1995 #35, VanDyke, 10-2-95
In Re: JOHN W. VAN DYKE, JR.,Debtor. JOHN TOKEHIM and MARY TOKHEIM, Plaintiffs, EARL GEIGER, Individually, and EARL GEIGER AND VERNONE HENJES, Co-Trustees of John Van Dyke, Jr. Standby Trust, Defendants, Bankr. No. L-88-01173S, Adversary No. 95-5010KS, Chapter 11
MEMORANDUM OF DECISION RE: EQUITABLE SUBORDINATION COMPLAINT
The matter before the Court is the complaint for equitable subordination filed by creditors John and Mary Tokheim. This is a core matter under 28 U.S.C. § 157(b)(2). This Memorandum of Decision and subsequent order and judgment shall constitute the Court's findings and conclusions under F.R.Bankr.P. 7052. As set forth below more fully, the Court concludes that the full claims of Earl Geiger, as a creditor of the estate, and the claims of Geiger Corporation shall be subordinated to all other claims against the estate.
I.
Debtor filed a Chapter 11 plan on October 20, 1989. The plan provided for a three-year term during which the Debtor would liquidate assets and pay 100% of the claims, plus interest and reasonable attorneys' fees. The plan set forth a schedule of payments. The final payment was to be made within 36 months after confirmation. If the payments were not completed as scheduled, the plan provided for the creation of a standby trust to carry out the terms of the plan. Under both the plan and the trust, estate assets were to be auctioned if claims were not paid in full thirty-six months after confirmation. The auction was to be completed within thirty-eight months after confirmation.
The plan, as amended October 20, 1989, and as modified November 6, 1989, described in detail the nature of the claims held by John and Mary Tokheim and set forth how the amounts of these claims were to be determined. An order confirming the plan as modified was entered November 20, 1989. The effective date of the plan was December 15, 1989. Under the terms of the plan, payment of all claims was to be completed by November 20, 1992.
By Order entered January 31, 1991, Debtor was granted an extension to March 20, 1991 to make the plan payment due November 20, 1990. The Order further provided that if the payment was not made by the extended date, the default provisions of the confirmed plan would "kick in." Limited progress was made in the case that year.
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.
In response to allegations that Debtor had defaulted on the plan, the Court by Order entered January 21, 1992 directed the Unsecured Creditors Committee and Debtor to file a status report. On January 31, 1992, the Unsecured Creditors Committee and Debtor reported that Debtor had defaulted on the plan and that Debtor wanted more time to resolve claims and other problems. The Court ordered that a second status report be made in six months. That report was never filed. 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. Debtor and Vernon H. Henjes became the co-trustees.
On December 31, 1992, a settlement between Debtor and the Unsecured Creditors Committee was filed in response to an application by the Committee to remove Debtor as a co-trustee. The settlement provided that Debtor would resign as a co-trustee and that Earl Geiger, Debtor's father-in-law, would be appointed in his stead. The settlement also provided that:
1. the plan term of three years set forth in section 1.13 of the plan would be extended to four years;
2. the deadline for payment of the claims in order to avoid an auction of assets set forth in Article X of the plan would be extended twelve months;
3. the deadline for the completion of the sale of assets set forth in paragraph 3(f) of the trust would be extended twelve months; and
4. the deadline for payment of the claims in order to avoid an auction of assets set forth in section 4 of the trust would be extended twelve months.
Counsel for the Unsecured Creditors Committee indicated that all creditors had been given an opportunity to review the settlement before it was filed. Notice of the settlement was served on all creditors and parties in interest. No one objected. By Order entered February 1, 1993, the settlement was approved.
About this time, Earl Geiger and Geiger Corporation were buying creditors' claims, including the claims held by the members of the Unsecured Creditors Committee. Consequently, at the time Earl Geiger became a co-trustee, there were few remaining creditors besides himself, Geiger Corporation, the Tokheims, and some banks in which the Geiger family had an interest. The Unsecured Creditors Committee thereafter existed in name only although the Committee's attorney, Jeffrey M. Lamberti, continued to be active in the case, in essence, as general counsel for the co-trustees.
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 claims. The co-trustees resisted the Motion. They contended that § 6.14 of the plan adequately stated the treatment of the Tokheim's claims and that an accounting was unnecessary.
In mid-1993, the co-trustees sought court approval of a private sale of the Consolidated Freightways property held by the trust. The Tokheims objected. Concomitantly, the Tokheims' renewed their Motion to Determine Claim and for Production of Records. A hearing on both matters was held August 27, 1993. Appearances included Terry M. Anderson for the Tokheims, Attorney 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 he 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 claims. He also reported that with the assistance of Debtor's counsel, discovery regarding Debtor's financial records was progressing. That matter was continued for sixty days. The Court further ordered the co-trustees to sell the Consolidated Freightways property at an in-court auction. The sale was conducted September 20, 1993 and the Tokheims were the successful bidder at $115,000.00, which increased the estate's proceeds over the original sale proposed by the co-trustees.
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 co-trustee Earl Geiger. 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. The Tokheims did not accept the offer. On December 23, 1993, the co-trustees filed a resistance to the Tokheims' motion to remove the co-trustees.
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, including a second hearing on the Tokheims' motion to remove the co-trustees. At that time, counsel for the Tokheims, the Unsecured Creditors Committee, and the co-trustees reported that some issues regarding the Tokheims' claims had been resolved. Counsel for the co-trustees further reported that funds should be sufficient to pay the Tokheims' claims in full. Consequently, the Tokheims agreed to put their motion to remove the co-trustees on hold and focus on the resolution of their claims.
The unresolved issues regarding the Tokheims' claims included how interest on the claims was to be calculated, the amount of attorney's fees, if any, to be paid to the Tokheims as an administrative expense, and whether the Charter Oak Bank stock had been sold by the Tokheims in a commercially reasonable manner.
An evidentiary hearing on whether the Tokheims had sold the Charter Oak Bank stock in a commercially reasonable manner was held April 6, 1994. The Court concluded that the Tokheims' claims 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 sale costs because the plan did not provide for the payment of sale costs. That Order was entered April 7, 1994. By order entered July 25, 1994, the Court also decided the interest and attorney fee issues related to the Tokheims' claims.
By letter dated September 2, 1994, the Court asked counsel for the co-trustees what their intentions were to move the case forward since the Tokheims' claims supposedly had been resolved earlier that year. On September 21, 1994, counsel for the co-trustees reported that there were assets yet to be sold and that all matters involving the Tokheims had not been resolved. Counsel further stated that these matters would require on-going court supervision and that the case would not be ready for closing by the end of 1994.
In response, by letter dated September 30, 1994, the Court directed all interested parties to hold an in-person conference to compose a schedule for the resolution of remaining issues. The schedule was to be presented to the Court no later than November 7, 1994. If the parties could not reach a consensus, the Court stated it would enter its own scheduling order.
In response to the Court's letter, on November 2, 1994 one group of creditors, which included Earl Geiger personally and Geiger Corporation,(1) filed a Motion to Order Trustee to Liquidate Assets. The Motion, in essence, requested a liquidation of certain assets and the payments of claims in a manner different than provided by the default provisions of the plan and standby trust. The Court ordered interested parties to file any responses to the Motion by December 2, 1994.
The co-trustees filed a response to the Court's letter on November 4, 1994. Counsel for the co-trustees stated that counsel for interested parties had met in September but that no consensus had been reached with the Tokheims. The co-trustees and Unsecured Creditors Committee proposed that any remaining assets not sold by March 1, 1995 be sold at public auction no later than April 1, 1995. They also asked for a date certain by which the Tokheims would have to pursue their claim arising out of a consulting contract. Finally, the co-trustees then informed the Court that assets would not be sufficient to pay interest in full on the remaining claims, including the Tokheims' claims.
The Tokheims filed an objection to the Motion to Order Trustee to Liquidate Assets on December 5, 1994. The Tokheims argued that the sale method proposed by the other creditors was not in all creditors' best interest and was not authorized by 11 U.S.C. § 363. The Tokheims stated the proposed sale method favored co-trustee Earl Geiger by permitting him to "purchase the most attractive estate property and obtain complete payment, at the expense of creditors holding smaller claims."
Combined with their objection, the Tokheims also moved for equitable subordination under 11 U.S.C. § 510(c) of co-trustee Earl Geiger's claim to the Tokheims' claims. They argued the delay in estate administration was caused by the co-trustees and stated they earlier had relied on the co-trustees' representation that the estate had sufficient funds to pay the Tokheims' claims in full.
By Memorandum of Decision and Order entered December 27, 1994, the Court denied the creditors' Motion to Order Trustees to Liquidate Assets because the proposed sale terms and method of paying claims were contrary to the sale and payment terms in the confirmed plan and standby trust. The Court also ordered that any proposed modification of Debtor's plan or the standby trust must be filed and noticed by February 1, 1995 and that absent a timely modification, that the co-trustee should comply with the terms of the plan and standby trust and present the case for closing by March 31, 1995.
On January 25, 1995, the Tokheims filed a motion seeking a determination of their contingent claim. By Order entered March 14, 1995 the amount of that claim was established.
On January 30, 1995, the Tokheims commenced this adversary proceeding against Earl Geiger and Vernon H. Henjes as the co-trustees of the trust and Earl Geiger personally. The Tokheims sought under 11 U.S.C. § 510(c)(1) a subordination of claims owned or controlled by Earl Geiger to their claims due to the co-trustees' delay in administering the case, the co-trustee's failure to comply with the plan and trust terms, and because the co-trustees earlier had informed them erroneously that sufficient funds existed to pay their claim in full. Earl Geiger personally answered on February 17, 1995 and sought dismissal of the complaint. The co-trustees answered on March 2, 1995. They also sought dismissal of the action and affirmatively defended that the complaint was untimely based on the Court's March 31, 1995 liquidation deadline and that the complaint was an impermissible attempt to modify the plan without complying with 11 U.S.C. § 1127(b). The Tokheims filed a general reply to the affirmative defenses on March 9, 1995.
On March 6, 1995, the co-trustees filed a Motion for Authority to Sell Property Free and Clear of Liens and Other Interest. Both the Tokheims' complaint and the co-trustees' sale motion were discussed during telephonic conferences in March 1995. The Court directed the co-trustees to submit an estate accounting by March 20, 1995 before either matter progressed. Upon the Court's Orders entered March 23, 1995 and April 28, 1995, an in-court auction of the estate property described in the co-trustees' sale motion was held May 1, 1995.
At another pre-trial conference on the Tokheims' complaint held May 16, 1995, the parties orally stipulated that the co-trustees could be dismissed from the suit. The trial was held June 29, 1995. Appearances included Attorney Anderson for the Tokheims and Wil L. Forker for Earl Geiger individually.
At the trial, Plaintiff John Tokheim testified that his original claim against the bankruptcy estate was approximately $731,000.00. He stated $178,000.00 remains unpaid.
John Tokheim also testified that his Change of Control application to the State of Iowa regarding the Charter Oak Bank, in which he had purchased controlling interest from the estate, was delayed after the co-trustees commenced a suit challenging the validity of the sale of the Bank stock to him. During the delay, John Tokheim complained that the Bank had been operating imprudently to his detriment. John Tokheim acknowledged that his
application already had been pending 22 months with the Iowa banking officials before the co-trustees commenced their suit. He said he finally got state approval in January 1994 and assumed actual control of the Bank in February 1994.
John Tokheim testified that at one time he offered to let Earl Geiger buy him out. He also acknowledged that he and his counsel had been willing to "let things slide a little bit" because they understood they ultimately would be paid in full.
Attorney Lamberti, former counsel for the Unsecured Creditors Committee, testified that after Earl Geiger and Geiger Corporation bought most of the remaining unsecured claims, including those of the Unsecured Creditors Committee, he continued to work with the co-trustees in administering the estate and attempting to negotiate a settlement with the Tokheims. He stated that during his tenure, only one piece of estate property, the Consolidated Freightways property, was sold. Attorney Lamberti also opined that it was a physical impossibility for the co-trustees to comply with the deadlines set forth in the plan and trust. He acknowledged that the Unsecured Creditors Committee did not take any formal action to get the co-trustees to comply with the plan and trust. He stated that he and the co-trustees' actions were directed at maximizing recovery on the sale of assets.
Attorney Irwin, former counsel for the co-trustees, testified that he was employed by the co-trustees in mid January 1993 to commence litigation against the Tokheims in state court regarding the sale of the Charter Oak Bank to the Tokheims. He acknowledged that the suit was removed to Federal District Court for the Northern District of Iowa and that all the co-trustees' claims based on federal or state banking laws were dismissed. He also acknowledged that this Court had resolved, in the Tokheims' favor, the issue of whether the Bank was sold in a commercially reasonable manner. He was not aware of the status of the remaining issues, if any, in that Federal District Court lawsuit.
Defendant co-trustee Earl Geiger, like John Tokheim, a banker by profession, testified that he was not familiar with Debtor's Chapter 11 plan nor, essentially, was he familiar with the terms and deadlines imposed by the Trust. He said his assessment of the case was that he needed to get the Tokheims paid or reach a settlement with them. He stated co-trustee Vernon Henjes assumed responsibility for the trust's accounting and recording keeping. Earl Geiger testified that he relied on Attorney Lamberti to explain his authority as a co-trustee.
Earl Geiger acknowledged that he had challenged and would continue to challenge the validity of the sale of the Charter Oak Bank to John Tokheim. He stated he contested whether John Tokheim was a qualified buyer and he continued to argue that the sale was not conducted in a commercially reasonable manner, although this Court previously approved the sale method by its April 7, 1994 Order. Earl Geiger stated he unsuccessfully tried to negotiate a settlement with John Tokheim that presumably would yield a higher sale price for the Bank.
Earl Geiger also testified about his dealings with Tom Van Dyke, Debtor's brother and a shareholder and the managing officer in the Charter Oak Bank until John Tokheim got control. Earl Geiger acknowledged that he had forgiven a $300,000.00 claim that the bankruptcy estate had against Tom Van Dyke in an effort to foster the sale of estate property in which both Debtor and Tom Van Dyke had an interest. Earl Geiger further stated he and Tom Van Dyke had worked together to sell the Bank but their efforts were frustrated when John Tokheim took control after getting state approval. The record also shows that the co-trustees did not obtain court approval for the forgiveness of Tom Van Dyke's debt. However, Earl Geiger testified that he had discussed the forgiveness with other unsecured creditors.
A Mutual Release and Settlement Agreement executed in late 1992 made Earl Geiger a guarantor of any debt the Tokheims might have against Tom Van Dyke if the Bank were sold and funds were insufficient to pay sale expenses, the preferred shareholders, and the Tokheims. Earl Geiger signed the Mutual Release individually and under a power of attorney for John Van Dyke but he did not sign it as a co-trustee of the Stand-by Trust. The Mutual Release was signed and dated December 23, 1992.
Under a separate Approval of Bankruptcy Trustee and Earl Geiger Having Power of Attorney for John Van Dyke, Jr., the co-trustees approved Earl Geiger's actions under the Mutual Release, including the complete release of any and all claims and causes of actions against Tom Van Dyke. This Approval was signed and dated December 23, 1992. Both the Mutual Release and the Approval were executed before Earl Geiger formally was approved as a co-trustee on February 1, 1993.(2) At trial, Earl Geiger admitted the debt-forgiveness deal with Tom Van Dyke was a risk he took that, in hindsight, was not prudent.
Earl Geiger explained that the Taco Bell property in Indiana had yielded proceeds of $135,000.00 from the sale of the property and $27,500.00 from the sale of the rights to the condemnation action on the property.
Earl Geiger stated that he and Geiger Corporation had purchased claims totaling $323,774.00, as stated in the co-trustee's March 1995 accounting. He conceded that he has control over all the claims purchased by Geiger Corporation. Earl Geiger stated he had no interest in the Heritage Banks or their claims against the estate. Upon receipt of this testimony, Plaintiffs orally amended their complaint to include a subordination claim against Geiger Corporation since Plaintiffs previously did not know that Geiger Corporation had purchased some unsecured claims.
II.
Section 510(c)(1) of the Code provides in pertinent part:
[A]fter notice and a hearing, the court may --
(1) under principles of equitable subordination, subordinate for purposes of distribution all or part of an allowed claim to all or part of another allowed claim[.]
The Code does not define equitable subordination nor state under what circumstances it should be employed. United States v. Reorganized CF&I Fabricators of Utah, Inc. (In re CF&I Fabricators of Utah, Inc.), 53 F.3d. 1155, 1158 (10th Cir. 1995), petition for cert. filed, 64 U.S.L.W. 3161 U.S. (Aug. 24, 1995) (No. 95-325). Instead, Congress intended that the courts should look to common law principles for guidance. Id.; Schultz Broadway Inn v. United States, 912 F.2d 230, 232 (8th Cir. 1990).
Generally, equitable subordination is imposed when the following three criteria are met:(3) (1) the claimant whose claim is to be subordinated has engaged in inequitable conduct; (2) the claimant's conduct has injured other creditors or given unfair advantage to the claimant;(4) and (3) subordination of the claim is not inconsistent with the Code. Sloan v. Zions First National Bank (In re Castletons, Inc.), 990 F.2d 551, 559 (10th Cir. 1993); Stoumbos v. Kilimnik, 988 F.2d 949, 958 (9th Cir. 1993); First National Bank of Barnesville v. Rafoth (In re Baker & Getty Financial Services, Inc.), 974 F.2d 712, 718 (6th Cir. 1992); Bergquist v. Anderson-Greenwood Aviation Corp. (In re Bellanca Aircraft Corp.), 850 F.2d 1275, 1282 (8th Cir. 1988); and Wilson v. Huffman (In re Missionary Baptist Foundation of America), 818 F.2d 1135, 1138 (5th Cir. 1987). The focus of the inquiry is the conduct of the claimant and the nature of the claimant's relationship with the debtor. Stoumbos, 988 F.2d at 959. Application of the doctrine of equitable subordination is "usually reserved for instances where there is fraud or insiders acting in such a manner as to undermine other creditors' rights." In re Halvorson, 102 B.R. 736, 741 (D.S.D. 1989). The conduct complained of need not relate to the claimant's acquisition or assertion of his claim but should be directed against the bankruptcy estate or its creditors. Missionary Baptist Foundation, 818 F.2d at 1143. The harm need not have been intended but must result from the claimant's conduct. Herby's Foods, Inc. v. Summit Coffee Company, Inc. (In re Herby's Foods, Inc.), 134 B.R. 207, 211 (Bankr. N.D. Tex. 1991), aff'g 2 F.3d 128 (8th. Cir. 1993); Sepco, Inc. v. Valley State Bank (In re Sepco, Inc.), 36 B.R. 279, 287 (Bankr. D.S.D.), aff'd on related issues, United States v. Arlon Industries, Inc. (In re Sepco, Inc.), 750 F.2d 51 (8th Cir. 1984)
A case by case approach should be applied. In re Virtual Network Services Corp., 902 F.2d 1246, 1250 (7th Cir. 1990). Further, "[a] claim will be subordinated only to the claims of creditors whom the inequitable conduct has disadvantaged." Stoumbos, 988 F.2d at 960 (cite therein). Further, the subordination imposed should equal the extent of the harm. Id.; Sepco, Inc., 36 B.R. at 287. The equitable relief granted should be remedial, not penal. Missionary Baptist Foundation, 818 F.2d at 1143.
If the claimant is an insider or holds a fiduciary relationship to the estate, the scrutiny of his action is more rigorous. Stoumbos, 988 F.2d at 959, First National Bank of Barnesville, 974 F.2d at 718(citing Anaconda-Ericsson, Inc. v. Hessen (In re Teltronics Services, Inc.), 29 B.R. 139, 169 (Bankr. E.D.N.Y. 1983)); Bellanca Aircraft Corp., 850 F.2d at 1282 n.13; compare Castletons, Inc., 990 F.2d at 559. The movant must prove that the claimant whose claim is to be subordinated breached a fiduciary duty or engaged in conduct that is somehow unfair, Bellanca Aircraft Corp., 850 F.2d at 1282 n.13 (cites therein), and must overcome the prima facie validity of the claim under 11 U.S.C. § 501. Missionary Baptist Foundation, 818 F.2d at 1143. Once the movant has shown inequitable conduct, the burden shifts to the claimant to prove the fairness of his transactions. Stoumbos, 988 F.2d at 958 (cites therein); Sepco, Inc., 36 B.R. at 287. This allocation of the burden of proof assures that the plaintiff does not under prove his objection while the fiduciary need not over prove his good faith and fairness at the mere cry of inequity. Missionary Baptist Foundation, 818 F.2d at 1144 (quoting therein Machinery Rental, Inc. v. Herpel (In re Multiponics, Inc.), 622 F.2d 709, 714 (5th Cir. 1980)). In the rare circumstance where a creditor exercises control over the debtor's decision-making processes "as amounts to a domination" of the debtor's will, the creditor may be held accountable for his actions under a fiduciary standard. Teltronics Services, 29 B.R. at 170.
III.
When Earl Geiger's conduct and the nature of his relationship to the bankruptcy estate is examined, it is clear that the three criteria for subordinating the claims of Earl Geiger and Geiger Corporation are met in this case. Further, the appropriate remedial action is to subordinate fully Earl Geiger's and Geiger Corporation's claims to all other claims.
Earl Geiger engaged in inequitable conduct. By failing to abide by the terms of the plan and trust and by promoting deals that were not directed to the estate's best interests, co-trustee Earl Geiger acted inequitably toward the estate and failed to fulfill his fiduciary duty. While terms of the plan and trust gave the trustees great latitude in managing estate property, the plan and trust contained certain deadlines and procedures for liquidating assets and paying claims. These deadlines and procedures largely were ignored by co-trustee Geiger. In the interim, a plan that proposed a 100% payout now will produce something substantially less. Further, the delays and detours occasioned by Earl Geiger's desire to litigate the Tokheims' claims or strike a deal with John Tokheim only resulted in higher attorney fees and administrative costs for the estate and higher attorney fees for the Tokheims. Little substance to Earl Geiger's legal challenges was found by this or other courts.
Further, co-trustee Geiger's deal with Tom Van Dyke offered little benefit to the estate, even when viewed at the time it was made. The only return the estate may have gotten from Tom Van Dyke in exchange for the $300,000.00 debt forgiveness was his supposed cooperation in the sale of jointly owned assets. Therefore, for the debt forgiveness to be of value to the estate, Tom Van Dyke's cooperation would have had to generate an additional $300,000.00 plus from the sale of jointly owned assets. Earl Geiger did not come forward with any evidence to support that rationale or otherwise show that the settlement was made in good faith and fairness to the estate. See In re Automatic Washer Co., 226 F.Supp. 834, 837 (S.D. Iowa 1964), aff'd, Bankers Life & Casualty Co. v. Kirtley, 338 F.2d 1006 (8th Cir. 1964).
Earl Geiger's conduct injured others. Co-trustee Geiger's actions in the case delayed the administration of estate assets and increased costs. His plan to get better prices for the sale of trust property and to make a deal with the Tokheims or pursue litigation against the Tokheims -- however well-intended -- produced nothing tangible for the estate. The increased administrative costs, including attorneys' fees, will result in fewer funds being available to pay creditors' claims. All claims, plus interest and attorneys fees, were originally intended to be paid when the plan was confirmed. Now funds may be insufficient even to pay all administrative claims and some of the creditors' principal claims.
Subordination of Earl Geiger's and Geiger Corporation's claims is not inconsistent with the Code. Earl Geiger's and Geiger Corporation's claims were not entitled to any priority under the Bankruptcy Code. Moreover, other than through subordination under 11 U.S.C. § 510(c)(1), there is no other means for the Court to fashion a remedy for Earl Geiger's failure to abide by the terms and conditions of the plan and trust and his failure to act as the trust's fiduciary.
The appropriate subordination is the entire amount of Earl Geiger's and Geiger Corporation's claims, especially since it is difficult to ascertain the exact harm to the estate caused by his actions. See Missionary Baptist Foundation, 818 F.2d at 1147; Automatic Washer Co., 226 F.Supp. at 836. There was not just one or a few specific instances where Earl Geiger failed to comply with the plan and trust. Instead, while he has held office, there has been little movement in the case that was not forced by the Tokheims or the Court. Thus, quantification of the resulting harm must remedy the rather widespread consequences of his actions. Only subordination of Earl Geiger's and Geiger Corporation's full claims will do that.
Finally, all claim holders were injured by Earl Geiger's inequitable conduct since the funds available for distribution have been depleted by the delays and fruitless litigation. Therefore, all claim holders, including those holding administrative claims, should benefit from the subordination of Earl Geiger's and Geiger Corporation's claims.
While the Tokheims may have suffered more because of their increased legal expenses from the earlier state/federal lawsuit brought by the co-trustees, the Tokheims may seek redress for those costs from that court. Further, there was insufficient evidence for the Court to conclude that Earl Geiger primarily was responsible for the delay in John Tokheim assuming control of the Charter Oak Bank.
Attorney Anderson shall prepare an appropriate order and judgment.
So ordered this 2nd day of October, 1995.
1. These creditors included: Toy National Bank, Heritage Banks of Willmar, Minnesota, Madelia, Minnesota, and Holstein, Iowa, Earl Geiger, Mary Van Dyke, Geiger Corporation, and Gerald Weiner. They state they hold 94% of all claims. According to these creditors' figures, Earl Geiger, a co-trustee of the standby trust, and Geiger Corporation, holds over 60% of these claims or over 58% of all claims.
2. The validity of this debt forgiveness is not an issue presently before the Court.
3. Equitable subordination also has been imposed under a balancing of the equities approach when subordination of non pecuniary loss tax penalties is considered. See United States v. Noland (In re First Truck Lines, Inc.), 48 F.3d 210, 214-15 (6th Cir. 1995); Schultz Broadway Inn v. United States, 912 F.2d 230, 234 (8th Cir. 1990); and In re Virtual Network Services Corp., 902 F.2d 1246, 1249-50 (7th Cir. 1990).
4. Ripeness when determining an equitable subordination claim is discussed in Rath Packing Co. v. United Food and Commercial Workers International Union (In re Rath Packing Co.), 38 B.R. 552, 556-57 (Bankr. N.D. Ia. 1984).