In Re NWFX, Inc.

MEMORANDUM OPINION

ROBERT F. FUSSELL, Bankruptcy Judge.

I. BACKGROUND OF THE CASE AND APPLICATIONS, MOTIONS, AND OBJECTIONS PENDING BEFORE THE COURT

NWFX, Inc. [NWFX], Gold Financial Express, Inc. [Gold], 'and Northwest Financial Express, Inc. [Northwest], together referred to as the Debtor Corporations, were incorporated by Larry Shaffer in the early 1980s for the purpose of selling money orders. NWFX and Gold sold money orders in a number of states in the United States. Northwest sold money orders in the Commonwealth of Puerto Rico. Shaffer gained expertise in the money order business while employed with the American Express Company, and is the sole shareholder of the Debtor Corporations.

Generally speaking, the Debtor Corporations conducted business by entering into contracts with convenience stores, grocery stores, and other retail concerns that acted as agents in selling money orders on behalf of the Debtor Corporations. Pursuant to their contract agreements with the Debtor Corporations, the retail businesses sold the money orders to their customers, retained a small fee for their services, and remitted the balance of the money order proceeds to the Debtor Corporations. After sale by the retail businesses to their customers, the money orders were processed through the Federal Reserve System and ultimately ended up for payment at the banks where the Debt- or Corporations had accounts.

During 1986, the Debtor Corporations began experiencing financial difficulties. Their bank account balances became overdrawn and the money orders began to be returned for insufficient funds. In 1986, the State of Arkansas Security Commissioner issued a cease and desist order that had the effect of closing down the Debtor Corporations’ operations.

On August 1, 1986, the Debtor Corporations filed voluntary petitions under chapter 11 of the bankruptcy code. On August 5, 1986, the Debtor Corporations filed a “Motion For Appointment of Trustee” pursuant to 11 U.S.C. § 1104 (a)(2). On August 11, 1986, John Folgeman, a former Chief Justice of the Supreme Court of Arkansas, was appointed trustee. He subsequently disqualified himself from the position. On August 12, 1986, Allen W. Bird, II [Bird or Trustee] was appointed trustee in the three cases. The cases were consolidated for purposes of administration on September 5, 1986. There has been ongoing litigation in the consolidated case for the past fourteen years.

Pending before the Court are the following applications and motions filed by the Trustee:

(1) “Final Report and Account and Application For Final Decree,” filed on July 29,1999;

(2) “Motion for Final Approval of All Professional Fees and Expenses,” filed on July 29,1999;

(3) “Trustee’s Application For Approval of Employment of Special Counsel Pursuant to 11 U.S.C. § 327 (e),” filed on December 1, 1999, to employ Wright, Lindsey & Jennings LLP;

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(4) “Amended Chapter 11 Final Report and Account and Application For Final Decree,” filed on December 15, 1999;

(5) “Motion For Approval of Professional Fees and Expenses,” filed on June 29, 2000, to pay the Rose Law Firm as counsel for the Trustee. The application seeks $72,181.50 in legal fees and $5015.90 in expenses;

(6) “First Application For Allowance of Fees and Expenses by Wright, Lindsey

&

Jennings LLP, Counsel for Trustee,” filed on June 29, 2000. The application seeks $194,574.00 in legal fees and $22,896.30 in expenses;

(7) “Second Application For Allowance of Fees and Expenses by Wright, Lindsey & Jennings LLP, Counsel For Trustee,” filed on September 20, 2000. The second application seeks $105,671.00 in legal fees and $16,228.14 in expenses.

Shaffer, as the equity security holder of the Debtor Corporations and a party in interest, filed objections to all of the above-listed applications and motions. Also pending before the Court are the following applications and motions filed by Shaffer:

(8) “Application for Allowance and Surcharge of Attorneys Fees and Expenses [Hall, Estill, Hardwick, Gable, Golden & Nelson, P.C.],” filed on June 30, 2000. The application seeks $289,065.50 in legal fees and $18,629.69 in expenses for Shaffer’s counsel.

(9) “First Interim Application of D.R. Payne

&

Associates as Financial Experts and Accountants For Larry Shaffer (‘Shareholder’) For Allowance of Compensaion For Actual, Necessary Services Rendered and For Reimbursement of All Actual, Necessary Expenses Incurred For the Period October 21, 1999 Through February 26, 2000,” filed on July 10, 2000. The application seeks $42,280.00 in fees and $2827.11 in expenses for services rendered from October 21, 1999, through February 26, 2000.

(10)“Supplement To Application For Allowance and Surcharge of Attorneys Fees and Expenses [Hall, Estill, Hard-wick, Gable, Golden

&

Nelson, P.C.],” filed on September 20, 2000. The supplemental application seeks $50,518.75 in fees and $11,449.50 in expenses.

The Trustee filed objections to Shaffer’s applications and motions. Following an evidentiary hearing in the case and the submission of post-trial briefs by the parties, the Court took the matter under advisement. The Court will enter separate orders as to each of the applications and motions pending in this case.

II. JURISDICTION

This Court has jurisdiction over the pending matters pursuant to 28 U.S.C. § 1334 . The above proceeding is a core proceeding as defined by 28 U.S.C. § 157 (b)(2)(A) and (O).

III. ISSUES BEFORE THE COURT

The issues in this litigation are voluminous' — the hearing lasted ten days, the transcript is over 2,000 pages, and the Court received twelve volumes of exhibits into evidence. The issues include,

A. The timeliness of Shaffer’s objections.

B. Whether the Trustee breached his fiduciary duty of care in the administration of the Debtor Corporations’ estates, and, if so, what damages resulted to the estates or to Shaffer as equity security holder of the estates?

1. Alleged delay in closing the estates;

2. Trustee’s refraining to pursue collection of judgments on behalf of the Debtor Corporations’ estates;

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3. Sales of personal property of the Debtor Corporations’ estates;

4. Alleged sharing and paying of employees of the Debtor Corporations with the Rose Law Firm;

5. Alleged improper employment of and payment to employee Penny Scharmberg;

6. Alleged improper payments to Victoria Mason as accountant in the Debtor Corporations’s cases;

7. Alleged improper payments of legal fees to the Rose Law Firm without Court orders.

C. Whether the Trustee knowingly and intentionally made overpayments of trustee’s fees to the Rose Law Firm or himself; whether the Trustee filed false, misleading, or inaccurate final reports and accounts; and whether the Trustee failed to timely provide or reveal information reT garding his trustee’s fees as requested by Larry Schaffer, as a party in interest, and breached his fiduciary duty?

D. 11 U.S.C. § 326 (a) issues raised by the parties.

1. Is the Trustee entitled to a fee for claims that were compromised or set off?

2. Is the Trustee entitled to a fee for state bond proceeds that were distributed through the Debtor Corporations’ estates?

3. Is the Trustee entitled to a fee for money distributed to Shaffer as the equity security claimant in the Debtor Corporations’ cases?

E. Conclusions of law as to the appropriate 11 U.S.C. § 330 and § 326(a) compensation to be paid to the Trustee in the Debtor Corporations’ cases.

F.Appropriate compensation pursuant to 11 U.S.C. § 330 for professionals employed by the Trustee in the Debtor Corporation’s cases.

1. What is the appropriate compensation for accountant Victoria Mason?

2. What is the appropriate compensation for the Rose Law Firm as counsel for the Trustee in the Debtor Corporations’ cases?

3. Is Wright, Lindsey

&

Jennings LLP entitled to compensation as special counsel for the Trustee in the Debtor Corporations’ cases? If so, can, and should, the Trustee be surcharged for the legal fees and costs incurred by Wright, Lindsey & Jennings LLP?

4. Can, and should, the Trustee be surcharged for the legal fees and costs incurred by Hall, Estill, Hardwick, Gable, Golden & Nelson, P.C. in this litigation, including the fees and expenses of Shaffer’s expert witness and financial consultant, D.R. Payne & Associates, or should Shaffer be required to pay for his own legal fees and costs incurred?

5. Is the Rose Law Firm vicariously liable for the acts of the Trustee in the Debtor Corporations’ cases?

A.

The timeliness of Shaffer’s objections

1. Positions of the parties

The Trustee’s position is that Shaffer’s objections, which raise issues of negligence, fraud, and breach of fiduciary duty as to the Trustee’s July 29, 1999, “Final Report and Account and Application For Final Decree,” and December 15, 1999, ‘Amended Chapter 11 Final Report and Account and Application For Final De

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cree,” are barred by the three year statute of limitations in Arkansas under Arkansas law and the doctrine of latches.

1

The Trustee further contends that Shaffer’s objections to the Trustee’s “Application For Allowance of Final Compensation and Expenses For Counsel For the Trustee,” filed on November 9, 1998, and the Trustee’s “Motion For Final Approval of All Professional Fees and Expenses,” filed on July 29, 1999, are also time barred by the doctrine of laches.

Shaffer’s position is that the three year statute of limitations in Arkansas is not applicable to the above listed applications because the subject matter of the applications are administrative matters before the Court. There is no statutory limitation contained in the bankruptcy code as to these administrative matters. The code specifically requires that the Trustee file a final report and account in the Debtor Corporations’ cases.

2

Until a final report and account is actually filed and the contents made known, an interested party cannot file an objection to the final report and account. Shaffer submits that even if the three year statute of limitations in Arkansas was applicable, the statute is tolled when a party has concealed or failed to disclose his or her wrong-doing. Further, the three year statutory period would not begin to run until Shaffer knew or had reason to know of the Trustee’s wrongdoing. Likewise, the legal doctrine of laches is not applicable for the same reasons — until a final report is filed and the contents known, an interested party does not have knowledge of the accounting contained in such a final report. Regarding the Trustee’s applications for final payment of fees and expenses of the Rose Law Firm, the legal doctrine of laches is not applicable because the Trustee specifically waived Shaffer’s objections in the pending litigation before the Court.

2.

Findings of fact and conclusions of law

a.

Statute of limitation and doctrine of latches issues relating to the Trustee’s July 29, 1999, and December 15, 1999, final reports; and Shaffer’s objections

Bird was appointed as the chapter 11 Trustee in the Debtor Corporations’ bankruptcy cases on August ,12, 1986. Bird, as trustee, paid himself or the Rose Law Firm trustee fees during the years 1989 through 1993. Bird filed operating reports beginning in 1986, and going through and including August 6, 1991, that reflected the trustee fees that had been paid by the Debtor Corporations’ estates. No operating reports were filed beyond

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August 6, 1991, in the Debtor Corporations’ cases.

On November 15, 1999, Bird, as trustee, filed his “Response to Larry Shaffer’s Objections to Trustee’s Final Report and Account.” Bird’s response was to Shaffer’s September 10, 1999, objection to the Trustee’s July 29, 1999, final report. At that time, Bird disclosed that he or the Rose Law Firm had been overpaid $133,220.00. At the hearing in February 2000, Bird testified that discovering the overpayments had been a difficult and torturous process.

The Court finds that the three year statute of limitations in Arkansas is not applicable to the pending administrative matters before the Court. The Trustee’s motions for approval of final reports and accounts, and applications for final payments to the Rose Law Firm for professional legal services to the Trustee, and Shaffer’s objections to these motions and' applications, are core proceedings as defined in 28 U.S.C. § 157 (b)(2)(A).

3

Until the trustee files the final report and applications as required by §§ 1106(a)(1) and 704(9), a statute of limitation is not applicable to these proceedings. Until the motions and applications are filed, a party in interest does not know what the report or applications will contain, and whether the statements and information contained therein are accurate, misleading, or fraudulent. Further, the parties agreed in a “Joint Stipulation” filed with the Court on January 12, 1999, that Shaffer would have the opportunity to review and object to all fees and expenses awarded or requested in this case.

The cases relied upon by the Trustee in his post trial brief are factually dissimilar to the present proceedings. In

Nagle v. Alspach,

1992 WL 308457 (E.D.Pa.),

aff'd,

8 F.3d 141 (3d Cir.1993), shareholders of a debtor corporation filed a civil action against the debtor corporation’s bankruptcy trustee and the trustee’s attorneys alleging the trustee had negligently failed to file lawsuits on behalf of the debtor corporation within the limitation period. In

Stumpf v. Albracht,

982 F.2d 275 (8th Cir.1992), a chapter 11 trustee brought suit against the debtor’s former attorney based on the debtor’s claim that the attorney advised them to conceal assets belonging to the bankruptcy estate. The proceedings pending before this Court are neither civil actions or adversary proceedings filed by a party in interest; rather, they are objections filed to the final reports based on the accuracy of the reports and the performance of the Trustee in administering the Debtor Corporations’ estates. According to the First Circuit Court of Appeals, “[t]he very purpose of a final report and account is to insure that trustees disclose and be held accountable for their handling of the estate.”

Lopez-Stubbe v. Rodriguez-Estrada, (In re San Juan Hotel Corp.),

847 F.2d 931, 939 (1st Cir.1988);

see also,

6 Collier on Bankruptcy ¶ 704.13, at 704-23 to 24 (15th ed. rev.)(2000). Therefore, only after having filed a final report can the Trustee be absolved from his fiduciary duties to the Debtor Corporations’ estates in this proceeding.

Finally, the January 27, 1989, order allowing an interim trustee’s fee of $38,000.00, and the January 26,1990, order

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allowing an interim trustee’s fee of $50,000.00, contained the following specific language regarding the interim trustee’s fees: “which amount shall be subject to final review by this Court and a final accounting of all Trustee’s fees.”

The Court further concludes and finds that even if the three year statute of limitation in Arkansas was applicable to these proceeding, the statute is tolled when a party has concealed his wrongdoing.

Gibson v. Herring,

63 Ark.App. 155 , 975 S.W.2d 860, 862 (1998);

see also Stoltz v. Friday,

325 Ark. 399 , 926 S.W.2d 438 (1996). In the present proceedings before the Court, the Trustee either failed to disclose, or avoided disclosing, the overpayment of trustee’s fees until he filed a response on November 15, 1999. Therefore, the statute of limitation would not begin to run until November 15, 1999, the date of the disclosure by the Trustee of the overpayments of trustee’s fees, which is also the date Shaffer knew or had reason to know of the Trustee’s alleged wrongdoing.

Gibson,

975 S.W.2d at 862 ;

see also O’Mara v. Dykema,

328 Ark. 310 , 942 S.W.2d 854, 858 (1997);

Swink v. Ernst & Young,

322 Ark. 417 , 908 S.W.2d 660, 663 (1995). Bird has testified that discovering the overpayment of trustee’s fees in issue was difficult and tedious.

The Court also rejects the Trustee’s position that the doctrine of laches should be applied to Shaffer’s objections to the Trustee’s final reports. Laches is based on the legal theory that a party seeking relief may not do so if the party has unreasonably delayed seeking such relief to the detriment of the party’s adversary.

J.W. Reynolds Lumber Co. v. Smackover State Bank,

310 Ark. 342 , 836 S.W.2d 853, 856 (1992);

see also Briarwood Apts. v. Lieblong,

12 Ark.App. 94 , 671 S.W.2d 207 (1984). Again, there is a lack of evidence that Shaffer had knowledge of the Trustee’s overpayment of trustee’s fees until the Trustee filed a response on November 15, 1999, disclosing the overpayment. The Trustee decided to stop filing monthly operation reports in August of 1991, which, if reported accurately, would have reflected the amount of trustee’s fees that had been paid by the Debtor Corporations in these cases.

b.

Doctrine of latches issues relating to the Trustee’s July 29, 1999, motion for final approval of all professional fees; and Shaffer’s objections

Bird, as trustee, filed applications for allowance of legal fees and expenses on behalf of the Rose Law Firm, as counsel for the Trustee in the Debtor Corporations’ cases, beginning December 30, 1986, and going through December 24, 1997. No objections to these applications were filed by Shaffer. The Court entered orders approving twelve applications through January 23,1998.

On November 9, 1998, the Trustee filed his “Application For Allowance of Final Compensation and Expenses For Counsel For the Trustee.” The application sought unbilled legal fees and expenses for the Rose Law Firm as counsel for the Trustee in the amounts of $21,136.50 and $325.81, respectfully. Also, the application sought a legal fee enhancement of $50,000.00. The application was noticed by the Trustee to Larry Shaffer on November 9, 1998, at the following address: Larry D. Shaffer, 2704 American Street, Suite 3, Springdale, AR 72764. The notice provided that if no objections were filed by December 1, 1998, the Court may enter an order approving such application without a further hearing.

On December 8, 1998, the Court filed an order approving the November 9, 1998, application. On December 18, 1998, Shaffer filed a “Motion For New Trial or Alternatively to Alter or Amend Order Filed

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December 8,1998.” In his motion, Shaffer stated that the November 9, 1998, application and notice were not received by Shaffer until December 3, 1998. Attached to the pleading were the affidavits of Shaffer and Moldenhauer, and a Federal Express shipment slip that noted delivery of the November 9, 1998, application and notice to Shaffer on December 3, 1998. Shaffer requested a hearing on the application, and that the December 8, 1998, order be set aside.

On January 12, 1999, Bird and Shaffer filed a “Joint Stipulation.” The stipulation provided that the Rose Law Firm anticipated filing a renewed application for final allowance of all fees awarded to the firm during the pendency of the cases, including those fees sought in the pending application. In order to avoid duplicative litigation costs, the Trustee, the Rose Law Firm, and Shaffer stipulated and agreed that, (1) the law firm would file a renewed application for final allowance of fees and expenses awarded or requested in the case, including those covered by the pending application; (2) Shaffer would have the opportunity to review and object to all fees and expenses awarded or requested in the case, including those covered by the pending application, and despite his failure to timely object to any application for interim allowance thereof; (3) subject to the Court’s approval of the preceding stipulations, Shaffer’s motion would be withdrawn, and (4) also subject to the Court’s approval of the preceding stipulations, the hearing on Shaffer’s motion set for January 15, 1999, would be stricken. The parties requested the Court to enter its order approving the stipulations, and on January 14, 1999, the Court filed its order approving the January 12, 1999, joint stipulation.

On July 26, 1999, Bird, as trustee, signed a “Motion For Final Approval of All Professional Fees and Expenses,” which was subsequently filed on July 29, 1999. The motion sought legal fees in the amount of $589,633.41, and reimbursement of expenses in the amount of $57,682.42 for the Rose Law Firm as counsel for the Trustee, and payment of legal fees to other law firms in the amount of $86,871.94 as compensation for reasonable and necessary services rendered in the Debtor Corporations’ cases. On September 10, 1999, Shaffer filed his “Objection to Motion For Final Approval of All Professional Fees and Expenses.” On October 21, 1999, Shaffer filed his “Supplement to Objection to Motion For Final Approval of All Professional Fees and Expenses.”

As to the doctrine of laches asserted by the Trustee, the Court finds that the Trustee and Rose Law Firm expressly waived the doctrine by filing a joint stipulation on January 12,1999, and agreeing to permit Shaffer to have the opportunity to review and object to all fees and expenses awarded and requested in this case including the November 9, 1998, application, despite Shaffer’s previous failure to timely object to any application for interim fees. Shaffer is not barred from objecting to all of the Rose Law Finn’s applications for legal fees and expenses as counsel for the Trustee in the Debtor Corporations’ cases.

B.

Whether the Trustee breached his fiduciary duty of care in the administration of the Debtor Corporations’ estates, and, if so, what damayes resulted to the estates or to Shaffer as equity security holder of the estates

1.

Alleged delay in closiny the estates

a.

Positions of the parties

Shaffer maintains that beginning in 1992, the Trustee delayed closing the Debtor Corporations’ estates at substantial

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cost to the estates and the parties in interest, including Shaffer. He contends that the Trustee should have fully administered the consolidated case by no later than the end of 1995. Shaffer asserts that the Trustee should have paid out the last distribution to money order claimants pursuant to the confirmed plan, as amended, by mid-1993, and to non-money order claimants by as early as 1995.

The Trustee’s position is that he did not negligently delay the closing of the Debtor Corporations’ consolidated case. The Trustee submits that because the July 1992 amended plan required him to attempt to locate all money order claimants who had filed proofs of claims and pay their claims in full if funds were available, all of 1993 was consumed by processing the checks that were issued to claimants in 1992 and 1993. The Trustee also asserts that some delay he experienced in closing the case is attributable to computer and computer personnel problems he encountered in administering the case. The Trustee asserts that during the years 1994 and 1995, he continued to locate money order holders and make distributions, and that approximately 20,000 more checks were issued and processed during that time. During the latter part of 1995, the Trustee became convinced that there would be sufficient funds remaining after paying all the money order claimants to pay the unsecured creditors of the Debtor Corporations, so he began reviewing all of the unsecured creditors’ proof of claims that had been filed in the case. In 1996, the Trustee filed objections to numerous unsecured claims, including that of City National Bank, whose claim totaled $1,500,000.00. The years 1996 through 1998 were spent in extensive discovery and discovery disputes regarding the City National Bank claim. That claim was eventually settled for $500,000.00 through mediation, despite Shaffer’s objection to the settlement. The Trustee notes that he filed his final report in November 1998, after which, he asserts, Shaffer vastly expanded the issues in this litigation.

b.

Findings of fact

(1)

Findings of fact

— 1986

through 1990

Although Shaffer asserts that the Trustee’s delay in administering the Debtor Corporations’ estates occurred beginning in 1992, in order to resolve the issue of delay, an overview of the entire administration of the Debtor Corporations’ estates by the Trustee is necessary. A summary of the history of the case follows.

As stated above, the Debtor Corporations filed their chapter 11 petitions on August 1, 1986. With the filing of the bankruptcy petitions, the Debtor Corporations filed an emergency complaint for turnover naming as defendants over eight hundred agents who sold money orders for the Debtor Corporations. The emergency complaint sought turnover of blank money orders, money order imprint machines, proceeds from the sales of the Debtor Corporations’ money orders, and sales records of the money orders sold. The complaint alleged that those items were property of the Debtor Corporations’ estates pursuant to 11 U.S.C. § 541 (a) and subject to turnover under 11 U.S.C. § 542 . The complaint asserted that an emergency existed in that millions of dollars of blank money orders had been printed by the Debtor Corporations and delivered to the agent defendants, and that the potential for fraud was substantial if the blank money orders and the money order imprint machines were not immediately recovered. The sales records were necessary to determine the serial number of each outstanding money order and the amount for which each money order was sold. Only by utilizing the sale records could the Debtor

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Corporations identify money order purchasers, the potential claimants in the Debtor Corporations’ bankruptcy cases.

The Debtor Corporations requested an emergency hearing, which the Court granted. The hearing was held on August 5 and 6, 1986. Following the conclusion of the hearing, the Court issued a “Protective Order” requiring the agents to turn over to the Court and interplead into the pending bankruptcy cases the blank money orders, the imprint machines, the records of sales of money orders by agents, and the proceeds from the sales of money orders previously sold. The Court required that notice be given to all parties in interest in the pending cases and all parties who claimed ownership or an interest in the proceeds of the sales of money orders. The Court set a subsequent hearing on the merits of the issues raised in the complaint. Approximately one-half of the defendants did not comply with the turnover order. The Court issued an “Order to Show Cause” on August 27, 1986, and the Trustee eventually filed a second complaint in the matter on May 24, 1988. That amended complaint and the resultant judgments in favor of the Trustee against the agents are the subject of section III. B.2. of this opinion.

On August 1, 1986, the Debtor Corporations also filed a “Motion For Joint Administration” of their bankruptcy cases. The Court entered an order granting that motion on September 5, 1986. On August 5, 1986, the Debtor Corporations filed a “Motion For Appointment of Trustee” in the three cases. This Court entered an order on August 12, 1986, appointing Bird as the Trustee for the three Debtor Corporations. Until the appointment of the trustee, the Debtor Corporations remained in possession and control of the affairs of their estates as debtors-in-possession. Separate bank accounts were maintained for Gold, Northwest, and NWFX for the duration of the Debtor Corporations’ cases.

At the February 2000 hearing in this matter, Bird testified that he is a partner at the Rose Law Firm, where he has been employed for the past twenty-five years. He practices in the areas of commercial law, commercial litigation, banking, and bankruptcy. Through the years, he has appeared on numerous bankruptcy seminar panels and at meetings of the Arkansas Bar Association. He has been involved in several significant bankruptcy cases both within and outside the State of Arkansas. He is a member of the American College of Bankruptcy Lawyers, an organization that recognizes members of the bankruptcy bar who have bankruptcy experience and expertise and who contribute by writing and appearing at educational seminars.

Bird testified that he learned about the Debtor Corporations’ bankruptcy through the Arkansas Gazette newspaper and that he wrote the Court requesting that he be considered for appointment as trustee in the cases. Shortly after his appointment, Bird traveled to Fayetteville, Arkansas, where the Debtor Corporations’ offices were located. He spent the first couple of weeks orienting himself to the business operations of the Debtor Corporations.

Based upon his investigation of the Debtor Corporations’ business affairs, he concluded that the reason the Debtor Corporations had filed for bankruptcy protection was because the Arkansas State Securities Department had issued orders to the companies to cease and desist from further operations in the state. Bird testified that Shaffer requested he sue the State of Arkansas Securities Commissioner to set aside the cease and desist order. However, because the Debtor Corporations had already been shut down and “money orders were bouncing everywhere,” Bird ul

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timately decided there was no particular reason to engage the Arkansas State Securities Department. He determined that to do so would be expensive and would not lead to any asset he could liquidate and distribute to the holders of the money orders. Because the only purpose in pursuing such a cause of action would be to vindicate the officers of the Debtor Corporations, and there would be no financial value to the companies if he was successful, he decided not to pursue the litigation.

Bird testified that, initially, he gave some thought to whether a reorganization of the Debtor Corporations’ business was possible. He concluded that because of the animosity of the agents, the hostility of the money order purchasers, and the general reputation of the Debtor Corporations in the states in which they did business, a reorganization would be unsuccessful. He determined he could not sell the business because the Debtors Corporations’ business affairs were in disarray and there was no “good will” to sell.

Bird testified that at the early stages of the case, the Debtor Corporations were receiving hundreds of telephone calls per day from irate money order claimants who demanded immediate payment of the money orders they had purchased. During that period, he and his staff spent a lot of time answering those calls and trying to explain to the callers that immediate payment of their claims would not be possible.

Shaffer also insisted that Bird file a cause of action against City National Bank. Bird investigated the basis and facts for a claim against City National Bank and determined that a case against the bank would be difficult to prove. He considered how much of the estates’ assets would be consumed by the litigation and concluded that it would not be cost efficient to pursue the claim. Ultimately, he abandoned the claim to Shaffer.

Bird testified that in the process of administering the Debtor Corporations’ estates, he had to determine which of the employees of the Debtor Corporations he should retain and which employees were not needed. Bird did not retain Shaffer. Greg Moldenhauer, a financial officer of the Debtor Corporations, was astute as to the business operations. Bird retained him for some time, and he helped Bird become familiar with the operations of the business. Bird also retained the services of John Brown, who was head of the Debt- or Corporations’ computer operations.

Prior to their filing for bankruptcy protection, the Debtor Corporations’ volume of money orders being sold was overwhelming. The Debtor Corporations were utilizing a computer system manufactured by Data Point and referred to as the “Agent Money Master” to track the money orders. Brown was very knowledgeable about the computer operations of the business and appeared to be the only employee who could operate the Debtor Corporations’ entire computer system.

At the time Bird took over the business operations, the Debtor Corporations also employed dozens of individuals who did data entry; specifically, keying the money order entries into the computer system. Bird did not retain the services of those employees.

Bird generally described the Debtor Corporations’

money order

business during his testimony. The Debtor Corporations would mail blocks of the money order forms the Debtor Corporations had printed to agents. Each money order form consisted of two pages. The top page was the negotiable instrument, and attached to it was a copy referred to as the “reporting copy.” The money orders were sent out in blank to the agents. When an agent sold a money order to a customer, the agent

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would put the money order onto the imprint machine, turn the tumblers on the imprint machine to show the amount of the money order, and then move the bar of the imprint machine across the top of the money order so it would imprint the amount of the money order on the face of the money order form. At the same time, a carbon copy — the reporting copy — would be made. The agent would tear the top copy off and give it to the customer, who would pay the agent the imprinted amount plus a service charge. The customer would use the money order to pay a third party. The payee would endorse the money order and deposit it in the bank. The money order would move through the Federal Reserve System just like any other check. Ultimately, the money order would come back to the Debt- or Corporations’ bank accounts.

After the agent sold a money order, the agent would collect the reporting copies for a period of time, deduct a fee of anywhere between $0.25 and $0.50 per money order, and send the reporting copies back to the Debtor Corporations along with a check for the amount due to the Debtor Corporations.

Each of the money orders had a serial number on it. When the reporting copies came back to the Debtor Corporations, their employees would locate the serial number that had already been keyed into the computer system and key in the amount for which the money order had been sold. After the money order had been negotiated and cleared the bank, the bank would report to the Debtor Corporations the serial number and the face amount of the money order. The Debtor Corporations would match that information with the information in its computer system to verify the amount for which the money order had been sold, and to confirm that no one had subsequently altered that amount. Once that information was verified, and the person processing the money order determined that the agent had remitted the funds owing the Debtor Corporation, that money order would be set aside and the next one processed.

Bird determined that the purchasers of money orders were likely to be people of lower socioeconomic means. They were generally individuals who could not afford a checking account. They pm-chased money orders to pay their necessities in life such as rent, car payments, gas, utilities, and groceries. Bird prepared a special claims form, which was subsequently approved by the Court, to make it as simple as possible for potential money order claimants to prepare and file a claim. Notices were posted at the locations of the agents with which the Debtor Corporations did business, and proof of claim forms were left with the agents. Bird also advertised in newspapers in each location where agents sold the money orders, informing whomever had purchased a money order to get a proof of claim form and file a claim for their money order purchase.

In January of 1987, Bird filed his complaints for turnover naming as defendants Puerto Rico and all of the states that had required the Debtor Corporations to obtain bonds as a condition of doing business in their states and Puerto Rico. The bonds had been posted by the Debtor Corporations previously to serve as security for money order purchasers in the states and Puerto Rico. The Trustee contended that these bonds proceeds were property of the Debtor Corporations’ estates under 11 U.S.C. § 541 (a). The defendants contended that the bond proceeds were property of each state and Puerto Rico, to be held in trust for purchasers of money orders in each state and Puerto Rico. This Court determined that the bonds proceeds were not property of the Debtor Corporations’

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estates. The Trustee did not appeal this decision.

Subsequently, the Trustee, with Court approval, entered into agreements with the various states and Puerto Rico to administer all the money order claims against the Debtor Corporations that arose in each state and Puerto Rico. Through extended negotiations, the Trustee convinced the state and Puerto Rican officials that it would be impractical and costly for them to implement their own systems to administer the money order claims in their jurisdictions. The Trustee already had in place a computer system that identified by name each money order purchaser, the jurisdiction in which the purchaser lived, the serial number of the money order purchased, and the amount for which the money order was purchased. Bird testified that his settlement with the states and Puerto Rico resolved two critical problems: it eliminated any duplication of claims, and allowed him to have control over the administration of all of the money order claims. This resulted in his not having to wait for the states and Puerto Rico to develop a claims system to pay money order claimants, which, Bird testified, would have taken an inordinate amount of time.

In summary, under the terms of the agreement between the Trustee and the various states and Puerto Rico, the following would occur: (1) the states and Puerto Rico would turn over the bond proceeds and any other collateral pledged as security to the Trustee; (2) the Trustee would set up a separate bank account for each state and Puerto Rico and would use the bond proceeds and security pledged in each state or Puerto Rico to pay the money order purchaser claimants from those states or Puerto Rico; (3) Bird would charge each state or Puerto Rico, on an individual basis, generally, a three percent (3%) commission for administering and paying the claim filed in the Debtor Corporations’ bankruptcy case; (4) Bird would utilize his experience as trustee and the facilities and equipment of the Debtor Corporations to administer the claims; and (5) in return, the Debtor Corporations’ estates would receive all of the unused funds from the bond proceeds or collateral pledged as security to pay other money order claimants in the Debtor Corporations’ estates.

Bird testified that based on the negotiated agreements, he brought approximately an additional $1,200,000.00 into the Debtor Corporations’ estate to pay creditors. Had this not occurred, Bird testified, there would have been no money available to pay unsecured creditors or Shaffer. Based upon the negotiated agreements, this Court entered an order extending the deadline for filing proof of claims until February 15, 1997. Ultimately, over 60,-000 proofs of claims were filed in the case.

On June 15, 1988, Bird filed a “Plan of Reorganization Submitted by the Trustee” [the Plan] in the consolidated case. He testified that he never thought that there would be a 100% payout, because, even if the Debtor Corporations had been solvent at the time of bankruptcy, the cost of administration and other expenses would have eaten into the funds available to pay money order claimants, leaving little or nothing for unsecured creditors and Shaffer. As reflected in the June 1988 plan, Bird believed that the money order purchasers claims should be paid ahead of the claims of other unsecured creditors. No objections to the Plan were filed on this ground.

The relevant portions of the Plan are set forth below:

I.

DEFINITIONS

1.1 “Agent” shall mean an entity of any nature which sold money orders issued

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by one of the Debtors and shall include all subagents.

1.2 “Claim” shall mean a duly listed or timely filed claim which is allowed and ordered paid by the Court pursuant to Section 502 of the Code.

1.8 “Creditors” shall mean all creditors of the Debtors holding claims for unsecured debts, liabilities, demands or claims of any character whatsoever.

1.9 “Debtors” shall mean collectively, Northwest Financial Express, Inc., NWFX, Inc. and Gold Financial Express, Inc.

1.10 “Distribution Account” shall mean the account authorized by the Court to actually disburse funds at UNB.

1.12 “Equity Security Claim” means a claim of an equity security holder as that term is defined in § 101(16) of the Code.

1.13 “Gold Account” shall mean that account at UNB, which shall include all Gold Funds, less the Costs of Administration and Costs of Distribution.

1.15 “Money Order Claim” shall mean a claim based upon liability of one of the Debtors arising from the purchase of a money order issued by one of the Debtors and the subsequent nonpayment of the instrument. This definition also covers assignees by the original purchasers of money orders. Inserting the name of the state before this term shall mean that the claimant purchased the money order from an agent located and authorized to do business in that state, i.e., “Michigan Money Order Claim” shall mean a claim based upon the sale of a money order from an agent in Michigan.

1.16 “Northwest Account” shall mean that account at UNB, which shall contain Puerto Rico Funds, and shall also include all funds located at Banco Popular in San Juan, Puerto Rico, and collected by U.S. Marshals in Puerto Rico, and less Costs of Administration and Costs of Distribution.

1.17 “NWFX Account” shall mean that account at UNB, which shall include all NWFX Funds, less the Costs of Administration and Costs of Distribution.

1.18 “NWFX Funds” shall mean all funds collected or to be collected from Agents located and authorized to do business in all states other than Puerto Rico, Louisiana, Mississippi and Alabama, which represents the proceeds from sale of money orders.

1.19 “NWFX Money Order Claim,” “Northwest Money Order Claim,” and “Gold Money Order Claim” shall mean a Money Order Claim based upon money orders sold by Agents located and authorized to do business in the following states:

Gold: Louisiana, Mississippi and Alabama

Northwest: Puerto Rico

NWFX: All other Money Order Claims

(Savings

&

Checking)

1.20 “Operating Account” shall mean those accounts at UNB, which the Trustee has established and has been paying the on going expenses of the estate (Nos. 17-4196-00-06 and 78-882-731), and which shall be used to pay all claims in class I and all Costs of Administration and Costs of Distribution. All funds received by the estates of the Debtors which are not from agents who were actively selling money orders within a month of August 1, 1986, shall be credited to this account.

1.22 “Priority Claim” shall mean all claims entitled to a priority pursuant to Section 507 of the Bankruptcy Code.

1.23 “Puerto Rico Funds” shall mean all funds collected or to be collected from agents located and authorized to do business in Puerto Rico which represents the proceeds from the sale of money orders.

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1.24 “Secured Claim” shall mean a claim secured by a lien, security interest or other encumbrance which has been properly perfected as required by law with respect to property of one of the Debtors, up to the value of property in which the claimant had a security interest.

1.25 “Segregated Fund Accounts” shall mean jointly the Northwest Account, Gold Account and NWFX Account.

1.26 “State Indemnity Fund” shall mean the amount of indemnity provided by one of the Debtors in each state in the form of cash or negotiable securities and indemnity bonds issued by Travelers Indemnity Company (or in Puerto Rico, by the Puerto Rican — American Insurance Company), plus interest earned on such amount since the filing of the petition by the Debtors. In the event no interest has been earned on such amounts, then interest at the rate of 6% per annum since August 1, 1986, shall be imputed in determining such amount.

1.27 “UNB” shall mean Union National Bank of Little Rock, Arkansas.

1.28 “Unsecured Claim” shall mean a claim against one of the Debtors other than Secured, Priority, and Money Order Claims.

The original principal amounts of the indemnity are as follows:

Security Pledge State Indemnity Bond

Alabama $ 10,000 -0-

Arkansas $175,000 $ 75,000

Kansas $200,000 -0-

Michigan -0-$100,000

Louisiana $ 50,000 -0-

Mississippi $ 25,000 -0-

Ohio $130,000 -0-

Oklahoma $175,000 $ 75,000

Tennessee -0-$250,000

Texas -0-$250,000

Puerto Rico -0-$105,000

II.

CLASSIFICATION OF CLAIMS

2.1 Class I. — Claims entitled to a priority pursuant to Section 507 of the Bankruptcy Code as the same are allowed, approved and ordered paid by the Court. Claims in this class, not paid in the ordinary course of business, shall be paid from the Operating Accounts of the Trustee. In the event the Operating Accounts are insufficient to pay such claims, each Segregated Funds Account shall be charged a pro-rata amount to fund all such claims in this class, plus an amount equal to the Cost of Disbursement allocated to that Debtor.

2.2 Class II. — Secured Claims, excluding all tax liens and judgment liens, up to the value of the collateral in which the claimant has or had a security interest.

2.3 Class III. — All NWFX Money Order Claimants except Michigan Money Order Claimants and Oklahoma Money Order Claimants.

2.4 Class IV. — All Northwest Money Order Claimants.

2.5 Class V. — All Gold Money Order Claimants.

2.6 Class VI. — All Michigan Money Order Claimants.

2.7 Class VII. — All Oklahoma Money Order Claimants.

2.8 Class VIII. — All Unsecured Claims.

2.9 Class IX. — All Equity Security Claims.

IV.

TREATMENT OF CLASSES THAT ARE IMPAIRED UNDER THE PLAN

4.1 Class II — (Secured Creditors) shall be paid the value of the Secured Claim from the Operating Accounts.

4.2 Class III — (NWFX Money Order Claimants) shall be paid pro-rata from, and only from, the NWFX Account.

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4.3 Class IV — (Northwest Money Order Claimants) These claims shall be paid pro-rata from, and only from, the Northwest Account.

4.4 Class V — (Gold Money Order Claimants) These claims shall be paid pro-rata from, and only from, the Gold Account.

4.5 Class VI — (Michigan Money Order Claimants) shall be paid pro-rata from, and only from, the NWFX Account, on the same basis as Class III Claims; provided, however, that the pro-rata share will be calculated as if each Claimant had already received a pro-rata share of the Michigan State Indemnity Fund, and each such Claim shall be reduced by that pro-rata share before calculating the share of the NWFX Account.

4.6 Class VII — (Oklahoma Money Order Claimants) shall be paid pro-rata from, and only from, the NWFX Account, on the same basis as Class III Claims; provided, however, that the pro-rata share shall be calculated as if each claimant had already received a pro-rata share of the Oklahoma State Indemnity Fund, and such Claim shall be reduced by the pro-rata share before the calculating the share of the NWFX Account.

4.7 Class VIII — (Unsecured Creditors) shall be paid only from the Operating Accounts, and then only after all claims in Classes I & II are paid in full. Such claims shall be paid pro-rata from such funds as are available for such payment.

4.8 Class IX — (Equity Security Claims) shall be paid pro-rata from funds remaining on hand with the Trustee after all claims in all other Classes have been paid in full.

V.

MEANS FOR EXECUTION OF THE PLAN

5.1 The execution of the Plan will be accomplished by determining the pro-rata share each claim bears to the appropriate account and pay that portion of the claim. The pro-rata calculation will be performed by dividing the balance of the Segregated Funds Account by the Money Order Claims in the appropriate Class and obtaining a percentage. The percentage would then be multiplied times the claim amount, and the result paid on that Claim (not to exceed 100%). For example, the total of all NWFX Money Order Claims as allowed will be divided into the NWFX Account to determine a percentage. That percentage figure (not to exceed 100%) will then be multiplied times the amount of the Money Order Claim and the resulting dollar figure paid. A pro-rata share of the necessary Costs of Administration and Costs of Distribution will be subtracted from the Segregated Funds Account before the pro-rata calculation is performed. In the event all claims are paid from a Segregated Funds Account in full, the balance shall be split evenly between the other of the Segregated Funds Accounts remaining with payment of less than 100%, or deposited in a single remaining such Account. All funds, in Segregated Funds Accounts shall be transferred to the Distribution Account for the purposes of actual disbursement to the claimant.

5.2 The Money Order Claims from each state shall be reduced by the amount actually distributed from that stated State Indemnity Fund to that Claimant if distribution of at least eighty-five percent (85%) of the total State Indemnity Fund has occurred or the Claimants’ pro-rata share of the amount set aside to be distributed, but not less than 85% of such State Indemnity Fund. If no such distribution of the State Indemnity Fund has occurred then such claim shall be reduced by the

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Claimant’s pro-rata share of the State Indemnity Fund calculated as stated above in paragraph 1.26.

VI.

UNCLAIMED FUNDS

Any check issued to a claimant not paid at UNB within ninety days of its issuance, shall have a stop payment order entered by the Trustee. The Trustee shall make reasonable efforts to determine the current address of claimants where checks are returned by the post office, and mail new checks to such new addresses as he is able to locate. All funds not disbursed because of stopped checks shall be held by the Trustee for a period of one hundred eighty days after such stopped payment. During that one hundred eighty day period the Trustee may issue replacement checks to claimants who are located during that time. All unclaimed funds in the Distribution Account after all checks are stopped on that account shall be transferred by the Trustee to the Operating Accounts and be available for payment of additional Administrative Claims upon order of the Court. All funds in the Operating Account after payment of all Administrative Claims shall be paid into the Court and disposed of under Chapter 129 of Title 28 ( 28 U.S.C. § 2041 , et seq.).

Carl’s Grocery Company, Northwest National Bank, and the Commissioner of Financial Institutions of Puerto Rico filed objections to the Plan. Those objections were subsequently resolved. Shaffer did not file any objections to the Plan. The Court entered an “Order Confirming Plan” on October 17,1988.

(2)

Findings of fact

— 1991

through 1998

On June 26, 1991, the Trustee filed a “Motion to Amend Plan.” Notably, Section VI. of the original plan, which required that “unclaimed funds” be paid over to the clerk of the bankruptcy court, was eliminated in the amended plan. Instead, the amended plan contained the following provisions:

6.1 After all initial distribution checks issued by the Trustee have become stale (issued for more than 90 days), the Trustee shall repeat the distribution described in Article V. above by using the funds remaining on hand to make a second distribution to those claimants who negotiated their initial distribution cheeks. The claims of those claimants to whom checks were sent, but failed to negotiate the checks within the 90 days of the date of the check, shall be ignored for purposes of the second distribution calculations. The second distribution shall be made by using the same means described in Article V, but the calculations shall be made ignoring the claims of those claimants who failed to negotiate the initial distribution checks. In the event it is necessary, the Trustee shall make additional distributions using the same method of calculation as described above, until all funds in an account are fully distributed or all claims against that account are paid in full.

6.2 In the event all of the NWFX Money Order Claims, the Northwest Money Order Claims or the Gold Money Order Claims shall be paid in full from the corresponding Account, then the funds remaining in that account shall be divided pro rata among the other accounts based on the pending unpaid claims in the other accounts.

The Trustee served a “Notice of Motion to Amend Plan of Reorganization” on all claimants on August 2, 1991. Objections were due on August 23, 1991. The Commissioner of Financial Institutions of Puer-to Rico filed an objection to the amended plan on August 22, 1992, that was subse

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quently withdrawn. Shaffer did not file an objection to the amended plan. The Court entered its order granting the trustee’s motion to amend the plan on July 27,1992.

Bird testified that he amended the original plan to change the method of' distribution to money order claimants. Under the original plan there would be only one distribution to money order claimants. The proceeds of checks not cashed by money order claimants would be turned over to the clerk of the bankruptcy court, held for five years, and then escheat to the federal government. In contrast, under the amended plan, there would be a series, or “waves,” of distributions to money order claimants until all money order claimants who could be found were paid one hundred percent of their claims. In other words, if the first distribution paid only a certain percentage of a claimant’s total claim, as funds became available, ■ another distribution would be made to pay a higher percentage of the claim. Theoretically, as funds continued to become available, subsequent distributions would be made until each money order claim was paid in full. The funds necessary for subsequent distributions would come from checks that had been mailed to money order claimants but had not cleared the bank because the claimants could not be located. The intended result was that additional money would be distributed to the money order claimants who could be located.

Bird testified that distributions were made in the order called for under the amended plan. First, the bond proceeds were paid to claimants in those states in which the Debtor Corporations had posted bonds. After the bond proceeds were paid, Bird began the process of distributing the funds remaining in the Debtors Corporations’ estates. Shaffer’s exhibit 19, entitled “In re NWFX et al Check Database Checks issued by Year,” reflects that 41,938 checks, totaling $5,134,85.00, were issued during 1992 and early January 1993. Bird deferred to Scharmberg, his administrative assistant, for an exact description of the check processing procedures. However, he provided a general explanation regarding what was involved in processing and accounting for the checks issued during that period. Scharmberg’s testimony regarding the distribution process closely mirrored that of Bird.

Bird testified that Scharmberg was responsible for the day to day administration of the Debtor Corporations’ estates. She was in charge of bookkeeping, data entry, and handling claims filed in the Debtor Corporations’ cases. Scharmberg testified that during 1992 and early January 1993 there were large waves of distributions made to individuals who had purchased money orders and filed proofs of claims. In 1992, 5245 checks were mailed on January 25; 9275 on October 5; 3883 on October 14; and 19,118 on December 12. Most of the checks that were mailed out were computer generated checks. However, on some days she issued checks by hand. Scharmberg testified that, as to the computer generated checks, Brown did the computer programming that enabled the checks to be printed. Brown printed the checks, worked on imprinting the Trustee’s signature on the checks, and put the checks through the burster and decollating machine. After that was accomplished, Scharmberg would separate the checks by zip code. The checks were sorted by the first three numbers of the zip code, bundled together, and taken to the post office to mail. Scharmberg testified that sometimes the printing machine would malfunction and the checks in the machine would have be to taken from the machine and reissued by hand. She then had to manually change the information in the computer system.

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After the first wave of distributions, the checks came back in one of two forms— either they had cleared the bank, or they were returned because the claimant was not found at the address to which the check was sent. Scharmberg organized checks that cleared the bank in numerical order. She would reconcile the check against the bank statement and, if there were any corrections to be made based upon her review of the cleared checks and bank statements, she would call the bank to have the corrections made. All the cleared checks would then be filed.

Bird testified, and Shaffer’s exhibit 19 reflects, that out of the 41,938 checks issued in 1992 and between January 1 and 4, 1993, 14,830 checks did not clear the bank. The amount of those checks totaled $1,555,277.00. Bird testified that all of 1993 was consumed with processing and accounting for these checks. Scharmberg testified that as to the checks returned unclaimed, she had to open the envelopes and sort the checks by number. If a check was returned with a forwarding address, Scharmberg would mail the checks to the forwarding address and enter the new information into the computer check data base.

After the distribution in 1992 and early January 1993, the Trustee received numerous phone calls daily. Most claimants did not understand the distribution procedure or why they had received only a portion of their claim. Bird and Scharmberg were required to give explanations to hundreds of people about the distribution process and the payment of their claims. Scharm-berg testified that when she received a telephone call, the first thing she would do was bring the caller’s claim up on the computer and determine the status of the claim. Next, she would determine whether the check to which the caller was referring had cleared the bank or had been returned by the post office. She would then explain to the caller what happened and deal with the problem. If the address was incorrect and the check had not cleared the bank, she would reissue a check, change the information in the computer, and send the check and a letter of explanation to the caller. If the check had cleared the bank, she would make a copy of the front and back of the check and send it with a letter of explanation to the caller so he or she could see who had endorsed the check.

Bird testified that the checks issued by the Trustee were stamped with a notation that stated they were not valid after 90 days. However, Union National Bank, the bank upon which the checks were drawn, did not recognize the notation that the checks were void after the 90 day period. The bank’s position was that the responsibility was either on the maker or the payee of the check to determine if the check was void after 90 days. Bird testified that the bank was going to charge a per item fee of approximately $20.00 to stop payment on a check. Therefore, it was impractical to stop payment on checks that had already been issued. Bird testified that he never refused to honor a check, regardless of when a money order claimant sought to cash it, because the intent of the amended plan was to pay every money order claimant in full. Bird testified that 1993 was consumed by processing over 41,000 checks, more than 14,000 of which had not cleared the bank and triggered a subsequent distribution under the amended plan.

Bird testified that another problem he encountered after the major distribution in 1992 and early January 1993 was that Brown, the Debtor Corporations’ computer expert, quit. Brown was the only individual who possessed the expertise and experience to make the computer system work.

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The Debtor Corporations’ computer operations were dependant on Brown running the system. No one else understood and knew how to make the system work completely. Scharmberg testified that even if Brown had not left the employment of the trustee, and the computer software had continued to operate as it had in the past, it would have taken her, the Trustee, and the rest of the NWFX staff, at least a year after December 1992 to issue the next series of computer generated checks.

On May 13, 1993, Bird wrote the Court regarding the progress of the distribution process. An attachment to the letter stated, “As of May, 1993,

every claimant

who could be found had been paid 100% of their claim, with the exception of claimants in Texas, Michigan, and Tennessee who have been paid 87% to date, with the anticipation that the final distribution will equal approximately 97%.” Shaffer’s Ex. 92.

In 1993, in order to avoid dependancy on a single computer employee, Bird decided to convert to a computer system that was standard in the marketplace. The estates had previously used a database system called Sun DB Sys. Bird hired Kim Kanak-is to convert the Sun DB Sys data to the Paradox data base, and to assist with check processing. During 1993 and early 1994, Kanakis was able to perform and accomplish some of the tasks such as processing the checks and making reports to Bird. However, according to Bird and Scharmberg, Kanakis was never able to accomplish a complete conversion to the Paradox system.

From November 1993 to November 1994, Bird resided in Washington D.C., where he had opened a branch office of the Rose Law Firm. He testified that he kept abreast of the Debtor Corporations’ operations while in D.C., and that he was in contact with Scharmberg and talked to her during the week. No significant litigation occurred in the cases during the time Bird was in Washington D.C.

In 1994, Bird terminated Kanakis’s employment and hired Joe Patterson. Patterson had been identified by a Paradox user’s group as someone in central Arkansas who was familiar with the Paradox system and could do computer programming. Bird testified that Patterson did good work, but was not capable of fully implementing the Paradox System. Subsequently, at the first of 1995, Bird hired Personalized Computing. Personalized Computing had expertise with Paradox and accomplished the job of fully converting to the Paradox system and finishing the processing of the large distribution of checks made in 1995. Shaffer’s exhibit 19 reflects that 21,772 checks were issued in 1995, totaling $610,580.00. Of those checks, 15,454 cleared, totaling $460,694.00, and 6,318 did not clear, totaling $149,886.00.

Bird testified that making distributions of 21,000 checks to money order claimants in 1995 was a major undertaking. Scharmberg was the only employee handling and accounting for the distributions. The process was complicated by the fact that the signature machine was not working at the time and the burster and decol-later were mutilating checks. Scharmberg was required to manually stamp the Trustee’s signature on each check. She then folded each check by hand and separated the checks from each other. After the checks were issued, Scharmberg was required to go through the cleared and uncleared checks and account for them on the Debtor Corporations’ books and records.

After processing the checks distributed in 1995, Bird and Scharmberg began reviewing the unsecured claims. Bird testified that he did not take up the unsecured claims until the processing of the money

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order claims was complete and he knew how much money would be available for unsecured creditors. After 1995, Scharm-berg processed the checks by herself. In the latter part of 1995 and during 1996, she worked on reviewing the unsecured claims and handled inquiries regarding the 1995 distribution. She also continued to handle distributions made in 1997 and 1998 for the estates, and assisted in the preparation of the November 1998 final report.

In July 1996, Bird began filing objections to unsecured claims. He objected to approximately 80 unsecured claims. In October 1996, Bird filed an objection to City National Bank’s claim of $1,500,000.00. Substantial discovery took place in the litigation with City National Bank over a two year period. In November 1998, the claim was finally settled for $500,0000 through mediation. Shaffer objected to the settlement. The Court held a hearing on the Shaffer’s objection, and ultimately approved the settlement. Shaffer attempted to appeal the Court’s decision, but failed to perfect his appeal. The order dismissing Shaffer’s objection to the settlement was filed on November 12, 1998.

Bird filed a “Chapter 11 Final Report and Account and Application For Final Decree” on November 9, 1998. Shaffer filed a general objection to the November 9, 1998, final report on December 18, 1998.

4

The Trustee called James Dowden and qualified him as an expert witness. Dow-den is with the law firm of Grobmeyer, Ramsey, and Ross, and has served as a law clerk for United States Bankruptcy Judges Charles Baker and James G. Mix-on. He has been in the private practice of law since 1985, and seventy-five to eighty percent of his practice has been in the area of bankruptcy. He has been a panel trustee since 1985 and has served as trustee in excess of 10,000 cases. Further, he has represented most of the trustees in the State of Arkansas as their attorney in bankruptcy cases.

The Trustee also called Thomas E. Robertson and qualified him as an expert witness. Robertson is the senior partner in Robertson, Beasley, Cowan and Ketchum. He started practicing law in 1969, and has served as a panel trustee since 1979. Over one half of his practice has been in the area of bankruptcy.

Dowden and Robertson are both panel trustees in Arkansas. Dowden is presently serving as trustee in a chapter 7 case that was filed in 1990. Robertson is presently serving as trustee in a chapter 7 case that was filed in 1985. Both witnesses acknowledged that the circumstances surrounding each case would determine the length of time the case would remain open.

Shaffer called David R. Payne as an expert witness in support of his position that the trustee was negligent in delaying the closing of the Debtor Corporations’ estates. Payne testified that he is a certified public accountant, and that he, or members of his firm under his supervision, have served as a professional for chapter 11 trustees in more than 30 cases. Additionally, Payne has served as a chapter 11 trustee in five cases. Payne was employed

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by Shaffer in early October 1999 to review the Trustee’s final reports and accounts in the Debtor Corporations’ cases, and to formulate opinions and conclusions as the issues Shaffer raised in this litigation. The Court received into evidence at the February 1999 hearing, Shaffer’s exhibit 5, “Actual and Projected Reasonable Timeline.” Payne testified that this exhibit reflected the reasonable period of time in which the Trustee should have administered and closed the Debtor Corporations’ cases.

Shaffer’s exhibit 5 provides:

ACTUAL AND PROJECTED REASONABLE TIMELINE

Actual Timeline

06/26/92 to Motion of Trustee for allowance of Trustee’s Fee and Authorization for payment of legal fees held back.

07/27/92 Order granting Motion of Trustee for allowance of Trustee’s Fee and Authorization for payment of legal fees held back.

09/8/92 Letter from Trustee to Judge asking to reduce bond due to Trustee was “... in the process of distributing all of the proceeds” and “... the fact that within the next 30 days, checks will be mailed equaling almost the total amount in the estate.

Projected Reasonable Timeline

04/30/1993 Reconcile bank statements to determine checks not cleared; determine to 05/30/93 100% payments would be made to money order creditors pursuant to plan and determine distribution available to holders of unsecured claims.

06/30/93 File motion/adversary to determine City National Claim and object to other unsecured claims as appropriate.

03/01/95 Resolve objection to City National Bank Claim and other unsecured claims.

12/31/95 Prepare final distributions, write checks, reconcile accounts, prepare Final Report, Final Tax Returns and close case.

Payne explained that he prepared Shaffer’s exhibit 5 based upon his analysis of actual events that occurred in 1992. On September 8, 1992, the Trustee sent a letter to the Court requesting a reduction in the amount of his bond. He advised the Court that he was in the process of distributing all the proceeds of the Debtor Corporations’ estate, and within the next 30 days checks would be mailed equaling almost the total amount in the Debtor Corporations’ cases. Payne used the September 8, 1992, letter as a starting point to project a reasonable time within which the Trustee should have addressed the remaining issues in the Debtor Corporations’ cases and closed the estates.

According to Payne, based on the Trustee’s records (data from Quicken data processing records), in June of 1993 there was $1,724,000.00 cash in the Debtor Corporations’ checking accounts with which to pay claims. The Trustee could have determined that there were funds available as of that date to pay unsecured creditor. Shaffer believes the Trustee was negligent in not starting a review of the unsecured claims in June 1993. Instead, the Trustee waited until after all the money order claimants were paid 100% in 1995 before

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starting to administer the unsecured claims of the Debtor Corporations. There was no provisions in the amended plan requiring all unsecured creditors to be paid 100% before starting to administer the unsecured claims.

Payne testified that the Debtor Corporations’ estates were top heavy with expenses as compared to income after 1994. The expenses substantially exceeded the income the longer the cases were delayed. According to Shaffer’s exhibit 16, “In re NWFX et al — Receipts and Disbursements — June 1, 1993 through July 26, 1998,” total income for this period of time was $740,956.71 and total expenses were $1,350,023.84, for a negative net income of $609,067.13. Payne also questioned whether the full time employment of Penny Scharmberg was justified after the major distribution in 1992 and early 1993. Payne testified that Shaffer, as the equity security holder in the Debtor Corporations’ cases, is entitled to lost opportunity costs based on the Trustee’s failure to close the Debtors corporations cases by the end of 1995.

c.

Conclusions of law

According to the Eighth Circuit Court of Appeals, a trustee has a fiduciary duty to act in the best interest of the creditors, as well as the shareholders, of a debtor corporation.

Stockholders’ Protective Comm. for Moulded Prods., Inc. v. Barry (In re Moulded Prods., Inc.),

474 F.2d 220, 224 (8th Cir.1973);

see also In re L & S Indus., Inc.,

989 F.2d 929 (7th Cir.1993);

Hansen, Jones & Leta, P.C. v. Segal,

220 B.R. 434, 450 (D.Utah 1998) (citing

Commodity Futures Trading Comm’n v. Weintraub,

471 U.S. 343, 355 , 105 S.Ct. 1986 , 85 L.Ed.2d 372 (1985)). The trustee has an absolute obligation to act in the best interest of the estate at all times.

Mosser v. Harrow,

341 U.S. 267 , 71 S.Ct. 680 , 95 L.Ed. 927 (1951). However, a trustee is not responsible for mistakes in the exercise of his or her judgment where the judgment was discretionary and reasonable under the circumstances.

Id.

at 272 , 71 S.Ct. 680 .

Negligence is the failure to do something that a reasonably careful person would do. A negligent act arises from a situation where a ordinarily prudent person in the same situation would foresee such appreciable risk of harm to others that he would not act, or at least would act in a more careful manner.

Mason v. Jackson,

323 Ark. 252 , 914 S.W.2d 728, 730 (1996);

see also Dancy v. Hyster Co.,

127 F.3d 649, 654 (8th Cir.1997).

In resolving whether the Trustee improperly or negligently delayed the closing of the Debtor Corporations’ estate, the Court will consider the circumstances of the administration of the estates, and whether the Trustee handled the administration of the estates within a reasonable time commensurate with the complexity of the administration and the nature of the tasks to be performed. For this issue, counsel for the Trustee called Bird and Scharmberg as witnesses, and Dowden and Robertson as expert witnesses. Counsel for Shaffer called Payne as his expert witness as to this issue. Numerous exhibits were received into evidence, and the Court has considered all of the exhibits and the testimony of the witnesses. As a result, the Court makes the following findings and conclusions.

The Debtor Corporations’ money order business required detailed administration of the sales, processing, and accounting for thousands of money orders that it sold daily while in business. The nature of its business operations required the use of a competent computer system. When the Trustee was appointed, the Debtor Corporations’ operations were in disarray, and

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money orders were not being honored. The Trustee had no prior experience in the money order business. He educated himself as quickly as possible regarding the business affairs of the companies with the help of Moldenhauer, who the Trustee retained on payroll for several weeks. He also hired Scharmberg as his administrative assistant, and retained Brown for computer assistance.

During 1986, the Trustee moved the Debtors business operations from Fayette-ville to Little Rock, scaled back the number of employees, and developed a system for identifying the purchasers of money orders. Over 60,000 proofs of claims were filed after 1986, accompanied by more than 100,000 money orders to be processed by the, Trustee in the administration of the Debtor Corporations’ cases.

The Trustee filed his Plan of Reorganization (liquidation) for the Debtor Corporations on June 15, 1988. The plan was based on the administrative consolidation of the three Debtor Corporations, but not on the substantive consolidation of their respective business affairs. This was rather sophisticated, requiring a segregated account for each Debtor Corporations’ estate and detailed processing and accounting for all funds received and distributed through each account. Also, individual accounts were set up for each state and Puerto Rico so that state bond proceeds could be processed through the Debtor Corporations’ plan. The proceeds were to be accounted for, and then paid first to the respective claimants in each state and Puerto Rico, then, if there were additional proceeds, to other money order claimants under the plan. The plan only called for one distribution to money order claimants, who were given priority over other unsecured creditors. The intent of the plan was to pay all the money order purchasers’ claims in full after the payment of administrative claims. At the time the plan was filed, the Trustee did not believe there would be enough money to pay the money order purchasers in full because of the administrative claims that had to be paid first.

On June 26, 1991, the Trustee filed his motion to amend the plan. In the amended plan, the Trustee proposed making a series of distributions to the money order purchasers until all claims were paid in full, assuming there were sufficient funds to pay all claims. The Court entered its order granting the Trustee’s motion to amend the plan on July 27, 1992. No substantial distributions had been made to money order claimants prior to the amended plan.

In short, the administration of the Debt- or Corporations’ plan and amended plan was very complex, requiring extremely detailed job tasks to be performed, recorded, and verified as to accuracy. The issue regarding the alleged delay in closing the estates is one of credibility. Shaffer contends that the Trustee was negligent because the Debtor Corporations’ estates should have been closed by the end of 1995. The Trustee contends that the administration of the Debtor Corporations’ estates required numerous jobs to be performed, and the Trustee performed these jobs in a reasonable period of time under the circumstances. The Court will briefly revisit Payne’s testimony on why he believes the Trustee was negligent in failing to close the Debtor Corporations’ estates in a timely manner, and Bird’s and Scharmberg’s testimony on why the length of time to administer the estates was justified and necessary. The Court will then make its credibility findings and conclusions as to this issue.

Shaffer’s counsel called Payne as an expert witness. Payne possesses exceptional qualifications as an expert witness in trust

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ee matters and case administration, and was an impressive witness. He testified that it was his opinion that Bird was negligent by delaying the closing of the Debtor Corporations’ cases. He believed that (1) the Trustee should have fully administered this case by the end of 1995, (2) the Trustee should have paid out the final distribution to money order claimants pursuant to the amended plan by mid-1993, and to non-money order claimants by early 1995, and (3) the bankruptcy estate not only had the capacity to process and mail thousands of checks per day to claimants, it did so. In summary, Payne testified that he prepared the timetable used at trial

5

based upon a letter the Trustee wrote the Court on September 8, 1992, requesting a reduction in his bond. The Trustee stated in the letter that within the next thirty days, checks would be mailed equaling almost the total amount of the estate. He requested the Court reduce the bond fee to $100,000.00 to reduce the costs of the bond premium. He testified that he used that date as a starting point to project a reasonable time within which the Trustee could address the remaining issues in the Debtor Corporations’ consolidated case.

Payne testified that the first series of distributions were made in December 1992 and early January 1993. According to Payne, there was a period of over 90 days during which time the Trustee could have contacted the bank to determine which checks had been honored by the bank, and which checks were still outstanding. This would have allowed the Trustee to have known by June of 1993 that there were sufficient funds on hand to pay the remaining money order claimants and unsecured creditors. Payne also stated that the Trustee could have filed objections to the claim of City National Bank and other unsecured creditors as early as June of 1993 and, assuming it would take 20 months to resolve those claims, could have been completed by March 1, 1995. Then, the preparation of the final distributions, check writing, account reconciliation, preparation of final reports, preparation of final tax returns, and closing of the estates could have been accomplished by the end of 1995.

Payne testified that in May 1993, money order claimants had been paid 87% of their claims. In December 1993, there was $1,724,000.00 cash on hand in the Debtor Corporations’ bank accounts available for distribution. If all the checks that had been written to money order claimants cleared the bank, there would have been money available to pay unsecured creditors in 1993. Because of this, the Trustee was negligent in not beginning to administer the unsecured claims in 1993. Further, the Trustee had moved to Washington D.C. and was working in the Rose Law Firm office there during 1994. The docket sheet reflected little activity during 1994. Payne testified that in his opinion Scharm-berg was not needed as a full time employee, especially after 1995, because there were no major distributions remaining. He believed that a part-time bookkeeper could have been hired to perform the remaining work.

Bird testified that all of 1993 was spent handling and processing the 41,498 checks that were issued and mailed out in 1992, 14,619 of which were not presented for payment at the bank. He said that Scharmberg handled and processed the money order checks that were issued. He testified the intent of the amended plan was to pay every money order claimant who could be located in full, and by May 1993 not all of the claimants had been paid in full. In 1995, a second , large distribu

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tion was made consisting of 21,772 checks in the amount of $610,580.00. Of those checks, 15,454 were presented to the bank and cleared, and 6318 were not presented. Bird testified that he carried out the intent of the plan and amended plan, and had a fiduciary duty to do that first while administrating the Debtor Corporations’ estates. He testified that while he was in Washington D.C., he was in daily contact with Scharmberg and continued to work on the Debtor Corporations’ estates. He did not know until the second distribution was completed whether any money would be available to pay unsecured creditors. At that time, he instructed Scharmberg to review the unsecured claims and prepare any objections to the claims. This included City National Bank’s claim. After extensive discovery disputes, City National Bank’s claim was settled through mediation.

Bird testified that after the big distributions in 1992 and early January 1993, Brown, the computer expert he had hired, quit. At that time, Brown was the only one who could operate the existing system effectively. Bird decided to switch to another computer system in order to avoid being dependant on one person. After two unsuccessful attempts, he finally found a computer firm, Personalized Computing, that was able to perform satisfactorily.

Scharmberg testified as to her job tasks during 1991 through, and until she quit in, 1998. She testified in detail as to what happened in the Debtor Corporations’ cases during 1992, 1993, 1994, and 1995, and in general from 1996 through 1998; the work that was required; and how she performed that work under the circumstances. She explained that after the distribution of over 41,000 checks in 1992 and early January J993, the checks had to be processed. As the checks came in, each check would have to be reconciled with the bank statement. That consisted of verifying the check number, amount of the check, and MICR number on each check to see if it matched the information on the bank statement. Then, information about each check had to be entered into the Debtor Corporations’ computer systems after the checks had been sorted by number.

The checks that did not clear the bank required additional processing. Scharm-berg would try to locate the claimants in preparation of another distribution. When the post office had a forwarding address, Scharmberg would reissue the check, change the information in the computer, and mail the check to the new address. Scharmberg also said that phone calls were continuous from money order claimants who were confused and did not understand why they were not getting their claim paid in full. Scharmberg had to explain the process, and follow up with a letter of explanation.

Scharmberg stated that she was not aware in 1993 or 1994 that money would be available to pay unsecured creditors. Until the second distribution was made in 1995, the amount of money available to pay unsecured creditors was not known. At that time, the Trustee calculated the amount of claims and the money available for unsecured creditors.

Scharmberg explained that they could not get the new computer system to issue and print checks. For that reason, there were no major fund distributions until 1995, when Personalized Computing was hired. Until then, all checks were issued by hand. Also, during 1994, Scharmberg was the only employee and performed all the work details. In 1995, Scharmberg started reviewing unsecured claims and setting up claims files. She gave the information to the Trustee, who filed objections to the unsecured claims. From 1996

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through 1998, Seharmberg kept up with all the litigation involving unsecured claimants, including City National Bank. Finally, in 1998 she assisted in filing the November 9, 1998, final report and account, and finding and gathering the information requested by Schaffer until she left in July of 1999.

As to this issue, the Court finds that the Trustee did not improperly delay the closing of the Debtor Corporations’ estates, nor was he negligent or breach his fiduciary duty as to this issue. Bird’s and Scharmberg’s explanation of the work that was performed is much more persuasive than Payne’s opinion as to a reasonable time when the estate should have been closed. Payne’s “Projected Reasonable Timeline,” after the issuance of over 41,000 checks in 1992 and the first few days in 1993, is premised on the belief that all the work could be performed, and the determination that a 100% payout could be made to the money order claimants, by May 31, 1993. Under this scenario, Payne believed the Trustee should have filed an adversary proceeding to determine the unsecured claim of City National Bank by June 30, 1993. Payne’s timeline is a simplification based on a belief that all that had to be done was reconcile the Debtor Corporations’ bank statements to determine what checks cleared, and then make another distribution within five months. The projection is based on a perfect business environment with no problems or interruptions. It does not realistically consider the duty of the Trustee to carry out the priorities of the plan and amended plan — to find and pay in full all money order claimants.

Seharmberg testified in detail, and the Court credits her testimony, that it took all of 1993 to process the 41,000 checks that were issued, distributed, and returned to the Debtor Corporations, both cleared and uncleared. Over 14,000 checks had not cleared, requiring another distribution under the amended plan. These checks had to be reconciled with the bank statements and the pertinent information entered in the computer system. Continuous inquiries were being made by money order claimants who had not been paid their full claim, and there was an on-going requirement that all information that affected a claim be entered into the computer system. The Court is convinced that under the circumstances and given the complexity of the Debtor Corporations’ cases and the detail work required, it reasonably took the Trustee almost all of 1993 to process the checks. Payne did not rebut any of the testimony regarding the length of time it took to perform the job tasks. He recognized that with the number of claimants, the administration of the estate would be complex.

Payne surmised that the Trustee had to be aware that, after the major distribution in 1992 and early 1993, funds were going to be available to pay unsecured claims. Further, Shaffer believes the Trustee was negligent for not investigating the unsecured claims, filing objections to the claims, and resolving the claims by early 1995. However, according to Shaffer’s exhibit 19, as of January 4, 1993, 21,636 checks in the amount of $1,726,644.00 had not cleared the bank. If all the checks had cleared, there would have been no money available to pay unsecured creditors. The Trustee was not able to determine how many of the checks that had not cleared would clear after a second distribution to the claimants. The Court cannot conclude that the Trustee failed to exercise due diligence in waiting until after the second distribution in 1995 to determine what funds would be available to pay unsecured creditors. The Trustee was aware in 1992 that City National Bank had filed a proof of claim for an unsecured claim in the amount of $1,500,000.00. Until the Trust

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ee could determine what amount of money would be available after the claimants were paid, he would not have been in a position to determine whether substantial sums of money should be spent investigating and litigating the City National Bank claim.

The Court also does not find the Trustee negligent in changing to a more current computer system, or in failing to relieve Kanakis or Patterson more promptly. While hindsight appears to show that the Trustee should have terminated both employees earlier, the Court cannot find that the Trustee was not using his best business judgment at the time. There are no guarantees in employing people, and it is difficult to determine if an employee can do his or her job. Both Kanakis and Patterson were highly recommended to the Trustee, and they possessed skills and were performing work efficiently in some respects; however, evidently neither were able to fully master the program that printed out computer generated checks.

The Court finds that the time Bird spent in Washington D.C. during 1993 and 1994 was inconsequential. Bird and Scharm-berg were in regular contact to discuss any specific matters either one of them had at the time, and there was no major litigation during this period. Scharmberg was continuing to run the day to day operations of the Debtor Corporations’ administrative affairs. Further, the Court is convinced that Scharmberg needed to continue to be employed as a full time employee until she finally left. She possessed a wealth of information and skills that were needed to help prepare the final reports and accounts, and obtain any information needed by the Trustee, especially during 1998.

While Payne is an impressive witness, his dateline is not realistic in view of the complexity and detail required to perform the necessary work to implement the amended plan. Having determined that the Trustee did not improperly or negligently cause a delay in closing the Debtor Corporations’ estates, or breach his fiduciary ' duty in regard to the same, the Court denies Shaffer’s claim for damages as to this issue.

2.

Trustee’s refraining to pursue collection of judgments on behalf of the Debtor Corporations’ estates

a.

Position of the parties

Shaffer contends that the Trustee breached his fiduciary duty by failing to collect on hundreds of default judgments that had been obtained against money-order agents on the Debtor Corporations’ behalf. Even assuming that these judgments were worth $416,441.00, and not in excess of the five million dollars as had appeared to be their potential value in 1990, the Trustee still should have made reasonable and timely efforts to collect. Further, if the judgments later appeared to the Trustee to be of no appreciable value, the Trustee should have abandoned them to Shaffer, as the equity security-holder. Shaffer claims that in either event, he was damaged by the Trustee’s breach of duty in the amount of $416,441.00.

The Trustee responds that his decision was reasonable not to collect on the judgments. Their value of five million dollars, as had been assessed early in the bankruptcy, represented only potential liability exposure, based on the face value of all money orders outstanding in the agents’ possession. The actual value, when adjusted downwards to include only money orders subsequently negotiated and claimed on, or otherwise owed, was $416,441.00. Moreover/ this amount was spread over 110 agents in various states, who owed an average of less than $4000.00

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per agent, and whose collectibility was questionable. The Trustee concluded the expenses involved in collecting these judgments would exceed their actual value.

As to Shaffer’s contention that the Trustee should have abandoned the judgments to him in 1990, the Trustee argues that he was unwilling to pay the commission and fees that Shaffer and his then-counsel sought; he did not know or necessarily trust Shaffer’s then-counsel; excepting through that counsel, Shaffer had subsequently neither moved for nor made any other request for such abandonment; and even if he had, the Trustee would largely have opposed the same, because he questioned the wisdom of Shaffer himself seeking to extract proceeds from the very agents who would be least pleased to have further dealings with him. Thus, the Trustee concludes he was not negligent as to the default judgments.

b.

Findings of fact

Before Bird was appointed trustee in the Debtor Corporations’ cases, the Debtor Corporations filed complaints for turnover against approximately 800 of its money-order agents. The property the Debtor Corporations sought to recover were blank money orders, proceeds from the agents’ sale of money orders, and the agents’ records of money order sales. When the agents did not answer or appear after service of appropriate notice, the Trustee moved for, and obtained, default judgments. By 1990, the balance due on these judgments totaled $5,577,699.28.

(1)

Actual value of judgments

At trial, the Trustee testified that the five million-dollar balance was not a “true” figure. Rather, it generally represented the face value of all blank money orders in the agents’ possession. He sought recovery for all such instruments because they were no longer under the Debtor Corporations’ control and might have been released into the open market. The outstanding judgments signified the estates’ exposure to liability, not its actual liability. For example, if one agent had in its possession one thousand money orders that it could have sold for $300.00 each, then the estates might have been liable for the full $300,000.00 in unaccounted-for, blank money orders. The Trustee testified that as the administration of the bankruptcy proceeded and actual money-order claims became established with certainty, true losses more accurately emerged.

As an example of the calculation used by Bird to determine the true value of the default judgments, Bird testified regarding the judgment obtained against Scruggs d/b/a Quick Check Grocery. That judgment was in the amount of $332,532.13, based on the agent’s possession of 1,100 unreported money orders, the face value of which, at $300.00 each, represented a potential risk to the estate of $330,000.00. Added to that figure were the proceeds of money orders that Quick Check actually sold but failed to remit to the estates, which was $2,532.13. Later, when Bird determined that this agent or its customers would not lodge any further claims, and the outstanding blank money orders would not be negotiated, Bird arrived at a maximum balance this agent owed in the amount of $2,532.13.

Bird testified to three other categories of claims he established to develop the true value of judgments: “X” claims, “P” claims, and “U” claims. “X” claims, or “offset” claims, were those in which the agents had redeemed money orders for their customers and then sought reimbursement from the bankruptcy estates. In such cases, rather than actually paying out the agents’ claims, the Trustee simply offset the claims and deducted them from

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the amount of the default judgment against the agents. “P” claims, or “compromised” claims, were similar to the offset claims, except that the Trustee compromised with the agents not to pay fully on agents’ claims already filed. Finally, “U” claims, or unreported “real-loss” claims, were those in which agents had sold money orders and apparently kept the proceeds. The purchasers themselves subsequently claimed the money from the Debtor Corporation estates. The Trustee added these claims to the judgment amounts against the agents.

After reviewing all of the agent files and making computations, the Trustee calculated the “true” value of the default judgments as $416,441.00. This amount was spread over more than one hundred agents, in various states, who owed an average of less than $4,000.00 per agent.

Shaffer’s expert witness, James M. Lit-zler, declined to express an opinion as to the value of the judgments. He testified that he had not reviewed the issue and had neither seen nor heard any evidence to contradict the Trustee’s assessments. Similarly, after reviewing exhibits summarizing the worth of the judgments, Shaffer’s expert witness David Payne testified that he, too, was unable to quantify their value.

(2)

Collection of judgments

The Trustee testified to numerous reasons contributing to his decision not to aggressively pursue collecting these judgments. First, he stated that collection expenses, which would be deemed administrative expenses, would have reduced the money available to pay money-order purchasers already in line for claims. There was little reason to suppose that money expended on enforcing the judgments would yield any return. The defaulting agents had already avoided legal process by failing to respond to two orders for turnover from the Court, and there was nothing to suggest that post-judgment collection efforts would be any more productive.

Second, the Trustee explained that in some cases the Debtor Corporations’ estate might have had to pay the agents money it owed them, and not the other way around. This would have occurred in instances in which either the agents had redeemed more money orders than they had claimed from the estate and, thus, would expect those sums to be made good on; or the Trustee had settled many agents’ “P” claims for fifty percent less than they would have received under the plan and, if pursued, the agents would likely demand full payout instead.

Finally, the Trustee testified that he did, in fact, make some efforts to collect. He testified to turning over five cases to a national collection agency, which absconded with the money it recovered. Further, he stated he tried to enforce the judgments with minimal expense to the estate by registering them, in hopes that agents would then pay the judgment to protect their credit ratings. He testified that this method proved ineffective.

Shaffer’s expert witness, James M. Lit-zler, who claimed collection expertise only in Texas, testified that he was accustomed to working for a money-order company on an hourly basis. He said that when payment was on that basis, he would be more likely to undertake the case without investigating the ultimate collectibility of the delinquent account in question. He also testified that he would be more willing to forego investigation if he knew that his client customarily made the collectibility assessment before turning over the file to him. He stated that judgments generally were more collectible if they had been defended against than if defaulted, “be

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cause they [had] fought the thing and we know they’re out there.” He said that if the Trustee had pursued collection in 1990, his chances of success would have been better because it was closer in time to the rendering of the judgments. He also said that the Trustee would have been well advised to hire local counsel to collect out-of-state judgments.

Finally, expert witness James Dowden listened to the Trustee’s trial testimony and, based on it and the evidence in support, stated that the Trustee’s decision not to expend estate assets in pursuing agents was appropriate.

(3)

Abandonment of judgments

The Trustee testified that in 1990 he was approached by Charles A. Wilkes Jr., a Colorado attorney representing Shaffer at the time, who proposed that the Trustee pay him and Shaffer to pursue the judgments at issue. The Trustee declined, for several reasons. First, the Trustee testified that he believed that attempting to collect judgments would cost the estates and would result in no worthwhile return. Further, the Trustee declined to pay contingency fees to counsel, and the three thousand dollars a month, that Shaffer sought to pursue collection. Additionally, the Trustee was not willing to deputize the Debtor Corporations’ principal, and an out-of-state lawyer who the Trustee did not know, to control the collection efforts. Finally, the Trustee doubted the wisdom of permitting Shaffer contact with the very agents who had reason to object to any further dealings with him.

The Trustee testified that at no time other than through Wilkes had Shaffer suggested that the Trustee abandon the judgments to him. The Trustee stated that in 1999 he had offered to Shaffer’s counsel Soulé to abandon the judgments. Soulé referred the Trustee to Shaffer, but Shaffer never responded.

c.

Conclusions of law

The standard of care applicable to bankruptcy trustees in their official capacity, both as to affirmative and negative duties, is the exercise of due care, diligence, and skill. These are to be evaluated in the light of the information that was, or reasonably should have been, available at the time of the challenged conduct.

In re Haugen Const. Serv., Inc.,

104 B.R. 233, 234 (Bankr.D.N.D.),

aff'd

876 F.2d 681 (8th Cir.1989);

United States v. Aldrich (In re

Rigden), 795 F.2d 727, 730-31 (9th Cir.1986),

cited in Armstrong v. Harris (In re

Harris), 886 F.2d 1011, 1013 (8th Cir.1989). The measure is that of “an ordinarily prudent [person] in the conduct of his private affairs under similar circumstances and with a similar object in view.”

Haugen Const. Serv., Inc.,

104 B.R. at 240 . Mere mistakes in a trustee’s judgment cannot be the basis of liability.

Id.

For the reasons stated below, the Court finds that the Trustee’s conduct in declining to pursue the default judgments, and in declining to abandon them to Shaffer, was reasonable, and did not breach his fiduciary duty to the Debtor Corporations’ estate or Shaffer as the equity security holder. First, the Court credits the Trustee’s testimony in its entirety that the sums represented by the default judgments, when properly adjusted downward to include only those liabilities that were subsequently proved real, were of comparatively minimal value. This testimony was amply supported by a voluminous record, and was uncontradicted by either of Shaffer’s expert witnesses, both of whom declared themselves unable to quantify the judgments. The defaulting parties were widely scattered across numerous foreign jurisdictions, they were of uncertain collec-

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tibility, and their individual liabilities were relatively modest. Further, the cost of collection would have been incurred to the detriment of the money-order claimants the plan sought to pay. Thus, the Court concludes that the Trustee exercised reasonable business judgment in not pursuing the collection of the judgments in issue.

Also, the Trustee was under no fiduciary obligation to abandon the judgments to Shaffer. The Trustee’s judgment that they were of questionable worth was within the realm of any trustee’s reasonable discretion. Moreover, the Court credits the Trustee’s testimony and evidence in support that in 1999 he did approach Shaffer’s counsel Soulé with an offer to abandon, but that Shaffer did not respond. Finally, the Court notes that the code expressly authorizes motions to abandon by parties in interest.

6

Shaffer did not avail himself of that procedure at any time. Accordingly, the Court finds the Trustee was not negligent nor breached his fiduciary duty by declining to abandon the default judgments to Shaffer.

3.

Sales of personal property of the Debtor Corporations’ estates

a.

Position of the parties

Shaffer contends that in 1996, the Trustee was negligent in selling, disposing of, and donating personal property of the Debtor Corporations’ estates. First, Shaffer asserts that the Trustee failed to move for and obtain a Court order authorizing the 1996 sales or donations of property. Second, Shaffer asserts the Trustee failed generally to account for such property in his final reports, as required by the bankruptcy code and rules. Last, Shaffer asserts the Trustee failed to exercise reasonable business judgment in disposing of assets; specifically, the Agent Money Master [AMM] computer system, which Shaffer alleges the Trustee gave away or destroyed. Shaffer says the AMM system was worth as much as $50,000.00 based on the amount it would have taken to recreate the software system.

The Trustee counters that the sales he conducted in 1996 were properly before the Court and authorized by the Court’s order in 1986. Further, the Trustee asserts that he exercised reasonable business judgment in the 1996 sales because the disposed-of assets were of little or no value, and the estate would have had to pay more to advertise those items than to dispose of them by private means. As for the AMM system specifically, the Trustee testified that he had ensured the data it contained had been extracted and retained, and the equipment itself was antiquated and obsolete.

b.

Findings of fact

(1)

Failure to seek order for 1996 sales or donations

On August 28, 1986, the Trustee filed a “Motion to Sell Assets.” The motion states, in relevant part:

1. In his capacity as Trustee, he has discovered that the Debtors for whom he is Trustee have miscellaneous office furniture and motor vehicles, which appear to have relatively inconsequential value. Much of the furniture is located in Fayetteville, Arkansas; however, there is also furniture located in Houston, Texas, Dallas, Texas, San Juan, Puerto Rico and Detroit, Michigan. The furniture located at each site is not worth more than $2,000 for each location. The administrative rent which would have to be incurred by the estate

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in order to store such furniture would be more than the value of the furniture. The administrative expense in employing agents of the Trustee to travel to each of these locations to dispose of such assets would cost more than the value of the asset. In addition, the rent required in Fayetteville to store all of the used furniture is more than the value of the furniture.

2. The Trustee believes that he will be able to obtain quotes from used furniture dealers in various locations and to dispose of the furniture and the automobiles efficiently and terminate the expense of storage and administrative rent on the offices in the various locations expeditiously and in a manner most ben-efitting to the estate.

WHEREFORE, the Trustee prays that the Court will enter an Order authorizing him to immediately dispose of used furniture at the locations mentioned above and dispose of the automobiles while preserving rights of any parties in and to the proceeds of the sales, if any, and for all other proper relief.

On September 4, 1986, the Court approved the sale on the terms as sought, in an order that expressly incorporated the language of the motion.

At trial, the Trustee was questioned whether he had assumed that the 1986 order served to authorize the 1996 sales. He testified that he remembered in 1996 that he had obtained the 1986 order, but that he would not read it to apply definitely to those assets sold in 1996.

Expert witness Thomas E. Robertson stated that the 1986 order did not appear to apply to assets subsequently bought or sold, on grounds that the order specified particular locations and particular value. He further testified that the better practice would have been for the Trustee to apply again to the Court in 1996 for authority to sell different assets. Robertson added, however, that this amount of process might not necessarily be in the best interest of the estates if the value of the assets did not justify it.

Expert witness James Dowden testified to the same effect as to donations, noting that if the assets were of no value, then failure to notice creditors and obtain a prior order would not damage the estates.

2.

Failure to report to the Court

The September 4, 1986, order states that the Trustee was authorized to sell or dispose of furniture, equipment, and automobiles and to “report to the Court such disposition ....” Neither party contests the fact that the Trustee failed to comply with this provision.

3.

Reasonable business judgment

Sometime in 1996, the Trustee began to rid the estate of personal property in order to consolidate storage space so that more files could be accommodated. Scharmberg testified that the Trustee assigned to her the task of disposing of miscellaneous office equipment ánd furniture that had been moved from various Debtor Corporation offices to storage in the Tower Building, near the Rose Law Firm’s offices in Little Rock. Scharmberg testified that she worked with the Tower Building’s manager in contacting other Tower Building tenants who might want to buy some of the items. Scharmberg assigned prices to these items based on her own general experience and in consultation with the Tower Building manager.

The Trustee testified that the value of this property would not justify advertising or auctioneer expenses. Scharmberg testified that she had advertised some furniture and used equipment, but “was told that the equipment was so old it didn’t

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interface with all the new equipment” and “could not even be taken on consignment.”

The Trustee testified that he sold some used office furniture to Rose Law Firm employees, but nothing to any Rose Law Firm lawyers. He further testified that he disposed of the property as he did, in part, to avoid storage and transportation charges. He stated that “anyone who was willing to come and haul ... off’ the property was welcome to do so, because then the estate would not have to pay to have it removed.

As to the AMM computer system, Shaffer’s expert witness, David R. Payne, testified that, generally, software from a debt- or’s company should be maintained for several reasons: (1) as a source of information about what had been the company’s business practices, (2) to preserve an “audit trail,” and (3) as a resource to answer questions that might be collateral to the administration of the bankruptcy case. However, John Brown, the Trustee’s employee with computer expertise, testified that he could not use the AMM software itself, so he had extracted the necessary data from the AMM system and transferred it to the current system, so the data could be moved from machine to machine. Brown testified in some detail as to the manner in which he stored the data from AMM. He further testified that data not retained from AMM was of only “historical” character, which Brown did not need to track in detail and, thus, was “not relevant” to administering the bankruptcy. Brown asserted that at no time did he ever lose any data that he could not subsequently retrieve through other storage backups. Expert witness James Dowden agreed that data should be retained if it were relevant to estate receivables. He also testified that the decision to keep software should be taken on a case-by-case basis, and that he lacked computer expertise generally. John Brown testified that he guessed the AMM replacement value would be approximately $50,000.00, referring specifically to recreation of AMM software. The Trustee testified that once data had been obtained from AMM, the software system itself was of no further use. The Court specifically credits the Trustee’s testimony as to this issue, and gives more weight to Brown’s testimony over Payne’s testimony in this instance.

c.

Conclusions of law

Section 363 of the bankruptcy code provides that the trustee may use, sell, or lease property of the estate only “after notice and a hearing.” 11 U.S.C. § 363 (b)(1), Fed. R. Bankr.P. 6007;

see Gekas v. Pipin (In re Met-L-Wood Corp.)

861 F.2d 1012, 1018 (7th Cir.1988) (invalidating sale taken without proper procedure). Section 102(i) provides that the trustee must give “such notice as is appropriate in the particular circumstances, and such opportunity for a hearing as is appropriate in the particular circumstances.”

Id.

7

Thus, if a trustee believes property to be of inconsequential value so that the notice-hearing procedure would be unnecessarily burdensome to the estate, he may seek court approval to abandon such property and give notice pursuant to 11 U.S.C. § 554 and Federal Rule of Bankruptcy Procedure 6007. Section 554 anticipates that worthless assets might be

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abandoned, and provides that the order closing the estate effects abandonment on such left property. In fact, the trustee has an affirmative duty to rid the estate of such inconsequential property.

In re Carter Paper Co.,

220 B.R. 276, 301 (Bankr.M.D.La.1998). Otherwise, the trustee’s failure to abandon property of the estate properly may provide a basis for an action for breach of fiduciary duty, governed by a negligence standard.

Id.

However, negligence liability will not be imposed on trustees for mere mistakes in business judgment.

Naert v. Daff (In re Washington Trust Deed Service Corp.),

224 B.R. 109 (9th Cir. BAP 1998). The reasonableness of a trustee’s decisions is evaluated “in light of the information that was, or reasonably should have been, available to him or her at the time. The standard ... is ‘reasonable care’ and ‘due diligence ....’”

United States v. Aldrich (In re Rigden),

795 F.2d 727, 730-31 (9th Cir.1986),

cited in Armstrong v. Harris (In re Harris),

886 F.2d 1011, 1013 (8th Cir.1989).

Just as in any other tort case, however, even if a breach of legal or fiduciary duty is found, the objecting party must produce a preponderance of evidence, beyond mere conjecture, to show that the breach proximately caused harm.

See DiStefano v. Stern (In re J.F.D. Enterp.),

223 B.R. 610, 629-30 (Bankr.D.Mass.1998). The harm in the bankruptcy context may be to the plaintiff or to the estate as a whole.

Id.

First, the Court finds that the Trustee breached his fiduciary duty to the Debtor Corporations’ estates by failing to give proper notice of the sales in accordance with Federal Rules of Bankruptcy Procedure 2002 and 6004, and failing to obtain a Court order approving the sales. The Court agrees with Shaffer that the Trustee failed to obtain sufficient authorization for the sales and donations in the first instance. The 1986 order authorized disposal of the property set forth in the 1986 motion. The motion identified the property at issue with particularity, as being below two-thousand-dollar value; located in Texas, Puerto Rico, and Michigan; and, in view of the distant locations, worth less than disposition by more formal means would justify. The motion says nothing about Little Rock, which was where the property had been moved prior to 1996. Moreover, the motion seeks authority “to immediately dispose” of the property “at the locations mentioned above.” The Court is not prepared to construe the word “immediately” to embrace a period of ten or more years. The order must be read to authorize the 1986 sales only. Ten years later, the Trustee should have sought and obtained new Court approval.

Second, the Court finds the Trustee exercised reasonable business judgment in selling or disposing of the items of personal property in issue. The Court is sufficiently convinced that the items were of inconsequential value and credits the Trustee’s and Scharmberg’s testimony as to the value of the items.

Shaffer has not pled money damages in this context and, in fact, concedes in his brief that the “issue here is not the value of the property sold or given away.”

8

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Instead, he complains only as to the procedure the Trustee did or did not follow. The Court finds that the Trustee’s failure to follow proper procedure was flawed, but

de minimis

in its effect on the estates as a whole. Thus, the Trustee did not breach his fiduciary duty to protect the estates’ assets in this regard, and exerdsed reasonable business judgment in disposing of the assets in issue. The Debtor Corporations’ estates were not damaged by the Trustee’s disposition and sale of these items.

4.

Alleged sharing and paging of employees of the Debtor Corporations with the Rose Law Firm

a.

Position of the parties

Shaffer asserts that when the Trustee hired employees with computer expertise to work part-time for the bankruptcy estate and part-time for the Rose Law Firm, this resulted in an appearance of self-interest and impropriety. Because the Trustee failed to furnish notice or seek Court approval, Shaffer contends that this is one more example of the Trustee’s repeated abuses of the bankruptcy estates for which he should be held accountable.

The Trustee responds that by sharing these employees with the Rose Law Firm, he reduced estate costs and retained employees who were key to the administration of the bankruptcy estates. These employees’ job performance was competent and essential, their compensation was reasonable, and sharing them with the Rose Law Firm was necessary to retain their services. The Trustee concedes that the better course would have been for him to have given notice and obtained approval, but asserts that failure to do so resulted in no actionable breach. There was no self-interest, and the estates were considerably benefited, not damaged.

b.

Findings of fact

The Trustee testified that at the time he was appointed to administer the estates in 1986, computer technician John Brown had been employed by the Debtor Corporations in their Fayetteville offices. The Trustee stated that Brown was, and had been, familiar with the Debtor Corporations’ daily business operations. He understood the number systems used to track money-order agents and the money-order instruments in their possession, he understood the workings of the AMM software and the Data Point hardware that the companies had used for those purposes, and he possessed the computer capability needed in the liquidation of the Debtor Corporations’ assets to write programs and analyze data.

Accordingly, the Trustee stated he hired Brown postpetition to work full-time for the Debtor Corporations’ estates. The Trustee paid him by the hour and, if Brown were to work more than forty hours a week, at an overtime rate.

Over the first year postpetition, the Trustee testified that Brown captured the data necessary for liquidation. Brown gathered and logged elaims-register data, names and addresses of money-order claimants, and agents’ accounts of unsold money orders or proceeds from sold money orders. These operations were complete in the summer of 1987. At that

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point, the Trustee decided to consolidate operations in Little Rock to save estate money on Fayetteville office space and on leases of computer hardware systems there. Because Brown had worked with the Debtor Corporations before bankruptcy, and had subsequently worked with the Trustee on the liquidation efforts, the Trustee testified that in his judgment, Brown was uniquely qualified to continue to assist him in Little Rock.

The Trustee testified that in his estimation, the work remaining in the estates would no longer justify keeping Brown on a full-time basis. At the same time, the Trustee was aware that the Rose Law Firm had a computer position that needed filling for an employee to maintain and administer its Wang word-processing and accounting programs. The Trustee believed that both the Debtor Corporations’ estates and the Rose Law Firm would benefit by assigning both entities’ work to one person. The estate would benefit by keeping Brown, the person most qualified to continue administering its computer operations. The Rose Law Firm would benefit by acquiring Brown as an in-house computer expert.

According to Bird, Brown was willing to move himself and his family from Fayette-ville to Little Rock, even though Brown knew that the estate job would eventually end. Brown himself testified that he found the time-sharing proposal with the Rose Law Firm actually to be an incentive to move because of the Rose Law Firm’s good reputation. Thus, Brown and the Rose Law Firm agreed to the Trustee’s proposal and, in August 1987, Brown began work in Little Rock.

Brown spent two-thirds of his time working for the Rose Law Firm and one-third for the Debtor Corporations’ estate. The Trustee testified that Brown was paid by two separate checks, one from the Rose Law Firm and one from the Debtor Corporations’ estate. The Trustee further testified that he reviewed the time records periodically to ensure that the pay arrangement accurately reflected the time Brown actually spent on each account, and that Brown was fairly paid as to both entities. By paying Brown on a salary basis instead of an hourly basis, Brown’s payment could be stabilized to a regular amount that the Trustee would then be able to predict on an annualized basis. Also, by the Rose Law Firm paying the larger part of Brown’s salary, the Debtor Corporations’ estate could pay less, especially on Brown’s overtime.

The Trustee also employed Donna Collins-Ellison, a Rose Law Firm employee whom the Trustee paid $3560.63 for computer work that she performed for the estate from January to August 1985. When Brown left in December 1992, the Trustee replaced him with Kim Kanakis.

At no time did the Trustee notice interested parties or seek the Court’s approval to employ John Brown, or other computer employees, on the Debtor Corporations’ behalf.

c.

Conclusions of law

As earlier stated, Shaffer takes issue only with the appearance of impropriety and the absence of notice and approval before the Trustee engaged the employees. The argument must fail, in this particular context, for infirmities of pleading and proof.

First, the case law Shaffer offers here applies the willfulness standard governing personal liability for improper and exploi-tive employment arrangements.

See Mosser v. Darrow,

341 U.S. 267 , 71 S.Ct. 680 , 95 L.Ed. 927 (1951). However, as noted earlier, in a suit alleging negligent official-capacity liability, the courts defer to a

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trustee’s exercise of reasonable business judgment.

Naert v. Daff (In re Washington Trust Deed Service Corp.),

224 B.R. 109 (9th Cir. BAP 1998).

Second, as a factual matter, Shaffer concedes that the employment arrangements challenged here did not substantively damage the bankruptcy estate. However, the law requires the proofs to show actual, substantive injury.

See DiStefano v. Stern (In re J.F.D. Enterp.),

223 B.R. 610, 629-30 (Bankr.D.Mass.1998). Specifically, if failure to notice and obtain approval results in no harm to the estate, then there is no ground for sanction.

Thus, in

Mosser ,

the case to which Shaffer cites this Court, the United States Supreme Court affirmed personal liability on a trustee for having agreed to employ promoters of reorganizing trusts and, at the same time and without notice or approval, knowingly having permitted the promoters to continue trading in trust-corpus bonds. These employees made “substantial” profits by selling bonds back to trusts.

Mosser,

341 U.S. at 270 , 71 S.Ct. 680 . The Court clarified that “the prohibition is not merely against injuring the estate — it is against profiting out of the position of trust.”

Id.

at 273 , 71 S.Ct. 680 .

As noted, and in contrast, it is undisputed that neither the employees in the case at bar, nor Bird himself, profited by exploiting their positions of trust. Rather, the reverse occurred — the Debtor Corporations’ estate profited from the Trustee’s decision to employ qualified people, who performed well and who were paid from estate funds commensurate with their contribution to the estate’s benefit. The evidence supports a conclusion that the Trustee exercised reasonable business judgment in the hiring arrangements at issue here.

5.

Alleged improper employment of and payment to employee Penny Scharmberg

a. As

a full time employee

(1)

Position of the parties

Shaffer’s position is that Sharmberg’s full time employment was not justified after early 1993. The Trustee kept Scharm-berg on as a full time employee after the major distribution of checks were issued in 1992 and early 1993 until July 1999. Shaffer contends that Scharmberg had far less to do after the major distribution in 1992 and early 1993 and, therefore, her full time employment was not warranted.

The Trustee’s position is that Scharm-berg’s full time retention until June 1999 was necessary. During the time after the major distribution in 1992 and early January 1993, Scharmberg was busy processing the 41,000 money order checks that were issued during that distribution. She continued to process checks in 1994 and prepared for another major distribution of over 21,000 money order checks in 1995. Without any other staff assistance, she spent 1995 processing the 21,000 checks issued using the same job tasks as performed in 1993. In late 1995 and early 1996, she reviewed unsecured claims and turned her review over to the Trustee, who filed at' least 80 objections to unsecured claims by October 1996. She also handled the daily operations of the Debtor Corporations, including continuing to process checks, answering phone calls, updating unsecured claims files, assisting with the preparation of the November 1993 final report, and, in 1999, assisting with the gathering of all the information Shaffer had requested from the Trustee, which was voluminous and time consuming.

(2)

Findings of fact

The Court adopts and incorporates its findings of fact as to Bird, Scharmberg,

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and Payne found in section III.B.l.b. (1) and (2) of this opinion. In summary, Bird testified that Scharmberg was needed as a full time employee until she left in June 1999. She was a key employee who possessed full working knowledge of the administration of the Debtor Corporations’ estates and her skills were needed to perform the daily operations of the Debtor Corporations. Bird stated that Scharm-berg could explain in much more detail regarding the many daily job tasks she performed. Bird testified that after 1994, Sharmberg was the lone employee of the Debtor Corporations, and was responsible for performing all of the operations of the Debtor Corporations. She continued to process money order checks, reconcile bank statements, and answer phone calls and inquiries from money order claimants. In 1995, after all of the money order claimants who could be found were paid in full, she began to handle the unsecured claims. From 1996 through 1998, she continued to process claims, answer phone calls, and handle the unsecured claim files. In 1999, she assisted the Trustee in gathering information for Shaffer’s document request.

Scharmberg testified that it took her all of 1993 to process and account for the 41,000 checks issued and distributed in 1992 and early January 1993. There were no short cuts in processing each check. Each check had to be entered into the Debtor Corporations’ records and computer system, verified as to correctness, and reconciled with the Debtor Corporations’ bank statements. During 1994, she continued to process checks, answer phone calls and inquiries, write letters, and prepare for another major check distribution to be made in 1995. In 1995, over 21,000 checks were issued, and she alone had to process each check following the same procedures that were used in 1993.

In the later part of 1995, after all the money order claimants had been paid in full, she began to review unsecured claims and sort them into stacks based on the objections the Trustee would make. From 1996 through June 1999, she continued to process checks and account for them, answer phone calls, write letters to money order purchasers answering their questions, maintain the unsecured claims files, assist the Trustee in preparing the November 1998 final report and account, and, in 1999, assist the Trustee in gathering the information needed to respond to the voluminous document requests made by Shaffer.

Payne testified that, in his opinion, after the major distribution of checks in 1992 and early January 1993, Scharmberg was not needed as a full time employee of the Debtor Corporations. Her work load was substantially reduced and the longer the Debtor Corporations’ cases drew out, the less work there was for Scharmberg to perform. Payne testified that in managing businesses, he has terminated full time employees if the work load did not justify the employment. He believes the Trustee was negligent in keeping Scharmberg on as a full time employee when the work load of the Debtor Corporations no longer justified full time employment.

(3)

Conclusions of law

The Court finds that, based on the evidence, the Trustee was justified in retaining Scharmberg as a full time employee until the time she left the Debtor Corporations’ employment in June 1999. The Court credits Scharmberg’s testimony in this instance as to the detail work she performed. While Scharmberg may not have been as busy after 1995 as she was prior to that time, the Court is convinced that there remained substantial work to be performed in administering the estates of

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the Debtor Corporations, and Scharmberg was the most able person to do that work.

b.

The payment of a $10,000.00 bonus by the Trustee to Scharmberg

(1)

Position of the parties

Shaffer’s position is that the Trustee improperly paid Scharmberg a $10,000.00 bonus without Court order. Further, Shaffer believes that either the Trustee or Scharmberg should be required to remit the $10,000.00 back to the Debtor Corporations’ estates.

The Trustee’s position is that Scharm-berg was the key employee who could maintain the day to day operations of the Debtor Corporations’ estates, and her retention was essential. She had an out of state job offer that she was going to accept so he offered her a bonus of $10,000.00 in order to assure her continued employment until the Debtor Corporations’ estates were closed. The Trustee believes it was in the best interest of the Debtor Corporations’ estates to secure her continued employment.

(2)

Findings of fact

The facts are undisputed that on February 8, 1999, the Trustee paid Scharmberg a $10,000.00 bonus to stay on as an employee of the Debtor Corporations. The facts are also undisputed that Bird, as trustee, did not file a motion to pay Scharmberg a $10,000.00 bonus, give notice to all parties in interest of his intent to pay Scharmberg a $10,000.00 bonus, or obtain a Court order authorizing the payment. Even the Trustee’s own witnesses, Dowden and Robertson, testified that as a trustee they would have obtained a Court order authorizing the payment of a bonus.

During Bird’s testimony, Bird explained that Scharmberg was his administrative assistant and the only employee of the Debtor Corporations in 1999. She had a job offer to go out of state and was going to accept that job offer. She was completely knowledgeable as to the Debtor Corporations’ books and records, and the administration of the Debtor Corporations’ estates; and she was the only person who could perform the day to day operations of the Debtor Corporations. If she was not retained to perform the necessary work, more time and money would be expended to bring in someone to learn and do Scharmberg’s job. In short, it would have had been more costly to the Debtor Corporations’ estates to have replaced her, and taken more time to bring about a close to the Debtor Corporations’ estates. Her retention was critical and necessary and because of that, he offered her a $10,000.00 bonus to insure her continued employment, which she accepted. The Court finds Bird’s testimony more creditable than Payne’s as to this issue.

(3)Conclusions of law

The Court concludes that Bird, as trustee, breached his fiduciary duty by not filing a motion to pay Scharmberg a $10,000.00 bonus, give notice to all parties in interest, and obtain a Court order approving the employment arrangement. However, the Court is also convinced that the retention of Scharmberg was in the best interest of the Debtor Corporations’ estates. The $10,000.00 bonus given to retain Scharmberg far outweighs the economical costs of replacing her with a new employee with no knowledge of the Debtor Corporations’ business and, even more importantly, familiarity with the Debtor Corporations’ records and computer system. At the beginning of 1999, numerous requests for information were being made by Shaffer. Scharmberg’s knowledge and ability to locate the records and information requested was essential at that time and until she quit. The Trustee exercised

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reasonable business judgment in paying her a $10,000.00 bonus and retaining her as an employee. The Debtor Corporations benefitted by her retention. Accordingly, the Court will deny Shaffer’s request that the $10,000.00 bonus be remitted back to the Debtor Corporations’ estates. The Trustee’s breach of fiduciary duty will be considered later in this opinion under the topic of appropriate compensation for the Trustee pursuant to § 326(a) and § 330.

6.

Alleged improper payments to Victoria Mason as accountant in Debtor Corporation’s cases

On March 26,1991, Bird filed an application to employ Victoria Mason, a Little Rock CPA, to prepare tax returns and give accounting advice. The purpose of the application was to obtain authorization to fill John D. Toney’s vacancy. Toney was an accountant appointed by order of the Court on February 27, 1990, but who did not perform any services. The motion stated that Mason’s area of responsibility would be primarily income tax returns, and the Trustee believed she could prepare the returns at less cost than other accountants for the estate. It further stated that there would be no duplication of services. Mason’s compensation, like To-ney’s, would be on a general retainer basis.

Mason lived in Little Rock, Arkansas, and was the Assistant Financial Officer for Crews and Associates. Mason also engaged in part time work as a CPA while working at Crews and Associates. Bird told Mason that given his experience with Arthur Young & Co., he was concerned about an accountant charging an hourly rate, and he wanted to employ her on a fixed rate to prepare the tax returns of the Debtor Corporations’ and give tax advice regarding accounting matters. The Court’s order appointing Mason as an additional accountant was filed on April 3, 1991.

In Bird’s opinion, Mason’s fees for the preparation of the tax returns over the course of her employment were reasonable. He formed that opinion based on conferences with other accountants in the Little Rock area and his experience in the employment of accountants. Bird determined that Mason’s proposed fee in each instance was reasonable. Bird admitted he did not obtain a Court order authorizing payments to Mason in all instances.

The following checks were received into evidence reflecting the fees paid to Mason for preparing the Debtor Corporations’ tax returns:

• Check number 2666 in the amount of $3960.00, dated April 15, 1992, for the preparation of the 1990 tax returns.

• Check number 2712 in the amount of $4200.00, dated April 21, 1992, for the preparation of the 1991 tax returns.

• Check number 2976 in the amount of $4500.00, dated May 10, 1992, for the preparation of the 1992 tax returns.

• Check number 3263 in the amount of $4700.00, dated August 1, 1994, for the preparation of the 1993 tax returns.

• Check number 3403 in the amount of $4700.00, dated June 28, 1995, for the preparation of the 1994 tax returns.

• Check number 3607 in the amount of $4400.00, dated September 17, 1996, for the preparation of the 1995 tax returns.

• Check number 3769 in the amount of $4800.00, dated September 16, 1997, for the preparation of the 1996 tax returns.

• Check number 3836 in the amount of $2000.00, dated March 11, 1998, for the preparation of the 1997 tax returns.

• Check number 3909 in the amount of .$2800.00, dated September 16, 1998,

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for the- preparation of the 1997 tax returns.

• Check number 3938 in the amount of $5000.00, dated December 14, 1998, for the preparation of the 1998 tax returns.

Of the ten checks, the Trustee issued checks numbered 2666 and 2712 pursuant to Court orders. The Trustee issued the remaining eight checks without Court orders. Although he could not recall specifics of any of the payments made without Court order, he was under the impression at the time the payments were made that he had the authority to make those payments.

The Court finds that Bird, as trustee, breached his fiduciary duty when he failed to file motions seeking compensation for Victoria Mason as a professional pursuant to 11 U.S.C. § 330 and failed to obtain Court orders in eight instances when he paid Mason without Court order. The Court will address the reasonableness of Mason’s compensation as an accountant for the Debtor Corporations’ estates later in this opinion under section III.F.l.

7.

Alleged improper payments of legal fees to the Rose Law Firm without Court orders

The facts are undisputed that the following billing statements by the Rose Law Firm were paid without Court orders:

October 6, 1992 $4850.25 in legal fees, $2039.56 in expenses;

April 28,1993 $2810.00 in legal fees, $1454.95 in expenses;

March 8,1995 $307.50 in legal fees, $708.13 in expenses; and

January 17,1997 $10,494.75 in legal fees, $723.73 in expenses.

The Court finds that Bird, as trustee, breached his fiduciary duty in four instances by paying the Rose Law Firm as attorney for the Trustee without Court orders pursuant to 11 U.S.C. § 330 . The Court will address the issue of whether the Rose Law Firm is entitled to compensation in these instances under section III.F.2.C. of this opinion.

C.

Whether the Trustee knowingly and intentionally made overpayments of trustee’s fees to the Rose Law Firm or himself; whether the Trustee filed false, misleading, or inaccurate final reports and accounts; and whether the Trustee failed to timely provide or reveal information as to his trustee’s fees as requested by Larry Schaffer, as a party in interest, and breached his fiduciary duty

1.

Position of the parties

First, Shaffer contends that Bird, as trustee, knowingly and intentionally overpaid trustee’s fees either to himself or the Rose law Firm without Court authorization or Court orders on numerous occasions. Further, Bird, as trustee, knowingly and intentionally paid trustee’s fees to himself or the Rose Law Firm as a duplicate payment in the amount of $88,000.00 by pre

*171

paring and filing a “Motion For Allowance of Trustee’s Fees and Authorization For Payment of Legal Fees Held Back,” and obtaining an order granting the motion on July 27, 1992. Shaffer argues that Bird knew at the time of the motion and order that he had already filed two previous applications for interim allowance of trustee’s fees totaling $88,000.00, orders authorizing the payments of these interim trustee’s fees had been entered, and Bird had been paid these trustee’s fees. Shaffer also argues that Bird, as trustee, knowingly and intentionally paid himself or the Rose Law Firm a second payment of state surety bond proceeds in the amount of $41,527.00 from the money of the Debtor Corporations’ estates.

Second, Shaffer contends that Bird, as trustee, filed a false, misleading, or incorrect final report and account on November 9, 1998, and a false, misleading, or incorrect final report and account on July 29, 1999, which was dated July 26,1999.

Third, Shaffer contends that Bird, as trustee, engaged in a course of conduct from around January 1999 through October 1999 to avoid providing Shaffer, as a equity security holder and party in interest, information Shaffer had requested as to Bird’s § 326 calculation of a trustee’s fee entitlement, and an accounting of trustee’s fees paid and owing. Further, Bird breached his fiduciary duty to the Debtor Corporations’ estates and continued in a course of conduct to mislead or not reveal to the Court and Shaffer his overpayments of trustee’s fees in the Debtor Corporations’ cases. Shaffer argues that Bird’s intent and course of conduct to avoid disclosing the overpayment of trustee’s fee to himself or the Rose Law Firm is manifested by his ceasing to file operating reports in 1991, which, if he had continued to do, would have reflected and tracked the over-payments of the trustee’s fees in issue. Additionally, Bird had previously made § 326 calculations as to his trustee’s fee entitlement in his interim applications for trustee’s fees filed on January 3, 1989, and December 26, 1989, but failed to perform a § 326 calculation and give an accounting of trustee’s fees paid and owing in his November 9, 1998, final report and account, and July 29,1999, final report and account.

Bird’s position is that he did not knowingly or intentionally make overpayments of any trustee’s fees. At the time he applied for and obtained trustee’s fees in the Debtor Corporations’ cases, he believed he had Court orders authorizing payment of the fee. Further, in regard to the duplicate payment of the $88,000.00 in trustee’s fee at the time he prepared and filed his June 25, 1992, “Motion For Allowance of Trustee’s Fee and Authorization For Payment of Legal Fees Held Back,” and obtained an order approving the same, he had forgotten that he had been paid $88,000.00 in interim trustee’s fees. According to Bird, it was a honest mistake.

Bird argues that a duplicate payment of $41,600.00 in state surety bond fees from the Debtor Corporations’ estate happened because the employee who entered the data into the Debtor Corporations’ records mistakenly coded a payment of state surety bond fees of $41,600.00 in the wrong category under “legal fees,” and a second payment of $41,527.00 of state surety bond fees under the category “Trustee’s Bond.”

9

Further, Bird contends that he had forgotten that he had been paid

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$41,600.00 in state surety bond fees at the time he signed the October 29, 1992, check for $141,527.00, which resulted in a duplicate payment of state surety bond fees out of proceeds from the Debtor Corporations’ estates.

Bird contends that the November 9, 1998, final report and account did contain an error; specifically, a wrong total distribution figure was used because of a mistake in addition made by adding administrative expenses. This was not intentional, and the final report and account was later withdrawn. He also contends that he thought the July 29, 1999, final report was correct as to the trustee’s fees set forth as approved and paid at the time he filed the report. Even though Shaffer had objected to his November 1998 final report and July 1999 final report, Shaffer never identified specifically what he thought was the source of the overpayment of any trustee’s fees. Bird made available and provided all the books and records of the Debtor Corporations’ to Shaffer.

Further, Bird argues that Bird, not Shaffer, discovered all of the mistakes as to the overpayment of trustee’s fees in the amount of $133,220.00, and immediately remitted the overpayment to the Debtor Corporations’ estates, with interest. There was never any concealment of any transactions by the Trustee, alteration of records, or any intent to obtain overpay-ments of trustee’s fees in the Debtor Corporation’ cases. Bird states that although honest mistakes did occur in overpay-ments, the Debtor Corporations’ estates have been properly reimbursed.

2.

Applicable law as to fraudulent intent

In order to determine if the Trustee committed fraud upon the Debtor Corporations’ estates or the Court, the Court must look at the Trustee’s intent to defraud in the performance of his job as trustee. Intent is rarely provable by one’s admission to an act, so the Court has to look at the circumstances surrounding the performance or conduct of the Trustee in order to arrive at the Trustee’s intent as to the allegations asserted against him in this case. Fraud can then be inferred through the circumstantial evidence.

See Ramsay v. Hall (In re Hall),

216 B.R. 17, 19 (Bankr.E.D.Ark.1997)(finding that a court must look to all of the circumstances to determine if the evidence suggests that a debtor had the necessary intent from which the court could draw an inference);

see also Brown v. Third Nat’l Bank (In re Sherman),

67 F.3d 1348 , 1353 (8th Cir.1995)(recognizing that courts infer fraudulent intent from the circumstances surrounding the event). The existence of actual fraudulent intent is a matter of federal law.

Sherman,

67 F.3d at 1354.

A single indication of fraud is not enough to establish actual fraudulent intent. However, “ ‘the confluence of several can constitute conclusive evidence of an actual intent to defraud.’ ”

Id.

(quoting

Max Sugarman Funeral Home, Inc. v. A.D.B. Investors,

926 F.2d 1248, 1254-55 (1st Cir.1991)). The Court must consider the totality of the circumstances in arriving at its decision. In the present case, the facts involve a substantial period of time with numerous transactions and correspondence between the litigants. Because of this, it is necessary for the Court to review a chronology of events that have occurred since the inception of this case. The Court believes that this chronological review will assist the reader in understanding the testimony of the witnesses and the Court’s findings and conclusions.

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3.

Findings of fact

Because of the length of the findings of fact, and the difficulty of following the numerous transactions and correspondence between the litigants, the findings of facts are set out under two topics: first, a calendar sequence of events based on exhibits received into evidence to give a background and overview of what transpired as to the issues that have been raised; second, a review of the testimony of the witnesses, including the pertinent exhibits relating to their testimony.

a.

Exhibits/chronology based on documents received into evidence, including docket

sheet

10

Because the document chronology consists of approximately 100 pages, it appears in a separate Appendix I.

b.

Testimony of witnesses

(1)

Testimony of Allen W. Bird II and related exhibits to his testimony

(a)

Overpayment of trustee’s fees

In order to follow Bird’s testimony as to the issue of overpayment of trustee’s fees, a date sequence of all applications or motions for trustee’s fees, orders approving trustee’s fees and disbursements, and all checks signed by Bird, as trustee, and subsequently paid by the Debtor Corporations’ estates is set forth below. All checks were drawn on the Operating Account of NWFX, Inc., located at Union National Bank of Little Rock, Arkansas.

January 3,1989 “Application For Interim Allowance of Trustee’s Fees.” The Trustee has disbursed $859,924.00 to parties in interest through September 30, 1988. Pursuant to § 326, the Trustee is entitled to a maximum trustee’s fee of $48,000.00. The Trustee has received no interim fee payments to date, and requests an eighty percent distribution of fees earned, which is $38,000.00, subject to a final accounting of trustee’s fees.

11

January 27,1989 “Order Allowing Interim Trustee’s Fee.” The Trustee is authorized to pay himself a trustee’s fee of $38,000.00, which is eighty percent of the maximum allowed trustee fee based on actual disbursements, and subject to final review by the Court.

12

February 2,1989 Check number 001589 payable to Allen W. Bird II, Trustee, in the amount of $38,000.00. Notation on face of the check states “Interim Trustee’s Fees.” This check was recorded in the Quickzoom Report under the category “Trustee’s Fees.”

13

December 26,1989 “Application For Second Interim Allowance of Trustee’s Fees.” The Trustee has disbursed to parties in interest over $3,500,000.00 through the date of the petition. Pursuant to § 326, the Trustee is entitled to a maximum fee of $105,000.00. The Trustee has received one interim payment of $38,000.00, and believes a second interim distribution of $50,000.00 is proper at this time, subject to a final review and final accounting of all trustee’s fees.

14

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January 29,1990 Check number 002004 payable to Allen W. Bird in the amount of $50,000.00. Notation on the face of the check states “Trustee’s Fees/NWFX, Inc.” This check was recorded in the Quickzoom Report under the category “Trustee’s Fees.”

15

January 30,1990 “Order Allowing Interim Trustee’s Fees.” The Trustee is authorized to pay himself a second interim distribution of a trustee’s fee in the amount of $50,000.00 at this time, which is eighty percent of the maximum allowed trustee fee based on actual disbursements, and subject to final review by the Court.

16

May 5,1991 Check number 02424 payable to Allen W. Bird II in the amount of $1500.00. There is no notation on the face of the check as to the purpose of the payment. This check is recorded in Quickzoom Report under the category “Trustee’s Fees.”

17

December 8,1991 Check number 02569 payable to Allen W. Bird II in the amount of $2000.00. There is no notation on the face of the check as to the purpose of the payment of the check. This check is recorded in Quickzoom Report under the category “Trustee’s Fees.”

18

June 15,1992 Check number 2707 payable to the Rose Law Firm in the amount of $41,600.00. Notation on the face of the check states “NWFX 99031-1.” This check was entered in Quickzoom Report under the category “Legal Fees.”

At the hearing, Bird testified that this check was in payment of fees owed by state regulators to him personally pursuant to agreements with various states to pay him a three percent commission for handling, processing, and distributing proceeds from state surety bonds, which the Court had held were not property of the Debtor Corporations’ estates and not subject to a fee by the Debtor Corporations’ estates pursuant to § 326. Bird testified that no Court order was necessary in connection with these fees. Bird further testified at the hearing that this check was coded or entered in error in the Quicken Records as a “Legal Fee.”

19

June 25,1992 “Motion of Trustee For Allowance of Trustee’s Fee and Authorization For Payment of Legal Fees Held Back.” The Trastee recognizes that compensation of the trustee is limited to fifteen percent of the first $1000.00, six percent of the next $3000.00, and three percent of the amount in excess of $3000.00 of all moneys disbursed or turned over to the parties in interest. The following funds are property of the debtors’ estates: Northwest Financial Express, Inc., $800,000.00; NWFX, Inc., $4,296,000.00; Gold Financial Express, Inc., $162,000.00. In addition to the sums above, the Trustee had collected funds that were also assets of the estate but were not in the hands of the agents at the date of the petition. These include funds in the corporate bank accounts, unsegregated by debtor. These funds have been used to pay all of the expenses of the estate and have been (or will have been) disbursed when the case is closed. The total of these funds is $2,296,000.00. These funds are also property of the estate and are subject to an allocation of trustee’s

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fees. The maximum amount of trustee’s fees as allowed by the code as applied to these debtors would be: Northwest Financial Express, Inc., $24,000.00; NWFX, Inc., $128,880.00; Gold Financial Express, Inc., $4,860.00; and property of the estate not otherwise specifically allocated to one of the three debtors, $69,140.00; for a total trustee’s fee of $226,880.00. The Trustee believes he should be awarded the maximum statutory trustee’s fee in these cases, and attorney fees of $40,000.00 previously held back and not paid to the Rose Law Firm.

The motion further stated that the Court should be aware that as a result of the negotiations and agreements with the state regulators the Trustee was allowed a three percent commission of the non-estate funds distributed in various states to money order claimants in those states totaling $1,223,970.00, for a total fee of $41,527.00. In each case, the Trustee negotiated a contract that called for the Trustee to distribute those funds to claimants, and the expenses of distribution to be paid from bond funds proceeds, including a three percent allowance for trustee’s fees, postage, and other administrative expenses. The estate paid none of the expenses in distributing the bond funds.

20

Bird testified that at the time of this motion, he forgot he had previously paid interim trustee’s fees in the amounts of $38,000.00 and $50,000.00, and forgot to deduct these amounts from the $226,800.00 in total trustee’s fees that he was seeking in the Motion.

July 9,1992 Check number 02726 payable to Allen W. Bird II in the amount of $10,000.00. Notation on the face of the check states “Trustee’s Fees.” This check was recorded in the Quickzoom Report under the category “Trustee’s Fees.”

21

July 20,1992 Check number 02732 payable to Allen W. Bird II in the amount of $2000.00. There is no notation on the face of the check as to the purpose of the payment of the check. This check was recorded in the Quickzoom Report under the category “Trustee’s Fees.”

22

July 27,1992 “Order Granting Motion of Trustee For Allowance of Trustee’s Fee and Authorization For Payment of Legal Fee Held Back.” The Trustee is allowed a trustee’s fee in the case of Northwest Financial Express, Inc. in the amount of $24,000.00; in the case of NWFX, Inc. in the amount of $128,880.00; in the case of Gold Financial Express, Inc. in the amount of $4860.00; and as to unallocated funds in the amount of $69,140.00; for a total trustee’s fee of $226,880.00. The Trustee is also authorized to disburse $40,000.00 in legal fees held back to the Rose Law Firm.

23

July 28,1992 Check number 2733 payable to Allen W. Bird II in the amount of $5000.00. Notation on the face of the check states “Trustee’s Fees.” This check was recorded in the Quickzoom Report under the category “Trustee’s Fees.”

24

August 20,1992 Check number 02755 payable to Allen W. Bird II in the amount of $5000.00. Notation on the face of the check states “Trustee’s Fees.”

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This check was recorded in the Quickzoom Report under the category “Trustee’s Fees.”

25

October 28,1992 Check number 02806 payable to Allen W. Bird II in the amount of $5000.00. Notation on the face of the check states “Trustee’s Fees.” This check was recorded in the Quickzoom Report under the category “Trustee’s Fees.”

26

October 29,1992 Check number 02813 payable to the Rose Law Firm in the amount of $141,527.00. There is no notation on the face of the check as to the purpose of the payment. This check was recorded in the Quickzoom Report in two places: $100,000.00 was recorded under the category “Trustee’s Fees,” and $41,527.00 was recorded under the category “Trustee’s Bond.” Bird testified at the hearing that the $41,527.00 amount was recorded in the wrong category in error. The $41,527.00 amount was in payment of state bond fees owed to him personally for processing and distributing state surety bond proceeds, which the Court held were not property of the Debtor Corporations’ estates. Through negotiations and agreement with state regulators, he agreed to process and disburse the bond proceeds to money order claimants in the individual states for a three percent commission to be paid out of the bond proceeds, and not by the Debtor Corporations’ estates. Because the states were paying these fees to him personally out of non-estates funds, no Court order was required to authorize these payments. Bird testified that at the time of this check he did not recall having been paid the $41,600.00 on June 15,1992.

27

January 27,1993 Check number 02891 payable to the Rose Law Firm in the amount of $100,000.00. There is no notation on the face of the check as to the purpose of the payment. This check was recorded in the Quickzoom Report under the category “Trustee’s Fees.”

28

May 24,1993

Sua sponte

order awarding the Trustee a $20,000.00 fee enhancement. The order recognizes that the Trustee in the Debtor Corporations’ cases achieved a remarkable financial recovery for the Debtor Corporations’ estates in view of the financial disaster of the Debtors’ businesses at the time of the filing of the bankruptcies in 1986. The Trustee was successful in paying all money order claimants who could be found 100% of their claims, except money order claimants in the states of Texas, Michigan, and Tennessee, who had been paid approximately 87% of their claims, and likely will be paid up to 97% of their claims.

29

May 24,1993 Check number 2985 payable to the Rose Law Firm in the amount of $5000.00. Notation on the face of the check states “Trustee’s Fees.” This check was recorded in the Quickzoom Report under the category “Trustee’s Fees.”

30

May 24,1993 Check number 2986 payable to Allen W. Bird II in the amount of $5000.00. Notation on the face of the check states “Trustee’s Fees.”

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This check was recorded in the Quickzoom Report under the category “Trustee’s Fees.”

31

June 29,1993 Check number 3011 payable to Allen W. Bird in the amount of $2500.00. Notation on the face of the check states “Trustee’s Fees.” This check was recorded in the Quickzoom Report under the category “Trustee’s Fees.”

32

July 30,1993 Check number 3036 payable to Allen W. Bird II in the amount of $2500.00. Notation on the face of the check states “Trustee’s Fees.” This check was recorded in the Quickzoom Report under the category “Trustee’s Fees.”

33

September 22, 1993 Check number 3064 payable to Allen W. Bird in the amount of $5000.00. Notation on the face of the check states “Trustee’s Fees.” This check was recorded in the Quickzoom Report under the category “Trustee’s Fees.”

34

Bird testified as to the overpayment of trustee’s fees: “I don’t recall ever having any intent to write any check that I didn’t believe was authorized and proper under the bankruptcy code.”

35

Bird further testified that he did not believe he wrote any checks to the Rose Law Firm or himself at a time when there was not a Court order authorizing payment.

36

Bird acknowledged that a trustee should always have a Court order before he or she pays a professional or trustee’s fee.

Bird testified as to the procedure used in writing and recording checks written for trustee’s fees. Generally, one of the administrative persons would prepare the check for Bird’s signature, and be responsible for entering the data into the Quicken record system. Most of the time the administrative person would not write a check for trustee or legal fees unless Bird told them to. If they had an invoice from the Rose Law Firm, the administrative person would prepare the check and bring it to Bird for his signature. If Bird believed there was an order authorizing the check, then Bird would sign it. Bird also stated that sometimes he would call or walk up to somebody and tell them a check needed to be prepared in a certain amount.

According to Bird, it was not his practice to write a check immediately for the full amount of any trustee’s fee after an order had been entered. Bird testified that there was no specific system in place for matching checks with Court orders. The Rose Law Firm kept Court orders in a central location. Bird kept a file on attorney fees, which primarily contained bills, so Bird had a history of all bills that were issued. He also kept a trustee’s fee file where he kept whatever calculations he had made. He said there was no other system of specifically matching up a check with a particular Court order other than his memory.

37

Bird was asked about check numbered 2424 dated May 5, 1991, in the amount of $1500.00. Bird testified that as "of May 1991, there were funds being held in the estate accounts to which he was entitled a

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fee either from the Debtor Corporations’ estates or from state bond fund fees. As of, May 1991, Bird had received over a million dollars -from state bond funds out of which fees were payable, but had not been paid. Bird could not recall what he was thinking on May 5, 1991, when he wrote check number 2424, other than there were funds in the account from the state bonds.

Bird was next asked about check numbered 2569 dated December 8, 1991, in the amount of $2000.00. Bird testified that again, as of December 1991, he would have received state bond funds in excess of a million dollars out of which fees were payable, but had not been paid. He could not tie this check to a specific order. In June 1992, he wrote a check for $41,600.00 for the payment of state bond fees.

Bird testified that when he wrote check number 2726 dated July 9, 1992, in the amount of $10,000.00, he had been paid $41,600.00 toward the state bond fees. He further testified that he thought there was an order authorizing the $10,000.00 to be paid. Bird was also asked about check numbered 2732 dated July 20, 1992, in the amount of $2000.00. Bird replied that his answer was the same as check numbered 2726, he thought there was an order authorizing payment. Bird acknowled

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