Thursday, October 2, 2008

Three New Unpublished Judge Alley Opinions: Dismissal of Malicious Prosecution, Trustee Appointment in Ch. 11, BAPCPA Tr. Fees Applied Retroactively

By Andrew Toth-Fejel, Bankruptcy Litigation Support for Attorneys,

These three unpublished opinions by Judge Frank Alley are all dated September 15, 2008, although they hit the court's website a few days after that. The case names are linked to the opinions on the court website for quick access to the full opinions.

Miller v. McDougal Bros. Investments
Adv. Pro. No. 08-6110-fra

In this rather factually detailed adversary proceeding (for a 6-page letter opinion at least), Judge Alley granted defendants’ motion to dismiss the complaint with prejudice and without a hearing. Plaintiff was a Chapter 7 debtor. Defendants were a) a lessor/seller of real property to debtor, b) a subsequent purchaser of that property at a foreclosure sale, c) an attorney for that purchaser who represented that purchaser in a suit to eject the debtor from the property, and d) the attorney who defended the purchaser's attorney in a bar complaint by debtor against that purchaser's attorney, and also represented the purchaser in a lawsuit by debtor against the purchaser. The judge held as follows:

1) The debtor-plaintiff failed to state a claim for malicious prosecution or fraud and misrepresentation against the two attorneys for informing the Chapter 7 trustee of plaintiff's possible interest in the real property at the time of filing, although by that time he had been legally ejected from the property. Plaintiff had failed to list this possible interest in the property in his bankruptcy schedules, it was not deemed abandoned to the plaintiff in his role as a debtor and so continued to remain property of the estate subject to the trustee's administration and also subject to the automatic stay. The attorneys violated no duty to plaintiff in informing the Chapter 7 trustee about this possible property interest; indeed it indirectly led to the US Trustee moving to reopening the Chapter 7 case and the trustee realizing some funds for the estate from which to pay creditors. In addition, the attorneys acted within the scope of their attorney-client relationship so they were "within their qualified privilege against liability in tort for actions taken on behalf of a client."

2) Judge Alley held that the bankruptcy court had no jurisdiction to review a state court order dismissing plaintiff's complaint against the purchaser at the foreclosure sale, because "it would constitute an invalid collateral attack on that court's final order." Plaintiff's state court case had been dismissed because he did not have standing, the real estate at issue being still vested in the bankruptcy estate.

3) Similarly, the judge held that the bankruptcy court had no jurisdiction to review the Oregon Court of Appeal's dismissal of plaintiff's appeal of the ejectment judgment, that plaintiff should have address his concerns about that proceeding with that court. And the attorney for the purchaser at foreclosure did not violate any bankruptcy order when he filed a motion to dismiss that appeal on behalf of the purchaser.

In re South Star Oil Co.
Case No. 08-61072-fra11

On motion of the US Trustee and several creditors to dismiss or convert this chapter 11 case to chapter 7, or to appoint a trustee, Judge Alley determined that a trustee should be appointed pursuant to § 1104 of the Code.

1) Under § 503(b)(9) administrative expenses include "the value of any goods received by the debtor within 20 days before the date of commencement of a case under this title in which the goods have been sold to the debtor in the ordinary course of such debtor's business." Administrative expenses must be paid in full on the effective date of the plan, unless the holder of the claim agrees to the contrary, pursuant to § 1129(a)(9)(A). The debtor-in-possession (DIP) is the operator of ten gasoline service stations. During the 20-day pre-petition period, about $1.3 million in product was supplied by one gasoline supplier, leaving an administrative expense of between $512,000 and $1.3 million depending on some accounting issues involving a large payment made during that same period. Given the supplier's unwillingness to be delay payment in full, and the DIP's lack of cash or any marketable equity in its assets, the judge determined it unlikely that the DIP could propose and confirm a plan. Thus there was cause to convert or dismiss the case because this constituted "the absence of a reasonable likelihood of rehabilitation" under § 1112(a)(4).

2) Judge Alley concluded as follow, applying § 1104(a), and particularly (although not stating so) § 1104(a)(3) added by BAPCPA and explicitly allowing the appointment of a trustee whenever grounds exist for conversion or dismissal, if it "is in the best interests of creditors and the estate" :
Where cause for dismissal is established, the Court may, in the alternative, appoint a trustee or an examiner if it appears to be in the best interest of the creditors to do so. At first blush, a dismissal of the case appears to be the most likely remedy. However, dismissal would severely prejudice [the supplier's administrative] claim, since it would not have administrative priority in any subsequently filed case. Conversion to Chapter 7, while it would provide for a speedy liquidation of the debtor’s assets, and payment of most of the secured debt, would not allow the estate to avail itself of any value these properties have while they support ongoing businesses. It follows that the best resolution to a difficult situation is the appointment of a trustee under Code § 1104.

In re Owens
Case No. 05-70329-fra7

1) The court's primary ruling was to retroactively apply one of BAPCPA's changes to a Chapter 7 case filed a few days BEFORE BAPCPA's effective date, on the justification that "[w]hen a statutory amendment acts to clarify an existing provision rather than to make substantive changes to it, the amendment is normally applied retroactively." The provision added by BAPCPA was a new §330(a)(7) of the Code, stating:
In determining the amount of reasonable compensation to be awarded to a trustee, the court shall treat such compensation as a commission, based on § 326.
§ 326 in turn lays out the maximums that Chapter 7 (and Chapter 11) trustees may be compensated, the familiar "not to exceed 25 percent on the first $5,000 or less, 10 percent on any amount in excess of $5,000 but not in excess of $50,000 . . . ." Judge Alley interpreted the new §330(a)(7)'s requirement that trustee compensation be treated "as a commission" as doing "no more than to clarify Congress' understanding of §326."

2) Beyond applying BAPCPA's §330(a)(7) retroactively, Judge Alley's interpreted how this addition interplays with §326. His interpretation indicates a significant change in the method for trustee fee calculation, at least in certain cases. Judge Alley stated that before BAPCPA a trustee's commission was "determined by multiplying the amount of time spent by the trustee by a reasonable hourly rate; thus, the limits set out in §326 are a ceiling, and no more." But now "[r]eading §§ 326 and 330 together, the statutory scheme provides that a trustee is presumed to be entitled to compensation in the amount specified in §326," although that "presumptive commission . . . must be adjusted to the extent necessary to ensure that the commission actually paid is reasonable." The commission is "subject to reduction if the maximum amount is substantially disproportionate to the value of the trustee's services to the estate" or "if errors or omissions on the part of the trustee result in a material loss to the estate or unsecured creditors."

3) The error by the trustee in this case was to sell debtor's real property with a net loss to the estate after paying liens against the property and the realtor's and trustee's commissions, because the trustee had not realized that one of the secured creditors was entitled to a $8,000 prepayment penalty. Judge Alley noted that the trustee's fee could be reduced to whatever the fee would have been had the real estate been abandoned, but here " the result would be draconian." Instead the judge reduced the trustee's fee by $2,430, the amount "necessary to restore to unsecured creditors the amount lost as a result of the sale."

by: Andrew Toth-Fejel
Bankruptcy Litigation Support for Attorneys

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