In re Livore

Citations: 473 B.R. 864; 2012 Bankr. LEXIS 2933; 56 Bankr. Ct. Dec. (CRR) 194; 2012 WL 2400469Docket: No. 08-32423/JHW

Court: United States Bankruptcy Court, D. New Jersey; June 26, 2012; Us Bankruptcy; United States Bankruptcy Court

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The court addressed a motion by the Chapter 7 trustee to recover fees paid to Frankel and Rubinson, Inc. (F.R.), a property management company, during the administration of a Chapter 7 bankruptcy estate. The trustee sought to disgorge $19,194.85 of the total $86,563.21 paid to F.R., arguing that these payments should be reallocated to ensure equitable distribution among administrative claimants, as F.R.'s services should be considered "semi-professional" rather than ordinary course services. However, the court ruled against the motion, determining that the payments made to F.R. were legitimate administrative expenses under § 503(b)(1)(A) and entitled to priority under § 507(a)(2). The court emphasized that because these services were performed in the ordinary course of business as permitted by § 363(c)(1) of the Bankruptcy Code, they were not subject to disgorgement. The case background includes the debtor's transition from a Chapter 11 to a Chapter 7 bankruptcy, the appointment of the trustee, the hiring of F.R. without a hearing, and the operational challenges faced by the trustee. Ultimately, the request for disgorgement was denied, reaffirming F.R.'s right to retain the payments made for its services.

The trustee’s motion to disgorge payments to F.R. highlights a conflict between two fundamental principles of bankruptcy law: the equal distribution of assets among creditors and the public policy favoring the maximization of debtors’ estates to support successful reorganization. The Bankruptcy Code emphasizes that creditors of equal priority should receive pro rata shares of the debtor’s property, as established in Begier v. I.R.S. However, in Chapter 7 bankruptcy, the priority shifts toward maximizing the value of the debtor’s estate rather than facilitating reorganization.

Section 363(c)(1) allows trustees to conduct transactions in the ordinary course of business without prior notice or hearing, promoting business engagement with the trustee. Conversely, transactions outside this ordinary course require notice and a hearing. The trustee acknowledges this provision but contends that payments to F.R. should be disgorged to ensure compliance with the pro rata distribution mandated by § 726 of the Bankruptcy Code.

Section 726 specifies that payments on certain claims must be made pro rata among creditors of the same priority. Administrative expenses, detailed in § 507(a)(2) and § 503(b), must be treated equally in distribution. If an administrative claimant is fully paid during the ordinary course under § 363(c)(1), they receive no further payment during the estate's distribution, meaning § 726 is not applicable. However, if administrative claimants are not fully compensated at the time the estate incurs debts and there are insufficient funds for full payment, their claims will be distributed pro rata with other administrative creditors. Relevant cases have clarified these principles, illustrating the complexities involved in the distribution of bankruptcy estates.

§ 549 of the Bankruptcy Code governs post-petition transactions, particularly the authority of trustees to avoid transfers. According to § 549(a), trustees can only avoid transfers of estate property that occur after the case's commencement if they are not authorized under the Code or by the court. Specifically, payments made in the ordinary course of business, as permitted by § 363(c)(1), are protected from avoidance or disgorgement. Case law supports this interpretation, including In re St. Joseph Cleaners, which noted that disgorgement of ordinary course payments is not allowed under § 549. 

The Third Circuit, in In re Roth American, clarified that post-petition agreements are not considered ordinary course transactions unless they receive court approval, reinforcing that transactions made in the ordinary course are protected from avoidance. Similarly, the Fourth Circuit acknowledged that ordinary course transactions cannot be avoided under § 549, affirming this principle in In re Southeast Hotel Properties. Other court cases have also consistently indicated that payments made under § 363(c)(1) are not subject to disgorgement, further solidifying the protection of such transactions within bankruptcy proceedings.

In Chapter 11 bankruptcy cases, courts emphasize the necessity of paying administrative expenses incurred during the ordinary course of business immediately, without the risk of disgorgement. Such payments are critical for businesses to retain employees and maintain operations. Courts have consistently ruled that vendors receiving payments under Section 363(c)(1) for ordinary business transactions need not worry about these payments being subject to recovery. The rationale is that allowing disgorgement would deter prudent business dealings with Chapter 11 debtors, undermining their ability to operate effectively. 

Administrative creditors should not see their unpaid claims reduced merely because they were paid in the ordinary course; instead, these should be treated as Section 503(b) claims and prioritized in distributions. This principle also extends to Chapter 7 cases, where courts have similarly rejected disgorgement of ordinary course payments.

The distinction between payments made in the ordinary course and professional fees is significant, as the latter may be subject to different rules regarding compensation and potential disgorgement. A "professional person" under § 327 must play a critical role in the bankruptcy case, such as assisting in financing or negotiating claims, rather than simply being a trained professional. The court found no precedent supporting the disgorgement of payments made in the ordinary course, reinforcing the protection for such transactions. The trustee's argument to categorize a recipient as "semi-professional" did not alter this conclusion, as the recipient did not meet the criteria for professional status under the law.

F.R. was not significantly involved in the bankruptcy case's administration, primarily executing the trustee's directives related to property maintenance, repairs, and tenant management. The trustee retained responsibility for financial matters, such as rent collection and bill payments. The U.S. Trustee concurred that F.R. did not need professional retention under § 327(a), as F.R.'s services did not include typical Chapter 7 tasks like asset liquidation or creditor distribution. The trustee's alternative argument that F.R.'s payments were not ordinary course payments was rejected; both the trustee and U.S. Trustee agreed these payments fell under § 363(c) as ordinary course payments, which cannot be disgorged to allow for pro rata distribution per § 726(b). Consequently, the motion to disgorge payments made to F.R. was denied. The unpaid administrative claims totaled $105,821.23, including amounts owed to the Chapter 7 Trustee, U.S. Trustee, and the trustee's counsel and accountant. The excerpt references the Seventh Circuit's ruling in *Park Terrace Townhouses v. Wilds*, highlighting that the duties of the property manager in that case surpassed those of F.R. Other courts have noted the lack of contestation regarding a property manager's professional status in *Park Terrace Townhouses*. The excerpt also outlines a two-step test for determining whether actions are in the ordinary course of business, which includes assessing industry norms and creditor expectations based on the debtor's pre-petition conduct and the evolving circumstances.