The Receiver is Thinking of Filing a Bankruptcy Petition for a Corporation in Receivership. As Counsel, if this Happens, are My Fees in Jeopardy?

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QUESTION: I am counsel to a receiver for a corporation and things aren’t going too well. The receiver is thinking of filing a bankruptcy petition for the corporation. If this happens, are my fees in jeopardy?

ANSWER: They might be. Generally when a bankruptcy petition is filed for an entity in receivership, the receiver becomes a “custodian” under the Bankruptcy Code. 11 U.S.C. §101(11). As a custodian the receiver has certain duties as set forth in 11 U.S.C. §543, including delivering property in his or her possession, custody or control to the trustee and filing an accounting of any property that had come into his or her possession. In order to protect the receiver, should the entity he or she is receiver of file bankruptcy, 11 U.S.C. §543(c) provides the court shall “provide for the payment of reasonable compensation for services rendered and costs and expenses incurred by such custodian.” These fees and expenses are given administrative expense status under 11 U.S.C. §503(3)(E). Section 503(4) also provides administrative expense status for reasonable compensation of “an attorney or an accountant” of a custodian “superseded under section 543”. Therefore, if the entity under the receiver’s possession or control files bankruptcy, or an involuntary bankruptcy is filed against it, the receiver, his attorneys and accountants can be paid in the bankruptcy case and their fees will have administrative expense status. This means they get paid on a par with the bankruptcy trustee and his professionals and before unsecured creditors are paid. A problem may arise, however, if it is the receiver that files the bankruptcy petition. In re Statepark Building Group, Ltd., et al., _____ B.R. ___, 2005 Bankr. Lexis 1248 (Bankr. N.D. Tex. 2005), the bankruptcy court denied administrative expense status for the receiver’s fees and that of his attorneys because it was the receiver who commenced the bankruptcy case. The court held that where the receiver commences the bankruptcy case he is not “superseded under section 543”. In order to be superseded, the court felt the receiver has to be forced out of his role and that only occurs if the debtor or creditors commence the bankruptcy case. In a further backhand slap, the court stated that even if the receiver and counsel were entitled to administrative claims the court would reduce them substantially because if bankruptcy was the best mechanism to realize value for creditors, the receiver should have realized that and filed the bankruptcy case before incurring substantial expenses. The court did allow the receiver and his counsel to have an unsecured claim for their fees.

Topics:  Attorney's Fees, Commercial Bankruptcy, Receivership

Published In: Bankruptcy Updates, General Business Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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