Administrative Creditor Had No Claim To Assets That Were Not Estate Property
IN RE: HOLLY MARINE TOWING, INC. (January 6, 2012)
Holly Marine operated a tugboat service on Lake Michigan out of a facility at 9320 S. Ewing Avenue in Chicago. It went into bankruptcy in 2007. The S. Ewing property was sold for over $900,000. Competing claims arose. Each of Holly's co-owners (a couple going through a divorce) and the estate itself claimed the sale proceeds. A settlement gave the estate 50% of the proceeds and each co-owner 25%. The co-owners also paid the estate’s attorneys $65,000 from their shares. An administrative creditor objected to the $65,000 payment. The bankruptcy court approved the settlement and denied the creditor's motion to amend the order. Judge Kendall (N.D. Ill.) affirmed. The creditor appeals.
In their opinion, Seventh Circuit Judges Bauer, Manion, and Kanne affirmed. The Court first addressed standing, since the $65,000 came from the co-owners and would revert to the co-owners (and not to the creditors) if the order is reversed. The Court found that the creditor had standing. Although it may not be able to reach the $65,000, that is a question on the merits, not on standing. The creditor has provided services to the estate and is an administrative creditor. It has a pecuniary interest in the settlement and standing. On the merits, the Court found no error in the district court's conclusion that the $65,000 was never part of the estate. The bankruptcy court considered all the claims on the $900,000 sale proceeds and approved the agreed-upon distribution. The $65,000 payment came from the co-owners’ share, not the estate’s. Therefore, the general priority scheme between creditors does not apply. The Court also found no abuse of discretion in the bankruptcy court’s approval of the settlement. The bankruptcy court carefully considered all the interests involved and weighed them against the costs of further litigation. The ultimate settlement was within a reasonable range of outcomes.
Michael Rigney practices in the law offices of GVC Ltd. in Chicago. In this blog, he reports on select