546 B.R. 522
Bankr. E.D.N.Y.2016Background
- Debtor All Island Truck Leasing filed chapter 11; case converted to chapter 7 and Kenneth Kirschenbaum was appointed trustee who retained Kirschenbaum & Kirschenbaum, an auctioneer, accountant, and collection counsel.
- Trustee negotiated carve-outs with secured creditors (Sovereign, Navistar, Bank of America) that funneled $160,950.96 into the estate; only $7,500 was expressly designated for unsecured creditors under the Sovereign stipulation.
- Trustee liquidated collateral and unencumbered vehicles, generating gross receipts of $863,479.97; after secured creditor payoffs the estate totaled $222,427.31.
- Trustee’s Final Report proposed paying chapter 7 administrative claims (~$202,544.51) and a small pro rata distribution to pre-conversion chapter 11 administrative claimants, leaving unsecured priority and general unsecured creditors with no distribution.
- Trustee sought statutory commission ($46,424) and counsel (K & K) fees ($34,725); court found trustee and counsel may have administered mainly for secured creditors and professionals, contrary to trustee’s fiduciary duty to maximize distribution to unsecured creditors.
- Court adjourned fee applications and ordered an amended final report because services were not shown to have benefited unsecured creditors and because trustee miscalculated commission by including payments to retained professionals in disbursements.
Issues
| Issue | Trustee's Argument | Court/UST Argument | Held |
|---|---|---|---|
| Whether trustee may administer fully or largely encumbered assets and be paid if unsecured creditors receive nothing | Trustee: uncertainty at outset; administration sometimes necessary to preserve assets and may not yield a distribution; carve-outs justified administration | Court & UST: administration permitted only if reasonably likely to benefit unsecured creditors; carve-outs that only pay professionals are improper | Court: Trustee breached fiduciary duty; cannot be compensated unless services provided a benefit to unsecured creditors; fee applications adjourned and Final Report must be amended |
| Whether payments to retained professionals count as "disbursements to parties in interest" for computing §326 commission | Trustee: calculated commission on total receipts including payments to professionals | Court: retained professionals are not parties in interest; such payments should not be included when computing trustee commission | Court: trustee improperly calculated commission; must resubmit distribution and recalculated fees consistent with law |
| Whether pre-conversion chapter 11 administrative claimants’ small pro rata share can be treated as a benefit to unsecured creditors to justify trustee/professional fees | Trustee: pre-conversion admin claimants are unsecured and thus their small pro rata recovery shows benefit to unsecured creditors | Court: pre-conversion chapter 11 administrative claims retain administrative priority and are not general unsecured creditors; paying them is not a distribution to unsecured creditors | Court rejected trustee’s argument; payment to chapter 11 administrative claimants does not satisfy duty to unsecured creditors |
| Whether trustee’s and K & K’s services were "necessary" under §330 when no unsecured distribution results | Trustee: services were reasonably likely to benefit the estate at time performed; practical difficulties justified actions | Court: necessity requires an objective likelihood of benefit to unsecured creditors; here services produced no benefit to unsecured creditors | Court: services not shown to be necessary for unsecured creditors; compensation not warranted absent amended distribution showing benefit |
Key Cases Cited
- In re KVN Corp., 514 B.R. 1 (9th Cir. BAP 2014) (sales of fully encumbered assets generally improper absent meaningful distribution to unsecured creditors)
- In re McBrearty, 335 B.R. 513 (Bankr. E.D.N.Y. 2005) (payments to trustee's retained professionals are not disbursements to parties in interest for computing trustee commission)
- In re Dow Corning Corp., 194 B.R. 147 (Bankr. E.D. Mich. 1996) (role of U.S. Trustee to protect integrity of bankruptcy system and monitor trustee practices)
- In re Acme Cake Co., 495 B.R. 212 (Bankr. E.D.N.Y. 2013) (services compensable only if they provide a benefit to the estate)
- In re Kohl, 421 B.R. 115 (Bankr. S.D.N.Y. 2009) (objective test: services must be reasonably likely to benefit the estate)
- In re Thorogood, 22 B.R. 725 (Bankr. E.D.N.Y. 1982) (denial of trustee compensation warranted for breach of fiduciary duties)