Houston draws many visitors looking for the hottest and spiciest foods in Texas.  A recent Houston tradition is the “Houston Hot Sauce Festival,” which last September for its 8th annual fest drew over 40 competitors statewide.  So who’s got the hottest sauce in Texas?  The festival’s “2006 People’s Choice Award” for the festival’s hottest sauce went to the sauce aptly-named “Stupid Hot aka Unbearable.”  Sadly, the planners report, “due to a combination of personal tragedy and the general economy, it is not feasible to put on the festival this year.”  To the right is last year’s official festival t-shirt, an eerie premonition of this year’s salmonella-laced deadliest batch.

Houston also is home to one of the hottest bankruptcy districts, whose judges include Judge Marvin Isgur, whose opinions have stirred much controversy on several fronts, and Chief Judge Wesley Steen, who last year completed his term as the first sitting judge to serve as President of the American Bankruptcy Institute.  Much personal gratitude is due Judge Steen for his recommendation of this blog as a resource to incoming judicial clerks, and for the establishment of the ABI Bankruptcy Blog Exchange under his watch, which includes this blog at the top of the list.

As often observed on this blog, Houston’s Judge Isgur has laid enough of his own special hot sauce to send debtors, creditors, and lawyers alike rushing for the exit.  Early on, I pinned the classic “Don’t Mess with Texas”  label on him for his pathbreaking decision tossing poor Mother Hubbard from her cupboard (though he later reversed himself on other grounds).  Here, he cited to Abe Lincoln’s stirring 278-word Gettysburg address to find meaning in 278 words of statutory gibberish.  And here (at p.94, In re Porcheddu, 338 B.R. 729), his extreme hot sauce cost a prominent Texas firm $65,000 for trying to pull the wool over his keen eyes.  Finally, early last year, at a luncheon sponsored by the Houston Association of Debtors Attorneys, Judge Isgur served up some more hot sauce after a credit counseling firm’s CEO spouted off about how his firm never hires bankrupts, thus prompting Judge Isgur to launch this investigation into that firm’s hiring practices and whether they violated the anti-discrimination provisions of Bankruptcy Code section 525(a).  After laying the hot sauce on thick at this status conference, the CEO finally conceded in these sworn affidavits he was effectively “out to lunch” (which he technically was) when it came to his having real knowledge of the firm’s hiring practices (and that, moveover, he wasn’t trying to be cute in earlier affidavits to avoid possible sanction).

Judge Steen, for his part, also has his own fiery sauce for lawyers, as reported last year by the WSJ Law Blog’s founder, Peter Lattman.  And, of course, who can forget the fiery rebuke of Countrywide and its lawyers delivered by another Houston Bankruptcy Judge, Jeff Bohm, for “negligent bungling” that came within a hair’s breadth of “full-blown bad faith.”  Finally, let’s not forget Houston Bankruptcy Judge Letitia Clark’s flaming sauce served in issuing a TRO that enjoined the Russian government’s planned auction of Yukos (as reported at length in these series of articles by Houston’s Clear Thinker, Tom Kirkendall).  Given recent events in Georgia, she’s looking braver and braver by the minute.

So, in the end, just as Houston’s Hot Sauce Festival’s promoters warn that great sauces may be obscured by ordinary labels, don’t let the calm and friendly demeanors of Houston’s bankrutpcy judges fool you.  One dose of their own respective blends and you’ll feel about as “sharp as a mashed potato,” as they say in Texas.

All this is a long-winded late Friday afternoon introduction to the real point of this post, which is Judge Steen’s latest decision in In re Premiere Holdings of Texas LP, 2008 WL 2963041 (Bankr. S.D. Tex. 7/28/08) (pdf).  This long running case began shortly after 9/11 and was one of the first sub-prime mortgage debacles, eventually landing the founders in hot water, according to the criminal complaint described here by Tom Kirkendall.  Coincidentally, one of the founders, David Lapin, just pled guilty to criminal charges this past Monday, and the trial of his two other partners is set for later this month (looks like the dominant strategy ruled this prisoner’s dilemma).

Meanwhile, Premiere’s reorganization plan, confirmed on June 18, 2002, has run its course, and the liquidating trustee made its final distribution to creditors on 4/14/08.  Of the millions distributed, $25,969 in checks remained unclaimed.  Because the plan didn’t economically provide for disposition of these unclaimed funds, the liquidating trustee filed a motion to deposit the funds into the Court’s registry.  Despite the lack of response or opposition, Judge Steen found himself in a quandary since “deposit of unclaimed funds into the registry of the court is only available under Bankruptcy Code § 347(a) and only for unclaimed funds in chapters 7, 12, and 13.”  Conversely, unclaimed funds in a chapter 11, he noted, is governed by Bankruptcy Code § 347(b), which requires that the funds revert to the debtor or to the entity acquiring the assets of the debtor under a plan.

Judge Steen, however, saw no justice in letting the unclaimed funds escheat to the cheats, and so wouldn’t let the money go back to the debtor and its principals.  Literal application of § 347(b), however, would have resulted here in an “infinite circular loop” that would “be broken only when the administrative expenses of continuing the loop extinguished the funds in the trust.”  Judge Steen thus broke the loop and ordered that the funds be deposited into the Court’s registry to escheat to the United States and further disposition under 28 USC § 2041 et seq.

The problem faced by Judge Steen and the liquidating trustee is not new, with liquidating trustees and disbursing agents long trying to creatively distribute unclaimed funds.  In the most recent comprehensive review of the subject, Chicago’s Judge Jack Schmetterer in In re Xpedior, Inc., 354 B.R. 210 (Bankr. N.D. Ill. 2006) (pdf), held that the
bankruptcy court could not delegate to the liquidating trustee responsibility for selecting charities to which unclaimed plan distributions would be distributed pursuant to the cy pres doctrine“Exercise of the cy pres doctrine,” he noted, “is a judicial function which should not be delegated to individuals to make donations to objects of their personal interest without court guidance or standards.”  Id. at 239.  Citing recent district court precedent, Judge Schmetterer pointed to other judges that have “used interesting devices” to dispose of such funds, even soliciting grant applications from worthy causes.  Id.

The $25,969 left unclaimed in the Premiere case, along with the $4,000 in monies unspent that had been reserved for expenses, would probably have adequately funded this year’s cancelled 2008 Houston Hot Sauce Festival.  Too bad the time to file a motion for reconsideration passed just yesterday.  It’d be hard to fault Judge Steen for funding such a worthy cause!

© Steve Jakubowski 2008