Doing business with businesses in Chapter 11 and trustees in bankruptcy-the importance of getting paid and knowing the ropes

We often counsel businesses that are asked to perform services for a company in Chapter 11 bankruptcy or a trustee for a debtor. Our advice is simple. Make sure you have the proper paperwork and watch that you get paid. A recent decision out of the New Jersey Bankruptcy Court, In re Livore, 2012 WL 2400469 (2012)  underscores this. Mr. Livore owned several apartment complexes. He started in Chapter 11 but soon found himself in Chapter 7. The Chapter 7 trustee decided it was going to be profitable to run these apartment complexes and got section 721 court authority to do so, evidently thinking the complexes could managed,  and sold as a going concern with money left over for creditors. He hired a property management company and real estate brokers. He paid the management company’s bills in the ordinary course of business and paid brokers upon sale of some of the properties. After all that, he found that, contrary to expectations, there would not be enough money left even to pay his fees and expenses, and other “administrative expenses”. Under the Bankruptcy Code, all persons with “administrative claims” for goods or services supplied after the bankruptcy filing that benefit the bankruptcy estate being administered are supposed to be paid first, and if there is not enough money to pay them all, they are all supposed to receive the same pro-rata percentage of the funds available. So the Trustee filed a motion asking the court to order the management company to refund some of the money they got paid because on a pro-rata basis in hindsight, the management company had been overpaid, leaving less money  to pay everyone else with administrative claims, including  the trustee’s attorney and his accountant,   the US Trustee and others.

Chief Judge Wizmur denied the motion, saying in essence that when a trustee (and by extension any Chapter 11 or Chapter 13 debtor) hires someone in the ordinary course of business under authority granted under the Bankruptcy Code, the money paid to such people on an ongoing basis is theirs to keep, and cannot be “clawed back” to “even the pot” for other people who provided services but were not paid. She relied on Bankruptcy Code section 549 which describes when and how a trustee can recover unauthorized post-petition transfers. That section, she said, limited the trustee’s rights to recover payments made post petition to those that were made without court approval or contrary to bankruptcy code authority.  Since the property manager here was not a “professional” and the trustee had hired and paid him in the “ordinary course of business” after receiving the required court approval to operate the apartment buildings as a business, his doing so was authorized under Bankruptcy Code section 363(c)(1).

This decision is well supported. It is good news for most people who get paid by a Chapter 11 or Chapter 13 debtor or a trustee while a bankruptcy is ongoing. It is not good for those who let unpaid bills mount or who do not get the proper court authorization before doing work or supplying value.

The latter group includes those who provide “professional” services, such as brokers, accountants, lawyers and auctioneers. They still have to make sure that the trustee gets court approval of their employment right at the outset. Judge Wizmur opined that the property manager’s role did not rise to that level.

Anyone who deals with debtors in bankruptcy or their trustees needs to know what is required. At a minimum, a written agreement, and a careful understanding of the legal basis for being hired is critcal, as is prompt billing and payment. One interesting note: had the Trustee engaged the property manager with a written contract that preserved the trustee’s right to “clawback” payments made so as to give all administrative claimants the same treatment, the result might have been different.

 



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