on July 29, 1999;

(3) "Trustee\'s Application For Approval of Employment of Special Counsel Pursuant to 11 U.S.C. § 327(e)," filed on December 1, 1999, to employ Wright, Lindsey & Jennings LLP (4) "Amended Chapter 11 Final Report and Account and Application For Final Decree," filed on December 15, 1999;

(5) "Motion For Approval of Professional Fees and Expenses," filed on June 29, 2000, to pay the Rose Law Firm as counsel for the Trustee. The application seeks $72,181.50 in legal fees and $5015.90 in expenses;

(6) "First Application For Allowance of Fees and Expenses by Wright, Lindsey & Jennings LLP, Counsel for Trustee," filed on June 29, 2000. The application seeks $194,574.00 in legal fees and $22,896.30 in expenses;

(7) "Second Application For Allowance of Fees and Expenses by Wright, Lindsey & Jennings LLP, Counsel For Trustee," filed on September 20, 2000. The second application seeks $105,671.00 in legal fees and $16,228.14 in expenses.

Shaffer, as the equity security holder of the Debtor Corporations and a party in interest, filed objections to all of the above-listed applications and motions. Also pending before the Court are the following applications and motions filed by Shaffer:

(8) "Application for Allowance and Surcharge of Attorneys Fees and Expenses Hall, Estill, Hardwick, Gable, Golden & Nelson, P.C.," filed on June 30, 2000. The application seeks $289,065.50 in legal fees and $18,629.69 in expenses for Shaffer\'s counsel.

(9) "First Interim Application of D.R. Payne & Associates as Financial Experts and Accountants For Larry Shaffer (`Shareholder\') For Allowance of Compensaion For Actual, Necessary Services Rendered and For Reimbursement of All Actual, Necessary Expenses Incurred For the Period October 21, 1999 Through February 26, 2000," filed on July 10, 2000. The application seeks $42,280.00 in fees and $2827.11 in expenses for services rendered from October 21, 1999, through February 26, 2000. (10) "Supplement To Application For Allowance and Surcharge of Attorneys Fees and Expenses Hall, Estill, Hardwick, Gable, Golden & Nelson, P.C.," filed on September 20, 2000. The supplemental application seeks $50,518.75 in fees and $11,449.50 in expenses.

The Trustee filed objections to Shaffer's applications and motions. Following an evidentiary hearing in the case and the submission of post-trial briefs by the parties, the Court took the matter under advisement. The Court will enter separate orders as to each of the applications and motions pending in this case.

II. JURISDICTION

This Court has jurisdiction over the pending matters pursuant to 28 U.S.C. § 1334. The above proceeding is a core proceeding as defined by 28 U.S.C. § 157(b)(2)(A) and (O).

III. ISSUES BEFORE THE COURT

The issues in this litigation are voluminous — the hearing lasted ten days, the transcript is over 2,000 pages, and the Court received twelve volumes of exhibits into evidence. The issues include,

A. The timeliness of Shaffer\'s objections.

B. Whether the Trustee breached his fiduciary duty of care in the administration of the Debtor Corporations\' estates, and, if so, what damages resulted to the estates or to Shaffer as equity security holder of the estates?

1. Alleged delay in closing the estates;

2. Trustee\'s refraining to pursue collection of judgments on behalf of the Debtor Corporations\' estates 3. Sales of personal property of the Debtor Corporations\' estates;

4. Alleged sharing and paying of employees of the Debtor Corporations with the Rose Law Firm;

5. Alleged improper employment of and payment to employee Penny Scharmberg;

6. Alleged improper payments to Victoria Mason as accountant in the Debtor Corporations\'s cases;

7. Alleged improper payments of legal fees to the Rose Law Firm without Court orders.

C. Whether the Trustee knowingly and intentionally made overpayments of trustee\'s fees to the Rose Law Firm or himself; whether the Trustee filed false, misleading, or inaccurate final reports and accounts; and whether the Trustee failed to timely provide or reveal information regarding his trustee\'s fees as requested by Larry Schaffer, as a party in interest, and breached his fiduciary duty?

D. 11 U.S.C. § 326(a) issues raised by the parties.

1. Is the Trustee entitled to a fee for claims that were compromised or set off?

2. Is the Trustee entitled to a fee for state bond proceeds that were distributed through the Debtor Corporations\' estates?

3. Is the Trustee entitled to a fee for money distributed to Shaffer as the equity security claimant in the Debtor Corporations\' cases?

E. Conclusions of law as to the appropriate 11 U.S.C. § 330 and § 326(a) compensation to be paid to the Trustee in the Debtor Corporations\' cases.

F. Appropriate compensation pursuant to 11 U.S.C. § 330 for professionals employed by the Trustee in the Debtor Corporation\'s cases.

1. What is the appropriate compensation for accountant Victoria Mason?

2. What is the appropriate compensation for the Rose Law Firm as counsel for the Trustee in the Debtor Corporations\' cases?

3. Is Wright, Lindsey & Jennings LLP entitled to compensation as special counsel for the Trustee in the Debtor Corporations\' cases? If so, can, and should, the Trustee be surcharged for the legal fees and costs incurred by Wright, Lindsey & Jennings LLP?

4. Can, and should, the Trustee be surcharged for the legal fees and costs incurred by Hall, Estill, Hardwick, Gable, Golden & Nelson, P.C. in this litigation, including the fees and expenses of Shaffer\'s expert witness and financial consultant, D.R. Payne & Associates, or should Shaffer be required to pay for his own legal fees and costs incurred?

5. Is the Rose Law Firm vicariously liable for the acts of the Trustee in the Debtor Corporations\' cases?

A. The timeliness of Shaffer's objections

1. Positions of the parties

The Trustee's position is that Shaffer's objections, which raise issues of negligence, fraud, and breach of fiduciary duty as to the Trustee's July 29, 1999, "Final Report and Account and Application For Final Decree," and December 15, 1999, "Amended Chapter 11 Final Report and Account and Application For Final Decree," are barred by the three year statute of limitations in Arkansas under Arkansas law and the doctrine of latches.¹ The Trustee further contends that Shaffer's objections to the Trustee's "Application For Allowance of Final Compensation and Expenses For Counsel For the Trustee," filed on November 9, 1998, and the Trustee's "Motion For Final Approval of All Professional Fees and Expenses," filed on July 29,...