- Category: Judge Somers
- Published on 07 January 2011
- Written by Judge Somers
SIGNED this 05 day of January, 2011.
Dale L. Somers
UNITED STATES BANKRUPTCY JUDGE
Opinion designated for on-line use and print publication
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANSAS
BROOKE CORPORATION, et el., CASE NO. 08-22786
DEBTORS. CHAPTER 7
MEMORANDUM OPINION AND ORDER GRANTING
THE TRUSTEE'S MOTION FOR SUMMARY JUDGMENT
ON THE ADMINISTRATIVE EXPENSE REQUEST OF
THE BANK OF NEW YORK MELLON
The matter under advisement is the motion for summary judgment filed by Albert
A. Riederer, the Chapter 7 Trustee for Brooke Corporation, Brooke Capital Corporation,
and Brooke Investments, Inc. (hereafter collectively “the Debtors”), seeking judgment in
his favor on the Administrative Expense Request filed by the Bank of New York Mellon,
as Indenture Trustee (hereafter “BONY” and also at times referred to by the parties as
Case 08-22786 Doc# 1676 Filed 01/05/11 Page 1 of 34
“BNY” and “BNYM”).1 The Court has jurisdiction.2 The Court has carefully examined
the briefs of the parties, reviewed the exhibits provided, and heard the oral arguments of
counsel. For the reasons stated below, the Court grants the motion for summary
judgment, finding that there are no material facts in controversy and the uncontroverted
facts establish that the prepetition activities of BONY for which it seeks compensation
from the estates did not provide a substantial benefit to the estates, as required by
BONY has requested, pursuant to 11 U.S.C. § 503(b)(3)(D), to be paid as an
administrative expense the attorney fees incurred prepetition by counsel for two
securitization lenders, Bayerische Hypo-und Vereinsbank (hereafter “HVB”) and Fifth
Third Bank (hereafter “Fifth Third”). BONY is the Indenture Trustee for notes issued by
Brooke Securitization Company 2006-1 (“the 2006-1 Notes”), held by HVB, which has
become UniCredit Bank AG (hereafter “UniCredit”),3 and for notes issued by Brooke
Master Trust (“the 2007-A Notes”), held by Fifth Third. The 2006-1 Notes and the 2007
1 Doc. 1027.
2 This Court has jurisdiction pursuant to 28 U.S.C. § 157(a) and § 1334(a) and (b) and the
Standing Order of the United States District Court for the District of Kansas that exercised authority
conferred by § 157(a) to refer to the District’s bankruptcy judges all matters under the Bankruptcy Code
and all proceedings arising under the Code or arising in or related to a case under the Code, effective July
10, 1984. Further this is a core proceeding which ths Court may hear and determine as provided in 28
U.S.C.§ 157(b)(2)(A). There is no objection to venue or jurisdiction over the parties.
3 See Doc. 1384-14, p.1, stating “UniCredit Bank AG, New York Branch, a German corporation
(formerly Bayerische Hypo-und Vereinsbank AG, New York Branch) has acquired the 2006-1 notes.”
For purposes of this opinion, no distinction shall made between UniCredit and HVB.
Case 08-22786 Doc# 1676 Filed 01/05/11 Page 2 of 34
A Notes are collectively referred to herein as “the Notes.”
Very generally, prepetition, the Debtors and related Brooke entities (hereafter
collectively “the Brooke Entities”) operated an insurance agency franchise business. The
issuers of the Notes and Brooke-sponsored entities performing similar functions are
referred to by the parties as “the Securitization Companies.” The Brooke Entities loaned
monies to their franchisees (“Brooke Franchise Agents”), primarily for the acquisition or
growth of insurance brokerage businesses. Many of these loans were then “bundled” and
sold to certain Securitization Companies or to other lenders, which then issued notes to
investors, such as HVB, Fifth Third, and other banks. The notes were secured by the
income and assets of the Brooke Franchise Agents. The parties refer to these transactions
as “Securitizations.” Under the governing documents, revenue flowing to the borrowers
was required to be captured in certain trust accounts. In turn, those monies were
supposed to be distributed through a “waterfall,” a carefully structured procedure
governing the distribution of revenue, so that, among other things, principal and interest
would be repaid. At least by the summer of 2008, the Brooke Entities were not
distributing the funds as agreed.
FINDINGS OF FACT.
A. UNCONTROVERTED FACTS.
The parties agree the following facts are uncontroverted.
In or about the summer of 2008, it became apparent to BONY and other creditors
that the Debtors and some related companies were in significant financial distress, were
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misappropriating and diverting funds, and had manipulated their accounting system to
conceal such diversions and misappropriations. As a result, counsel for UniCredit and
Fifth Third by late August began considering the possibility of bringing suit against
certain of the Brooke Entities in order to bring them under the management of a receiver,
and began drafting papers for such a suit. On or about September 3, 2008, representatives
of the holders of the Notes, Textron Business Services, Inc. (the servicer for a number of
the Securitization Companies), and other creditors met with representatives of the Debtors
and some related Brooke companies in continued hopes of reaching a consensual
resolution of the issues surrounding the Brooke Entities. Those efforts failed when it
became apparent that the Brooke Entities were, and admitted to, continuing their
diversions of money, and other serious issues came to light. At that point, UniCredit and
Fifth Third determined that bringing an action to replace the Brooke Entities’
management with a receiver was the best way to protect the assets of the Brooke Entities
and achieve honest management of the Brooke Entities. Contemporaneously and in
connection with the anticipated action, after considering several possible receivers,
BONY selected Albert A. Riederer, a former judge and experienced insurance company
liquidator, as its proposed receiver.
On September 11, 2008, BONY, in its capacity as Indenture Trustee for the Notes,4
filed a Complaint in the United States District Court for the District of Kansas (Case No.
4 BONY alleged that as of September 3, 2008, $35,858,800.77 in aggregate principal amount of
2006-1 Notes remained outstanding, and on the sale date, the outstanding aggregate principal amount of
the 2007-A Notes was $139,946,744.93.
Case 08-22786 Doc# 1676 Filed 01/05/11 Page 4 of 34
08-CV-2424) against Aleritas Capital Corporation, Brooke Capital Corporation, Brooke
Corporation, Brooke Capital Advisors, Inc., Brooke Agency Services Company LLC, and
Robert D. Orr5 (hereafter “Special Master Case”), alleging breach of contract, conversion
and fraud, and seeking the prompt appointment of a receiver. In its Complaint, BONY
made several factual allegations which are relevant to the present matter. The following
paragraphs, retaining the Complaint’s numbering, paraphrase the relevant allegations:
This action arises from the Defendants’ fraudulent conduct and misappropriation
of millions of dollars pledged to note holders under certain securitizations (and due
other lenders), and the spoliation of evidence to conceal these Defendants’ actions.
Instead of honoring the carefully structured procedures governing the distribution
of revenue, the Defendants other than Robert D. Orr (hereafter the “Brooke
Parties”) have diverted the revenues designed to be deposited in trust accounts to
The Brooke Parties have put in place a phony records system designed to keep at
bay the servicer of the loans. The Brooke Parties recently have experienced the
departure of key high level executives. Mismanagement, distrust, and dishonesty
abound throughout the Brooke Parties.
The Brooke Parties have altered their computer systems to conceal information
concerning bank accounts to which monies are deposited in order to make it
5 Debtor Brooke Investments, Inc., was not named as a defendant.
Case 08-22786 Doc# 1676 Filed 01/05/11 Page 5 of 34
difficult to ascertain where monies received from insurance companies and others
are deposited, enabling the Brooke Parties to deposit monies to accounts other than
those required under their contracts with BONY, Textron, franchisees and others.
Brooke Capital continues to misappropriate, or direct the misappropriation of,
funds comprising part of the collateral.
The failure of agencies caused by the Brooke Parties’ defalcations is causing the
loss of collateral for the Notes, a loss that increases every day the diversion of
As a result of the defaults and misappropriation of funds alleged in the Complaint,
BONY is in danger of suffering irreparable injury and is entitled to the
appointment of a receiver forthwith to preserve and protect the business and
operations of the Brooke Entities, and to maintain their value.
78(C) The diversion and dissipation of the funds specified in the Complaint, which
constitute BONY’s collateral for the benefit of Fifth Third and HVB, irreparably
harms BONY in its capacity as Indenture Trustee under each of the Indentures, and
Fifth Third and HVB as holders of the Notes.
78(D) No remedy other than a receivership can protect BONY’s interest from further
78(E) The appointment of a receiver will do more good than harm, in that the Brooke
Parties’ fraudulent conduct harms not only BONY, but the Brooke Parties’ other
creditors, and hundreds of insurance agencies who are Brooke franchisees.
Case 08-22786 Doc# 1676 Filed 01/05/11 Page 6 of 34
Given the dire problems that had become apparent at the Brooke Entities,
UniCredit and Fifth Third recognized at the time the Special Master Case was
commenced that bankruptcy of some of the Brooke Entities, including the Debtors, was a
BONY simultaneously with the filing of the Complaint moved for the appointment
of Mr. Riederer as Receiver. The Brooke Parties opposed the motion for a receiver, but
instead moved for the appointment of a special master under Federal Rule of Civil
Procedure 53. Debtors Brooke Corporation and Brooke Capital Corporation, as parties to
the Special Master Case, agreed that the appointment of a special master was necessary,
Pending the final adjudication of this action, Defendants (and,
really, all parties) need the intervention of a Special Master
appointed by the Court to ensure that the flow of money from
the pool franchise/borrowers is properly distributed to BCAP,
BONY, TBS, Aleritas, Fifth Third, HVB, and the various
franchise borrowers in accordance with the terms and
requirements of the various securitization documents.
BONY opposed the Brooke Parties’ motion. After intense negotiation under the auspices
of the District Court, on September 17, 2008, the District Court of Kansas entered a
Consent Order Appointing a Special Master (“Consent Order”) wherein Mr. Riederer was
appointed as Special Master for Brooke Corporation, Brooke Capital Corporation and
Brooke Capital Advisors, Inc. (collectively “the Special Master Entities”). The Consent
Order was jointly prepared and submitted to the Court by counsel for BONY and the
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Defendants. The Consent Order granted the Special Master substantially the same
powers as BONY had sought for a receiver.
In his capacity as Special Master, Mr. Riederer was given authority to direct the
affairs of the Special Master Entities. Paragraph 5 of the Consent Order specifically
directed that “[t]he Special Master will act on behalf of the Special Master Entities and
their subsidiaries to implement the terms of the Securitization Documents,” defined to
include all documents relating to all Securitization Companies sponsored by the Brooke
Entities, of which there were several in addition to the 2006-1 and 2007-A Securitizations
with respect to which the Special Master Case was brought. BONY served as trustee for
many or perhaps all of the Securitizations issued by the Securitization Companies.
Relevant provisions of the Consent Order were based on the order entered in the
Unofficial On-Shore Creditors’ Committee of the Bayou Family of Companies v. Bayou
Group, LLC, No. 7:06-sv-02379-UA (Apr. 28, 2006).6 The appointment of the Special
Master had the intended effect of stopping the defalcations, and allowed the Special
Master and creditors to understand whether or not the Brooke Parties could remain going
Both the Special Master and his counsel had regular and extensive contact with
representatives and attorneys for BONY and lender banks involved in the Securitizations
6 When moving for an award of administrative expenses, BONY relies primarily upon a 2010
opinion in the bankruptcy cases of the Bayou family of investment funds that awarded fees and expenses
for prebankruptcy services to an unofficial committee of investors under § 503(b)(4). In re Bayou Group,
LLC, 431 B.R. 549 (Bankr. S.D.N.Y. 2010).
Case 08-22786 Doc# 1676 Filed 01/05/11 Page 8 of 34
in issue in the Special Master Case, including Fifth Third and HVB-UniCredit
(collectively, “the BONY Banks”). During the period before the Debtors’ bankruptcy
cases were filed, there were many occasions where the BONY Banks’ interests and the
Special Master’s interests coincided, and the BONY Banks’ representatives and attorneys
worked cooperatively and collaboratively with the Special Master and his attorneys
because of such mutuality of interests. In contrast, there were other occasions where the
interests of the BONY Banks and the Special Master were not mutual, and on those
occasions the BONY Banks’ representatives and attorneys disagreed with the Special
Master and his attorneys, and attempted to influence the Special Master to change his
plans or conduct.
After the appointment of the Special Master, representatives of BONY
communicated regularly and frequently with the Special Master and professionals he
engaged in order to aid his understanding of the Debtors’ businesses and agreements, and
to plan the operations and wind-down of the Debtors, allowing for orderly bankruptcy
cases and preserving the assets of the Debtors’ estates. Because the Brooke Entities were
not capable of providing services to the Brooke Franchise Agents (such as acting as agent
of record or providing the marketing and other services required under the franchise
agreements), BONY worked with the Special Master to (among other things) secure the
release of Brooke Franchise Agents in the Securitizations (who were also creditors of the
Brooke Entities) so that the agents could find new agents of record (or become such) in
order to continue in their business of selling insurance policies. The release of the agents
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from their franchise agreements had no effect on the flow of commission payments under
existing policies to and through the Brooke Entities. As the Special Master reported,
most policy releases “will continue to have endorsement commissions flowing to Brooke
for up to 12 months following the effective date of the release.” It became apparent that
the Brooke Entities could not continue to function and that filing Chapter 11 bankruptcy
cases would be in the best interests of “the Debtors, their subsidiaries, their creditors and
all parties in interest.”
On October 28, 2008, Brooke Corporation and Brooke Capital Corporation filed
their Chapter 11 petitions. Mr. Riederer was appointed as the Chapter 11 Trustee for both
companies on October 29, 2008, and joint administration of the cases was ordered. As
Debtors Brooke Corporation and Brooke Capital Corporation said in their application to
appoint Mr. Riederer as their Chapter 11 Trustee:
Debtors believe that the Special Master has provided
needed oversight and stability to the Debtors’ business
operations and given confidence and trust to the creditors.
Debtors believe it is essential to the preservation of the
Debtors’ assets that the knowledge and experience of the
Special Master be combined with the enhanced powers and
protections afforded debtors in bankruptcy by having the
Special Master be appointed Chapter 11 Trustee for Debtors.
On November 3, 2008, Brooke Investments, Inc., filed its Chapter 11 petition, and
likewise sought and obtained Mr. Riederer’s appointment as its Chapter 11 Trustee. Joint
administration with the other two Debtors’ cases was also granted.
B. FACTS WHICH THE COURT FINDS UNCONTROVERTED BECAUSE
BONY’S ATTEMPTED CONTRAVENTION OF THE TRUSTEE’ STATEMENTS
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IS NOT EFFECTIVE.
When moving for summary judgment, the Trustee provided the following
additional statements of fact which BONY in its response identified as controverted. For
the reasons stated in the footnotes to each paragraph, the Court finds that these facts are
uncontroverted for purposes of the Trustee’s motion for summary judgment.
During both the Pre-Petition Period (September 17, 2008, to October 28, 2008)
and the Bankruptcy Period (October 20, 2008, to the present), all actions, conduct and
statements by the BONY Banks’ representatives and attorneys which were observed by
both the Special Master and his counsel were consistent with actions taken for the sole
benefit of the BONY Banks and their interests in the Debtors and assets owned or
controlled by the Debtors.7
7 BONY attempts to controvert this statement of fact by stating: “The Noteholders [HVB and
Fifth Third] undertook substantial activities with respect to, among other things, Brooke Franchise
Agents, and provided information to the Special Master concerning acts and assets of the Debtors.” This
is not a denial of the facts stated by the Trustee; it is consistent with the Trustee’s statement, since the
amounts owed by the Brooke Franchise Agents were collateral for the Notes.
BONY further attempts to controvert the Trustee’s statement of fact by the following statement:
“As the Trustee has acknowledged, these actions were intended to, and did benefit the estate and other
creditors.” BONY cites in support two paragraphs of a “first-day” emergency motion, filed in this Court
(Doc. 24) jointly by the Trustee and three banks having interests in the Securitizations, to approve an
agreed order permitting continuations of prepetition releases, powers of attorney, and other agreements
between the Debtors and Brooke Franchise Agents. That motion, prepared by counsel for the BONY
Banks, sought to cut off the payment of commissions to the Debtors, and direct that the commissions be
paid directly to the BONY Banks. The paragraphs of Doc. 24 cited in support recite that the proposed
order “seeks to preserve and protect the assets of the bankruptcy remote Securitization Companies” and to
transfer servicing and other obligations to the movants “in order that the Securitization Companies and
franchisee relationships may not be further disrupted.” Doc. 24 does not support either the contention
that the Trustee has acknowledged that BONY’s actions were intended to and did benefit the estate, or the
related contention that such actions did in fact benefit the estate and other creditors. Further, even if
properly supported, the statement that the estate and creditors were benefitted does not controvert the
Trustee’s statement that BONY’s actions were consistent with action taken for the sole benefit of the
BONY Banks. BONY cites no activities undertaken which were not consistent with action taken for the
benefit of the BONY Banks and their interests in the Debtors and assets controlled by the Debtors.
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The BONY Banks’ interests as expressed to Mr. Riederer and his counsel, and to
the Court in the Special Master Case were to protect their position in the assets of the
Debtors and funds controlled by the Debtors which were alleged to be collateral for the
BONY Banks’ secured loans to Brooke franchisees.8
The BONY Banks’ interests were primarily focused on the cash flow stream of
commission payments being made by various insurance companies to the Debtors and
their affiliates in which the BONY Banks’ claimed their security interests attached.9
One subject where the BONY Banks and the Special Master disagreed was
whether the income stream collected by the Special Master should be immediately turned
over to the BONY Banks or held by the Special Master until an allocation could be
completed. Understandably, out of self-interest, the BONY Banks wanted to get control
of the money and that became the focal point of their activities, both in the Pre-Petition
Period and the Bankruptcy Period. During the Pre-Petition Period, the BONY Banks
worked hard to have the Special Master terminate franchise agreements so that the BONY
8 BONY attempts to controvert this statement by stating, “BNYM was interested in, among other
things, the Debtors’ provision [of] (or failure to provide) services to Brooke Franchise Agents.” This
statement does not controvert the Trustee’s statement. Further, providing services to Brooke Franchise
Agents is directly related to the commissions earned by the Agents, which commissions were the source
of payments on the Notes.
BONY also states, “As the Trustee has acknowledged, these actions were intended to, and did
benefit the estate and other creditors.” This statement is rejected as the basis for controverting the
Trustee’s statement for the reasons stated in the immediately preceding footnote.
9 BONY’s response to this statement is identical to its response to the immediately preceding
statement and is rejected for the reasons stated in the immediately preceding footnote.
Case 08-22786 Doc# 1676 Filed 01/05/11 Page 12 of 34
Banks could get the insurance companies to stop paying commissions to Brooke.10
Another subject of disagreement between the BONY Banks and the Special Master
was whether the Brooke Parties should be put into bankruptcy. The Special Master first
raised this issue with the BONY Banks in early October and the BONY Banks
discouraged the filing of bankruptcy cases and remained opposed to the idea, but when
the Special Master made it clear that he would file bankruptcies, the BONY Banks
focused their attention on first-day motions designed to clarify the termination of
franchise agreements so that insurance commissions would not be paid to the Debtors.11
10 BONY states it denies this statement. It responds as follows:
In fact, BNYM sought to have the Special Master fully comply with the terms of the
Special Master Order, requiring full compliance with the terms of the Securitization
Documents, and distribute funds accordingly, rather than maintain those funds under the
control of Brooke Entities. With respect to franchise agreements, . . . BNYM and others,
including Brooke Franchise Agents, sought termination of the franchise agreements so
that the Brooke Franchise Agents could seek direct agent of record appointment with
insurance carriers because the Brooke Entities were no longer providing services,
including acting as agent of record for new policies, to the Brooke Franchise Agents. As
the Trustee himself determined, terminating franchise agreements would have little or no
effect on the payment of commissions through Brooke on then-existing policies.
The Court finds that BONY’s first sentence does not controvert that of the Trustee, since the
Securitization Documents provided for distributions to the BONY Banks. The evidence cited in support
of sentence two is the emergency motion filed in this Court to approve prepetition releases, powers of
attorney, and other agreements to terminate the franchise agreements (Doc. 24). Rather than
controverting the Trustee’s statement, this document supports the Trustee as it evidences BONY’s interest
in getting control of the money. The evidence cited in support of sentence three does not support the
statement. In fact the Trustee’s memo cited as supporting the last sentence, while not stating that
termination would have little or no effect on the payment of commissions through the Brooke Entities on
existing policies, does state: “Lenders are in the process of establishing direct contact with
agent/borrowers, and we are helping to get that done. In order for collateral value to be preserved, agents
will also need a relation to one or more carriers without Brooke in the middle.” (Emphasis supplied.)
11 BONY denies this statement, stating:
In fact, on October 8, 2008, the Special Master reported to Judge Lungstrum in the
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After the Debtors filed for bankruptcy, the Special Master applied for
compensation in the Special Master Case for himself and his professionals for the Pre-
Petition Period. The BONY Banks objected to this fee request in large part because a
portion of the fees were for services rendered in connection with the consideration of and
planning for the filing of bankruptcy by the Debtors.12
District Court Action that Brooke was at a crossroads, whether to proceed with an orderly
wind down or file a Chapter 11 bankruptcy. A wind down would mean releasing the
Brooke Franchise Agents from their franchise agreements, working with them to make
sure they had access to insurance carriers, and lining up the agents with the Securitization
Companies and or banks holding their loans. He reported that he had spoken that day
with about fifty banks via conference call, and that the banks preferred an orderly wind
down. A wind down would require funding contributions from the banks. The Special
Master further stated that a Chapter 11 filing would be “catastrophic” to the banks’
collateral. UniCredit Bank, Fifth Third and other creditors did, in fact, provide funding
contributions. In addition, the “first day motion designed to clarify the termination of
franchise agreements” referenced in paragraph 12 was in fact a motion in which the
Trustee, BNYM, UniCredit Bank, Fifth Third Bank and another bank, DZ Bank, joined.
In that motion, the Trustee (along with the other parties) stated that “the proposed Agreed
Order [with respect to franchise termination and other matters] is in the best interests of
the Debtors’ estates and their creditors.” The Trustee further concurred that:
The Agreed Order does not disturb the property owned by the Debtors’
estates, as the disengagement of Insurance Agents from the Debtors’
business allows relationships to continue which otherwise would
collapse. In this sense the Agreed Order simply implements the terms of
the Consent Order that the Debtors agreed to and seeks to preserve and
protect the assets of the bankruptcy remote Securitization Companies.
The Release of franchisees from their agreements and grant of Powers of
Attorney [to certain Securitization Companies or Lenders] similarly
furthers that purpose and disentangles certain of the Debtors (and
affiliated non-Debtors) from the burdens of continued servicing and
other obligations which they can no longer support.
Thus, “the Agreed Order simply reaffirms the course of business that the Movants have
already agreed to.”
The Court finds that BONY’s statement does not controvert the substance of the Trustee’s statement of
fact as to the disagreement regarding filing for bankruptcy and the purpose of the first day order regarding
12 BONY denies this paragraph, and the following two paragraphs, stating:
The fee dispute – which was only over the proper source of payment for certain costs and
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In their objection, the BONY Banks argued that bankruptcy was not within the
scope and purpose of the Special Master Case.13
Ultimately, this portion of the Special Master’s attorney fees was never allowed in
the Special Master Case and was never paid.14
C. CONTROVERTED STATEMENT OF FACT.
The Trustee states as an uncontroverted fact the following:
Neither Riederer [the Receiver-Trustee] nor Schmidt [counsel for the
Receiver-Trustee] are aware of any action taken by the BONY Banks
during the Pre-Petition Period [or] the Bankruptcy Period which provided a
direct tangible benefit to the Debtors, their estates or their creditors (other
than the BONY Banks) in this bankruptcy case. Whatever indirect benefit,
if any, which the Debtors or their estates may have received from the
actions of the BONY Banks in the Pre-Petition Period would have been
only incidental to the benefit intended and directed by the BONY Banks to
expenses claimed by the Special Master – had nothing to do with whether or not the
appointment of the Special Master and BNYM’s work with the Special Master
constituted a substantial benefit to the Debtors’ estate. The basis for the objection was
that the Special Master had already sought (and UniCredit Bank had provided) money for
the purpose of preparing for bankruptcy. Thus, the basis for the objection was that the
Special Master was seeking payment for that [for] which he had already been paid. In
addition, BNYM objected because any additional costs for bankruptcy filings were
properly ordinary business expenses of the Debtors, not matter chargeable by the Special
The Court finds that BONY’s statement does not controvert the Trustee’s statement that BONY opposed
the fee request because it included compensation for services related to the preparation for bankruptcy
filings. BONY’s position as stated in its pleading opposing the Special Master’s request was “the
provision of bankruptcy advice to the Brooke companies so that they might file for bankruptcy is an
expense of Brooke, not the Special Master.”
13 BONY denied this statement for the same reasons as the preceding statement. This denial is
rejected as a basis for controverting the Trustee’s statement for the reasons stated in the immediately
14 BONY denied this statement for the same reasons as the two preceding statements. This denial
is rejected as a basis for controverting the Trustee’s statement for the same reasons as those denials were
Case 08-22786 Doc# 1676 Filed 01/05/11 Page 15 of 34
go to themselves.
BONY denies this statement on the basis that the appointment of Mr. Riederer as Special
Master was a benefit. BONY states:
In fact, the Debtors in the District Court Action admitted that the
appointment of a Special Master was necessary. Before this Court in this
case, Debtors represented that the Special Master “has provided needed
oversight and stability to the Debtors’ business operations and given
confidence and trust to the creditors” such that “Debtors believe it is
essential to the preservation of the Debtors’ assets that the knowledge and
experience of the Special Master be combined with the enhanced powers
and protections afforded debtors in bankruptcy by having the Special
Master be appointed Chapter 11 Trustee for Debtors.”
Whether the BONY Banks during the Pre-Petition Period engaged in activities
which were a substantial benefit to the administration of this case is the ultimate finding
to be made by the Court when ruling on the pending motion. The Trustee’s “statement of
uncontroverted fact” quoted above is merely a statement of the desired finding on this
issue and is not a proper subject for inclusion in the statements of fact submitted in
support of a motion for summary judgment. Whether the activities in issue provided a
substantial benefit or only an indirect benefit is one of the issues before the Court.
D. FACTS ALLEGED BY BONY WHICH THE COURT WILL DISREGARD
BECAUSE THEY ARE CONTRADICTED RATHER THAN SUPPORTED BY
THE EVIDENCE CITED.
BONY asserts two statements of fact which are contradicted, rather than
supported, by the exhibits cited by BONY. The Court will therefore disregard these
statements for purposes of the summary judgment motion.
First, BONY states the following as an uncontroverted fact: “[T]he Special
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Master Order was drafted to give the Special Master the management of the Debtors, to
file Debtors in bankruptcy and to allow him to continue as Chapter 11 Trustee of
Debtors.”15 Paragraph 7 of the Consent order is cited as support. The Trustee responds,
correctly, that the Consent Order provides that bankruptcy could not be filed without the
approval of both the Special Master and the Debtors, and that the Special Master Order is
silent as to the Special Master serving as a Chapter 11 trustee.
Second, BONY states the following as an uncontroverted fact: “As anticipated in
the Consent Order, Mr. Riederer was appointed Chapter 11 Trustee on October 29,
2008.”16 The Trustee correctly controverts the first phrase of this statement, since there is
nothing in the Consent Order anticipating that Mr. Riederer would be appointed Chapter
BURDEN OF PROOF AND APPLICABLE SUMMARY JUDGMENT
BONY, an indenture trustee, seeks compensation as administrative expenses for
attorney fees and expenses incurred prepetition by two securitized lenders during the
period beginning with the planning for the filing of the Complaint in the Special Master
Case and ending with the filing of the Chapter 11 case on October 28, 2008. BONY
seeks the award pursuant to 11 U.S.C. § 503(b)(3)(D).17 It provides:
15 Doc. 1384, ¶ 15 (sentence 2).
16 Id. ¶ 21.
17 It could be argued that BONY seeks reimbursement under the wrong Code section. Subsection
503(b)(3) specifically excludes compensation and reimbursement of a kind specified in § 503(b)(4),
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After notice and a hearing, there shall be allowed
administrative expenses, other than claims allowed under
section 502(f) of this title, including —
. . .
the actual, necessary expenses, other than
compensation and reimbursement specified in
paragraph (4) of this subsection, incurred by —
. . .
a creditor, an indenture trustee, an
equity security holder, or a
committee representing creditors
or equity security holders other
than a committee appointed under
section 1102 of this title, in
making a substantial contribution
in a case under chapter 9 or 11 of
The Tenth Circuit held in Lister18 that administrative expenses incurred prior to the
bankruptcy filing are compensable under this subsection if they provided a “substantial
contribution” to the bankruptcy estate. BONY, as the party seeking compensation, has
the burden of proof to establish entitlement by a preponderance of the evidence.19
Summary judgment may be entered in favor of the Trustee, who does not have the
burden of proof, if BONY, as the party seeking the award, has insufficient evidence to
prevail as a matter of law. The Trustee, as the moving party, bears the initial burden to
which provides for reasonable compensation for professional services rendered by an attorney of an entity
whose expenses are allowable under § 503(b)(3)(D). However, since this issue has not been raised and
BONY’s right to reimbursement under § 503(b)(3)(D) would be in issue if the motion were filed under
§ 503(b)(4), the Court will not consider the possibility that BONY is proceeding under the wrong Code
18 Haskins v. United States (In re Lister), 846 F.2d 55, 57 (10th Cir. 1988).
19 Lister, 846 F.2d at 57; In re 9085 East Mineral Office Bldg., Ltd., 119 B.R. 246, 249 (Bankr. D.
Case 08-22786 Doc# 1676 Filed 01/05/11 Page 18 of 34
establish his “presumptive entitlement to summary judgment in the absence of an
adequate response by the nonmovant.”20 “In moving for summary judgment against a
party who will bear the ultimate burden of proof at trial, the movant’s burden will be
satisfied if he can point to an absence of evidence to support an essential element of the
nonmoving party’s claim.”21 “Once the movant has sustained this initial burden of
production, the burden shifts to the nonmovant to show the court that there is in fact a
genuine issue for trial”22 and to “articulate a legal argument precluding summary
judgment on the record before the court.”23
ANALYSIS AND CONCLUSIONS OF LAW.
A. THE MEANING OF “SUBSTANTIAL CONTRIBUTION”.
The application of the foregoing standard for granting summary judgment requires
a full understanding of the meaning of “substantial contribution” as used in
§ 503(b)(3)(D). A number of courts,24 including the Tenth Circuit,25 have held that this
20 11 Jeffrey W. Stempel, Moore’s Federal Practice — Civil, § 56.13 (3rd ed. 2010), citing
Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986) (“a party seeking
summary judgment always bears the initial responsibility of informing the district court of the basis for
21 Goenaga v. March of Dimes Birth Defects Foundation, 51 F.3d 14, 18 (2nd Cir.1995); see
Celotex Corp. v. Catrett, 477 U.S. at 324-26.
22 11 Moore’s Federal Practice — Civil, § 56.13, citing Anderson v. Liberty Lobby, Inc., 477
U.S. 242, 250, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986).
23 Id. at § 56.13.
24 E.g., Lebron v. Mechem Fin., Inc., 27 F.3d 937, 944-45 (3d Cir. 1994); In re Alert Holdings,
Inc., 157 B.R. 753, 758 (Bankr. S.D.N.Y. 1993); Bayou Group, 431 B.R. at 549.
25 Lister, 846 F.2d at 55.
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subsection applies not only to postpetition activity but also to prepetition activity. The
challenge to the courts is the definition of “making a substantial contribution in a case.”
Of course, an attorney for a creditor or indenture trustee must generally be paid by his or
her client, not the estate. The substantial contribution standard for allowance of such fees
as an administrative expense is a limited exception. When applying this exception, a
balance is required “between the need to interpret the provisions of § 503 broadly enough
to effectuate its goal of stimulating, encouraging and promoting meaningful creditor
participation in reorganization proceedings and the need to keep administrative expenses
to a minimum.”26 This Court agrees that “[t]he integrity of section 503(b) can be
maintained by strictly limiting compensation to extraordinary creditor actions which lead
directly to tangible benefits to the creditors, debtor or estate.”27 The Fifth Circuit has
said, “[S]ervices which substantially contribute to a case are those which foster and
enhance, rather than retard or interrupt the progress of reorganization.”28 “Inherent in the
term ‘substantial’ is the concept that the benefit received by the estate must be more than
an incidental one arising from activities the applicant has pursued in protecting his or her
own interests.”29 Since creditors are presumed to act primarily for their own benefit, they
26 Jeffrey A. Warren, Substantial Contribution Claims: A New Perspective?, 20 Am. Bankr. Inst.
J. 10, 35 (2001).
27 Bayou Group, 431 B.R. at 560, quoting In re Best Prods. Co., Inc., 173 B.R. 862, 866 (Bankr.
28 In re Consolidated Bancshares, Inc., 785 F.2d 1249, 1253 (5th Cir, 1986), quoted with favor in
In re Williams, 49 Fed. Appx. 845, 850 (10th Cir. 2002) (order and judgment not binding as precedent).
29 Lebron, 27 F.3d at 944.
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face a particularly high hurdle in showing “substantial benefit.”
The Tenth Circuit has stated the following as to the meaning of substantial
contribution when a creditor seeks administrative expense status for prepetition activities:
Administrative expenses incurred prior to the filing of
a bankruptcy petition are compensable under 11 U.S.C.
§ 503(b)(3)(D), if those expenses are incurred in efforts which
were intended to benefit, and which did directly benefit, the
bankruptcy estate. Efforts undertaken by a creditor solely to
further his own self-interest, however, will not be
compensable, notwithstanding any incidental benefit accruing
to the bankruptcy estate. Generally, creditors are presumed to
act primarily in their own interest and not for the benefit of
the estate as a whole.30
Under Lister, the elements to be considered are: (1) Whether the efforts were undertaken
with the intent to benefit the bankruptcy estate; (2) whether the efforts directly benefitted
the estate or whether the benefit to the estate was only incidental; and (3) whether the
applicant has rebutted the presumption that it acted primarily for its own benefit rather
than the estate as a whole. The three requirements are interrelated. The first requirement
is the most difficult. This standard has been interpreted as placing emphasis on intent and
excluding reimbursement under the subsection “if the creditor’s actions were designed
primarily to serve its own interests and would have been taken without any expectation of
reimbursement from the estate.”31 This is not to say that the applicant’s actions “must
30 Lister, 846 F.2d at 57, citing In re Jensen-Farley Pictures, Inc., 47 B.R. 557 , 565-69 (Bankr.
D. Utah 1985) and In re Automatic Spring Prods., Inc., 50 B.R. 6, 7 (Bankr. S.D. Fla.1985).
31 4 Collier on Bankruptcy, ¶ 503.10[a] (Alan N. Resnick & Henry J.Sommer eds.-in-chief,
16th ed. 2010), citing Lebron, 27 F.3d at 944.
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have been based solely on altruism.”32 A creditor with a primary purpose to benefit itself
and a secondary purpose of benefitting the estate may satisfy the intent requirement.33 As
stated by the Third Circuit, which quoted Lister, a creditor seeking reimbursement from
the estate for prepetition expenses for services which benefitted the estate “should be
presumed to be acting in his or her own interest unless the court is able to find that his or
her actions were designed to benefit others who would foreseeably be interested in the
The requirements that the benefit to the estate be direct rather than incidental and
that the applicant overcome the presumption that it acted for its own benefit are closely
related to the requirement that the actions were undertaken for the benefit of the estate.
As one court has said, “The term ‘incidental,’ in light of the facts in Lister, appears to
refer to any such accidental, inadvertent, or unintentional result.”35 As to the
presumption, the Third Circuit has said, “Creditors are presumed to be acting in their own
interests until they satisfy the court that their efforts have transcended self-protection.”36
B. POSITIONS OF THE PARTIES.
The parties agree that the Lister standard controls BONY’s request. BONY
32 Amdura Nat’l Distrib. Co. v. Amdura Corp., 1995 U.S. Dist. LEXIS 21375, *6 (D.Ct. D. Colo.
1995), aff’d 105 F.3d 669 (10th Cir. 1997).
34 Lebron, 27 F.3d at 946 (emphasis supplied).
35 9085 E. Mineral Office Building, 119 B.R. at 251.
36 Lebron, 27 F.3d at 944.
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submits that under this standard it made a substantial contribution,37 while the Trustee
submits that BONY’s activities only incidentally benefitted the estate.
BONY relies primarily upon Bayou Group,38 a 2010 decision of the Bankruptcy
Court for the Southern District of New York, where the court found that an unofficial
creditors committee’s prepetition activities made a substantial contribution to the
administration of the bankruptcy cases of the Bayou family of on-shore investment funds.
A thorough review of that case is helpful. In the summer of 2005, it became clear that the
Bayou family of on-shore and off-shore investment funds operated a Ponzi scheme.
Although the funds’ principals had been placed in federal custody and their assets
subjected to seizure and forfeiture, the government did not seek a receiver for the entities.
In January 2006, various Bayou investors determined to form an unofficial committee
(hereafter “Committee”) to represent the interests of investors, as a whole, in the on-shore
funds. Forty-two investors with in excess of $109 million of unpaid investments
responded to a notice. On February 7, 2006, six of the largest investors agreed to serve
on the Committee, which would retain counsel to be paid pro rata based on the amount of
37 However, BONY relies primarily upon Bayou Group, 431 B.R. 549. Although that decision
cites Lister, it did not expressly apply the Lister standard for the award of administrative expenses for
prepetition services. Rather it de-emphasized intent, focused upon the meaning of substantial
contribution, and found a controlling consideration to be whether the movant’s contribution was in place
or instead of professionals who normally would be compensated out of the debtor’s assets. Id., at 562.
The evidence of substantial contribution in Bayou is compelling. If that evidence had been evaluated
under the Lister standard, this Court is convinced that the result would not have changed and
administrative expenses would have been awarded.
38 Bayou Group, 431 B.R. at 549. It is uncontroverted that when preparing the complaint in the
Special Master Case, BONY relied upon the order appointing the receiver for the Bayou family of onshore
Case 08-22786 Doc# 1676 Filed 01/05/11 Page 23 of 34
the members’ unpaid investments. The bylaws of the Committee provided that its goal
was to “represent the interests of creditors holding unsecured claims against one or more
of the on-shore entities comprising the Bayou family of companies . . . by facilitating the
marshalling of assets of Debtor and prompt distribution to creditors.” The Committee
laid the ground work for what became Chapter 11 cases. It performed the following
tasks: Researched potential claims of the on-shore Bayou entities; searched for and
obtained the services of an individual to serve as a receiver, managing member, and
possible bankruptcy trustee of the on-shore Bayou entities; researched and prepared a
complaint for the appointment of a receiver; obtained the consent of a wide variety of
entities to the appointment of a receiver; shared its legal research about potential claims
with the receiver; and obtained and documented preliminary financing commitments that
served as the basis of debtor-in-possession financing once the on-shore entities sought
bankruptcy relief. The Committee commenced a suit and filed a motion to appoint a
receiver on March 26, 2006, and an order appointing the receiver was filed on April 28,
2006. It provided that the receiver’s duties would include, in his capacity as sole
managing member of the on-shore entities, petitioning to commence cases under Title 11
and serving as the debtor-in-possession in cases under Chapter 11. Chapter 11 cases were
commenced by the receiver on May 30, 2006. The Committee sought an award of fees
and expenses of counsel to the Committee for pre-bankruptcy services as an
administrative expense under § 503(b)(4), which allows compensation for professional
services rendered by an attorney for an entity whose expense is allowed under
Case 08-22786 Doc# 1676 Filed 01/05/11 Page 24 of 34
§ 503(b)(3)(D). The United States Trustee and some creditors objected.
The bankruptcy court found that the Committee’s activities had substantially
benefitted the cases. The Committee’s substantial contribution was one that debtor-
compensated professionals should have made but did not. First, the Committee aimed to
file and organize the Chapter 11 cases. Second, the Committee represented the interests
of creditors of the Bayou on-shore funds as a whole. The speed with which the
bankruptcies were filed reduced the risk that potential assets subject to recovery would be
dissipated and evidence would become stale. The Committee lined up debtor-inpossession
financing. The United States Trustee’s argument that the Committee should
not be compensated for services in filing the receivership rather than involuntary
bankruptcy cases was rejected because the orderly process resulting from the receivership
substantially benefitted the estate. Finally, the court noted that the Committee’s legal
research as to potential claims was clearly undertaken with an eye toward bankruptcy and
that complaints to avoid prepetition redemptions were filed almost simultaneously with
the bankruptcy filing, resulting in settlements and recoveries which comprised most of the
assets of the estate and funded the confirmed plan.
In the cases before this Court, on the other hand, the Trustee submits that
administrative expense compensation is not warranted because the BONY Banks’
activities did not provide a substantial benefit to the cases. The Trustee relies upon the
Case 08-22786 Doc# 1676 Filed 01/05/11 Page 25 of 34
Tenth Circuit’s Lister39 opinion, where administrative expense status was denied as to
prepetition activities. A thorough review of Lister is also helpful here.
In January of 1980, a man named Haskins obtained a judgment against the Listers
in federal court in the amount of $440,000, plus interest and attorney fees. He began
efforts to collect the judgment. After gathering information about the Listers’ assets, he
obtained an injunction prohibiting their transfer, and commenced garnishment and
attachment proceedings against the Listers’ property. The Listers filed for relief under
Chapter 11 in November of 1980. In October of 1985, Haskins filed an application for
administrative expenses pursuant to § 503(b)(3)(D) for $326,000 relating to prepetition
and postpetition efforts. The bankruptcy court denied the application, the district court
affirmed, and the Tenth Circuit also affirmed. The Tenth Circuit found that the efforts of
Haskins were undertaken “solely for the purpose of collecting his judgment” and “could
not have been undertaken in anticipation of the reorganization of the debtors, as he was
unaware of the pendency of the bankruptcy proceedings until after the petition was
filed.”40 Any benefit to the estate in identifying and preventing the dissipation of assets
was found to be “only incidental”41 so that expenses incurred prepetition were not
compensable under § 503(b)(3)(D). The Trustee argues that the facts of these cases are
similar to Lister.
39 Lister, 846 F.2d at 55.
40 Id. at 57.
Case 08-22786 Doc# 1676 Filed 01/05/11 Page 26 of 34
The Court agrees with the Trustee that under the facts of these cases and the
standard of Lister, BONY is not entitled to an award of administrative expenses for
prepetition attorney fees and expenses. These cases and Bayou are similar as to the
prepetition procedures undertaken by the movant. In both situations, there was a
prepetition federal court action which preserved the status quo and resulted in the
appointment of a receiver or special master who later served as the representative of the
Chapter 11 estates after the bankruptcy cases were filed. However, the “substantial
contribution” standard as applied to a request for compensation of prepetition expenses
does not focus on prepetition procedures. The fact that the movant argues that but for the
prepetition actions, the Chapter 11 case might not have been filed or a particular person
might not have been appointed to represent the Chapter 11 estate is not sufficient.42 The
presence or absence of a substantial contribution focuses on the activities of the applicant
and their benefit to the estate, using the three factors identified in Lister. The Court
therefore examines those factors.
The first Lister factor is whether the expenses were incurred in efforts which were
intended to benefit the bankruptcy estate. When the expenses relate to prepetition events,
this element is difficult to prove since the estate was not in existence when the activities
42 Lister, 846 F.2d at 57. See also Bayou Group, 431 B.R. at 563, citing Lister and Lebron, 27
F.3d at 946, in support of the proposition that “if the movant argues merely that, but for some action that
it took prepetition, the chapter 11 case would not have been filed or steps would not ultimately have been
taken to recover or marshal the debtor’s assets for creditors, the creditor would have a heavy burden to
show that it made a ‘substantial contribution in the case,’ as opposed to having merely pursued its rights
as a creditor.”
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were undertaken. The question becomes whether the activities were undertaken with the
intent to promote a future bankruptcy. The Trustee has presented uncontroverted facts
evidencing that the activities were not intended to promote a future bankruptcy. BONY
has not shown that there are any material facts in controversy in this regard. The
uncontroverted facts establish that when the Special Master Case was filed, UniCredit and
Fifth Third “recognized” that bankruptcy of the Brooke entities, including the Debtors,
was a “substantial likelihood.” After the filing of the Special Master Case, this likelihood
materialized. However, the uncontroverted facts do not evidence that the actions of the
BONY Banks facilitated the filing. Rather, the BONY Banks disagreed with the Special
Master about the filings under Title 11. When the Special Master first raised the issue
with the BONY Banks in early October, the Banks discouraged the filings and remained
opposed to the idea. The Consent Order, negotiated by BONY, appointing the Special
Master and defining his powers and duties did not empower him to file under Title 11;
consent of the Debtors and the Special Master was required. When the Special Master
made it clear that bankruptcy relief would be sought, the BONY Banks focused their
attention on first-day motions designed to clarify the termination of franchise agreements
so that insurance commissions would not be paid to the Debtors, an action which would
benefit the Banks, not the bankruptcy estates.
After the Debtors filed for relief, the Special Master applied for compensation in
the Special Master Case for himself and his professionals for the Pre-Petition Period.
BONY opposed the motion in large part because the fees were for services rendered in
Case 08-22786 Doc# 1676 Filed 01/05/11 Page 28 of 34
connection with the consideration of and planning for the filing of bankruptcy by the
Debtors. It is uncontroverted that BONY, as part of its argument opposing compensation,
asserted that bankruptcy was not within the scope of the Special Master Case. When
seeking administrative expense status for the BONY Banks’ fees, BONY argues that the
foregoing facts are irrelevant because all it opposed was the payment for those services by
securitization holders, when in its view, the Brooke Entities should have borne that cost.
The Court finds the significant matter to be the assertion that bankruptcy planning was
not within the scope of the Special Master Case, which is different from an argument
about the source of funding. Since all of the expenses for which the BONY Banks seek
compensation were undertaken in conjunction with the planning for and litigation of the
Special Master Case, it is hard for the Court to comprehend how the activities of BONY
could have been taken with the intent to promote a future bankruptcy when bankruptcy
was not within the scope of the Special Master Case.
The Trustee has pointed to an absence of evidence to support BONY’s burden of
proof to show that the activities for which it seeks compensation were undertaken with
the intent to benefit the bankruptcy case. BONY has not shown a genuine issue for trial
as to the first element of the Lister standard.
The second Lister element is whether the efforts directly benefitted the estate or
whether the benefit to the estate was only incidental to efforts undertaken by the BONY
Banks for their own self interest. The primary benefit to the estate on which BONY relies
is the appointment of Mr. Riederer as the Chapter 11 Trustee immediately after the filing
Case 08-22786 Doc# 1676 Filed 01/05/11 Page 29 of 34
of these cases. There is no doubt that his appointment was beneficial to the estates and
the cases; the question is whether that benefit was incidental or direct. The Court finds
that it was incidental.
BONY was the moving force in identifying Mr. Riederer as a qualified person to
manage the Brooke Parties and obtaining his appointment as Special Master in the
Special Master Case. When filing the Special Master Case and obtaining the appointment
of the Special Master, BONY was acting to stop the diversion of funds which should have
been, but were not being, applied to the securitization contracts, to stop the loss of
collateral for the Notes, and to achieve honest management of the Brooke Entities. The
Complaint alleged that the Special Master Case was filed to protect BONY’s interests
from further harm. Mr. Riederer was not granted authority to place the Brooke Parties in
bankruptcy, the Consent Order did not provide that he would serve as a Chapter 11 trustee
if Chapter 11 cases were filed, and, according to BONY, preparing for bankruptcy was
not within the scope of Mr. Riederer’s duties in the Special Master Case. The Court
therefore cannot conclude that either the filing for relief under Chapter 11 or Mr.
Riederer’s appointment as the Chapter 11 Trustee was a direct result of BONY’S
activities. These events were the incidental results of the filing of the Special Master
Case, and the selection and appointment of Mr. Riederer as Special Master, actions which
were taken by BONY as indenture trustee to protect the interests of Fifth Third and HVB
as holders of the 2007-A Notes and the 2006-1 Notes.
BONY also asserts that it directly aided the administration of the bankruptcy cases
Case 08-22786 Doc# 1676 Filed 01/05/11 Page 30 of 34
by assisting the Special Master in “getting up to speed.” Again, it is uncontroverted that
such assistance was given and that it benefitted the estates to have the immediate
appointment of a trustee familiar with the Brooke businesses. But again, the question is
whether this benefit was direct or incidental. In its statement of facts, BONY identifies
no assistance given to the Trustee which was not consistent with BONY’s primary goal of
protecting the investments of the securitization holders, and has not shown that there is a
controverted issue of fact in this regard.
BONY in its statement of facts and arguments places significant emphasis upon its
efforts initiated in the Special Master Case and continuing in this case to release the
Brooke Franchise Agents from their arrangements with the Brooke Entities. During the
Special Master Case, the BONY Banks were particularly concerned with the cash-flow
stream of commission payments being made by various insurance companies to the
Debtors and their affiliates, in which the BONY Banks claimed a security interest. The
BONY Banks worked with the Special Master to terminate the franchise agreements so
that the BONY Banks could get the insurance companies to stop paying commissions to
any of the Brooke Entities. At least initially, the Special Master and the BONY Banks
disagreed whether the income stream should be collected by the Special Master until an
allocation could be completed, or whether, as urged by BONY, the BONY Banks should
get immediate control of the funds. When the bankruptcy cases were filed, Mr. Riederer
and three banks filed a joint motion to approve an agreed order permitting the
continuation of prepetition releases, powers of attorney, and other agreements between
Case 08-22786 Doc# 1676 Filed 01/05/11 Page 31 of 34
the Brooke Parties and the Brooke Franchise Agents. BONY fails to explain how these
efforts benefitted the estates as a whole, rather than just the BONY Banks and other
securitization holders. Nevertheless, assuming that these activities provided benefits to
entities other than the BONY Banks, such as other holders of securitized Brooke notes
and the Brooke Franchise Agents, the question is whether those benefits were incidental
or direct. Again the Court concludes that they were incidental. It is uncontroverted that
the BONY Banks filed the Special Master Case to protect their positions in assets of the
Brooke Parties, and that the termination of franchise agreements was one method
undertaken to achieve that goal.
The Trustee has pointed to an absence of evidence to support BONY’s burden of
proof to show that the activities for which it seeks compensation directly benefitted the
bankruptcy estate. BONY has not shown a genuine issue for trial as to the second
element of the Lister standard.
The incidental rather than direct benefit of the prepetition actions in this case is
illuminated when contrasted with the prepetition actions in Bayou which were found to
have made a substantial contribution to the subsequent bankruptcy case. In Bayou, the
prepetition receiver alone had authority to place the Bayou entities in Chapter 11 cases,
and the Committee supported filing when the receivership case was in the proper posture.
In these cases, pursuant to the Consent Decree negotiated by BONY, the Special Master
could not act alone but needed the consent of the Debtors to file for bankruptcy relief, and
BONY opposed the Special Master’s decision that bankruptcy was appropriate. In
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Bayou, the Committee expressly took upon itself the representation of all the debtors’
creditors. In these cases, BONY represented only two of the banks who held Brooke
Securitizations. In Bayou, but not in these cases, the applicant made arrangements for
debtor-in-possession financing. In Bayou, but not in these cases, the applicant undertook
research of bankruptcy causes of action to recover assets for the estate and shared those
results with the receiver-debtor-in-possession, allowing the prompt filing of recovery
actions before the assets became unavailable. In these cases, the uncontroverted facts
establish that representatives of BONY communicated regularly with the Special Master
and the professionals he engaged to aid his understanding of the Debtors’ businesses, and
to plan the operation and wind-down of the Debtors. Although there is no controversy
that these actions allowed for orderly bankruptcy cases and preserved the Debtors’ assets,
there are no facts indicating that this contribution was direct or significant.
These cases are more like Lister, where the creditor was not entitled to an
administrative expense claim for prepetition services. The creditor, as a result of acting to
facilitate collection of his judgment, preserved the assets of the estate. In Lister, as in
these cases, the estate benefitted, but the benefit was an incidental result of actions taken
primarily to benefit the creditor.
Further, BONY has not satisfied the third Lister element, which is closely related
to the first two; it has not rebutted the presumption that it acted primarily for its own
benefit rather than for the estates as a whole. Indeed, the Court observes that secured
creditors, who have interests in specific assets of an estate, have an inherent conflict with
Case 08-22786 Doc# 1676 Filed 01/05/11 Page 33 of 34
unsecured creditors, who have an interest in augmenting the unencumbered assets of the
estate. This makes it especially difficult for secured creditors to overcome the
presumption that they acted primarily for their own benefit. In this case, the Court is not
satisfied that the efforts of BONY transcended protection of the BONY Banks. The
uncontroverted facts establish that all actions of BONY in the Special Master Case were
consistent with actions taken for the sole benefit of the BONY Banks and their interests in
the Debtors and assets owned or controlled by the Debtors. BONY has not shown that
there is a material fact in controversy as to its motivation.
For the foregoing reasons, the Court grants the Trustee’s Motion for Summary
Judgment on the Administrative Expense Request of the Bank of New York Mellon.
There are no material facts in controversy, and the Trustee is entitled to judgment as a
matter of law.
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.
Judgment is hereby entered denying the Administrative Expense Request of
The Bank of New York Mellon.43
IT IS SO ORDERED.
# # #
43 Doc. 1027.
Case 08-22786 Doc# 1676 Filed 01/05/11 Page 34 of 34
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