In the Matter of: CLIFFORD J. WOERNER; GAIL S. WOERNER, Debtors BARRON & NEWBURGER, P.C., Appellant v. TEXAS SKYLINE, LIMITED; PECOS & 15TH, LIMITED; UNITED STATES TRUSTEE; SKYLINE INTERESTS, L.L.C., Appellees
United States Court of Appeals, Fifth Circuit
July 15, 2014
EDWARD C. PRADO, Circuit Judge
Appeals from the United States District Court for the Western District
Before REAVLEY, PRADO, and OWEN, Circuit Judges.
EDWARD C. PRADO, Circuit Judge:
This case concerns a bankruptcy court‘s order reducing the fees a debtor‘s counsel received under
I. FACTUAL AND PROCEDURAL BACKGROUND
A. Events Before Woerner Filed for Bankruptcy
In 2006, Woerner and Texas Skyline, Ltd. (“Texas Skyline“) formed a limited partnership for the purpose of a real estate venture. Within the partnership, DPRS—a company Woerner owned—was the sole general partner, Woerner was a limited partner with a 49.99% interest in the partnership, and Texas Skyline was the sole investor and a limited partner in the project. Over the course of the next three years, Woerner misappropriated funds from the partnership for personal use. When Texas Skyline discovered Woerner‘s activities, it sued him in state court for breach of the partnership agreement and breach of fiduciary duties. The case proceeded to a bench trial on April 27, 2010. After the parties rested, the state court announced an oral ruling in favor of Texas Skyline and set a remedies hearing for May 14, 2010.
Woerner and his state-court trial counsel met with B & N on May 4, 2010 to discuss filing for bankruptcy. Woerner was “agitated” and wanted to find counsel that would “stand up to the Texas Skyline parties,” although “he wanted to make sure that every creditor with legitimate claims against him was paid.” B & N agreed to the representation and filed Woerner‘s voluntary petition for Chapter 11 bankruptcy relief on May 13—the night before the state-court remedies hearing. That filing triggered the Bankruptcy Code‘s automatic stay provision, which brought the state-court proceeding to a halt. See
B. B & N Litigates Woerner‘s Chapter 11 Case
In the ensuing eleven months, B & N provided services that it claimed were worth $134,800 in legal fees. These services included the filing of a mandatory disclosure statement. On May 18, 2010, Woerner filed mandatory disclosure documents with the bankruptcy court—namely, schedules and a statement of financial affairs.
These services also included efforts to defend Woerner in adversary proceedings to prevent Woerner from discharging liabilities.
B & N helped Woerner negotiate with his creditors. Woerner and the adversarial creditors agreed to mediation with a bankruptcy judge. Talks with Texas Skyline broke down, but on December 17, 2010, B & N filed a Joint Motion to Compromise with the bankruptcy court, which B & N maintained would have resolved this case had it completely settled. Yet Baker insisted that the settlement was merely a proposal, objected to it and refused to execute it. For these negotiation services, B & N sought over $6,000. See infra Part I(D).
B & N also investigated the concealment of some of Woerner‘s assets and subsequently amended Woerner‘s financial disclosures to include approximately $9,000 of additional personal goods, including investments, jewelry, firearms, and fur coats that were not originally disclosed. This concealment prompted Baker to move to convert Woerner‘s case from a Chapter 11 reorganization to a Chapter 7 trustee-administered liquidation. See
C. Woerner‘s Case Is Converted to Chapter 7, Ending B & N‘s Employment
The bankruptcy court conducted a hearing on the pending motions, denying the motion to approve settlement and granting the motion to convert on April 20, 2011. As the bankruptcy court summarized in its oral ruling on the fee application, “the Court found that it was appropriate to convert this case to Chapter 7 because the Court was of the opinion . . . that [Woerner] w[as] not forthright as a Debtor[] under the Bankruptcy Code in terms of listing [his] assets and giving proper evaluations.” On September 3, 2011, B & N filed an application for approximately $134,000 in fees under
D. The Bankruptcy Court Disallows Most of B & N‘s Requested Fees
The bankruptcy court then conducted a hearing on the fee request. B & N offered testimony from Woerner‘s nonbankruptcy counsel and two attorneys from B & N to prove that (1) Woerner brought the case
The bankruptcy court took the fee application under advisement and entered an oral ruling on April 11, 2012. Citing In re Pro–Snax Distributors, Inc., 157 F.3d 414 (5th Cir. 1998), the court explained that, for a service to be compensable under
The following table (based on U.S. Trustee‘s Br. 16–17) summarizes the bankruptcy court‘s findings:
| CATEGORY | FEE REQUESTED | FEE ALLOWED | FINDING |
|---|---|---|---|
| Asset Analysis and Recovery | 8,692 | 1,500 | Fees for initial analysis reasonable; Fees for subsequent investigations unreasonable; Fees for Texas Skyline deposition not beneficial to the estate |
| Alternative Dispute Resolution | 6,647 | 6,647 | Reasonable |
| Case Administration | 46,532 | 5,000 | Fees for mandatory meetings and filings reasonable; Fees for litigating conversion motion and settlement motion not beneficial to the estate |
| Claims Determination | 14,301 | 0 | No benefit to the estate |
| Dischargeability | 25,170 | 0 | No benefit to the estate |
| Disclosure Statement and Plan | 13,075 | 0 | No material benefit to the estate |
| Employment and Fees | 3,172 | 0 | No material benefit to the estate |
| Filing of Schedules and Statement of Financial Affairs | 5,000 | 2,500 | Redundant with asset analysis, unreasonable |
| Lift Stay | 3,810 | 1,000 | Abnormally high |
| Business Operations | 562 | 562 | Reasonable |
| Client Communications | 2,200 | 2,200 | Reasonable |
| Financing | 225 | 0 | Unreasonable |
| Sale Use and Lease of Assets | 1,252 | 0 | No benefit to the estate |
| TOTAL | $130,638 | $19,409 |
B & N then moved to certify a direct appeal to the Fifth Circuit. In denying the motion, the bankruptcy court also noted its ruling was informed by the bad conduct of the Debtors themselves, which
The district court entered its final order affirming the bankruptcy court on January 17, 2013. It ruled that the record supported finding that B & N‘s fees were unreasonable under
II. JURISDICTION AND STANDARD OF REVIEW
B & N timely filed a notice of appeal from the bankruptcy court‘s order to the United States District Court for the Western District of Texas under
This court reviews the district court‘s decision “by applying the same standard of review to the bankruptcy court‘s conclusions of law and findings of fact that the district court applied.” In re Cahill, 428 F.3d 536, 539 (5th Cir. 2005) (citation omitted). Accordingly, this court reviews the bankruptcy court‘s legal conclusions de novo and its findings of fact for clear error. Id. (citations omitted). By contrast, this court reviews the bankruptcy court‘s award of attorneys’ fees for abuse of discretion. Id. (citing In re Coho Energy, Inc., 395 F.3d 198, 204 (5th Cir. 2004); In re Barron, 325 F.3d 690, 692 (5th Cir. 2003)). “An abuse of discretion occurs where the bankruptcy court (1) applies an improper legal standard or follows improper procedures in calculating the fee award, or (2) rests its decision on findings of fact that are clearly erroneous.” Id. (citing In re Evangeline Ref. Co., 890 F.2d 1312, 1325 (5th Cir. 1989)).
III. DISCUSSION
B & N argues that the district court erred in two ways: first, in applying the wrong standard for awarding attorney‘s fees and, second, in misapplying that standard. We address these issues in turn.
A. Whether the Bankruptcy Court Used the Proper Standard
B & N contends that the court applied the wrong standard for awarding attorney‘s fees under
1. Statutory Framework
a. Reorganization Under Chapter 11 of the Bankruptcy Code
When a debtor commences a bankruptcy case, a legal entity known as the “estate” is created.
If the creditors accept the reorganization plan, it must then be confirmed by the bankruptcy court.
b. Compensation to Professionals Under Chapter 11
The debtor-in-possession may ask the bankruptcy court for permission to employ professionals, including attorneys, to assist the debtor-in-possession with the reorganization of the bankruptcy estate.
Congress has enacted a uniform scheme for retaining and compensating such court-authorized attorneys under
(A) the time spent on such services;
(B) the rates charged for such services;
(C) whether the services were necessary to the administration of, or beneficial at the time at which the service was rendered toward the completion of, a case under this title;
(D) whether the services were performed within a reasonable amount of time commensurate with the complexity, importance, and nature of the problem, issue, or task addressed; [and]
. . .
(F) whether the compensation is reasonable based on the customary compensation charged by comparably skilled practitioners in cases other than cases under this title.
Section 330 further lists those services for which a court may not provide compensation:
(4)(A) Except as provided in subparagraph (B), the court shall not allow compensation for—
(i) unnecessary duplication of services; or
(ii) services that were not—
(I) reasonably likely to benefit the debtor‘s estate; or
(II) necessary to the administration of the case.
2. Fifth Circuit Case Law: Pro-Snax
The underlying bankruptcy case at issue in Pro–Snax was initiated when creditors filed an involuntary Chapter 7 bankruptcy petition against the debtor. Pro-Snax, 157 F.3d at 416. The bankruptcy court later converted the case to Chapter 11 upon the debtor‘s consent and appointed a
The law firm of Andrews and Kurth (“A & K“) provided legal services to the debtor both before and after the case had been converted to Chapter 11. Id. at 416–17. Upon A & K‘s fee application, the bankruptcy court awarded A & K $30,000 in fees and $7,500 in expenses. Id. at 417 n.4. The district court reversed the award on the ground that
On appeal, our court divided its discussion of the merits into two parts. It first took up the issue of “whether a Chapter 11 debtor‘s attorney may be compensated for work done after the appointment of a trustee under
In the second, briefer part of the opinion, of relevance here, we discussed the applicable standard to evaluate A & K‘s fee application for the services it rendered to the debtor before the trustee was appointed. This court considered two possible tests advocated by the parties. A & K urged the use of a “reasonableness” test—“whether the services were objectively beneficial toward the completion of the case at the time they were performed.” Id. at 426 (emphasis added). The creditors, on the other hand, advanced a hindsight approach—whether the services ”resulted in an identifiable, tangible, and material benefit to the bankruptcy estate.” Id. (emphasis added). With little analysis or explanation—the opinion cites only one case in support of its position, In re Melp, Ltd., 179 B.R. 636, 640 (E.D. Mo. 1995)—we adopted the stricter “hindsight” or “material benefit” measure. The court expressed its reluctance “to hold that any service performed at any time need only be reasonable to be compensable.” Id.
3. Analysis
The bankruptcy court below relied on the holding in Pro–Snax in making its ruling on the fee application. In its oral ruling on the fee application, the court emphasized that “[Chapter 11 attorney‘s] fees are at risk if there is not the attendant material benefit to the estate.” As the district court succinctly put it: “[B & N] argues this [reliance on Pro-Snax] was error, but Pro-Snax is binding, Fifth Circuit precedent.”
Further, any argument that Pro–Snax was wrongly decided is irrelevant to the key question before us: whether the bankruptcy court erred by applying the wrong standard. Just as the district court said, whether ”Pro–Snax was a wrongly decided, errant opinion . . . is an argument properly addressed to higher tribunals,” but Pro-Snax is still the governing standard. Therefore, based on our review of the statutory framework and this court‘s decision in Pro-Snax, we conclude that the bankruptcy court did not apply the wrong standard and thus did not abuse its discretion.
B. Whether the Bankruptcy Court Erred in Finding that B & N Was Entitled to Only a Small Subset of the Fees Requested
B & N further contends that the court abused its discretion by not awarding fees for filing and amending schedules, which it contends provided an identifiable, tangible, and material benefit and therefore should be awarded under any standard.2 B & N argues that the bankruptcy court did not reward the firm for necessary activity—namely, amending schedules and statements of financial affairs, citing
Trustee brief glosses it, “it was not reasonable [for] the estate to foot the bill for the debtor‘s overt misconduct.” More importantly, nothing in the text of
Therefore, we hold that the district court did not abuse its discretion in denying these fees.
IV. CONCLUSION
For the foregoing reasons, we AFFIRM the bankruptcy court‘s ruling on B & N‘s fee application.
EDWARD C. PRADO, Circuit Judge, specially concurring:*
Even though we find no error in the bankruptcy court‘s use of the Pro-Snax standard to resolve the attorney fee application in this case, I write separately to note that the Pro–Snax standard may be
The plain language of
The statute reinforces this point in an accompanying section: a court must disallow any compensation when “the services were not reasonably likely to benefit the debtor‘s estate or necessary to the administration of the case.”
* Judges Reavley and Owen join this special concurrence.
Section 330, then, explicitly contemplates compensation for attorneys whose services were reasonable when rendered but which ultimately may fail to produce an actual benefit. “Litigation is a gamble, and a failed gamble can often produce a large net loss even if it was a good gamble when it was made.” In re Taxman Clothing Co., 49 F.3d 310, 313 (7th Cir. 1995). The statute permits a court to compensate an attorney for any activities that were “necessary,” but also for any good gambles—that is, services that were objectively reasonable at the time they were made—even when those gambles do not produce an “identifiable, tangible, and material benefit.1 What matters is that, prospectively, the choice to pursue a course of action was reasonable.2
The legislative history of
administration of a bankruptcy estate are acting not as private persons but as officers of the court, they should not expect to be compensated as generously for their services as they might be were they privately employed.” Id. (citation omitted); see also Mass. Mut. Life Ins. Co. v. Brock, 405 F.2d 429, 432–33 (5th Cir. 1968) (holding that the interest of the public—especially the debtor and creditors—could limit compensation to a debtor‘s counsel), superseded by statute,
But “[i]n enacting section 330, Congress intended to move away from doctrines that strictly limited fee awards” and instead provide compensation “commensurate with the fees awarded for comparable services in non-bankruptcy cases.” In re UNR Indus., Inc., 986 F.2d 207, 208–09 (7th Cir. 1993) (citing, inter alia, H.R. Rep. No. 95–595, at 329–30 (1978), reprinted in 1978 U.S.C.C.A.N. 5963, 6286); see also 3 Collier on Bankruptcy ¶ 330.03[a][3]. To that end,
The drafting history of those provisions suggests that Congress
considered and specifically rejected an actual benefit test. The Senate version contained the seed of the eventual guidelines for reasonable compensation under
Besides contravening the plain effect of
Snax. In In re Ames Department Stores, Inc., 76 F.3d 66, 71 (2d Cir. 1996), the Second Circuit specifically rejected an approach that would make fee award “contingent upon a showing of actual benefit to the estate,” opting instead to give effect to the statute‘s “reasonably likely to benefit the estate” standard. Id. at 71. The Third Circuit rejected the very approach our court adopted in Pro–Snax, concluding that it departed from the statute by imposing a “heightened standard” and requiring evaluation “by hindsight.” In re Top Grade Sausage, Inc., 227 F.3d 123, 132 (3d Cir. 2000) abrogated on other grounds by Lamie, 540 U.S. 526. Finally, the Ninth Circuit held that
While Pro-Snax purported to consider the post-1994 guidelines of
The Pro-Snax actual benefit test has led to confusion among the courts of our circuit. According to one Fifth Circuit bankruptcy practitioner, “the Pro-Snax decision is of constant discussion and concern.”
[A]ll courts interpreting Pro-Snax have reached the conclusion that some sort of retrospective analysis is required. Lower courts have adopted differing views of what type of retrospective analysis should be employed and have disagreed whether a prospective analysis may be considered in determining whether Pro–Snax is satisfied.
In re Broughton Ltd. P’ship, 474 B.R. 206, 209–10 n.5 (Bankr. N.D. Tex. 2012) (collecting cases). So, for example, one district court interpreted the Pro–Snax requirement as a threshold issue of entitlement to compensability under
We note that application of the
For these reasons, we urge reconsideration of the standard in Pro–Snax by this court sitting en banc.