In re Wilnor Drilling, Inc.
| Citation | 29 BR 727 |
| Decision Date | 04 August 1982 |
| Docket Number | Bankruptcy No. 82 5240-82 5244. |
| Court | U.S. District Court — Southern District of Illinois |
| Parties | In re WILNOR DRILLING, INC.; Mason Oil Company; William R. Mason Petroleum, Inc.; William R. Mason & Elnora D. Mason; Teresella Petroleum; Debtors. |
Joel A. Kunin, East St. Louis, Ill. and Leland W. Hutchison, Jr., Rooks, Pitts, Fullagar & Poust, Chicago, Ill., for Wilnor Drilling, Inc.
Ronald L. Pallmann, East St. Louis, Ill. and Nurie & Bucklin, Kalamazoo, Mich., for Lovely, Beach and Hanson.
John Richards Lee, S.E.C., Chicago, Ill., for S.E.C.
Schwartz, Cooper, Kolb & Gaynor, Chicago, Ill., Kassly, Bone, Becker, Dix & Tillery, Belleville, Ill., for Official Creditors Committee.
Before the Court is an appeal of the Bankruptcy Court's order denying the motion of Securities and Exchange Commission for reconsideration, entered June 29, 1982. The Bankruptcy Court affirmed its earlier ruling that the fees and expenses of the Investors' Committee will be subordinated to the reasonable fees and expenses of the Creditors' Committee. The issue on appeal is whether the Bankruptcy Court erred in subordinating the fees and expenses of the Investors' Committee to the reasonable fees and expenses of the Creditors' Committee.
On or about November 2, 1981, Wilnor Drilling, Inc., Mason Oil Company, William R. and Elenora D. Mason, and William R. Mason Petroleum, Inc., filed voluntary petitions for a business reorganization pursuant to Chapter 11 of the United States Bankruptcy Code, 11 U.S.C. Sec. 1101 et seq. Subsequent to that date, on or about November 30, 1981, Teresella Petroleum, Inc. also filed for a voluntary petition for a business reorganization under Chapter 11. The Bankruptcy Court appointed a committee of creditors (the Official Creditors' Committee) as required by Section 1102(a)(1) of the Bankruptcy Code. 11 U.S.C. Section 1102(a)(1).
The Securities and Exchange Commission (Commission) filed a motion, on or about March 1, 1982, to appoint a committee of investors. The motion was filed pursuant to Section 1102(a)(2) of the Bankruptcy Code which allows the Court to appoint "additional committees of creditors or equity security holders if necessary to assure adequate representation of creditors or of equity security holders." 11 U.S.C. Section 1102(a)(2).
The Bankruptcy Court determined that the investors who sought to have a committee appointed had interests in various oil wells of the debtors. As a result of these interests, the Bankruptcy Court found that the investors were "creditors" of the debtors as defined in Section 101(9)(A) of the Bankruptcy Code, 11 U.S.C. Section 101(9). By the order of March 23, 1982, the Bankruptcy Court granted the motion of the Commission to allow a separate committee (the Official Investors' Committee) to assure adequate representation and protection of the investors' interests. However, the Bankruptcy Court held that the expenses and fees of the Investors' Committee should be subordinated to the reasonable fees and expenses of the Creditors' Committee to assure the proper functioning of the Creditors' Committee.
The Commission filed a motion to reconsider the portion of the March 23rd order subordinating the fees and expenses of the Investors' Committee. The Bankruptcy Court denied the motion for reconsideration by memorandum order issued June 29, 1982. The Court stated that the Creditors' Committee is a mandatory committee under the Code, while the Investment Committee is only discretionary. See 11 U.S.C. Section 1102(a)(1), (a)(2). The Court further noted that since it is Congress' intent to make the Creditors' Committee the principal committee, then it is reasonable to subordinate the fees and expenses of other committees to the reasonable fees and expenses of the Creditors' Committee. The Court held that "(t)he only reason the fees and expenses of the Investors' Committee were subordinated to the reasonable fees and expenses of the Creditors' Committee was to admonish the Investors' Committee that the Court would equitably subordinate (emphasis added) their fees and expenses in the event there were not enough assets to cover all of the reasonable fees and expenses." June 29th Order.
We respectfully reverse the decision of the Bankruptcy Court to subordinate the fees and expenses of the Investors' Committee to the reasonable fees and expenses of the Creditors' Committee for two reasons. First, the Bankruptcy Court should not fix priorities of payment within the same class when Congress has not set up an order of priority. In Re Columbia Ribbon Co., 117 F.2d 999, 1001 (3rd Cir.1941). Second, three conditions must be satisfied before a Court should equitably subordinate one claim to another claim. Matter of Mobile Steel Co., 563 F.2d 692 (5th Cir.1977).
It is well established that "(t)he courts of bankruptcy are courts of equity and exercise all equitable powers unless prohibited by the Bankruptcy Act." Young v. Higbee Company, 324 U.S. 204, 65 S.Ct. 594, 89 L.Ed. 890 (1945). The proceedings of the Court are inherently proceedings in equity. In Re: Jewish Memorial Hospital 13 B.R. 417 (Bkrtcy.S.D.N.Y.1981). "(T)he bankruptcy court has the power to shift the circumstances surrounding any claim to see that injustice or unfairness is not done in administration of the bankrupt estate." Pepper v. Litton, 308 U.S. 295, 60 S.Ct. 238, 84 L.Ed. 281 (1939). The priorities for payment of expenses and claims are set forth in Section 507(a) of the Bankruptcy Code. See 11 U.S.C. Section 507(a). While Congress has set the order of priorities payment under the Bankruptcy Act, strict adherence to the order is not always necessary. The Bankruptcy Act does not establish inexorable rules of priority and distribution. The Bankruptcy Court may deviate from the rules in the interest of justice and equity. Home Indemnity Company v. F.H. Donovan Painting Company, 325 F.2d 870 (8th Cir. 1963). However, the Court should not use this flexibility merely to establish a ranking of priorities within priorities. In Re: Jewish Memorial Hospital, supra at 421.
The Bankruptcy Court appointed both the Creditors' Committee and the Investors' Committee. 11 U.S.C. Sec. 1102. The fees and expenses of both committees are included as administrative expenses defined by Section 503(b)(2) of the Bankruptcy Code. 11 U.S.C. Section 503(b)(2). As a result of being administrative expenses, the fees and expenses of both committees constitute the first priority of payment under the Bankruptcy Code. 11 U.S.C. Section 507(a)(1). Section 507(a)(1) of the Bankruptcy Code does not set forth a priority of payment within the first class. By subordinating the fees and expenses of the Investors' Committee to the reasonable fees and expenses of the Creditors' Committee, the Bankruptcy Court has set up a priority within the class of administrative expenses. "Since Congress has set up no order of priority within the first class the Court may not fix priorities within the class." In Re Columbia Ribbon Company, supra at 1001. The fact that the Creditors' Committee is a mandatory appointment while the Investors' Committee is only a discretionary appointment is not sufficient reason for equitable subordination. Since the fees and expenses of both committees are in the class of administrative expenses, they are on parity as to payment. In Re Western Farmers Association, 13 B.R. 132 (Bkrtcy.W.D.Wash. 1981). The Bankruptcy Code does not make any distinction between a mandatory committee (11 U.S.C. Section 1102(a)(1)) and a discretionary committee (11 U.S.C. Section 1102(a)(2)) when describing the powers and duties of the committees in Section 1103 of the Bankruptcy Code. 11 U.S.C. Section 1103. Thus, Congress' intention is not to differentiate between the two types of committees. This idea must be inferred to the payment of priorities. The two claims are of the single class of administrative expenses and are of equivalent priority in the class. Missouri v. Ross, 299 U.S. 72, 57...
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