In re No. 97-32984DM Chapter 11 Consolidated Adversary Proceeding Nos. 98-3166DM., 98-3291DM and 98-3413DM STREAMLOGIC CORPORATION, a , Delaware corporation formerly known as Micropolis Corporation, Debtor. ___________________________________/ NORTH AMERICAN TRUST COMPANY, Plaintiff, v. STREAMLOGIC CORPORATION, Defendant. ___________________________________/ DISTRIBUTION AGENT, SUSAN UECKER For the Estate of STREAMLOGIC CORPORATION, a Delaware Corporation fka MICROPOLIS CORPORATION, Plaintiff, v. STREAMLOGIC CORPORATION, INDEMNIFICATION TRUST, dated March 29, 1996; et al., Defendant. ___________________________________/ NORTH AMERICAN TRUST COMPANY as Trustee of the STREAMLOGIC CORPORATION INDEMNIFICATION TRUST dated March 29, 1996, Plaintiff, v. DISTRIBUTION AGENT, et al., Defendant. ___________________________________/
SUPPLEMENTAL MEMORANDUM DECISION REGARDING MOTION FOR SUMMARY JUDGMENT
On December 15, 1999, this court held a hearing on the motion for summary judgment filed by North American Trust Company ("NATC") in the above-referenced consolidated adversary proceedings. On December 28, 1999, this court issued a memorandum decision indicating that it would grant summary judgment in favor of NATC with respect to certain fraudulent transfer claims contained in the first amended complaint filed by Susan Uecker ("Uecker"), the Distribution Agent for the Estate of Streamlogic Corporation ("Debtor"), and that it would require further briefing by the parties on certain other issues. NATC submitted its supplemental brief on January 27, 2000; Uecker submitted her supplemental opposition brief on February 16, 2000. For the reasons stated below, the court will grant summary judgment in favor of NATC as to the validity of the trust agreement which is the subject of these consolidated adversary proceedings. The court, however, finds that a substantial portion of the fees requested by NATC and its counsel is unreasonable. The court will reduce such fees by $53,460.25.
II. FACTUAL BACKGROUND(1) 
NATC is the successor trustee of the Streamlogic Corporation Indemnification Trust dated March 29, 1996 (the "Trust"). The Trust was created to fund obligations of Debtor under individual Indemnification Agreements between Debtor and certain of Debtor's directors and officers (the "Indemnitees") to indemnify those Indemnitees against potential claims based on their acts or omissions as officers and directors of Debtor. The Trust was created pursuant to an indemnification trust agreement (the "Trust Agreement") dated March 29, 1996.
The Trust Agreement contains the following relevant provisions (emphasis added):
(6)(a) In the event the Trustee receives notice of any action, suit or proceeding challenging the validity or enforceability of any provision of this Trust Agreement or the payment out of the Indemnification Trust Fund of any Indemnification Claim, the Trustee shall promptly give Notice thereof to the Indemnitees and, upon upon request of any Indemnitee or counsel therefor, shall provide such information as may be available to it with respect to such event. Upon written instruction from a majority of the Indemnitees to such effect, the Trustee shall retain legal counsel to represent the interests of the Indemnitees under this Trust Agreement in such action, suit or proceeding or to commence and prosecute an appropriate action to enforce the rights of the Trust. All expenses (including fees and disbursements of legal counsel) reasonably incurred in connection with any such action, suit or proceeding shall be paid out of the Indemnification Trust Fund.
(6)(b) Notwithstanding any other provision of this Trust Agreement, the Trustee may suspend payment on any Indemnification claim, or any other distribution out of the Indemnification Trust Fund contemplated by Section 4 hereof, and shall be excused from making such distribution in accordance herewith, during any period during which (I) any court or administrative or executive order is in effect prohibiting such payment, even if such order or decree shall subsequently be reversed or vacated or held unlawful or (ii) any action, suit or proceeding challenging payment on an Indemnification claim shall be pending and during which the Trustee, upon advice of counsel, shall have reasonably determined that payment on such Indemnification claim might expose the Trustee to personal liability.
The Trust Agreement also states that the "Trustee shall also make payments as it deems appropriate out of the Indemnification Trust Fund in respect of the expenses of the Trust, including . . . the fees of the Trustee, its expenses . . ." The Trust Agreement further provides (emphasis added) that ". . . The Trustee shall also be entitled to reimbursement of its reasonable out-of-pocket expenses incurred in connection with the performance of its services as Trustee, including reasonable fees and disbursements of legal counsel."
On May 7, 1996, Debtor (then known as Micropolis Corporation) issued a proxy statement (the "Proxy Statement") soliciting the consent of the shareholders to a sale of substantially all of the Debtor's assets and to a change of corporate name. On pages 6, 7, and 27 of the Proxy Statement, Debtor disclosed the interest of management in the sale. In particular, on page seven, the Debtor stated:
The Board of Directors has agreed to establish an Indemnification Trust for the benefit of directors and certain executive officers and to deposit therein the sum of $500 thousand(2)  from the proceeds of the Sale to secure the indemnification obligations of the Company to such persons.
After dissemination of this Proxy Statement, the shareholders voted to approve the transactions described therein.(3) 
III. PROCEDURAL BACKGROUND
Debtor filed its voluntary Chapter 11 petition in June 1997, and thereafter notified NATC that it believed that the transfer of funds to the Trust constituted a fraudulent transfer recoverable by Debtor as debtor in possession under 11 U.S.C. § 544(b). Around the same time, certain Indemnitees made indemnification claims against the Trust. NATC retained legal counsel, but has not produced any evidence that it obtained the prior written consent of the Indemnitees before doing so. Notwithstanding the pending bankruptcy of Debtor, NATC filed an action in state court to obtain instructions as to how to distribute the Trust assets. Pursuant to paragraph 6(a) of the Trust Agreement, NATC was excused from making any distribution under the Trust if a proceeding challenging payment had been commenced. NATC described Debtor's bankruptcy as such a proceeding in its state court action. In paragraph 17 of the petition initiating the state court action, NATC acknowledged its belief that the bankruptcy filing was "tantamount to a 'proceeding challenging payment on an Indemnification Claim.'"(4)  The state court action was removed to federal district court and eventually transferred to this court and is pending as one of the consolidated adversary proceedings. NATC also filed a separate (but similar) interpleader action in this court,(5)  which is also one of the consolidated adversary proceedings. The actions commenced by NATC were largely unopposed.
In addition, Uecker filed an action against NATC, the Trust and certain Indemnitees, alleging, inter alia, that the transfer of funds to the Trust constituted a fraudulent transfer, that the Trust is void for failure to obtain proper corporate authorization,(6)  that the defendant Indemnitees breached their fiduciary duties in creating the Trust, and that the Trust should be terminated.(7)  The action filed by Uecker is also one of the consolidated adversary proceedings.
On November 17, 1999, NATC filed a motion for summary judgment. On December 28, 1999, the court granted the motion for summary judgment in favor of NATC on the fraudulent transfer claims. In particular, the court granted summary judgment in NATC's favor on the first, second, third and fourth claims of Uecker's first amended complaint. The court requested additional briefing on whether the Trust is voidable as a matter of law, whether NATC could nevertheless receive its fees and expenses if the Trust were declared void, and whether the fees and costs of NATC and its counsel are reasonable.(8) 
A. The Trust Is Not Void Or Voidable.
Uecker contends that the Trust is void or voidable because the directors failed to obtain requisite corporate approval and because the directors breached their fiduciary duties to the corporation in creating the Trust. While an act arising out of a breach of fiduciary duty by the directors or officers may be voidable,(9)  such "voidable acts are susceptible to cure by shareholder approval." Michelson v. Duncan, 407 A.2d 211, 219 (Del. 1979). Similarly, "a validly accomplished shareholder ratification relates back to cure otherwise unauthorized acts of officers and directors." Id.; see also 8 Del.C. § 144(a)(2) (an interested or self-dealing transaction is not void or voidable solely for this reason if "the material facts as to the director's or officer's relationship or interest and as to the contract or transaction are disclosed [to shareholders], and the contract or transaction is specifically approved in good faith by vote of the shareholders.").
Michelson describes the standards for effective shareholder ratification. "Shareholder ratification is valid only where the stockholders so ratifying are adequately informed of the consequences of their acts and the reasons therefor." Michelson, 407 A.2d at 220. "Whether the shareholders were informed, and thus their ratification valid, turns on the fairness and completeness of the proxy submitted by the management to the . . . shareholders." Id.
In this case, the Proxy Statement disclosed the material facts relating to creation of the Trust. The Proxy Statement disclosed at page 21 that after consummation of the sale, "the company expects to have deficit net worth." The Proxy Statement also disclosed that the directors and officers nevertheless intended to use $500,000 from the sale proceeds to fund a trust securing payment of Debtor's indemnification agreements with them. The information regarding the Trust was not placed in an obscure footnote; rather, it was placed in two sections specifically entitled "Interest of Management in Sale." A shareholder reviewing the Proxy Statement therefore received notice of the existence of and reasons for the Trust; the Proxy Statement provided notice that the directors and officers would utilize $500,000 of the sale proceeds to fund a trust for their benefit, even though the company would be insolvent following the sale.
Uecker has not alleged that the Proxy Statement was misleading, or that the Proxy Statement substantially omitted material terms of the Trust. Rather, Uecker argues that the shareholders did not "specifically" approve the Trust because the Proxy Statement specifically requested only approval of the sale and name change. In other words, Uecker contends that a resolution specifically seeking approval of the Trust should have been presented separately to the Board. The Proxy Statement, however, clearly states that the sale proceeds would be utilized to fund the Trust; the shareholders ratified the sale and therefore ratified the proposed use and distribution of the proceeds. The court therefore holds that the shareholders did ratify the decision of the Board to create the Trust.
Because the court finds that the shareholders ratified the actions of Debtor's officers and directors in creating the Trust, it concludes that the Trust Agreement is not void or voidable.(10)  Consequently, NATC is entitled under the terms of the Trust Agreement to recover its reasonable fees and costs.
B. NATC's Fees And Expenses Are Unreasonable.
The res of the Trust is only $250,000 (plus interest), yet NATC now claims $103,460.25 in legal fees and $7,604.81 in expenses relating to the Trust. It has conceded that this court can determine the reasonableness of those fees and expenses, and that after deducting such allowed fees and expenses from the funds in the Trust, the balance should be paid to Uecker.
Under the terms of the Trust, NATC could have suspended payment on indemnification claims while any action challenging payment of such claims was pending, where payment of such claim could possibly expose NATC to personal liability. Uecker filed an action challenging the validity of the trust and the validity of the underlying indemnification agreements in August 1998. At that point, NATC could have simply ceased activity with respect to the Trust, particularly where an action was already pending wherein NATC was seeking to obtain judicial instructions regarding disbursements from the Trust. Instead, according to the time records of NATC's counsel, NATC incurred approximately $88,267.43 in fees and expenses after Uecker commenced litigation challenging the validity of any payment to the Indemnitees under the Trust.(11)  Under the terms of the Trust Agreement, services rendered after commencement of the bankruptcy case (and particularly after commencement of Uecker's action) were unnecessary, as NATC was relieved of its obligations to make payments. Moreover, NATC had not been authorized in writing by a majority of the Indemnitees to represent their interests under the Trust. Consequently, under the terms of the Trust Agreement itself, the services rendered by NATC's counsel after August 1998 were largely unnecessary.
Nevertheless, with the consent of Uecker, NATC commenced its interpleader action, yet another legal action to determine how it should distribute the proceeds of the Trust. In large part, this interpleader action was duplicative of the state court action initiated by NATC. In the interpleader action, the only answers filed by the Indemnitees disclaimed all interest in the Trust funds. No other answers were filed by the Indemnitees, and no discovery ever occurred. Under such circumstances, reasonable fees for obtaining default judgments should have been no more than $5000 to $7500.
The time entries provided by counsel for NATC show that much of the work performed was duplicative, with two or three (or more) attorneys performing the same tasks. Many tasks performed by NATC's counsel were unnecessary, such as the discharge motion that was later withdrawn by NATC. In addition, from December 1997 through June 1998, counsel used a minimum billing increment of fifteen minutes; such a large minimum time increment results in inflated time entries which do not necessarily correspond with actual time spent on a task. Furthermore, partners performed associate and clerical tasks at high hourly rates. For example, the senior partner on the matter spent extensive time updating a service list, obtaining service on defendants, drafting stipulations for extension of time, and doing research. While charging $310 an hour in 1999, he expended approximately 63.4 hours(12)  on matters resulting in defaults of defendants Kamdar and Kannappan. Other attorneys also billed time with respect to this particular task, causing total fees related to this task to exceed $20,000.
While the court does not necessarily agree with Uecker's contention that NATC's counsel may have simply regarded the Trust as a "guaranteed" source of fees, it does agree that NATC's counsel did not exercise reasonable judgment in providing legal services and in billing for such services. The court believes that, given the failure of the Indemnitees to assert claims against the interpleader funds and the lack of written instructions from the Indemnitees to the Trustee to engage legal counsel to represent their interests, many of the services rendered by NATC's counsel were unnecessary and therefore the charges for them are unreasonable.
In determining an amount of fees which would be reasonable under the circumstances, the court must rely on its experience in evaluating fee applications submitted for similar services in other cases. The court was hampered by counsel's failure to categorize its time by major project; the court cannot easily ascertain how much time was expended on the state court action as opposed to the interpleader action as opposed to defense of Uecker's fraudulent transfer action. In any event, fees exceeding forty percent of the res of the Trust are unreasonable, especially in light of the deficiencies just described. The court therefore looks at the case in its totality and fixes a reasonable fee of $50,000, which is twenty percent of the original principal of the Trust res. The expenses will be allowed as requested.
Within ten days of the date of service of this Supplemental Memorandum Decision Counsel for NATC should submit an order granting summary judgment, allowing it fees of $53,460.25 and expenses of $7,604.81, and directing turnover of the balance of the res of the Trust to Uecker.
Counsel should comply with B.L.R. 9021-1 and 9022-1 when submitting the order.
Dated: March 27, 2000 ______________________________ Dennis Montali United States Bankruptcy Judge
1. The following discussion constitutes the court's findings of fact and conclusions of law. Fed. R. Bankr. P. 7052(a).
2. The Trust was originally funded in the amount of $500,000, but was subsequently reduced to $250,000.
3. NATC has not offered any evidence that the shareholders approved the sale and name change, but Uecker has not challenged the assumption that the shareholders did vote in favor of sale and name change. The court therefore finds that the shareholders approved the transactions described in the Proxy Statement.
4. As noted in paragraph 6(b) of the Trust Agreement, such a proceeding excused NATC from making distributions in accordance with the agreement.
5. Is in state court action, NATC filed the interpleader action in an effort to obtain a judicial determination of the proper distribution of trust assets, even though the Trust Agreement itself excused NATC from making any distributions thereunder (see footnote 4, supra, and accompanying text).
6. Uecker alleges that Debtor's board of directors failed to approve the creation of the Trust by the affirmative votes of a majority of disinterested directors, that the shareholders failed to approve the creation of and transfer of assets to the Trust, that the creation of the Trust and transfer of assets to it was unfair to the Debtor as of the time it was authorized, and that failure to obtain the requisite corporate authority renders the trust void under Delaware law.
7. See the First Amended Complaint filed by Uecker on November 9, 1999. The First Amended Complaint adds NATC's counsel, Luce, Forward, Hamilton & Scripps, LLP ("Luce"), as a defendant.
8. At the last page of her Memorandum of Points and Authorities in Opposition to Supplemental Motion for Summary Judgment, Uecker revisited the fraudulent transfer theory previously decided against her. This time she went after Luce, arguing that it, as NATC's counsel, is liable as an initial transferee or an immediate transferee of a fraudulent transfer to NATC. Uecker relies on In re Mill Street, Inc., 96 B.R. 268 (9th Cir. BAP 1989). The problem is that in Mill Street the liability of a collection agency was based upon its retention of a portion of an admittedly voidable transfer. Here, because NATC did not receive a voidable transfer, its attorney (as agent) cannot be held liable either.
9. "On the list of voidable acts, i.e., acts performed in the corporation's interest but beyond management's explicit authority, are other acts that may relate to breaches of fiduciary duty." Solomon v. Armstrong, 1999 W.L. 182569 at *8 (Del. Ch. 1999).
10. Had the court found that the Trust Agreement was void or voidable, it would have denied any recovery of fees and expenses to NATC. NATC failed to present sufficient arguments or legal authority to support an award of fees in the event the Trust Agreement was declared void or voidable. Rather, NATC contended that it could recover the fees as a "custodian" under 11 U.S.C. § 543. NATC, however, is not custodian for the purposes of section 543, because it is not acting under court appointment nor assignment of creditors, and is not administering the Trust for the benefit of creditors. See Camdenton United Super, Inc., 140 B.R. 523 (Bankr. W.D. Mo. 1992).
11. Prior to September 1998, NATC had incurred approximately $22,797.65 in legal fees and costs, even though the Indemnitees had not requested in writing that NATC should retain legal counsel to represent their interests (as required by paragraph 6(a) of the Indemnifcation Trust Agreement. Instead, NATC incurred those fees just to determine how it should act as Trustee and how it should disburse funds. The Trustee could have filed a simple interpleader or declaratory action immediately, and the reasonable costs of such an action would not have approached $22,797.65.
12. The court calculated these amounts by reviewing specific time entries appended to that partner's second supplemental
declaration filed on January 27, 2000. Many of the time entries were vague as to the nature and purpose of the task being
performed. Moreover, NATC's counsel did not divide its time entries by task, thereby further complicating the court's
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