UNITED STATES BANKRUPTCY COURT

EASTERN DISTRICT OF KENTUCKY

PIKEVILLE DIVISION




IN RE:


BLACK DIAMOND MINING COMPANY, LLC, et al.

 

DEBTORS                                                                CASE Nos. 08-70066, 08-70067, and 08-70069 through 08-70073


                                                                                  Jointly Administered


MEMORANDUM OPINION AND ORDER


           This matter is before the court on the Objection of BD Acquisition LLC (“BDA”) to Proof of Claim No. 1213 Filed by King & Spalding LLP (Doc. # 1674). King & Spalding LLP (“K&S”) filed a Response (Doc. # 1702). The matter was heard on December 15, 2009 and taken under consideration for decision. K&S was given ten days to file a full fee statement, and a Notice of Filing of Gap Period Invoice (“the Invoice”)(Doc. # 1742) was filed on December 22, 2009.

           1.        Factual and procedural background

           On February 19, 2008, involuntary petitions for relief were filed against the Debtors herein. Orders for relief were entered on Marcy 11, 2008, authorizing the Debtors’ cases to proceed under Chapter 11 of the Bankruptcy Code. On March 21, 2008, the Debtors filed an Application to Employ King & Spalding as Bankruptcy Counsel (Doc. # 240) (“the Application”) which provided that K&S received a $300,000.00 cash retainer from the Debtors. Several objections to the Application were filed and on April 29, 2008, the court entered an Order Denying the Application to Approve Retention of King & Spalding LLP as Bankruptcy Counsel to the Debtors (Doc. # 450) because they were not disinterested. This decision was appealed to the Sixth Circuit Bankruptcy Appellate Panel (“BAP”) on May 9, 2008.

           On August 15, 2008, K&S submitted its proof of claim in the amount of $361,637.03 for legal services performed during the gap period. As claimed in the proof of claim, $300,000.00 of the total claim amount is secured by the cash retainer, and the remaining $61,637.03 is entitled to priority under Bankruptcy Code sections 502(f) and 507(a)(3). On March 19, 2009, the BAP dismissed K&S’s appeal for lack of jurisdiction because the Order Denying the Application did not constitute an appealable final order. Apparently no further appeal has been taken.

           The Debtors’ Third Amended Joint Plan of Liquidation (Doc. # 1458)(“the Plan”) was confirmed by an Order (Doc. # 1562) entered on July 23, 2009. Pursuant to Article VII.A.2 of the Plan, BDA has the authority to object to priority and “other secured” claims. Pursuant to Articles IV.C.4(a) and IV.D.1 and Exhibit IV.D.1 to the Plan, any claims or causes of action against K&S were retained by the Debtors’ estates and transferred to the BD Unsecured Creditors’ Trust.

           2.        Discussion

           K&S seeks compensation for legal services performed “in the ordinary course of the debtor’s business or financial affairs after the commencement of the case but before the earlier of the appointment of a trustee and the order for relief[.]” 11 U.S.C. § 502(f). This is the so-called “gap period.” Expenses incurred during the gap period are entitled to priority pursuant to Bankruptcy Code section 507(a)(3). See In re Monarch Capital Corp., 163 B.R. 899, 904-05 (Bankr. D. Mass. 1994)(denying section 507(a)(3) priority to the fee of an investment banking and business brokerage firm as not in the ordinary course). Expenses for legal or other services to defend an involuntary bankruptcy petition do not qualify as ordinary course expenses. See In re Hanson Indus., Inc., 90 B.R. 405, 414 (Bankr. D. Minn. 1988).

           BDA contends that K&S is not entitled to section 507(a)(3) priority for any legal services it performed during the gap period. It states that K&S is attempting to “subvert the clear mandate” of Bankruptcy Code sections 327(a) and 330(a) which require a court-approved professional appointment as a prerequisite to an award of compensation. K&S’s Application was denied, and so it was never employed pursuant to Code section 327(a) and is not entitled to compensation under Code section 330(a). K&S does not seek an award of compensation as post-petition bankruptcy counsel to the Debtors, however; its claim is for work performed during the gap period, and such claims are not subject to the requirements of sections 327(a) and 330(a). See In re Wiredyne, Inc., 3 F.3d 1125, 1127 (7th Cir. 1993).

           As concerns its gap period claim, K&S responds that legal fees earned prior to the entry of the order for relief are subject to denial or reduction only if they are “unreasonable or excessive” under Code section 329. Id. at 1128. There has been no allegation that K&S’s fees are unreasonable or excessive. K&S states that the ordinary course fees and expenses it incurred total $126,021.02 and relate to, among other things, review of customer contracts, review and negotiation of coal purchase agreements, review of financing and insurance options, and review of setoff rights claimed by certain customers. K&S has attached the Declaration of Ira Jay Genser in Support of Proof of Claim No. 1213 Filed by King & Spalding LLP (“Genser Declaration”) which notes that at least $126,021.02 of fees and expenses which K&S earned were in the ordinary course of the Debtors’ business and were independent of the involuntary bankruptcy petitions (Genser Decl., ¶ 7).

           K&S further states of the $126,021.02 in ordinary course fees and expenses incurred, $58,132.73 is unsecured. K&S contends the remaining amount is secured by the $300,000.00 cash retainer from the Debtors. K&S therefore asserts an unsecured priority claim under Code sections 502(f) and 507(a)(3) in the amount of $58,132.73 ($61,637.03 claimed less a duplicate time entry). K&S’s contention notwithstanding, since it appears that the retainer applies to all sums owed to K & S, the retainer amount had to be exhausted by all billings before any amounts claimed to be earned during the gap period as ordinary course expenses can be considered for priority treatment. In reviewing K&S’s Invoice, it appears that the retainer was exhausted by March 7, 2008. Gap period ordinary course fees claimed after that date total $5,565.00. Footnote This is the extent of the priority claim that may be allowed under Code sections 503(f) and 507(a)(3).

           The court therefore concludes that BDA’s Objection to Proof of Claim should be sustained in part, and that K&S should be allowed a priority claim under Code sections 503(f) and 507(a)(3) in the amount of $5,565.00. IT IS SO ORDERED.

Copies to:


Robert J. Brown, Esq.

Paul K. Ferdinands, Esq.

U.S. Trustee