TYS, Inc.

UNITED STATES BANKRUPTCY COURT
FOR THE
DISTRICT OF MASSACHUSETTS
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
In re
TYS, INC., 	Chapter 7
Debtor 	Case No. 07-10531-JNF
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
MEMORANDUM
I. INTRODUCTION
The matters before the Court are three requests for compensation made by Michael
B. Feinman, Esq. (“Attorney Feinman”) pursuant to 11 U.S.C. § 543(c)(2) relating to his
services as Assignee for the Benefit of Creditors of TYS, Inc. (the “Debtor” or “TYS”). In
total, Attorney Feinman seeks $30,653.76. 	The Chapter 7 Trustee objected to all requests1
for compensation.
The Court conducted an evidentiary hearing on November 30, 2009 at which
Attorney Feinman testified and ten exhibits were introduced into evidence, including
Attorney Feinman seeks reimbursement for attorney’s fees. The record does1
not reflect that he employed himself as counsel in his capacity as Assignee. Thus, the
Court shall construe his requests for compensation in his capacity as a custodian only.
See 11 U.S.C. § 101(11) (“The term ‘custodian’ means . . . assignee under a general
assignment for the benefit of the debtor’s creditors . . . .”).
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“Stipulated Facts Requiring No Further Proof.” Following the trial, the parties submitted
post-trial briefs. 2
The Court now makes the following findings of fact and conclusions of law in
accordance with Fed. R. Bankr. P. 7052.
II. FACTS
TYS was a Massachusetts corporation formerly engaged in the business of the retail
sale of fireplace and barbecue equipment, as well as the wholesale and retail distribution
of propane, with locations in Massachusetts, Maine and New Hampshire. Beginning in
April 2006, Eugene Harris (“Harris”), was the president, treasurer and clerk, and a director,
of the Debtor. 	Harris’s wife, Phyllis Ryan (“Ryan”), was the assistant treasurer, and is
alleged to have been a director. From at least April 2006 until January 4, 2007, Harris and
Following the trial, Attorney Feinman filed a Motion to Strike Portions of the2
Chapter 7 Trustee’s Post Trial Memorandum. Upon consideration of the Motion and
the Trustee’s Opposition, the Court shall enter an order denying the Motion to Strike.
Attorney Feinman specifically objected to a footnote in which the Trustee referenced a
“question of law as to whether the assignment was properly authorized;” a reference to
the expenses incurred by the Trustee with respect to undoing the Assignment for the
Benefit of Creditors and references to the sale of assets to NEFP and a discussion
relating to the sale and other adversary proceedings, which ostensibly were not
introduced into evidence. The Trustee responded, noting that the Court can take
judicial notice of its own docket. See In re Hyde, 334 B.R. 506, 508 n.2 (Bankr. D. Mass.
2005). The Court agrees with the position espoused by the Trustee. Nevertheless, the
portions of the Trustee’s Memorandum to which Attorney Feinman objected are not
dispositive of the issues before the Court, and the Court has relied almost exclusively
on the parties Stipulated Facts and Attorney Feinman’s testimony, rather than the
contents of the briefs.
Additionally, the Court denies Attorney Feinman’s request to introduce his
affidavit and that of Thomas Raftery, Esq. set forth in his Motion to Strike. The Court
sustained the Trustee’s objection to admission of the affidavits as hearsay, and Attorney
Feinman proffered no reason to reconsider that ruling.
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Ryan exercised exclusive control over the overall management of the business and finances
of the Debtor, as well as the day-to-day operations of the Debtor.
Between January 2006 and July 2006, Harris and Ryan advanced nearly $600,000 to
the Debtor to fund the continuing operations of its business. On or about October 31, 2006,
WEH Business Trust (“WEH”), a Massachusetts business trust which held 100% of the
stock of the Debtor and for whom Harris and Ryan served as two of three trustees, caused3
to be sold a portion of a separately incorporated business held by it, namely its wholesale
and retail propane distribution business - to a third party, Ferrellgas, for the sum of
approximately $3.8 million (the “Ferrellgas Sale”). Following the payment of the secured
The parties failed to identify WEH in the Stipulated Facts. The Court takes3
judicial notice that on March 21, 2008 the Chapter 7 Trustee commenced an action
against Feinman in which he alleged that Attorney Feinman committed:
attorney malpractice stemming from his conflict of interest arising from
his simultaneous and mutually exclusive representation of the Debtor and
the interests of its principals, by which he facilitated the preferential
repayment of the inside principal of monies advanced to the corporation,
and subsequent repurchase of the business of the Debtor as a turnkey
operation from Attorney Feinman, acting as assignee for the benefit of
creditors, through a new corporation, using the very funds that had been
preferentially transferred to them.
In conjunction with that litigation, the parties filed a Joint Pretrial Memorandum in
which they stipulated to facts relating to the identity and ownership of WEH. The
Court takes further judicial notice that the Chapter 7 Trustee and Attorney Feinman
compromised the claims set forth in the adversary proceeding. The Stipulation of
Settlement, which this Court approved, specifically did not “constitute an admission of
liability in any manner or fashion on the part of [Attorney] Feinman, and [Attorney]
Feinman expressly denie[d] any liability for the claims raised in the Adversary
Proceeding. See generally In re Harmony Holdings, LLC, 393 B.R. 409, 413 (Bankr. D.S.C.
2008); In re Hyde, 334 B.R. 506, 508 n.2 (Bankr. D. Mass. 2005).
3
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creditor of WEH from the proceeds of the Ferrellgas Sale, there was approximately $1
million in cash available from that sale. 	Moreover, after the Ferrellgas Sale, TYS had
unsecured debts in excess of $1.3 million, together with contingent liabilities on real estate
leases, in addition to the amounts allegedly advanced by Harris and Ryan.
On or about November 7, 2006, Harris and Ryan met with Attorney Feinman, who
practices in the area of bankruptcy and insolvency law, for the purpose of seeking
insolvency related advice. 	They had never met Attorney Feinman, and he had never
represented either of them individually or the Debtor. Rather, Charles Nierman, Esq. had
represented TYS. Attorney Nierman’s office was a referral source for Attorney Feinman
for clients with insolvency problems, and Attorney Nierman referred TYS to him.
During the course of their introductory meeting, Harris and Ryan described in
general terms the financial condition of TYS and its affiliates. Attorney Feinman advised
Harris and Ryan that he required a retainer, as well as documents pertaining to TYS’s
finances in anticipation of a possible Chapter 11 petition for TYS.
On or about November 17, 2006, Harris and Ryan, on behalf of TYS, returned to
Attorney Feinman’s office and engaged him as attorney for TYS for the purpose of
obtaining recommendations about a possible workout or commencement of a Chapter 11
case, as well as related financial issues. 	Attorney Feinman requested, and was paid, a
$5,000 retainer, identified as an advance deposit on fees, pursuant to an Engagement
Agreement executed by Harris as president of TYS on that date. He also obtained copies
of leases and an accounts payable aging.
4
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Pursuant to the Engagement Agreement, Attorney Feinman represented that he
would provide legal services to TYS and bill for services and expenses, including “such
things as conferences with others on your behalf, legal research necessary to properly
advise you, preparation of documents and correspondence, discussions and negotiations
with other parties, interoffice conferences with lawyers and staff and travel time.”
Additionally the Engagement Agreement provided: 	“We [attorneys associated with
Feinman Law Offices] can terminate our services at any time so long as you give us written
notice. We can discontinue our services if you do not pay us or if we feel we can no longer
properly represent you for any reason.”
Attorney Feinman testified about one telephonic conference with Harris:
Mr. Harris explained to me that he had a very - - he was very upset with his
brother, how his brother had managed the company into its financial
condition. He had indicated to me that a part of any plan of reorganization
for the company, that he wanted to form a new company to buy out the
business. 	I indicated to him that he needed to get separate counsel to
address those issues. 	I specifically told him I could not wear two hats, I
could not serve his interests and the interests of the company.
As a result of Attorney Feinman’s advice, Harris retained Thomas Raftery, Esq.
(“Attorney Raftery”) to represent him with respect to personal financial issues. 	On or
about December 15, 2006, Attorney Raftery formed a corporation known as NEFP, Inc.
(“NEFP”), whose president and sole shareholder was Ann Lynch (“Lynch”), Ryan’s sister
and Harris’s sister-in-law. NEFP’s principal place of business was identified as 140 South
Main Street, Middleton, Massachusetts, the same address at which TYS was then
maintaining its principal place of business.
5
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TYS never sent Feinman Law Offices written notice terminating its services, and
Attorney Feinman never sent TYS a termination notice with respect to their attorney/client
relationship. Attorney Feinman’s itemization of professional services does not reveal that
Feinman Law Offices formally discontinued its service, and, as will be discussed below,
Attorney Feinman did not exhaust the $5,000 retainer obtained by his firm.
On or about January 4, 2007, Harris, as the owner of fifty-two percent of the shares
of the Debtor, representing his interest in WEH Business Trust, purportedly authorized
the Assignment for the Benefit of Creditors (the “Assignment”), pursuant to which all of
the assets of the Debtor were assigned to Attorney Feinman as Assignee. The Assignment,4
which was executed by Harris as president of TYS and by Attorney Feinman, provided:
“The Assignee, primarily in the interest of creditors, shall hold and manage the Trust
Property, receive and collect the rents, income and proceeds thereof, and convert the Trust
Property into money as rapidly as he may think expedient, and in such manner as he may
think best.” (emphasis supplied). It also provided that the Assignee was to pay claims in
the order of priority set forth in the Bankruptcy Code with “any balance remaining to the
Debtor.”
Attorney Feinman submitted his first invoice to TYS on or around January 3, 2007,
one day before the execution of the Assignment. 	The invoice contained time entries
beginning on November 17, 2006 and ending on December 14, 2006. On December 9, 2006,
As noted in note one above, Attorney Feinman objected to the Trustee’s4
reference to the issue of whether the Assignment was properly authorized. The parties,
however, used the word “purportedly” in their Stipulated Facts.
6
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Attorney Feinman charged TYS $687.50 for “Compile assignment; vote and assent forms
for review by debtor and Thomas Raftery. [sic]” On December 14, 2006, he charged TYS
$330 for “Review of documents; Telephonic conference call with Thomas Raftery and
Richard Erricola [the appraiser engaged to value the business and assets of TYS]
concerning execution of assignment.” 	In total, Attorney Feinman, who was the sole5
attorney involved in matters relating to TYS, sought a total of $3,685 from TYS, leaving a
balance of $1,315. Thus, at the time of the execution of the Assignment for the Benefit of
Creditors, Attorney Feinman owed the Debtor $1,315 resulting from the unused portion
of his firm’s retainer.
On January 5, 2007, one day after the execution of the Assignment for the Benefit of
Creditors, Attorney Feinman, as Assignee, sold substantially all of the remaining assets of
the Debtor to NEFP. NEFP continued to operate the same retail business which the Debtor
had operated under the name “Yankee Fireplace,” in the same locations in Middleton,
Massachusetts and Arundel, Maine, and Harris and Ryan managed its day-to-day
operations. NEFP purchased the Debtor’s assets for a stated consideration of $800,000, of
which $80,000 was paid by NEFP as a deposit, with the remaining $720,000 to be paid over
five years in monthly installments of approximately $6,000, pursuant to a promissory note
(the “Note”) payable to the Assignee. That Note was secured by the assets of the business.
This was the first mention of Richard Erricola in Attorney Feinman’s5
itemization of his services to TYS. Additionally, the itemizations suggest that Attorney
Feinman was billing TYS for services he was performing, or intended to perform, as
Assignee beginning on December 9, 2006.
7
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Under the terms of the Note, a balloon payment in excess of $550,000 was due at the
conclusion of the five-year term. There was not evidence that Attorney Feinman conducted
any due diligence with respect to NEFP. 	Because NEFP was making payments to the
Assignee over a five year period, it was incumbent upon him to ascertain its financial
capabilities and its ability to pay and the identity and experience of its officers, directors,
and management. 	In view of the absence of that information, Attorney Feinman
undoubtedly knew that NEFP was an entity through which Harris could maintain control
of the business of TYS.
Attorney Feinman did not advertise the sale of TYS’s assets or solicit other offers or
counteroffers. Indeed, while he was negotiating the sales price, he shared the appraised
value of the business with Attorney Raftery, who represented both Harris, who had
expressed a wish to maintain control of the business, and NEFP, the buyer.
Prior to the execution of the Assignment for the Benefit of Creditors, Harris and
Ryan received a total of at least $579,987.44 from the Debtor, in repayment of amounts they
claimed to have advanced to the Debtor (the “Payments”). They received at least $497,000
from the assets of TYS between November 13, 2006 and December 28, 2006, a period
spanning the period when Attorney Feinman represented TYS. Prior to the January 4, 2007
Assignment for the Benefit of Creditors, Harris and Ryan used a portion of the assets of
TYS to purchase a substantial quantity of new inventory, which was ultimately sold to
NEFP pursuant to the Assignment, to the benefit of NEFP and to the detriment of the
Debtor’s creditors.
8
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The initial payment of $80,000 to the Assignee for the purchase of the assets of the
Debtor was not funded by NEFP or Lynch, as its sole shareholder; rather, it constituted a
portion of the Payments received by Harris and Ryan, who paid at least $80,000 of such
funds to capitalize NEFP. These funds, in turn, were paid by NEFP to Attorney Feinman,
as Assignee, to acquire the assets of the Debtor.
Attorney Feinman testified that he did not learn of any of the Payments until
October of 2007 when the Chapter 7 Trustee conducted an examination of him pursuant
to Fed. R. Bankr. P. 2004.
Attorney Feinman testified that he did not discuss the sale price for TYS’s assets
until he had obtained an appraisal from Richard Erricola (“Erricola”). He testified that he
had one meeting in his office with Harris and Attorney Raftery, but subsequent
negotiations were with Attorney Raftery by telephone or e-mail. 	Attorney Feinman
indicated that he rejected Harris’s initial offer of the liquidation value for the assets. He
stated that he “indicated [to Harris] that I would not accept it and would not handle the
assignment at that price.” Although Attorney Feinman had a telephone conference with
Attorney Raftery and Erricola on December 14, 2006, it is unclear precisely when Erricola
was employed and by whom. Although the sale of TYS’s assets to NEFP was negotiated
in December of 2006 and finalized on January 5, 2007, Erricola was paid by Attorney
Feinman, as Assignee, on January 26, 2007.
Attorney Feinman, in his March 15, 2007 itemization of professional services as
Assignee, disclosed that, on January 4, 2007, he reviewed documentation and appraisals.
9
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On January 9, 2007, he again reviewed information from the appraiser and had a
conference with Erricola. He testified that Erricola provided him with a liquidation value
for TYS’s assets of $240,343 and that he shared that number with Attorney Raftery, adding
that he did not obtain a copy of the appraisal from Erricola until after the physical
appraisal of the assets. 	From the sequence of events, it would appear that Attorney
Feinman was purporting to act as Assignee prior to the actual execution of the Assignment
for the Benefit of Creditors.
One day after Attorney Feinman sold the assets of TYS to NEFP, he sent a letter to
all of the creditors of TYS as well as parties in interest. The letter provided in pertinent part
the following:
Pursuant to the terms and provisions of the Assignment, as Assignee,
I have partially liquidated the assets of the company, and will continue to do
so in order to make distribution to creditors on the terms and conditions set
forth in the assignment for the benefit of creditors. The Assignment for the
Benefit of Creditors executed by the Debtor provides for distribution to
creditors as would normally be provided for in a bankruptcy proceeding
commenced on January 4, 2007, using the same priority provisions of the
Bankruptcy Code. . . .
As of the present date, I have sold the Debtor’s physical assets and
certain contractual rights to a third party. A Purchase and Sale Agreement,
Bill of Sale and related documents have been executed for the sale of the
physical assets of TYS, Inc. for the sum of $800,000.00. 	The sale does not
include funds on hand in the Debtor’s bank accounts, nor does the sale
include causes of action available to the Debtor against third parties. . . .
***
Finally, in handling this Assignment for the Benefit of Creditors, as
Assignee, I represent the interests of the creditor body as a whole, and do not
represent the interests of any particular creditor. . . .
10
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Although Attorney Feinman represented in his January 5, 2007 letter that he sold
the assets of TYS to a “third party,” he did not disclose that NEFP was a newly created
entity whose president was Ryan’s sister and Harris’s sister in law - - an insider as that
term is defined in the Bankruptcy Code. See 11 U.S.C. § 101(31)(B)(vi). He also did not
disclose that NEFP’s principal place of business and address were the same as those of
TYS. Additionally, he did not disclose that Harris was going to be managing NEFP. With
respect to his own involvement, Attorney Feinman did not disclose that he had acted as
counsel to TYS beginning on November 17, 2006. Finally, he did not disclose that he had
taken no steps whatsoever to advertise or otherwise market the assets of TYS or solicit
counteroffers for its assets.
An involuntary petition for bankruptcy relief was filed by certain unsecured,
unpaid creditors of the Debtor on January 29, 2007. On March 13, 2007, an Order of Relief
was entered, and the Trustee was appointed.
Attorney Feinman cooperated fully with the Trustee and promptly turned over his
records, provided assistance, and provided an accounting to the Trustee. On March 15,
2007, he filed his “Final Account by Assignee for the Benefit of Creditors.” He stated that
“[a]s of March 4, 2007, total funds on hand were $150,376.80. Of all funds received by me
as Assignee, only one administrative expense was paid in the amount of $5,817.50 to
Richard Erricola for an inventory and appraisal of physical assets of the Debtor which were
anticipated to be sold.” As noted above, the account showed that Erricola was paid on
January 26, 2007.
11
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Attorney Feinman filed a Motion for Allowance and Reimbursement of Legal Fees
and Expenses on March 15, 2007 to which he attached an itemization of his services
beginning on January 2, 2007 and ending on March 15, 2007. 	Through his Motion, he
sought $14,295 for services and $471.64 for expenses. Between January 2, 2007 and January
29, 2007, the date the involuntary petition was filed, Attorney Feinman incurred fees
totaling $9,022.50 and expenses totaling $450.49. His itemization reveals that he sought
compensation for filing a Reply to the involuntary petition. In that Reply, which was filed
on February 12, 2007, he stated:
The pre-assignment relationship between various principals of the Debtor
entity 	was 	acrimonious, 	and 	accordingly, 	in 	the 	absence 	of 	further
information, as assignee seeking to liquidate the assets of the Debtor and to
make payments upon creditors [sic], I have concern about the nature of these
proceedings. In the absence of such further information, as assignee I am
unable to recommend to the Court to enter an order for relief as requested
by the petitioning creditors. 6
Upon motion by the Debtor and by Order dated July 27, 2007, the Court converted
the Debtor’s bankruptcy case from a Chapter 7 proceeding to Chapter 11, and the Trustee
was appointed Chapter 11 Trustee on August 2, 2007. Following a settlement of certain
claims against Harris, Ryan and others, the Debtor’s Chapter 11 case was converted back
to a Chapter 7 proceeding, and the Trustee was again appointed Chapter 7 Trustee of TYS.
On July 15, 2009, Attorney Feinman submitted a Second Supplemental Request for
Compensation seeking $6,480 in fees for professional services and $5,023.12 in expenses.
Only the debtor, or a general partner in a partnership debtor that did not join in6
the petition may file an answer to an involuntary petition. See 	11 U.S.C. § 303(d).
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His itemization set forth a balance forward of $20,483.76 and an adjustment of $1,333.12.
The disbursements included $5,000 for a deductible with respect to his professional liability
insurance. As set forth above, he seeks a total of $30,653.76.
From the Stipulated Facts, as supplemented with reference to the documentary
evidence and testimony, it is unclear when Attorney Feinman ceased to represent the
Debtor and agreed in principle to accept the Assignment for the Benefit of Creditors. 	In
other words, between December 14, 2006 and January 2, 2007, who did he represent?
Attorney Feinman testified that he thought about declining the Assignment, “but the
problem was is [sic] that I had only had involvement with Mr. Harris for about two weeks,
maybe three weeks at most. I felt that I could proceed with it without any conflict issues.
I didn’t recommend the assignment. I didn’t pursue it . . . .” 	He added that, if he had
known that there were insider transfers taking place, he likely would have declined the
Assignment. Additionally, he testified that although Harris told him about preferences to
trade creditors he did not tell him about the ones TYS made to him and Ryan, stating that
because he was Assignee for only a short period of time, he did not have the opportunity
to perform a preference analysis.
III. POSITIONS OF THE PARTIES
Attorney Feinman maintains that the issue before the Court is whether there is a
bright line rule that bars an attorney from acting as an assignee for the benefit of creditors
if the attorney-client privilege has attached. He distinguishes the case relied upon by the
Trustee, namely In re Colony Press, Inc., 83 B.R. 862 (Bankr. D. Mass. 1988). Attorney
13
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Feinman argues that he played an “exceedingly limited role in both scope and time” as
counsel to TYS before Harris chose to obtain separate counsel to pursue an assignment for
the benefit of creditors. He also emphasizes that he had no actual conflict of interest or
actual knowledge of any conduct on the part of the Debtor’s principals that was later
challenged by the Chapter 7 Trustee.
The Chapter 7 Trustee, also relying upon In re Colony Press, Inc., objects to the
payment of any fees incurred by Attorney Feinman due to his prior service as counsel to
the Debtor. Additionally, he maintains that the services rendered did not benefit the estate
or its creditors because they were performed exclusively to benefit the principals of the
Debtor and NEFP. The Trustee asserts that Attorney Feinman’s professional obligation to
maintain the confidences of TYS, as disclosed to him by Harris, was at odds with his duty
to make full disclosure to TYS’s creditors as Assignee. The Trustee maintains that Attorney
Feinman knew, or should have known, if proper inquiry had been made, that the
Assignment for the Benefit of Creditors had the effect of having nearly $500,000 paid to the
Debtor’s principals rather than to its creditors within six weeks of the date of the
Assignment - a period in which Attorney Feinman was serving as counsel to TYS. Further,
the Trustee states that, had Attorney Feinman obtained knowledge of preferential transfers
during the attorney-client relationship, such knowledge would constitute a client
confidence that would have precluded him from serving as Assignee. The Trustee adds
that Harris’s expressed wish to remain in control was sufficient to create a conflict of
interest.
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With respect to his argument that Attorney Feinman’s services did not benefit the
estate, the Trustee points to his failure to disclose that the “third party” to whom he sold
the assets of TYS was NEFP, a newly formed corporation owned by Harris’s sister-in-law,
as well as his failure to disclose that Harris was going to continue to manage the business
of NEFP, and his failure to disclose that NEFP was going to continue to operate TYS’s
business from the same location.
The Trustee specifically objects to any fees and costs incurred by Attorney Feinman
between April 3, 2008 and July 30, 2009. The Trustee maintains that fees and expenses
incurred by Attorney Feinman, including a $5,000 deductible to his professional liability
carrier, did not benefit the estate. The Trustee also notes that Attorney Feinman failed to
account for $1,315, representing the balance of the retainer provided to him by TYS.
IV. DISCUSSION
A. Conflict of Interest
The first issue that the Court must resolve is whether Attorney Feinman had a
conflict of interest with respect to his representation of the Debtor and his status as a
fiduciary to its creditors as Assignee. Based upon the evidence presented, Massachusetts
Rule of Professional Conduct 1.7, and the decision in Colony Press, the Court concludes
that Attorney Feinman, in fact, had a conflict of interest when he accepted the Assignment
for the Benefit of Creditors, despite his testimony to the contrary. Attorney Feinman’s
dual role as counsel to TYS and as Assignee created an irreconcilable conflict of interest due
to the adverse interests of the corporation and the constituency of creditors. 	See In re
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Colony Press, Inc., 83 at 865. In that case, the court explained the conflicting roles of an
assignee and a debtor’s attorney. It stated:
For example, if Petitioner had learned in confidence from the Debtor of a
preference or fraudulent transfer made by the Debtor, he would not be
permitted to disclose this information even though it could be crucial in the
creditors’ decision on whether or not to assent to the Assignment. See Mass.
Sup. Jud. Ct. R. 3:07, DR 4-101. Petitioner’s obligation to be diligent in his
duties under the Assignment would likely require some “policing” of the
Debtor to be sure that the Debtor was not holding out on the inclusion of any
property in the Assignment. But the necessity of such policing appears to
require him to have declined the Assignment, because under the Canons he
must decline any proffered employment that is likely to adversely affect his
exercise of independent professional judgment in behalf of a client. See Mass.
Sup. Jud. Ct .R. 3:07, DR 5-105.
Beyond those considerations, the very terms of the Assignment create
potential conflict. It grants the Debtor the right to receive back the excess of
the value of unencumbered property over the total claims of assenting
creditors. Any questions concerning the amount of a claim, or whether a
creditor should be permitted to assent, therefore bear directly upon the
existence 	or 	not 	of 	surplus 	going 	back 	to 	the 	Debtor. 	Petitioner’s
understandable inclination to favor the Debtor as his client would likely
cloud his decisions as Assignee concerning these matters. So we appear to
have yet another violation of Petitioner’s professional obligations, the
obligation to avoid even the appearance of professional 	impropriety. See
Mass. Sup. Jud. Ct. R. 3:07, Canon 9.
83 B.R. at 865-66. 7
The court added:7
These considerations appear to have prompted some states to pass
legislation which either prohibits a debtor from naming his lawyer as
assignee or gives creditors the power to replace the assignee named by the
debtor. FN2 Massachusetts, whose regulation on the subject of
assignments is minimal ( See Mass.G.L. ch. 203, §§ 40- 42), has imposed no
such restriction. But Congress has done so with respect to the analogous
situation involving the appointment of a trustee under the Bankruptcy
Code
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Attorney Feinman’s conflict of interest is highlighted by the fait accompli he
presented to the creditors of TYS in the form of the sale of TYS’s assets to NEFP without
any marketing or solicitation of higher offers, by his failure to disclose pertinent
information about the ownership and management of NEFP to the creditors of TYS, and
by his failure to disclose information about his role as counsel to the Debtor.
Massachusetts Rules of Professional conduct address conflicts of interest. 	In
pertinent part, the Rule 1.7 provides:
(a) A lawyer shall not represent a client if the representation of that client will
be directly adverse to another client, unless:
(1) the lawyer reasonably believes the representation will not
adversely affect the relationship with the other client; and
(2) each client consents after consultation.
(b) A lawyer shall not represent a client if the representation of that client
may be materially limited by the lawyer’s responsibilities to another client
or to a third person, or by the lawyer's own interests, unless:
(1) the lawyer reasonably believes the representation will not
be adversely affected; and
(2) the client consents after consultation. When representation
of multiple clients in a single matter is undertaken, the
consultation shall include explanation of the implications of the
common 	representation 	and 	the 	advantages 	and 	risks
involved.
Mass. R. Prof. Conduct 1.7. Even if Attorney Feinman may have believed that he could act
as Assignee, less than three weeks after the last time entry for which he charged TYS for
Id. at 866.
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his services, namely December 14, 2006, he should have formally terminated his
representation of TYS, and, more importantly, disclosed his involvement as counsel to TYS
to its creditors in his January 5, 2007 letter. Although he was not acting as an attorney to
the beneficiaries of the Assignment, as Assignee, he was acting in a fiduciary capacity to
the creditors of the Debtor. 	See Mike C. Buckley and Gregory Sterling, What Banks Need8
to Know About ABCs, 120 Banking L. J. 48 (Jan. 2003) (“The basic job of an Assignee is to
fulfill the responsibilities of a prudent fiduciary.”); 	Geoffrey L. Berman and Robert J.
Keach, “The Receivership Alternative”- A Response, 20 Am. Bankr. Inst. J. 26 (July/Aug.
2001). 	Thus, his role as Assignee was sufficiently similar to the role of an attorney to
warrant reference to Rule 1.7.
In In re Colony Press, Inc., the court stated:
As a trustee, the Petitioner was required to administer the trust diligently in
accordance with its terms and in the sole interest of the assenting creditors.
His position of trust and confidence also mandated full disclosure to the
assenting creditors of all material facts known to him which related to their
right under the trust.
83 B.R. at 865 (citing Restatement (Second) of Trusts §§ 170, 173 comment d, and 174).
Attorney Feinman’s omissions in the January 5, 2007 letter were so glaring as to
suggest, at best, willful ignorance or, at worst, collusion with Harris and NEFP so that
Additionally, to the extent TYS was insolvent, Harris and Ryan owed fiduciary8
duties to the creditors of TYS. See Mike C. Buckley and Gregory Sterling, What Banks
Need to Know About ABCs, 120 Banking L. J. 48 (Jan. 2003). It was incumbent upon
Attorney Feinman in undertaking fiduciary duties as Assignee to ascertain whether the
principals of the corporation for which he was appointed Assignee had satisfied those
duties with respect to their conduct involving the creation of and sale of TYS’s assets to
NEFP. Id.
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Harris could maintain control of the business of TYS. In this regard, although Attorney
Feinman testified that he recommended the filing of a Chapter 11 petition to Harris, as
president of TYS, he failed to elicit basic information from him about officer loans, transfers
outside the ordinary course of business, and he inexplicably failed to advise TYS not to
make payments that might be considered preferential and avoidable by a bankruptcy
trustee or an assignee. Thus, while he was counsel to TYS, TYS made payments of $497,000
to Harris and Ryan who used that money to boost inventory which was purchased by
NEFP, whose sole shareholder was an insider. Had Attorney Feinman made even minimal
inquiry before accepting the Assignment, he would have learned that as Assignee, he
would have to sue Harris and Ryan, a circumstance that undoubtedly would have
unraveled the very sale he effected and recommended to creditors as Assignee.
As Assignee, Attorney Feinman had a duty to the Debtor’s creditors to maximize
the sales price for its assets. 	He failed in the performance of that duty by facilitating,
endorsing, and implementing a “back-room deal.” 	Not only did he share Erricola’s
appraisal with Attorney Raftery, he hastily and without any proffered justification, sold
the assets of TYS to NEFP, a newly created entity, with a minimal cash down payment and
a five year payout. In Colony Press, a case Attorney Feinman attempts to distinguish, the
bankruptcy court disallowed compensation to an assignee who, though conflicted, at least
advertised a scheduled auction by placing ads in The Worcester Telegram, The Boston
Globe and The Providence Journal. See In re Colony Press, Inc., 83 B.R. at 863.
An Assignee is the equivalent of a Chapter 7 trustee. 	According to one
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commentator,
[T]he assignee is the analogous equivalent to the Chapter 7 trustee. An ABC’s
purpose is to provide the assignor’s creditors with an equal distribution of
the assignor’s estate in proportion to their claims. Once the trust agreement
is created, the assignee stands in the debtor’s shoes and can protect him or
her from creditors because the assignee now possesses legal and equitable
title to all assets. In other words, because the debtor no longer has title to his
or her assets, the creditor cannot attach or execute on the property
transferred to the assignee.
Jonathan T. Edwards, The Crossroads: The Intersection of State Law Remedies and
Bankruptcy, 18 J. Bankr. L. & Prac. 2, Art. 4 (2009). Given the similar status of assignees
and trustees, this Court finds that an assignee’s employment is subject to the same
requirements. See 11 U.S.C. §§ 101(14), 327(a) and 701(a)(1); see also In re Colony Press,
Inc., 83 BR. at 866. This Court agrees with the court in Colony Press, a case in which the
assignor also served as counsel to the debtor, that “the principle which prevents the
debtor’s lawyer from serving as trustee or trustee’s counsel because he has a materially
adverse interest, and which denies him compensation if he does serve, also controls the
question of an assignee’s compensation under § 543.” Id. at 868. Thus, based upon the
weight of the credible evidence, the Court finds that Attorney Feinman was conflicted and
failed to satisfactorily perform his duties as Assignee. 	The principles set forth in the
Bankruptcy Code dictate the conclusion that Attorney Feinman is precluded from receiving
compensation for his services as assignee because of the material adverse interest he had
resulting from his representation of TYS and the interest of its creditors as Assignee.
B. Benefit to the Estate
Section 543(c) of the Bankruptcy Code provides that “[t]he court, after notice and
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a hearing, shall - - . . . provide for the payment of reasonable compensation for services
rendered and costs and expenses incurred by such custodian. . . .” 	11 U.S.C. § 543(c).
According to the United States Court of Appeals for the Fifth Circuit,
A custodian’s compensation for “services” and “actual, necessary expenses”
are an administrative expense of the estate and are thereby entitled to
priority in the bankruptcy proceedings. 	In addition to compensation for
services 	and 	“actual, 	necessary 	expenses,” 	a 	superseded 	custodian’s
compensation may include “reasonable compensation for professional
services rendered by an attorney” employed by the custodian to further an
“allowed”’ expense, as well as that attorney’s “actual, necessary expenses.”
In re Bodenheimer, Jones, Szwak & Winchell L.L.P., __ F.3d __, 2009 WL 5103546 at *4 (5th
Cir. Dec. 29, 2009). 	The Fifth Circuit in Bodenheimer also observed that prepetition
services of a custodian are governed by 11 U.S.C. § 503(b)(3)(E) which provides that the
actual, necessary expenses, other than compensation and reimbursement specified for
professional services of an attorney or accountant to a custodian require benefit to the
estate. 2009 WL 5103546 at *5. It stated: “[t]he ‘benefit’ requirement has no independent
basis in the Code, however, but is merely a way of testing whether a particular expense
was truly ‘necessary’ to the estate: If it was of no ‘benefit,’ it cannot have been ‘necessary.’”
Id. (citing In re H.L.S. Energy Co., 151 F.3d 434, 437 (5th Cir.1998)) (footnote omitted). The
Fifth Circuit explained:
[T]he “benefit to the estate” requirement for “services” of pre-petition
liquidators and post-petition custodians is supported by long-established
pre-Bankruptcy Code precedent. The “benefit to the estate” doctrine was first
recognized in Randolph & Randolph v. Scruggs, where Justice Holmes,
writing for a unanimous Court, held that a state-law assignee of a debtor’s
estate was entitled to seek payment for services that he undertook prior to
the adjudication of the bankruptcy, inasmuch as those services benefitted the
bankruptcy estate. The Court added, however, that “[w]e are not prepared
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to go further than to allow compensation for services which were beneficial
to the estate. Beyond that point we must throw the risk of his conduct on the
assignee, as he was chargeable with knowledge of what might happen.” The
Court also concluded that the assignee’s decision to contest the bankruptcy
once it had commenced did not appear to be a benefit to the estate, and
therefore resulting fees were not allowable expenses entitled to priority.
Since the Supreme Court’s decision in Randolph, Congress enacted the
Bankruptcy Code. Admittedly, Congress made no mention of the “benefit to
the estate” rule in the provisions of the Code governing the services of
superseded custodians. However, “[w]hen Congress amends the bankruptcy
laws, it does not write ‘on a clean slate.’” Dewsnup v. Timm. Indeed, we
must “not read the Bankruptcy Code to erode past bankruptcy practice
absent a clear indication that Congress intended such a departure.” Cohen
v. de la Cruz. There is no indication that Congress intended to overturn the
“benefit to the estate” doctrine when passing the statutes governing payment
to superseded custodians. Indeed, the legislative history points to the
contrary.
2009 WL 5103546 	*5 (footnotes omitted). 	Thus, the Fifth Circuit concluded that “the
language of § 543 clearly circumscribes the actions of superseded custodians to those which
are necessary to preserve the assets of the estate once a bankruptcy petition has been filed.”
2009 WL 5103546 at * 6.
In view of the foregoing, the Court agrees with the Chapter 7 Trustee that Attorney
Feinman’s services and the disbursements for which he seeks reimbursement, provided no
benefit to the bankruptcy estate. For the reasons set forth in the discussion concerning his
conflict of interest, the Court concludes that his services and disbursements not only failed
to benefit the bankruptcy estate but delayed its administration.
V. CONCLUSION
In view of the foregoing, the Court shall enter an order denying Attorney Feinman’s
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requests for compensation in this case.
By the Court,
Joan N. Feeney
United States Bankruptcy Judge
Dated: February 5, 2010
cc: Mark W. Corner, Esq., Matthew R. Johnson, Esq., Michael B. Feinman, Esq., Joseph
Braunstein, Esq.
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