In re Orchid Island Hotels, Inc.
| Decision Date | 26 March 1982 |
| Docket Number | Bankruptcy No. 76-0061. |
| Citation | 18 BR 926 |
| Parties | In re ORCHID ISLAND HOTELS, INC., Bankrupt. |
| Court | U.S. Bankruptcy Court — District of Hawaii |
COPYRIGHT MATERIAL OMITTED
COPYRIGHT MATERIAL OMITTED
Allan S. Chock, Honolulu, Hawaii, for Dept. of Taxation.
Takeo Tokumaru, George M. Takane, Honolulu, Hawaii, co-trustees.
James Duca, Honolulu, Hawaii, for Krist Ann Advertising.
Connie Meredith, Honolulu, Hawaii, for debtor.
Lawrence I. Weisman, Towson, Md., Jerry A. Ruthruff, Honolulu, Hawaii, for Wong.
Jeffrey Choi, Hilo, Hawaii, for Hilo Const.
H. William Burgess, Honolulu, Hawaii, for ERS.
Carol K. Yamamoto, Dept. of Labor and Indus. Relations, Honolulu, Hawaii, for "DLIR".
Stephen K. Yamashiro, Hilo, Hawaii, for Frost & Omta.
The issue in this case is whether or not the respective claims of various creditors are entitled to priority ahead of the Employees' Retirement System, a secured creditor.
A hearing on this matter was held on October 17, 1980, pursuant to the filing by the Co-Trustees of an Application for Final Determination as to Priority of Various Claims. At the hearing Lawrence I. Weisman appeared on behalf of himself, as original counsel for Willard M.P. Wong (hereafter "Wong"), the state court-appointed Receiver of the Orchid Island Hotel; H. William Burgess appeared on behalf of the State Employees' Retirement System (hereafter "ERS"); Stephen K. Yamashiro for Frost and Omta; Connie G.W. Meredith for Orchid Island Hotels, Inc. and Pecos Land and Cattle Corporation; George M. Takane on behalf of himself as Co-Trustee of the bankrupt estate; James N. Duca on behalf of Krist Ann Advertising, Inc.; Carol K. Yamamoto for the State Department of Labor and Industrial Relations (hereafter "DLIR"); Allan S. Chock for the State Department of Taxation; Jerry A. Ruthruff on behalf of Receiver Wong (replaced Weisman as counsel on April 10, 1978); and Jeffrey Choi on behalf of Hilo Construction, Inc. The Court took the matter under advisement and requested any further memoranda on the issue.
Based upon the record and memoranda filed herein, and the arguments of counsel, the Court finds that the pre-petition debts incurred do not have priority over the status of ERS. The Court also finds that the post-petition expenses should not be paid from the proceeds of the ERS sale as costs and expenses of the sale of the hotel.
On February 5, 1975, ERS, the first mortgagee, commenced a foreclosure action in the First Circuit Court, State of Hawaii. Subsequently, ERS requested that the state court appoint a receiver to take possession of and operate the Orchid Island Hotel during the pendency of the foreclosure proceedings. ERS had alleged that cessation of hotel operations would not be in the best interests of the parties to the foreclosure proceeding since the hotel would be more readily saleable and could command a higher price as an ongoing concern. On October 6, 1975, the Circuit Court appointed Mr. Willard Wong as receiver, with instructions to continue operation of the hotel. Pursuant to the Order Appointing Receiver, Wong took control over the hotel and continued its operation until shortly after the commencement of the bankruptcy action.
Orchid Island Hotels, Inc., hereafter "Bankrupt", filed a petition for corporate reorganization under Chapter X on February 9, 1976. On March 15, 1976, the Bankruptcy Court authorized the Receiver to borrow additional monies from ERS, not to exceed $15,000.00. Following an evidentiary hearing on March 26, 1976, on the petition for reorganization, Judge Martin Pence declared Orchid Island bankrupt (the Order for Adjudication was entered June 29, 1976).
On April 30, 1976, the Court ordered retention of jurisdiction over the property and authorized sale of the property. The duly appointed state commissioners, George Takane and Takeo Tokumaru, were also appointed commissioners in this court to sell the real property.
On June 23, 1976, this Court entered an Order for Negotiated Sale of Real Estate, authorizing the purchaser, Salisbury Estate, to take possession of the property and to operate the hotel pending completion of the $2.75 million sale. On October 14, 1976, Salisbury Estate was found in default and the hotel was then sold to Frost and Omta, second mortgagees, for $1.5 million.
By order of the Court, Frost and Omta were given an extension until June 30, 1977, to pay the purchase price and complete the sale. As of August 10, 1977, however, Frost and Omta were found to be in substantial default and the Co-Trustees (earlier appointed commissioners) were ordered to sell the hotel at public auction.
At the public auction held on September 19, 1977, ERS purchased the Orchid Island Hotel. On November 10, 1977, the Court confirmed the sale to the ERS, the first mortgagee for a purchase price of $1,200,000.00. The Order provided:
And it is further ORDERED, ADJUDGED AND DECREED that the Employees\' Retirement System, State of Hawaii, shall deposit with the Commissioners such amount as may be ordered by the Court for the payment of administrative expenses and costs incurred herein; and the deposit of the remainder of the purchase price shall be subject to further order of this Court.
On December 26, 1979, in its Order Approving Compromise (of Real Property Taxes) this Court held that real property taxes are a paramount lien and the ERS was ordered to pay $115,781.26 out of the purchase price for the hotel so that the bankruptcy trustees could pay that sum to the State Tax Office in settlement of the real property tax claims. This Court has not ordered any further payments out of the proceeds of the sale.
There exist numerous claims to the proceeds from the sale to the ERS. Briefly the creditors' claims can be summarized as follows:
A. Hilo Construction, Inc.
This claimant seeks payment of compensation for repair work done to Orchid Island Hotel as a result of earthquake damage. At the time the repair work was done the hotel was being operated under the receivership of Wong. A proof of claim was filed on May 17, 1976 in the amount of $4,672.00.
B. Krist Ann Advertising, Inc.
The claimant alleges that it provided entertainment and advertising services for Orchid Island Hotel from October 8, 1975 through February 5, 1976 (during the state receivership period) totaling approximately $21,068.14. A proof of claim was filed on June 9, 1976 in the amount of $2,378.10 for the unpaid balance.
C. Department of Labor & Industrial Relations
DLIR has filed claims for unpaid wages and unemployment compensation taxes due and unpaid both before and after the filing of the bankruptcy petition. In the alternative, DLIR claims these debts as costs of the sale of the property.
D. Department of Taxation
The Director of Taxation claims priority for all general excise and withholding taxes incurred and due from October 6, 1975 to present. The claims presented relate to or arose in connection with the foreclosure proceedings in the state and federal courts.
E. Receiver Wong and Attorney for Receiver
Receiver Wong, represented by attorney Weisman, seeks compensation for services rendered and monies advanced for the operation and maintenance of the Orchid Island Hotel.
Mr. Weisman, the attorney for Wong, seeks compensation for services rendered during the administration of Orchid Island Hotel in the State Court prior to the bankruptcy proceeding, as well as during the present bankruptcy proceedings.
F. Attorney for Bankrupt
The attorney for the Bankrupt is seeking reasonable attorneys' fees of $7,220.00 as an administrative claim for services rendered after the petition in bankruptcy was filed.
In determining whether each particular claim has priority over ERS, a distinction must be made between pre-petition and post-petition claims. The following priority analysis will be divided first, into a discussion of the pre-petition claims, and next, the post-petition claims against ERS. These claims will be treated separately because different issues arise in determining the priority of distribution of the proceeds from the sale of the hotel.
Included among the various creditors asserting claims ahead of ERS for debts which were incurred during the state receivership period are: the Receiver and his attorney, Mr. Weisman; Hilo Construction, Inc.; Krist Ann Advertising; DLIR and the State Department of Taxation. Each of these claimants seeks reimbursement against the bankrupt estate out of proceeds from the sale of ERS for compensation and/or expenses of the superseded receivership.
The principles governing the propriety and amount of allowances for pre-bankruptcy expenses are generally derived from the landmark case of Randolph v. Scruggs, 190 U.S. 533, 23 S.Ct. 710, 47 L.Ed. 1165 (1903). The doctrine of Randolph v. Scruggs has been referred to as the "benefit" doctrine and may be summarized as follows:
In Randolph the Supreme Court stated the principle that costs of a superseded assignment for the benefit of creditors1, including attorney's fees for representation of the assignee, were entitled to first payment out of the bankrupt estate as an equitable lien. This equitable lien would be imposed provided that the costs were beneficial and tended to preserve the assets. The Court reasoned that reimbursement and/or...
To continue reading
Request your trial