Opinion
No. 7-01-18004 MA, Adversary No. 03-1296 M
March 17, 2004
Victor E. Carlin, Albuquerque, NM, for Plaintiff
William F. Davis, Albuquerque, NM, for Defendant
Order on Motion to Dismiss Complaint
THIS MATTER is before the Court on the Defendant's Motion to Dismiss Complaint for Judgment Requiring Disgorgement of $35,000 For Failure to State a Claim for Lack of Standing (the "Motion") filed on October 29, 2003 . The Plaintiff, Springer Industrial Center, Ltd. ("Springer") filed an Objection and Response (the "Response") to the Motion on November 17, 2003 . Springer filed the Complaint on July 30, 2003 seeking disgorgement of fees received by the Defendant from the reorganized Debtor. The Defendant filed an Answer and Counterclaim which was later amended.
After reviewing the Motion, the Response and supporting memoranda and being otherwise informed, the Court will deny the Motion. The allegations of the Complaint are as follows:
1. This bankruptcy was filed under Chapter 11 on November 30, 2001.
2. On January 24, 2002, the Court entered an Order Compelling Compliance with 11 U.S.C. § 364(c)(1) Super Priority Administrative Expense Claim, Granting Debtor's Motion for Extension of Time to Perform Obligations Required Under 11 U.S.C. § 365(d)(3) and for Extension of Time to Assume or Reject Lease Under 11 U.S.C. § 365(d)(4), and Conditionally Granting Motion for Relief From Automatic Stay (Doc. 31) (the "Order Compelling Compliance"). The Order Compelling Compliance provided:
"[t]o the extent that the Debtor fails to timely pay its post-Petition rents and other obligations under the Lease (the obligations required to be performed pursuant to 11 U.S.C. § 365(d)(3)) by the end of each month, as aforesaid, Springer shall have an 11 U.S.C. § 364(c)(1) super priority administrative expense claim to get said obligation paid from this bankruptcy estate."
Order Compelling Compliance at p. 2.
3. The Debtor filed its First Amended Plan of Reorganization (the "Plan") (Doc. 130) on September 5, 2002. By order entered December 19, 2002 (the "Confirmation Order") (Doc. 168), the Plan was confirmed. The Plan provides for payments to Springer as follows:
To the extent the Debtor fails to pay the post-petition rents and obligations under the lease, Springer has an 11 U.S.C. § 364(c)(1) super priority administrative claim. The Debtor, Springer, and Wells Fargo Bank have agreed that Springer has a super priority Post-Petition administrative expense claim liquidated in the amount of $60,000. . . . An Auction shall be held on September 7, 2002. The Debtor shall cause Springer to be paid $25,000 from the proceeds of the Auction after payment of the Auctioneer's approved fees and costs. . . . The balance of Springer's administrative claim in the amount of $35,000 shall be paid by the reorganized Debtor in equal monthly installments of $2,916.67 each, beginning January 15, 2003 , and continuing on the 15th day of each month thereafter until paid in full. Plan at p. 6.
4. The Debtor failed to pay Springer the monthly installment payments of Springer's priority administrative claim. On April 18, 2003, Springer filed an Affidavit of Default and Notice of Intent to Seek Disgorgement (the "Affidavit of Default") (Doc. 181) alleging that the Debtor had failed to make the monthly payments to Springer under the Plan. In the Affidavit of Default, Springer states, "[u] nless the Debtor promptly cures the . . . default, and gives adequate assurance of future performance under its confirmed Plan, . . . Springer reserves the right to seek disgorgement from administrative claimants with lower priority than that of Springer." Affidavit of Default, ¶ 8.
5. On or about April 25, 2003 , the Defendant filed its Second and Final Application by Attorneys for the Debtor for Allowance and Payment of Compensation (the " Fee Application") for services rendered from October 1, 2002 to March 31, 2003 (Doc. 182). The Fee Application indicated that Davis Pierce received payments from or on behalf of the Debtor after the confirmation of the Plan. 1 Springer filed an objection to the Fee Application.
6. The Debtor's estate is administratively insolvent.
7. On July 24, 2003 , the case was converted to a Chapter 7 proceeding and a trustee was appointed.
8. On July 30, 2003 , Springer filed this Complaint for disgorgement of $35,000 from Davis Pierce.
9. On September 11, 2003 , the Trustee filed a "no asset" report and notice of abandonment of property to the Debtor.
10. On October 10, 2003 , the Court partially approved the Fee Application subject to the outcome of this adversary proceeding. See Order Approving Second and Final Application by Attorneys for the Debtor for Allowance and Payment of Compensation (Doc. 207).
11. The Confirmation Order provides as follows:
Unless the Bankruptcy Court determines otherwise, the Court shall retain jurisdiction of this Reorganization Case and over all adversary proceedings, contested matters or proceedings arising in or in connection with this Bankruptcy Case, including without limitation jurisdiction to:
. . .
3. Hear and determine controversies, suits, and disputes between the Reorganized Debtor and any creditor that may arise in connection with the interpretation or enforcement of the Plan;
. . .
9. Correct any defect, cure any omission, or reconcile any inconsistency in the Plan or the Confirmation Order as may be necessary to carry out the Plan or the Confirmation Order, or as may be necessary to carry out the purposes and intent of the Plan;
. . .
11. Determine any and all disputes arising under or relating to the Plan and enforce and administer the provisions of the Plan;
. . .
14. Make such Orders as are necessary or appropriate to carry out the provisions of the Plan;
15. Make such Orders or give such direction as may be appropriate under § 1142 of the Bankruptcy Code . . .
See Confirmation Order at pp. 10-11.
Discussion
Federal Rule of Civil Procedure 12(b)(6), which is applicable in bankruptcy under Federal Bankruptcy Rule 7012(b), allows a court to dismiss a cause of action when it fails to state a claim upon which relief can be granted. F.R.Bankr.P. 7012(b)(6). A motion to dismiss can be granted only if it appears beyond doubt that the Plaintiff "can prove no set of facts in support of his claim which would entitle him to relief." GFF Corp. v. Associated Wholesale Grocers, Inc., 130 F.3d 1381, 1384 (10th Cir. 1997) citing, Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 102, 2 L.Ed.2d 80 (1957); and Ash Creek Mining Co. v. Lujan, 969 F.2d 868, 870 (10th Cir. 1992). In determining whether to dismiss a complaint, all well-pleaded factual allegations must be accepted as true and viewed in the light most favorable to the nonmoving party. GFF Corp., 130 F.3d at 1384 citing Scheuer v. Rhodes, 416 U.S. 232, 236, 94 S.Ct. 1683, 1686, 40 L.Ed.2d 90 (1974). The Defendant first argues that Springer has no cause of action for disgorgement of funds because the Plan is silent on the issue of disgorgement. The Defendant argues that Behles-Giddens, P. A. v. Raft (In re K. D. Company, Inc.), 254 B.R. 480 (Bankr. D. N.M. 2000), a case cited by Springer in support of its right to bring this cause of action, is inapplicable here. In that case, the court allowed the disgorgement of funds received by the Debtor's attorney post-petition because the confirmed plan specifically allowed for such an action to equalize distribution of administrative expense payments. Because this Plan provides no specific right to seek disgorgement, the Defendant argues that Springer cannot rely on K. D. Company, Inc. and has no basis for this action.
Springer asserts that it can seek to enforce the provisions of the Plan regarding its super priority administrative claim even though the Plan does not specifically allow disgorgement from administrative claimants. By asserting a violation of the Plan provision, Springer asks this Court to enforce the provisions of the Plan granting Springer a super priority claim to be paid on a monthly basis. This Court has jurisdiction to enforce the Plan. See e. g. In re Greenley Energy Holdings of Pennsylvania, 110 B.R. 173, 180 (Bankr. E. D. Pa. 1990) (stating "[t] here is no doubt that the bankruptcy court's jurisdiction continues post confirmation to protect its confirmation decree, to prevent interference with the execution of the plan and to aid otherwise in its operation."); Refrigerant Reclamation Corp. of America v. Todak (In re Refrigerant Reclamation Corp. of America), 186 B.R. 78, 82 (Bankr. M. D. Tenn. 1995) (noting that even though dispute arises after confirmation does not affect analysis of jurisdiction under 28 U.S.C. § 1334(b) and that enforcing plan is at least "related to" bankruptcy); In re Service Decorating Co. 105 B.R. 859, 862 (N.D. Ill., 1989) (holding that even after the order of confirmation has been entered, bankruptcy court has subject matter jurisdiction to enter orders implementing the plan of reorganization and to administer the estate); see also 11 U.S.C. § 1142(b). Springer and the Debtor recognized this continuing jurisdiction in the Plan language. See ¶ 11 supra. Even though the Plan contains no specific provision regarding disgorgement, Springer has nevertheless stated a cause of action to enforce a provision of the Plan. Springer's Complaint properly seeks to redress Debtor's alleged breach of the monthly payment provision of the Plan.
Defendant further argues that all assets of the bankruptcy estate are vested in the Debtor once the Plan is confirmed. According to the Defendant, because the funds did not then belong to the estate, they are not subject to a claim for preferential or fraudulent transfer claim under the Bankruptcy Code. While it is true that the assets of the estate were re-vested in the Debtor upon confirmation, In re Troutman Enterprises, Inc. 253 B.R. 8, 11 ((6th Cir. BAP 2000), a creditor may sue the Debtor for enforcement of the plan. Id. As stated in Troutman, "[i] f a reorganized debtor defaults under a plan, creditors have several options, including enforcing the plan terms in any court of competent jurisdiction." Id. (quoting lower court opinion), citing, In re Xofox Indus., Ltd., 241 B.R. 541, 543 (Bankr. E. D. Mich. 1999) (noting that prepetition claims become "plan claims" after confirmation of Chapter 11 plan). Moreover, Springer demanded that the Debtor pursue disgorgement of the funds paid to the Defendant, which the Debtor has refused to do. See Affidavit of Default. Springer seeks to assert its plan claim against assets of the Debtor that Springer claims were wrongfully paid to the Defendant. Springer may pursue this claim to enforce the provisions of the Plan even though Springer is not seeking to recover funds for the estate. Since the Debtor has refused to pursue disgorgement, it is left to Springer to enforce provisions directly affecting its pecuniary interests. See K. D. Company, Inc., 254 B.R. at 487 (administrative claim creditor was entitled to seek disgorgement to obtain recovery of creditor's plan claim upon debtor's refusal to pursue disgorgement under plan). Next, the Defendant argues that even if disgorgement may be brought in this Court, Springer has no standing to pursue disgorgement. The Defendant points out that the events upon which that this action arises occurred during the Chapter 11 while the Debtor was administering its Plan. The Defendant argues that in a Chapter 11 context, only a trustee or creditor's committee has standing to bring a derivative action, such as a preference action, on behalf of or for the benefit of the estate. The Defendant cites Cybergenics v. Chinery, 330 F.3d 548 (3rd Cir. 2003 ), in which the court ruled that a creditor's committee has standing to bring a derivative action under § 544(b) on behalf of the estate after court approval when the debtor unreasonably refuses to seek recovery. Id. at 566. In Cybergenics, the creditor's committee demanded that the debtor-in-possession seek to recover a preferential transfer, and after debtor's refusal, sought court permission to pursue the transfer for the benefit of the estate. At first glance Cybergenics seems applicable here. Here, the Debtor allegedly made improper payments in contravention of a confirmed Plan, and Springer now seeks to recover those funds for proper distribution. In contrast, Cybergenics involved an attempt to recover a voidable transfer under 544(b), which is a power normally reserved for the Trustee. The Third Circuit Court of Appeals allowed a creditor's committee to bring a derivative action to recover assets belonging to the estate when the debtor in possession refused to seek the recovery. Springer is not attempting to step into the shoes of a trustee (or debtor in possession) to pursue an avoidance action. Instead, Springer is seeking to enforce the Plan. Standing to request disgorgement is not limited to trustees and debtors in possession. See In re Kids Creek Partners, L. P., 236 B.R. 871, 874 (Bankr. N. D. Ill. 1999) (allowing creditor holding super priority administrative claim to seek disgorgement of fees paid to Chapter 7 trustee and trustee's special counsel when estate became administratively insolvent.). As stated in Kids Creek Partners, "disgorgement [may be] necessary to prevent a lower priority class of creditor from receiving payment on their claims until a higher priority creditor has been paid in full." Id. at 877.
In cases converted from Chapter 11 to Chapter 7, Courts have allowed creditors and Chapter 7 trustees to recover interim compensation paid to Chapter 11 professionals upon a showing of administrative insolvency. See In re Lochmiller Industries, Inc., 178 B.R. 241, 251-54 (Bankr. S.D. Cal. 1995) (describing cases recognizing court's authority to require disgorgement of professional fees for payment to higher priority claimants or for pro rata distribution to claimants with the same priority); but see In re Unitcast, Inc., 214 B.R. 992, 1007 (Bankr. N.D. Ohio 1997) (stating that administrative insolvency should not be a basis for disgorgement solely for the purpose of achieving a pro rata distribution). Even though not directly applicable to this case, these cases recognize the Court's authority to order disgorgement upon administrative insolvency to remedy unequal payments of administrative claims. Therefore, the Defendant's argument that this case must be brought as a derivative action by the trustee or creditor's committee fails. In analyzing this case, the reasoning of K. D. Company Inc., is instructive. There the debtor was insolvent and could not pay the administrative claimants. The creditor seeking disgorgement made a demand on the debtor to seek disgorgement and was refused. The bankruptcy court ordered the Chapter 11 debtor's counsel to disgorge fees because it had received more than its pro rata share of available funds. Id. at 483-85. The 10th Circuit BAP agreed and stated that since the debtor failed to seek disgorgement, the creditor was entitled to seek disgorgement on his own behalf. Id. at 487. As in this case, K. D. Company converted to Chapter 7 and the trustee filed a "no asset" report. In considering whether the appeal was moot due to the conversion, the BAP noted that the confirmed plan was not nullified upon conversion, and the creditor could enforce his rights under the plan. Id. Similarly, Springer demanded that the Debtor seek disgorgement, the Debtor refused, and Springer asserts the right to seek disgorgement from the Defendant. The conversion to Chapter 7, as in K. D. Company, Inc. does not nullify the right asserted by Springer to recover for breach of the Plan.2 In sum, Springer states a cause of action to recover funds paid out to the Defendant in contravention of provisions of the Plan.
In its Complaint, Springer also alleges that the Defendant breached its fiduciary duty to it as a creditor of the bankruptcy estate. Springer asserts that the Defendant ceased to be a disinterested professional when it became obvious that the Debtor's post confirmation business could not continue. According to Springer, the Defendant breached its fiduciary duty by causing the reorganized Debtor to pay it instead of Springer. See 11 U.S.C. § 328(c) (allowing court to deny compensation to professional who is not disinterested or holds an adverse interest). See also Gray v. English, 30 F.3d 1319, 1324 (10th Cir. 1994) (recognizing discretion of court to deny compensation or order disgorgement under § 328(c)). The Defendant does not address this count in the Complaint in its Motion. Therefore, whether Springer has a cause of action against the Defendant for breach of fiduciary duty is left for another day.
The Court finds based on the well pleaded facts in this Complaint, that Springer has stated a cause of action to enforce the provisions of the Plan and has standing to pursue its claim in this Court. Therefore, the Motion is hereby denied.
I hereby certify that a true and correct copy of the foregoing was either electronically transmitted, faxed, delivered, or mailed to the listed counsel and parties, on the date file-stamped above.
The Court entered an Order Approving Debtor's Motion to Employ Attorneys on April 9, 2002. Under the approved arrangement with its attorneys, the Debtor was authorized to pay to Defendant 75% of its attorneys' fees on a monthly basis.