IN THE UNITED STATES BANKRUPTCY COURT
FOR THE NORTHERN DISTRICT OF CALIFORNIA
|DO NOT PUBLISH
This case disposition has no value as precedent and is not intended for publication. Any publication, either in print or electronically, is contrary to the intent and wishes of the court.
PRESTON LUMBER CORPORATION, No. 95-11869
The debtor's attempt to reorganize has failed, and John MacGregor has been appointed trustee
and charged with liquidating the estate. He has retained an auctioneer for this purpose and a sale
date has been set.
Creditor Sumitomo Bank has a lien on the debtor's sawmill equipment and rolling stock. This
collateral in encumbered far in excess of its worth. Accordingly, the estate should have no
interest in administering these assets and the trustee would be expected to abandon them.
However, for reasons which make the court very uncomfortable, the trustee is including the
collateral in his sale and seeks an order selling them free and clear of liens other than
A dispute has arisen between Sumitomo and Bessie Richardson, the lessor of the debtor's
business premises. The dispute involves whether certain machinery is the bank's collateral or
fixtures attached to the property. There is no reason why the trustee or this court should care
about this dispute, which does not involve the debtor or the estate. In fact, it is generally an
abuse of discretion for a bankruptcy court to retain jurisdiction over a dispute which no longer
affects the estate. However, Sumitomo and the trustee have entered into a very questionable
arrangement which calls for the court to become involved in the dispute between Sumitomo and
Sumitomo has induced the trustee to seek permission to sell its collateral free and clear of the
Richardson interest pursuant to section 363(f) of the Bankruptcy Code. In return, Sumitomo has
agreed to pay the trustee a percentage of the auction proceeds and trustee's counsel $35,000.00.
The court finds this arrangement highly improper.
The trustee's powers under the Bankruptcy Code are not supposed to be money-making assets
which the trustee can make available to the highest bidder. They are tools for the trustee to
maximize recovery for the estate
. A trustee abuses his powers when he makes them available
to secured creditors at a price with no resulting benefit to the estate.
Worse, the trustee and his counsel are clearly motivated by personal gain. The trustee, who
obviously views section 326 of the Bankruptcy Code as a commission rather than a limitation,
expects to receive a 3% commission from Sumitomo. His counsel gets $35,000.00. Their
employer, the bankruptcy estate, gets nothing.
The trustee and his counsel are fiduciaries of the bankruptcy estate. They are not at liberty
to make side deals with other parties to increase their compensation. At best, these arrangements
distract the trustee from his primary duties. At worst, they create actual conflicts of interest when
the trustee sees he can make more money for himself by liquidating collateral for a secured
creditor than he can by asserting a claim against the secured creditor on behalf of the estate.
Since it appears that Richardson has consented to the sale, the court will not upset the plans
of the parties at this point. However, it approves the sale only on the following terms:
1. Sumitomo will be surcharged for the reasonable and necessary costs of disposing of its
collateral to the extent of the benefit it may obtain, as provided by section 506(d) of the
Bankruptcy Code. The court declines to fix or limit the amount of the surcharge at this time.
2. The trustee should expect to be compensated on an hourly basis, and should be keeping
good time records. His fees are subject to the statutory maximum set forth in section 326(a) of
the Bankruptcy Code. The court is not likely to use the proceeds of the sale of Sumitomo's
collateral in computing the maximum absent a clear showing of benefit to the estate.
3. Counsel will not be allowed any extra fees on account of the sale of Sumitomo's collateral
absent a clear showing of benefit to the estate.
4. Neither the trustee nor his counsel may accept any form of compensation directly from
5. At any time before the sale, either Sumitomo or Richardson may elect to withdraw from
the sale. In such case, the sale will not be free and clear of Richardson's claims.
Counsel for the trustee shall submit an appropriate form of order which the U.S. Trustee has
approved as to form.
Dated: August 16, 1996 _______________________