United States: Trump: Delaware Bankruptcy Court Confirms Secured Nature Of Tax Firm’s Claim Against Trump Debtors

Last Updated: December 8 2014
Article by Carl D. Neff

In the recent decision of In re Trump Entertainment Resorts, Inc., Case No. 14-12103 (Bankr. D. Del. December 5, 2014), the Delaware Bankruptcy Court adjudicated the motion of Staller, Sklar, Chan & Brown, P.A. ("SSC&B" or "Firm") to fix the value and priority of its claim and to allow its claim to be deemed secured in full. SSC&B served as tax counsel to the Trump Debtors prior to their filing for bankruptcy. This case is a good read for any law firm attempting to enforce a claim for pre-petition services provided to a debtor.

Background

SSC&B was retained in 2008 to file tax appeals in the Tax Court of New Jersey for casino hotel properties owned by Trump Debtors. SSC&B achieved a settlement in 2012 which resulted in a $50.5 million reduction in tax liabilities, plus additional tax reduction assessments in the future.

The Firm was retained on a contingency basis, receiving a 17.5% contingency fee. Because the Debtors were financially distressed, SSC&B agreed to a delayed payment of their fees to accommodate Debtors. Thereafter, the Firm entered into various amendments of their agreement, and Trump Debtors acknowledged the Firm's Charging Lien. In addition, the Firm obtained an order from the Tax Court perfecting its Charging Lien.

In July 2014, Trump Debtors advised SSC&B that it would not pay the final $1.25 million installment to the Firm. SSC&B filed a motion to enforce its perfected Charging Lien with the Tax Court, which was opposed by Trump. However Debtors acknowledged that they owed the money to the Firm, and did not oppose the existence of the Charging Lien. The Tax Court then issued a Writ of Execution directing the Sheriff of Atlantic County, New Jersey to satisfy the $1.25 million judgment by levying on a Trump account.

Analysis

In light of the prior proceedings before the Tax Court, and the significant decrease in tax liability, the Court found the Debtor's challenge to the Firm's lien and their disparagement of the Firm and its fees to be "unsettling." Slip. op. at 6. The Court found no basis to reverse the findings of the Tax Court, which would be precluded under the "Rooker-Feldman Doctrine".

Moreover, the Court rejected the argument of the Debtors and Ichan Entities that because the refund was not segregated, and that the funds were spent, the Charing Lien attaches to nothing. Instead, the Court ultimately found that the SSC&B's Charging Lien attaches to all of the Debtors' cash, subject to priority liens.

Finally, the Court denied the Firm's request that the Charging Lien be applied retroactively and before the date of the liens of the Ichan Entities. The Court would not agree to prime a pre-existing lien, applying the common law rule that "first in time is first in right". Slip op. at 9.

This case should serve as a clear reminder to law firms or other professionals that when providing services to a financially distressed company, in the event the company files for bankruptcy, significant efforts may need to be taken in order to protect such claim. Therefore, service providers should engage the assistance of bankruptcy counsel to determine how best to insulate their claims from attack during the bankruptcy process.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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