1994 #08, Van Dyke, 6-10-94

In re: JOHN W. VAN DYKE, JR., Bankr. Case No. L-88-01173S, Chapter 11

MEMORANDUM OF DECISION RE: DETERMINATION OF THE CLAIM OF JOHN TOKHEIM AND MARY TOKHEIM

The matters before the Court are the Motion to Determine Claim and for Production of Records filed by creditors John Tokheim and Mary Tokheim, the Motion to Determine Claim filed by Co-trustees Earl Geiger and Vern Henjes, and the responses thereto. These are core proceedings under 28 U.S.C. § 157(b)(2). This Memorandum and subsequent related Order shall constitute findings and conclusions as required by F.R.Bankr.P. 7052.

I.

Debtor John W. Van Dyke filed a Chapter 11 petition on September 12, 1988. A plan of reorganization was confirmed on November 20, 1989. The plan, as amended October 20, 1989, and as modified November 6, 1989, stated:

Claims not determined at this time by hearing or Plan treatment are (1) part of John and Mary Tokheim claim [.]

. . . .

II. 2.04 Interest. Secured creditors shall be paid interest on their allowed claims at the rate provided in the note, contract, or other agreement which is the basis of their respective claims while the obligation is not in default (the "contract rate") unless the creditor accepts a different arrangement as set out in its class in this Plan. Interest will not be paid at any default rate which might be provided for in the agreement. Unsecured creditors shall be paid interest on their allowed claims at the rate of ten percent (10%) per annum from the effective date of the Plan unless a lower contract rate has been prescribed by agreement, in which event the contract rate will be paid.

. . . .

In his claims report filed February 15, 1989, the Debtor identified substantial claims as disputed or contingent. Some disputes and contingencies have since been resolved. Should it become necessary for these creditors to be paid, they would in all likelihood be members of the unsecured class. These creditors whose claims have not already been resolved or decided by the Court and the amounts of their claims are described as follows: . . .

3. John Tokheim [with a claim amount of] $112,000.00. . . .

Unsecured creditors will be paid their reasonable attorneys fees and related expenses if the documents of obligation so provide, provided there are sufficient assets in the estate or liquidating trust to pay the same. If the assets are insufficient to pay all such fees and expenses of the unsecured creditors, the reasonable attorneys fees and related expenses of the unsecured creditors if the documents of obligation so provide shall be paid pro-rata according to their respective expenditures for the same.

. . . .

IX. 6.14 Class 14 Claim. The Class 14 Claimants (Tokheim) shall be paid all cash proceeds, including interest earned thereon, of liquidation dividends on escrowed Toy National Bank stock. This amount is estimated to be $135,000.00.

As soon as practical, but before the prorata payment is made as set forth in the next paragraph, all readily saleable escrowed stock shall be sold by the Debtor, with proceeds payable to Tokheim. Certain family stock having de minimus [sic] [value] shall be retained by the Debtor. For purposes of this Plan, the amount of proceeds payable to Tokheim is estimated to be $20,000.00. This will leave an approximate balance of $575,917.40, on which interest of 8% per annum will accrue from the effective date of the Plan.

Tokheim shall receive a prorata payment from the pool of funds scheduled to be paid to all other creditors on or shortly after confirmation of the Plan. The percentage amount to be paid shall be that percentage payable to other creditors, and shall be computed based on the amount of Tokheims' claim left unpaid after deductions of the amounts paid to Tokheim pursuant to the above two paragraphs.

The balance of Tokheim's claim, after deduction of payments referred to above, shall be paid out of the proceeds of the sale of Debtor's shares of stock in the Farmers State Bank of Charter Oak. Debtor will take necessary and appropriate steps, including filing lawsuits, to insure that all common stock held in escrow or by Thomas Van Dyke shall be sold within one year of the date of confirmation. Costs of such lawsuits against Thomas Van Dyke shall be borne by the Debtor.

The proceeds of the sale of Debtor's bank stock, equal in amount to the percentage share of stock that was required to be escrowed under the Agreement between Debtor and Tokheim, shall be used to satisfy the balance of the Tokheim claim, including interest. Any surplus shall be the property of the Debtor for use under this Plan.

Any balance unpaid after the sale of Debtor's bank stock shall be paid in the same manner as other unsecured claims, as set forth in this Plan.

Debtor shall pay an attorney fee to Terry M. Anderson for Tokheim, in addition to the amount set forth above. The amount of such fees shall be ordered by the Bankruptcy Court, not to exceed $10,000.00. Tokheims' claim shall be increased to the extent of the fee awarded by the Court.

Upon confirmation, Tokheim shall dismiss the case now pending in Federal District Court in which Tokheim is Plaintiff and Debtor, among others, are Defendants denomnted [sic] Case No. 87-4012.

In the event Debtor has not entered into a binding contract for the cash sale of the bank within one year of confirmation, Debtor's share of the stock in the bank shall be auctioned off at public auction, consistent with regulations of all appropriate state and federal regulatory agencies, no later than thirty (30) days after one year from confirmation. The buyer must meet the approval of all necessary regulatory agencies. The proceeds of such auction shall be payable to Tokheim up to the then unpaid balance of his claim, plus accrued interest. Provided, however, Debtor may acquire the complete, unencumbered ownership of all the Debtor's shares of stock of the bank by payment of $350,000.00 to Tokheim at such time. Debtor agrees to make a good faith effort to sell the bank or shares of stock within the allotted period.

The plan further provided that if Debtor did not make certain payments to creditors by certain dates, a trust of estate assets would be created for the benefit of creditors.

On November 6, 1989, Attorney Terry M. Anderson, the Tokheims' counsel, filed an Application for Allowance of Compensation. Therein, he sought compensation for services rendered for the Tokheims against the $10,000.00 allowance provided by the confirmed plan. No objections to the application were filed. By Order entered December 12, 1989, the Court ⁽¹⁾ approved compensation and reimbursement of $11,385.00, as requested by Attorney Anderson. Thus, the $10,000.00 maximum allowed by the Court pursuant to the plan was exhausted.

On March 11, 1991, the Tokheims filed a Motion to Compel Compliance with Court Order in which they sought an order compelling Debtor to place his shares of the Charter Oak Bank in escrow pending a sale as provided by the plan. Debtor objected to the motion on unspecified grounds. After a telephonic hearing on March 18, 1991, the Tokheims and Debtor agreed that Debtor would turn over the Charter Oak Bank stock to the Tokheims. While Debtor consented to the auction of the bank stock planned by the Tokheims, the parties reserved for future litigation the issues of whether the sale was commercially reasonable and the amount of the Tokheims' claim after application of the sale proceeds. An Order regarding the sale of the bank stock was entered March 20, 1991.

A public auction of the Charter Oak Bank stock was conducted by counsel for the Tokheims on March 22, 1991. The Tokheims purchased the shares for $230,000.00.

Debtor did not make all plan payments timely. On May 14, 1992, the Court activated the plan's standby trust on a motion by the Tokheims.

On July 6, 1992, Attorney Anderson filed an application for additional fees. Specifically, Attorney Anderson wanted $1,393.77 in fees and expenses arising from the Motion to Invoke Standby Trust that the Tokheims filed. He did not state the Code section under which he sought compensation. That application was never noticed to creditors for objections.

On August 6, 1993, the Tokheims filed a Motion to Determine Claim and for Production of Records. They wanted an accounting of receipts to and disbursements from the trust relating to their claim. The co-trustee resisted the Motion. They contended that § 6.14 of the plan adequately stated the treatment of the Tokheim's claim and that an accounting was unnecessary.

A hearing on the Tokheim's Motion to Determine Claim and for Production of Records was held August 27, 1993.⁽²⁾ Appearances included Attorney Anderson for the Tokheims, Jeffrey M. Lamberti for the Unsecured Creditors Committee, and L. Jay Irwin, III, for the co-trustees. Attorney Lamberti acknowledged that additional financial records were needed from Debtor and he stated that they would file a discovery request with Debtor. The hearing was continued to September 20, 1993. On September 20, 1993, Attorney Anderson reported that interested parties had agreed on the amount that the Tokheims had received to date on their claim. He also reported that with the assistance of Debtor's counsel, discovery on Debtor's financial records was progressing. The matter was continued for sixty days.

On December 3, 1993, the Tokheims filed a Motion to Remove Co-trustees. They alleged the co-trustees had failed to discharge their obligations under the plan and trust, had mismanaged trust property, and had not acted in the best interests of the creditors. A joint resistance to Tokheims' Motion to Remove Co-trustee was filed by several creditors and one of the co-trustees. A hearing on the Motion was held December 20, 1993. Appearances included Attorney Anderson for the Tokheims, Attorney Lamberti for the Unsecured Creditors Committee, and Attorney Irwin for the co-trustees. The parties reported that a settlement was being discussed. Attorney Anderson was directed to notify the other parties by December 27, 1993 if the Tokheims accepted the offer. Tokheims did not accept the offer. On December 23, 1993, the co-trustees filed a resistance to the Tokheims' Motion to Remove.

On January 31, 1994, the co-trustees filed a Motion to Determine Claim because attempts to settle with the Tokheims had not been successful. They stated court intervention was needed to determine several issues. Hearings on several matters in the case were held February 4, 1994. At that time, counsel for the Tokheims, the Unsecured Creditors Committee, and the co-trustees reported that some issues regarding the Tokheims' claim had been resolved. The unresolved issues included how interest was to be calculated on the Tokheims' claim, the amount of attorney's fees, if any, to be allowed to the Tokheims as an administrative expense, and whether the Charter Oak Bank stock was sold by Tokheims in a commercially reasonable manner. The parties were directed to submit briefs on or before March 15, 1994 on how interest on Tokheims' claim should be calculated. The parties also were directed to submit any stipulated facts regarding the Tokheims' claim by March 15, 1994. Finally, Attorney Anderson was directed to file and serve on or before March 14, 1994 a renewed motion for payment of attorney's fees as an administrative expense. An evidentiary hearing on whether the Tokheims had sold the Charter Oak Bank stock in a commercially reasonable manner was set for April 6, 1994.

The parties requested an extension until March 21, 1994 to file their stipulated facts and briefs on the interest question. That request was granted by Order entered March 8, 1994. The Tokheims filed their brief on March 22, 1994. They argued that payments on their claim should be applied toward principal and accrued interest and that interest should be computed on the unpaid balance of both principal and interest. They further argued that the Charter Oak Bank stock was sold in a commercially reasonable manner and that the sale complied with applicable state and federal regulations.

The co-trustees filed their brief on March 24, 1994. They argued that the Charter Oak Bank stock was not sold in a commercially reasonable manner and, therefore, the trust should be entitled to a fair market value credit of $350,000.00 against the Tokheims' claim rather than a credit of $230,000.00 for what the Tokheims actually paid for the bank shares at the auction. The co-trustees further argued that the Tokheims are not entitled to interest on the balance of their claim remaining after the bank stock sale because that portion of their claim is unsecured and because the deficiency resulted from the irregular sale of the bank stock. The co-trustees further stated that simple interest accrued only on that portion of the Tokheims' claim that was secured by the bank stock. Finally, the co-trustees argued the Tokheims are not entitled to attorney's fees and costs as an administrative expense because the estate did not benefit from Attorney Anderson's post-confirmation services.

Upon receipt of evidence at the April 6, 1994 hearing, the Court concluded that the Tokheims' claim should not be reduced by any alleged damages arising from the sale of the Charter Oak Bank stock because the sale was conducted in compliance with the plan. The Court also ruled that the Tokheims were not entitled to costs arising from the sale because the plan did not provide for their payment.

By Order entered April 7, 1994, the Court directed Attorney Anderson to submit a motion for payment of administrative expense and an itemized statement of attorney's fees and costs. Any objections thereto were to be filed by April 29, 1994. Finally, the Court ordered each party to file a statement of their computations of the interest due on the Tokheims' claim based on their respective theories.

Attorney Anderson's amended application for attorney's fees and an itemized statement were filed April 18, 1994. He sought $3,336.27 in fees and expenses related to the Tokheims' Motion to Invoke Trust and the Tokheims' objection to the proposed sale of the Consolidated Freightways property. He stated these services were "reasonable and necessary to protect the interests of creditors and the Estate." The co-trustees filed an objection to the amended application on April 22, 1994 on the grounds that the services did not benefit the estate and because Attorney Anderson had failed to file the fee application by March 14, 1994 as originally ordered by the Court.

The co-trustees filed their interest calculation statement on April 22, 1994. They concluded that as of March 20, 1991, the Tokheims were still owed $97,672.68 in principal, $42,921.32 in accrued interest, and $10,000.00 in attorney's fees. The Tokheims filed their interest calculation statement on April 28, 1994. They concluded they were owed $194,080.75 in principal (including $10,000.00 in attorney's fees) and accrued interest through May 1, 1994.

II.

Calculation of Interest. How interest is to be calculated will be determined based on the terms of the confirmed plan and trust. Bankruptcy Code sections and state law provisions are not expressly incorporated into the plan or trust and, therefore, do not govern.

Payment of Attorney's Fees as an Administrative Expense. A claim may be paid as an administrative priority if it meets the criteria of 11 U.S.C. § 503(b)(1)(A). In re Pauling Auto Supply, Inc., 158 B.R. 789, 793 (Bankr. N.D. Iowa 1993); White Front Feed & Seed, Division of Paul Lammers & Sons, Inc., v. State National Bank of Platteville (In re Ramaker), 117 B.R. 959, 962 (Bankr. N.D. Iowa 1990); In re Dakota Industries, Inc., 31 B.R. 23, 26 (Bankr. D.S.D. 1983). Under 11 U.S.C. § 503(b)(1)(A), a party may be allowed an administrative expense for the "actual, necessary costs and expenses of preserving the estate, including wages, salaries, or commissions for services rendered after the commencement of the case[.]" The request is subject to notice and hearing upon motion filed by the entity seeking payment of the expense. 11 U.S.C. §§ 503(a) and 503(b)(1)(A); Dakota Industries, Inc., 31 B.R. at 26. If allowed under § 503(b), an administrative expense claim has first priority, along with certain fees, over all other claims. 11 U.S.C. § 507(a)(1).

Courts have generally construed narrowly the terms "actual" and "necessary" as set forth in § 503(b)(1). NL Industries, Inc. v. GHR Energy Corp., 940 F.2d 957, 966 (5th Cir. 1991)(citing In re Dant & Russell, Inc., 853 F.2d 700, 706 (9th Cir. 1988); In re White Motor Corp., 831 F.2d 106, 110 (6th Cir. 1987); and Trustees of the Amalgamated Ins. Fund v. McFarlin's, Inc., 789 F.2d 98, 101 (2d. Cir. 1986)). Consequently, not all debt incurred post-petition is entitled to priority as an administrative expense.

The threshold requirement, that the expense incurred be "actual" and "necessary" to the preservation of the estate, . . . indicates Congress' intent that priority status be awarded parsimoniously to unsecured creditors who are also a party to an executory contract with the debtor over other unsecured creditors. It would be contrary to the purpose of the statute to saddle debtors with burdensome post-petition obligations or give preferential treatment to select creditors by creating a broad category of administrative expenses.

In re ICS Cybernetics, 111 B.R. 32, 36 (Bankr. N.D.N.Y. 1989). A two-part test is often employed to determine whether the expense meets the criteria of § 503(b)(1). First, did the expense obligation arise post-petition? Second, did the expense benefit the debtor-in-possession in the operation of its business? Pauling Auto Supply, Inc., 158 B.R. at 793; Ramaker, 117 B.R. at 962 (cites therein); ICS Cybernetics, 111 B.R. at 37. The key issue is whether the transaction was beneficial to the estate, not whether a creditor should be compensated for a loss it incurred during the case. See Ramaker, 117 B.R. at 962; ICS Cybernetics, 111 B.R. at 36.

The claimant must show that other unsecured creditors received tangible benefits from the services or goods provided by the claimant. In re Jack Winter Apparel, Inc., 119 B.R. 629, 633 (E.D. Wisc. 1990); Kinnan & Kinnan Partnership v. Agristor Leasing, 116 B.R. 162, 166 (D. Neb. 1990); In re Herrick, Bankr. No. 184-00041, slip op. at 2 (Bankr. D.S.D. May 9, 1988). Incidental benefit to the estate or extensive participation in the case, standing alone, is not a sufficient base for an administrative status. Jack Winter Apparel, Inc., 119 B.R. at 633. A creditor's efforts undertaken solely to further its own self-interest is not compensable. Id.

The burden of persuasion always remains with the claimant. ICS Cybernetics, 111 B.R. at 36-37. The claimant must show his entitlement to the administrative priority by a preponderance of evidence. Firearms Import and Export Corp. v. United Capitol Insurance Co. (In re Firearms Import and Export Corp.), 131 B.R. 1009 (Bankr. S.D. Fla. 1991)(cases cited therein); Jack Winter Apparel, Inc., 119 B.R. at 632; In re Buttes Gas & Oil Co., 112 B.R. 191, 193 (Bankr. S.D. Tex. 1989). The burden of production shifts to the objector if the claimant presents a prima facie case. ICS Cybernetics, 111 B.R. at 36.

III.

Calculation of interest. The confirmed plan provides that interest on secured claims will be paid "at the rate provided in the note, contract, or other agreement which is the basis of their respective claims while the obligation is not in default (the "contract rate") unless the creditor accepts a different arrangement as set out in its class in this Plan." The Tokheims bargained for an interest rate of 8%. The balance of the Tokheims' claim after the application of the proceeds from the Charter Oak bank stock was to be paid as an unsecured claim. Under the plan, unsecured creditors were to receive 10% interest per annum on their allowed claims from the effective date of the Plan "unless a lower contract rate has been prescribed by agreement, in which event the contract rate will be paid." Since the Tokheims bargained for a lower rate of 8%, that lower rate applies on the unsecured portion of their claim, also.

Neither the trust nor parts 6.14 (governing the Tokheims' claim) or 6.15 (governing unsecured claims) of the modified plan clearly state whether the 8% interest to be paid on the Tokheims' claim is simple or compound interest. The plan and trust do state, however, that the co-trustees' distributions are to be applied to principal first and then accrued interest. Further, the trust empowers the co-trustees "to apportion receipts and disbursements between principal and income." In the absence of a more specific term in the trust or plan, the Court concludes that it is within the co-trustees' discretion to pay simple interest on claims, including the Tokheims' claim.

The trust also states that unsecured claim holders will be treated the same. The Court presumes that all unsecured creditors paid to date, other than the Tokheims, have received only simple interest on their claims. If that is not the case, then the Tokheims should receive interest that is calculated in the same manner that interest on other unsecured claims was calculated.

Attorney's fees as a Part of the Tokheims' claim. Part 6.14 of the modified plan provided that Tokheims' claim was to be increased to the extent of the fee awarded by the Court, not to exceed $10,000.00. Since Attorney Anderson was awarded over $10,000.00 on December 12, 1989, the Tokheims' claim should be increased by $10,000.00 as of December 12, 1989 and interest should be paid on that $10,000.00 from December 12, 1989. While part 6.15 of the plan governing unsecured claims says attorney's fees will be paid as a last priority, the Tokheims received more specific treatment of their attorney fees in part 6.14. The more specific provision governs.

Attorney's fees as an Administrative Expense. The services rendered by Attorney Anderson as set forth in his April 18, 1994 application benefited the estate by compelling compliance with the plan. While the co-trustees would characterize the Tokheims' actions as merely litigious, the Court finds such actions were necessary to move the case forward. The requested fees and expenses totaling $3,336.27 are therefore awarded to the Tokheims as an administrative expense.

The Court agrees with the co-trustees that Attorney Anderson should have filed the amended application timely. He is cautioned that further lack of attention to a deadline imposed by the Court will not be tolerated.

Attorney Irwin shall prepare a proposed order in compliance with these findings and conclusions and shall circulate it to counsel for other interested parties for objections. A proposed order accepted by all interested parties shall be provided to the Court no later than July 11, 1994.

Dated this 10th day of June, 1994.

1. The Hon. Michael J. Melloy, Chief Bankruptcy Judge for the Northern District of Iowa.

2. The Hon. Irvin N. Hoyt, Chief Bankruptcy Judge for the District of South Dakota, sitting by designation.