Park Terrace Townhouses v. Wilds

• Decision Date: 26 July 1988
• Docket Number: No. 87-2379,87-2379
• Citation: 852 F.2d 1019
• Parties: Bankr. L. Rep. P 72,410 In the Matter of PARK TERRACE TOWNHOUSES, Debtor-Appellant, v. Bruce W. WILDS, Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 1019

852 F.2d 1019

Bankr. L. Rep. P 72,410

In the Matter of PARK TERRACE TOWNHOUSES, Debtor-Appellant, v. Bruce W. WILDS, Appellee.

No. 87-2379.

United States Court of Appeals Seventh Circuit.

Argued Jan. 21, 1988.

Decided July 26, 1988.

C. David Peebles, Peebles, Thompson, Rogers & Skekloff, Fort Wayne, Ind., for debtor-appellant.

James R. Grossman, Grossman & Boeglin, Fort Wayne, Ind., for appellee.

Before CUMMINGS and WOOD, Jr., Circuit Judges, and WILL, Senior District Judge. ^*

WILL, Senior District Judge.

This is an appeal from the district court's order affirming the bankruptcy court's decision to award administrative expenses to the appellee for his maintenance and improvement of property owned by the debtor-appellant. The appellee took possession of the property and performed services pursuant to an agreement under which he would eventually purchase the property. This agreement was not completed because the debtor later sold the property to a third party and that sale was approved by the bankruptcy court. For the reasons stated below, the district court's order is affirmed.

Background

In March 1983, Park Terrace Townhouses ("PTT"), an Indiana apartment complex, debtor-appellant, filed a voluntary petition for relief under Chapter 11. On October 19, 1983, the bankruptcy court authorized the sale of PTT's property (the townhouses) for cash or on terms agreeable to its three mortgagees.

On December 13, 1983, Bruce W. Wilds, appellee, and John K. Meiners, representing PTT, executed a written purchase agreement for the sale of PTT's property. Under the contract, Wilds agreed to pay the debtor-in-possession $50,000, assume the balance of the first mortgage (held by First Federal Savings and Loan of New Castle), pay the balance of the second mortgage (held by Indiana Bank and Trust Company of Fort Wayne) and pay $75,000 for a full and complete release of the third mortgage (held by Pacific Service Company).

The contract also included the following provisions:

2(d)(ii). In the event the above conditions cannot be met by March 1, 1984, then the Seller shall file in the Bankruptcy Court such applications, complaints, or other proceedings that may be required to effect a sale to Purchaser upon terms herein set forth. If Seller is unable to effect such sale through the Bankruptcy Court by September 1, 1984, then this agreement shall be null and void and of no further force and effect.

8. Seller shall deliver to purchaser full and complete possession and management of Park Terrace following the execution of this agreement. Purchaser shall assume the role of property manager as the same is being conducted by the present manager thereof. Purchaser shall receive no salary for the performance of said managerial responsibilities. Seller agrees to use its best efforts to effect a closing date at the earliest possible time for the purpose of relieving [sic] purchaser of this responsibility pursuant to the terms of this purchase contract.

On appeal from the bankruptcy court's orders, the district court made the following undisputed findings of fact:

Wilds took possession of the townhouses on December 13, 1983, and personally assumed the roles of property manager and maintenance supervisor. During Wilds' management, he instituted a marketing program which increased occupancy from 58% to 73% and monthly income from approximately $24,500 to $32,700. Wilds removed the debtor's resident manager and took over the functions of that position by hiring, training, and supervising a staff to perform all required leasing, bookkeeping, maintenance, and related activities. In addition to the maintenance necessary to prevent damage from the severe winter weather, Wilds upgraded and remodeled the rental units.

On January 31, 1984, the debtor entered into another purchase agreement with James H. Calkins. Wilds did not learn of this agreement until February 24, 1984. On February 27, 1984, and March 9, 1984, Calkins and Wilds, respectively, filed applications for approval of sale of Park Terrace Townhouses. The debtor-in-possession filed an application for instructions regarding the two purchase agreements on March 19, 1984. The court heard evidence on the pending applications on March 27, 1984. Following this hearing, [on March 29, 1984] the Bankruptcy Court approved the sale of Park Terrace Townhouses to Calkins. Calkins immediately assumed possession of the complex.

District Court Order, July 29, 1987, at 3-4.

On April 5, 1984, pursuant to 11 U.S.C. Sec. 503(b)(1)(A), ¹ Wilds filed an application for administrative expenses regarding his services rendered as property manager and maintenance supervisor from December 13, 1983 to March 29, 1984. The Bankruptcy Court awarded Wilds $21,750 for 870 hours at the rate of $25 per hour. ²

The district court originally referred appeal of the bankruptcy court's orders to a magistrate. We held that the district court did not have authority to refer the appeal to a magistrate and we vacated the magistrate's order and remanded the appeal to the district court. In The Matter Of: Park Terrace Townhouses, No. 87-1245 (April 10, 1987). See In the Matter of Elcona Homes Corp., 810 F.2d 136, 138-40 (7th Cir.1987). The district court subsequently affirmed the bankruptcy court's orders. PTT appeals the district court's order. We affirm. ³

Standard of Review

PTT appeals the award, although not the amount awarded, arguing that: (1) the bankruptcy code allows an award of administrative expenses only if Wilds' services are rendered with prior court approval, which they were not; and (2) Wilds did not possess an Indiana real estate broker's license, which is required to collect fees for his services. PTT essentially contends that the district court's conclusions of law were erroneous. There are no issues of fact. ⁴ Accordingly, our review is de novo. In re Ellsworth, 722 F.2d 1448, 1450 (9th Cir.1984).

Analysis

PTT argues that Wilds acted as a "professional person," see In re Interstate Restaurant Systems, Inc., 61 B.R. 945, 949 (S.D.Fla.1986), and, as such, may not receive administrative fees for his services because the bankruptcy court did not give prior approval.

(a) Except as otherwise provided in this section, the trustee, with the court's approval, may employ one or more attorneys, accountants, appraisers, auctioneers or other professional persons, that do not hold or represent an interest adverse to the estate, and that are disinterested persons, to represent or assist the trustee in carrying out the trustee's duties under this title.

11 U.S.C. Sec. 327(a) (emphasis added). PTT also contends that, because Wilds did not seek prior court approval, his services were in the nature of volunteer work, for which he should not receive compensation in any event.

PTT ignores the fact that both the bankruptcy and district courts relied on section 327(b) rather than section 327(a), and the unique facts of this case. The bankruptcy court based its award on 11 U.S.C. Secs. 503(b)(1)(A), see note 1 supra, and 327(b), which states:

(b) If the trustee is authorized to operate the business of the debtor under section 721, 1202, or 1108 of this title, and if the debtor has regularly employed attorneys, accountants, or other professional persons on salary, the trustee may retain or replace such professional persons if necessary in the operation of such business.

The bankruptcy court found that PTT regularly employed professional persons to assume the responsibilities in question assumed by Wilds. ⁵ Accordingly, under section 327(b), PTT could retain or replace such persons if necessary in its ordinary course of business and without prior court approval. In Re Johns-Manville Corp., 60 B.R. 612, 618-19 (Bankr.S.D.N.Y.1986). See also United States ex rel. Kraft v. Aetna Casualty & Surety Co., 43 B.R. 119, 121 (M.D.Tenn.1984) (court approval was necessary where business did not regularly employ appraiser); In Re Cummins, 8 B.R. 701, 702 (Bankr.C.D.Cal.1981) (real estate broker could not receive award under section 327(b) because he was not retained on salary, but rather worked for a commission, and did not seek prior court approval).

The fact that Wilds was employed in PTT's ordinary course of business was admitted by PTT in its application for instructions filed with the bankruptcy court:

4. That since said date [October 19, 1983], and pursuant to the terms of said agreement [the contract entered into on December 13, 1983], Bruce W. Wilds has been in possession of Park Terrace Townhouses, and has managed same, which said management and possession have been in the ordinary course of business of the Debtor in Possession, and at the request of and with the approval of the Debtor in Possession.

Application Of Debtor In Possession For Instructions, February 26, 1986, Record at 4.

PTT additionally argues that the phrase "on salary" in section 327(b) makes that section inapplicable here--Wilds did not receive a salary. Wilds was not "on salary" because it was intended that he (and the other interested parties) would ultimately benefit from his services. He was managing the property he expected to buy, pursuant to a written and executed agreement. PTT prevented the sale to Wilds by selling the property to a third party. By denying him compensation, the estate and subsequent purchaser would reap the benefits of his services, which included an increase in rental income and structural improvements to the apartments. Wilds performed services which were ongoing, previously performed on a regular basis by salaried employees and, which we conclude, are compensable under section 327(b), notwithstanding the fact that he was not on salary.

The district court also reviewed the underlying written agreement, between PTT and Wilds, and its context, and concluded that awarding administrative expenses is not inconsistent with their intent. Air Line Stewards, Etc. v. American Airlines, Inc., 763 F.2d 875, 877 (7th...