In re Riverside-Linden Inv. Co., Bankruptcy No. 83-00948-H7.
| Decision Date | 06 April 1988 |
| Docket Number | Bankruptcy No. 83-00948-H7. |
| Citation | 85 BR 107 |
| Parties | In re RIVERSIDE-LINDEN INVESTMENT CO., a general partnership, Debtor. |
| Court | U.S. Bankruptcy Court — Southern District of California |
Joel C. Estes, Kevin J. Hoyt, Robert A. Hessling, San Diego, Cal., for Trustee Ralph Boldt.
John Forest Hilbert, Anderson, Goldberg & Waldron, San Diego, Cal., for Kathryn Crake.
Jerome E. Eggers, Sternberg, Eggers, Kidder & Fox, P.C., San Diego, Cal., for Earl Hafer.
At issue are the propriety and reasonableness of the fees charged by the attorneys and accountants for the trustee relating to the administration of the Chapter 7 debtor's estate. Kathryn Crake, fifty percent general partner in the debtor, objects to these fees, alleging that (1) the trustee's investigation of the unsecured claim of Earl V. Hafer ("the Hafer claim") was unnecessary, excessive, and did not lead to the filing of a claim objection; (2) the trustee's investigation into and motion to subordinate or disallow her partnership interest and the trustee's opposition to her motion for distribution of the estate, or in the alternative dismissal of the case were unnecessary, retaliatory and beyond the scope of the trustee's duties; and (3) the trustee's investigation into the debtor's formation and early financial history for the purpose of preparing partnership tax returns was unnecessary, excessive and beyond the scope of the trustee's duties.
The trustee responds that all actions taken by the attorneys and accountants on his behalf were in accordance with the duties of a Chapter 7 trustee pursuant to 11 U.S.C. § 704 and 26 U.S.C. § 6031, and the concomitant duties of diligence required of professional persons in the performance of their duties.
This court has jurisdiction to hear these matter pursuant to 28 U.S.C. § 1334 and § 157 and General Order No. 312-D of the United States District Court, Southern District of California. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A), (B) and (O).
Kathryn Crake ("Crake"), and six other persons are general partners in the debtor general partnership. The debtor's primary asset was an 8.4 acre parcel located in Riverside, California ("the Riverside property").
The debtor filed for relief under Chapter 11 of the Bankruptcy Code on March 2, 1983. On November 7, 1984, this case was converted to a Chapter 7 proceeding and Ralph Boldt appointed as Chapter 7 trustee. A court approved sale of the Riverside property resulted in the trustee receiving net proceeds of $398,453.41 in September 1985.
On November 8, 1985, Hafer, an unsecured creditor, moved this court to compel distribution of his claim of $65,879.98. None of the creditors objected, with the largest then creditor, James W. Kugler, consenting to such distribution. However, the trustee filed opposition claiming that the distribution was premature, since there was still the possibility of late filed1 or amended claims being filed, and that the "claims"2 of the general partners had not been subordinated to those of the non-insider creditors. The trustee made no objection per se to the allowability of the Hafer claim in his opposition to distribution.
Thereafter, over a period of approximately five months, Hafer, the trustee, and ultimately Crake, negotiated an arrangement whereby funds sufficient to satisfy the Hafer claim were placed in a mutual fund. Income from this mutual fund was to be paid directly to Hafer, with the trustee reserving his right to object to the Hafer claim at a later time. On December 10, 1985, the court granted the trustee's application to expand the role of Estes & Hoyt ("E & H") as counsel for the trustee, to include services in connection with the review of claims and objections thereto and the administration of miscellaneous matters in the distribution and closing of the estate. During the period the Hafer arrangement was being negotiated and immediately thereafter, the trustee undertook various claim objections, which ultimately left Hafer's claim as the sole remaining creditor claim. Furthermore, subsequent to May 19, 1986, the debtor was solvent, with cash assets in the possession of the trustee substantially exceeding the sum of the Hafer claim and all administrative expenses.
On June 5, 1986, the court granted the trustee's motion for authority to hire the accounting firm of Steres, Alpert & Carne ("S A & C") in fulfilling his duties as trustee.
On January 16, 1987, the court granted the trustee's ex parte application for production of documents in the possession of the partners and creditors, pursuant to Bankr.R. 2004, in order to prepare the partnership tax returns and investigate the financial history of the partnership. On January 20, 1987, the court granted the trustee's application requesting the turnover of all documents in the possession of Master Escrow Services, Inc., in connection with its investigation of the Hafer claim. On April 16, 1987, the trustee subpoenaed Crake and her non-bankruptcy counsel, Caldwell & Toms, for deposition and production of documents on May 18-19, 1987 (apparently for the purpose of investigating the formation of the debtor, Crake's partnership interest and the Hafer claim, although the notice provided no specific purpose). None of these pleadings revealed that the estate was solvent. During this time period, counsel for Crake made several requests to E & H's associate Michael O'Halloran ("O'Halloran") and SA & C's accountant Michael D. Conroy ("Conroy") that certain minor debts be treated in a manner most favorable to the IRS, in order to save the expense of investigation and to expedite the closing of the estate. There is no evidence that this alternative was considered by the trustee.
On October 14, 1987, Crake filed a motion to compel distribution of the assets of the estate or in the alternative for dismissal of the proceeding. This motion was joined by Hafer, still the only remaining creditor of the estate. The motion to distribute or dismiss was opposed by the trustee, who concurrently filed a counter-motion entitled "Motion For Partial Disallowance Of Crake's Unsecured Claim based on her ownership of a fifty percent interest in the partnership Or In The Alternative Equitable Subordination." This motion was based on "(1) the debtor having assumed an obligation evidenced by a note in the sum of $64,512.36 payable by Equity Investments, an alter ego of Crake . . . and . . . Hafer . . . and (2) the breach of her fiduciary duty to the other general partners in connection with such assumption." The motion went on to allege "inequitable conduct which . . . injured the creditors of the debtor," despite the fact that over two years had passed since the September 17, 1985 claims bar date and the only unpaid creditor remaining, Hafer (who would be paid in full by such distribution), joined Crake's motion to distribute. The trustee's motion was withdrawn subsequent to this court's December 7, 1987 decision to grant the motion for distribution and immediately release the funds reserved to pay the Hafer claim.
Thereafter, on January 25, 1988, this court heard the applications for compensation made by E & H and S A & C. Crake filed her objection to the respective fee applications. At the hearing, this court took the applications and objections thereto under submission and requested additional briefing.
Crake objects inter alia to the fees incurred by E & H in connection with the trustee's investigation of the Hafer claim.3 Crake points out that although E & H spent 56.7 hours over a period of eighteen months investigating the Hafer claim, no objection was filed. During this time, there were no other creditors of the estate besides Hafer and the estate had sufficient money to pay Hafer's claim and all the administrative expenses as well as a surplus for distribution to the general partners. In addition, none of the general partners opposed Hafer's request to distribute nor did they challenge the validity of his claim. Crake asserts that the investigation undertaken by E & H on behalf of the trustee was unnecessary. Furthermore, Crake attributes a portion of these billings to the education of E & H associate Robert Hessling ("Hessling"), the second E & H attorney responsible for this matter, and asserts that had the trustee diligently processed this estate, a second attorney would not have been necessary.4 Finally, Crake asserts that the extensive investigation of the formation of the debtor was beyond the scope of the trustee's duties.
The trustee responds that despite the fact that the estate had a surplus and despite the fact that none of the general partners objected to the Hafer claim, he had a duty to investigate the affairs of the debtor, including those transactions giving rise to the Hafer claim, and that the services of E & H in connection therewith were reasonable, necessary and authorized by the Code.
A Chapter 7 trustee's duties are set forth by 11 U.S.C. § 704. Among those duties are:
Within these duties lies at least a latent conflict. While the trustee is obligated to expeditiously close the estate in the best interests of the parties in interest, such a closing will often be delayed while the trustee objects to the claims of certain parties in interest. Clearly, "a purpose would be served" when there are other creditors who stand to benefit from the trustee's actions and such actions show a likelihood of increasing the total distribution to the creditors. However,...
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In re Riverside-Linden Inv. Co.
...in an order which ultimately approved $27,168.50 in fees and $1,892.45 in costs of the total sum of $40,965.65 requested by applicant. 85 BR 107. On May 26, 1988, applicant filed its supplemental application for final award of compensation requesting the additional sum of $7,959.00 (later r......