McMillan v. Joseph Decosimo and Co.

PUBLISH
IN THE UNITED STATES COURT OF APPEALS
FOR THE ELEVENTH CIRCUIT
No. 96-6981
D. C. Docket No. CV-94-G-1572-NE
Bkcy Court. No. 88-6467
IN RE: DAS A. BORDEN & COMPANY,
Debtor.
ED LEIGH McMILLAN, II,
MONTFORD COMPANIES, INC.,
Plaintiffs-Appellees,
versus
JOSEPH DECOSIMO AND COMPANY,
Defendant-Appellant,
DAS A. BORDEN & COMPANY,
Defendant.
Appeal from the United States District Court
for the Northern District of Alabama
(December 31, 1997)
Before HATCHETT, Chief Judge, FAY and FARRIS*, Senior Circuit
Judges.
___________________________________________________________________
*Honorable Jerome Farris, Senior U.S. Circuit Judge for the Ninth
Circuit, sitting by designation.
FAY, Senior Circuit Judge:
Appellant Joseph Decosimo and Company (“Decosimo”), an
accounting firm, appeals a district court’s decision to reverse a
bankruptcy court order granting Decosimo $99,053.10 in accounting
fees as an administrative expense of the bankruptcy estate of Das
A. Borden & Company. Decosimo contends the district court erred in
substituting its judgment for that of the bankruptcy court.
Because it appears from the record and from our review of the
applicable law that Decosimo improperly sought compensation for
accounting work that was not reasonable and necessary to the
maintenance of the bankruptcy estate of the debtor, we find no
error on the part of the district court and therefore affirm its
order.
I. BACKGROUND
A. The Historical Facts
1. The Parties
The factual setting for this dispute is a bit complicated.
Appellant Decosimo is an accounting firm hired by Das A. Borden
(“Borden”), individually, and by Das A. Borden and Company (the
“Company”). Between January 1, 1990 and August 28, 1993, Decosimo
performed various accounting services including consulting, tax
audit duties, and other professional services for the Company,
Borden, and certain limited partnerships affiliated with the
Company and/or Borden. It is Decosimo’s work for Borden and the
eighteen other related entities that is the basis of this dispute.
The other entities are Turtle Lake, Ltd. (“Turtle Lake”), Navarro
2
Place Associates (“Navarro”), Riverchase, Ltd. (“Riverchase”),
Greentree Place Apartments (“Greentree”), Willow Wood Ltd. (“Willow
Wood”), Wood Village Ltd. (“Wood Village”) and twelve HUD-assigned
partnerships (“HUD”). With the exceptions of Willow Wood and Wood
Village, all of these partnerships had filed for bankruptcy, with
all of the bankruptcy cases, except that of Greentree, filed in the
U.S. Bankruptcy Court for the Northern District of Alabama.
Greentree’s bankruptcy case was filed in New Orleans, Louisiana.
The appellees are Ed Lee McMillan, II, and McMillan’s assignee, the
Montford Companies, Inc. (collectively “McMillan”). McMillan is a
secured creditor of the Company and Borden. Pursuant to a cash
collateral agreement, McMillan is obligated to pay the allowed
administrative expenses necessary to wind up the Company’s
bankruptcy case.1
2. Chronology
On July 8, 1988, the Company filed its voluntary petition for
Chapter 11 relief in the United States Bankruptcy Court for the
Northern District of Alabama. On July 11, 1988, Borden consented
1
Initially, Ed Lee McMillan, II, was a guarantor of $3,000,000
of debt of the Company and Borden owed to AmSouth Bank. At that
time, First United Bank was a $4,500,000 secured creditor of the
Company and Borden. Its security was the partnership interests and
distributions, management fees, and advances to the partnerships of
the Company and Borden. When First United Bank made public to all
parties in interest that it desired to sell its secured claim, Mr.
McMillan purchased the secured claim of First United Bank and then
allowed his cash collateral, consisting largely of management fees,
to be used by the Company to pay certain expenses necessary to
preserving the Company’s bankruptcy estate. In the cash collateral
agreement, this practice became formalized and Mr. McMillan agreed
to have his cash collateral applied to the administrative expenses
necessary to the preservation of the Company’s estate.
3
to the entry of an order of relief under Chapter 7. 2 On July 12,
1988, Borden converted his bankruptcy case to one under Chapter 11.
At the time of the commencement of the Company’s and Borden’s
bankruptcy cases, the Company and Borden were general partners of
approximately 40 limited partnerships which operated various
apartment complexes throughout the southeast.3
On October 8, 1991, the bankruptcy court approved the
employment of Decosimo as accountants for the Company. The
application stated that it was necessary for the Company to employ
the accountants for a number of reasons.4 In 1992, Borden applied
2
An involuntary bankruptcy petition had been filed against
Borden on April 18, 1988.
3
Turtle Lake, the 12 HUD-assigned partnerships, Navarro,
Riverchase, Willow Wood, and Wood Village were among the forty
limited partnerships. Borden alone was a general partner of
Greentree.
4
The reasons, as stated in the application, were limited to
the following:
(a) Said accountants must prepare federal and appropriate
state income tax returns of Das A. Borden & Company for
the year ended March 31, 1991, in accordance with the
attached engagement letter dated September 23, 1991, made
exhibit A to this application;
(b) Said accountants are to assist Debtors-In-Possession
in preparing periodic statements of the Debtors-In-
Possession operations as required by the rules of this
court or the Estate Analyst;
(c) Said accountants must inspect and verify financial
records and reports and review financial transactions;
(d) Said accountants must review claims and advise
concerning the financial computations and bases for
claims;
(e) Said accountants must advise concerning the tax
aspects of various partnership activities and the impact
upon Debtors-In-Possession of partnerships of which for
which Debtors-In-Possession are general partners; and
(f) Said accountants are to render such other accounting
services as will probably be required by Debtors-In-
4
to the bankruptcy court to have Decosimo perform personal
accounting work for Borden individually and this separate
application in a separate bankruptcy case was similarly approved.
In September of 1993, McMillan, the Company, and the Unsecured
Creditor’s Committee entered into an agreement in the Company
bankruptcy case which called for the liquidation of the Company and
payment of a small dividend to unsecured creditors. Under the
terms of this cash collateral agreement, McMillan agreed to the
use of his cash collateral to pay the administrative expenses
necessary to close the Company case. After an objection by
Decosimo, McMillan agreed to include Decosimo’s accounting fees as
an administrative expense of the Company’s case if such fees were
deemed by the bankruptcy court to have administrative expense
priority. On October 4, 1993, the bankruptcy court entered an
order approving the cash collateral agreement.
Prior to the court order approving the agreement, on September
30, 1993, Decosimo filed applications for payment in the Borden and
Company bankruptcy cases seeking payment from the Company for
various accounting services. The fees in dispute in the instant
case include:
1. Borden’s Personal Tax Work -- (1991) -- $31,961.07 for
work on Borden’s federal and state income tax returns, tax
accounting, and research and consulting.
2. Greentree -- (1992) -- $6,025.00 for tax and audit
services, preparation of K-1's.
3. Turtle Lake -- (1990) -- $5,793.75 for services performed
in 1990 related to litigation.
Possession.
5
4. The Twelve HUD-Assigned Partnerships -- (1992) --
$15,000.00 for preparation of financial statements to be
submitted to HUD relating to various audits and tax returns.
5. Navarro -- (1991 & 1992) -- $12,981.22 for preparation of
federal and state income tax returns and K-1's, assistance in
preparation of a plan of reorganization and in supplementing
disclosure statements.
6. Riverchase -- (1992) -- 2,266.66 for services relating to
compiling tax basis financial statements and preparation of
federal and state tax returns and K-1's.
7. Willow Wood -- (1990, 1991, & 1992) -- $15,875.00 for an
audit of the financial statements and preparation of federal
and state tax returns and Schedule K-1's.
8. Wood Village -- (1991 & 1992) -- $8,650.00 for performance
of audit services and preparation of federal and state tax
returns and Schedule K-1's.
Over the objections of McMillan, the Company, and Borden, on April
22, 1994, the bankruptcy court entered an order allowing all claims
5
in the Company case. McMillan appealed to the district court.
The district court conducted a de novo review of the record and
reversed the award of accounting fees. Decosimo appeals to this
court seeking a reinstatement of the bankruptcy court order.
II. Standard of Review
Our standard of review of the bankruptcy court’s findings of
fact is the clearly erroneous standard, while conclusions of law
made by the bankruptcy court or the district court are reviewed de
novo. In re Miller, 39 F.3d 301, 304-05 (11th Cir. 1994). As the
second court of review in this bankruptcy matter, this court’s
5
McMillan disputes the process provided by the bankruptcy
court after the bankruptcy court tried the case without allowing
McMillan access to Decosimo’s source documents and work product.
6
review of the decision of the district court is entirely de novo.
In re Sublett, 895 F.2d 1381, 1384 (11th Cir. 1990). As this court
explained in In re Sublett, when a district court reverses the
factual findings of a bankruptcy court, we must be independently
convinced, upon de novo review, that the factual findings by the
bankruptcy court were clearly erroneous. Id. at 1384 n.5.
However, when the question at issue depends upon a proper
construction of the Bankruptcy Code by the bankruptcy court or
district court, we subject such interpretations to de novo review.
In re Haas, 48 F.3d 1153, 1155 (11th Cir. 1995).
III. Discussion
Decosimo contends that in providing accounting services to
Borden individually and to various limited partnerships6 to which
the Company was either a general partner, managing partner, or
managing agent, Decosimo was acting on behalf of the Company’s
interests and is, accordingly, entitled to compensation for the
accounting services provided. The issue before this court is not
whether Decosimo is entitled to be compensated for the accounting
work done for Borden and the limited partnerships. Rather the
issue to be resolved by this court is whether the fees for such
services are to be categorized as an administrative expense of the
Company’s bankruptcy estate, for which McMillan would be liable
under the cash collateral agreement. We hold that the accounting
fees in dispute arising from services provided to Borden and the
6
Again, the Decosimo fees in dispute are for Borden, Turtle
Lake, Navarro, Riverchase, Greentree, the twelve HUD partnerships,
Willow Wood, and Wood Village.
7
limited partnerships are not administrative expenses of the
Company’s bankruptcy estate entitled to a favored priority, and
that the bankruptcy court’s decision to the contrary was in error
as a matter of law.
Initially, McMillan contends that Decosimo’s accounting fees
for services provided to Borden and the limited partnerships are
not administrative expenses of the Company’s estate because
Decosimo never received, as per 11 U.S.C. § 327(a), 7 the required
prospective approval in the Company case to provide services to any
of these challenged entities. While it is clear that Decosimo
never received prospective approval for the accounting services for
Borden and the limited partnerships, it is not clear that such
prospective approval is an absolute requirement. So far as we can
ascertain, this court has never grappled with the issue of whether
§ 327(a) of the Bankruptcy Code permits the nunc pro tunc,8 or post
facto,9 approval of professional services after the services have
7
The pertinent statute states that “the trustee, with the
court’s approval, may employ one or more . . . accountants . . .
to represent or assist the trustee in carrying out the trustee’s
duties under this title.” 11 U.S.C. § 327(a). The Company, as a
debtor in possession, has the right to appoint professionals such
as accountants through the operation of 11 U.S.C. § 1107(a) which
grants to the debtor in possession all the rights (except the right
to receive compensation), powers, functions and duties of a trustee
serving in a case under Chapter 11.
8
Nunc pro tunc literally means “now for then”. See In re
Singson, 41 F.3d 316, 318 (7th Cir. 1994).
9
It has not escaped our attention that Judge Easterbrook has
noted that the use of the appellation “ nunc pro tunc” in this
context is confusing given the use of that term in connection with
the correction of court records. See Singson, 41 F.3d at 318.
However, given that the parties in this dispute have elected to
refer to such after the fact authorization as nunc pro tunc
8
already been rendered. In light of other grounds mandating
affirmance of the district court order, we reserve our opinion on
the propriety of nunc pro tunc authorizations for another dispute
demanding the resolution of this divisive issue.10
The narrow issue to be resolved by this court is whether the
accounting services in dispute were actual and necessary to the
administration of the bankruptcy estate of the Company so as to
render McMillan liable for payment of such services under the cash
collateral agreement as an administrative expense. We hold that
the accounting fees at issue were clearly not necessary to the
upkeep and maintenance of the bankruptcy estate of the company and
we therefore affirm the district court. “The threshold requirement
for an administrative expense is that it be actual and necessary to
the preservation of the estate; the benefit must run to the debtor
and be fundamental to the conduct of its business.” In re Colortex
11
Indus., Inc. , 19 F.3d 1371, 1383 (11th Cir. 1994). Here any
benefit from the accounting services rendered by Decosimo ran to
authorization, we will refer to it by that name in this opinion.
10
In 1983, the Fifth Circuit offered a brief review of the
split between circuits on this issue of the requirement of prior
court approval under § 327(a). See In re Triangle Chemicals, Inc.,
697 F.2d 1280, 1285-88 (5th Cir. 1983). Since 1983, several
decisions on this subject have been issued by federal courts. See,
e.g., In re Jarvis, 53 F.3d 416, 419-21 (1st Cir. 1995); Singson,
41 F.3d at 319-20; In re Land, 943 F.2d 1265, 1267-68 (10th Cir.
1991); In re F/S Airlease II, Inc., 844 F.2d 99, 105 (3d Cir.
1988); In re THC Financial Corp., 837 F.2d 389, 391-92 (9th Cir.
1988).
11
The compensation Decosimo seeks under 11 U.S.C. § 330(a)(1)
specifically provides that the compensation is to be for “actual,
necessary services.”
9
Borden, individually, and to eighteen separate entities to which
the Company was either a general partner, managing partner, or
managing agent. While it is clear from the record that the
personal accounting work done for Borden is not an administrative
expense of the Company for which McMillan is liable,12 the
accounting work for the eighteen limited partnerships is a bit more
complicated.
Decosimo argues that under Alabama law the Company, as a
partner or managing agent of these partnerships, is obligated for
the debts of these partnerships.13 Assuming, without deciding, that
such is correct, the avenue for recovery for fees for Decosimo
would not be as an administrative expense, but as an unsecured
creditor. Accounting fees arising from services performed for
other debtors in separate bankruptcy proceedings and arising from
work for entities other than the debtor in this case are not fees
incurred in the upkeep and maintenance of this debtor’s estate and
therefore are not to be reimbursed as an administrative expense.
The tenuous and incidental benefit Decosimo alleges it provided the
12
There is no written or verbal agreement by either the Company
or McMillan to pay for the accounting services rendered to Borden.
Decosimo contends that Borden told Decosimo that McMillan would pay
for these services. The Company was never invoiced for these
services; in fact, Decosimo only invoiced Borden in its search for
payment. Consequently, there is no legal basis to allow Decosimo
and administrative claim against the Company’s estate for these
services.
13
Decosimo contends Ala. Code § 10-8-52(2) renders the Company
liable for the debts of the various partnerships. § 10-8-52
states: “All partners are liable . . . (2) Jointly and severally
for all debts and obligations of the partnership, except as may be
otherwise provided by law.”
10
Company, without more, is insufficient basis for administrative
priority status. See In re Appliance Store, Inc. , 181 B.R. 237,
242 (Bankr. W.D. Pa. 1995). Rather than give Decosimo a leg up on
the other creditors of the Company by granting its fee claims
administrative expense priority, we would require Decosimo to
proceed against each of the parties for whom the services were
rendered. If Decosimo is successful in its suits against these
limited partnerships, and if it were found that the Company is
liable for Decosimo’s fees, then Decosimo would stand as a creditor
of the Company, no more and no less. Given the Bankruptcy Code’s
overriding concern for keeping administrative expenses to a minimum
so as to preserve as much of the estate as possible for the
creditors, we must carefully review the legitimacy of such claims.
See Otte v. United States, 419 U.S. 43, 53 (1974). Decosimo’s fees
for work performed for other entities are simply not administrative
expenses of the Company for which McMillan is liable under the cash
collateral agreement.
III. Conclusion
For the foregoing reasons, we AFFIRM the judgment of the
United States District Court for the Northern District of Alabama.
AFFIRMED.
11