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The Essential Resource for Today’s Busy Insolvency Professional
Building Blocks
By NathaNiel R. hull aNd StepheN B. Segal
Disgorgement upon Insolvency:
Continuing Uncertainty
Ensuring an equitable distribution of a debtor’s
assets has been described as one of the “twin
goals” sitting at the core of the Bankruptcy
Code.1 Case insolvency at either the chapter 7 or 11
administrative priority level is forcing many courts
to decide whether the goal of ensuring an equitable
distribution of assets is the same as ensuring an
equal distribution when achieving that end would
require disgorgement.
These decisions involving so-called “dis-
gorgement upon insolvency”2 are producing
a wide range of outcomes for professionals
depending on the jurisdiction in which the case
is pending. Therefore, all chapter 11 and 7 pro-
fessionals, including appointed ones like patient
care ombudsmen and examiners, would be well
served to familiarize themselves with the diverg-
ing treatment of disgorgement in administratively
insolvent3 cases.
Further complicating this issue is the fact that
few of the bankruptcy court decisions on “disgorge-
ment upon insolvency” seem to be appealed, rais-
ing the prospect that professionals will continue to
operate in a zone of uncertainty in this area for a
great deal longer. It will be helpful to familiarize
oneself with the policy arguments on both sides of
this issue, since it is unlikely there will be any con-
trolling law in your court.
Thankfully, a leading court on this issue was
recently asked to “revisit” its prior holdings that
disgorgement is allowed upon administrative insol-
vency in light of a growing minority approach that
has found no authority to compel disgorgement sim-
ply because of case insolvency.4 Although the court
declined the invitation to reverse its prior holding,
the decision presents an opportunity to explore the
case law on both sides of the issue as it matures and
develops. It also provides a chance to think about
practical steps that professionals can take to best
position themselves in the event of administrative
insolvency in their cases.
A Leading Court Revisits Its
Prior Holding
The facts in In re Nettel Corp. are typical
of many administratively insolvent cases. Over
the course of time, several retained profession-
als received interim payments in accordance
with § 331 for post-petition, post-conversion
services rendered to the estate according to court
orders authorizing the employment and tempo-
rary operation of the business.5 There was no
suggestion that the trustee or his law rm were
paid for services in excess of their value; instead,
the sole issue was that in the course of review-
ing the trustee’s proposed nal distribution, the
court observed that if approved, the trustee would
receive 99.94 percent of his claim, his law rm
would receive 98.94 percent of its claim and
his accountant would receive 100 percent of his
claim, whereas two other administrative prior-
ity claimants, including the U.S. Trustee, would
only receive 62.042 percent of their claims.6
Questioning whether this proposed distribution
violated the mandates of the Bankruptcy Code’s
distribution scheme, the court then ordered a
brieng and provided an opportunity for the par-
ties to address whether fees paid to the trustee and
Stephen B. Segal
Verrill Dana, LLP
Portland, Maine
Neff, 137 S. Ct. 831 (2017) (along with giving debtor a fresh start); Moses v. CashCall Inc.,
781 F.3d 63, 72 (4th Cir. 2015) (“Grounded in the Constitution, bankruptcy provides debt-
ors with a fresh start and creditors with an equitable distribution of the debtor’s assets.”).
3 That is, when there are insufficient funds remaining in the estate to ensure that all
administrative expenses receive full payment.
Nate Hull and Steve
Segal are attorneys
with Verrill Dana, LLP
in Portland, Maine.
4 In re Nettel Corp., No. 00-01771, 2017 WL 5664840, at *6 (Bankr. D.D.C. Oct. 2, 2017).
5 Id. at *2.
6 Id. at *3.
Coordinating Editor
Nathaniel R. Hull
Verrill Dana, LLP
Portland, Maine
