Opinion
No. 01-41571 J11, Jointly Administered with Cases Nos. 01-41573 J11, 01-41574 J11, 01-41575 J11, 01-41576 J11
June 11, 2003
MEMORANDUM DECISION — MOTION FOR RECONSIDERATION
On June 6, 2003, this court entered its Order Denying Motion for Reconsideration by which it denied a motion by Stephen G. Weinstein and Marta E. Weinstein, individually and as trustees of a certain living trust (the "Weinstein Parties"), seeking reconsideration of this court's order entered March 13, 2003. By the order of March 13, 2003, the court denied a motion by Bradley D. Sharp, chapter 11 trustee (the "trustee"), seeking authority to: (a) forgive certain debts owed to the estate by the Weinstein Parties and (b) convey to them certain software technology owned by the estate. This Memorandum Decision sets forth the court's reasons for doing so.
The trustee packaged the original motion as one seeking authority under Bankruptcy Code § 363(b) to "use" valuable estate property out of the ordinary course of business by giving it to the Weinstein Parties. The present motion by the Weinstein Parties repackages the trustee's motion as one seeking nunc pro tunc authority for the trustee to employ the Weinstein Parties as professional persons in accordance with what appears to have been a secret side deal between the trustee and the Weinstein Parties, or to compensate them on a quantum meruit basis beyond the scope of their employment contract with the trustee.
Bankruptcy Code § 363(b) provides "The trustee, after notice and a hearing, may use, sell, or lease, other than in the ordinary course of business, property of the estate."
Notwithstanding the new wrapper and bows that the Weinstein Parties have placed around the trustee's motion, what is being asked is, again, nothing other than the court's permission for the trustee to make a substantial gift of estate property to the Weinstein Parties. Again, the court declines to grant such permission.
The court notes that the present motion (no pun intended) was filed by the chapter 11 trustee whereas reconsideration is being requested, not by the trustee, but by the Weinstein Parties. The court will assume, without deciding, that the Weinstein Parties have standing to request reconsideration of the trustee's motion.
A. Background
The above debtors filed their voluntary chapter 11 petitions herein on March 23, 2001. At the date of the petitions, Marta Weinstein was the Chief Executive Officer of debtor Software Logistics Corp. and Stephen Weinstein had an executive role. On October 12, 2001, the court appointed the trustee.
Following his employment, the trustee sought and obtained authority of this court to provide an incentive for certain employees, not including the Weinstein Parties, to remain employed with the debtors in the hope, ultimately successful, that he could keep the debtors afloat while a buyer was sought. The trustee's request included authority to pay substantial severance, plus a bonus upon sale of the business, to such employees. The court approved the request by order entered January 30, 2002.
Under the plan, Mr. Westerbos was entitled to receive severance pay in the sum of $195,000 plus a bonus that turned out to be $200,000. Mr. Downey was entitled to receive severance pay in the sum of $50,000, plus a bonus that turned out to be $200,000.
By design, the trustee's request did not include any severance or bonuses for the Weinstein Parties. However, the trustee did agree to keep them on as salaried employees. The trustee employed Marta Weinstein at the rate of $25,000 per month (corresponding to an annual salary of $300,000) and employed Stephen Weinstein at the rate of $16,666 per month (corresponding to an annual salary of $200,000).
Apparently, the foregoing salaries were insufficient to assure the cooperation of the Weinstein Parties in connection with a sale of the debtors' assets. On December 31, 2001, while Marta Weinstein was employed by the trustee at an annual salary of $300,000, the trustee entered into an agreement with the Weinstein Parties to cancel certain non-recourse debt, secured by shares of the debtors' stock, that the Weinstein Parties owed to the debtors. The agreement recited the consideration as the Weinstein Parties' "cooperation and assistance." Cf. Bankruptcy Code § 521(3).
Bankruptcy Code § 521(3) provides: "The debtor shall — (3) if a trustee is serving in the case, cooperate with the trustee as necessary to enable the trustee to perform the trustee's duties under this title."
The trustee concedes that he had agreed with the Weinstein Parties that he would defer any formal disclosure of the agreement or request for court approval thereof until after a sale.
On July 11, 2002, the court approved a sale of the debtors' assets. Approval came some four months after Marta Weinstein had ended her employment with the trustee, and some nine months after Stephen Weinstein had terminated his employment.
According to both the trustee's motion (p. 5/lines 20-21) and the Weinstein Parties' motion for reconsideration (p. 17/lines 17-18), Marta Weinstein's employment terminated March 15, 2002, through which date she was compensated. (At oral argument, counsel for the Weinstein Parties represented, in error, that Marta Weinstein left the trustee's employ in March 2001. March 6, 2003 hearing, R. at p. 12, line 9). Stephen Weinstein's employment terminated October 26, 2001.
Thereafter, on February 21, 2003, some seven months after the sale, the trustee entered into an agreement with the Weinstein Parties to forgive certain recourse debt they owed to the estate, and to convey to them certain software technology that belonged to the estates. The agreement recited
After his appointment as chapter 11 trustee, the Trustee requested and the Weinsteins agreed that the Weinsteins would serve on a temporary employment basis, and thereafter as consultants, to assist the Trustee as requested in managing the sale of the Company and in identifying potential claims against third parties. In consideration for the Weinsteins' cooperation and assistance, the satisfactory fulfillment of which the Trustee hereby acknowledges, the Trustee has agreed (subject to Bankruptcy Court approval as set forth below) to release the liability of the Weinsteins on the Loan Agreements and to transfer the AMS program to S. Weinstein or his designee, all on the terms provided below.
Agreement for Cancellation of Indebtedness and Assignment of Software Program, Para. R. Thus, according to this agreement, the trustee was to forgive the recourse debt and convey the software technology because of the Weinstein Parties' "cooperation and assistance" during and after their tenure as employees. The agreement was conditioned on court approval.
Even without the condition, the agreement would not have been enforceable in the absence of court approval because of Bankruptcy Code §§ 363(b)(1) (quoted at n. 1, supra) and 102(1) (defining "notice and a hearing"), which prohibit a trustee from using estate property out of the ordinary course of business, over the objection of a party in interest, absent an authorizing court order. See, e.g., In re Snyder, 74 B.R. 872, 874-75 (Bankr. E.D. Pa. 1987).
Under the aforementioned written agreements, the trustee agreed to forgive non-recourse loans from the debtors that totaled $2,225,000, plus recourse loans that totaled $480,000. Thus, when immunity from any potential liability under Bankruptcy Code § 548(a) (fraudulent conveyances) arising out of the non-recourse loans is factored in, the total in debt forgiveness or immunity potentially comes to $2,705,000. The value of the software technology is unknown to the court, but the Official Creditors' Committee (the "Committee"), which opposed the original motion and opposes the motion for reconsideration, believes that it might be valuable and does not accept the trustee's stated view that the software technology is worth no more than $75,000.
The motion for reconsideration states that the Weinstein Parties are seeking only the software technology and forgiveness of the loans, and that the motion does not affect "other claims" that the creditors' committee may have against the Weinstein Parties. It is unclear to the court, however, whether a release of the Weinstein Parties for any liability under the nonrecourse notes would carry with it a release of any liability for having received corporate assets in exchange for such nonrecourse notes. Given the court's rulings, this potential issue is now moot.
On February 3, 2003, the trustee filed a motion seeking approval of the debt forgiveness and transfers covered by the two agreements. The motion recited the instances of the cooperation and assistance that the Weinstein Parties provided to the trustee. The motion did not mention the dates of such cooperation and assistance, or whether and to what extent the trustee proposed to compensate the Weinstein Parties for their cooperation and assistance while they were employed by the trustee. The Committee opposed the motion.
On March 13, 2003, this court entered its order denying the motion. Referencing the Committee's opposition, the court held that any agreement by the trustee to enhance the Weinstein Parties' aggregate $500,000 per year salaries for serving as employees, or to hire them thereafter as compensated "consultants," had not been disclosed to the creditors or court before the Weinstein Parties provided the services. The court also held that the estate was not under any contractual obligation to forgive any debt owing by the Weinstein Parties or to transfer any assets to them, that no valid justification for approval of the arrangements had been presented, and that the trustee's proposal was essentially one to make a gift to the Weinstein Parties of potentially valuable estate assets.
The present motion for reconsideration by the Weinstein Parties followed.
B. Nunc Pro Tunc Employment Authority
Pursuant to Bankruptcy Code § 327(a), the trustee may employ professional persons only "with court approval." Pursuant to F.R.Bankr.P. 2014, a trustee's application to employ a professional person must include, among other things, "the specific facts showing the necessity for employment," the "professional services to be rendered," and the "proposed arrangement for compensation." Here, the trustee did not comply. Absent compliance, compensation is not allowable. Bankruptcy Code § 330(a)(1) (compensation out of the estate may be allowed only to "persons employed under section 327"); In re Haley, 950 F.2d 588, 590 (9th Cir. 1991) (holding that real estate broker who procured buyers of estate property was not entitled to be compensated out of the estate because the broker's employment had not been authorized prior to the broker's rendering of services).
Acknowledging that prior court approval pursuant to Bankruptcy Code § 327(a) and Fed.R.Bankr. 2014 was neither sought nor obtained before the Weinstein Parties provided the services at issue, the Weinstein Parties now ask the court to ratify the secret arrangement, nunc pro tunc.
Nunc pro tunc approval is not warranted (even putting aside the fact that the trustee has not filed an application to employ the Weinstein Parties on a nunc pro tunc basis, or as of this date otherwise fully complied with the requirements for employment of a professional person as provided by Bankruptcy Code § 327(a) and F.R.Bankr.P. 2014).
In In re THC Financial Corp., 837 F.2d 389, 392 (9th Cir. 1988), the Ninth Circuit held that a court may approve a trustee's employment arrangement with a professional person, nunc pro tunc, but only under "exceptional circumstances" and only when the trustee has given a "satisfactory explanation for the failure to receive prior judicial approval" and if the professional person has conferred a substantial benefit to the estate. See also In re Atkins, 69 F.3d 970, 974 (9th Cir. 1995).
Here, the trustee and the Weinstein Parties have not given a satisfactory explanation for the delay. Indeed, they have given no explanation. Nor do any other equitable factors justify the award, e.g., the need to provide services immediately because of a time emergency, or because an innocent professional person was mislead into believing that the trustee would seek immediate court approval of the professional's employment. See Atkins, 69 F.3d at 976-78. Moreover, although not determinative, the consent of the creditors, missing here, has generally been an important factor in courts' decisions to grant a request for a nunc pro tunc employment order. Id.
In addition, even if the trustee had timely applied for authority to employ the Weinstein Parties on the terms provided by the two agreements, it is quite doubtful that the court would have approved same over the objection of the Committee. See Atkins, 69 F.3d at 974 (mentioning the factors relevant to an application for nunc pro tunc employment set forth in In re Twinton Properties Partnership, 27 B.R. 817, 819-20 (Bankr. M.D. Tenn. 1983)).
Thus, even if the Weinstein Parties conferred a substantial benefit on the estate for which they were not otherwise compensated, a contention by the Weinstein Parties that the Committee vigorously disputes, the Weinstein Parties would not be entitled to a nunc pro tunc order of employment. Atkins, 69 F.3d at 974.
This conclusion is not only mandated by the Bankruptcy Code and all of the applicable Ninth Circuit case law thereunder, but by sound policy. Secret compensation deals between fiduciaries of bankruptcy estates and those that they employ are not to be condoned. They seriously sabotage the integrity of the bankruptcy process, undermine creditor confidence in that process and in the professionals entrusted with the management of the valuable assets of the estate, and sometimes victimize both creditors and innocent professionals (not the case here) who have provided services to the estate in good faith in the expectation of being fairly compensated. If courts were to condone such deals by granting nunc pro tunc applications that do not meet the established criteria, transgressions would only become more frequent. See In re Kroeger Properties and Development, Inc., 57 B.R. 821, 822-23 (9th Cir. BAP 1986); In re Downtown Investment Club III, 89 B.R. 59, 63 (9th Cir. BAP 1988).
In fact, the court's attention has not been directed to even one reported Ninth Circuit decision wherein the court approved nunc pro tunc employment under circumstances where the trustee and professional were aware of the requirement of court approval before the services were rendered, had time available to seek a court order without any risk of damage to the estate, and nevertheless elected to disregard the employment requirements of the Bankruptcy Code and rules.
C. Quantum Meruit
The Weinstein Parties contend that the court should approve the debt forgiveness and asset transfer based on the equitable doctrine of quantum meruit. The court disagrees. Even putting aside the disputed factual issues as to what the Weinstein Parties did, when, why, and the value thereof, or any issues as to the malfeasance alleged by the Committee, the simple fact is that the Bankruptcy Code does not permit professionals to be compensated "for services performed on behalf of a bankruptcy estate based on state law theories not provided for by the Code, such as quantum meruit." In re Weibel, Inc., 176 B.R. 209, 212 (9th Cir. BAP 1994). See also In re Monument Auto Detail, Inc., 226 B.R. 219, 224-25 (9th Cir. BAP 1998).
In re De Laurentiis Entertainment Group, Inc., 963 F.2d 1269 (9th Cir. 1992), cited by the Weinstein Parties, is not to the contrary. In De Laurentiis, the issue was the allowability of a prepetition creditor claim under California law. The case had nothing to do with compensation of professionals employed by a trustee, postpetition, under the Bankruptcy Code. Id. at 1271-73.
D. Other Arguments
The Weinstein Parties have raised several other arguments in connection with the original motion or motion for reconsideration, none of which have any merit. They argue that certain allegations of malfeasance that the Committee has raised are not well grounded. The court, however, did not and does not base its ruling on the validity of such allegations, which remain in dispute.
The Weinstein Parties argue that some employees received severance pay and bonuses from the estate in addition to their salaries, which they (the Weinstein Parties) did not, and that they, too, deserve a compensation package funded by the estate in addition to the salaries that the trustee contracted to pay them. The difference is that, unlike the trustee's arrangement with the Weinstein Parties, the trustee's retention plan as to the other employees was disclosed to all parties in interest, found by the court to have been reasonable, and was approved by the court, in open court, pursuant to an application on file with the court, before the affected employees continued their employment with the debtors in reliance on the retention plan.
The Weinstein Parties' moving papers suggest that the Committee was aware of and agreed to the payment of additional compensation to the Weinstein Parties for their cooperation and assistance. There is no supporting evidence before the court that such suggestion is true, and any such evidence would not justify a change in the result.
The Weinstein parties argue that the court denied the original motion without prejudice and that they have now justified the motion for reconsideration with additional evidence. It is true that the court denied the trustee's motion without prejudice, but only to allow reconsideration if the assets at issue proved to be without value such that an abandonment under Bankruptcy Code § 554(a) might be warranted (in which case a conveyance to the Weinstein Parties might be of no cost to the estate). March 6, 2003 hearing, R. p. 21/line 23 — p. 22/line 9. There is no evidence before the court that the assets in question are valueless, and the Committee continues to believe that they have substantial value. Thus, nothing new has been presented that would justify a change in the original ruling.
E. Conclusion
The motion for reconsideration is without merit, and has thus been denied.