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In re Rubin Family Irrevocable Stock Trust

United States Bankruptcy Court, E.D. New York

September 19, 2014

In re: RUBIN FAMILY IRREVOCABLE STOCK TRUST et al, Debtor

For Rubin Family Irrevocable Stock Trust, Debtor: Ashley Koenen, Nancy L Kourland, Sanford P Rosen, Rosen & Associates, P.C., New York, NY; Rosen & Associates PC, New York, NY.

For Robert M Rubin Family Realty Trust, Robert Michael Rubin, Jointly Administered Debtors: Nancy L Kourland, Rosen & Associates PC, New York, NY.

For Margery Rubin, Jointly Administered Debtor: Nancy L Kourland, Rosen & Associates PC, New York, NY; Paul Rachmuth, Rockville Centre, NY.

OPINION

Page 222

MEMORANDUM DECISION

Robert E. Grossman, United States Bankruptcy Judge.

Before the Court is the Debtors' motion objecting to the proofs of claim filed by ACE Investors, LLC (" ACE" ), and seeking to disallow any claim by ACE for attorneys' fees and costs incurred post-petition.[1] The parties have stipulated that ACE is entitled to an allowed pre-petition claim in the amount of $3,464,365.13, less certain costs incurred by ACE attributable to expert witness fees.[2] They also have stipulated that ACE's collateral " has a value greater than the ACE Claim. . . [and] [i]n accordance with section 506(a)(1) of the Bankruptcy Code, and for all purposes in the Debtors' chapter 11 cases, the ACE Claim is secured in an amount equal to the amount of the ACE Claim." [Dkt. #294, ¶ 3, 4]. On August 8, 2014, ACE filed a Supplemental Proof of Secured Claim amending its proofs of claim and asserting that it is entitled to a fully secured claim in the amount of $5,170,953.83, which includes post-petition attorneys' fees, expenses and interest through and including September 8, 2014. [Dkt. #281].

The question for this Court to decide is whether, under sections 502 and 506 of the Bankruptcy Code, an oversecured[3] creditor

Page 223

in a chapter 11 case can assert a claim, as that term is defined in section 101(5) of the Code, for post-petition attorneys fees' and costs where the right to such fees and costs is set forth, not in a contract or statute, but in an otherwise enforceable and final pre-petition judgment; and if that claim is allowable under section 502, whether it is entitled to secured status under section 506(b). The distinction between the secured or unsecured status of the claim, if it is even allowable in the bankruptcy, makes a difference if the Debtors propose less than a 100% distribution to all creditors. Although the Debtors' proposed plan of reorganization, as drafted, and as indicated by the Debtors since the inception of this case, proposes to pay creditors 100%, the Debtors' counsel explained for the first time at a hearing on September 8, 2014, that the plan might not pay 100% if the amount of the ACE claim exceeds a certain amount. Thus, the determination of secured or unsecured status is necessary.

On September 8, 2014, the Court gave a preliminary ruling on the Debtors' objection to ACE's claim and indicated that a written decision would follow. The Court finds that the April 23, 2013 and May 8, 2013 Orders and Judgments of the District Court for the Southern District of New York, together created a liquidated judgment against the Debtors'[4] in the amount of $3,464,365.13, and established an unliquidated liability for " all attorneys' fees and costs of [ACE's counsel] to collect the Augmented Judgment . . . until the judgment has been fully satisfied." These orders are final, non-appealable and fully enforceable against the Debtors[5] and are entitled to res judicata effect in this Court. Section 502 provides the basis for this Court to disallow a validly and timely filed proof of claim, and there is no basis in section 502 to disallow ACE's claim for post-petition attorneys' fees and costs to collect the judgment based upon the prior District Court orders. As such ACE's claim shall include attorneys' fees and costs " to collect the Augmented Judgment" . This does not answer the secondary question of whether ACE is entitled to assert secured status with respect to the post-petition attorneys' fees and costs allowed under section 502. Under section 506(b) an oversecured creditor is entitled to a secured claim for " any reasonable fees, costs or charges provided for under the agreement or State statute under which such claim arose." 11 U.S.C. § 506(b) (emphasis added). This Court finds that because ACE's entitlement to post-petition attorneys' fees and costs is premised upon the existence of a judgment, as opposed to an agreement or State statute, the claim for post-petition attorneys' fees and costs should not be given secured status under section 506(b). Because

Page 224

the Court will not be examining ACE's post-petition attorneys' fees and costs under the lens of section 506(b), the " reasonableness" of the fees and costs is not an issue; rather, the standard to be applied to determine the allowance or disallowance of the claim under section 502 is that which is delineated in the Judgment, i.e., this Court will allow only those attorneys' fees and costs which it finds were incurred to " collect the Augmented Judgment."

ACE shall have a secured claim in these cases for at least the stipulated amount of $3,464,365.13, less expert witness fees, and will be entitled to an unsecured claim for the amount of post-petition attorneys' fees and costs ...


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