IN RE: DIVERSIFIED LENDING SERVICES, INC. Chapter 7, Debtor.

Case No. 00-15475PM.United States Bankruptcy Court, D. Maryland, at Greenbelt.
June 12, 2007

MEMORANDUM OF DECISION
PAUL MANNES, Bankruptcy Judge

Before the court is the Trustee’s Amended Application for Compensation (“Trustee’s Application”) in this bankruptcy case originally filed under Chapter 11 on May 15, 2000, and thereafter converted to a case under Chapter 7 on Debtor’s motion three days later. Janet M. Nesse, a member of the Chapter 7 Trustee Panel, was appointed Interim Trustee and there being no elected trustee thereafter served as Trustee in the case pursuant to 11 U.S.C. § 702(d) (“Trustee” or “Ms. Nesse”). The Trustee seeks final compensation of $111,051.93, reduced by an overpayment ($1,076.87) and a voluntary reduction ($1,921.00), as well as reimbursement for out-of-pocket expenses incurred of $12,432.10. The United States Trustee (“U.S. Trustee”) filed an Objection to the Trustee’s Application. The matter came on for hearing before the court on May 31, 2007. In the course of oral argument, the U.S. Trustee suggested that Ms. Nesse’s compensation be reduced by more than 30%.

The Objection is based entirely upon the perceived failure of Ms. Nesse to file a timely and accurate Trustee’s Final Report and Proposed Distribution (“Final Report”). In support of his argument, the U.S. Trustee cites numerous cases and relies upon § 704(a)(1) of the

Page 2

Bankruptcy Code.[1] The Objection does not pertain to the Trustee’s administration of the debtor’s assets, but rather to the quality and timing of the filing of the Trustee’s Final Report. Aside from this, there is absolutely no criticism of the way that the Trustee managed this estate — an extremely difficult estate that involved a quasi-Ponzi scheme where the controlling officer of the debtor, Jacob Krampf, used the payoff proceeds of Notes collected to continue making high interest rate payments on other Notes.

The Trustee took possession of the debtor’s records. These records, while complete, were not in electronic format and required considerable reorganization in order for the Trustee to understand the debtor’s financial affairs. Armed with these records in manageable form, Ms. Nesse filed numerous adversary proceedings to recover assets for the estate and liquidated the tangible and intangible properties in her possession. Because of the inability of the U.S. Trustee to convince the United States Attorney for the District of Maryland to commence a criminal prosecution against Jacob Krampf in May, 2005, the Trustee served her notice to abandon possible claims for restitution against Jacob Krampf or any other individual associated with the debtor. This notice was the last substantive matter in the estate.

Because of the Trustee’s efforts, this case will produce a return to creditors of approximately 60% of the principal amount of the allowed unsecured claims without priority. In the experience of the court, this is an extraordinary result in a Ponzi-type case. Criticism of the delay in closing of the case is softened somewhat by the fact that the Trustee obtained authorization of the court to make interim distributions of $800,000.00 (D.E. #360), $500,000.00 (D.E. #515), and $500,000.00 (D.E. #524). There remains for distribution in the estate account approximately $900,000.00. The delay in making this final distribution and the perceived errors in submitted but rejected Final Reports are the basis for the U.S. Trustee’s Objection.

Page 3

Cited by the U.S. Trustee in support of his argument is Yadkin Valley Bank Trust Co. v. McGee, et al. (In re Hutchinson), 5 F.3d 750 (CA4 1993). The Hutchinson case involved the trustee’s failure to sell certain dairy farm property expeditiously. The trustee was sued by the debtor and a mortgagee in a negligence complaint based upon the trustee’s alleged failure to consummate a sale pursuant to an offer obtained by the trustee that would have produced sufficient funds to discharge all encumbrances upon the property. During the period of the trustee’s delay, third parties entered the property and removed milking and feeding equipment in violation of the automatic stay. As a result of the removal of the equipment, the prospective purchaser lowered his offer to a price that the trustee would not accept. The property then went to foreclosure, and the sale did not cover a note securing a second deed of trust held by the bank. The court announces that § 704(a)(1) imposes upon a trustee the affirmative duty to reduce property to money as expeditiously as possible compatible with the interests of the debtor and interested parties. Hutchinson, 5 F.3d at 754. This is a statement of hornbook law with which no one can disagree. The remaining cases discussed below cited by the U.S. Trustee do not support the proposition espoused here.

In the case of In re Kitchen Lady, Inc., 144 B.R. 544 (BC M.D. Fla. 1992), the court reduced the compensation sought by the trustee by one-half, or $721.18, because of the fact that in 3-1/2 years of the 6-1/2 years the case had been pending, there was no appreciable activity of record. The court found that if funds ultimately distributed by the trustee had been available to the creditors, that the creditors would have earned interest of over $4,981.00 during the period that the funds were retained by the trustee.

In the case of In re Ducharme, 39 B.R. 681 (BC R.I. 1984), the court denied all compensation to a trustee under a number of Bankruptcy Act cases, finding this an appropriate sanction for a 5-year delay. There was evidence in the record of constant prodding from the Office of the Clerk of the Court. The court characterized the delay as “extreme, unjustified, and dilatory.”

In the case of In re C. Keffas Son Florist, Inc., 240 B.R. 466 (BC E.D.N.Y. 1999), the court found that the trustee had breached his statutory duty to maximize the proceeds of collection and to distribute those proceeds as expeditiously as possible by, among other breaches, keeping the case open needlessly with little result for 2-1/2 years after initial collection. Because of these breaches, a cost-benefit analysis was employed by the court that

Page 4

found that the trustee had not maximized the distribution of proceeds to creditors and offset the net opportunity cost lost by creditors against the trustee’s commission. The trustee was held personally liable for the insufficiency to the estate.

In the case of In re Blackburn, 171 B.R. 292 (BC S.D. Ohio 1994), the trustee’s report showed as the only disbursement one for the priority claim of the Internal Revenue Service at a rate of 71.10% of the claim. The trustee was held responsible for not placing the funds of the estate in an interest-bearing account and for spending unnecessary time and effort in reviewing claims that would not be payable in view of the priority position of the Internal Revenue Service. The court found a lack of supervision by the trustee over his staff and financial institutions holding estate funds and was, therefore, not entitled to maximum compensation in the amount of $529.39 and reduced that by 50%.

In the case of In re Harris, 143 B.R. 957 (BC M.D. Fla. 1992), the court reduced compensation by half in two estates administered by the trustee. The cases were filed on March 9, 1987. The assets of the estate were collected by the trustee without contest, and the last activity relating to any asset took place on June 17, 1988. Not until nine months later did the attorney apply for authorization to employ an accountant, and the final report was filed on January 23, 1992. The court found that the 3-1/2 year delay in the distribution of estate’s assets amounted to a prejudice of the creditors.

Finally, in the case of In re Williams, 159 B.R. 936 (B.C. Colo. 1993), the court took aim at a trustee who had filed final reports in four cases that were found wanting. Indeed, the testimony reflected that the U.S. Trustee had returned 97 final reports to that trustee, each comment by the United States Trustee having one to three pages of complaints. In one case, the report was filed 18 months after the last substantive action. Despite the delay, the trustee’s report was unsatisfactory because of the failure of the trustee to file tax returns in connection with taxes paid on certain litigation proceeds received and supplied no explanation of certain unadministered non-exempt property. In another case, this trustee’s final report did not reveal why certain accounts receivable had not distributed in a simple business case and the U.S. Trustee asserted that the trustee had failed to adequately supervise an employed auctioneer. The court could not even guess why there was such a long delay in closing the case and that the delay caused needless expenditure of U.S. Trustee’s and court administrative time. In another case, the trustee failed to account for over $90,000.00 in inventory subject to secured claims and to file

Page 5

proper notices of sale, unreasonably delaying administration. In another case, the U.S. Trustee took issue with the final report, likewise untimely filed, where it appeared that the trustee sold assets that were leased and not owned by the estate.

Aside from the Hutchinson case, none of the cases cited by the U.S. Trustee bears the least semblance of relevance to the instant case with 252 filed claims and nearly 600 docket entries. This liquidation of assets was handled competently and with reasonable dispatch.

The substance of the U.S. Trustee’s objections are set out at paragraph 11 of his pleading that dealt with the ante-penultimate Final Report filed by the Trustee. This Report resulted in a letter from the U.S. Trustee to the Trustee dated November 15, 2006, that appears as U.S. Trustee Exhibit No. C. This correspondence, and indeed the processing of the case, reflects hard feelings and a failure of both parties to communicate with a view towards resolving disputes. Such an attitude is not helpful to the administration of the bankruptcy system. Paragraph 11 of this exhibit states:

11. Unfortunately, the trustee again submitted a TFR that contained numerous serious errors:
(a) The trustee’s treatment of three “preference” creditors (Ethel Furman, Alan or Suzanne Furman, and Alan Marcus) was incorrect;[2]
(b) As a result of the treatment of these claims, the distribution to other unsecured creditors was overstated;
(c) The trustee proposed to overpay Dr. Melnick (Claim Nos. 15 and 238) as a result of her prior overpayment in the interim distribution;
(d) The proposed distribution failed to include the United States Trustee’s claim for unpaid quarterly fees (Claim No. 252); and
(e) The proposed distribution references distributions to “Other Professionals” in the amount of $116,442.30, which in fact represented the trustee’s proposed distributions to the preference creditors.

Subparagraphs (a) and (b) relate to how the claims of three creditors who received preferences were paid. The Trustee had crafted a settlement that was approved by the court (D.E.#s 284, 278, 270) whereby these creditors would not be required to refund preferences that they had

Page 6

received by the estate. Instead, because each of these “preference creditors” held valid claims as to which distributions were to be made, the “preference creditors” would be given credit for the amount of what the distribution to each would have been had there been no preference obligation subject to avoidance. This process would continue until the credits equaled the preference obligation in full. Upon full payment of the preference obligation, these creditors would then receive dividends from the Trustee. This simplified the process mandated by § 502(d) of the Bankruptcy Code. The U.S. Trustee took the position that the three preference creditors should be handled as though there were but one final distribution, rather than the interim distributions, while Ms. Nesse argued that the creditors should not receive credits until they had paid preference claims against them in full.

Under the U.S. Trustee’s view, the “preference creditors” received $40,000.00 more than they were to receive under the Trustee’s view. In time, the Trustee “caved in” on this proposition, but not without highlighting the difference of opinion in her notice of filings with the court that stated her calculation of final distribution. In so doing, the Trustee must have decided that it was in the interest of all concerned to close out this estate without further delay caused by her taking up the cudgel for the non-preference creditors. These creditors had the opportunity to object to the distribution mandated by the U.S. Trustee. It is true as the U.S. Trustee points out that nothing prevented the Trustee from filing the Final Report in the format urged by her. This tack would only have caused a delay in the final distribution, because the U.S. Trustee would have objected to the Final Report. If the parties involved, after being alerted by the Trustee, decided not to take action, that was their decision. Instead, the Trustee filed a statement entitled “Calculation of Final Distribution” as an addition to her Notice of Filing of her Final Report (D.E. #567). This document explained her position and the dispute with the U.S. Trustee as to the distribution to the “preference creditors.” The Trustee was not surrendering on this issue without this parting shot.

As to subparagraph (c), the Trustee agreed that there was an overpayment to Dr. Melnick of $1,076.87. In the interests of bringing the estate to an end, the Trustee agreed that sum would be deducted from her compensation. Likewise, as to subparagraph (d), the Chapter 11 administrative expense of the U.S. Trustee was covered in future accounts. The court is satisfied that the reference to the preference creditors in subparagraph (e) as “Other Professionals” as

Page 7

shown in the Final Report is an unfortunate product of the software system used by Trustees in this District. The court does not see that any harm was caused by this labeling.

The court is advised that on December 11, 2006, the U.S. Trustee approved the distribution by the Trustee, other than the matter of the Trustee’s final compensation. The U.S. Trustee takes issue now with the failure to file a Final Report until February 16, 2007, and urges that the Trustee should be penalized $34,000.00 for what the U.S. Trustee perceives as a 10-month delay in processing the Final Report. As stated above, the court finds the administration of the case, in terms of liquidation of the assets, to be first-rate in every respect. For whatever reason, the parties before the court could not communicate successfully in an effort to bring this matter to a speedier conclusion. The court does not believe that this breakdown is entirely the Trustee’s fault. On the other hand, the Trustee is not blameless in bringing this case to a conclusion more speedily. However, the court is not inclined to reduce her compensation by the token amount warranted.

An appropriate order will be entered.

[1] 11 U.S.C. § 704. Duties of trustee

(a) The trustee shall —
(1) collect and reduce to money the property of the estate for which such trustee serves, and close such estate as expeditiously as is compatible with the best interests of parties in interest[.]

[2] Review of the treatment of these three creditors was further complicated by the trustee’s cryptic statement in the report that she was “manually” computing the payment of these claims. Unfortunately, the trustee failed to disclose how the claims were calculated.