IN RE: MORROW IMAGE TECHNOLOGIES, INC. CASE NO. 96-50238

UNITED STATES BANKRUPTCY COURT 

EASTERN DISTRICT OF KENTUCKY

LEXINGTON

IN RE:

MORROW IMAGE TECHNOLOGIES, INC. CASE NO. 96-50238

DEBTOR

MEMORANDUM OPINION

This case was heard by the court on May 15, 1996, pursuant to an order entered by the court on its own motion, for the purpose of determining whether the case should be reconverted to a case under chapter 7 of the Bankruptcy Code.

The debtor filed a petition for relief under chapter 7 of the Bankruptcy Code in this court on February 9, 1996. The disclosure statement of the attorney for the debtor accompanying the petition indicates the attorney was paid $2,500 for services rendered or to be rendered in the case. The statement says "[t]his fee also covers post-petition work with regard to the auction."

On March 7, 1996, the debtor, by counsel, filed a notice of conversion of the case to a case under chapter 11 accompanied by a chapter 11 converter petition. A new disclosure statement filed by the attorney for the debtor indicates he was paid $10,000 for services rendered or to be rendered in connection with the case. Both disclosure statements indicate the source of the payments made to counsel was from earnings of the debtor.

However, the schedules to the petition indicate the debtor has no earnings. See Item 1 to Statement of Financial Affairs accompanying both petitions; Schedules I and J accompanying both petitions. The schedules to the petition do not indicate the date the debtor's business was terminated. It is conceded the debtor ceased operating its business prior to bankruptcy. The schedules to the chapter 7 petition indicate that as of the commencement of this case the debtor had on hand monies totaling $2,248.45 as follows: cash $500; general bank account $1,310.12; payroll bank account $438.33.

The schedules to the chapter 11 petition indicate that on the date the converter petition was filed the debtor had on hand cash and undeposited checks in the amount of $26,025.85. The amount in the general and payroll bank accounts is shown as zero. Presumably the $26,025.85 is the amount remaining after payment of $10,000 to the debtor's attorney.

The source of this increase in funds is not apparent from the record. Exhibit 1, a list of accounts receivable, accompanying each petition is identical.

The debtor's business involved the sale of micrographic equipment, supplies and services to numerous businesses and educational institutions. See Schedules B 22 and G to the petitions.

In addition to monies on hand or in banks the debtor lists assets as follows: accounts receivable, $113,890.66 (of which approximately $42,000 is shown as collectible); service agreements, $180,000; five motor vehicles, $42,400; machinery, fixtures, equipment, $407,117.95; inventory, $76,084.57.

The schedules indicate the equipment, inventory, fixtures and accounts receivable of the debtor are subject to a security interest of Central Bank and Trust Company to secure an indebtedness of $521,000. Three of the motor vehicles are subject to a security interest of Liberty National Bank (now Bank One) in the amount of $33,150. According to the schedules to the petition, some of the equipment used by the debtor in its business is leased.

James B. Morrow, the president and sole shareholder of the debtor, has filed a petition for relief under chapter 13 of the Bankruptcy Code, case no. 96-50792, filed April 18, 1995. The attorney of record for the corporate debtor in this case is also the attorney of record for Mr. Morrow in his individual chapter 13 case. The schedules to Mr. Morrow's chapter 13 petition indicate he owns the building in which Morrow Image Technologies, Inc. conducted its business and is owed $80,500 in salary and rent.

In the schedules to the chapter 11 petition of Morrow Image Technologies, James B. Morrow is listed as a creditor holding a priority claim for salary in the amount of $7,438.50, a nonpriority claim for salary in the amount of $52,000, and a claim for rent in the amount of $28,500. In any event, Mr. Morrow is a creditor of the debtor and counsel for the debtor is also representing a creditor of the debtor.

The schedules to Mr. Morrow's chapter 13 petition indicate he individually is claiming a joint ownership interest in the five motor vehicles listed as assets of Morrow Image Technologies, Inc.

The debtor in possession in this chapter 11 has made application for appointment of counsel for the debtor as counsel for the debtor in possession. Counsel argues that under his representation the debtor in possession, because of Mr. Morrow's contacts in the industry, they will be able to liquidate the assets of the debtor for the highest dollar. Mr. Morrow will be motivated to work diligently in disposing of the assets of the debtor for the highest price attainable not only to satisfy the claims of secured creditors but to realize a surplus for payment of certain trust fund taxes for which Mr. Morrow is subject to assessment as a responsible party. These taxes are listed as liabilities of Mr. Morrow in his chapter 13 case.

The court is not persuaded by this argument. Mr. Morrow as principal officer of the debtor is obligated to cooperate with the trustee in disposing of the assets of the estate. 11 U.S.C. 521(3). The trustee must reduce the assets of the estate to cash as expeditiously as possible. 11 U.S.C. 704(1). Also, as the court and counsel for Central Bank observed at the hearing, there is no reason to believe the bank will not work with the debtor and the trustee in liquidating the assets of the debtor for the maximum amount attainable.

In any event, counsel for the debtor is ineligible for appointment as counsel for the debtor in possession. By reason of his representation of Mr. Morrow who is a creditor of the debtor and also an insider, counsel is not a "disinterested person." 11 U.S.C. 101(14) and 101(31). The application for appointment of counsel for the debtor as counsel for the debtor in possession is denied. A debtor in possession as a trustee for creditors cannot waive the ethical conflict present in this case.

The court is persuaded and finds that this case should be ordered reconverted to a case under chapter 7 of the Bankruptcy Code.

The court will rely on the chapter 7 trustee, the United States Trustee, or counsel for a creditor to raise the issue of whether and to what extent the compensation received by counsel for the debtor in this case is excessive and should be forfeited in its entirety.

Dated:

By the court -

 

_____________________________

JOE LEE, CHIEF JUDGE

 

Copies to:

 

Matthew B. Bunch, Esq.

W. Thomas Bunch, Esq.

Randy Shaw, Esq.

Elizabeth H. Brittain, Esq.

Sarah Charles Wright, Esq.

Dean Langdon, Esq.

Sidney N. White, Esq.

 

 

f:\opinions\1996\morrow

UNITED STATES BANKRUPTCY COURT

EASTERN DISTRICT OF KENTUCKY

LEXINGTON

 

 

IN RE:

 

MORROW IMAGE TECHNOLOGIES, INC. CASE NO. 96-50238

 

DEBTOR

 

 

 

ORDER

 

 

In conformity with the memorandum opinion of the court this day entered, IT IS ORDERED that this case be reconverted from a case under chapter 11 to a case under chapter 7 of the Bankruptcy Code.

IT IS FURTHER ORDERED that the application of the debtor to employ Matthew B. Bunch and the law firm of Bunch & Brock as counsel under general retainer for the debtor in possession is denied.

Dated:

By the court -

 

_____________________________

JOE LEE, CHIEF JUDGE

 

Copies to:

 

Matthew B. Bunch, Esq.

W. Thomas Bunch, Esq.

Randy Shaw, Esq.

Elizabeth H. Brittain, Esq.

Sarah Charles Wright, Esq.

Dean Langdon, Esq.

Sidney N. White, Esq.