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In re Mennella

January 24, 2008

IN RE: DONNA MENNELLA, DEBTOR.


The opinion of the court was delivered by: Spatt, District Judge.

MEMORANDUM OF DECISION AND ORDER

This appeal arises from an April 2, 2007 Memorandum of Decision and Order (the "Order") by United States Bankruptcy Judge Stan Bernstein which reduced the amount of compensation sought by the law firm of Zinker & Herzberg, LLP ("ZH" or the "Appellant"), attorneys for Richard L. Stern, Esq. ("Stern" or the "Trustee"), the Chapter 7 trustee of the Estate of Donna Mennella (the "Debtor").

I. BACKGROUND

A. Factual Background

On July 29, 2004, the Debtor filed a voluntary petition for relief under Chapter 7 of the United States Bankruptcy Code and Stern was appointed as the Trustee. By order dated October 8, 2004, the law firm of Zinker & Herzberg, LLP was authorized to act as attorneys for the Trustee.

On behalf of the Trustee, ZH investigated the Debtor's finances and an alleged fraudulent transfer made by Michael Minnella, the Debtor's husband. At that time, the Debtor and Michael Minnella were engaged in a contentious divorce proceeding. ZH commenced an adversary proceeding against the Debtor's husband, and his parents.

ZH discovered that the Debtor and Michael Minnella sold a home (the "Property") on April 7, 2000 for $850,000. After various disbursements, the Debtor and her husband received approximately $326,522.38 in net closing proceeds. The closing proceeds were given to Michael Minnella and his parents. However, ZH also discovered that the Debtor and her husband had signed an undated document in which they agreed to reimburse Salvatore Minnella, the Debtor's father-in-law, in the amount of $214,000, as repayment for a loan made to the Debtor and her husband for a down payment on the Property.

The Debtor contended that the money provided by her husband's parents was a gift, rather than a loan. The Debtor also disputed that she had signed the undated document at the time that she received the money.

ZH initiated an adversary proceeding against Michael Minnella seeking recovery of the alleged excess obtained by him and his parents from the closing proceeds. ZH believed that the Trustee would be entitled to summary judgment on the fraudulent transfer cause of action. However, at the Debtor's deposition she testified that her in-laws had, in fact, advanced $214,000 for the purchase of the Property and although she believed that the first $100,000 was a gift, she was aware that the remaining advance was a loan. In addition, ZH discovered that Michael Minnella had repaid more than $35,000 of the loan for the Debtor's benefit, as well as having paid her car loan and credit card bills.

As a result, ZH admits that although it instituted the adversary proceeding because it believed that Michael Minnella had fraudulently transferred the Debtor's 50% share of the $326,522.38 in closing proceeds, the evidence revealed an alleged fraudulent transfer of much less. ZH realized that Michael Minnella's parents had, in fact, loaned the Debtor money for the purchase of the house. In fact, although the parents had advanced $214,000, the Debtor only believed that $100,000 was a gift. As a result, only the Debtor's 50% share of that $100,000 gift, or $50,000, was allegedly fraudulently transferred. Inaddition, because the Debtor's husband had made payments on the Debtor's behalf, that $50,000 was reduced to an even lower figure. As a result, the adversary proceeding initiated by the Trustee was settled for $30,000 and that amount was promptly paid to the Trustee.

On August 4, 2006, ZH filed an application seeking compensation for attorneys' fees rendered in the amount of $22,605.00.Thereafter, ZH voluntarily reduced its fees by the sum of $2,605.00 to the amount of $20,000. ZH also applied for reimbursement of expenses and costs in the amount of $411.59.

B. The Bankruptcy Court's Decision

Judge Bernstein determined that ZH performed a timely investigation of the issues in the case; commenced an adversary proceeding; and negotiated a good-faith settlement. However, Judge Bernstein further determined that the professional fees and costs and the Trustee's maximum commission would exhaust 92.8% of the liquidated assets of the estate. Judge Bernstein found that the Trustee's counsel had entered into a settlement for $30,000. However, the Trustee's maximum commission of $3,758.21; the Trustee's accounting fees of $725; and counsel's requested fees of $20,000 plus costs, totaled approximately $25,000. He found that the general unsecured creditors, the intended beneficiaries of any Chapter7 administration, were being denied any benefit. Timely filed general unsecured creditor claims totaled $61,654.12. As a result, he determined that a due proportionality analysis between allowed administrative expenses and distributions to unsecured creditors, would be applied.

Judge Bernstein further determined that ZH did not charge excessive fees, although as the United States trustee noted, ZH did not pull back when it was obvious that the fees were rising to a disproportionate level. Citing to a 2005 decision from this Court, In re Stein, 04-cv-3196, 2005 U.S. Dist. LEXIS 30278 (E.D.N.Y. Mar. 25, 2005), Judge Bernstein concluded that ZH's fees had to be substantially reduced in order to restore proportionality between the administrative expenses and distributions to the ...


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