TERRY L. MYERS, U.S. BANKRUPTCY JUDGE.
On August 15, 2017, following an unsuccessful attempt at reorganizing its business under state law, Pavement Markings Northwest, Inc., ("Pavement" or "Debtor")
The issues presently before the Court arise from the request of a state court-appointed receiver, Steven G. Neighbors ("Neighbors") of Strategic & Operational Solutions, Inc. ("SOS"), for allowance of compensation under § 543(c)(2)
This Application requested allowance of "$20,124.52 incurred by custodian [Receiver], and $10,214.90 incurred by the custodian's attorneys." Doc. No. 154 at 3. Thus, a total of $30,303.27 was requested. Id. Trustee's Objection acknowledged § 543(c)(2) provides for reasonable compensation related to certain post-petition duties imposed on a custodian under §§ 543(a) and (b), but argued that § 543(b) and Rule 6002 require delivery of any property held by the custodian to the Trustee and that the custodian file an accounting, and that neither requirement had been satisfied. Trustee additionally objected to allowance of any prepetition compensation based on
Neighbors' Response changed the amounts requested from those in the Application. Under the Response, Neighbors sought $24,407.52 for "time" he and SOS staff expended and for SOS' costs, and also sought $17,437.40 for SOS' attorneys, for a total of $41,844.92. Doc. No. 187 at 1-2. Neighbors then filed an additional submission on May 4, 2018, which he characterized as "Supplemental Information re: Response to Trustee's Objection re: Expenses and Fees." Doc. No. 193. The supplement requests the same amounts as set forth in the Response and attaches several "Receivership Reports."
The Application, Objection and Response were initially heard on May 21, 2018, and the Court set the matters over for an evidentiary hearing on August 16, 2018. Another supplement was filed by Neighbors on July 20, 2018. Doc. No. 208.
Due to illness of counsel, the referenced August hearing was vacated and continued to October 23, 2018. On October 11, 2018, Neighbors filed yet another "supplement" to the previously filed materials. Doc. No. 221. The supplement asserts that, prior to the receivership, SOS had billed and Pavement had paid $10,856
At the hearing on October 23, 2018, Gregory Harp ("Harp"), the owner of
In May 2019, Neighbors/SOS filed the supplemental briefing required by the Court, Doc. No. 232, and Neighbors' affidavit in support of that brief, Doc. No. 231. Trustee responded with his brief. Doc. No. 237. Hearing was set for October 22, 2019. On that date, Trustee and Neighbors/SOS appeared through counsel. Neighbors was examined, and Exhibits 103, 104, 105 and 109 were admitted. The parties rested and, after oral argument, the Court took the Application and Objection under advisement. Doc. No. 242 (minute entry). This Decision constitutes the Court's findings of fact and conclusions of law under Rules 7052 and 9014.
The fundamental questions are easy to identify: (1) is Neighbors (and/or SOS) a "custodian" under the Code; (2) if so, have the Code's prerequisites to a custodian obtaining allowance of compensation been satisfied; and (3) is there a competent evidentiary record to support the amount of such compensation?
To address these issues, the Court has considered the evidence presented at the hearings held on the Application and Objection on October 22, 2019, during which Neighbors testified, and on October 23, 2018, during which Harp testified. It has considered carefully the weight to be given such testimony. It has also carefully reviewed Exhibits 103, 104, 105 and 109, which were the only exhibits out of the eighteen marked exhibits that were ultimately admitted into evidence. And, for context (but not as evidence except to the extent subject to actual corroborating testimony at hearing), the Court has considered the seriatim filings by Neighbors/SOS including those mentioned above.
In 1971, Neighbors founded what was to become Pavement, a business involved in highway and roadway striping, and he incorporated it in 1974. He testified that he sold Pavement to Harp in 2001.
In approximately 2013-2014, Harp moved away from the Boise, Idaho area and allowed other individuals to handle Pavement's daily operations. In late 2016, Harp became concerned about Pavement's financial condition and operations, and he contacted Neighbors to review the company's books and provide advice. Neighbors —who characterizes himself as a "turnaround consultant" and "forensic financial analyst" as well as at times a "chief reorganization officer" or "CRO"—agreed to do so.
In April 2017, Pavement commenced a voluntary receivership action in the Fourth Judicial District Court of the State of Idaho, in and for Ada County (the "State District Court"), in Case No. CV01-17-07925 (the "Receivership Case"). Pavement was represented therein by the same firm that would later file the August 15, 2017 chapter 11 bankruptcy petition as counsel for Debtor.
The receivership petition was filed April 27, 2017, and indicates that "Steven G. Neighbors of Strategic & Operational Solutions, Inc." was the "Proposed Receiver."
As noted, this order identifies "Steven G. Neighbors
Neighbors testified that, in his view, Idaho state receivership law was "weak" because it lacked a stay of creditor action while the receivership went forward, and he opined that this defect made it likely that Pavement would have to file a chapter 11. He also stated that there were positive features to Pavement's business as it entered into the receivership (e.g., $4 million of work on the books; a good crew; a good reputation) but that $400,000 to $600,000 of working capital would be needed.
Neighbors' Receivership Report #2, Ex. 104, attempted to create a more accurate balance sheet as of December 31, 2016. Id. at 2-3 and Attachment 4. Neighbors concluded that Pavement's balance sheet reflected roughly a negative $2 million value, that liquidation would not generate enough to satisfy secured creditors in full, and that an "operational element" would be needed to fully pay those creditors and generate something for unsecured creditors. Id. at 3-4. This operational element was the "Go-Forward Plan."
Following the provision of such financial information and plan, Neighbors was to "attempt to gain the cooperation of the creditors and stakeholders" regarding the plan. The Receiver was also required to provide an annual "accounting of the estate under the Receiver's control[.]" See Ex. 104.
The approach taken to prove reasonable compensation—both in the manner by which Neighbors and Pavement allegedly addressed how Neighbors and SOS would be paid, and by which Neighbors attempted to establish a credible evidentiary record to support such payment—was ineffective. Part of this is due to inconsistent language such as "cap," "flat fee," "fixed fee," "costs fee" and the like, and lack of coherent and consistent explanation of the terms or conditions of the engagement. Part is due to the inconsistencies in the several documents utilized by Neighbors to establish the amount of the claimed compensation. And part is due to the difficulties Neighbors' counsel had in presenting an adequate evidentiary record in support of the Application.
The financial arrangements for Neighbors/SOS' work were addressed several times, in various submissions (e.g., the "Receiver's reports") and at the two hearings, but not clearly. From Neighbors' testimony, the arrangement was to include the following: (1) Neighbors' personal work would be charged at a rate of $225/hour; (2) Neighbors would "cap" his fees from the inception of the receivership engagement to the date the Go-Forward Plan was filed at $18,750; (3) Neighbors would bill his time at the indicated rate on a monthly basis, but he would only be paid a maximum of $3,000/month in fees
No written agreement between Neighbors and Pavement regarding compensation was admitted into evidence, nor is it clear that there was ever any disclosure of
"Receiver's Report #3/Receiver's Go-Forward Plan," Ex. 105, asserts the following in regard to Neighbors' "fee":
Ex. 105 at 7. These provisions are also repeated in the Go-Forward Plan at page 6.
"Receivership Report #5 through June 30, 2017," Ex. 109, also explains the fee structure, although with some differences:
Id. at 2-3.
The Receivership Order did not address compensation, no "Letters of Receivership" were introduced into evidence, and there is nothing in the record that indicates any State District Court approval of any compensation terms or structure.
The Application, Doc. No. 154, asks for "custodian fees" for Neighbors and SOS of $20,124.52 under § 543(c)(2) and § 503(b)(3)(E). The Application also seeks allowance of custodian's attorneys' fees and costs of $10,214.90. Id. at 2-3 (citing § 503(b)(4)). Attached to the Application as Exhibit B are SOS invoices:
Inv. # Dates Total Amt. Payments #2960 6/6/17 to 6/27/17 $11,868.75 -$11,338.75 $530.00 Balance Due 23 #2997 7/5/17 to 7/31/17 $695.22 --- $695.22 #3030 7/5/17 to 7/31/17 $11,925.00 --- $11,925.00 #3061 8/7/17 to 8/15/17 $4,350.25 --- $4,350.25 #3272 8/16/17 to 8/31/17 $2,030.05 --- $2,030.05 #3099 9/5/17 to 9/30/17 $506.50 --- $506.50 #3235 10/31/17 $97.50 --- $97.50 #3182 11/7/17 to 11/30/17 $8,926.75 --- $8,926.75
Id. at 15-25. The suggested total balance due to SOS (from June 6, 2017 to November 30, 2017) based on these invoices was $29,061.27. Id. at 25.
The Application also shows invoices or billings from The Richards Firm (attorney Jace Richards):
Inv. # Dates Total Amt. Payments #684 8/1/17 to 8/31/17 $1,683.50 --- $1,683.50 #693 9/1/17 to 9/25/17 $448.50 --- $448.50 #700 10/31/17 $97.50 --- $97.50 #708 11/3/17 to 11/30/17 $6,743.40 --- $6,743.40 Balance Due
Id. at 26-32. These invoices add up to $8,972.90. (A "total amount due" of $8,972.90 also appears on each of the invoices.) The Application then shows a single invoice from Ysursa Law (attorney Mick Ysursa):
#136 1/24/18 to 2/13/18 $1,818.00 -$576.00 $1,242.00
Id. at 33 (a note indicates the $576.00 was not a payment but an amount held in trust). Adding Richards' claim at $8,972.90 and Ysursa's at $1,242.00 result in a total for the attorneys of $10,214.90, which matches the claimed amount for SOS' attorney expenses in the Application.
However, none of these attorneys' invoices were admitted. And there was no testimony or other evidence submitted as
Neighbors testified as to a 3-page "Receiver's Fees & Cost Report" attached to "Receiver's Report #5 through June 30, 2017." Ex. 109.
As noted earlier, Receiver's Report #6, the so-called "Final Report" was filed with the Court as Doc. No. 187. Exhibit 114, which contains the first 14 pages of that document, was never admitted. However, the Court notes, simply by way of background, Neighbors' assertions therein:
SOS (S. Neighbors) $22,343.00
SOS (support staff and costs) $2,064.62 $24,407.62
__________
Jace A. Richards, Chtd. $16,195.40
Ysursa Law $1,242.00 $17,437.40
__________ __________
TOTAL $41,845.02
Doc. No. 187 at 14. The referenced "Exhibit 1" to this report were SOS invoices from June 6, 2017, through April 13, 2018 (id. at 16-27); Richards' claimed amounts from August 1, 2017, through April 13, 2018 (id. at 28-36); and Ysursa's claimed amounts from January 14, 2018, through February 13, 2018 (id. at 37).
After the parties rested at the October 22, 2019 hearing, counsel
These amounts—totaling $48,516.25—were characterized by counsel as "earned but not yet paid." Counsel went on to state that a total of $50,549.95 had previously been paid to and received by SOS. Of that amount, he indicated that $31,720 was paid toward fees and costs incurred during the periods of time summarized immediately above, i.e., through the date of the chapter 11 filing.
In short, this closing was difficult to follow. It was untethered to the evidence, with no reference to any of the four admitted exhibits or to directly applicable testimony. However, counsel was very clear in his ultimate assertion that the only amount Neighbors/SOS requests be allowed by the Court is $18,162.82 for the prebankruptcy periods.
No request or argument was made as to allowance of any other amounts. And no argument was made, nor evidence discussed, as to any of the other claims that were asserted in the underlying Application or other documents filed by Neighbors.
The Application seeks allowance of custodian's fees and costs under § 543(c)(2). Doc. No. 154 at 1. The Code defines custodian as a "receiver or trustee of any property of the debtor, appointed in a case or proceeding not under this title[.]" See § 101(11)(A) (emphasis added). The Bankruptcy Appellate Panel articulated the background of the term custodian as set forth in § 101(11):
Bakonyi v. Boardroom Info. Sys. (In re Quality Laser Works), 211 B.R. 936, 943 (9th Cir. BAP 1997).
More recently, another court explained:
In re Montemurro, 581 B.R. 565, 576-77 (Bankr. N.D. Ill. 2018). The court thus emphasized that § 503 applies to custodians "superseded under section 543 of this title" and this means those custodians who had been in possession, custody, or control of property of the debtor, proceeds, products, offspring, rents, or profits of such property on the petition date. Id. at 573-74.
The Code definition focuses on (A) the receiver or trustee "of any of the property of the debtor" appointed in a case or proceeding not under Title 11; (B) an assignee under a general assignment for the benefit of creditors; and (C) a trustee, receiver or agent "that is appointed or authorized to take charge of property of the debtor" to enforce a lien against the same or to generally administer the same for the benefit of creditors. Section 101(11). An example of such a custodian was addressed in In re Ute Lake Ranch, Inc., 2016 WL 6472043 (Bankr. D. Colo. Sept. 14, 2016). There the state court order appointed Cordes & Company, Inc. ("Cordes") under Colorado state law as a receiver and custodian. As summarized:
Id. at *1. Cordes caused the chapter 11 petitions to be filed. Id. at *2. However, Cordes disputed it was a custodian subject to the requirements of § 543. The court, relying inter alia on Cash Currency Exchange and the legislative history there discussed, found "little doubt that Cordes, in its role as the State Court-appointed receiver and custodian of Debtors qualifies as a `custodian' under the Code's definition
On October 22, 2019, Neighbors testified that when Harp first contacted him, he acted as a "consultant" to Pavement. Pavement continued in operation under Harp's control. Even after Neighbors recommended the receivership and it was initiated in state court, nothing in the evidence indicates Neighbors ever received possession or control of Pavement's assets.
Neighbors testified that in May 2017, he dealt with creditors, worked on Pavement's contract bids, sought to obtain appraisals, and conducted lien and title searches. He said nothing about taking possession or control of Pavements' assets. In the "Supplement to Receiver's Final Report," Doc. No. 208-1 filed July 20, 2018, he explained:
Id. at 6.
Id. at 15-16. He again summarized, with apparent reference to the language of § 543(b)(1) and (2):
Id. at 17. He then stated:
Id. at 17.
Similarly, Neighbor's Prehearing Memorandum, Doc. No. 219, states:
Doc. No. 219 at 1-2 (emphasis in original).
Neighbors emphasized repeatedly and in numerous submissions that he and/or SOS never took possession or control of any property of Pavement and that, at all times, Pavement (under Harp's management) operated the business. Though titled a "receiver" in the State District Court's order, the duties assigned to and imposed on Neighbors under that order are unlike those of a custodian as contemplated by the Code. The State District Court order required Neighbors to evaluate Pavement's situation and provide the court within 30 days an opening balance sheet with appropriate details and schedules, and also within that time provide the court with a "go-forward plan" that Neighbors "deems to be in the best interest and welfare" of Pavement and its creditor, after which Neighbors was to attempt to gain the cooperation of the creditors and other stakeholders on such a plan, or to bring the matter back to the court. Ex. 105 at 27. As Neighbors emphasized in his Supplement to Receiver's Final Report, throughout the Receivership period Pavement "remained in control of all its assets and all financial distributions." Neighbors characterized his "control" of Pavement as "constructive" but insisted that all "actual physical control of all assets in their entirety remained at all times with [Pavement]." Indeed, it was Hart, as president of Pavement—not Neighbors as receiver— that authorized and initiated the chapter 11 bankruptcy filing.
Neighbors' role started out as a "consultant" (or variously described as financial analyst, CRO, or turnaround consultant). The evidence indicates it continued in very much that same vein throughout. Neighbors'
This conclusion moots questions that manifestly exist on this record as to the amount of compensation or cost reimbursement Neighbors actually seeks. However, if the Court were required to address the amount of compensation under § 503(b)(3)(E), it would find that the burden placed on the applicant to establish an amount and a supporting record was not sustained.
In addition, concluding Neighbors was not a custodian as defined under the Code also impacts the requests for allowance of compensation for Neighbors/SOS' attorneys under § 503(b)(4). To the extent those requests were not already abandoned (when Neighbors' counsel in his closing argument limited the total amount sought by the Application to $18,162.82), the denial of recovery for Neighbors on the foregoing grounds eliminates any basis for counsels' compensation. In re Stainless Sales Corp., 583 B.R. 717, 726 (Bankr. N.D. Ill. 2018) (holding that a threshold for § 503(b)(4) compensation is the existence of a § 503(b)(3) entity with allowable expenses) (citing In re 29 Brooklyn Ave., LLC, 548 B.R. 642,651 (Bankr. E.D.N.Y. 2016)).
Based on the foregoing, the Court determines that the Application will be disallowed. An appropriate order will be entered.
