Opinion
CASE NO. 03-11241-WCH.
April 26, 2007
MEMORANDUM OF DECISION REGARDING APPLICATION OF STEPHEN GORDON FOR ALLOWANCE OF ADMINISTRATIVE EXPENSE CLAIM
I. Introduction
Creditor Stephen Gordon ("Gordon") filed an application for recovery of his expenses and compensation under 11 U.S.C. §§ 503(b)(3)(B) and 503(b)(4) for his allegedly successful efforts in recovering monies wrongfully diverted by the Debtor prior to the bankruptcy. While no one disputed Gordon's characterization of his services in the bankruptcy, and no one objected to the Application, I took this matter under advisement because of my concerns with whether the Application meets the appropriate standards for the allowance of such claims under the circumstances of this case. For the reasons set forth below, I will enter an order disallowing the Application.
In re Streck, Case No. 03-11241-WCH, Application of Stephen Gordon for Allowance of Administrative Expense Claim Pursuant to 11 U.S.C. §§ 503(b)(3)(B) and 503(b)(4) (hereinafter "Application"), Docket No. 65.
II. Background
This case has been contentious from the very beginning. One day after Gary Streck (the "Debtor") filed his case on February 19, 2003, Gordon filed a claim for an amount due under his judgment against the Debtor in the amount of $48,911.48 for attorney's fees incurred in defending the Debtor in a prepetition lawsuit. Gordon attended the 11 U.S.C. § 341 meeting of creditors in March, 2003, and soon thereafter filed his motion seeking permission to conduct Rule 2004 examinations of the Debtor and various parties, and an adversary complaint objecting to the discharge of the Debtor under 11 U.S.C. § 727.
Fed.R.Bankr.P. 2004 provides that "[o]n motion of any party in interest, the court may order the examination of any entity." Gordon sought to examine the Debtor, the Debtor's wife, Jill Streck, and the Debtor's mother-in-law, Evelyn Meyers.
See Gordon v. Streck, Adversary Proceeding No. 03-1193-WCH (Bankr. D. Mass. 2003). Citations hereinafter shall be to Adv. Pro. No. 03-1193.
The Chapter 7 Trustee subsequently followed suit, filing his own motion to conduct a Rule 2004 examination of the Debtor and the Debtor's wife in June, 2003. He also filed an adversary proceeding to avoid and recover the proceeds of an allegedly fraudulent transfer of the Debtor's interest in his former condominium in Brookline, Massachusetts to the Debtor's wife and mother-in-law. In the Chapter 7 Trustee's adversary proceeding, the parties reached a settlement pursuant to which the Debtor's wife and mother-in-law agreed to pay $25,000 to the estate, and the adversary proceeding was dismissed.
See Desmond v. Streck and Meyers, Adversary Proceeding No. 05-1175-WCH (Bankr. D. Mass. 2005).
Meanwhile, in Gordon's adversary proceeding contested matters ensued in the three and a half years after its filing, including numerous motions and extensions, Gordon's motions to compel discovery against various parties and a motion to disqualify Debtor's counsel. Just prior to the continued trial date of January 30, 2007, the parties moved to settle. The proffered settlement agreement provided that in exchange for the Debtor's payment of $15,000 to Gordon, Gordon would dismiss his pending adversary proceeding and release the Debtor of his claims. On January 25, 2007, because all of the consideration under the proposed settlement agreement would have gone to Gordon and not to the bankruptcy estate, I denied the motion to approve the settlement.
See Adv. Pro. No. 03-1193, Docket Nos. 32, 96, 107, 128, 139.
See Gordon v. Streck (In re Streck), Slip Copy, 2007 WL 268552 (Bankr. D. Mass.).
On March 9, 2007, the parties filed a revised version of the original settlement. The revised agreement was essentially the same as the original, with the exception that the same $15,000 would be paid to the Chapter 7 Trustee instead of Gordon. Gordon's motion to approve the revised settlement was filed contemporaneously with the Application for the allowance of an administrative expense claim of $10,000 plus expenses. In his motion to approve the settlement, Gordon represented that the settlement was conditioned upon the allowance to Gordon of an administrative expense claim of $10,000 plus expenses for his work in substantially contributing to a recovery for the estate. The terms of the actual settlement agreement, however, do not reference an administrative expense claim. In addition, the final time entry in the Application indicates that he first conferred with the Chapter 7 Trustee regarding his adversary proceeding on February 16, 2007. At hearings on the revised settlement and the Application, I approved the revised settlement and took the Application under advisement.
The Chapter 7 Trustee also signed the revised agreement.
See Application, Docket No. 65.
See Adv. Pro. No. 03-1193, Joint Motion to Approve Settlement Agreement and to Authorize Dismissal of Adversary Complaint, Docket No. 160, ¶ 8.
See Adv. Pro. No. 03-1193, Settlement Agreement, Docket No. 161; No. 03-11241, Application, Docket No. 65.
See Application, Docket No. 65.
III. Discussion
The question presented is whether Gordon's claim of $10,000 against the bankruptcy estate is allowable under the circumstances in this case as an administrative expense. Gordon alleges that, as a result of his efforts, the Chapter 7 Trustee was able to discover information utilized in recovering $25,000 for the estate in the Trustee's adversary proceeding. In addition, Gordon contends that his efforts have led to the recovery of an additional $15,000 for the estate as a settlement of Gordon's own adversary proceeding against the Debtor. As a result, Gordon posits that his claim is allowable under 11 U.S.C. §§ 503(b)(3)(B) and 503(b)(4).
In support of his claim, Gordon makes two primary arguments. First, he argues that due to his successful recovery for the estate, prior court approval for his services was not necessary. Second, Gordon argues that the scope of his services was reasonable and necessary. In support of these propositions, Gordon cites cases in which the creditors therein had taken actions where the Trustee had not. See, e.g., In re Antar, 122 B.R. 788, 790 (Bankr. S.D. Fla. 1990) (creditor proceeded to litigate pending action in which counsel for chapter 7 trustee had declined to intervene); In re Rumpza, 54 B.R. 107, 108 (Bankr. S.D. 1985) (creditor proceeded to litigate action which chapter 7 trustee declined to pursue). Based on the plain language of the statute, precedent in this circuit and circumstances of this case, however, I believe that both of Gordon's arguments are flawed.
First, 11 U.S.C. § 503(b)(3) provides that: ". . . (b) After notice and a hearing, there shall be allowed, administrative expenses . . . including . . . (3) the actual necessary expenses, other than compensation and reimbursement specified in paragraph (4) of this subsection, incurred by . . . (B) a creditor that recovers, after the court's approval, for the benefit of the estate any property transferred or concealed by the debtor." 11 U.S.C. § 503(b)(3) (emphasis added). The majority of courts have held that court approval for an attorney's services on behalf of a bankruptcy estate is necessary prior to the allowance of an administrative claim under 11 U.S.C. § 503(b)(3)(B). See, e.g., In re Blount, 276 B.R. 753, 759 n. 17 (Bankr. M.D. La. 2002) (citing cases). Other courts have held that, while prior approval is generally a requirement for reimbursement, retroactive approval is appropriate under certain circumstances. Id. The Bankruptcy Appellate Panel for the First Circuit recently adopted a similar rule based on the First Circuit's rule for the post facto employment of professionals under In re Jarvis, 53 F.3d 416, 418 (1st Cir. 1995). See Xifaras v. Morad (In re Morad), 328 B.R. 264, 271 (B.A.P. 1st Cir. 2005).
Gordon did not cite or distinguish Morad in his Application.
In Morad, the appellate panel agreed with the courts that required prior court approval, yet allowed post facto approval due to extraordinary circumstances. Id. As the appellate panel noted:
[P]rior approval is preferable `because it permits the bankruptcy court to supervise the administration of the estate more closely, and minimizes the chance that the court will be confronted with a fait accompli. To achieve these desirable ends, the prior approval requirement must have teeth. A relatively strict standard, such as extraordinary circumstances, serves this purpose. At the same time, it encourages compliance with the statute and eliminates opportunities for manipulation. Id. (citing Jarvis, 53 F.3d at 421).
I agree with the appellate panel's reasoning, and will follow the rule set forth in Morad. Consequently, I disagree with Gordon's argument that prior court approval is generally not required under 11 U.S.C. § 503(b)(3).
Following the rule in Morad, and because Gordon did not seek prior court approval, the analysis then turns to whether the Application demonstrates extraordinary circumstances such as to justify post facto approval of his claim. The burden of proving entitlement to an administrative expense rests with the party requesting it. Morad, 328 B.R. at 269 (citing Woburn Assocs. v. Kahn (In re Hemingway Transp., Inc.), 954 F.2d 1, 5 (1st Cir. 1992). Gordon contends that his services to the estate were only reasonable and necessary, which, by his own argument, would constitute circumstances less than extraordinary. Under the reasoning inMorad, I conclude that Gordon has not met his burden of demonstrating extraordinary circumstances warranting the allowance of his administrative expenses.
Even if I were to find extraordinary circumstances, I could not approve the Application because I reject Gordon's argument that his services were even necessary to the estate. Gordon points to the case of Pergament v. Maghazeh Family Trust et al. (In re Maghazeh), 315 B.R. 650 (Bankr. E.D.N.Y. 2004) for the proposition that courts have rewarded creditors who engaged in extensive discovery that benefitted the bankruptcy estate. In that case, the bankruptcy court awarded to the United States, the creditor therein, its fees and expenses where the actions of the creditor resulted in the recovery of a valuable asset for the estate, despite the lack of prior approval for the creditor's services. 315 B.R. at 654. In Maghazeh, it was undisputed that but for the actions of the United States the assets the debtor hid would not have been uncovered for the benefit of creditors.Id. at 653.
The statutory language of 11 U.S.C. § 503(b)(3), assuming the standards for allowance are otherwise met, allows reimbursement of actual and necessary expenses. Accordingly, I do not find Gordon's argument that his services were reasonable in addition to necessary as part of the standard for evaluating these claims, although it would not change my conclusion.
In contrast, Gordon has not demonstrated why his services were necessary to the estate in addition to those of the Chapter 7 Trustee. The Chapter 7 Trustee was already investigating the Debtor's affairs and preparing his own adversary proceeding to recover assets for the estate. The docket demonstrates that the Chapter 7 Trustee dutifully conducted the 11 U.S.C. § 341 meeting, filed his motion for permission to conduct a 2004 examination shortly thereafter, and pursued and successfully recovered the value of the alleged fraudulent transfer for the estate, among other duties. The Chapter 7 Trustee did not delay in prosecuting this case. Additionally in the prosecution of his own 11 U.S.C. § 727 action, Gordon was pursuing his own claim, not seeking to provide a benefit for the bankruptcy estate. Gordon was acting as his own agent, not as that of the Trustee. In fact, his time entries reveal that Gordon did not even confer with the Trustee until February 16, 2007 when he tried to get the Trustee to agree to the revised settlement. Gordon did not have permission to provide services to the estate through the prosecution of his own 11 U.S.C. § 727 action. There was no action taken in Gordon's 11 U.S.C. § 727 proceeding that was not already satisfactorily performed by the Chapter 7 Trustee. I cannot find that his claimed services provided any necessary benefit to the estate.
In addition, Gordon is an attorney with over twenty-five years experience and not a stranger to litigation in the bankruptcy courts. See Application, Docket No. 65. He should be aware that 11 U.S.C. § 327 requires court approval for professionals providing services to a bankruptcy estate.
Under 11 U.S.C. § 503(b)(4), after a creditor has made the requisite showing under 11 U.S.C. § 503(b)(3), a bankruptcy court may allow as an administrative expense "reasonable compensation for professional services rendered by an attorney or an accountant of an entity whose expense is allowable under paragraph (3) of this subsection, based on the time, the nature, the extent, and the value of such services, and the cost of comparable services other than in a case under this title, and reimbursement for actual, necessary expenses incurred by such attorney or accountant." 11 U.S.C. § 503(b)(4) (2004). Because I do not find that Gordon has met his burden of justifying his administrative expenses under 11 U.S.C. § 503(b)(3), he is not entitled to recovery under 11 U.S.C. § 503(b)(4). See Maghazeh, 315 B.R. at 653.
IV. Conclusion
For the foregoing reasons, I will enter an order disallowing the Application.