U.S. trustee objects to EFI fees

March 25, 2009

By KAREN VELIE and DANIEL BLACKBURN

A federal bankruptcy judge overseeing the division of assets of failed North County hard money lender Estate Financial Inc. (EFI) balked Wednesday at professional fee requests totaling nearly $4 million and said she will examine those claims more closely.

Trustees of EFI’s funds sought the court’s approval of the fees for themselves, attorneys, and others working on EFI’s bankruptcy proceedings during a hearing in a Santa Barbara U.S. bankruptcy court so that they could start dispersing funds monthly to professionals working on the bankruptcy.

Judge Robin Riblet agreed with U.S. trustee Brian Fittipaldi’s objection to the proposed charges.

Fittipaldi told the court that some of the professionals’ request for fees presented appeared to be cross-billing and double-billing.

Riblet then said she would not grant any fee request above the amount of unencumbered funds in the EFI accounts.

“I will determine how much is paid to the professionals. I am not allowing all the millions of dollars in fees,” she said. “I am only allowing what is appropriate to ask for now. Some of the professionals crossed the line.”

EFI trustee Thomas Jeremiassen explained that eight properties had been sold and $1 million had been dolled out to investors. Approximately $760,000 remains unencumbered. Of that he wanted $600,000 to go to professional fees.

Riblet asked if the part of money belonged to “one of the estates.”

“Kind of,” Jeremiassen responded. “The fund didn’t get assigned deeds of trust.”

Riblet continued to question the trustee on how monies would be split between the two separate bankruptcies – EFI and the EFI Fund.]

“So your position is I should just take $600,000 and allocate it to the professionals discounting that $100,000 may belong to the fund and $500,000 to EFI,” Riblet said.

Jeremiassen responded, “Yes, that is what we are suggesting.”

Riblit temporarily tabled the claims and informed the professionals she requires written responses to Fittipaldi’s fee objections prior to the next hearing on April 22, or those requests will be waved.

One of the creditor’s responsible for EFI’s bankruptcy filing, developer Ron Cooper, asked the judge why the trustees were not communicating upcoming court dates with the public as previously stated in court. The trustees agreed to start posting hearing dates on their web site.

In addition, Cooper voiced his dismay at the lack of construction and real estate experience held by the professionals. He noted that approximately $60 million had been lost due to the speed of the trustees and their crews.

“The slowness in the disposition of the assets is causing the estate harm,” Cooper added. “There will be a motion to transfer to Chapter 7 before there are more losses.”

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Stefan

(By: kielper on 3/29/09 ) Continued


“of the [Chapter 11] procedure itself” that results in that recovery rate. Id. at 1290. In sum, these experts conclude:

“Chapter 7 seems to offer few advantages: It takes almost as long to resolve, requires similar fees, and in the end

provides creditors with lower recovery rates . . . than a comparable Chapter 11 procedure.” Id. at 1301.

The administrative expense to the EFI Estates has been substantial. This should not come as a

surprise. The principals of EFI are in jail, charged with fraud, violations of securities laws, etc.

Their business records were in shambles at the time the Trustees were appointed. The Trustees had

to spend a considerable amount of time reconstructing and reorganizing the Debtors records,

analyzing the estates assets, and determining the validity of thousands of transactions and liens.

Most of this work has been completed and the Trustees have moved forward to address the

property issues – maintenance and sale. Given the amount of work already completed, it is most

probable the Estates have already absorbed the bulk of the costs of that were necessarily incurred

due to the morass of the EFI business operations.

Should the estates be converted to Chapter 7, a Chapter 7 trustee would be appointed. He or she

would be entitled to employ legal counsel and perhaps accountants that would add additional

administrative expenses. These professionals would be paid ahead of Allowed General Unsecured

Creditors. Moreover, there is a learning curve that the Chapter 7 Trustees’ professionals would have

to go through, all at a cost to the Estates. On the other hand, the Chapter 11 trustees already have

legal counsel knowledgeable about this case and the legal issues surrounding the Assets of the

Estate. The Chapter 11 trustees also have their own accounting and administrative personnel who

are best qualified to resolve outstanding claims and issues related to assets. The invaluable advice of

the Committee — which will continue to supervise the Liquidating Trustees – would be lost as there

are no committees in Chapter 7 liquidation. Finally, given what has occurred in this case it would be

highly likely that the court would appoint the same professionals to continue in their roles, only

under the rules of Chapter 7.

It must also be noted that the accounting related to the Debtors' business was complex and its

claims adjudication process will remain complex. Arcane matters of accounting and account

reconciliation related to royalty payments and obligations are best handled by the Chapter 11

trustee's own experienced staff who have already been working diligently for months to "get their

hands around" these assets. These persons are especially important because of their knowledge of

the assets and issues cannot easily be accessed by a Chapter 7 trustee reading “cold” records.

In summary, bankruptcy is a complicated and complex process. The fraud perpetrated upon the

investors, and the complete disorganization of the business records of the debtor further

complicates what needs to be accomplished. Layer the collapse of the economy upon this, and it

should be recognized that the administration of the EFI estate is not merely another common place

Chapter 11 or that the process will completed within a short period of time. It is easy to look in

from the outside, without the benefit of knowledge and cast stones. In this case, those that would

seek conversion are most likely not fully informed. Moreover, one must test the interests of those

seeking the conversion. Are they debtors of the Estates who think they may have a better chance at

compromising their debt obligations if the matter was handled as a Chapter 7 Liquidation? Do they

have interests in purchasing EFI’s real estate and are they looking for a way to get the lowest price

possible (a forced liquidation)? There are many factors that motivate people – those factors should

be considered in light of the “campaign” that is taking place.

The Committee is comfortable that the professionals retained in the EFI bankruptcy are some of the

most well respected professionals practicing in the field. The Committee believes that these

professionals take their responsibilities seriously and have been executing those responsibilities in

the best interests of creditors and investors.

Sincerely,

/s/

Larry W. Gabriel, Of Counsel,

Ezra|Brutzkus|Gubner