In re Printcrafters, Inc.
| Citation | 208 BR 968 |
| Decision Date | 05 May 1997 |
| Docket Number | Bankruptcy No. 96-12068 MSK. |
| Parties | In re PRINTCRAFTERS, INC., a Colorado corporation, d/b/a Phoenix Press, Inc.; d/b/a Color Tek Printing, Inc., a/k/a Media Communications Group, Inc., aka Renaissance Publishing Incorporated; d/b/a Strategic Mail, Inc., EIN XX-XXXXXXX Debtor. |
| Court | United States Bankruptcy Courts. Tenth Circuit. U.S. Bankruptcy Court — District of Colorado |
CORRECTED* ORDER ON APPLICATION FOR ALLOWANCE OF ADMINISTRATIVE EXPENSES OF WEINMAN, COHEN & NEIBRUGGE, P.C.
THIS MATTER comes before the Court on the Application for Allowance of Administrative Expenses of Weinman, Cohen & Neibrugge, P.C. (Application). The Application requests allowance of fees and expenses incurred in the representation of Debtor prior to the conversion of the case from Chapter 11 to Chapter 7. Notice of the Application was given in accordance with Fed.R.Bankr.P. 2002. M. Stephen Peters, the Chapter 7 Trustee (Trustee) filed a timely limited objection. The Trustee did not object to the allowance of the fees or expenses as requested but objected to Weinman, Cohen & Neibrugge, P.C.'s (WC & N) consumption of a prepetition retainer in partial satisfaction of its Chapter 11 administrative claim. A hearing was held at which the time the Court found that the requested fees and expenses were reasonable and allowable as an administrative claim under 11 U.S.C. § 503(b). The Court reserved final ruling on the Application until the parties briefed the issue of whether the retainer held by WC & N could be applied against its claim.
Having considered the undisputed facts and arguments of the parties, the Court finds and concludes as follows:
I. JURISDICTION
This Court has jurisdiction in this contested matter pursuant to 28 U.S.C. § 1334. This is a core matter. 28 U.S.C. § 157(b)(2)(A) and (B).
II. FACTUAL BACKGROUND
This case was filed by voluntary petition under Chapter 11 on February 29, 1996. Shortly thereafter the Debtor sought to retain WC & N as its bankruptcy counsel (retention application). The retention application recited that WC & N was disinterested, that the Debtor had paid WC & N a prepetition retainer of $25,000.00 (a portion of which had been expended on prepetition services and filing fees) and that the remaining portion of the retainer was held by WC & N in an interest bearing trust account. The affidavit of Jeffrey A. Weinman on behalf of WC & N was attached, but neither the application nor the affidavit described terms of any attorney retention agreement.
The Debtor gave notice of the retention application and $25,000.00 prepetition retainer to all creditors pursuant to L.B.R. 202. No objections were filed.
On April 2, 1996, the Court entered an Order authorizing the Debtor to employ WC & N and Jeffrey A. Weinman as counsel. With regard to the retainer, the Order provided:
The retainer is approved. Pending entry of an Order by the Court authorizing payment of fees and expenses, counsel shall hold all funds held on the date of the filing of the petition or received thereafter, in an interest bearing trust account and not draw against same.
On June 18, 1996, the case was converted to Chapter 7 and the Trustee appointed. The Application now before the Court recites that $6,583.48 of the original $25,000.00 retainer was applied prepetition to attorney fees and expenses, and that $18,416.52 remains in WC & N's trust account (retained funds). No copy of an attorney retention agreement has been presented to the Court.
III. ISSUE
WC & N and the Trustee agree that the retained funds are property of the bankruptcy estate. WC & N argues that it holds a prepetition security interest in such funds to the extent of its allowed fees and expenses. Since the Court has determined that WC & N's fees and expenses are reasonable. WC & N argues it should be entitled to draw against the retained funds. According to WC & N, to restrict it from applying the retained funds would defeat the purpose of having a retainer and chill future representation of Chapter 11 debtors by able and competent counsel who would then be subjected to the risk of nonpayment if a case were converted to Chapter 7.
The Trustee argues that because 11 U.S.C. § 726(b) subordinates Chapter 11 administrative expenses to Chapter 7 administrative expenses, payment to WC & N from the retained funds cannot be made until the estate is sufficiently administered to assure the administrative expense claims of both the Chapter 7 and Chapter 11 phases of the case will be paid in full. If there are insufficient assets to pay all administrative claims, the Trustee contends that WC & N's prepetition security interest would be avoidable.
The issue presented is: After conversion of a case from Chapter 11 to Chapter 7, may Debtor's counsel satisfy an allowed Chapter 11 administrative expense claim from a pre-petition retainer?
IV. ANALYSIS
Conversion of a Chapter 11 case to Chapter 7 changes the priorities for payment of creditors holding administrative expense claims allowed under § 503(b). Section 726(b) of the Bankruptcy Code provides that administrative expense claims incurred prior to the conversion are subordinate to those incurred during the administration of the case under Chapter 7:
(b) Payment on claims of a kind specified in paragraph (1), (2), (3), (4).(5), (6), (7) or (8) of section 507(a) of this title, or in paragraph (2), (3), (4), or (5) of subsection (a) of this section, 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 1009sic, 1112, 1208, or 1307 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 or under this chapter before such conversion and over any expenses of a custodian superseded under section 543 of this title. (Emphasis added.)
After conversion, Chapter 11 administrative claims are subordinated to subsequent Chapter 7 administrative claims in order to assure sufficient funds for the liquidation and so-called "burial expenses" incurred in the Chapter 7 phase of the case. In re Kaleidoscope of High Point, Inc., 56 B.R. 562, 565 (Bankr.M.D.N.C.1986); In re IML Freight, Inc., 52 B.R. 124, 134 (Bankr.D.Utah 1985); In re Codesco, Inc., 18 B.R. 225, 227 (Bankr. S.D.N.Y.1982); In re Price Chopper Supermarkets, Inc., 19 B.R. 462, 468 (Bankr. S.D.Cal.1982).
The super-priority status for the so-called "burial expenses" after the conversion was intended to provide an incentive to encourage capable trustees and professionals to act in superseding cases. This purpose would be negated if liquidating administrative expenses of an aborted Chapter 11 case could also qualify for super-priority status in a converted Chapter 7 case. Codesco at 227.
One effect of the subordination of Chapter 11 administrative expense claims is the ability of a Chapter 7 trustee to require disgorgement of interim payments made during the Chapter 11 phase of the case to the extent that there are insufficient assets to pay all Chapter 7 administrative expenses. See United States Trustee v. Johnston, 189 B.R. 676, 677 (N.D.Miss.1995) (); Shaia v. Durrette, Irvin, Lemons & Bradshaw, P.C. (In re Metropolitan Electric Supply, Corp.), 185 B.R. 505 (Bankr. E.D.Va.1995) (); In re Lochmiller Industries, Inc., 178 B.R. 241, 251 (Bankr.S.D.Cal. 1995) (); Guinee v. Toombs (In re Kearing), 170 B.R. 1, 7-8 (Bankr.D.C.1994) (). The risk of disgorgement is shared by all professionals serving a Chapter 11 debtor-in-possession.
The language of § 726(b) is plain and unambiguous. In the absence of a clearly expressed legislative intent to the contrary or a result which is absurdly inconsistent with the remainder of the Code, the language must be deemed conclusive. United States v. Turkette, 452 U.S. 576, 580, 101 S.Ct. 2524, 2527, 69 L.Ed.2d 246 (1981); Hubbard v. United States, 514 U.S. 695, 701-704, 115 S.Ct. 1754, 1758-59, 131 L.Ed.2d 779 (1995); BFP v. Resolution Trust Corp., 511 U.S. 531, 114 S.Ct. 1757, 128 L.Ed.2d 556 (1994) (Souter, J., dissenting), reh'g denied, 512 U.S. 1247, 114 S.Ct. 2771, 129 L.Ed.2d 884 (1994). Bankruptcy courts are not free to rearrange Congress' priorities for the treatment of creditors based on equitable grounds, except by application of § 510 to the claim of a particular creditor. United States v. Noland, ___ U.S. ___, 116 S.Ct. 1524, 134 L.Ed.2d 748 (1996).
Because the retained funds are admittedly property of the estate, they must be administered as such. The funds may not be used to pay claims in deviation of priorities set out in § 726(b). To except the retained funds from general administration, WC & N must establish an interest in or a lien against the funds which is senior to the estate's interest. However, the relative interests of the estate and WC & N may become moot if there are sufficient assets to pay all Chapter 7 and other Chapter 11 administrative expenses. Thus, the Trustee is correct. Absent a determination that WC & N has a lien upon or interest in the retained funds senior to the interest of the estate, WC & N may not draw...
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