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In re Resource Technology Corp.

December 1, 2008

IN RE RESOURCE TECHNOLOGY CORP., DEBTOR.
APPEAL OF CHIPLEASE, INC., APPELLANT.



The opinion of the court was delivered by: Matthew F. Kennelly, District Judge

MEMORANDUM OPINION AND ORDER

Chiplease, Inc. appeals from an order of the bankruptcy court directing it to deposit $500,000 plus $47,367.37 in accrued interest into an account at the law firm of Arnstein & Lehr, which represents the Chapter 7 bankruptcy trustee of Resource Technology Corp. For the reasons stated below, the Court affirms bankruptcy court's order except to the extent it requires a deposit of interest.

Facts

On March 14, 2006, the bankruptcy court entered an order approving a settlement between the bankruptcy estate and Leon Greenblatt, Chiplease, and other related entities. Paragraph 23 of the order stated, in relevant part, as follows:

23. As more fully set forth in Paragraph 11 of the Settlement Agreement: (i) the Purchaser shall deposit the sum of $500,000.00 to be held in escrow by its counsel, Dykema Gossett PLLC, for the payment of all unpaid Chapter 7 operating expenses above $150,000.00 and any expenses incurred while the Estate continues to operate the Debtor's business[.]

Order of Mar. 16, 2006 ¶ 23. The Dykema Gossett firm was Chiplease's legal counsel at the time. Paragraph 11 of the settlement agreement provided, in relevant part, as follows:

11. Consideration. Chiplease for itself and on behalf of the other Banco Secured Lenders shall pay to the Estate the following consideration:

(i) Chiplease shall pay all unpaid Chapter 7 operating expenses above $150,000 and any expenses incurred while the Estate continues to operate the Debtor's business ("Expenses"). The Estate shall pay the first $150,000 of these expenses. On or before the Closing Date, Chiplease shall deliver to its counsel, Dykema Gossett PLLC the sum of $500,000.00 to be used to pay the Expenses ("Adequate Security"). After the Estate has paid a total of $150,000 in Chapter 7 Expenses, Chiplease will be requested to pay all additional Chapter 7 operating expenses. The Chapter 7 Trustee shall advise Chiplease in writing of Chiplease's obligation to pay one or more Expenses (the "Expense Request"). Chiplease shall have seven (7) days from receipt of the Expense Request to either pay the Estate sufficient funds to fully satisfy the Expense Request, or to dispute the payment of the Requested Expenses in writing ("Expense Dispute"). If Chiplease fails to make a timely Expense Dispute, the Expense Request will be deemed allowed and Chiplease will be required to pay it. If an Expense Dispute is timely made, the Estate shall have ten (10) days from the receipt of the Expense Dispute to seek to have the Expense Request allowed or disallowed by the Court (the "Expense Motion"). In the event that the Estate does not file an Expense Motion within the ten (10) day period, Chiplease shall be granted standing for the limited purpose of seeking to have the Expense Request disallowed;

(a) The term "Chapter 7 operating expenses" shall not include the Chapter 7 Loan or any Chapter 7 Trustee's fees or expenses or any professional fees and expenses, which the Estate shall pay from the Estate's assets including but not limited to the consideration below including the 506(c) Funds[.]

Id., Ex. A ¶ 11.

On April 17, 2008, two administrative claimants filed a motion asking the bankruptcy court to direct Chiplease to post a $5 million letter of credit as security for as-yet-unpaid administrative expenses. The claimants contended that in the settlement the court had approved in March 2006, Chiplease undertook to pay Chapter 7 operating expenses above $150,000, and they argued that Chiplease had attempted to evade this obligation in various ways. On May 13, 2008, the bankruptcy court ordered the filing of responses to the motion by June 3 and replies by June 10. See Bankr. Ct. Dkt. No. 4280.

Both Chiplease and the Chapter 7 trustee filed timely responses to the claimants' motion. The trustee's response focused on Chiplease's undertaking in the settlement to "deposit the sum of $500,000.00 to be held in escrow by its counsel, Dykema Gossett PLLC, for the payment of all unpaid Chapter 7 operating expenses above $150,000.00 . . . ." The trustee stated that Chiplease's then-counsel, Gregory Jordan, had earlier advised the trustee's counsel that the escrow had been established. The trustee stated that in May 2008, after Jordan and his firm were granted leave to withdraw as Chiplease's counsel, the trustee asked Jordan to account for the funds received into the escrow and to transfer the escrow to Chiplease's new counsel. Jordan, according to the trustee, directed the trustee's questions to new counsel, who reported that he had no information about the escrow. As a result, the trustee spoke again to Jordan, who claimed that he had never told the trustee's counsel that an escrow had been established. The trustee reported that he had advised Chiplease and its new counsel of the apparent noncompliance with the settlement order and was told in response that "Chiplease had paid claims in excess of $500,000.00 [and that] Chiplease apparently takes the position that those expenditures offset the amount which should have been in the escrow." Trustee Resp. ¶ 14. The trustee reported that he had obtained a list of the payments that Chiplease was contending should be offset; many of them, the trustee said, actually predated the March 2006 settlement approval or were expenses incurred after the debtor's business operations were terminated -- in other words, they were not "operating expenses." The trustee argued that Chiplease had improperly taken it upon itself, contrary to the settlement agreement's terms, to determine what expenses would be paid. As a result, the trustee argued, the bankruptcy court should order Chiplease to establish the escrow it had previously been ordered to set up "and to deposit whatever additional security this Court determines is proper." Id. ¶ 19.

Chiplease's response, filed the same day as the trustee's response, makes it clear that Chiplease was aware that its compliance with the settlement agreement and approval order was at issue. It did not confine its response to the claimants' motion but also addressed the trustee's contention that it had failed to comply with the terms of the settlement agreement and approval order. Chiplease argued that the administrative claimants' request for posting of security amounted to a collateral attack on the order approving the settlement. Chiplease stated that the settlement did not require it to post security for all administrative claims but rather required Chiplease to deliver, on or before closing, $500,000 to its counsel for use in paying expenses, referred to as "Adequate Security."

Then, after this estate had paid a total of $150,000.00 of "operating expenses," Chiplease would be asked to pay operating expenses, or dispute the same, pursuant to additional procedures outlined in the Settlement Agreement.

Chiplease Resp. ¶ 8. Chiplease went on to "acknowledge[ ] that it did not deposit with Dykema Gossett on or before the closing date the $500,000.00 of 'adequate security'"; it stated that "[i]f anyone has the right to enforce the Settlement it is the Trustee who . . . was a party to the Settlement." Id. ¶ 9 & n.1. Chiplease claimed, however, that it had paid over $1,000,000 in Chapter 7 operating expenses, at least $500,000 with money it had deposited into a Dykema Gossett client trust account (on dates it did not specify).

It described in detail one of those claimed expenses -- insurance premium payments of $40,000. Chiplease attached to its response a spreadsheet listing the expenses it had paid that it contended should be considered. It also stated that "[t]he Trustee was aware of Chiplease's payment of certain payroll expenses by virtue of his being copied on a letter dated May 17, 2006 from Chiplease's counsel," a copy of which it attached to its response. Id. ΒΆ 13 & Ex. E. Aside from those particular payments, Chiplease did not contend the trustee had approved or was aware of any of the expense payments at ...


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