UNITED STATES BANKRUPTCY COURT FOR

EASTERN DISTRICT OF KENTUCKY

COVINGTON DIVISION


IN RE:
WILLARD SANDLIN and DELANA L. SANDLIN CASE NO. 02-20546
DEBTOR 

MEMORANDUM OPINION

Beverly M. Burden (the "Trustee"), the trustee of the bankruptcy estate of Willard Sandlin and Delana L. Sandlin (the "Debtors"), is before the court on the Application for Allowance for Compensation and Reimbursement for Expenses that she filed in this case on May 20, 2004. The application seeks the allowance of compensation for legal services rendered by John O. Morgan, Jr. (the "Attorney") and reimbursement of expenses incurred in connection with those services. The Debtors have filed an objection to the application. They do not question the amounts sought, but assert that the services and expenses were not "necessary." Having considered the Trustee's application, the Debtors' objection, the Trustee's response, and the arguments of counsel, the court will sustain the application for the reasons set forth below.

On March 1, 2002 the Debtors conveyed their residence to themselves for life with the remainder to their children for no meaningful consideration. On March 8, 2002 the Debtors filed a voluntary petition for relief under Chapter 13 of the Bankruptcy Code, commencing the above-styled case. Their statement of financial affairs disclosed the transfer as a gift to their children, the remainder interests having an estimated value of $28,000, and the Debtors' life estate was listed on their Schedule A as having a value of $28,100. (1) Schedule D does not disclose any mortgages on the property. The Debtors' Chapter 13 Plan was confirmed on June 14, 2002, and it appears that general unsecured creditors will receive a 100% dividend under the plan.

The Debtors represent that they offered to agree to a tolling of the limitations period with respect to the avoidance of the transfer of their residence, and that the Trustee was willing to enter into a tolling agreement only if the Debtors acknowledged, in the agreement, that they made the transfer with actual intent to hinder, delay, and defraud creditors. The Debtors were unwilling to make such an acknowledgment, asserting that their intent was to preserve their home for their children without any detrimental impact on creditors. The record does not include any correspondence, proposed tolling agreement, or other documents evidencing the representations set forth above.

On March 1, 2004 the Attorney sent the Debtors' counsel a letter pointing out that the statute of limitations would expire six days later and stated that a complaint would be filed unless the enclosed Agreed Order was signed and returned. That order would have provided for the reconveyance of fee simple title to the property to the Debtors, with the Trustee receiving a lien thereon until all Chapter 13 Plan payments had been made. The Agreed Order does not include an acknowledgment or finding with respect to the Debtors' fraudulent intent.

The record does not reflect the Debtors' attorney's response to the Attorney's letter, if any. Apparently she declined the Trustee's proposal or did not respond thereto because, on March 5, 2004 the Trustee filed a complaint against the Debtors and their children seeking the avoidance of the conveyance. In April and May 2004 the court entered Agreed Judgments that are substantially identical to the proposed Agreed Order that the Attorney sent to Debtors' counsel on March 1.

As indicated above, on May 20, 2004 the Trustee filed the application presently before the court. It seeks the allowance of a total of $3,519.19 in compensation and expense reimbursement. Of that sum, $3,045.43 was incurred in connection with the adversary proceeding, $120.00 was incurred in connection with the preparation of the fee application, and $353.76 was incurred in connection with the Chapter 13 case proper. The Debtors filed their objection on June 9, 2004, the Trustee filed a response on June 23, 2004, and the court conducted hearings on July 13, 2004 and August 24, 2004.

Section 330(a)(1) of the Bankruptcy Code authorizes the court to award to a professional employed under 327 of the Code (A) reasonable compensation for actual, necessary services rendered by the professional person, and (B) reimbursement for actual, necessary expenses. The debtors take the position that the services and expenses were not "necessary" because, if the Trustee had entered into the tolling agreement proposed by the Debtors, the services and expenses in connection with the adversary proceeding would not have been rendered and incurred. The Trustee counters that she has a statutory obligation to avoid fraudulent conveyances.

Although a Chapter 7 trustee has a statutory obligation to set aside avoidable transfers, 11 U.S.C. 704(1), a Chapter 13 trustee may not have that obligation, id. 1302(b)(1) (only Subsections (2)-(7) and (9) of 704 apply to Chapter 13 trustees). See McRoberts v. S.I.V.I., 1801 N. Belt W., Belleville, IL 62223 (In re Bequette), 184 B.R. 327, 333 (Bankr. S.D. Ill. 1995) (citations omitted); see also Handeen v. Lemaire, 112 F.3d 1339, 1349 n.13 (8th Cir. 1997); Berry v. Pattison (In re Berry), 30 B.R. 36, 37-38 (Bankr. E.D. Mich. 1983). However, a Chapter 13 trustee has the discretion to bring avoidance actions. 11 U.S.C. 103(a) (Chapter 5 of Bankruptcy Code applies in Chapter 13 cases); id. 323(b) (trustee in any bankruptcy case has capacity to sue). Indeed, the Chapter 13 trustee's power to prosecute avoidance proceedings is amply demonstrated by the fact that one of the events that can trigger the running of the limitations period with respect to such claims is "the appointment or election of the first trustee under section 702, 1104, 1163, 1202, or 1302 of this title." Id. 546(a)(1)(B) (emphasis added).

It is that statute of limitations that made it reasonable for the Trustee to take action regarding the fraudulent transfer, despite the fact that the Debtors' Chapter 13 Plan does not depend on the avoidance of the transfer for its consummation. Pending the closing or dismissal of a case, the limitations period for avoiding fraudulent transfers is the later of two years after the order for relief and one year after the appointment of the first trustee. Id. 546(a). Accordingly, if the Trustee had taken no action and the Debtors converted their case to Chapter 7 more than two years after the filing of their petition, the Chapter 7 trustee would be barred from seeking to avoid the transfer. Counsel for the Debtors represents that that possibility would be avoided if the Trustee had executed the tolling agreement proposed by the Debtors. However, the court has not seen a draft tolling agreement and is not otherwise aware of its terms, so the court cannot evaluate whether the agreement would have represented a reasonable resolution of the problem. Moreover, the approach taken by the Agreed Order proposed by the Trustee afforded greater protection to creditors, because the bringing into the estate of fee simple title to the transferred property would make it less likely that the Debtors would succeed if they were seek the dismissal of their case. In addition, a tolling agreement between the Trustee and the Debtors and their children would not likely have any effect on the running of the limitations period with respect to individual creditors' rights to seek the avoidance of the transfer under state law (such as if the bankruptcy case was dismissed). On the other hand, the proposed Agreed Order would preserve the rights of the Debtors and their children because, upon completion of the Debtors' obligations under their Chapter 13 Plan, the Trustee's lien would be released, the Debtors would hold title to the property free and clear, and they could then re-transfer interests in the property to their children (assuming that the conveyance would not constitute a fraudulent transfer at that time).

There is no requirement that professional services be rendered in fulfilling statutory obligations for the services to be considered "necessary" within the meaning of 330(a). Rather, "[c]ourts have found that a task is necessary if it reasonably facilitates the successful representation of an estate." Quesada v. Banco Bilbao Vizcaya--P.R. (In re Elac Food Corp.), 226 B.R. 320, 323 (D.P.R. 1998) (citation omitted); accord, In re Rheam of Ind., Inc., 133 B.R. 325, 335 (E.D. Pa. 1991); In re Breeden, 180 B.R. 802, 812 (Bankr. N.D. W. Va. 1995); see Vergos v. Reisz (In re Gibbs-Inman Co.), 114 F.3d 1187 (Table), 1997 WL 267586, at **1 (6th Cir. 1997) ("In order for the services of a debtor's attorney to be 'necessary,' they must benefit the debtor's estate.") (citation omitted). The initiation and prosecution of the adversary proceeding against the Debtors and their children "reasonably facilitated" the Attorney's representation of the estate, and that representation was successful as the defendants agreed to the entry of judgments granting the relief the Trustee sought. Indeed, it was the Debtors' conduct in failing or refusing to sign the Agreed Order proposed by the Trustee a week before the complaint was filed that resulted in the initiation of the adversary proceeding. The Agreed Order, which would have protected creditors in the event of conversion of the case to Chapter 7 or an attempt to dismiss the case, is substantially identical to the Agreed Judgments entered a month later and preserved the Debtors' residence for them and their children so long as the Debtors performed their obligations under their Chapter 13 Plan. The Debtors may not now be heard to complain about services rendered in connection with the adversary proceeding when they were afforded the opportunity to avoid the initiation of the proceeding but did not take that opportunity.

For the foregoing reasons, the court will enter a separate order sustaining the Trustee's application.

Copies to:

Beverly M. Burden, Trustee

John O. Morgan, Jr., Esq.

Virginia J. Southgate, Esq.

1. The March 2002 deed warranted that the fair market value of the property was $56,200.