Summary
holding that bankruptcy court was not bound by dictum from district court
Summary of this case from In re Metroplex on the Atlantic, LLCOpinion
No. 804-83813-511.
December 30, 2005.
Adam C. Gomerman, Huntington Station, NY, for Debtor.
DECISION (Re: Chapter 7 Trustee Compensation)
In this case, the Chapter 7 Trustee seeks approval of his statutory compensation calculated pursuant to 11 U.S.C. § 326. The particular issue presented is whether the trustee is entitled to statutory compensation based upon funds distributed to administrative claimants in view of the Testaverde and Stein decisions recently rendered by the United States District Court for the Eastern District of New York. See In re Testaverde, 317 B.R. 51 (E.D.N.Y. 2004) (Hurley, J.), and In re Stein, Case No. 04-CV-3196 (ADS) (E.D.N.Y. March 25, 2005) (Spatt, J.). For the reasons that follow, this Court finds that the Chapter 7 trustees are not per se prohibited from basing their statutory compensation on funds distributed to administrative claimants, but, consistent with the Testaverde/Stein rationale, they may not base their compensation on funds paid to professionals retained under 11 U.S.C. § 327 and compensated under 11 U.S.C. § 330.
FACTS
See In re Suzette Ciminelli, Case No. 802-88326-511 (the " Ciminelli Case"). The Ciminelli Case was the first case in which the issues presently pending before the Court were briefed. Because of the extensive briefing presented by the Ciminelli Trustee, other Chapter 7 Trustees thereafter simply "joined in the arguments presented by the Ciminelli Trustee." As it happened, however, after oral argument and after the motion was taken under submission by the Court for decision, the Ciminelli Trustee withdrew, without prejudice, his application for compensation for his services as trustee and for the services of his counsel because additional assets were discovered that will cause the administration of the Ciminelli estate to remain open for a time beyond the final meeting of creditors. Nonetheless, since other Chapter 7 Trustees relied so heavily upon and "adopted" the arguments presented by the Ciminelli Trustee, the Court believes it is appropriate to include his arguments within this decision.
On April 25, 2005, Allan B. Mendelsohn ("Mendelsohn"), the Chapter 7 Trustee of the estate of Suzette Ciminelli, filed an application for compensation for his services as trustee in the case. Mendelsohn sought statutory commissions of $7,302.13 as provided by Section 326 of the Bankruptcy Code. This compensation was calculated based on $81,042.62 of total disbursements to "parties in interest, excluding the Debtor, but including holders of secured claims." The Chapter 7 administrative expenses totaled $41,582.47 of the overall disbursements of $81,042.62 and were comprised of the following:
Trustee's statutory compensation $7,302.13 (commissions) $ 86.50 (expenses) Trustee's counsel: LaMonica, Herbst $33,743.84 (fees and expenses) Maniscalco LLP ("LHM") Court filing fees $ 450The Office of the United States Trustee ("UST") objects to Mendelsohn's commission, arguing that the Testaverde/Stein decisions prohibit a Chapter 7 trustee from calculating his Section 326 compensation based upon distributions made on administrative claims, which includes the fee request of his retained professionals. Consequently, the UST argues that the maximum compensation that should be allowed to the Ciminelli Trustee is $4,900.
In response to the UST objection, Mendelsohn makes several arguments. First, he urges that Testaverde and Stein were wrongly decided and that these cases disregard clearly established caselaw. Secondly, relying upon In re KAR Development Associates, LP, 180 B.R. 629 (D. Kan. 1995); and In re Carrozzela Richardson, 255 B.R. 267 (Bankr. D. Conn. 2000), Mendelsohn asserts that this Court is not bound by the Testaverde/Stein decisions because they are but District Court decisions. Third, Mendelsohn points out that the bankruptcy judge whose decisions were both affirmed in Testaverde and Stein disagrees with the District Court's broad rule which excludes all administrative claims from the calculation of a trustee's compensation. See In re Enrico Vona, Case No. 803-86782-288 (Emended Decision entered on November 10, 2005). Finally, Mendelsohn argues that Testaverde and Stein are factually distinguishable from the Ciminelli case because (a) in Stein, nearly all of the estate assets were being used to pay the trustee and his counsel, and (b) in Testaverde, the trustee retained his own law firm to act as his counsel.
The UST filed a Memorandum of Law in further support of its objection to the compensation sought by the Chapter 7 Trustee in the Ciminelli Case. The UST argues that the Testaverde/Stein decisions both focused on the plain language of Section 326 which provides that compensation may only be calculated based on distributions to "parties in interest." The UST further contends that both Judges of the District Court found that the plain language of the statute leaves no conclusion other than that administrative professionals are not "parties in interest" within the meaning of Section 326. In this regard, the UST points out that, in Testaverde, the Court went even further by saying that it "does not agree that the bankruptcy code permits a trustee to include his administrative expenses when calculating his compensation." Testaverde, 317 B.R. at 55. Lastly, the UST urges that neither Testaverde nor Stein are distinguishable from the facts of these cases and that all of Mendelsohn's arguments were considered and rejected by the District Court within the Testaverde/Stein decisions.
The McBrearty Case
The facts of the McBrearty case captioned above and the issues to be decided herein are nearly identical to the Ciminelli Case. In both of these cases, the Chapter 7 trustee seeks a statutory commission based in part on the fees to be paid to his professionals. The UST objects to the trustee's commissions on the same grounds as it did in Ciminelli. The relevant facts of the McBrearty case are summarized as follows:
Marc A. Pergament ("Pergament"), the Chapter 7 Trustee of the McBrearty estate, filed an application for compensation seeking statutory commissions of $2,501.05. This commission was based on $17,510.46 of total disbursements to "parties in interest, excluding the Debtor, but including holders of secured claims." Of this $17,510.46 in total disbursements, $8,216.87 was for Chapter 7 administrative expenses. The administrative expenses were comprised of the following:
Trustee's statutory compensation $2,501.05 (commissions) $ 0.00 (expenses)
Trustee's counsel: Weinberg Gross $5,565.82 (fees and expenses) Pergament LLP
Court filing fees $ 150
In the McBrearty case, Pergament echoed Mendelsohn's arguments that this Court is not bound by the decisions of the District Court in Testaverde and Stein and also pointed out that in the recent case of In re James McQueen, Case No. 803-87785-288, Judge Bernstein declined to follow the decisions of Testaverde and Stein.
The UST opposed Pergament's compensation request on the same grounds as in Ciminelli.
DISCUSSION
Section 326(a) of the Code provides that,
[i]n a case under chapter 7 or 11, the court may allow reasonable compensation under section 330 of this title of the trustee for the trustee's service, payable after the trustee renders such services, 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, 5 percent on any amount in excess of $50,000 but not in excess of $1,000,000, and reasonable compensation not to exceed 3 percent of such moneys in excess of $1,000,000, upon all moneys disbursed or turned over in the case by the trustee to parties in interest, excluding the debtor, but including holders of secured claims.
11 U.S.C. § 326 (emphasis added). The issue squarely presented in Testaverde and Stein was whether administrative claimants are "parties in interest" within the meaning of this provision. Both District Court Judges concluded that they are not and that, consequently, the statutory commission of a Chapter 7 trustee cannot be properly based upon distributions made to the trustee's professionals.
More specifically, in the Testaverde case, the Chapter 7 trustee retained counsel to represent him in connection with the prosecution of a fraudulent conveyance adversary proceeding for the benefit of the Chapter 7 estate. The trustee sought the maximum statutory compensation of $4,848.09 which was based on total distributions, which included a $7,414.52 distribution to his counsel for attorneys' fees and expenses. On these facts in the Testaverde case, Bankruptcy Court Judge Stan Bernstein found that,
See In re Testaverde, 317 B.R. 51 (E.D.N.Y. 2004) (Hurley, J.).
when the trustee calculated the distribution in this case, he included the distributions made to the trustee's counsel. In essence, if the Court were to allow such a formula the trustee would be "double-dipping" by receiving commission on top of the fees paid to its counsel. Consistent with the Court's decision in In re Guido, 237 B.R. 562 (Bankr. E.D.N.Y. 1999), the trustee may not include within the base of distributions any fees and costs paid to his accountants, special counsel, or his own general counsel. A review of the trustee's final report . . . indicates that there are $31,119.50 in allowed unsecured claims. By applying the maximum statutory formula under 11 U.S.C. § 326(a), the Court determines that the trustee is entitled to a commission in the amount of $3,861.95.
See In re Testaverde, Case No. 802-88997-288, oral decision on March 2, 2004, and Order, dated March 12, 2004. It appears that this commission was calculated based on the assumption that all of the $31,119.50 monies in the estate were distributed to the general unsecured creditors.
The District Court affirmed Judge Bernstein's holding. In so doing, the District Court examined the plain meaning of the term "party in interest." United States v. Ron Pair Enterprises, 489 U.S. 235 (1989). The District Court noted that the definition of "party in interest" is "one whose pecuniary interest is directly affected by the bankruptcy proceeding." Black's Law Dictionary 1122 (6th ed. 1990). Based on this definition, the District Court found that the term "parties in interest" as found within Section 326 does not include a trustee's counsel because counsel does not have a pecuniary interest that is directly affected by the bankruptcy proceeding. The District Court thus reasoned that the trustee's statutory commission cannot be based on a distribution to trustee's counsel. Going beyond the facts of the case, the District Court further stated in dicta that the Code does not permit a trustee to include his "administrative expenses" ( i.e., the sum of his commissions) when calculating his compensation. Testaverde, 317 B.R. at 55.
The circumstances presented in Stein are similar. In Stein, the trustee's retained counsel successfully prosecuted two adversary proceedings: the first resulted in the denial of the Debtor's discharge, and the second resulted in the settlement of a fraudulent conveyance action for a $40,000 benefit to the estate. This $40,000 settlement was the only asset available for distribution to creditors. For their work in the case, the trustee's counsel filed an application for compensation in the amount of $27,610.67 (reflecting a $47,011.63 voluntary reduction in fees), and expenses in the amount of $7,138.84. The trustee filed a request for statutory compensation in the amount of $4,755.50, which was calculated based upon a total estate of $40,055.01 (presumably including the $40,000 settlement plus some interest). Thus, in Stein, even with the significant voluntary reduction of fees by trustee's counsel, nearly all of the funds in the estate were to be distributed to the trustee and his counsel with little, if any, distribution to the general unsecured creditors. Based on these facts, Judge Stan Bernstein denied the trustee's statutory compensation in its entirety, finding that "[b]y definition, the trustee's general counsel is neither a creditor nor a party in interest." The bankruptcy court further reasoned that a proposed distribution, that included only the trustee's counsel, did not allow the trustee to seek compensation. On appeal, the District Court agreed and adopted the reasoning of Testaverde in affirming.
There is a third case from this District which was cited favorably by the District Court in Testaverde. In In re Guido, 237 B.R. 562 (Bankr. E.D.N.Y. 1999), Judge Bernstein held that a Chapter 7 trustee's commission could not include contingency fees or expenses paid directly to a debtor's personal injury counsel on the basis that these funds were not "actually received," i.e., they were only "constructively received."
It is in the aftermath of the District Court decisions in Testaverde and Stein and the Bankruptcy Court decision in Vona, that this controversy comes before this Court. As a general matter, this Court agrees with the Ciminelli Trustee that it is not "bound" by the District Court decisions in Testaverde and Stein. As the District Court explained in In re KAR Development Associates, LP, 180 B.R. at 640,
The better view, the one which reflects an understanding of the court structure and the nature of stare decisis, is that because district court bankruptcy decisions do not bind other district judges within the same district, they are not binding on bankruptcy courts either. See In re Abernathy, 150 B.R. 688, 693 n. 7 (Bankr. N.D.Ill. 1993); In re Globe Illumination Co., 149 B.R. 614, 619 (Bankr. C.D. Cal. 1993); in re Shattuc Cable Corp., 138 B.R. 557, 566-67 (Bankr. N.D. Ill 1992).
This reasoning was echoed by Chief Bankruptcy Judge Albert S. Dabrowski where, in the Carrozzela Richardson decision, 255 B.R. at 272, he stated:
It is widely accepted that the decision of one district court judge is not binding on another district judge, even within the same district. E.g., Threadgill v. Armstrong World Industries, Inc., 928 F.2d 1366 (3rd Cir. 1991). Logically then, a judge of the bankruptcy court — a unit of the district court, 28 U.S.C. section 151 — is not bound by the decision of a single district court judge. . . . [citations omitted] To view district court decisions as binding on bankruptcy judges, but not other district judges, potentially places a bankruptcy judge in the impossible position of simultaneously following two or more conflicting district precedents.
Nonetheless, this Court also agrees with the underlying philosophy expressed by Chief Bankruptcy Judge Michael J. Kaplan in In re Phipps, 217 B.R. 427, 430-31 (Bankr. W.D.N.Y. 1998), in which he states:
My own view (a dogmatic view, perhaps) is that any court whose decisions (even if unanimous) are subject to reversal by a single judge of another court is "inferior" to the reversing court for stare decisis purposes. . . . [Moreover, t]he Second Circuit Court of Appeals has addressed this issue [in Whiting Pools, 674 F.2d 144 (2d Cir. 1982)] and resolved it in favor of a bankruptcy judge being bound by the earlier decision of a single district judge who sits in a multi-judge district court, even though the earlier decision was in a different case. . . . Some believe that the 1984 amendments made the bankruptcy courts more constitutional by making them more subordinate to the district court. I agree. Consequently, I find that efforts to read the bizarre, but functional, 1984 amendments in such a way as to render the bankruptcy courts less inferior for stare decisis purposes than they were in 1981, rest on too slender a reed to stand.
It is for this reason, without regard to how one might characterize the precedential relationship between the courts, that this Court concludes that it cannot ignore the holdings of Testaverde and Stein. By these decisions, two esteemed District Court Judges independently considered the rulings and rationale of my colleague, Judge Stan Bernstein, and affirmed his decisions. Notwithstanding the Vona decision in which Judge Bernstein has clarified the reasoning in his earlier decisions, this Court believes it is compelled to apply the holdings in Testaverde and Stein.
Nor is the Court persuaded that the facts in the underlying Testaverde and Stein cases are distinguishable from those that appear in the two cases captioned above. While the facts may be different in certain respects, this Court believes that they would not have made a difference in the District Court's analysis in either Testaverde or Stein, and therefore they are not truly distinguishable.
On the other hand, this Court does not believe that it is bound by dictum of the Testaverde District Court. See, e.g., Hernandez v. Greiner, 305 F. Supp.2d 216, 228 (E.D.N.Y. 2004) (quoting United States v. Bell, 524 F.2d 202, 206 (2d Cir. 1975)). "Gratis dictum" is defined in Black's Law Dictionary as:
1. A voluntarily statement; an assertion that a person makes without being obligated to do so. 2. A court's stating a legal principal more broadly than is necessary to decide the case. 3. A court's discussion of points or questions not raised by the record or its suggestion of rules not applicable in the case at bar.
Black's Law Dictionary 485 (8th edition) (emphasis added).
It is a maxim, not to be disregarded, that general expressions, in every opinion, are to be taken in connection with the case in which those expressions are used. If they go beyond the case, they may be respected, but ought not to control the judgment in a subsequent suit, when the very point is presented for decision. The reason of this maxim is obvious. The question actually before the court is investigated with care, and considered in its full extent. Other principles which may serve to illustrate it, are considered in their relation to the case decided, but their possible bearing on all other cases is seldom completely investigated.
Cohens v. Virginia, 19 U.S. 264, 398 (1821).
The precise issue presented and decided by the District Court in both Testaverde and Stein was whether the trustee could base his statutory commission upon distributions made to his retained professionals. This Court believes that the statement in the Testaverde decision that "this Court does not agree that the bankruptcy code permits a trustee to include his administrative expenses when calculating his compensation," Testaverde, 317 B.R. at 55 (emphasis added), went beyond the facts of that case and was either a misstatement or was stated in dicta which is not binding. While this Court agrees that the trustee's professional's fees are administrative expenses, 11 U.S.C. § 503(b)(2), there are other categories of administrative expense that do not involve the trustee's professionals and which would likely be considered distributions to "parties in interest" under the District Court's plain meaning analysis. See In re Nardelli, 327 B.R. 488, 490 (Bankr. M.D. Fla. 2005). More specifically, compensation of professionals employed under Section 330 of the Code is but one example of an administrative claim. 11 U.S.C. § 503(b)(2). Administrative expense claims include all "actual, necessary costs and expenses of preserving the estate" which can mean many different things depending upon the case. 11 U.S.C. § 503(b)(1)(A); Nardelli, 327 B.R. at 490 ("Administrative creditors include those supplying post-petition goods or services that benefit the estate. A typical example of such a creditor is a utility company that continues to supply electricity to the debtor post-petition").
The Court also finds it notable that when the Testaverde District Court made the broad statement about administrative expenses not being included in the trustee's commission base, it did so in the context of disagreeing with the holding in In re Orient River Investments, Ltd., 133 B.R. 729 (Bankr. E.D. Pa. 1991). The facts of the Orient River case, however, were distinguishable from the facts of Testaverde and the cases before this Court today. The holding in Orient River that administrative expenses were properly included in the trustee's commission base was limited to cases involving an operating trustee. As the Orient River court stated, "[w]e hold that, considering the extensive scope of duties which operating trustees perform for debtors' estates, beyond that of trustees who merely liquidate debtors' estates, operating costs are properly included in the computation." Orient River, 133 B.R. at 729. Clearly, there is a significant difference between operating and liquidating cases.
The Court, therefore, will not apply the Testaverde and Stein decisions as a per se rule that a Chapter 7 trustee may not base his statutory compensation upon distributions made to administrative claimants. However, for all the reasons expressed herein, this Court will follow the direct holdings of the Testaverde and Stein decisions which limit the compensation of Chapter 7 trustees, pursuant to Section 326, such that their statutory commissions may not be calculated based upon distributions to their legal professionals.
Accordingly, this Court upholds the objection of the UST to the extent that the trustee's statutory compensation is based upon fees paid to any of the trustee's professionals and denies, in part, the request of the Chapter 7 Trustee for compensation to the extent that the same is calculated based upon distributions to his professionals retained under 11 U.S.C. § 327 and compensated under 11 U.S.C. § 330.
The Court directs the Chapter 7 Trustee to settle an order consistent with this Decision upon the Debtor, her counsel and the United States Trustee.