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In Re Holly Marine Towing, Inc v. Bauch & Michaels

March 29, 2011

IN RE HOLLY MARINE TOWING, INC., DEBTOR. SCOULER & CO., APPELLANT,
v.
BAUCH & MICHAELS, LLC, APPELLEE.



The opinion of the court was delivered by: Judge Virginia M. Kendall

MEMORANDUM OPINION AND ORDER

The debtor, Holly Marine Towing, Inc. ("Holly Marine"), filed for bankruptcy. Glenn Dawson ("Dawson") and Holly Headland ("Headland"), previously married and principals of Holly Marine, entered into an agreement with the Trustee regarding distribution of proceeds from selling the marine facility located at 9320 S. Ewing in Chicago ("Ewing Property"). As a result of the agreement, the Trustee received 50% of the proceeds and Dawson and Headland each received 25%. Dawson and Headland paid Bauch & Michaels, LLC ("Bauch"), Holly Marine's bankruptcy attorney, out of these proceeds. Scouler & Co. ("Scouler"), an entity which provides financial and risk management services, was also awarded approximately $24,000 for administrative and professional services provided to Holly Marine during the administration of the Chapter 11 case. The Bankruptcy Court approved this agreement despite Scouler's objection. Scouler appeals this decision, maintaining that it violates the priority scheme and was not in the best interest of the estate. Bauch moves to dismiss Scouler's appeal for lack of standing and the Trustee moves to dismiss based on defective notice of appeal. For the following reasons, the Court denies the motions to dismiss and affirms the Bankruptcy Court's ruling.

STATEMENT OF FACTS

I. Distribution of Proceeds to Bauch

The debtor, Holly Marine Towing, Inc. ("Holly Marine"), owned commercial tugboats and provided towing and other marine-related services, and operated its facility at 9320 S. Ewing in Chicago. Holly Marine filed Chapter 11 bankruptcy on January 8, 2007 with the goal of continuing its business and paying off creditors over time. On March 26, 2008, however, the Bankruptcy Court entered an order converting the case to Chapter 7 Liquidation bankruptcy, where a Trustee was to take control of Holly Marine's assets, convert them to cash, and pay creditors.

When the Bankruptcy Court appointed a Trustee, there were two separate disputes in the background of the bankruptcy proceedings. First, there was a divorce proceeding between Dawson and Headland, where both asserted interests-Dawson as the holder of title and Headland through marital property-in the Ewing Property. Second, Holly Marine had sued Dawson for breach of fiduciary duty and usurping corporate opportunities and sought declaratory relief that the Ewing Property was part of the bankruptcy estate. Upon appointment, the Trustee took over this proceeding for Holly Marine.

As settlement for the Trustee's claims against Dawson and the marital property dispute between Dawson and Headland, the Bankruptcy Court approved the Trustee's sale of the Ewing Property. After paying the fees and taxes, the proceeds from the sale of property were $911,620.40. The Trustee, Dawson, and Headland then agreed to distribution of this amount amongst themselves.

The estate, via the Trustee, would receive 50% ($458,252.18) and Dawson and Headland would each receive 25% ($229,126.09). All claims between the parties would also be released.

An agreed order filed by the Trustee, Dawson, and Headland detailed the distribution of Dawson and Headland's proceeds. Of Dawson's $229,126.09, he would keep $79,126.09 and $150,000 would be paid to Adelman & Gettleman, Ltd., his counsel. For Headland, all of her $229,126.09 went to her counsel, Joseph Mitchell. The Trustee filed and validly noticed a Motion to Approve this agreed order, to which Scouler did not object.

At the December 30, 2009 hearing on the motion, Bauch objected to the agreed order because it did not to receive any of the proceeds. As such, hand-written changes were made to the agreed order giving Bauch a portion of Dawson and Headland's proceeds, and the new updated order ("Settlement Agreement") was submitted to the Bankruptcy Court. The Settlement Agreement altered the distribution of the proceeds as follows: Dawson kept $69,126.09, Adelman & Gettleman received $140,000, and Bauch received $20,000; for Headland, $184,126.09 went to Joseph Mitchell and $45,000 to Bauch. Scouler did not receive notice of Dawson and Headland's amended distributions to Bauch. The Bankrupcy Court approved the Settlement Agreement.

Bauch therefore received $65,000 for its services provided during the Chapter 11 case and for withdrawing its objection to the initial agreed order. This appeal centers around the propriety of that distribution.

II. Payment Arrangement for Administrative Claimants

Holly Marine was involved in various financing arrangements with Fifth Third Bank, its lender. Holly Marine's property was also subject to federal and state tax liens, and the value of the liens was greater than the value of its assets. As such, Holly Marine was able to maintain possession of its assets and run its business through cash collateral orders. Holly Marine used these orders that contained "carve outs" to pay fees for its own professionals and the Committee's professionals. In essence, a "carve out" is where a party with a security interest in the estate allows part of its lien proceeds to be paid to another party. After the court-approved sale of the majority of Holly Marine's assets on February 12, 2008, FH Partners, the assignee of Fifth Third Bank's interest, Holly Marine, and the Committee stipulated that $70,000 would be paid to the Committee and set aside to satisfy "carve outs" for professionals.

Scouler is a company the Committee hired to provide financial advice to Holly Marine. After providing financial services to Holly Marine, the Bankruptcy Court approved Scouler's fee application on March 27, 2008 for $24,094.88. Scouler appeals the Bankruptcy Court's decision to approve the Settlement Agreement, which allowed Bauch to collect $65,000 from Dawson and Headland but failed to provide it with payment for its fees.

The Settlement Agreement dated January 20, 2010 was entered on January 25, 2010, and Scouler timely filed its Notice of Appeal on February 1, 2010. This Court has ...


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