Dale L. Somers, United States Bankruptcy Judge.
Throughout this Chapter 7 case, Bill Fair & Co. (BFC) has managed real properties owned by Debtor. The amount owed by the estate to BFC as management fees and for expenses is a contested issue, which has been the subject of three days of trial, begun on May 22 and 23, 2013,
The controversy arises in the context of a confluence of unfortunate circumstances. Debtor owned three real properties in Douglas County, Kansas. They are known as Villa 26 Apartments, Four Wheel Drive, and the North Lawrence Real Estate. A judgment against Debtor and his daughter, Gail Youngquist, entered in Texas, was registered in Douglas County, Kansas District Court. By an Order of Sale, BFC was appointed by that court to manage the three properties and to conduct an auction sale of Villa 26 Apartments and Four Wheel Drive.
In response to the registration of the Texas judgment, the Order of Sale, and the appointment of BFC, but before the
The Chapter 7 Trustee, who has no experience managing large apartment complexes, obtained Court approval for the employment of BFC as manager and auctioneer for the three Douglas County properties. But BFC also had no experience managing apartment complexes, large or small, on a long-term basis. Further, BFC has no familiarity with bankruptcy proceedings and received no guidance from the Trustee. In large part because of objections to the Trustee's proposed sale of Villa 26 Apartments, the management phase of BFC's employment has lasted over two years, during which time the Trustee, who is located in Wichita, approximately 150 miles from Lawrence, failed to inspect the properties under management or to demand and receive payments, accountings, or management updates from BFC. Neither Debtor nor his daughter were capable of cooperating with BFC. After the auction sale of Villa 26 Apartments, BFC requested from the Trustee compensation for its management services and expenses under the management contracts approved by the Douglas County, Kansas District Court and by this Court.
The issue of the compensation due BFC for management fees and expenses is presented to the Court by the following pleadings: Application to Determine Accounting and Fees of Property Manager, through February 28, 2013, filed by Trustee J. Michael Morris;
On February 18, 2010, the District Court of Travis County, Texas, 126th Judicial
Debtor Rex Veech Youngquist filed this case pro se under Chapter 7 on January 25, 2011. J. Michael Morris was appointed as the Chapter 7 Trustee. Debtor's Schedule A, "Real Property," filed with his voluntary petition, listed the following Douglas County, Kansas properties, with the values as shown in parentheses: Villa 26 Apartments ($2,400,000); Four Wheel Drive ($700,000); and North Lawrence Real Estate ($170,000). On March 31, 2011, the Trustee filed his Application to Employ Property Manager/Realtor/Auctioneer (Trustee's Application to Employ),
On March 22, 2011, the Trustee filed a Complaint to Sell Jointly Owned Property, seeking authority to sell the estate's and Gail Youngquist's interests in Villa 26 Apartments under the authority of § 363(h).
Villa 26 Apartments is a 76-unit apartment complex, comprised of nine buildings. There are one-, two-, and three-bedroom units. Each unit has parking or a garage, its own appliances, and central air conditioning and heat. There is no clubhouse or pool. The complex was constructed in approximately 1988 and has been owned by the Youngquist family since that time. The Youngquist family also managed the property until BFC was engaged with the approval of the Douglas County, Kansas District Court.
Bill Fair and his wife, Kathy Fair, who operate BFC, testified at trial. BFC's primary business is auctioning, not management, except for short-term management of properties to prepare them for sale. When BFC was appointed by the Douglas County, Kansas District Court, Bill Fair anticipated that the auction of Villa 26 Apartments and Four Wheel Drive would be held within 60 to 90 days. BFC undertook to clean up the Villa 26 Apartments property and seek tenants for vacant units. When the auction of Villa 26 Apartments was advertised, the occupancy was rate 98%. The rents collected by BFC for this property from January 1, 2011, through February 28, 2013, were $933,325.52, and the expenses, not including management fees, were $511,935.82.
The Four Wheel Drive property was valued at $700,000 in Debtor's schedules. That property includes a residence, additional rental units, and a separate office building. Debtor and Gail Youngquist, and perhaps other family members, lived in the residence at Four Wheel Drive during this bankruptcy. The Trustee directed BFC not to charge the Youngquists rent, which reduced the income from the property. The rents collected by BFC from January 1, 2011, through February 28, 2013, were $162,419.42, and the expenses, not including management fees, were $132,868.75. The Youngquists' occupancy of the Four Wheel Drive residence, although reducing required management services, compromised BFC's ability to efficiently manage the property. In addition, there was significant personal property belonging to various people, including the Youngquists and former tenants, stored at Four Wheel Drive which BFC had to deal with without the benefit of the Youngquists' historical knowledge and cooperation.
The North Lawrence Real Estate, valued at $170,000 in Debtor's schedules, required little management. It generated rental income of $36,300.80 from January 1, 2011, through February 28, 2013. For the same period, expenses, not including
The management authority granted to BFC by both the BFC-Pratt Management Agreement and the BFC-Morris Management Agreement was extensive and identical. BFC, referred to as the "broker" in the agreements, was given authority to collect rents and other tenant charges and to pay from such collections "expenses to operate the Property, including but not limited to, maintenance, taxes, insurance, utilities, repairs, security, management fees, leasing fees, and expenses authorized under this agreement."
The Order of Sale entered by the Douglas County, Kansas District Court approving BFC's retention for purposes of management and auction sale provides that BFC "shall be paid 10% of the volume of income as a management fee."
When the bankruptcy was filed, Bill Fair was contacted by the Trustee and asked to continue his company's management services. The BFC-Morris Management Agreement utilizes the same form agreement as the BFC-Pratt Management Agreement, with changes requested by the Trustee and agreed to by Bill Fair on behalf of BFC. There were no in-person negotiations of the terms. Bill Fair sent a proposed signed agreement to the Trustee, the Trustee made changes, signed the revised
For purposes of this dispute, the important differences between the BFC-Pratt Management Agreement and the BFC-Morris Management Agreement are in paragraph 12 regarding the broker's fees. The provision in the agreement with Pratt that the broker fees would apply separately to each of the three properties under management was stricken, and the parties agreed that the management fee for all properties would be the greater of $7,000 per month or 10% of the gross rents collected that month. The management fee for new tenancies was changed to "one month's rent to be paid from first month's rent to be paid by tenant." The management fee based on lease renewals or extensions was changed to "one month's rent to be paid from the first month's rent paid by tenant after the renewal or extension." The service fees, the right to retain interest on trust accounts, and the fees related to legal proceedings were not changed, but the administrative fees were reduced to 50% of any administrative charges collected from tenants.
At trial, Greg Hanson, employed by Weigand Omega Management, testified as BFC's expert witness as to fees and expenses for management of apartment complexes.
Throughout the period that BFC managed the estate's properties, BFC collected rents and other charges, and then paid expenses and its own compensation from the collected revenues. No money was distributed to Pratt before the bankruptcy case was filed or to the Trustee thereafter. The issue before the Court is to determine the management fees and expenses due BFC, deduct these and other funds due BFC
Highly summarized, the Trustee seeks an accounting of the funds collected by BFC, and the fees and expenses properly owed to BFC through February 28, 2013. BFC's position is that it is entitled to fees calculated in accord with the BFC-Pratt Management Agreement until June 8, 2011, and in accord with the BFC-Morris Management Agreement thereafter. The Trustee's position is that some of the expenses for which BFC seeks compensation should be disallowed and that the allowed management fees should be reasonable fees, not those stated in the two management agreements. In a post-trial brief, the Trustee submits five alternative approaches for determining BFC's allowable fees and expenses.
The Court has previously granted the Trustee's request to approve the disbursement to BFC of $289,727.50 as the commission and expenses for sale of Villa 26 Apartments under the BFC-Morris Auction Agreement. Such payment is subject to adjustment based on any amount owed to the estate by BFC under the BFC-Morris Management Agreement.
Under the facts of this case, an accounting of the management fees and expenses that are due to BFC involves a consideration of four discrete time periods: The prepetition period; the period between the filing of the bankruptcy and the filing of the Trustee's application for the appointment of BFC; the period during which the application was pending; and the period after the retention of BFC by the Trustee was approved. Each is considered below.
Prepetition, BFC was a "custodian" as defined by § 101(11)(C),
Compensation for prepetition services of a superseded custodian is entitled to administrative priority under § 503(b)(3)(E).
The Court finds that BFC is entitled to reasonable compensation and reimbursement of expenses for the prepetition period. The specifics of the determination of reasonable compensation under § 543(c)(2) are discussed in section D below.
A superseded custodian is also entitled to reasonable compensation under § 543(c)(2) for services rendered and costs and expenses incurred, and the priority provision of § 503(b)(3)(E) applies to a superseded custodian's postpetition "winding up" services and expenses.
The specifics of the determination of reasonable compensation under § 543(c)(2) are discussed in section D below.
The question with respect to the third period is whether the fees and expenses for this period should be governed by the standards applicable before the Trustee's application to appoint BFC was filed with this Court (examined above) or those applicable after the order of appointment was filed (discussed below). Neither the Trustee's Application to Employ nor the Employment Order addresses the effective date of the retention.
BFC argues that the Employment Order and the BFC-Morris Management Agreement were not effective until June 9, 2011. BFC cites Federal Rule of Bankruptcy Procedure 9021, which provides, "A judgment or order is effective when entered." The Trustee does not challenge BFC's position that the BFC-Morris Management Agreement does not become a factor until the period commencing on June 9, 2011. The BFC-Morris Management Agreement supports this construction, as it states its primary term "begins and ends as follows: Commencement Date: Order to Employ Expiration Date: Closing."
The Court finds that the BFC-Morris Management Agreement does not apply to the period between the filing of the Trustee's Application to Employ and the entry of the Employment Order. For this period, the standard for the award of fees and expenses is the reasonableness standard of § 543(c)(2), the specifics of which are discussed in section D immediately below.
BFC requests the allowance of management fees of $126,859.71 for the period from January 1, 2011, through June 8, 2011. BFC's accounting for this period itemizes "Brokerage Expense," or BFC's management fees, as follows:
Retainer Fee $ 80,000.00 Management Fee $ 40,000.0038 Expense 10% Fee $ 4,149.71 Admin. 50% Exp $ 465.00 Lease Extensions $ 2,245.00 ___________ $126,859.71
Based upon the foregoing discussion, the Court finds that it should allow BFC "reasonable compensation for services rendered and costs and expenses incurred" under § 543(c)(2) and § 503(b)(3)(E) for periods I, II, and III — from January 1, 2011, to June 8, 2011. Although the parties do not contest the applicability of § 543(c)(2), they do disagree about its meaning and application. BFC contends that reasonable compensation is determined by the terms of the BFC-Pratt Management Agreement. BFC cites In re 400 Madison Avenue
The Court agrees with the Trustee that the BFC-Pratt Management Agreement does not determine the fees and expenses that should be allowed. 400 Madison Avenue does not support BFC's contention to the contrary. That case addresses the authority of a prepetition custodian who remained in that position after the bankruptcy filing under an agreement between the Chapter 11 debtor and a secured creditor to retain counsel and pay counsel's bill, subject only to a determination of reasonableness.
However, the Court rejects the Trustee's argument that reasonable compensation under § 543(c)(2) should be construed to mean the adjusted lodestar approach adopted by the Tenth Circuit to
The standard for an award under § 543(c)(2), with priority as an administrative claim under § 503(b)(3)(E), is reasonableness. Subsection 543(c)(2) expressly provides for the payment of "reasonable compensation." A commentator states, "The determination of what qualifies as `reasonable compensation' under section 543(c)(2) is a question of federal law, not state law, and is determined in accordance with bankruptcy law standards."
As to the reasonableness standard in § 503(b)(3)(E), one commentator states:
There are no Tenth Circuit cases defining reasonableness for purposes of allowing fees and expenses to superseded custodians. After examining the authorities, the Court finds that the allowance of reasonable fees and expenses under § 543(c)(2), with priority under § 503(b)(3)(E), requires consideration of all the facts and circumstances of the case. In this case, the Court finds the relevant considerations to be: the services provided, the difficulty of the undertaking, the results obtained, the usual charges for such services if there had been no bankruptcy, and the benefit to the estate.
Second, the Court will not allow the requested additional elements of the management fees — the $40,000 minimum management fee, the $4,149.71 fee based on 10% of renovation expenses that BFC authorized, the $465 administrative fee, and the $2,245 for lease renewals. They are all based upon paragraph 12 of the BFC-Pratt Management Agreement. It provides as to each managed property, "Each month Owner will pay Broker the greater of $4,000 (minimum management fee) or... 10% of the gross monthly rents collected that month." The gross monthly rents for the Villa 26 Apartments and Four Wheel Drive properties for the period from January 1, 2011, to June 8, 2011, were $226,583.42, 10% of which is $22,658.34. The fee requested for the period in issue is $40,000, which is the greater of the two items on which the fees are to be based under the agreement. But, as explained above, when determining reasonable fees, the Court has rejected the BFC-Pratt Management Agreement as setting the standard for reasonableness.
What management fees are reasonable? Villa 26 Apartments had 76 units and its operation required continuous and significant management. However, Four Wheel Drive was smaller and required less attention. BFC's duty was to preserve and protect the properties, and to maintain their value, not to generate income for the estate. The benefit to the estate of preserving Villa 26 Apartments as an operating rental property is obvious; Villa 26 Apartments sold for considerably more than predicted at the outset of the case. Other than complaints by Gail Youngquist, no questions have been raised about the quality of the management services provided by BFC to either Villa 26 Apartments or Four Wheel Drive. BFC has provided an accounting of its operations, which all the parties accept as an accurate report of the income and expenses. Despite the foregoing, the Court finds that the requested fees and expenses are not reasonable. Based upon the rents collected, the minimum fee of $4,000 per month, or a total of $20,000 for each property, is only slightly excessive for the services provided at Villa 26 Apartments, which generated rent of $197,808 during the five months, but far too large for the Four Wheel Drive property, where the rents collected were $28,623.50. The excessiveness of the requested fees is compounded by the request for an additional allowance of approximately $7,000 under the other elements of the payment terms of the agreement. BFC's expert testified that management fees for similar size properties are typically 8 to 10% of gross rents, without additional fees based upon other criteria. In this case, the Court finds that a management fee of $22,000 for the period from January 1, 2011, to June 8, 2011, which is approximately 10% of the gross rents, is reasonable
The Court finds that the expenses requested are reimbursable, with the exception of the charges for an environmental inspection ($950.00), a survey expense ($10,068.40), and a miscellaneous expense ($82.50) for the sale of a vehicle. There is no question that the remaining expenses were necessary to the management of the properties and were actually incurred. The Court rejects the Trustee's challenge to the allowance of some expenses based on the contention that the expenses should be borne by BFC as part of the management services and not passed on to the property owner as separate expenses. The Court allows the charge for on-site maintenance of $13,595. This is the expense for an on-site manager assigned to Villa 26 Apartments and Four Wheel Drive, which the Court finds reasonable given the characteristics of the rental properties. The Court also allows the following expenses which the Trustee challenges: answering service ($792.84); bank service charges ($66.00); office supplies ($1,441.83); postage and delivery ($155.95); and telephone ($918.63). These are costs directly related to the operation of the two properties, not to BFC's general overhead.
The Court therefore allows BFC the following as administrative expenses for the period from January 1, 2011, to June 8, 2011: management fees of $22,000; and expense reimbursements of $104,027.69.
The Employment Order was entered under the authority of § 327(a), which provides that a trustee, with the Court's approval, may employ professional persons to assist the trustee in carrying out the trustee's duties. Section 330(a)(1) provides that after notice and hearing, and subject to §§ 326, 328, and 329, the Court may award to a professional person employed under § 327 "reasonable compensation for actual, necessary services rendered" and "reimbursement for actual, necessary expenses." Compensation awarded under § 330 is granted administrative expense status under § 503(b)(2). Section 328(a), "Limitation on compensation of professional persons," provides:
Section 328 governs when prior court approval has been given to a certain compensation, but subsequent events show the approved compensation was improvident; in that situation, the reasonableness standard of § 330 does not apply.
The question as to the fourth time period is whether the BFC-Morris Management Agreement controls because it constitutes pre-approved compensation under § 328 or whether the general standards of § 330 control. Three circuits, but not the Tenth Circuit, have addressed the standard for determining whether a fee
This Court likewise prefers the totality of the circumstances standard. Under this standard, the bright-line criteria of the Third and Ninth Circuits are factors to be considered, but are not determinative. The basic question is whether the Court when approving the employment also intended to approve the proposed terms and conditions, and to displace the § 330 reasonableness standard which would otherwise apply. The totality of the circumstances, including the application, the order, and the services to be provided, are relevant.
In this case, neither the application nor the order makes explicit reference to § 328. But the Trustee's Application to Employ BFC states that "[a]s property manager, Fair will receive management fees as set out in ¶ 12 in the attached Commercial Property Management Agreement."
For the period of time after June 9, 2011, the Court therefore allows BFC fees and expenses in accord with the BFC-Morris Management Agreement. The management fees requested for the three
Although the Trustee argues that the fees under the BFC-Morris Management Agreement are excessive, he provides no facts and no argument evidencing that the such terms and conditions have proven to have been improvident in light of developments not capable of being anticipated at the time he negotiated the terms of the agreement with BFC. The Court therefore allows BFC management fees of $260,867.79 for the period from June 9, 2011, through February 28, 2013, as pre-approved fees under § 328.
BFC also requests the allowance of expenses for the same period in the amount of $547,017.62 for the three properties.
Therefore for the period from June 9, 2011, through February 28, 2013, the Court rules that BFC is allowed management fees of $260,867.79 and expenses of $544,067.62.
The Court allows the following fees and expenses for BFC's services as a prepetition custodian, a superseded custodian, and a professional person employed pursuant to Court order: for the period from January 1, 2011, to June 8, 2011, management fees of $22,000 and expense reimbursement of $104,027.69; and for the period from June 9, 2011, through February 28, 2013, management fees of $260,867.79 and expense reimbursement of $544,067.62. Such fees and expenses are entitled to administrative expense priority under § 503(b)(2) and (3)(E). Given the Court's prior ruling that BFC is entitled to $289,727.50 for the sales commission and expenses for the sale of Villa 26 Apartments,
The foregoing constitutes Findings of Fact and Conclusions of Law under Rules 7052 and 9014(c) of the Federal Rules of Bankruptcy Procedure which make Rule 52(a) of the Federal Rules of Civil Procedure applicable to this matter.
