647 B.R. 236
Bankr. E.D. Wash.2022Background
- Two affiliated debtors: Easterday Ranches (Ranches) and Easterday Farms (Farms); Ranches filed chapter 11 after massive "ghost cattle" fraud; Farms later filed because of joint liability on some debt.
- Debtors retained common lead counsel (PSZJ); the U.S. Trustee (UST) objected to common representation but the court initially approved it, noting committees and disclosure as checks.
- Debtors negotiated a global resolution across many stakeholders and filed multiple chapter 11 plans; two plans (Dec. 2021 and Feb. 2022) are labeled the "Offending Plans."
- UST objected to PSZJ’s fourth interim fee application, arguing the Offending Plans subordinated Farms’ interests, created an actual intercompany conflict, and thus fees related to those plans should be denied under 11 U.S.C. §§ 328(c) and 330(a).
- The confirmed May 2022 plan produced a global settlement that yielded a 100% recovery for Farms’ unsecured creditors and resolved intercompany allocation and consolidation disputes.
- The court concluded PSZJ did not represent an interest adverse to either estate and declined to deny or reduce the firm’s fees under §328(c) or §330(a).
Issues
| Issue | UST's Argument | PSZJ's Argument | Held |
|---|---|---|---|
| Whether PSZJ’s filing of the Offending Plans made it "not disinterested" or representing an interest adverse to Farms under §328(c) | Offending Plans subordinated Farms and favored Ranches, creating an actual conflict and disqualifying PSZJ | Plans were negotiation tactics aligned with Farms’ interests (risk, timing, settlement value); dual representation was disclosed and justified | Court: No actual conflict; §328(c) not triggered |
| Whether fees for work on the Offending Plans are unreasonable or not beneficial under §330(a) | Fees tied to adverse representation and to plans that harmed Farms, so should be disallowed | Work materially advanced a global settlement that benefitted Farms; services were necessary and reasonable | Court: Fees compensable under §330(a) |
| Whether the Offending Plans were facially unconfirmable or an abuse of the plan process warranting sanctions | Plans impermissibly favored Ranches and were abusive negotiation devices | Filing plans is a legitimate negotiation/settlement tool; plans were not facially unconfirmable | Court: Plans were part of permissible negotiation; not abusive per se |
| Even if §328(c) could apply, whether a penalty or fee reduction is warranted | A penalty is appropriate to enforce disinterestedness rules | No prejudice to Farms; full disclosure; substantial benefit realized; draconian sanction unwarranted | Court: Exercise of discretion—no penalty; reduction denied |
Key Cases Cited
- Brown v. Gerdes, 321 U.S. 178 (1944) (bankruptcy court has exclusive authority to fix allowances for counsel fees)
- Baker Botts L.L.P. v. ASARCO LLC, 576 U.S. 121 (2015) (§330 reasonableness standard for professional compensation)
- JPMCC 2007-C1 Grasslawn Lodging, LLC v. Transwest Resort Props., Inc., 881 F.3d 724 (9th Cir. 2018) (approves a "per‑plan" approach in multi‑debtor plan contexts)
- In re Perez, 30 F.3d 1209 (9th Cir. 1994) (describes the role and responsibilities of debtor’s counsel in chapter 11 negotiations)
- Rome v. Braunstein, 19 F.3d 54 (1st Cir. 1994) (discusses §328(c) as a discretionary penalty for conflicts or lack of disinterestedness)