Opinion
Case No. 96-10910-AM
June 24, 1996
Steven Ramsdell, Esquire, Tyler, Bartl, Burke Albert, Alexandria, VA, for the debtors in possession
MEMORANDUM OPINION
This matter is before the court on the motion of the United States Trustee to compel the debtors in possession to comply with certain requirements of a standard "Consent Order Conditioning Rights of Debtor(s) in Possession." Specifically, the issue is whether the debtors must open a debtor in possession bank account and imprint their bank checks with the designation "debtors in possession." At the scheduled hearing on June 18, 1996, the parties waived oral argument and submitted the motion for determination based on the pleadings and memoranda.
Facts
The debtors, who are husband and wife, filed a joint voluntary petition under chapter 11 of the Bankruptcy Code in this Court on February 26, 1996. Aaron Smith, the husband, is a self-employed certified public accountant. Jean Smith, the wife, is an administrative assistant. They receive income not only in the form of Mrs. Smith's salary and income from Mr. Smith's accounting practice, but also in the form of rent from real property.
Mr. Smith practices as part of a firm. His schedules reflect that he receive $9,000 per month from the firm. The schedules do not indicate whether this income consists entirely of compensation for professional services performed by him or whether it also includes profits earned by the firm, e.g., on work performed by associates. Mrs. Smith's gross salary is $3,166.67 per month. The rental income is $5,200.00 per month. Their combined monthly expenses are $22,363.00, which perhaps explains why they are in chapter 11.
No trustee has been appointed, and the debtors remain in possession of their estate as debtors in possession. On March 13, 1996, a consent order "endorsed by counsel for the United States Trustee and counsel for the debtors" was entered conditioning the debtors' rights as debtors in possession. This order, which is a standard form of order entered in every chapter 11 case in this Division, includes the following language which is at issue here:
2. Except as otherwise agreed to by the United States Trustee in writing, the debtor shall close the bank accounts presently maintained, and all funds on deposit shall be transferred to the appropriate Debtor In Possession Account as hereinafter set forth. . . .
3. The debtor in possession shall immediately open a new bank account in such federally insured depository as the debtor may select. The account shall be opened in the name of the debtor and designated "Debtor in Possession Account," and all income derived by the debtor in possession shall be deposited therein. . . . [E]ach check written on the account shall be imprinted with the debtor's name and the notation, Debtor in Possession Account, together with appropriate additional information e.g., address of the debtor in possession.
Subsequent to the entry of the order, the debtors requested the United States Trustee to waive the requirement for opening a debtor in possession bank account and to waive the requirement for imprinting their bank checks with the notation "Debtor in Possession." The reasons advanced by the debtors were essentially four: their existing checking account at Centura Bank was opened just seven weeks prior to the chapter 11 filing; the account allows for computer-assisted home banking; the account will only be used for personal living expenses; and a "debtor in possession" notation on checks may lead to professional embarrassment. The United States Trustee has refused to waive the requirements and "since the debtors have not complied" has brought a motion to compel compliance.
As explained by debtors' counsel, Centura's home banking service "enables the Debtors to make payments on-line and to upload and download payment and checking account information on a daily basis from and into Quicken, the Debtors' personal finance software package." The debtors' counsel expressed concern that the bank might not "permit on-line banking with a DIP account," and that the on-line banking service "will facilitate the Debtors' monthly reporting to the U.S. Trustee and the bankruptcy court." Steven B. Ramsdell letter of 3/22/96, p. 1.
Conclusions of Law and Discussion
The present motion is a core proceeding over which this court has jurisdiction under 28 U.S.C. § 1334 and 157 and the general order of reference entered by the United States District Court for the Eastern District of Virginia.
There can be little question that the consent order entered on March 13, 1996, plainly and unambiguously requires the debtors in possession "unless" "otherwise agreed to by the United States Trustee in writing" to close their existing checking accounts, open a debtor in possession account, and imprint their checks with the notation "debtor in possession." The United States Trustee has not "otherwise agreed." Accordingly, the debtors in possession have a duty to comply with the order.
The debtors, however, argue that "good cause" exists for the waiving of the requirements and that the refusal of the United States Trustee to agree to a waiver is "arbitrary and capricious." Without having actually filed a motion under F.R.Bankr.P. 9024 for relief from the consent order, the debtors argue that they are nevertheless entitled to such relief. Additionally, they argue that "the majority" of the deposits into their existing bank account are not "property of the estate," since they consist of post-petition earnings from personal services.
§ 541(a)(6), Bankruptcy Code, excludes from the otherwise expansive definition of property of the estate "earnings from services performed by an individual debtor after the commencement of the case."
It is a commonplace observation, but one no less worth repeating, that a chapter 11 debtor in possession is a fiduciary. Under § 1107(a), Bankruptcy Code, a debtor in possession has, with certain exceptions not relevant here, the rights, powers and duties of a chapter 11 trustee. These include the duty to segregate and account for property of the estate and to make periodic reports as required by the court and the United States Trustee. §§ 1106(a)(1) and 704(2) and (8), Bankruptcy Code. The United States Trustee, for his or her part, has the duty, under the supervision of the Attorney General of the United States, to supervise the administration of "cases and trustees in cases" in cases under chapter 7, 11, 12, and 13. 28 U.S.C. § 586(a)(3) and (c).
As the United States Trustee correctly notes, the present Bankruptcy Code, enacted by the Bankruptcy Reform Act of 1978, represents a significant departure from prior practice under the Bankruptcy Act of 1898. Under the prior Act, bankruptcy judges were assigned general administrative tasks as well as judicial responsibilities, a mixture of roles that did little to enhance the public perception of bankruptcy courts as impartial deciders of competing interests. In re A-l Trash PickUp, Inc., 802 F.2d 774, 775 (4th Cir. 1986) ("[T]his administrative role was inconsistent with the judge's role as an impartial arbiter of disputes"). Congress, in enacting the present Bankruptcy Code, addressed this concern by creating the United States Trustee program. In doing so, Congress expected the United States Trustee to oversee the administration of bankruptcy cases and to protect the bankruptcy process from abuse, overreaching, and self-dealing. This is the United States Trustee's specific "public interest mandate." In re Salant Corp., 176 B.R. 131, 135 (Bankr. S.D. N.Y. 1994).
Since the United States Trustee's decision not to waive the requirement of the consent order implicates his supervisory duties over the administration of the estate, the position of the United States Trustee is properly reviewed by this court under an abuse of discretion standard. In re First Republican Corp., 95 B.R. 58, 60 (Bankr. N.D. Tex. 1988) (court should use "arbitrary and capricious standard" for review); In re Havanec, 175 B.R. 920 (Bankr. N.D. Ohio 1994) (decision not to formally conclude a meeting of creditors reviewable under abuse of discretion standard). This is particularly so where the requirements that the United States Trustee seeks to enforce are embodied in a consent order that specifically contemplates that the only exceptions will be such as are "otherwise agreed to by the United States Trustee."
Here, the court cannot find that the reasons articulated by the United States Trustee for refusing to agree to the waiver requested by the debtors are arbitrary or capricious. The United States Trustee's stated reason for requiring that a debtor in possession account, designated as such, be opened in an approved depository, is because doing so provides notice to parties dealing with the debtor in possession "including financial institutions holding estate funds" of the debtor in possession's status and because it assists the United States Trustee and other parties in monitoring the administration of the estate. Although the debtors in possession assert that their post-petition earnings from personal services do not constitute "property of the estate," the fact is that the debtors receive substantial rental income that clearly is property of the estate. Additionally, it is far from clear that Mr. Smith's income from his accounting practice consists solely of remuneration for personal services. The extent to which a chapter 11 debtor's post-petition earnings from a sole proprietorship are excluded from being property of the estate is one which has divided the courts. Gautier-Adams v. El-Amin (In re El-Amin), 126 B.R. 855, 860, n. 4 (Bankr. E.D. Va. 1991) (Tice, J.) (collecting authorities but not deciding issue); In re Harp, 166 B.R. 740 (Bankr. N.D. Ala. 1993); FitzSimmons v. Walsh (In re FitzSimmons), 725 F.2d 1208 (1984). In any event, since the rental income unquestionably is property of the estate, and since it "together with Mrs. Smith's salary and Mr. Smith's income from his professional practice" is being used to pay the debtors' living expenses as well as to make payments to creditors secured by property of the estate, a requirement that all funds be deposited in a single debtor in possession account facilitates informed review by the United States Trustee and creditors of the debtors' post-petition financial condition. Accordingly, the court need not decide in the context of the present case whether an individual chapter 11 debtor in possession who had no post-petition income other than salary or wages from services performed post-petition could be required to deposit those earnings in a designated debtor in possession account.
Under § 345(b), Bankruptcy Code, a trustee "and by extension, a debtor in possession" may deposit estate funds only in accounts or investments that are fully guaranteed by the United States or with respect to which the depository has furnished a bond or deposited approved securities to protect the estate against loss.
No evidence was provided as the type of business entity through which Mr. Smith carries on his profession (e.g., corporation, partnership, or sole-proprietorship) and the nature of the payments he receives (e.g., salary or draws), and, if he is not a salaried employee, whether a portion of the payments he receives consists of collections from prepetition accounts receivable or from profits or markup on the work performed by associates or independent contractors or from income from investments made by the business.
The court in Harp noted that courts considering the issue had reached three different conclusions: (1) that all post petition earnings by an individual chapter 11 debtor are excluded from the estate; (2) that post-petition earnings should be split between the debtor and the estate based on exactly how the income was generated, and (3) that all the income flowing to an individual in chapter 11 becomes property of the estate pending confirmation of a plan. 166 B.R. at 750. In Harp, which involved a medical doctor receiving income from a radiology practice, the court adopted the third view but also held that the debtor could be compensated as an employee of the estate.
FitzSimmons appears to be the only opinion by a Court of Appeals that has addressed this issue. In FitzSimmons, the 9th Circuit held that those portions of an attorney's post-petition earnings attributable to his own personal services were excluded from the bankruptcy estate, while income from the law practice's invested capital, accounts receivable, good will, employment contracts with the firm's staff, client relationships, fee agreements or the like belonged to the estate.
The debtors point out that some bankruptcy courts have declined to enforce a requirement that the debtors imprint their checks with the designation "debtor in possession." In re Johnson, 106 B.R. 623 (Bankr. D. Neb. 1989); In re Gold Standard Baking, Inc., 179 B.R. 98 (Bankr. N.D. Ill. 1995). Both cases, however, involved only a controversy over whether "debtor in possession" had to be printed on the debtor's checks; there was no dispute over the requirement that the pre-petition bank accounts be closed and new accounts opened (which the debtor has not done here). In each case, the court concluded that the United States Trustee's operating guidelines, as such, did not have the force and effect of law. Here, what the United States Trustee seeks to enforce is not his office's guidelines, but rather an existing order of this court whose terms were explicitly agreed to by the debtor in possession. Even Gold Standard Baking, while declining to enforce the requirement, concluded (1) that the "personal opinion [of the debtor's president] . . . with respect to the potential adverse impact . . . is sheer speculation on his part, and is not based on any objective evidence or experience" and (2) that the requirement for imprinting "debtor in possession" on checks issued by the debtor in possession was neither unreasonable nor arbitrary. 179 B.R. at 103. This court likewise concurs that the requirement "which has been uniformly applied within this District for many years" is neither arbitrary nor unreasonable. Since the requirement derives from an express order entered by this court with the consent of the debtor, and since the decision of the United States Trustee not to agree to a waiver is reviewable only for an abuse of discretion, and since the court cannot find from the record that the United States Trustee acted arbitrarily or unreasonably in refusing to agree to a waiver, the court concludes that the United States Trustee is entitled to an order enforcing the terms of the consent order.
Because the court does not find that the United States Trustee has acted arbitrarily or unreasonably, and because there is no evidence that the debtors "who were at all times represented by able and experienced counsel admitted to practice before this court" entered into the consent order by reason of mistake, fraud, misrepresentation, duress, inadvertence, or surprise, or that enforcement of the agreed order against the debtors in possession would be plainly unjust, relief from the order under F.R.Bankr.P. 9024 and Fed.R.Civ.P. 60(b) is likewise not warranted.
A separate order will be entered requiring the debtors to comply with the consent order by closing their pre-petition bank accounts and opening a debtor in possession account, designated as such, in an approved depository.