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Court Holds Chapter 11 Professional Fees not Subject to Disgorgement Despite Insolvency of Converted Chapter 7 Estate

The court in In re Headlee Mgmt. Corp., 519 B.R. 452 (Bankr. S.D.N.Y. 2014) refused to order disgorgement of interim fees paid to Chapter 11 professionals where the debtor’s estate was insolvent on conversion to Chapter 7. The Chapter 11 professionals were paid interim fees before the case was converted to Chapter 7. The Chapter 7 trustee moved to disgorge those interim fees, relying solely on the administrative insolvency of the Chapter 7 estate. The United States Trustee supported the disgorgement motion. The court noted that the Bankruptcy Code has a comprehensive system for the recovery of assets by the trustee, including specific provisions for the recovery of postpetition transfers and for the recovery of interim fees. Finding that the professional fees at issue were both postpetition transfers and interim fees, the court held that disgorgement of the interim Chapter 11 professional fees was not authorized by the Bankruptcy Code. The court disagreed with the Sixth Circuit’s statutory analysis in Specker Motor Sales Co. v. Eisen, 393 F.3d 659 (6th Cir. 2004) (finding disgorgement of interim fees in similar circumstances mandatory), questioned Specker Motor’s continuing validity in light of recent Supreme Court precedent, and noted that “the absolute pro rata distribution contemplated by Specker Motors is not even possible.” Id. at 459

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