In re Snergy Properties, Inc.

• Decision Date: 23 August 1991
• Docket Number: Bankruptcy No. 91 B 20718.
• Citation: 130 BR 700
• Parties: In re SNERGY PROPERTIES, INC., Debtor.
• Court: U.S. Bankruptcy Court — Southern District of New York

130 B.R. 700 (1991)

In re SNERGY PROPERTIES, INC., Debtor.

Bankruptcy No. 91 B 20718.

United States Bankruptcy Court, S.D. New York.

August 23, 1991.

COPYRIGHT MATERIAL OMITTED

Druckman and Raphan, New York City, for Brian A. Raphan, et al.

Denise L. Savage, Croton-on-Hudson, N.Y., for Brian A. Raphan, et al.

James A. Cartelli, White Plains, N.Y., for debtor.

HEARING ON MOTION FOR AN ORDER DIRECTING DEBTOR AND/OR CADO CAPITAL CORP. TO COMPENSATE BRIAN A. RAPHAN, DRUCKMAN AND RAPHAN, ESQS. AND DENISE L. SAVAGE, ESQ.

HOWARD SCHWARTZBERG, Bankruptcy Judge.

Brian A. Raphan, who was appointed by the New York Supreme Court, Westchester County, on August 22, 1990 to act as receiver with respect to the Chapter 11 debtor's real estate in Bronx County, New York, seeks compensation for himself and his attorneys, together with costs and expenses in connection with their services.

The debtor in possession opposes the application on various grounds. The debtor disputes that it owes anything to the mortgagee, Cado Capital Co. ("Cado Capital"), which caused the appointment of the receiver in state court. The debtor disputes that the mortgagee is entitled to collect rents from the mortgaged property with respect to which the receiver was appointed. The debtor also disputes the validity of the mortgage covering the property for which the receiver was appointed. Additionally, the debtor objects to any award for legal fees incurred by the receiver's attorneys on the ground that the receiver was not expressly authorized by the state court to retain attorneys.

Factual Background

On May 14, 1991, the debtor filed with this court a petition for reorganizational relief under Chapter 11 of the Bankruptcy Code and was continued in management and possession of its property and business in accordance with 11 U.S.C. §§ 1107 and 1108.

The debtor owns two pieces of property. One parcel is in Mount Vernon, New York, and is the home of the debtor's two principals; the other parcel is an income producing building in Bronx, New York, which was purchased from the principals of the mortgagee, Cado Capital. In February of 1990, Cado Capital commenced a mortgage foreclosure action against the debtor in the New York Supreme Court, Westchester County for the sum of $28,000.00. This action was the subject of substantial litigation. During the mortgage foreclosure proceedings, the state court entered an order on August 23, 1990, appointing Brian A. Raphan as receiver of the debtor's building on East 215th Street, Bronx, New York.

After his appointment and qualification, the receiver collected rents from the building in question, made disbursements to maintain the premises, commenced actions against tenants for nonpayment of rent, commenced dispossess proceedings against delinquent tenants and generally dealt with tenants and others in connection with problems pertaining to the maintenance and operation of the Bronx building.

In order to initiate and prosecute the legal proceedings required in connection with rent and eviction problems, the receiver retained the services of the law firm of Druckman and Raphan, Esqs., in which the receiver is a partner. Additionally, upon learning that the debtor filed a Chapter 11 case in the Bankruptcy Court, the receiver and his law firm retained the services of a bankruptcy specialist, Denise L. Savage, Esq., to perform services in connection with the receiver's turnover of the property of the estate to the debtor in possession in accordance with 11 U.S.C. § 543, including the preparation of an application for compensation pursuant to 11 U.S.C. § 543(c)(2).

There is no serious dispute as to the quality or amount claimed for the services performed by the receiver and his attorneys. Based on the amounts collected and disbursed, the receiver seeks compensation for his services based on the formula expressed in section 8004 of the New York Civil Practice Law and Rules, N.Y.Civ. Prac.L. & R. 8004 (McKinney 1981), together with properly incurred costs of $364.00. Druckman and Raphan, Esqs. seek legal fees for their services to the receiver in the sum of $4,141.66. Denise L. Savage, Esq. has applied for an award of $2,135.00 for her legal services for the receiver, plus disbursements of $40.00.

DISCUSSION

A receiver appointed in a state court mortgage foreclosure action is a "custodian" within the meaning of that term, as expressed in 11 U.S.C. § 101(11)(C). In re Gomes, 19 B.R. 9 (Bankr.D.R.I.1982); In re Left Guard of Madison, Inc., 11 B.R. 238 (Bankr. W.D.Wis.1981). Accordingly, a custodian may receive payment of reasonable compensation for services rendered and costs and expenses incurred pursuant to 11 U.S.C. § 543(c)(2). Moreover, 11 U.S.C. § 503(b)(3)(E) requires such reimbursement be treated as a first priority administrative expense.

The debtor objects to counsel fees claimed by the receiver's attorneys because counsel was not appointed by this court pursuant to 11 U.S.C. §§ 329 and 330. The debtor reasons that it should have been given prior notice of any proposed order authorizing counsel to appear for the debtor. The state court order which appointed the receiver is not clear as to whether or not the receiver was authorized to retain counsel. The order states that the receiver was granted "the usual powers and directions. . . ." The order also provides that the receiver was

authorized to institute and carry on all legal proceedings necessary for the protection of said premises, or to recover possession of the whole or any part thereof, and to institute and prosecute suits for the collection of rents now due or hereafter to become due, and summary proceedings for the removal of any tenant or tenants or other persons therefrom. . . .

Manifestly, legal services must be performed on behalf of the receiver in order to carry out the legal proceedings authorized in the order.

Under New York law, the implied authorization for the receiver to retain counsel, as reflected in the state court order of appointment, would not suffice to support the receiver's retention of counsel. The state court order expressly states that "the Receiver shall comply with Sections 6401-6404 CPLR. . . ." Section 6401(b) of the New York Civil Practice Law and Rules specifically states in relevant part as follows:

A receiver shall have no power to employ counsel unless expressly so authorized by order of court. (emphasis added).

N.Y.Civ.Prac.L. & R. 6401(b) (McKinney 1980). In Marine Midland Realty Credit Corp. v. Drake Evergreen Park Inc., 91 Misc.2d 569, 398 N.Y.S.2d 241 (Sup.Ct.Oswego Co.1977), the court refused to allow compensation for counsel fees where a receiver failed to obtain an order of the state court to employ counsel, even though all the parties concerned agreed to an allowance for counsel fees.

Nevertheless, compensation for the receiver and his counsel must be determined by this court in accordance with the standards established under the Bankruptcy Code and not by conditions imposed under state law. See In re 1020 Warburton Avenue Realty Corp., 127 B.R. 333, 336 (Bankr.S.D.N.Y.1991) (the Supremacy Clause in Art. 1, § 8, cl. 4 regarding bankruptcy proceedings prevails over state statutes relating to inconsistent state procedural matters). Generally, administrative expenses under 11 U.S.C. § 503 are payable only if they are subsequent to the filing of the debtor's bankruptcy petition. Trustees of Amalgamated Insurance Fund v. McFarlin's, Inc., 789 F.2d 98, 101 (2d Cir. 1986); In re Balport Construction Co., Inc., 123 B.R. 174, 178 (Bankr. S.D.N.Y.1991). However, 11 U.S.C. § 503(b)(3)(E) expressly authorizes compensation for the prepetition services of a custodian or receiver superseded under 11 U.S.C. § 543 and is an exception to the general rule with respect to the allowance of compensation for exclusively postpetition activities as an administrative expense. In re Hearth & Hinge, Inc., 28 B.R. 595, 597 (Bankr.S.D.Ohio 1983). Unlike the requirement in subsection (D) under § 503(b)(3), subsection (E), which governs superseded custodians, does not require that the services of the custodian made "a substantial contribution" in the Chapter 11 case. Moreover, the costs and expenses of a prepetition custodian or receiver superseded under 11 U.S.C. § 543 include the expense of counsel fees incurred by the custodian or receiver, for which prior court approval is not expressed as a prerequisite for allowances. In re Kenval Marketing Corp., 84 B.R. 32, 33-34 (Bankr.E.D.Pa. 1988).

Since this court did not appoint the receiver, this court would not be in a position to approve the receiver's retention of counsel to act on his behalf. The absence of a state court order authorizing the receiver to retain counsel is not fatal to an award for legal services because 11 U.S.C. § 503(b)(3...