The Clerk of the Court (“Clerk”) is the “official custodian of the records and dockets of the bankruptcy court,” and when it appears that there will be a distribution to unsecured creditors in a bankruptcy case, the Clerk must keep a list of all claims filed. 28 U.S.C. § 156(c); Fed. R. Bankr. P. 5003(b). In large cases, claims agents are often retained in order to assist the Clerk in fulfilling its administrative duties. In fact, certain districts require that claims agents be retained when the number of creditors and equity security holders exceed a certain threshold. For instance, the Bankruptcy Court for the Southern District of New York requires that a claim agent be retained when the number of creditor and equity security holders total 250 or more.
The practice of claims trading has become a common feature in large cases. Claims trading is an out of court transaction whereby private parties purchase and sell claims that are held by creditors against a bankruptcy debtor. Claims traders often seek to purchase claims at a discount, which provides the selling creditor with a guaranteed recovery without having to wait the prolonged period (sometimes years) for a distribution to be made in the bankruptcy case. However, despite the fact that the agreement for the sale of a claim is reached outside of court, the Federal Rules of Bankruptcy Procedure (the “Bankruptcy Rules”) require that any transfer of claim be recorded on the claims register.
Online marketplaces have been created to facilitate claims trading. These websites can provide a one-stop shop for claims traders interested in acquiring claims from creditors in large bankruptcy cases. In a recent case, In re Madison Square Boys & Girls Club, Inc., 642 B.R. 487 (Bankr. S.D.N.Y. 2022), the Bankruptcy Court for the Southern District of New York examined whether the claims agent retained in a case can enter into a private agreement with a claims broker to provide access to real-time and synchronized data of all of the claims submitted to the claims register in exchange for the claims agent receiving a commission of the claim trades. As discussed below, the Court found that the claims agent operates as an agent of the Clerk, and therefore is bound by the same duties, obligations, and protocols that bind the Clerk, and is prohibited from entering into for-profit agreements to provide additional services to third parties.
Claims Agents’ Retention
The authority to retain claims agents to assist the Clerk can be found in 28 U.S.C. § 156(c) (“Section 156(c)”), which states that “[a]ny court may utilize … services … off the court’s premises, which pertain to the provision of notices, dockets, calendars, and other administrative information to parties in [bankruptcy cases], where the costs of such … services are paid for out of the assets of the estate and are not charged to the United States. The utilization of such … services shall be subject to such conditions and limitations as the pertinent circuit council may prescribe.”
Claims agents retained under Section 156(c) may execute only those administrative tasks that the Clerk of the Court is authorized to perform. These administrative tasks include, but are not limited to, recording transfers of claims and providing notices of transfers as required under Bankruptcy Rule 3001(e).
However, if there is a desire for the claims agent to perform additional administrative services that extend beyond the scope of Section 156(c), the claims agent must be retained under 11 U.S.C. § 327(a) (“Section 327(a)”) by separate application and order of the Court. Permissible claims agent activities under Section 327(a) include the preparation of schedules, acting as balloting and tabulation agent, and/or distributing assets under a plan of reorganization. The Southern District of New York’s Protocol for the Employment of Claims and Noticing Agents Under Section 156(c) (the “SDNY Protocol”) distinguishes Section 156(c) activities as those that a claims agent performs as an agent of the Clerk whereas Section 327(a) activities are those that a claims agent performs on behalf of the debtor. In re Madison Square Boys & Girls Club, 642 B.R. at 492 (emphasis in original).
Impermissible Access Agreement and Corresponding Commission to Claims Agent
In In re Madison Square Boys & Girls Club, the Debtor sought to retain a claims agent (the “Claims Agent”) to perform the traditional Section 156(c) administrative functions and also, in connection with the Claims Agent’s retention, sought Court approval of an access agreement (“Access Agreement”). The Access Agreement was between the Claims Agent and a third-party claims trading platform (the “Claims Broker”) whereby the proofs of claim submitted to the Claims Agent shall be synchronized with the Claims Broker’s website where the claims are posted for sale. This real-time exchange of information was to be facilitated by the Claims Agent in return for receipt of a commission on the traded claims (the “Fee”).
The purpose and terms of the Access Agreement are as follows: (i) the Claims Broker synchronizes the claims register that the Claims Agent administers with the claims available for sale on the Claims Broker’s platform within three days of the creation of the claims register or filing of the bankruptcy petition; (ii) the claims related data is transferred to the Claims Broker in a digital format that is compatible with the Claims Broker’s platform; (iii) the Claims Broker sends trade information to the Claims Agent; (iv) the Claims Agent has corresponding obligations to ensure “timely access and ongoing synchronization to the claims registers”; (v) the Claims Agent must provide technical support to the Claims Broker to ensure that the data is continually transmitted through the Claims Broker’s software; (vi) the Claims Agent must notify the Claims Broker within one business day if there are any issues with any of the transmitted trades; and (vii) in exchange for the synchronization services the Claims Broker pays the Claims Agent a Fee equal to “10% of the commissions [the Claims Broker] receives from users who trade claims on its website in cases in which [the Claims Agent] serves as the court-approved claims agent.” See id. at 489-91.
During the first day hearing, the Court requested further briefing on the Access Agreement and the Fee. The Claims Agent and Claims Broker raised a number of arguments including, but not limited to: (i) the limitations of Section 156(c) do not apply to the Claims Agent’s relationship with the Claims Broker because “it is acting in its capacity as a private, for-profit business rather than as an agent of the Clerk” Id. at 494; (ii) it is unfair to restrict the Claims Broker’s access to information; and (iii) the Fee charged is permissible because the Miscellaneous Fee Schedule (defined herein) includes fees related to providing electronic copies of court records and claim transfer fees.
The Court’s Denial – Claims Agents Retained Under Section 156(c) are Agents of the Clerk
The Court denied the Claims Agent’s application as it related to the Access Agreement for a host of reasons. The main reason being that, as an agent of the Clerk, claims agents cannot engage in activities that the Clerk itself would not be allowed to do. The Access Agreement attempted to extend the Claims Agent’s services far beyond the permissible scope of administrative activities under Section 156(c) and the Clerk’s obligation under Bankruptcy Rule 5003(b) to “keep in a claims register a list of claims filed in the case.” The Court supported its denial via a few different sources, including but not limited to, Section 156(c), the SDNY Protocol, the Code of Conduct for Judicial Employees (“Code of Conduct”), and 28 U.S.C. § 1930.
Section 156(c) is narrow – only the activities enumerated in this section are those that the Clerk or an agent of the Clerk can engage in. Despite the Claims Agent’s argument that its activities were done in furtherance of its “private, for-profit business,” the Court explained that but for the Claims Agent’s retention under Section 156(c), the Claims Agent would not have access to the data that the Claims Broker was seeking. The Claims Agent also suggested that the SDNY Protocol permits this arrangement because (i) it contemplates separate engagements to perform administrative tasks for the debtor outside of the Section 156(c) activities, and (ii) is silent on the Claims Agent’s ability to provide claims register data access in a digital format to the public or third parties in an agreed upon format. The Court rebutted this argument by noting that the Debtor did not seek to retain the Claims Agent under Section 327(a) and the benefit to the Debtor requirement under Section 327(a) is nonexistent because the arrangement provides a benefit to the Claims Broker and, presumably, the Claims Agent through the Fee. Regardless, the Court said that even if the Debtor sought to retain the Claims Agent under a Section 327(a) application it would be inappropriate because, again, the Claims Agent only has access to the claims data by way of its retention under Section 156(c) (i.e. as an agent of the Clerk).
The Court also referred to Canon 2 of the Code of Code of Conduct, which requires the Clerk to “avoid impropriety and the appearance of impropriety” and judicial employees, like the Clerk, should not use public office for private gain. See Guide to Judiciary Policy, Vol. 2, Pt. A, Ch. 3. The Court also explained that a Clerk would not be able to contract with a third party. See Principles of Fed. Appropriations Law, Chapter 3, pp. 3-13 (United States Government Accountability Office, Office of the General Counsel) (4th ed. 2017) (“Brief mention should also be made of the axiom that an agency cannot do indirectly what it is not permitted to do directly. Thus, an agency cannot use the device of a contract, grant, or agreement to accomplish a purpose it could not do by direct expenditure.”) (emphasis added). The Court explained that the Access Agreement and the Fee ran afoul of Canon 2 because the agreement “lend[s] the prestige of the office to advance or appear to advance the private interest of others” by contracting to synchronize data for the Claims Broker’s platform, and the Fee violates Canon 2’s prohibition against using the public office for “private gain.” See Madison Square Boys & Girls Club, 642 B.R. at 494. The Claims Broker argued that it is “unfair” to be denied access to the information, but the Court emphasized that the Claims Broker is not being denied access to the data, rather, the Claims Broker simply is not permitted to access the data in its preferred format. The Claims Broker has access to all of the data the Claims Agent generates in the ordinary course of business, which is the same data that all general creditors and parties in interest have access to on the Claims Agent’s website. Again relying on the Code of Conduct, Canon 2, the Court explained “the Clerk of the Court could not receive a fee to process this claims data simply to further [the Claims Broker’s] private interest” and accordingly, neither can the Claims Agent.
Additionally, the Court turned to 28 U.S.C. § 1930 (“Section 1930”) in analyzing the fees that a Clerk may charge. Permissible fees are limited to those authorized under Section 1930, and Section 1930(b) provides that additional fees may be permitted by the Judicial Conference of the United States Under section 1914(b). The additional fees under section 1914(b) are “set forth in the extensive and painstaking detail” in the Miscellaneous Fee Schedule (“Miscellaneous Fee Schedule”), and relevant to the inquiry here, included therein are the $26 claim transfer fee (“Claim Transfer Fee”) and the $31 electronic copy fee (“Electronic Copy Fee”). See Madison Square Boys & Girls Club, 642 B.R. at 493. However, unlike the Fee provided for in the Access Agreement, these fees are paid to the Treasury Department, and the ongoing synchronization services and technical support provided for in the Access Agreement are not included in Section 1930 or the Miscellaneous Fee Schedule.
The Court found that the Access Agreement and the Fee are impermissible for a number of reasons, and the Court explained in detail that the Claims Agent and Claims Broker’s arguments do not change the Court’s opinion.
“Said another way, the Clerk cannot engage in for-profit relationship” solely to benefit the Claims Broker. Madison Square Boys & Girls Club, 642 B.R. at 493. Moving forward, the Madison Square Boys & Girls Club may impact how claim broker websites and claims traders obtain information on claims. Further, claims agents retained in bankruptcy cases must be mindful of the scope of their duties as an agent of the Clerk of the Court under various statues, rules, and other protocols. However, on September 1, 2022, the Claims Broker appealed the Court’s decision to the United States District Court for the Southern District of New York which could impact the Bankruptcy Court’s ruling.
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