Opinion
Case No. 02-20785-A-13G, Docket Control No. PP-6.
December 22, 2006
MEMORANDUM DECISION
I
Before the court is a fee application by counsel for the chapter 7 trustee, the law firm of Parkinson Phinney. The application seeks approval of interim compensation of $18,337.50 in fees and $210.46 in expense reimbursement for the period from November 1, 2005 through the present. The application also asks the court to give its final approval to all compensation previously awarded to Parkinson Phinney on an interim basis.
Gloria Farris, a creditor, objects both to the interim fee request and to any final award. The resolution of her objection requires the court to examine the record from the inception of the case.
Preliminarily, the court notes that the chapter 7 trustee has employed two different law firms in connection with this case. He first employed Weintraub Genshlea Chediak Sproul and then employed Parkinson Phinney. The orders approving their employment were filed on June 27, 2002 and July 1, 2005, respectively. Despite the change in law firms, the same attorneys, Donna T. Parkinson and Thomas R. Phinney, have worked for the chapter 7 trustee throughout this case. They were initially associated with Weintraub Genshlea Chediak Sproul and, when they formed Parkinson Phinney, they continued to represent the trustee.
The court approved Weintraub Genshlea Chediak Sproul's first interim fee application on June 21, 2004 ($20,708 in fees and $378.04 in costs), its second interim fee application on November 22, 2004 ($24,195 in fees and $422.10 in costs), and its third interim fee application on December 19, 2005 ($12,850 in fees and $884.91 in costs for services through May 31, 2005). In connection with the third interim fee application, the court also gave final approval to all interim compensation, $59,438.05.
Thereafter, Parkinson Phinney was counsel for the chapter 7 trustee. Parkinson Phinney's first interim fee award was approved on December 19, 2005 for work from June 1, 2005 through October 31, 2005. The court awarded $14,815 in fees and $292.26 in costs.
The second interim fee application is now before the court. It covers the period from November 1, 2005 through the present and seeks $18,337.50 in fees and $210.46 in expenses, a total of $18,547.96. The application also asks the court to finally approve all of Parkinson Phinney's interim compensation.
In summary, then, the court has approved, or is asked to approve, the following fees and costs:$18,547.96
Weintraub $59,438.05 (final award) Parkinson $15,107.26 (interim award) (pending interim award) $33,655.22 (pending final award) TOTAL $93,093.27 (assuming all fees approved) Because Weintraub Genshlea Chediak Sproul's compensation already has been finally awarded, without objection or appeal, the only compensation subject to review is that sought by Parkinson Phinney.A. Initial Proceedings under Chapter 7
The debtor filed a voluntary chapter 7 petition on January 23, 2002. According to the statements and schedules filed by the debtor, he owned no real estate and only minimal personal property. The debtor's one and only vehicle was fully encumbered and all equity in other personal property was declared exempt. Neither the chapter 7 trustee, Kenny Flinn, nor any creditor challenged the debtor's exemptions.
Schedule I listed a mere $300 monthly income. Similarly, for the two calendar years prior to the filing of the petition, the debtor disclosed that he had received minimal income, just $5,535 in 2000 and $4,904.08 in 2001.
Given the above, it comes as no surprise that the chapter 7 trustee filed a "no-asset" report on March 5, 2002. However, on April 2, 2002, a creditor, Earth and Road Works, Inc., objected to that report on the ground that the debtor had fraudulently transferred various assets. Based on this information, the court sustained an objection to the trustee's no-asset report.
The trustee then did three things.
First, on April 10, 2002, he amended his no-asset report to a report of assets.
Second, he asked the debtor to extend the time to file objections to discharge, presumably so the trustee could determine if the debtor had concealed or transferred assets. The trustee and the debtor entered into a stipulation, which the court approved on April 23, 2002, extending the deadline to file objections to July 22, 2002,
Third, on June 27, 2002, the trustee retained counsel, Donna T. Parkinson of Weintraub Genshlea Chediak Sproul, to assist him in his investigation of the fraudulent conveyance allegations.
That investigation apparently bore no fruit because the trustee again filed a no-asset report on July 24, 2002 and permitted the entry of the debtor's discharge on August 19, 2002.
The case then took another about face when, on August 21, 2002, the trustee once again amended his no-asset report to a report of assets. He had discovered that the debtor had an undisclosed interest in real property located at 3197 and 3199 Claremont Drive, Oroville, California. The debtor co-owned this property with his former spouse, Gloria Farris.
B. Conversion to Chapter 13
This turn of events apparently prompted the debtor on October 1, 2002 to convert his petition to one under chapter 13, thereby terminating the chapter 7 trustee's administration of the estate and halting efforts to avoid any fraudulent conveyances.
But, the conversion also required the debtor to propose a chapter 13 plan in order to pay his creditors at least what they would have received had the case proceeded to conclusion under chapter 7. See 11 U.S.C. § 1325(a)(4). The plan proposed by the debtor promised to pay all creditors in full.
No chapter 13 plan, however, would be successful if the debtor had no income with which to fund a plan. Indeed, an individual without regular income is not eligible to file a chapter 13 petition. See 11 U.S.C. § 109(e).
Consequently, it is not too surprising that the conversion to chapter 13 was immediately followed by the debtor's filing of amended schedules. Amended Schedule I showed that he had $35,400 in monthly income, primarily from the operation of a business. Amended Schedule J declared monthly living and business expenses of $34,400, leaving $1,000 to fund a plan.
The debtor also amended Schedule A to disclose that he might have a community property interest in 3199 Claremont Drive property. In his opinion, however, this interest had no value.
Amended Schedule A, however, made no mention of 3197 Claremont Drive.
C. Reconversion to Chapter 7
After the debtor filed a proposed plan and amended his schedules, he did nothing. He made no plan payments and he failed to appear at the meeting of creditors. This prompted the chapter 13 trustee to move for dismissal or reconversion to chapter 7.
It is not unusual for a chapter 7 debtor to convert a petition to chapter 13 in order to stymie the efforts of a chapter 7 trustee seeking to recover unscheduled assets or to avoid fraudulent transfers. Once safely in chapter 13, it is also not unusual for the debtor to bait the chapter 13 trustee and the court into dismissing the petition. The goal seems to be to avoid paying creditors. For instance, the debtor may not file a plan, make plan payments, or appear at the creditors' meeting in order to provoke the trustee into moving for the dismissal of the case.See e.g., In re Barnes, 275 B.R. 889 (Bankr. E.D. Cal. 2002).
This ploy did not work. Rather than dismiss the case, the court reconverted the petition to chapter 7 on January 6, 2003. In converting the petition back to chapter 7 the court ruled:
The motion will be granted and the case reconverted to chapter 7.
First, the debtor failed to appear at the first meeting of creditors conducted by the chapter 13 trustee as required by 11 U.S.C. § 343.
Second, the debtor is not eligible for chapter 13 relief. Schedules E and F list noncontingent, liquidated, unsecured claims of over $400,009. 11 U.S.C. § 109(e) limits chapter 13 relief to individual debtors with no more than $290,525 in noncontingent, liquidated, unsecured debt. The amount of such debt is to be determined from the debtor's schedules unless the debtor files the schedules in a bad faith attempt to gerrymander the eligibility constraints of section 109(e). In re Scovis, 249 F.3d 975, 982-983 (9th Cir. 2001) ("the bankruptcy court should normally look to the petition to determine the amount of debt owed, checking only to see that the schedules were made in good faith.").
The court notes that the debtor has listed the SBA as unsecured creditor on Schedule F. There is conflicting authority as to whether a debt under a guaranty is contingent or unliquidated debt. See Keith Lundin, Chapter 13 Bankruptcy, § 15.3 (3rd ed. 2002). However, the debt, in the sum of $257,000, is not listed as either contingent or unliquidated. Nor has the debtor come forward with any evidence that his liability under the guaranty has not matured or is contingent.
The court makes no ruling in connection with the objection based on the failure to disclose a pre-petition transfer.
The case is reconverted to chapter 7 because it appears there are possibly avoidable transfers and nonexempt assets that can be liquidated for the benefit of creditors.
D. The Adversary Proceeding to Avoid Transfers
After the reconversion, Kenny Flinn was reappointed as the chapter 7 trustee and, in turn, he re-employed Ms. Parkinson and Mr. Phinney of Weintraub Genshlea Chediak Sproul as his counsel. With their assistance, the trustee filed a complaint, Adv. No. 03-2438, on August 15, 2003 seeking the avoidance of a series of allegedly fraudulent transfers to the debtor's wife, Nichoel Farris, to his wife's parents, Bruce and Sharon Schroeder, to his brother and sister-in-law, Samuel and Maria Farris, and to a trust controlled by Samuel and Maria Farris. The complaint also sought to revoke the debtor's discharge and to sell real property jointly owned by the debtor, the above-named persons, and the debtor's former spouse, Gloria Farris. See 11 U.S.C. § 363(h).
The real properties allegedly fraudulently transferred are identified in the adversary proceeding as:
977 Hillcrest Ave., Yuba City, CA Vacant lot, Dillard Court, Sutter County Vacant lot, Silverleaf Drive, Sutter County 1740 Feather River Blvd., Oroville, CA 1836-1838 Feather River Blvd., Oroville, CA 1268 Grand Avenue, Oroville, CA
E. The Compromise with Gloria Farris
By May 19, 2004, the chapter 7 trustee had made a deal with Gloria Farris. The motion to approve the compromise with her informed the court that:
• the debtor and Gloria Farris each owned an undivided one-half interest in 3197 and 3199 Claremont Drive, Oroville, California (the Claremont property);
• the value of the debtor's one-half interest in the Claremont property, after considering liens and encumbrances, was $35,000;
• Gloria Farris was willing to pay the estate $35,000 for the debtor's interest in the Claremont property provided that she was dismissed from the above-mentioned adversary proceeding and she was permitted to amend her proof of claim to seek additional unpaid spousal support and reimbursement of amounts due on liens secured by the Claremont property that a divorce decree required the debtor to pay; and
• despite the proposed dismissal of Gloria Farris from the adversary proceeding, she agreed to cooperate in the sale of her "separate property" fractional interests in the property described in the adversary proceeding.
This issue is discussed in greater detail in part III(C) below.
This issue is discussed in greater detail in part III(C) below.
The court approved the compromise in an order entered on June 21, 2004.
F. Proofs of Claim Filed by Gloria Farris
A review of the claims register reveals that Gloria Farris filed a proof of claim on July 3, 2002 demanding $42,666 in spousal support for the period of September 1995 through January 2002. No priority was claimed under 11 U.S.C. § 507(a)(7). However, on February 14, 2003, an amended proof of claim was filed demanding such priority.
This case predates all effective dates of the various amendments made to the Bankruptcy Code by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. All references are to the Bankruptcy Code as it existed prior to those amendments.
On September 3, 2004, a second amended proof of claim was filed increasing the amount demanded by Ms. Farris from $42,666 to $137,566.33. This total includes the $42,666 previously demanded for pre-petition support, $46,560 in additional support accruing after the filing of the petition through July 2004, and $42,092.96 representing amounts secured by the Claremont property, which the debtor was obligated to pay.
The second amended proof of claim appears to be objectionable in two respects. First, it includes post-petition spousal support. This may be a claim against the debtor but it is not a claim against the bankruptcy estate. Second, the $42,092.96 may be a claim against the estate but there is nothing appended to the proof of claim suggesting that this amount is in the nature of support and is entitled to priority.
G. Compromise with Nichoel Farris and Sale of 1836-1838 Feather River Blvd.
On October 4, 2004, the trustee filed two motions seeking the approval of a compromise with Nichoel Farris and the sale of 1836-1838 Feather River Blvd. The compromise also involved all of the other real properties mentioned in the adversary proceeding that allegedly had been fraudulently transferred by the debtor. These motions provided:
• Nichoel Farris agreed to transfer to the bankruptcy estate the 25% undivided interest in 1836-1838 Feather River Blvd. transferred to her by the debtor shortly before he filed his bankruptcy petition;
• the bankruptcy estate and the owners of the remaining 75% interest in 1836-1838 Feather River Blvd. consented to a sale of 1836-1838 Feather River Blvd. to Gumba Investors for $184,100;
• the bankruptcy estate would retain $12,000 of the sale proceeds;
• after deducting costs of sale and the $12,000 paid to the estate, 25%, or $40,240.13, of the remaining sale proceeds would be distributed to Gloria Farris, 25% to the Small Business Administration (which held a lien on Nichoel Farris' interest), and 50%, or $80,480.25, to Samuel Farris, subject to a lien held by his former spouse, Jill Farris;
• Nichoel Farris agreed to transfer to the bankruptcy estate her one-sixth undivided interest in 1740 Feather River Blvd. and her one-half undivided interest in 1268 Grand Ave., both transferred to her by the debtor on the eve of his bankruptcy petition; and
• the chapter 7 trustee agreed to give up his efforts to avoid the transfer of 977 Hillcrest Ave., the vacant lot on Dillard Court, and the vacant lot on Silverleaf Drive. Thus, although the compromise motion is titled as a compromise with Nichoel Farris, it was also a compromise with Bruce and Sharon Schroeder, Samuel and Maria Farris, and the trust controlled by Samuel and Maria Farris, at least to the extent they claimed interests in these properties.
Without any objection, the court approved the compromise and the sale of 1836-1838 Feather River Blvd. on October 25, 2004.
H. Sale of 1268 Grand Ave.
As a result of the compromise with Nichoel Farris, et al., and subject to any interest Gloria Farris might have, the estate owned one-half of 1268 Grand Ave. The other one-half interest was owned by Samuel Farris.
Samuel Farris obtained a third party willing to purchase the entire property for $96,500. The chapter 7 trustee agreed to the sale and requested on October 12, 2004, that the court approve a sale of the estate's one-half interest. On November 12, 2004, the court approved the sale. As a result of the sale, the estate received approximately $44,860.88.
I. Sales of Commercial Properties Located at 1830 Feather River Blvd. and 1740 Feather River, Blvd. and Compromise with Samuel Farris and the Trust
On June 13, 2005 the trustee filed two motions to sell two commercial properties located at 1830 Feather River Blvd. and 1740 Feather River, Blvd. As part of these motions, the trustee also proposed a compromise between the estate and Samuel Farris and the Samuel and Maria Farris Trust.
In reviewing these two motions, as well as the exhibits filed with the motions, the court has been hampered by the sloppy documentation prepared by the parties. For instance, the motions sometimes refer to a property at 1840 Feather River Blvd. Since there is no such property, it is unclear whether this is a reference to 1740 or 1830 Feather River Blvd. The settlement agreement with Paul Farris, Exhibit 7, refers to one of the properties as 1730 Feather River Blvd. Once again, there is no such property. Nonetheless, based on the leases, title reports, and pleadings, the court concludes that these motions concern 1740 and 1830 Feather River Blvd.
1. The ownership of the two properties.
Samuel Farris owned a two-thirds undivided interest in both of these properties. The ownership of the remaining one-third interest in each property is more convoluted.
Prior to the filing of the petition, the debtor and his former spouse, Gloria Farris, owned the remaining one-third interest in both properties. However, on June 14, 2001, the debtor transferred a one-sixth interest in each property to Nichoel Farris, his current spouse. As a result of the compromise with Nichoel Farris, these one-sixth interests were returned to the bankruptcy estate.
In the sale motions, the trustee maintained that the one-sixth interests retained by Gloria Farris were community property. The trustee noted that, while the debtor and Gloria Farris had been divorced, their community and separate property interests had never been determined and divided. If her one-sixth interests were community property, the trustee asserted that they were property of the bankruptcy estate and he had the power to sell them, with or without Gloria Farris' assent. See 11 U.S.C. §§ 363(b)(1), 541(a)(2).
At the hearing on the motions, Gloria Farris countered that her interests in the two properties were her separate property. While she was prepared to agree to the proposed sales, she contested the trustee's assertion that her interests were community property.
Ultimately, the character of Gloria Farris' interests in the two properties was not determined in connection with the motions to sell the two properties on Feather River Blvd. With the agreement of the trustee and Gloria Farris, the issue was deferred for adjudication on a later date. The orders lodged by the attorneys for both of these parties provided that: "The issue or the potential issue of whether Gloria Farris' 1/6 interest in the Property is property of the estate pursuant to 11 U.S.C. § 541(a)(2) is reserved and is not determined by this order." Attorneys for both parties approved the order and it was filed by the court on June 30, 2005.
2. The value of the two properties.
In anticipation of a trial of the adversary proceeding and possibly to facilitate the sales and compromise, Samuel Farris had the two properties appraised. According to the appraiser, as of March 2005, 1740 Feather River Blvd. had a fair market value of $390,000, and 1830 Feather River Blvd. had a fair market value of $470,000.
3. The pre-petition leases affecting 1740 Feather River Blvd.
Before the petition was filed, the debtor and Samuel Farris leased two portions of 1740 Feather River Blvd. to two corporations owned and/or controlled by Samuel Farris. The rent was collected by Samuel Farris and he paid one-third of it to the debtor. This continued after the petition was filed through 2003. According to the settlement agreement between the estate and Samuel Farris, Exhibit 7 to the sale motions, Samuel Farris paid the debtor $7,647 and $9,458.40 for 2002 and 2003, respectively, for his (and Gloria Farris') one-third interest in the rents. This was done despite the fact that the bankruptcy trustee was entitled to those rents (subject to Gloria Farris' interest) once the bankruptcy petition was filed on January 23, 2002.
The order granting the motion to sell 1740 Feather River Blvd. refers to the lease of that property as well as 1830 Feather River Blvd. However, the two leases attached as exhibits to the motion identify the address of the leased property only as 1740 Feather River Blvd.
According to the leases attached as exhibits to the motions, Samuel Farris signed as the corporate officer of the lessees.
It was suggested during argument at the fee application hearing that Samuel Farris continued to pay the debtor after the chapter 7 petition was filed because he was unaware of the petition. However, Samuel Farris was served with the adversary proceeding on or about August 26, 2003 and he filed an answer on September 13, 2003. So, it seems clear that Samuel Farris was aware of the petition well before the end of 2003.
For 2004 and 2005, Samuel Farris did not pay the debtor's share of the rent either to the debtor or to the estate and Gloria Farris. The settlement agreement concedes that $7,852.11 was due the estate and Gloria Farris for 2004 and that a further $4,800 was due through June 2005. These two amounts total $12,652.11.
The settlement agreement, Exhibit 7, provided that:
Sam Farris further agrees, if it so provided in the order approving this agreement, to pay to the Trustee (or to such payee as directed by court order) all withheld rental income attributable to the 1/3 interest in the Properties previously held by Paul and Gloria Farris (approximately $12,500) out of his share of the escrow proceeds from the sale of the Properties. Sam Farris further agrees to cooperate with the Trustee regarding information about the accounting for rent generated by the Properties collected and paid since January 1, 2002.
This provision suggests to the court that the compromise settled only Samuel Farris' obligation to pay the estate the rent due for 2004 and January through June 2005. As to the rent for 2002 and 2003, Samuel Farris agreed to provide the trustee with an accounting of what he had paid to the debtor. This information would presumably be of use in an effort by the trustee to revoke the debtor's discharge and/or to recover the rent from the debtor.
The June 30, 2005 order approved the compromise regarding the rent, requiring the payment of the $12,500 to the estate.
The order lodged by counsel for the trustee and Gloria Farris, however, made two factual errors with reference to the rent. The $12,500 represents the rent withheld but not paid in 2004 and 2005. The order indicates that it is the rent due from January 1, 2003 to the present. This is not correct. It is the rent due from January 1, 2004 to the date of the order. The order also recites that the rent was generated by both properties. According to the leases, the rent was generated by two separate leases of portions of 1740 Feather River Blvd.
4. The proposed sales of the two properties.
Samuel Farris proposed to purchase the estate's and Gloria Farris' one-third interest in 1740 Feather River Blvd. for $100,000 and to turn over to the trustee the 2004 and 2005 rent he had withheld at the slightly discounted amount of $12,500.
The $100,000 is not equivalent to one-third of the appraised value, $390,000. The $30,000 discount on appraised value, however, was justified given the debtor's minority interest in the property and the long-term leases held by Samuel Farris' two corporations. Further, as explained below, the sale of 1740 was linked to the sale of 1830 Feather River Blvd. at $600,000, a price considerably higher than its $470,000 appraised value.
Samuel Farris' payment of the $100,000 and the $12,500 in rent was tied to the sale of 1830 Feather River Blvd. That property was to be sold to Gumba Investors for $600,000. From the sale proceeds allocable to Samuel Farris' interest, the estate and Gloria Farris would receive $112,500. in addition to one-third of the net proceeds, approximately $186,333.
In this fee application, Parkinson Phinney listed the following amounts recovered from the sale of these properties: $195,000 from the sale of 1740 Feather River Blvd. and $99,491 from the sale of 1830 Feather River Blvd. Gloria Farris received half of each of these amounts.
5. The delay in the close of the escrows.
According to the motions, both escrows were to close within 30 days. The sale orders were filed and entered on the docket on June 30, 2005. Given that July 30 and 31 fell on a weekend, the escrows should have closed by August 1. They did not.
More than six months after entry of the orders, on January 10, 2006, the parties jointly requested entry of an amended order in connection with the sale of 1830 Feather River Blvd. and then closed both escrows sometime in February 2006.
The amended order added Jill Farris, Nichoel Farris, and Maria Farris to those approving the form and content of the amended order and required the $100,000 due to Samuel Farris from the sale of 1830 Feather River Blvd. be deposited into the escrow for the sale of 1740 Feather River Blvd. rather than be paid directly to the trustee.
The record does not explain the delay in the close of the escrows. But, from Parkinson Phinney's time records, the court is made aware that, at least as late as November 2005, Gumba Investors had backed out of its commitment to purchase 1830 Feather River Blvd. The time records also make several references to another possible buyer, the City of Oroville. Beyond this, the court cannot discern the reason for the delay.
Two problems arose after the close of the escrows.
First, the estate somehow overpaid $29,844.71 to Samuel Farris in connection with the sale of 1830 Feather River Blvd. The trustee recovered this overpayment by May or June 2006. However, he failed to remit to Gloria Farris her one-half share of the $29,844.71 until approximately December 2, 2006, when he paid her $14,223.55. This still is $698.80 less than 50% of the overpayment.
Second, Gloria Farris maintains that the trustee should have collected one-third of the rent due from Samuel Farris' corporations for the period from July 2005 to the close of the escrows in February.
While final resolution of this dispute is not before the court, at this time the court can say only that Gloria Farris may, or may not, be correct.
On the one hand, the settlement with Samuel Farris appears to have resolved only his obligation to pay the estate and Gloria Farris their share of rent collected but withheld by Samuel Farris for the period from January 2004 through June 2005.
On the other hand, Parkinson Phinney's time records suggest that the delay in the close of the escrows was caused by Gumba Investors when it failed to timely complete the purchase of 1830 Feather River Blvd. The terms of Samuel Farris' purchase of 1740 Feather River Blvd. required the prior close of the escrow for 1830 Feather River Blvd. Samuel Farris may believe, rightly or wrongly, that he has no further obligation to pay rent during a delay caused by someone the estate and Gloria Farris chose to deal with, Gumba Investors.
J. The Second Compromise with Gloria Farris
On January 30, 2006, shortly before the two escrows for 1740 and 1830 Feather River Blvd. closed, the trustee filed a motion seeking approval of a second compromise with Gloria Farris. This compromise dealt with two issues.
First, the parties disposed of the controversy concerning the separate or community character of Gloria Farris' interests in all of the above properties. As noted above, this issue had not been resolved by the first compromise and it had been specifically reserved in the orders authorizing the sale of 1740 and 1830 Feather River Blvd. Ultimately, the trustee concluded that there was no need to attempt to characterize Gloria Farris' interests as community property because no community claims had been filed against the bankruptcy estate. Therefore, under 11 U.S.C. § 726(c) it made no difference whether her interests were community or separate property. Whichever they were, Gloria Farris was entitled to her share of the proceeds from the sale of her interests in the real properties.
As a result, the trustee agreed that Gloria Farris would be paid one-half of the amounts collected by the estate from the sale of 1268 Grand Ave., 1740 Feather River Blvd., and 1830 Feather River Blvd. Further, these amounts, as well as the $40,240.13 paid to Gloria Farris in connection with the estate's sale of 1836-1838 Feather River Blvd., would be paid without deduction or surcharge for administrative expenses.
Second, the parties settled any remaining objections to Gloria Farris' second amended proof of claim. The amount due for support was reduced to $76,139 and was accorded priority status. The amount demanded for nonsupport obligations was reduced to $5,641.56 and was allowed as a general unsecured claim.
An order approving this compromise was filed on February 27, 2006.
K. Administration Dismissal of Adversary Proceeding
Pursuant to his settlement agreement with Nichoel Farris, approved by the court on October 25, 2004, the trustee filed, and the court approved on October 5, 2005, a stipulation for the dismissal of all claims against Nichoel Farris, Bruce Schroeder, and Sharon Schroeder.
After selling the real properties and compromising his disputes with Gloria Farris, on May 10, 2006 the trustee filed a motion for the dismissal of the claims against the debtor and "Sam and Maria Farris." The motion makes no reference to Samuel Farris and Maria Farris as trustees for the Samuel and Maria Farris Trust. No party opposed the motion.
The court, Judge Brett Dorian presiding, held a hearing and granted the dismissal. Unlike the motion, the May 17, 2006 dismissal order provided for the dismissal of Samuel and Maria Farris only in their capacity as trustees of the Samuel and Maria Farris Trust. The order does not dismiss them in their individual capacities. Hence, the claims against Samuel and Maria Farris have not been dismissed.
Also, while the settlement agreement between the estate and Samuel Farris included Samuel Farris individually and in his capacity as trustee for the Trust, Maria Farris is not a party to that agreement in any capacity.
Thus, the status of the adversary proceeding is uncertain as to the claims against Samuel and Maria Farris in their individual capacity.
Further, the docket for the adversary proceeding does not show a dismissal of the claims against Gloria Farris.
II
A. Parkinson Phinney's First Interim Fee Award
Parkinson Phinney's first interim fee award was approved on December 19, 2005 for services rendered from June 1, 2005 through October 31, 2005. The court awarded $14,815 in fees and $292.26 in costs. During this application period, Parkinson Phinney performed the following services:
• Finalized the implementation of the trustee's first settlement agreement with Nichoel Farris, incurring fees in the total amount of $975. See Part I, Section G of this Memorandum.
• Prepared its employment and first interim fee application, incurring fees in the total amount of $975.
• Negotiated the sales of 1740 and 1830 Feather River Blvd., prepared the pleadings necessary to obtain court approval of the sales, negotiated a compromise with Samuel Farris relating to the sales, including the estate's interest in rents from the properties, and negotiated with various parties to resolve title and fractionalized interests issues, incurring fees in the total amount of $9,365. See Part I, Section I of this Memorandum.
• Addressed community and separate property issues with respect to Gloria Farris, negotiated her assent to the sale of 1740 and 1830 Feather River Blvd., and analyzed Gloria Farris' spousal support claims, incurring fees in the total amount of $3,110. See Part I, Section I of this Memorandum.
• Continued the prosecution of the adversary proceeding to avoid transfers, including the preparation for and attendance of status conferences, incurring fees in the total amount of $750. See Part I, Section K of this Memorandum.
B. Parkinson Phinney's Second Interim and Final Fee Application
The matter before the court is Parkinson Phinney's second interim and final fee application. The interim compensation sought consists of $18,337.50 in fees and $210.46 in expenses, for a total of $18,547.96. The application covers the period from November 1, 2005 through the present.
As noted above, because Weintraub Genshlea Chediak Sproul's fees have been finally awarded, without objection or appeal, the only prior fees subject to the pending final application are those of Parkinson Phinney.
During this application period, Parkinson Phinney:
• Researched title issues and reviewed bank and title records with respect to the sale of 1740 and 1830 Feather River Blvd., incurring fees in the total amount of $1,100. See Part I, Section K of this Memorandum.
• Renegotiated the sale with a buyer that had decided to back out from purchasing 1830 Feather River Blvd., considered interests from other potential buyers, worked on correcting title issues relating to the properties, obtained an amended order for the sale of the properties, and finalized the close of the escrows, incurring fees in the total amount of $6,075. See Part I, Section K(5) of this Memorandum.
• Negotiated a second settlement agreement with Gloria Farris, compromising her interests in 1268 Grand Ave., 1740 Feather River Blvd. and 1830 Feather River Blvd., and settling her spousal support and general unsecured claims against the estate, incurring fees in the total amount of $1,550. See Part I, Section J of this Memorandum.
• Continued the administration of the adversary proceeding to avoid transfers, conducted discovery, dismissed parties pursuant to the terms of settlement agreements, incurring fees in the total amount of $4,560. See Part I, Section K of this Memorandum.
• Analyzed the status and amendment of an IRS claim and analyzed and resolved capital gains issues related to the sale of the estate's interests in the various properties sold, incurring fees in the total amount of $1,515.
C. Objections to Parkinson Phinney's Second Interim and Final Fee Application.
Gloria Farris objects both to the second interim fee request by, and any final award to, Parkinson Phinney.
First, she contends that the application is inaccurate in its assertion that the trustee has paid all funds due her pursuant to her compromise granting her one-half of the amounts collected by the estate from the sales of 1268 Grand Ave., 1740 Feather River Blvd., and 1830 Feather River Blvd. Specifically, she maintains that the trustee has not yet turned over her 50% share of $29,844.71 overpaid by the estate to Samuel Farris in connection with the sale of 1830 Feather River Blvd.
Gloria Farris refers to this amount as an underpayment. She is entitled only to one-half of this amount.
Second, Gloria Farris argues that the trustee, either willfully or negligently, has failed to preserve the estate's (and her) interest in post-petition rent for the 1740 and 1830 Feather River Blvd.
Third, she asserts that the trustee has been dishonest and deceitful in failing to acknowledge an agreement to treat her interests in 1740 and 1830 Feather River Blvd. as her separate property rather than community property.
And fourth, Gloria Farris argues that the court should decrease Parkinson Phinney's fees because the administration of this estate had a "negative value to her." She maintains that she is receiving "considerably less from the administration of this estate" than she would have received if she had never reported the debtor's concealment of assets and instead pursued the debtor and the property he fraudulently conveyed in state court for her own account.
Parkinson Phinney replies that 1) the trustee's tardiness in paying Gloria Farris her 50% share in the $29,844.71 overpayment to Samuel Farris in the sale of 1830 Feather River Blvd. is not a ground for disallowing to its fees; 2) Gloria Farris' counsel signed off on the orders settling the estate's interest in rents from the 1740 and 1830 Feather River Blvd.; 3) as noted in the orders approving the sales of the 1740 and 1830 Feather River Blvd., the issue of whether Gloria Farris' interests in those properties were separate or community property was reserved and still undetermined by the court at the time of such sales; and 4) its fees are reasonable as its services have generated over $400,000 for the estate while its fees are less than 25% of that amount.
III
A. Gloria Farris' Share of the Overpayment to Samuel Farris
Parkinson Phinney concedes that the estate overpaid $29,844.71 to Samuel Farris in connection with the sale of the 1830 Feather River Blvd. Gloria Farris complains that, while Parkinson Phinney recovered this overpayment in May or June 2006, she still has not received her 50% share of it. Parkinson Phinney does not dispute that it recovered the overpayment in May or June 2006, or that Gloria Farris is owed 50% of it. It argues, however, that even though the trustee has been slow to pay Gloria Farris this is not a basis for disallowing its fees.
A trustee cannot withhold proceeds of a sale that are due a co-owner of the property. See 11 U.S.C. § 363(j); Stine v. Diamond (In re Flynn), 418 F.3d 1005, 1008 (9th Cir. 2005). The trustee must turn over the co-owner's share of sale proceeds immediately upon the close of sale. Flynn, 418 F.3d at 1008 (interpreting section 363(j) to require an immediate turnover of sales proceeds to a co-owner).
In this case, the court approved a second compromise between the estate and Gloria Farris on February 27, 2006, confirming her 50% interest in the net proceeds received by the estate from the sale of the 1830 Feather River Blvd. In effect, once the second compromise was approved, she and the estate co-owned one-third of that property. Pursuant to section 363(j) and Flynn, then, the trustee should have paid Gloria Farris her share of the sale proceeds upon receipt.
By and large, the trustee gave Gloria Farris her share of the sale proceeds. The problem arises in connection with the $29,844.71 overpayment to Samuel Farris and its recovery in May or June of 2006. Gloria Farris' one-half interest in the overpayment was not paid to her until December 2, 2006, and the amount paid, $14,223.55, is $698.80 less than what she was due.
This payment came approximately six months after the trustee recovered the overpayment. Neither the trustee, nor Parkinson Phinney, have offered an explanation for the delay or for the underpayment.
Assuming the delay and underpayment cannot be justified, Gloria Farris has not shown how they are relevant to the award and payment of Parkinson Phinney's interim fees. The trustee, and not Parkinson Phinney, is the one responsible for making payments to creditors and third parties. See 11 U.S.C. § 704(1), (2), (9). Based on this record, the delay, if it cannot be explained and justified, is relevant only to the approval and payment of the trustee's fees.
These issues, nonetheless, show that the trustee has not completed the administration of the estate. The court concludes that the services of Parkinson Phinney to the estate may not be complete either. For this reason, and others discussed below, the court will not finally approve Parkinson Phinney's compensation.
B. Recovery of Rental Income
Gloria Farris also argues that the trustee, either willfully or negligently, failed to preserve the estate's interest in post-petition rent generated by 1740 and 1830 Feather River Blvd. Specifically, she objects to the trustee's failure to recover 1) more than the settled amount of $12,500 in rents from Samuel Farris; 2) rent payments totaling $17,105.40, made post-petition by Samuel Farris to the debtor for his one-third interest in the leased property; and 3) further rent payments from Samuel Farris for the approximate eight-month delay in the close of escrow of 1740 and 1830 Feather River Blvd.
Preliminarily, the court notes that the rental income at issue concerns only 1740 Feather River Blvd. The order granting the motion to sell 1740 Feather River Blvd. refers to the lease of that property as well as 1830 Feather River Blvd. However, both leases attached as exhibits to the motion identify the address of the leased property only as 1740 Feather River Blvd.
1. The 2004 and 2005 rents.
Samuel Farris did not pay the debtor's share of the 2004 or 2005 rent to either the debtor, the estate, or Gloria Farris. He retained that rent.
The settlement agreement between the estate and Samuel Farris concedes that $7,852.11 was due to the estate for 2004 and that a further $4,800 was due to the estate through June 2005, for a total of $12,652.11.
The settlement agreement provides:
Sam Farris further agrees, if it so provided in the order approving this agreement, to pay to the Trustee (or to such payee as directed by court order) all withheld rental income attributable to the 1/3 interest in the Properties previously held by Paul and Gloria Farris (approximately $12,500) out of his share of the escrow proceeds from the sale of the Properties. Sam Farris further agrees to cooperate with the Trustee regarding information about the accounting for rent generated by the Properties collected and paid since January 1, 2002.
This provision settled Samuel Farris' obligation to turn over one-third of the rent due for 2004 and January through June 2005 and attributable to the one-third interest held by the bankruptcy estate and Gloria Farris in the leased property. Samuel Farris agreed to pay, and the estate agreed to accept, $12,500 in lieu of the actual amount due, $12,652.11. The amount discounted, $152.11, was forgiven by the compromise.
See footnote 9 above.
While Gloria Farris is not a signatory to the settlement agreement between the bankruptcy estate and Samuel Farris, she approved the orders (both the original orders filed June 30, 2005 and the amended order filed January 10, 2006) authorizing the sales of 1740 and 1830 Feather River Blvd. as well as the compromise. Those orders characterized the $12,500 as part of the sale proceeds from the sale of 1740 and 1830 Feather River Blvd.
Then, Gloria Farris entered into the second compromise with the estate. That compromise, and the February 6, 2006 order approving it, provided that Gloria Farris would receive one-half of the sale proceeds. The sale proceeds for 1740 and 1830 Feather River Blvd. included the $12,500 in rent. Thus, although not a signatory to the settlement, Gloria Farris agreed to accept one-half of the $12,500 for her right to one-half of the rent owed by Samuel Farris.
The February 6, 2006 order estimated that the "proceeds from the sale of interests of the Estate and Gloria Farris in 1740 and 1830 Feather River Blvd [sic] . . . [were] estimated [at] $149,000. . . ." That amount, $149,000, is drawn from a calculation in the January 10, 2006 order of the approximate amount that would be received on account of the estate's and Gloria Farris' undivided one-third interest in the two properties. With the $12,500 in rent and the sale proceeds, a total of $298,088 was the estimated amount due. One-half of this amount is $149,044, or approximately $149,000.
The court concludes that the trustee has fulfilled his obligation to recover the rents due for the period January 2004 through June 2005 and that Gloria Farris agreed to accept half of the amount recovered by the trustee.
2. The 2002 and 2003 rents.
According to the settlement agreement between the estate and Samuel Farris, Samuel Farris paid to the debtor $7,647 and $9,458.40 for 2002 and 2003, respectively. This rent was due to the estate and Gloria Farris.
The record shows that the trustee has not attempted to recover these rents from the debtor, even though Samuel Farris agreed to provide the trustee with an accounting of what he had paid to the debtor. Gloria Farris then may be correct in that the estate has a claim against the debtor for post-petition rent received by him. While the court can come to no conclusion regarding the debtor's liability for these rents, this is further indication that the trustee has not completed his administration of the estate. Therefore, it is premature to finally approve Parkinson Phinney's compensation.
However, the failure of the trustee to administer this asset, if it is an asset, is not a basis for not approving Parkinson Phinney's compensation on an interim basis.
3. The rents accrued after July 1, 2005 due to the late close of escrow.
According to the sale motions filed in June 2005, the escrows of 1740 and 1830 Feather River Blvd. were to close within 30 days. The sale orders were entered on the case docket on June 30, 2005. Assuming the 30 days ran from June 30, given that July 31 was a Sunday, the escrows should have closed by August 1. They did not.
On January 10, 2006, the parties jointly requested entry of an amended order in connection with the sale of 1830 Feather River Blvd. and then closed both escrows sometime in February 2006. As recounted above, the record does not explain the delay in the close of the escrows.
Whatever the reason for the delay, Gloria Farris maintains that the trustee should collect one-third of the rent due from Samuel Farris' corporations for the period from July 2005 to the close of the escrows in February.
The court is not in a position at this time to adjudicate the liability of the lessees for this rent because they are not before the court. It is possible at this point to conclude that there is bona fide issue regarding this rent. Once again, then, it appears that the administration of the estate is not complete and this is yet another reason to not finally approve Parkinson Phinney's compensation.
Assuming for purposes of argument that the trustee failed to recover these, there is no evidence that his failure is attributable to Parkinson Phinney. Therefore, this is not a basis for objecting to an interim award of fees.
C. The Alleged Agreement to Treat Gloria Farris' Interests in the Properties As Her Separate Property
Gloria Farris contends that the trustee has been "dishonest and deceitful" in failing to acknowledge an agreement reached early in the case to treat her interests in 1740 and 1830 Feather River Blvd. as separate property rather than community property.
She points in particular to a letter dated September 18, 2003, that her counsel, Charles Rathbun, sent to the trustee's counsel, Ms. Parkinson. Mr. Rathbun asked the trustee to agree that Gloria Farris' interests in the various real properties "be viewed as separate property. . . ."
By return mail on September 23, 2003, Ms. Parkinson indicated that the terms offered by Mr. Rathbun were acceptable, but she also requested additional terms. In other words, the exchange of letters between the attorneys evidences, not an agreement, but the negotiation of an agreement.
For instance, in Mr. Rathbun's letter, Gloria Farris offered to pay "in the neighborhood of $40,000" for 3197 and 3199 Claremont Drive. This phrasing itself suggests that the parties had not yet reached an agreement. In response, Ms. Parkinson demanded the "sum of $40,000." It seems clear that the negotiations continued after this exchange of letters because the price ultimately presented to the court was $35,000.
Also, in the first paragraph of Ms. Parkinson's letter, the trustee required that Gloria Farris cooperate with him in connection with the sale of 1740 and 1830 Feather River Blvd., a term absent from Mr. Rathbun's letter. This is yet another indication that the terms of the compromise had not been finalized with exchange of letters.
Moreover, the compromise, as presented to the court, did not indicate that the parties had agreed that Gloria Farris' interests in the various properties were her separate property. In both the motion and supporting declaration, when referring to Gloria Farris' separate property interests, the trustee merely stated that Ms. Farris "agree[s] to cooperate in the sale or other disposition of her separate property interests in other properties for which she holds partial title."
The court reads this to mean that, to the extent Gloria Farris' interests were separate property, she would cooperate with the trustee in the sale of the various properties. Left unsaid was the fact that if her interests were community property, the bankruptcy estate did not need her cooperation. When a spouse does not join the other spouse in a bankruptcy petition, all of their community property is considered property of the bankruptcy estate. See 11 U.S.C. § 541(a)(2). The trustee may sell the interests of both spouses subject only to the constraints imposed by 11 U.S.C. § 726(c). See 11 U.S.C. § 363(b)(1).
Only if Gloria Farris' interests were separate property, an issue that was not determined by this compromise, would the trustee need Gloria Farris' cooperation in liquidating co-owned property. By virtue of the compromise, she promised to give that cooperation.
The record contains no objection by Gloria Farris to the motion to approve the first compromise even though it says nothing about an agreement that her interests in the specific properties were her separate property. The character of Gloria Farris' interests in 1740 and 1830 Feather River Blvd. was not determined in connection with the approval of the first compromise with the trustee.
It also bears mention that the three orders filed on June 30, 2005 and January 10, 2006 approving the sales of 1740 and 1830 Feather River Blvd. provided that: "The issue or the potential issue of whether Gloria Farris' 1/6 interest in the Property is property of the estate pursuant to 11 U.S.C. § 541(a)(2) is reserved and is not determined by this order." These orders were approved by Gloria Farris' attorney before they were entered by the court.
Also, it was in the interest of the estate to resolve this issue shortly before the distribution of estate to creditors. While a bar date for filing proofs of claim was set early in the case, in chapter 7, late claims may lose priority when the estate is distributed but they are not disallowed. See 11 U.S.C. § 726(a). Further, when one spouse files a chapter 7 petition, community claims must be paid before half of the remaining community property, if any, is turned over to the nonfiling spouse. 11 U.S.C. § 726(c).
So, to guard against the possibility that a community creditor might file a late claim, it was prudent that the trustee not give up the argument that Gloria Farris' interests in the properties were community property. However, when no community claims were filed, the issue became a moot point.
The court has no doubt that Gloria Farris wanted an early resolution of the issue. If the trustee was uncooperative, she could have commenced a proceeding to determine the issue or simply objected to the sale motions on the ground that her interests in the properties were her separate property. This would have required the court to resolve the issue. She took neither step.
The court finds and concludes that neither the trustee nor his counsel acted dishonestly or deceitfully. The issue regarding the character of Gloria Farris' interests in the various properties was not determined until the court approved the second compromise on February 6, 2006. While the issue was discussed by the parties throughout the case, there was no earlier agreement or resolution of the issue.
D. Value of Parkinson Phinney's Services
1. Allegations by Gloria Farris.
Gloria Farris argues that the court should decrease Parkinson Phinney's fees because the administration of this estate had a "negative value to her. She maintains that she would have received more on account of her claims and interests in the properties had she never reported the debtor's concealment of assets, and instead pursued the debtor in state court litigation for her own account.
This is simply untrue.
As she acknowledged through her attorney at the December 4, 2006 hearing, Gloria Farris's proof of claim will be paid in full. Other than the $698.80 underpayment discussed above and her share of additional rent, if any, yet to be collected, she has already been paid in full for her interests in the various properties.
Gloria Farris has not presented any evidence that she is receiving less from the trustee's administration of this estate than she would have received had she proceeded in a different fashion.
The court also fails to understand her assertion that she could have proceeded in state court against the debtor without the trustee. If this had been attempted, the trustee could have easily intervened and/or removed the litigation to this court in order to administer any property for the benefit of all creditors. See 11 U.S.C. §§ 544 548. Even without Gloria Farris's cooperation this was likely. She was not the only creditor of the debtor who reported his attempts to conceal assets. On April 2, 2002, a creditor, Earth and Road Works, Inc., objected to the trustee's no-asset report on the grounds that it had evidence that the debtor had fraudulently transferred various assets.
2. Reasonableness of fees.
In deciding whether to approve Parkinson Phinney's compensation on an interim basis, the court turns to 11 U.S.C. § 330(a). Section 330(a)(1)(A) (B) requires "reasonable compensation for actual, necessary services rendered by . . . [a] professional person" and "reimbursement for actual, necessary expenses." In other words, the compensation must be reasonable, and must be only for the actual and necessary services rendered to the trustee in connection with his administration of the estate. See In re Yermakov, 718 F.2d 1465, 1469-70 (9th Cir. 1983) (holding that "[s]ection 330 is designed to secure for the estate the services of competent professional persons, including . . . an attorney for the trustee . . . who may be needed in order best to operate, reorganize, or liquidate the estate."). The reasonableness of compensation for services is determined based on the time spent, rates charged, necessity, time of performance given case complexity, nature, extent, and value of the services, as well as the cost of comparable services in cases other than cases under this title. 11 U.S.C. § 330(a)(3); In re Yermakov, 718 F.2d at 1470.
Parkinson Phinney spent approximately 76.5 hours assisting the trustee in his administration of the estate. These services included, without limitation, selling 1740 and 1830 Feather River Blvd., resolving fractionalized interests in those and other properties, negotiating the recovery of rent owed to the estate, renegotiating a sale after an approved buyer reneged, resolving title and tax issues, and litigating and settling the adversary proceeding. The record, as summarized in this Memorandum Decision, establishes that the administration of this estate was complex, difficult, and time consuming, given the debtor's transfer of undivided interests in the various properties to multiple parties, the existence of co-owners even after some of the properties were returned to the estate, and the several settlements the trustee had to secure in order to liquidate the estate's interests in the properties. The court finds that the time spent by Parkinson Phinney was reasonable and that its services were necessary for the administration of the estate. The court also finds that, given the complexity of the case, Parkinson Phinney performed its services within a reasonable time period.
With respect to the value of its services, though, Parkinson Phinney recovered approximately $216,675.94 for the benefit of the estate, incurring fees of approximately $93,093.27. These total fees are approximately 43% of the proceeds recovered for the estate. In a typical liquidation case, such fees might be considered excessive. However, this was not a typical liquidation case. In representing the trustee, Parkinson Phinney had to deal with an uncooperative debtor who had attempted to conceal assets, had to resolve multiple fractionalized interests in multiple real properties, and had to settle multiple claims and interests, just to sell the estate's interests. Based on this, the court finds that Parkinson Phinney's fees are representative of the value of its services to the estate.
This amount includes $35,000 from Gloria Farris for the sale of the Claremont property, $12,000 from the sale of 1836-1838 Feather River Blvd., $22,430.44 from the sale of 1268 Grande Ave., $49,745.50 from the sale of 1740 Feather River Blvd., and $97,500 from the sale of 1830 Feather River Blvd. But, it excludes any amounts recovered on account of SBA's secured claim or Gloria Farris' co-ownership interests in the properties.
This total includes the fees previously awarded to Weintraub Genshlea Chediak Sproul.
The court also finds that the hourly rate of $250, charged by Parkinson Phinney, was reasonable as it is comparable to the hourly rates charged by other attorneys representing trustees in this district.
Therefore, the court concludes that Parkinson Phinney's interim compensation is reasonable and was for actual and necessary services.
Despite the above findings and conclusions, the court disallows compensation for the work reflected in two time entries. The two time entries are dated November 29, 2005 and involve Parkinson Phinney's revisions of proofs of service. The revision of a proof of service is not a task requiring the expertise of an attorney. Accordingly, the court will disallow these fees. The court is unable to determine precisely how much time was spent on these tasks because this time is lumped with the time spent on other tasks. The court estimates that the time spent was one-half hour and it disallows a total of $125.
IV
For the reasons explained above, the objections to Parkinson Phinney's second interim fee application will be overruled. Except for the $125 the court has disallowed, the requested fees and costs will be approved.
As outlined and discussed in more detail above, this has been a difficult case for the trustee and his counsel to administer. Generally speaking, and in the context of Parkinson Phinney's fee application, Gloria Farris' objections only establish that the administration of the estate is incomplete and, for that reason, the court cannot approve Parkinson Phinney's compensation on a final basis.
Further administration of the estate will be necessary to resolve the outstanding rent issues, resolve the underpayment to Gloria Farris, clear up the record regarding the dismissal of the adversary proceeding, and, if Gloria Farris intends to seek a surcharge against the trustee, assist the trustee with the approval of his final report and account.
Parkinson Phinney shall prepare and lodge a conforming order.