IN RE: STEVE'S BIT SERVICE, INC. CASE NO. 96-50730

UNITED STATES BANKRUPTCY COURT 

EASTERN DISTRICT OF KENTUCKY

LEXINGTON

IN RE:

STEVE'S BIT SERVICE, INC. CASE NO. 96-50730

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 converted from a case under chapter 11 to a case under chapter 7 of the Bankruptcy Code.

The schedules indicate that the debtor has no income. Its business of selling and distributing rotary drill bits to customers in the mining industry was terminated in January 1996, prior to the commencement of this case on April 10, 1996.

The debtor lists only two creditors, its landlord and a supplier with whom the debtor is involved in litigation in Texas.

The landlord, Ann Collingsworth, is the wife of Steve Collingsworth, the president of the debtor. She was also an employee of the debtor. Apparently the debtor occupies office space and has its inventory stored in a building owned by Mrs. Collingsworth. She is owed $10,000 in salary and $10,500 in rent.

The supplier, Walker-McDonald Manufacturing Company, is owed $369,232.38 on open account. This creditor is the plaintiff in an action commenced in the District Court of Hunt County, Texas for the collection of the debt.

The debtor's unencumbered assets are valued at $78,484.05, consisting of cash $2,000, two trucks valued at $9,000, office equipment and furnishings valued at $1,000, inventory of drill bits valued at $30,459.94, and accounts receivable of $46,024.11, of which $11,783.95 is owed to the debtor by the Collingsworths.

The statement of the attorney for the debtor filed pursuant to Rule 2016(b) of the Federal Rules of Bankruptcy Procedure indicates the debtor has paid the attorney compensation in the amount of $10,000 for services rendered or to be rendered in connection with this case.

According to the attorney, the assets of the debtor are to be liquidated by sale of the inventory, office equipment, and motor vehicles, and by collection of the accounts receivable.

It is proposed that the collection action against the debtor pending in the state court in Texas, which was stayed by the commencement of this bankruptcy case, be removed to the appropriate bankruptcy court in Texas, after which that bankruptcy court will be requested to transfer the action to this court. Once this adversary proceeding is pending in this court, the debtor contemplates filing therein a counterclaim for damages for breach of contract against the creditor who was the debtor's principal supplier of drill bits. The debtor in possession has made application to employ as special counsel the father of counsel for the debtor in possession to assist in prosecuting this counterclaim.

Naturally the court inquired as to why the debtor's assets should not be liquidated and the debtor's cause of action for breach of contract should not be pursued by a trustee in the context of a chapter 7 bankruptcy case. The response was that the chapter 7 trustee may not be as motivated as is counsel for the debtor in possession to sell the assets for the highest dollar or to pursue the debtor's cause of action for breach of contract.

The debtor is under a duty to cooperate with the trustee as necessary to enable the trustee to perform the duties of the trustee. 11 U.S.C. 521(3). The trustee in a chapter 7 case is under a duty to liquidate the assets of the estate as expeditiously as is compatible with the best interests of parties in interest, which includes the debtor as well as creditors. 11 U.S.C. 704(1). The court does not believe the services of counsel are needed to assist a trustee in reducing the physical assets of the debtor to cash. Nor does the court believe it is necessary to import the debt collection action pending in Texas to this court in order for the trustee to assert a cause of action against Walker-McDonald Manufacturing Company for damages for breach of a distributorship agreement. Nationwide service of process permitted by Rule 7004(b) of the Federal Rules of Bankruptcy Procedure makes the former supplier of the debtor amenable to suit in an adversary proceeding in this court. Importation of the stayed Texas collection action to this court is unnecessary makework. The creditor is required to timely file a claim which the trustee may then object to, or the creditor can assert its claim as a counterclaim to any action commenced by the trustee.

If a chapter 7 trustee is desirous of using the services of the special counsel proposed by the debtor in possession the trustee may so request.

In any event, the court is not persuaded by arguments of counsel for the debtor against converting this case to a case under chapter 7.

An order shall be entered converting this case from a case under chapter 11 to a case under chapter 7 of the Bankruptcy Code.

Upon conversion of this case to a case under chapter 7 the question of whether the compensation paid to counsel for the debtor exceeds the reasonable value of services rendered or to be rendered by him in this case is another matter for consideration by the court.

Dated:

By the court -

 

_____________________________

JOE LEE, CHIEF JUDGE

 

Copies to:

 

W. Thomas Bunch, Esq.

Matthew Bunch, Esq.

Gerald Baldwin, Esq.

Elizabeth Brittain, Esq.

 

 

 

f:\opinions\1996\stevebit

UNITED STATES BANKRUPTCY COURT

EASTERN DISTRICT OF KENTUCKY

LEXINGTON

 

 

IN RE:

 

STEVE'S BIT SERVICE, INC. CASE NO. 96-50730

 

DEBTOR

 

 

ORDER

 

 

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

The applications for appointment of counsel and special counsel for the debtor in possession are denied.

Dated:

By the court -

 

______________________________

JOE LEE, CHIEF JUDGE

 

Copies to:

 

W. Thomas Bunch, Esq.

Matthew Bunch, Esq.

Gerald Baldwin, Esq.

Elizabeth Brittain, Esq.