OPINION REGARDING SUMMARY JUDGMENT MOTIONS
[1]
Thomas
J. Tucker Judge.
This
adversary proceeding is before the Court on motions for
summary judgment. Guy C. Vining (“Vining”), the
Plaintiff in this adversary proceeding, is the current and
third Chapter 7 Trustee in the Debtor M.T.G., Inc.'s
bankruptcy case. M.T.G., Inc. (the “Debtor” or
“MTG”), through its attorney Todd Halbert
(“Halbert”), filed a voluntary petition for
relief under Chapter 11 on August 7, 1995.[2] On February 8, 1996
MTG's Chapter 11 case was converted to Chapter 7, and
Charles J. Taunt (“Taunt”) was appointed as the
Chapter 7 Trustee.
After
Taunt's appointment was terminated on October 27, 2000
Douglas Ellman was
appointed as the successor Chapter 7 Trustee. Vining was
elected as the successor Chapter 7 Trustee of Douglas Ellman
on January 10, 2002.
Defendant
Comerica Bank ("Comerica" or the "Bank")
was MTG's primary lender and largest secured
creditor.[3]
On
August 18, 2003, Vining filed a 21-count complaint against
Comerica, Taunt, and other Defendants, commencing this
adversary proceeding.[4] Vining alleges in the complaint that he is
entitled to an award of compensatory damages in excess of $15
million, based on claims of
MTG that arose before the filing of MTG's bankruptcy case
(the "Pre-Petition Claims"),[5] and an award of
damages in excess of $19.5 million, plus attorney fees and
punitive damages, based on claims of the bankruptcy estate
that arose after the bankruptcy case was filed (the
"Post-Petition Claims").[6]
A.
The Pre-Petition Claims
Vining
alleges that pre-petition, Comerica and certain of its
officers and/or directors, namely, Ronald Marcinelli; Steve
Lyons; Paul Dufault; and Michael Collins (collectively, the
"Comerica Defendants"), engaged in misconduct which
forced MTG to file for relief under Chapter 11 of the
Bankruptcy Code, and ultimately, to go out of business.
Vining alleges that based on this misconduct, he has lender
liability-type claims against the Comerica Defendants with
"a value in excess of $15,000,000"[7]
B.
The Post-Petition Claims
Vining
alleges further that after the Debtor's Chapter 11 case
was converted to Chapter 7, and immediately after Taunt was
appointed as the Chapter 7 Trustee, Taunt, through his
attorneys Charles J. Taunt & Associates, P.C.
(collectively, the "Taunt Defendants") and Comerica
entered into an illegal fee agreement (the "Comerica Fee
Agreement"), which created a "serious, egregious
conflict of interest" for Taunt and was a breach of his
fiduciary duties to the
bankruptcy estate. Vining further alleges that Taunt and the
Comerica Defendants participated in a conspiracy to prevent
MTG from pursuing the Pre-Petition Claims, and violated
numerous federal criminal statutes. Vining alleges that
because the value of the Pre-Petition Claims greatly exceeded
the amount MTG owed to Comerica, if Taunt had prosecuted and
proven such claims, any damage award to MTG could have been
set off against Comerica's approximately $5.3 million
dollar secured claim, thereby greatly reducing such claim, or
most likely, eliminating it altogether.
1.
The root of the problem - the Comerica Fee Agreement
The
root of the problem in this case is the Comerica Fee
Agreement. That agreement was in part a surcharge agreement -
i.e., an agreement under which Comerica agreed that
the Trustee could surcharge Comerica's collateral under
Bankruptcy Code § 506(c)[8] - but it was more than that, as
this Court has previously ruled.
This
Court described and discussed the Comerica Fee Agreement in
detail, in its opinion entitled "Amended Opinion
Regarding 'Fraud on the Court' Issues," entered
in the main bankruptcy case on April 16, 2007 (the
"Fraud on the Court Opinion").[9] The Court
reiterates that
description and discussion, which includes the following:
The Comerica Fee Agreement provided that Taunt would
liquidate the Debtor's estate assets (all of which
Comerica claimed as its collateral,) with certain exceptions.
Operating under an initial budget totaling $25,000.00,
trustee's counsel was to bill Comerica for legal services
each month. Fees were to be billed on an hourly-rate basis,
at the Taunt firm's usual hourly rates, and
"compensation [was] not contingent upon [the] actual or
perceived degree of success." Comerica was to pay the
monthly invoices through a special "cash collateral
account" maintained by Comerica, "from which the
Trustee [was permitted to] withdraw payments for all
surchargeable items." The agreement further required
that all net proceeds from Taunt's liquidation of the
assets would be paid to Comerica. It further stated that
"[a]ny unresolved disputes concerning any invoice [of
trustee's counsel] shall be submitted to the Court for
resolution pursuant to motion under 11 [U.S.C. §]
506(c)."
The agreement described the "[s]ervices for which
Comerica shall be subject to surcharge" as including
"the preservation and liquidation of all of the
Debtor's machinery and equipment, the resolution of the
Becker situation, and other lesser matters as detailed in the
budget." The agreement stated that "[i]t is our
understanding that the Bank does not wish the Trustee to
pursue the recovery of escrowed funds, collection of accounts
receivable, or the "Injectronics" litigation.
Surchargeable services would include all services of the type
described herein rendered on or after February 8, 1996."
With respect to claims the estate might have against
Comerica, including possible lender-liability claims that
Halbert and the Debtor believe existed, the Comerica Fee
Agreement stated:
Finally, it must be clearly understood that nothing in this
proposal constitutes a waiver of any claims the estate might
have against Comerica Bank. It is the Trustee's intention
to investigate these claims fully, and we anticipate
Comerica's full cooperation in that regard.
The Comerica Fee Agreement and its budget did not indicate
that Comerica would pay for the [T]rustee's work in
investigating or
pursuing any claims against Comerica.
With respect to Comerica's secured claim, the agreement
stated that Comerica would pay Taunt to evaluate the claim.
It stated:
Further, in order to fix the value of Comerica Bank's
secured claim, we shall cause the Debtor's objection to
that claim to be brought on for hearing as soon as possible.
The budget attached to the agreement allocated $2,000.00 of
the $25,000.00 budget to the following:
Determination of Comerica Bank Secured Claim
Obtain hearing date from Court and serve notice of same;
review/analyze Comerica Bank security documents and
loan history; prepare written position on same for filing
with Court; appear at hearing; review/approve
proposed order.
Finally, the budget further stated that it "[a]ssumes
all uncontested matters. In the event any matter becomes
contested, the budget estimates do not
apply."[10]
In the
Fraud on the Court Opinion, which was issued after this case
had been through two appeals to the district court, this
Court explained the problems created by the Comerica Fee
Agreement. The Court reiterates what it said on that subject,
including the following:
The district court, in its September 7, 2000 bench opinion in
the first appeal, held that Taunt's fee agreement with
Comerica created a "serious, egregious, conflict of
interest and breach of fiduciary duty," and "that a
sanction . . . doesn't rectify the injustices that might
have been done by a Trustee in such conflict of interest and
in constant breach of his fiduciary duty." This Court
of course, is bound by these holdings of the district court,
as the law of the case and under the "mandate
rule." See Halbert v. Taunt (In re M.T.G.
Inc.), 291 B.R. 694, 701 (E.D. Mich. 2003). Thus, Taunt
had a "serious, egregious, conflict of interest,"
6
contrary to his representations to this Court.
A stark illustration of Taunt's undisclosed conflict of
interest is that under the Comerica Fee Agreement,
Taunt's firm was to be paid on an hourly-rate basis
by Comerica to review and analyze
Comerica's secured claim against
the estate. This aspect of the fee agreement alone
destroyed Taunt's disinterestedness. Then, after making
the undisclosed fee agreement, Taunt and his counsel signed a
stipulation and obtained from the Court the Comerica Claim
Allowance Order. That Order allowed Comerica's $5.3
million secured claim and determined that Comerica had a
"valid and properly perfected security interest in and
lien on all property of Debtor's estate" except
Chapter 5 causes of action. At a minimum, it was
"reckless" of Taunt and his counsel not to fully
disclose the Comerica Fee Agreement before he obtained this
Order.
Bankruptcy Code § 506(c) permits a trustee to surcharge
a secured creditor's collateral, with or without that
creditor's agreement, if certain requirements are met.
Under § 506(c),
The trustee may recover from property securing an allowed
secured claim the reasonable, necessary costs and expenses of
preserving, or disposing of, such property to the extent of
any benefit to the holder of such claim.
11 U.S.C. § 506(c). Comerica agreed to a surcharge of
its collateral, to the extent and under the terms of the
Comerica Fee Agreement.
It may well be that a trustee must always disclose to the
court a § 506(c) surcharge agreement. But quite apart
from that issue, the Comerica Fee Agreement went well beyond
what § 506(c) authorizes. The surcharge authorized by
the statute is for the trustee to recover the
"reasonable, necessary costs and expenses of
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