In re Office Products of America, Inc.

• Decision Date: 08 January 1992
• Docket Number: Bankruptcy No. 91-51849-C.
• Citation: 136 BR 675
• Parties: In re OFFICE PRODUCTS OF AMERICA, INC., Debtor.
• Court: U.S. Bankruptcy Court — Western District of Texas

136 B.R. 675 (1992)

In re OFFICE PRODUCTS OF AMERICA, INC., Debtor.

Bankruptcy No. 91-51849-C.

United States Bankruptcy Court, W.D. Texas, San Antonio Division.

January 8, 1992.

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Ronald Hornberger, Plunkett, Gibson & Allen, Inc., San Antonio, Tex., for Jesup, Josephthal & Co., Inc.

Robert L. Barrows, Lelaurin & Adams, P.C., San Antonio, Tex., for Trustee Randolph N. Osherow.

DECISION AND ORDER ON APPLICATION OF JESUP, JOSEPHTHAL FOR ALLOWANCE OF ADMINISTRATIVE EXPENSE AS FINANCIAL ADVISOR AND AGENT IN SALE OF ASSETS

LEIF M. CLARK, Bankruptcy Judge.

CAME ON for hearing the application of Jesup, Josephthal & Co., Inc. ("Jesup") for allowance of administrative expense, for acting as the financial adviser and agent in the sale of certain assets of the bankruptcy estate. Upon consideration thereof, the court finds and concludes that the fees should not be allowed, for the reasons set forth in this decision and order.

BACKGROUND FACTS

Jesup, Josephthal & Co., Inc. ("Jesup"), Movant here, is a nationally respected investment banking firm. Office Products of America ("OPA") was a publicly held company which operated warehouse-style office products stores, located in the Northeastern United States. In an effort to expand their business and by letter dated August 1, 1990, OPA enlisted Jesup's assistance in finding $10,000,000 of "equity financing" and another $10,000,000 in long-term loans for OPA. In return for these services, Jesup was to receive $25,000 in advance for expenses; unconditionally guaranteed payment of its other expenses; and, if it secured "equity financing" or a loan, a $150,000 transaction fee plus 6% of any funds obtained on behalf of OPA. Jesup's present application for administrative expenses is based upon this original agreement, as extended and modified several times before OPA filed its Chapter 7 petition on May 14, 1991.

Despite its prepetition efforts, Jesup was unsuccessful in finding either investors or long-term lenders for OPA. However, in late 1990 and early 1991, Jesup was able to arrange a $5 million loan by Freemont Financial Corp. (Freemont) to OPA. This financing arrangement was intended to provide short-term, bridge financing until Jesup could find investors and long-term lenders for OPA. For its services in arranging the Freemont loan, Jesup received a 1.5% commission ($75,000), half of which was paid directly to Jesup and half of which was paid to Seiden Commercial Corp., pursuant to an agreement between Jesup and Seiden.

In the meantime, Jesup continued its efforts to find equity investors and long-term lenders. In late February 1991, OPA sent financial data directly to Staples, Inc., one of the two largest office products retailers on the East Coast. In March, 1991, OPA and Jesup decided to expand Jesup's role to include a possible sale of OPA's assets. Once again, the arrangement was that Jesup was to receive a specified percentage of any sale it arranged.¹ On May 14, 1991, OPA filed a voluntary Chapter 7 petition, and a trustee was appointed the following day.

On or about the same day that the trustee was appointed, Office Depot, Inc. offered approximately $4 million to purchase two of OPA's three Baltimore-area stores. About a day later, the trustee sought court approval to sell these assets and to assign the leases to Office Depot, Inc., pursuant to its written offer. The court scheduled expedited hearings on these motions for June 5, 1991. The day before that hearing (June 4, 1991), an attorney for a second bidder — Staples, Inc. — contacted the trustee, seeking information about the bidding process for OPA's Baltimore-area stores.

Both Staples and Office Depot appeared at the June 5 hearing. The court conducted a sealed-bid judicial auction, in which Staples bid approximately $7,250,000 for all three Baltimore-area stores. Two Jesup representatives testified during the course of the June 5 hearing.²

Prior to the sale hearing, Jesup had asked the trustee to sign an agreement to employ Jesup, under terms essentially the same as those of the August 1990 arrangement between OPA and Jesup. Although the trustee never actually signed the proposed agreement, Jesup contends that by word and action the trustee indicated to Jesup that he intended to, and would, sign the agreement. In support of this contention, Jesup cites several pieces of correspondence between Jesup's attorneys and Randolph Osherow, the trustee. The letters — all which are dated between May 21, 1991, and May 29, 1991 (Jesup's Exhibits 7-10) — indicate prompt efforts by Jesup to have the trustee employ Jesup and make necessary application for court approval of said employment.³

In late July 1991, Jesup filed this Application for Administrative Expenses. Jesup seeks $486,000 in fees and $32,789.01 in expenses, for a total claim of $518,789.01. The $486,000 in fees represents a base transaction fee of $150,000 for the sale to Staples, plus 6% of Staples' net bid of approximately $5.6 million.⁴ Although Jesup seeks payment nunc pro tunc to the date of the original Chapter 7 petition (May 14, 1991), the trustee has never formally applied for court approval to hire Jesup, nor has Jesup itself applied for such approval nunc pro tunc. The trustee has raised several objections to Jesup's claim. In addition, on September 24, 1991, the trustee filed a counterclaim, alleging that Jesup owes the estate $5,786.86 which should be set off against any fees which the court awards Jesup.

Jesup urges a number of reasons why it is entitled to be paid. These arguments are summarized as issues, then discussed below.

(1) Is Jesup entitled to an administrative claim pursuant to 11 U.S.C. § 503(b)(2)?

(2) In the alternative, was the agreement between Jesup and OPA a prepetition executory contract which the trustee assumed, pursuant to 11 U.S.C. § 365?

(3) In the alternative, is Jesup entitled to assert an administrative claim under Section 503(b)(1)(A)?

(4) In the alternative, is Jesup entitled to compensation pursuant to Section 503(b)(6)?⁵

DISCUSSION

1. Is Jesup entitled to an administrative claim pursuant to 11 U.S.C. § 503(b)(2)?

Section 503(b)(2) only applies to awards already made under 11 U.S.C. § 330(a), which requires court approval under 11 U.S.C. § 327(a). Jesup's employment pursuant to 11 U.S.C. § 327(a) was never approved by the court, nor does Jesup qualify for nunc pro tunc approval. Therefore, Jesup is not entitled to an administrative claim under § 503(b)(2).

(a) The requirements of 11 U.S.C. § 503(b)(2). Section 503(b)(2) permits "compensation and reimbursement awarded under section 330(a)" to be allowed as an administrative expense, after notice and a hearing. 11 U.S.C. § 503(b)(2). Necessarily, then, § 503(b)(2) is inapplicable unless the court has already awarded compensation to the professional under § 330(a). Section 330(a), in turn, permits compensation to "professional persons" only if they have been employed under § 327. See discussion infra.

(b) The requirements of 11 U.S.C. § 330. Section 330 provides that "after notice to any parties in interest and to the United States trustee and a hearing, . . . the court may award . . . to a professional person employed under section 327 . . . reasonable compensation for actual, necessary services rendered by such . . . professional person . . . and . . . reimbursement for actual, necessary expenses." 11 U.S.C. § 330 (emphasis added). Thus, professional persons seeking compensation under § 330 must first meet the requirements prescribed by § 327, governing the hiring of professional persons.⁶ Id. To date, the trustee has not formally sought to employ Jesup pursuant to § 327, nor has the court approved Jesup's employment. Moreover, Jesup fails to meet the requirements for nunc pro tunc approval.⁷

Furthermore, Jesup's application for compensation fails to comply with the requirements of Rule 2016 of the Federal Rules of Bankruptcy Procedure and Local Bankruptcy Rule 2016, which implement § 330. National Rule 2016 provides that an "entity seeking interim or final compensation for services . . . from the estate shall file with the court an application setting forth a detailed statement of (1) the services rendered, time expended and expenses incurred, and (2) the amounts requested." Fed.R.Bankr.P. 2016. Similarly, Local Bankruptcy Rule 2016 lists multiple requirements for fee applications, including "(i) An itemized description of the services performed;/ (ii) The date the services were performed;/ (iii) The amount of time spent on those services;/ (iv) The identity and capacity of each person performing the services (i.e., attorney, lawclerk); and/ (v) the hourly rate(s) sought for each person(s) for whom compensation is sought." Bankr. L.R. 2016. The underlying purpose of these rules is to elicit, from the professional who is seeking compensation from the estate, sufficient information to permit the court to determine the reasonableness of the compensation sought and the necessity of the services rendered. Unfortunately, Jesup's application for compensation is devoid of any details which would permit the court to make such determinations.⁸

At least two courts have held that, notwithstanding their usual way of billing, investment bankers must comply with the same procedure and timing requirements as all other professionals seeking compensation from a bankruptcy estate. See In re Hillsborough Holdings Corp., 125 B.R. 837, 840 (Bankr.M.D.Fla.1991)⁹; In re Mortgage & Realty Trust, 123 B.R. 626, 633 (Bankr.C.D.Cal.1991). In addition, one New York bankruptcy court has attempted to remedy what it perceives as a "collision course between investment bankers/advisors and the Bankruptcy Code, and apparently a non-competitive market," and has established "requirements for the future retention of all investment bankers/advisors who seek to be retained" before that court:

Any investment banker/advisor

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