The Bankruptcy Law Firm, PC v. Siegel (In re Waksberg)

Summarized by David Hercher , U.S. Bankruptcy Court, District of Oregon
11 years 4 months ago

Citation:

In re Waksberg, BAP No. CC-14-1102-DTaSp (9th Cir. B.A.P. Oct. 15, 2014).

Tag(s):

Ruling:

Two chapter 7 estates should not be substantively consolidated over the material substantive objection of an administrative claimant against one estate. Not for publication memorandum decision.

Procedural context:

Morry Waksberg, M.D., and his corporation both filed petitions under chapter 11. In Dr. Waksberg’s individual case, he claimed certain property as exempt. In the corporation’s chapter 11 case, the creditors’ committee employed a law firm as its lawyers. During the chapter 11 case, the court awarded compensation to the law firm, of which only one-half was paid. Both cases were converted to chapter 7. The trustee objected to and then reached a compromise with Dr. Waksberg regarding the exemption claim. The trustee filed motions to approve the exemption compromise and to substantively consolidate the two estates. The law firm opposed consolidation, but not the exemption settlement. The bankruptcy court granted both motions. The law firm appealed consolidation, and the BAP reversed.

Facts:

Under In re Bonham, 229 F.3d 750 (9th Cir. 2000), a bankruptcy court should not approve substantive consolidation over the material substantive objections of an interested party. Consolidation is to be used “sparingly,” and if it cannot be applied equitably, it should not be applied at all. The law firm did not rely on Dr. Waksberg’s credit in seeking employment as counsel to the committee in the corporation’s chapter 11 case. Consolidation would result in no distribution to creditors in either estate—including the law firm. Conversely, if consolidation were not approved, then chapter 11 administrative claims, including that of the law firm, would be paid in full. In view of the law firm’s objection, consolidation would not be equitable and should not have been approved.

Judge(s):

Randall L. Dunn, Laura S. Taylor, and Gary A. Spraker, Bankruptcy Judges. (Judge Spraker, Chief Bankruptcy Judge for the District of Alaska, was sitting by designation.)

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