Court Throws Cold Water on Plan to Pay Out Car Wash Proceeds

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By Daniel Gill

Aug. 4 — A Chapter 7 trustee's final report, detailing how funds held by the trustee would be disbursed, didn't align with the statutory scheme for distributions from a bankruptcy estate, a bankruptcy court held ( In re MCO Wash, Inc., 2016 BL 249637, Bankr. E.D.N.Y., No. 8-14-73345-reg, 8/2/16 ).

Judge Robert E. Grossman of the U.S. Bankruptcy Court for the Eastern District of New York Aug. 2 denied the proposed disbursement, which included funds which a secured creditor voluntarily agreed would be given to the trustee from the sale of estate property.

The Office of the U.S. Trustee and former Chapter 11 counsel had objected to the proposed disbursement, which included some payments to unsecured creditors but none on account of the administrative claims held by Chapter 11 counsel.

MCO Wash, Inc., a company operating a car wash, filed a Chapter 11 case on July 22, 2014. Chapter 11 allows companies (or individuals) to enjoy protections from creditors while they seek to reorganize their debt or liquidate pursuant to a plan which must be approved by the bankruptcy court.

On Jan. 4, 2015, the court converted the case to Chapter 7, and Richard L. Stern was appointed as trustee. In Chapter 7, a debtor's assets are liquidated by a trustee, and the proceeds are distributed to creditors pursuant to a priority scheme prescribed in the Bankruptcy Code.

The trustee sold the debtor's assets with an agreement by a secured creditor that the trustee could “carve out” a portion of the sale proceeds (which otherwise would have been subject to the secured creditor's lien) for making payments for administrative expenses of the Chapter 7 estate and to general unsecured creditors, the court said.

The court didn't approve the final distributions, however, after parties holding administrative claims from the Chapter 11 portion of the case objected, on the grounds that Bankruptcy Code Sections 726 and 507 provided that their claims be paid before general unsecured creditors receive a distribution.

The court's decision also approved the applications for compensation submitted by the attorneys and accountants hired by the trustee with the court's prior approval.

MCO Wash, Inc. was represented by Anthony F. Giuliano, Pryor & Mandelup, LLP, Westbury, N.Y. The trustee was represented by Fred S. Kantrow and Avrum J. Rosen, Law Offices of Avrum J. Rosen, PLLC, Huntington, N.Y.

To contact the reporter on this story: Daniel Gill in Washington at dgill@bna.com

To contact the editor responsible for this story: Jay Horowitz at jhorowitz@bna.com

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