Our Objection to Fees
UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF OREGON
Jim Hull (”Hull”), Manager of Century Drive Mobile Home Park, LLC, an Oregon limited liability company; Mark Knowles, Principal of Unsecured Creditor XIGG, LLC (dba Smart Solutions); Stephanie Studebaker-DeYoung (”Studebaker”), Manager of interested parties Klondike Point, LLC, an Oregon limited liability company; and Century Drive Mobile Home Park, LLC, an Oregon limited liability company; (Collectively the “Interested Parties”), hereby submit the following Objection to the Professional and Attorney Fees submitted as claims in this case.
I.
PRELIMINARY STATEMENT
We are Interested Parties who are concerned about the cost of this bankruptcy case to unsecured creditors, LLC’s and LLC Members all of whom are suffering financially from the aftermath of this case. On April 22, 2009 Century Drive Mobile Home Park, LLC filed a proof of claim(1) with the Court for $585,584.68 (Exhibit A) representing shareholders’ share of proceeds from a 7/31/08 sale of 20.17% of the property to Jim Hull via a Tenant in Common Agreement. Checks were written directly to Inland Capital Corp (debtor’s affiliated lending company). Pursuant to the Century’s operating agreement, capital contributions were required to be made to cover the $80K per year of negative cash flow arising from distribution of these funds without paying down the related debt associated with this sale.
We are Interested Parties who don’t understand how the actions of the Trustee, i.e. no cooperation(2), no communication, and conducting activities that violate our operating agreements are able to create value for the estate. We believe these actions are a wanton waste of time and money, which increase legal and professional fees and decrease the assets in the estate, while increasing estate liabilities.
We have thoroughly reviewed the claims submitted by Obsidian Finance Group, LLC (”Obsidian”) – Claim 119-1 for $184,732.43, as financial advisor to debtor; Kevin Padrick’s (”Padrick”) – Claim 120-1 for $469,599.39 as Trustee; and Tonkon Torp, LLC’s (”Tonkon Torp”) – Claim 117-1 for $267,899.40 as Padrick’s legal counsel (Exhibit J). Total legal and professional fees being claimed due to the Trustee’s activity in the case are already $922,231.22. These professionals are charging approximately $185K PER MONTH to manage the affairs of this estate. At this rate the creditors could rack up attorney and professional fees over the 5 year term of approximately $11.1 MILLION. These Trustees fees are completely disproportionate to the amount of liquidation proceeds totaling $9,450 which include $7,650 of proceeds from furniture and equipment, and $1,800 of miscellaneous (Exhibit B, pg 4), resulting in liquidating proceeds of less than 10K for a cost of almost $1 Million. The Trustee’s involvement in this case has only resulted in a return to the estate of only a miniscule 0.09%/month. THAT MEANS, FOR EVERY $1 PAID BY THE CREDITOR’S TO THE PROFESSIONALS, THEY RECEIVE 1 PENNY PER YEAR WORTH OF BENEFIT.
GROUNDS FOR THIS OBJECTION ARE PURSUANT TO 11 U.S.C § 330
In determination of the amount of REASONABLE COMPENSATION to be awarded to a Trustee under Chapter 11, or professional person, the Court shall consider the nature, the extent, and the value of such services, taking into account all relevant factors. The Court SHALL NOT ALLOW compensation for services that were not, reasonably likely to benefit the debtor’s estate.
II.
SUMMARY OF MATERIAL FACTS
FUNDAMENTAL OBJECTIONS
A. WE OBJECT TO THE TIME SPENT IN GETTING THE JOB OF TRUSTEE
- Pursuant to Obsidian’s engagement (Exhibit C) by Summit Accommodator’s Inc. “to provide financial advisory and consulting services”, Obsidian submitted Claim 119-1 for $184,732. At least $48,100 (Exhibit D) of the charges represent, in substance, time spent trying to obtain the Trustee’s job. Kevin Padrick (”Padrick”), senior principal of Obsidian and Obsidian (the company) are the only parties who benefited from the services performed from 12/18/2008 through Padrick’s appointment as Trustee on 2/18/09. The CRO did not approved these services (Exhibit E) and these services bear no reasonable relation to Obsidian’s engagement to assist the CRO and debtor to increase the return payable to the debtor’s estate.
- On February, 11, 2009, a hearing was held regarding a motion to replace Vance as CRO. At this hearing Studebaker questioned what Obsidian and/or Padrick had going on with the creditors’ committee to get them to approve his excessive cost for professional fees and a commission of 15%. The creditors have not yet seen how this high commission rate would deplete the estate because only $9K has been brought in by the Trustee and Obsidian’s services. Court responded that “…Obsidian made an effective presentation to them, they were happy with the professional competence and strategic ideas that Obsidian presented” and that “…any compensation to Obsidian would be subject to the approval of the court based on a reasonableness determination and creditors and other Interested Parties would have an opportunity to object to them getting anything.” Studebaker explained that the shareholders, in this case, had not had an opportunity to review the presentation. The Court instructed Padrick to give the presentation to the shareholders and the US Trustee. The next day Vance, Studebaker, the 4 shareholder’s and one spouse gathered at Summit’s old office for a presentation lasting approximately 2 hours. One relevant question posed to Padrick at this Presentation regarding the engagement for services, was by Tim Larkin (”Larkin”). Larkin said that when they originally met with Padrick back in December, there were several things Obsidian put forth they could do for the shareholders…move quickly, engage the insurance companies almost immediately, and work fast enough perhaps so they could preserve some exchanges. At that time, the 45-day date (exchanger deadline on identification of replacement properties) had not passed. The shareholders spent a week or so putting together all of the information they could with hopes this thing would move forward quickly. Larkin said, “We’re seeing absolutely no results that you put forth you were going to bring to the table… We have put out $100,000 (Obsidian’s retainer) of exchanger money, essentially, and we’re seeing nothing from it…” Padrick’s said Obsidian started working on all the mitigation strategies and were told “stop, don’t do that”. So they stopped. They were told they couldn’t present that information to the creditors, so they didn’t. Padrick claimed that is was at the request of Vance that they ended up meeting with the creditors’ committee, but Vance interrupted by sternly stating that he never instructed Obsidian specifically to go to the creditors’ committee. To this date, Padrick has not provided any of the attendees of this presentation with the name of the person who sent him to meet with the Creditors’ Committee.
In the engagement, Obsidian was charged, in part, to facilitate exchanges, but did nothing. By reason of Obsidian’s failure to perform under the terms of the retainer agreement, the claims related to adverse tax consequences from incompletion of exchanges mounted substantially to the detriment of the creditors. These tax claims are hard to measure and can be in the MILLIONS OF DOLLARS.
These monies brought ABSOLUTELY NO BENEFIT TO THE CREDITOR’S. Obsidian’s failure to perform under the terms of their original engagement resulted in a slowdown of progress in the case which increased claims significantly as exchangers missed all sorts of crucial exchange deadlines. Time spent to prepare for and make presentation(s) to the Creditor’s Committee to the detriment of the CRO and without his instruction (Exhibit E), were in violation of both the terms and the intent of Obsidian’s engagement and it would be unconscionable to compensate them for time spent to breach their own obligations. § 330 does not allow for professional fees relating to breaching engagements, giving privileged information to parties in direct conflict of interest, and landing a job as Chapter 11 Trustee.
B. WE OBJECT TO THE OBSCENE AMOUNT OF COMPENSATION PAID TO A TRUSTEE FOR SIMPLY TRANSFERRING $5.4 MILLION DOLLARS FROM THE DEBTOR’S BANK ACCOUNT TO THE LIQUIDATING TRUST.
(Exhibit B) Claim 120-1 is based on the Trustee’s limitation of, essentially, 3% of the money already sitting in the Summit bank accounts. THAT EQUATES OUT TO $164,048 FOR SIMPLY CHANGING BANK ACCOUNTS. In determining the amount of reasonable compensation, the Court shall consider the nature of the services (essentially a bank transfer) as it relates directly to the compensation awarded to a Trustee pursuant to § 330(3).
C. WE OBJECT TO ALL THE FEES RELATED TO TIME SPENT BY TRUSTEE AND HIS LEGAL COUNSEL VIOLATING AND/OR BREACHING LLC OPERATING AGREEMENTS, SEIZING THIRD PARTY BANK ACCOUNTS, SENDING MASS NOTICES UNDER FALSE AUTHORITY TERMINATING LLC MANAGERS AND THEIR COUNSEL, CLAIMINGAND FILING DOCUMENT(S) WITH THE OREGON CORPORATION DIVISION WITHOUT THE CONSENT OF THE LLC’S MEMBERS CAUSING FUTURE CLAIMS AND LEGAL COSTS TO THE ESTATE. THE TRUSTEE IS SEEKING GOVERNING RIGHTS(2) THAT ARE NOT AUTHORIZED UNDER APPLICABLE STATE LAW.
See Exhibit F for a detailed recap of numerous actions, including taking governing rights away from the managers of Century and Klondike(3), by the Trustee and Tonkon Torp that ultimately result in more legal fees to the estate with little to no benefit to the creditors. Claims 120-1 and 117-1 represent services rendered for the sole purpose of knowingly and recklessly violating the terms of numerous LLC operating agreements. Padrick has taken actions which bear no connection to increasing the creditors’ return, and which have caused substantial damage to innocent third parties and reduced the value of the estate assets in the process. This has caused LLC members to take defensive stances and delayed progress putting many of the estate’s real properties on the market as they come dangerously close to foreclosure. The Trustee has made no attempt to make LLC capital contributions which would help pay debt service and maintenance costs to keep properties in a saleable condition. In many cases, LLC Members and other third parties[5] have been footing the bills and servicing the debt to keep their investment and their credit sound. Obsidian has also spent significant time on real properties that have negative equity. How are these services reasonable or likely to benefit the debtor’s estate pursuant to § 330(4) (ii) (I)?
D. WE OBJECT TO THE UNNECESSARY DUPLICATION OF SAME SERVICES BEING PERFORMED DUE TO MULTIPLE IN-HOUSE CONFERENCES AND A STAGGERING AMOUNT OF CONFERENCES WITH TRUSTEE’S LEGAL COUNSELS.
The Court shall not allow for compensation of unnecessary duplication of services pursuant to § 330(4)(i).
- There are excessive in-house conferences among Obsidian’s professional group. Obsidian’s fees related to in-house meetings amounts to be approximately $97,300 (Exhibit I).
- There are excessive conferences between Obsidian’s professional group and Tonkon Torp’s attorneys as counsel to Obsidian. An estimate of the charges related to these conferences was difficult to determine due to the many redactions included in Tonkon Torp’s fee application. Our best efforts determine the amounts to be approximately $93,720 (Exhibit H)
- There are excessive fees from 3 layers of highly compensated professional services relating to the finalization of reverse exchanges. The 3 layers of services include work done by Sussman Shank LLP (”Sussman”) totaling $63,226, work done by the Trustee totaling $78,870, and the work done by Tonkon Torp $9,829 (Exhibit G). An analysis of the fees charged by these professionals for completing ONLY HALF of the exchange transactions shows the professionals charging for 15 exchanges an average of $7,397 to complete the SECOND HALF of the exchange. The Trustee could have contracted with a reputable Qualified Intermediary with practical exchange experience for substantially less fees. A common charge for an entire reverse exchange transaction is approximately $3,500 per exchange, so ½ would be approximately $1,750 per exchange. The cost to the estate would approximate $26,250 ($1,750*15) based on the customary compensation charged by comparably skilled practitioners pursuant to § 330(F). The charges for exchanges in this case total $151,925(Exhibit G). This is approximately $125,675 more than what is reasonable.
E. WE OBJECT TO CLAIM 120-1 BECAUSE IT IS IMPOSSIBLE TO DETERMINE IF THE COMPENSATION IS REASONABLE PURSUANT TO § 330.
1. A preliminary analysis of the Obsidian’s entries for services in this claim related to conferences and meetings indicated 335 possible DISCREPANCIES (Exhibit K) between professionals at Obsidian, Tonkon Torp, Perkins Coie, LLP, and Sussman. The majority of discrepancies were among the conferences between the professionals at Obsidian. Based on the discrepancies found in just matching conferences and meetings, we believe a thorough investigation of Obsidian’s time would uncover many additional discrepancies.
2. Obsidian’s bills are vague, and included TONS of discrepancies. A comparable professional in the case (Sussman) provided bills with detail making it easy to determine the work performed related to time spent.
F. WE OBJECT TO THE AGGREGATE AMOUNT OF PROFESSIONAL AND ATTORNEY FEES RELATIVE TO THE MINISCULE RECOVERY OF ASSETS ATTRIBUTABLE TO THE TRUSTEE.
1. The Trustee’s claim 120-1 is based on total services and reimbursable expenses of $858,793.80 for the time period 2/18/09 through 5/12/09. The Trustee’s compensation is limited by a sliding percentage scale limiting the above fees by disbursements. Total disbursements include $138,584 attributable to operating expenses, $8,904,503 attributable to exchanger distributions, and $5,468,264 for changing bank accounts. The Trustee’s compensation is limited by the sum of these disbursements, $14,511,350.44. The limitation is approximately 3.2% of these disbursements or $469,599.39 (Claim 120-1). The $14.5 Million is made up of mostly money that was in the bank account when debtor declared bankruptcy and property liquidations, of which approximately $753K of net proceeds from real properties sold during the 2 months of Vance’s tenure as CRO. The Trustee’s efforts in the case have resulted in only 10K of net proceeds from assets sold during 4 months of Padrick’s tenure as Chapter 11 Trustee. Padrick has yet to sell any real properties. Vance’s Claim for fees total $89,827.41. Accordingly, the return on fees during Vance’s tenure averaged 419% per month. The return on fees during Padrick’s tenure averaged 0.5% per month. The fees in this case are exorbitant compared to the results of asset sales. The billing and time reports show almost no time spent on sales of real estate. The Trustee has spent barely any time on valid fair market offers that if he would have attended to and/or accepted instead of ignoring and rejecting would have produced approximately $902,851 (Exhibit M) in liquidating proceeds to the estate.
2. Approximately $111,395 (Exhibit N) of the professional and attorney fees is for committing WRONGFUL ACTS related to violating provisions in LLC operating agreements, taking money from LLC checking accounts without warning and without following the provisions of the operating agreement, filing document(s) with the Oregon Corporation Division under false authority (Civil Misdemeanor), and taking governance rights from LLC’s where governance rights do not exist under the LLC operating agreements. Although, these fees are small in comparison to other figures mentioned hereinabove, these actions have caused considerable cost and damage to innocent third parties and no gain for the estate. To compensate Obsidian, Padrick, and Tonkon Torp for their services performed in these matters is unconscionable and wanton waste of assets of the estate.
3. Office furniture originally costing $284,975 (Exhibit O) was essentially given away. The furniture was in excellent condition as almost all was purchased in recent years. The various professionals charged over $4,257 (Exhibit P) resulting in a sale of all furniture for ONLY $7,650 netting the estate a paltry $3,393. Will Obsidian’s 15% commission also be charged on the $7,650? Wouldn’t that be duplication of fees which the Court shall not allow pursuant to § 330(4) (i)?
III.
CONCLUSION
Based on the foregoing facts and discussion the Interested Parties hereby object to the fee requests submitted by Padrick, Obsidian, and Tonkon Torp on the following grounds pursuant to 11 U.S.C § 330 in determining whether the compensation is reasonable, for economy in administration is the basic objective. The compensation awarded to a Trustee under Chapter 11 and other professional persons is for actual necessary services, based on the time spent, the nature, the extent and the value of the services rendered, and the cost of comparable services in nonbankruptcy cases. There is inherent a “public interest” that “must be considered in awarding fees. The fees in bankruptcy cases can be quite large and should be closely examined by the Court. The professional and attorney fees in this case are extremely high and disproportionate to the value of the services performed.
- a.) § 330 does not allow for professionals to reap the rewards for implementing a deal that had already been struck with the Vance as CRO of the debtor’s estate by breaching engagements, giving privileged information to parties in direct conflict of interest, and landing a job as Chapter 11 Trustee. The services bear no reasonable relation to Obsidian’s engagement to assist the CRO and debtor to increase the return payable to the debtor’s creditors.
- b.) In determining the amount of reasonable compensation, the Court shall consider the nature of the services as it relates directly to the compensation awarded to a Trustee and the value of such services pursuant to § 330(3).
- i) The Trustee’s actions have delayed exchanges increasing the claims in the case.
- ii) By ignoring and rejecting valid fair market value offers, the Trustee and his team of professionals, Obsidian and Tonkon Torp have cost the estate approximately $902,851 (Exhibit M) and a high likelihood of additional legal and professional fees further depleting the estate of its already declining value.
- iii) The Trustee’s efforts to obtain compensation based on approximately 3% or $469K of, essentially, what was in the estate when he was appointed Trustee. The creditor’s are expected to pay close to ½ A MILLION DOLLARS for an BANK TRANSFER (representing the majority of the Trustee’s compensation), proceeds for liquidating assets approved by Vance during his 2 month tenure as CRO, and for selling brand new office furniture costing $285K at a HUGE DISCOUNT – Sold for $7,650 less Padrick’s fees of $4,257 for a net benefit to the estate of only $3,393.
- iv) Pursuant to §330 (3) (F) Professional and attorney fees should be reasonable based on customary compensation paid to other qualified professionals, such as Qualified Intermediaries.
The debtor’s shareholders have always been willing, since day one in the case, to make an assignment of certain interests’ in assets that are outside the estate to the estate, so it should not have cost over $2 MILLION in professional fees to get the shareholders to assign their interests’ to the estate. Over $100,000 in attorney fees have been spent by Interested Parties defending their rights as they relate to the fallout of this case resulting in further devaluation of the estate. These amounts are still absent of attorney fees paid to outside counsel for the debtor and the creditors’. If the debtor’s were already willing to assign their interests, why are the fees so horrendous?
V.
WRITTEN REQUEST FOR A HEARING
It is obvious the Trustee’s plans are not to work with the Interested Parties regarding their investments. There are approximately 106 Interested Parties whose rights have been negatively affected by this Trustee’s twisting of the Motion for Partial Summary Judgment Regarding Ninth Claim for Relief for Turnover Pursuant to 11 U.S.C. § 542 by exceeding the powers and rights granted to him by this Court order. The other Interested Parties are not objecting, due to their fear of the Trustee and the actions he may take in retaliation of the objection. There are approximately 100 1031 Exchangers losing their money due to the high costs on professional and attorney fees. The 1031 Exchangers are individuals/entities involved in real estate that have been devastated by the collapse of the real estate market across the Country. The Interested Parties, likewise, are suffering the same, but even more magnified because the majority resides in Central Oregon which has been devastated by this decline in real property values of approximately 50% of what they were a year ago and are continuing to decline. The dollar amounts described hereinabove are in the millions. The Interested Parties (who had nothing to do with debtor’s bankruptcy) and 1031 Exchangers are more than likely suffering from this financial loss and will continue to until the situation is resolved.
With respect, that it is clear, the Trustee intends on using this Court’s order to BULLY, TRAMPLE and assume management rights of 106 Interested Parties (Exhibit Q) by seizing company funds without warning, threatening 2004 Examinations, ignoring offers and LLC member rights, listing properties for sale under false authority, notifying renters to send rent checks to the Trustee instead of the company to which they belong is BLATANTLY IMPROPER, A WASTE OF ESTATE CASH RESERVES, AND CREATES POTENTIAL LIABILITY TO THE ESTATE. The LLC’s efforts to engage in dialog with the Trustee have been largely ineffective. The LLC’s assets primarily consist of real properties that continue to decrease in value due to Bend’s downturn in their real estate market. The LLC members are doing their best to preserve the interests.
TO EFFECTIVELY RESOLVE THE DISPUTES WITHOUT FURTHER REDUCING THE INVESTMENTS OF THE 1031 EXCHANGERS, RELATIVE TO THE COURT ORDER, WE SUGGEST STRONGLY THAT BEFORE ESTATE LIABILITIES INCREASE DUE TO THE TRUSTEES ACTIVITIES, THE COURT APPOINT A MEDIATOR TO RESOLVE THE DISPUTES OF THE 106 INTERESTED PARTIES.
The Interested Parties do hereby request a hearing on this Objection to Professional and Attorney Fees as this Objection is being timely filed within 20 days of the Notice Re Order Confirming Chapter 11 Plan, and Appropriate Injunction, and Discharge.
Respectfully Submitted,
DATED: July 2, 2009 INTERESTED PARTIES
(1)There has been no objection filed in relation to this claim, a claim that if not paid back to Century will ultimately result in foreclosure of the property and Hull losing the $900K in cash he used to purchase his portion of the property subject to the debt. Hull is a 69 year old man left with nothing but social security and minimal savings due to the fallout of this case. Instead of getting his share of the profits from the park, he is foregoing the money and working for free to keep the park out of foreclosure.
(2)Studebaker informed the Kevin Padrick, Senior Principal of Obsidian Finance Group, LLC about this situation on February 12th at his presentation to a small group of interested parties, including the shareholder’s and Terry Vance the Chief Restructuring Officer at the time. In the spirit of cooperation Studebaker emailed all the information she had on the company to Obsidian. Until recently, Hull and Studebaker as co-owners and managers of Century have received no response or communications back from the Trustee. On June 23, 2009 David Aman of Tonkon Torp, LLC acting as the Trustee’s legal counsel emailed a response to LLC’s attorney, Robert Opera , enclosing “copies of memoranda of action of the members of both Klondike and Century, removing the current managers of those companies and appointing the Trustee as the manager of each company.” In this same email, the “Trustee, acting as manager of both Klondike and Century” notified Opera that he was “terminated as legal counsel for either company, effective immediately” (Exhibit).
(3)According to Oregon law, the Trustee has recourse only to the shareholders’ “economic interests” in the LLCs. The Trustee will not become a member in any of the LLCs (unless all other members of an LLC consent), and he will not have any right to participate in governance of the LLCs. See, O.R.S. 63.259 (”Rights of judgment creditor against member. On application to a court of competent jurisdiction by any judgment creditor of a member, the court may charge the membership interest of the member with payment of the unsatisfied amount of the judgment with interest. To the extent so charged, the judgment creditor has only the rights of an assignee of the membership interest.
Outside the Courtroom, prior to the April 30th, 2009 hearing, Opera, counsel for the LLC’s included as Interest Parties told the Trustee’s counsel, Aman, that he was appearing on behalf of the LLC’s just to make sure the only interests the Trustee was asking for was the economic interests’ of the shareholders. Aman said that was all the Trustee was asking for. Opera said that he had a conversation with Leon Simson (”Simson) of Tonkon Torp that led Opera to believe the Trustee was going after governing rights. Aman said, “That too.”
Inside the Courtroom, Opera told the Court he was appearing on behalf of the LLC’s just to make sure the only interests the Trustee was asking for was the economic interests’ of the shareholders only. The Court said that was all the Summary Judgment Motion was asking for. The Court asked Aman if that was correct? Aman said the Trustee was only asking for the rights of the shareholders.
Opera raised with the Court the LLCs’ concerns regarding the substantive relief sought by the Trustee. The Court indicated that it would not, and could not, do anything to impair the rights of the LLC’s.
- 1. [4] Section8.1 of the operating agreement provides that any transfer of a member’s interest in Century and Klondike Point, LLC (”Klondike”) (both have identical provisions) is “prohibited,” and that no member may transfer his interest in these LLC’s. Section8.3.1 of the Operating Agreement provides that the transferee of a member’s interest will not be admitted as a substitute member without the unanimous written consent of the non‑transferring members. Such consent has not been obtained by the Trustee, and will not be given either byStudebaker or byHull or Barbara Tyler (manager of Klondike).
- 2. Oregon law is clear that the shareholders’ transfer of their interests to the Trustee allows the Trustee to have recourse only to the members’ economic interests in Century, and that the Trustee does not become, as a result of such transfer, a member in these LLC’s or obtain any right to participate in the governance of these LLC’s. See, O.R.S. 63.259. The Trustee has no greater rights with respect to these LLC’s, or any other LLC interest he receives than he has under the operating agreement and under applicable Oregon law. See, Butner v. United States, 440 U.S. 48 (1979).
- 3. Pursuant to the both Century’s and Klondike’s operating agreements the Trustee is not entitled to vote as a member of Century, and is not entitled to exercise any management rights under the Operating Agreement. Governing Oregon law is consistent with this result.
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