In Re Rockaway Bedding, Inc.
Dear Counsel:
Edward T. Gavin, the Post-Confirmation Plan Trustee (“Plan Trustee”), is before the Court on a motion to compel the respondents, Duane Morris LLP (“DM”), Capstone Advisory Group, LLC (“Capstone”) and Nuzzi & Mason, LLC (“NM”) (collectively, “Respondents”), to disgorge fees previously received, pursuant to a Consent Order entered by the Court on October 16, 2008 (“Consent Order”). The Plan Trustee argues that disgorgement is necessary in order to ensure that all chapter 11 administrative claimants are paid on a pro rata basis, in alleged accordance with the confirmed Plan of Liquidation (“Plan”).
The Respondents oppose the motion on the basis that: (1) the Consent Order was a final order, not subject to disgorgement; (2) the Plan Trustee has not satisfied the requirements for relief from a final order pursuant to Federal Rule of Bankruptcy Procedure 9024, which incorporates Federal Rule of Civil Procedure 60(b); and (3) the doctrines of res judicata, judicial es-toppel, and equitable estoppel otherwise preclude reconsideration of the Consent Order. 1
For the reasons that follow, the motion is denied. The Court has jurisdiction over this motion pursuant to 28 U.S.C. §§ 1334(a)-(b), 157(b)(1), and the Standing Order of Reference from the United States District Court for the District of New Jersey dated July 23, 1984. The matter is a
FACTS AND PROCEDURAL HISTORY
The Debtor, Rockaway Bedding, Inc., and its affiliated debtors 2 (collectively “Debtors”) filed voluntary petitions under chapter 11 on April 9, 2007. The Court approved the Debtors’ retention of DM as general bankruptcy counsel, Capstone as financial consultants, and NM as special counsel. On May 19, 2008, the Court confirmed the Debtors’ Joint Plan of Orderly Liquidation (“Plan”). Pursuant to the Plan, Mr. Gavin was appointed the Plan Trustee for the Post Confirmation Trust created thereunder. The Plan treated the Respondents as Allowed Administrative Claimants and provided that they were to be compensated on a pro rata basis from recoveries until paid in full. (Plan, Art. II, See. C, part 1) In the event the case was converted to chapter 7 after confirmation, the Plan provided that all estate property “that had not been disbursed pursuant to the Plan” would re-vest in the chapter 7 estate. (Id. at Art. Ill, Sec. I (emphasis added)) Furthermore, “any Allowed Claims for Administrative Expenses which are not paid on the Effective Date, and those Post-Effective Date Fees which are not paid prior to conversion, shall continue to be entitled to administrative priority ...” (Id. (emphasis added)) At the time of confirmation, the estate was administratively insolvent. (Decl. of Edward T. Gavin, ¶ 2) (“Gavin Deck”)
Following confirmation, the Respondents filed final fee applications requesting the following compensation:
(1) for DM, approval of $1,984,156.90 in fees and expenses over the duration of its service periods;
(2) for Capstone, approval of $1,644,357.82 in fees and expenses over the duration of its service periods; and
(3) for NM, approval of $147,285.00 in fees over the duration of its service periods and no reimbursement of expenses.
The Plan Trustee advised the Respondents that he intended to object to their respective applications. Thereafter, the parties engaged in extensive negotiations culminating, on October 16, 2008, in a Consent Order granting “allowed ... final compensation for services rendered” and acknowledging prior receipt by the Respondents of sums certain “as full and final satisfaction” of the allowed fees. (Consent Order Resolving Any Objections and Allowing Interim and Final Fee Applications [ ], “Resolution of the Trustee’s Objections”, ¶¶ 22-30) (“Consent Order”) The final allowed compensation was as follows:
(1) for DM, $1,563,484.20 in fees and expenses;
(2) for Capstone, $1,298,824.10 in fees and expenses; and
(3) for NM, $116,067.00 in fees.
Id.
In recognition of the estate’s administrative insolvency and the total funds presently available for distribution, the Plan Trustee has concluded that each chapter 11 Administrative Claimant should receive 79.43% of its “allowed” claim, in accordance with the
pro rata
distribution scheme provided for in the Plan. (Gavin
The Plan Trustee notes that each of the Respondents has already received over 98% of its respective allowed claim and that disgorgement is appropriate to ensure the Respondents are not paid in excess of other similarly situated creditors. (Gavin Deck, at ¶ 8) Conversely, the Respondents argue that the Plan Trustee should not be permitted to use the “allowed fees” in the Consent Order as a sword to force disgorgement. (Joint. Obj., ¶ 8) They note their collective decision to forego over $800,000 in combined requested fees as consideration for the resolution of the Plan Trustee’s objections. (Id.) If the present motion is granted, the Respondents will realize a distribution of only 61-64%, respectively, of their total requested fees in the case. (Id. nl) The Respondents argue that such a result is clearly inequitable in light of, among other reasons, the 79.43% distribution the Plan Trustee proposes for the other Administrative Claimants.
DISCUSSION
I. Professional Fees in Bankruptcy
A. Fee Awards and Disgorgement Generally
Pursuant to 11 U.S.C. §§ 330 and 331, a bankruptcy court may award reasonable compensation and reimbursement for expenses, as well as interim payments, to professionals employed pursuant to sections 327 or 1103 of the Bankruptcy Code. Section 330(a)(5) specifically permits a court to order disgorgement of interim payments received under section 331, to the extent that they exceed the ultimate amount awarded under section 330. 11 U.S.C. § 330(a)(5). Thus, interim awards to professionals are always “subject to reexamination and adjustment” and no professional may claim to be unaware of the inherent risk of disgorgement.
In re St. Joseph Cleaners, Inc.,
Although it is well established that interim fees are always subject to disgorgement, the issue of whether a court may order disgorgement of final fees is less settled. The Court’s research has turned up only one reported decision holding that final fee awards are not subject to disgorgement specifically because of their “final” status.
See St. Joseph Cleaners,
On appeal in
Specker Motors II,
the Sixth Circuit addressed the narrow issue of whether a retainer paid to the debtor’s counsel during the chapter 11 case remained property of the estate and subject to disgorgement in order to achieve
pro rata
distribution among claimants at the same priority level, as mandated by section 726(b), after the case was converted to chapter 7.
Specker Motors II,
Whereas the
Specker Motors
cases resulted in court-ordered disgorgement, the present case is distinguishable because the fees awarded were the result of a negotiated agreement between the Respondents and the Plan Trustee, in return for a resolution of the Plan Trustee’s objections. The fee awards were never designated as interim compensation. The Consent Order clearly designates the compensation received by the Respondents as “full and final satisfaction of the allowed fees” rather than “interim” payments as noted in
Specker Motors.
Thus, as final payments, the awards are not subject to disgorgement under section 330(a)(5).
See St. Joseph Cleaners,
Of course, a final fee award is like any other final order in that it remains subject to vacatur or modification under Federal Rule of Civil Procedure 60. Here, the
II. Relief from an Order under Federal Rule of Civil Procedure 60
The Plan Trustee’s motion is based entirely on the central principal of equality of distribution among creditors of equal priority,
see Begier v. I.R.S.,
Rule 60(b) provides the standard for obtaining relief from a final judgment or order. Relief may be granted for the following reasons: (1) mistake or excusable neglect; (2) newly discovered evidence that could not have been discovered earlier by due diligence; (3) fraud or misrepresentation; (4) the judgment is void; (5) the judgment was satisfied, released, or discharged; or (6) the interests of justice. Fed.R.Civ.P. 60(b). Relief under Rule 60(b)(6) is a “catch-all” provision and mutually exclusive of subsections (b)(l)-(5).
See Liljeberg v. Health Servs. Acquisition Corp.,
The Rule requires that motions for relief must be made within a “reasonable” time. However, for subsections (b)(l)-(3), motions must be made within one year after the final judgment or order was entered. Moreover, the one-year time limits in Rule 60(b) are absolute and cannot be extended by the courts. See Fed.R.Civ.P. 6(b). Therefore, it follows that sua sponte relief must also adhere to the one-year time limit.
Here, more than one year has passed since the entry of the Consent Order. Therefore, relief under subsections (b)(l)-(3) is time barred. Subsections (b)(4) and (5) are simply inapplicable to the present facts. Thus, the only potential avenue for relief is via Rule 60(b)(6). “To justify relief under subsection (b)(6), a party must show ‘extraordinary circumstances’ suggesting that the party is faultless in the delay.”
Pioneer Inv. Servs. Co. v. Brunswick Assocs.,
Alternatively, Rule 60(d) provides that Rule 60 does not limit a “[CJourt’s power to entertain an independent action to relieve a party from a judgment [or] order.” Fed.R.Civ.P. 60(d)(1). However, circumstances warranting relief under this subsection are even more limited than under Rule 60(b)(6).
See United States v. Beggerly,
III. Equitable Considerations
Even if the Consent Order were not final, as suggested by the Plan Trustee, the Court would still deny the motion based on the equities of this particular case.
See In re Jeffrey S. Anolik,
Moreover, neither the Consent Order nor the Plan expressly stated that the fees received by the Respondents were subject to disgorgement. Unlike the example of interim fees, which are always subject to disgorgement by virtue of section 330(a)(5), the Respondents would have required express notice that payments received “as full and final satisfaction” of allowed fees remained subject to further reduction. The Plan Trustee knew about the insolvency issues at the time the Consent Order was negotiated, yet did not expressly carve out a claw-back right if such action later became necessary to achieve pro rata distribution. At oral argument, the Plan Trustee’s counsel asserted that disgorgement was implied because nothing in the Consent Order barred disgorgement and the Respondents knew it was a possibility. However, the Respondents argue to the contrary and a review of the Plan provisions reveals that, upon a subsequent conversion of the case to chapter 7, the trustee would be barred from seeking disgorgement. (Plan, p. 39, Sec. I) This contemplated result does not square with the Plan Trustee’s assertion that disgorgement was implicit in the Consent Order and Plan.
In
Schwab v. United States, IRS (In re Shop N’ Go P’ship),
a case from the Middle District of Pennsylvania, the court
The court in In re Lochmiller disgorged payments made to professionals pursuant to an interim order. In re Lochmiller Indust.,178 B.R. 241 (Bankr.S.D.Ca.1995). Since the payments in ... Lochmiller were pursuant to an interim order, or subject to further review, it is foreseeable that a recipient of such a payment may have to return those funds.” Lochmiller,178 B.R. at 252 (citing In re Kearing,170 B.R. 1 , 6-7 (Bankr.D.D.C.1994)). The case at hand is not dealing with unauthorized or interim payments to professionals. Rather, the payment in question was made pursuant to a settlement agreement with court approval. Thus, disbursements made with court approval should not be disgorged because such payment does not subvert the Code’s requirements.
In the absence of an application of Rule 60(b), policy considerations weigh heavily in favor of honoring the settlement agreement. Expectation of the parties that entered into the settlement agreement should be upheld. If not, neither the IRS nor the DIP would have entered into the agreement and there would exist a chilling effect on all future settlement agreements.” In re Anolik,207 B.R. 34 (Bankr.D.Mass.1997); In re Unitcast, Inc.,219 B.R. 741 (6th Cir. BAP 1998) (parties’ expectation of finality of the payment). In addition, the Bankruptcy Code and Congress favor compromises in bankruptcy proceedings to minimize litigation and expedite administration of the estate. In re Martin,91 F.3d 389 , 393 (3rd Cir.1996) (citing 9 Collier on Baniíruptcy ¶ 9019.03[1] (15th ed. 1993)). As such, policy warrants this Court [ ] maintain the integrity of parties’ good faith efforts to resolve their conflicts through settlement agreements.
Schwab v. United States, IRS (In re Shop N’ Go P’ship),
The Court agrees with the reasoning in
Schwab,
particularly with respect to the finality of settlements. In light of the foregoing, the Court finds that the Respondents reasonably relied on the Consent Order as a final fee award. This reliance was grounded in the facts that: (1) the Plan Trustee was aware of the estate’s liquidity issues while negotiating the settlement but did not expressly reserve a disgorgement right, (2) the Consent Order was a final fee award and not interim, and (3) the Plan precluded the possibility of disgorgement in the event of a later conversion to chapter 7. Unlike the case with interim fee awards, it was not foreseeable that the Plan Trustee could come back to the Court at a later date and
CONCLUSION
The Consent Order granting “allowed ... final compensation for services rendered” and acknowledging prior receipt by the Respondents of sums certain “as full and final satisfaction” of the allowed fees was a final order. Final fee awards are not subject to disgorgement under 11 U.S.C. § 330(a)(5). Moreover, the requirements for granting relief from a final order under Rule 60 are not satisfied in this case. Finally, the equities of the case and the interest of finality weigh against granting the relief sought by the Plan Trustee. For the foregoing reasons, the motion is denied.
An Order in conformance with this Opinion has been entered by the Court and is attached hereto.
Notes
. The Respondents also question the Court’s post-confirmation jurisdiction on the basis that redistribution of fees among professionals does not impact creditors of the estate and lacks a sufficient nexus to the Plan. (Joint Obj. of DM, Capstone and NM, ¶ 48) ("Joint Obj.”) However, this is a core proceeding "arising in” a bankruptcy case because the Plan Trustee seeks redistribution based on the provisions of the Plan. Therefore, the Court has jurisdiction to resolve the dispute.
See Geruschat v. Ernst Young LLP (In re Seven Fields Dev. Corp.),
. The affiliated debtors include: Rockaway Bedding Centers of New York, Inc., Rocka-way Bedding of Pennsylvania, Inc., Rockaway Bedding of Maryland, Inc., Rockaway Bedding of Delaware, Inc., Rockaway Bedding of Connecticut, Inc., and Rockaway Bedding of 48th Street, Inc. The cases are jointly administered.
. The Circuits are divided on whether a court may grant
sua sponte
relief under Rule 60(b). The prevailing view is that
sua sponte
relief is permissible.
See Fort Knox Music, Inc. v. Baptiste,
. The trustee sought disgorgement from the Internal Revenue Service on the basis that the settlement "was made fraudulently, was inconsistent with the Chapter 11 Reorganization Plan and the Bankruptcy Code, and was a violation of the Debtor's ... fiduciary duty to its creditors.” Schwab, 261 B.R. at 811. The court, in denying the relief sought, noted that, in hindsight, it was easy to argue that the settlement was a bad deal. Id. at 810. At the time it was approved, however, the settlement was not objected to and was deemed to be in the best interests of the creditors and the estate. Id.