In re Blair Oil Invs., LLC

588 B.R. 579

IN RE: BLAIR OIL INVESTMENTS, LLC, Debtor.

Bankruptcy Case No. 15-15009 TBM

United States Bankruptcy Court, D. Colorado.

Signed June 1, 2018

Kenneth J. Buechler, Jeffrey Weinman, Risa Lynn Wolf-Smith, Denver, CO, for Debtor.

MEMORANDUM OPINION AND ORDER DENYING DEBTOR'S MOTION FOR ALLOWANCE OF ADMINISTRATIVE EXPENSE CLAIM

Thomas B. McNamara, United States Bankruptcy Judge

This dispute proceeds at the somewhat confounding intersection of bankruptcy and limited liability company law. An individual debtor filed for bankruptcy protection under Chapter 11. He was the sole member of a limited liability company which, itself, filed for protection under Chapter 11. The individual debtor died. Thereafter, the Court converted his individual case to a liquidation under Chapter 7 and the United States Trustee appointed a Chapter 7 trustee. Meanwhile, because the individual debtor wholly owned the limited liability company, his membership interest in the limited liability company passed to the Chapter 7 bankruptcy estate in the individual case. In re Albright, 291 B.R. 538, 541 (Bankr. D. Colo. 2003). The Chapter 7 trustee, acting as owner, removed the limited liability company's manager and appointed himself as the manager. By virtue of his self-appointment, the Chapter 7 trustee continued as trustee in the Chapter 7 individual case while at the same time also acting as the manager of the Chapter 11 limited liability company.

The Chapter 7 trustee did not request or receive authorization from the Court to be employed as a manager of the Chapter 11 limited liability company under Section 327(a) of the Bankruptcy Code.¹ Instead, he just started performing services. At first, the Chapter 7 trustee had no expectation of receiving any compensation in the Chapter 11 limited liability company case and instead appeared content that he would receive his statutory commission in the Chapter 7 individual case under Section 326(a). But over time, he worked more than he anticipated, leading him to hope that he would receive more than just a statutory commission in the Chapter 7 individual case. And, later, he formed a belief that he should be paid in both bankruptcy cases.

Thereafter, the Chapter 7 trustee, as manager of the Chapter 11 debtor, directed the filing of a plan of reorganization in the Chapter 11 limited liability company case, which included a compensation package for himself for his pre-confirmation services as well as for his proposed post-confirmation employment. The United States Trustee objected to the plan provisions concerning such proposed compensation for the Chapter 7 trustee. At that point, the Chapter 7 trustee put the plan process on the back-burner and instead sought compensation in the Chapter 11 limited liability company case as an administrative expense priority claim under Section 503(b)(1)(A). He did not ask for compensation under Sections 327 and 330 since he had never been approved as a "professional person" in the Chapter 11 limited liability company case and did not believe such approval was necessary. In any event, the Chapter 7 trustee worked hard and seemingly did a good job liquidating the assets of the Chapter 11 limited liability company even though the result was not sufficient to provide any direct monetary benefit to the estate in the Chapter 7 individual case in which he was appointed.

The United States Trustee objected to the Chapter 7 trustee's administrative expense priority claim on a myriad of grounds. At the most fundamental level, the United States Trustee contends that a Chapter 7 trustee may only be compensated through a commission under Section 326(a) in the Chapter 7 case in which he is appointed. Put another way, the United States Trustee contends that a Chapter 7 trustee cannot appoint himself to a new position in another bankruptcy case (especially without seeking to be employed as "professional person" under Section 327(a) in the other bankruptcy case) and enrich himself by receiving additional compensation in the second job. The United States Trustee argues that the Chapter 7 trustee's administrative expense priority claim violates the letter and spirit of the Bankruptcy Code.

All the foregoing leads to a series of tough questions: Is the Chapter 7 trustee a "professional person" under Section 327(a) in the Chapter 11 limited liability company case? If the Chapter 7 trustee is a "professional person," may he be compensated if he did not seek or obtain approval of his employment from the Court? May the Court approve an application for employment for a Chapter 7 trustee who wishes to employ himself as a manager in another bankruptcy case? May the Chapter 7 trustee pursue an administrative expense priority claim under Section 503(b)(1)(A) instead of seeking compensation under Sections 327(a) and 330 ? Is the Chapter 7 trustee's compensation limited by the commission available under Section 326(a) for disbursement in the case in which the Chapter 7 trustee was appointed? May the Chapter 7 trustee use an asset of the estate in which he serves as a fiduciary as a basis for additional personal compensation? These are important and practical questions that were not resolved in Albright, 291 B.R. at 541, the most influential case in this District concerning bankruptcy and limited liability company issues.

I. Jurisdiction and Venue.

The Court has jurisdiction over this matter pursuant to 28 U.S.C. § 1334. Adjudication of the administrative expense priority claim is a core proceeding under 28 U.S.C. § 157(b)(2)(A) (matters concerning administration of the estate), (b)(2)(B) (allowance or disallowance of claims against the estate), and (b)(2)(O) (other proceedings affecting the liquidation of assets of the estate). Accordingly, the Court may enter final judgment on the matter. Venue is proper in the Court pursuant to 28 U.S.C. §§ 1408 and 1409.

II. Procedural Background.

Peter H. Blair, Sr. ("Mr. Blair") filed for protection under Chapter 11 of the Bankruptcy Code on May 7, 2015, in the case captioned: In re Peter H. Blair , 15-15008 TBM (Bankr. D. Colo.) (the "Individual Case"). When he filed for bankruptcy, Mr. Blair wholly owned a limited liability company — Blair Oil Investments, LLC — and served as its Manager. Just after Mr. Blair filed the Individual Case, Blair Oil Investments, LLC (the "Debtor") also sought Chapter 11 relief in the case captioned: In re Blair Oil Investments, LLC , Case No. 15-15009 TBM (Bankr. D. Colo.) (the "Blair Oil Case"). (Ex. A; and Docket No. 1.² ) Shortly after initiating both bankruptcy cases, Mr. Blair died. (Docket No. 106 in Individual Case.) Thereafter, the Court converted the Individual Case from a Chapter 11 reorganization to a Chapter 7 liquidation. (Docket No. 141 in Individual Case.) But, the Blair Oil Case remained in Chapter 11.

Enter Jeffrey A. Weinman ("Mr. Weinman"). On August 20, 2015, the United States Trustee (the "UST") appointed Mr. Weinman as the Chapter 7 Trustee in the Individual Case. (Docket No. 143 in the Individual Case.) Notably, Mr. Weinman is not a trustee in the Blair Oil Case. But, very shortly after being appointed by the UST as Chapter 7 Trustee in the Individual Case, Mr. Weinman took control of Mr. Blair's 100% membership interest in the Debtor. Furthermore, acting as the Chapter 7 Trustee in the Individual Case and as sole member of the Debtor, on August 27, 2015, Mr. Weinman removed Mr. Blair (who, after all, had died) and appointed himself as the Manager of the Debtor.³ (Ex. 5; Ex. C.) From that time on, he has controlled the Debtor in the Blair Oil Case.

Almost two years after he appointed himself to be the Debtor's Manager, Mr. Weinman initiated his first effort to be paid for his managerial services in the Blair Oil Case. He caused the Debtor to file a Plan of Reorganization and Disclosure Statement, which provided that "Mr. Weinman shall be entitled [to] receive compensation for his services to the Debtor, pre and post-confirmation. Such compensation shall be calculated in accordance with 11 U.S.C. § 326...". (Docket No. 198 at 16.) The Plan of Reorganization estimated that Mr. Weinman would receive $55,000 from the Debtor and also provided that "the Debtor will continue to employ Jeffrey Weinman as its Manager" after confirmation. (Id. ) The UST objected "based ... on legal concerns related to the compensation to be paid to Mr. Weinman." (Docket No. 215 at 2.) The UST argued that Mr. Weinman's proposed compensation rights violated the Bankruptcy Code. (Id. ) Then, the Debtor submitted an Amended Plan of Reorganization and Disclosure Statement again providing that Mr. Weinman be compensated for his work as the Manager of the Debtor in the approximate amount of $48,518. (Ex. 4 at 18.) The UST objected again. (Docket No. 227.)

Since then, the Debtor has not proceeded with the plan process. Instead, at Mr. Weinman's direction, the Debtor filed a "Motion for Allowance of Administrative Expense Claim Pursuant to 11 U.S.C. § 503(b)" (Docket No. 229, the "Motion"). In the Motion, the Debtor seeks allowance of an administrative expense priority claim for Mr. Weinman in the amount of approximately $48,418 (the "Administrative Expense Claim") based upon estimated distributions to creditors in the Blair Oil Case. The UST objected to the Debtor's Motion. (Docket No. 233, the "Objection").

The Court convened a non-evidentiary hearing on the Debtor's Motion and the UST's Objection. (Docket No. 244.) Consistent with the request of the parties, the Court determined that an evidentiary hearing was required. On February 5, 2018, this Court conducted an evidentiary hearing on the Motion and the Objection. In support of its Motion, the Debtor presented testimony from Mr. Weinman and Jeffrey Bush, an expert witness who owns a professional placement firm focusing on the oil and gas industry. The UST did not call any additional witnesses but also examined Mr. Weinman and Mr. Bush. The Court admitted into evidence Exhibits 1-10...