Limitations Imposed on Claims Agents’ Freedom to Contract with Third Party Claims Traders

Giuseppina Mammoliti 

St. John’s University School of Law

American Bankruptcy Institute Law Review Staff

            In large bankruptcy cases, 28 U.S.C. § 156(c) provides that a court may appoint a claims agent to assist the Clerk of Court in administrative duties subject to certain jurisdictional conditions.[1] In In re Madison Square Boys & Girls Club, Inc., the U.S. Bankruptcy Court for the Southern District of New York held that a claims agent retained under 28 U.S.C. § 156(c) could not perform certain activities in exchange for a fee paid from an unauthorized source (i.e., not the estate) if those very same activities would not be permissible for the Clerk of the Court.[2] During bankruptcy proceedings, Madison Square Boys & Girls Club, Inc. (“Madison Square”), the debtor and debtor in possession, moved to retain Epiq Corporate Restructuring, LLC (‘‘Epiq’’) as the claims agent pursuant to Section 156(c). As part of the retention proposal, Epiq sought approval of an agreement with Xclaim Inc. (“Xclaim”) to provide access to the claims data.[3] Xclaim was engaged in the business of claims trading (i.e., purchasing claims in a bankruptcy hoping to make a profit), and entered into an Access Agreement with Epiq to synchronize the claims register that Epiq facilitates for a case with the claims available on the Xclaim website.[4] Under the Access Agreement, Epiq would allow Xclaim to use its proprietary software to streamline the exchange of data in an electronic format in exchange for a commission. At the second hearing before the bankruptcy court, Epiq argued in support of its retention including the Access Agreement, providing that Xclaim would operate as a private contracting company and not as an agent of the Clerk.[5] The bankruptcy court denied Epiq’s application to be retained as the claims agent in the Madison Square Boys & Girls Club, Inc. chapter 11 case so long as the retainer agreement included the Access Agreement with Xclaim. 

            The issue in Madison Square Boys & Girls Club, Inc. falls under the interpretation of the scope of duties under both 28 U.S.C. § 156(c) and the U.S. Bankruptcy Court for the Southern District of New York’s Protocol for the Employment of Claims and Noticing Agents Under 28 U.S.C. § 156(c) (‘‘SDNY Protocol’’).[6] Under the SDNY Protocol, a claims agent acts as an extension of the Clerk of the Court and is subject to the same duties, which limits the scope of the claims agent’s activities to noticing and claims management.[7] Under 28 U.S.C. § 1930, the Clerk is permitted to collect certain fees.[8] The fees at issue in this case are the permitted twenty-six dollar “Claims Transfer fee” and the thirty-one dollar “electronic copy fee,”[9] which are paid out by the Treasury. Those fees were proposed to be collected from the third-party Xclaim in the Madison Square Boys & Girls Club, Inc. case.[10] Alternatively, section 327(a) of title 11 of the United States Code (the “Bankruptcy Code”) allows a debtor to retain a claims agent and does not impose the same restrictions.[11]

            The bankruptcy court found the Access Agreement between Epiq and Xclaim to be improper as a violation of the SDNY Protocol and under the restriction of fees permitted under Title 28.[12] Epiq raised four arguments in support of its retention application including the Access Agreement, each of which was rejected by the bankruptcy court. First, under the Access Agreement, Epiq was operating as a private corporation and not as an agent of the Clerk of the Court. The bankruptcy court found this to be unpersuasive because Epiq sought to become a claims agent; its access to the data that Xclaim was seeking would only be available to Epiq because of the retention under this statute.[13] Second, Epiq argued that the activities it would engage in under the Access Agreement fall under a service to the chapter 11 debtor or to the greater public.[14] The bankruptcy court rejected Epiq’s argument as inconsistent with the facts because the debtor had not moved to retain Epiq under section 327(a) of the Bankruptcy Code.[15] Third, Epiq argued that the fee to be paid by Xclaim in exchange for access to the data was authorized, because it is thirty-one dollars and, therefore, mirrors the "Miscellaneous Fee Schedule" authorized by 28 U.S.C. § 1930. The bankruptcy court (in rejecting the nominal fee argument), held that pursuant to 28 U.S.C. § 1930, the fee, however small, is to be deposited with the Treasury.[16] Last, Epiq asserted that it is not subject to the fee schedule laid out in 28 U.S.C. § 1930. The bankruptcy court, in rejecting Epiq’s argument, held that while a claims agent is authorized to assign its own competitive rates for Section 156(c) services, the Access Agreement impermissibly required Epiq to (a) engage in activities that the Clerk of the Court is prohibited from engaging in, (b) be paid in the form of a third party fee the Clerk of the Court cannot charge, and (c) be paid from a source not authorized under the statute.[17]

            When a claims agent is appointed, it acts on behalf of the Clerk of the Court and is responsible for the management of government information. A claims agent retained under 28 U.S.C. § 156(c) in a bankruptcy case pending in the U.S. Bankruptcy Court for the Southern District of New York is not only limited in the scope of its duties to notice and manage claims, but also remains subject to the Code of Conduct of the Clerk and cannot be paid for services prohibited for the Clerk of the Court.