In re: Tbh19, LLC.
APPEARANCES
David Shemano of ShemanoLaw argued for appellants; Carolyn A. Dye argued for appellees Sam S. Leslie and LEA Accountancy, LLP; Ryan Daniel O‘Dea of Shulman Bastian Friedman & Bui LLP argued for appellee Shulman Bastian Friedman & Bui LLP
INTRODUCTION
Debtor TBH19, LLC‘s primary asset was a valuable but over-encumbered piece of real property. With the assistance of his professionals, the chapter 71 trustee sold the property after negotiating an agreement with the first-position lienholder that made $3.75 million available to pay administrative expenses and unsecured claims. The trustee and his professionals voluntarily agreed to reduce their fees such that unsecured creditors would receive a distribution of at least $700,000.
Unsecured creditors HAR-BD, LLC, HAR, LLC, Harvey Bookstein, and HAR-RFF, LLC (collectively, “HAR Parties“) did not object to the sale or the carveout but challenged the final fee applications of the trustee, his accountant, and his legal counsel. They argued that the requested fees were unreasonable when compared to the distribution to unsecured creditors and that the unsecured creditors should receive at least half of the carveout. The bankruptcy court approved the fee applications, and the HAR Parties appealed.
We discern no abuse of discretion and AFFIRM. We publish to clarify that the fact that a chapter 7 trustee and the trustee‘s professionals are receiving more money than unsecured creditors does not necessarily justify a reduction of a chapter 7 trustee‘s statutory commission or the professionals’ fees.
FACTS
A. Prepetition events
TBH19 owned real property located in Beverly Hills, California (“Property“). DBD Credit Funding LLC (“DBD“) held a first-position lien against the Property, and HAR-BD held a junior lien.
B. TBH19‘s bankruptcy filings
TBH19 filed a chapter 11 petition in late 2019. It scheduled the Property as its primary asset and represented that the Property was encumbered by secured liens totaling approximately $67 million.2 It also scheduled unsecured claims totaling nearly $8 million. Creditors filed proofs of claim for much larger amounts.
TBH19 unsuccessfully listed the Property for sale at $125 million. It eventually took the Property off the market.
C. Conversion to chapter 7, appointment of the Trustee, and employment of his professionals
In February 2021, the bankruptcy court converted TBH19‘s chapter 11 case to one under chapter 7. Sam Leslie was appointed chapter 7 trustee (“Trustee“).
Shortly thereafter, the Trustee sought bankruptcy court approval to employ LEA Accountancy, LLP (“LEA“) as his accountant to assist “in the accounting matters and tax preparation aspects of the administration of this estate, to advise Trustee of any tax consequences derived from liquidation of estate assets and to assist in any other accounting or tax matters as may arise in connection with the administration of this estate.” The Trustee disclosed that he is a partner at LEA.
The Trustee also sought to employ Shulman Bastian Friedman & Bui LLP (“SBFB“) as legal counsel. He requested legal assistance in order to investigate the liens, prosecute and defend against various lawsuits, review the lease agreements for tenants residing at the Property, assist in the Trustee‘s management of the Property, resolve disputes over personal property, and collect monies owed to the estate.
No one objected to either application. The bankruptcy court approved LEA‘s and SBFB‘s employment.
D. Compromise with DBD and sale of the Property
The Trustee listed the Property for sale at $89.75 million in April 2021. A month later, the Trustee, represented by SBFB, filed a motion to approve a settlement and compromise of DBD‘s claims against the estate. Under the agreement, the claims of DBD and other parties (totaling over $70 million) would be allowed in full and the Trustee would dismiss the estate‘s claims against DBD and related parties in the state court litigation. The Trustee proposed to file a motion to sell the Property. DBD agreed to make a credit bid in the amount of its claim and to carve out 6.25 percent of the sale price for administrative fees and costs and distributions to unsecured creditors. The settlement agreement provided that “[t]he Trustee may enter into any subsequent agreements between the Estate and any of its professionals in the Bankruptcy Case to ensure that the Carveout results in a meaningful distribution to unsecured creditors.”
HAR-BD filed a response to the Trustee‘s settlement motion. It did not object to the sale but questioned the amount of DBD‘s allowed claim.
On September 7, 2021, the bankruptcy court approved the settlement. Approximately a month later, the Trustee reported that he had sold the Property for $63.1 million to a third party. This resulted in a carveout of $3.75 million.
E. Interim fee applications
The Trustee, LEA, and SBFB filed applications for interim fees and expenses. The Trustee stated that he and his professionals settled almost all of the litigation against the estate and “made the impossible happen and created millions of dollars for the Estate, in an otherwise no asset case.” The Trustee requested a total of $1,803,905.21 ($1,795,667.24 in fees and $8,237.97 in costs) pursuant to the statutory formula. LEA sought a total of $246,230.80 ($245,779 in fees and $451.76 in costs). SBFB filed an application seeking a total of $1,027,704.64 ($1,012,355.50 in fees and $15,349.14 in costs).
HAR-BD responded that the bankruptcy court should defer approval of the fee applications until it had a better understanding of the Trustee‘s proposed use of the carveout funds and could evaluate the Trustee‘s actual work done on the case. It argued that if all the requested fees were allowed, none of the carveout funds would be available for distribution to unsecured creditors.
In his reply, the Trustee proposed that the court allow payment of fifty percent of the requested fees on an interim basis. Additionally, the Trustee and his professionals agreed to a $700,000 set-aside to guarantee some distribution to unsecured creditors.
Prior to the hearing, the Trustee reported that all of the relevant parties except for HAR-BD agreed to payment of fifty percent of the interim fees and all of the interim expenses sought by the Trustee, LEA, and SBFB. He reiterated that he and his professionals were “committed to having no less than $700,000.00 available for distribution to unsecured creditors, even if that means they will have to carve out funds from their fees that are ultimately approved by the Court.”
At the hearing on the three interim fee applications, the HAR Parties acknowledged that they did not object to any fee request but argued that all of the fee applications were premature and that the court did not have the necessary factual information to determine whether there would be a “meaningful distribution” to unsecured creditors.
The bankruptcy court granted the interim fee applications. It specifically noted that the case was a convoluted “mess” and stated, “But for the work of the Trustee and his professionals, there would be nothing in this case for anyone. I am convinced of that.” The court found no “duplication of services between the Trustee and his professionals.” The bankruptcy court awarded the requested fees in full on an interim basis and allowed payment of fifty percent.
F. Final fee applications
SBFB filed a final application for approval of fees and expenses. It sought allowance of $1,519,416.50 in fees and $22,587.59 in expenses (including the amounts allowed on an interim basis).
The Trustee filed his Final Report. He requested total compensation of $1,430,294.58 and total expenses of $8,602.42. He reported that he had realized gross receipts of $63,503,354.19 and that, accounting for administrative expenses, service fees, and payments to secured creditors and third parties, he had $2,255,598.61 available for distribution. He detailed his proposed distribution, which would result in exactly $700,000 to be divided among nineteen unsecured creditors; the HAR Parties would receive $501,848.63 on their allowed claims.
The HAR Parties objected to the Final Report and the final fee applications. They argued that the Trustee violated the “cardinal rule” against administering an asset where the proceeds would primarily benefit the Trustee and his professionals, rather than creditors. They said that unsecured creditors would receive a miniscule distribution.
The HAR Parties argued that the Trustee, LEA, and SBFB should not receive more than half of the carveout. They contended that, under In re KVN Corp., 514 B.R. 1 (9th Cir. BAP 2014), the carveout must result in a “meaningful distribution to unsecured creditors.” They urged the court to adopt the analysis offered in In re Scoggins, 517 B.R. 206 (Bankr. E.D. Cal. 2014), and not allow a trustee‘s fee to exceed the amount of funds that would be paid to unsecured creditors. They argued that “there is a rebuttable presumption that a trustee commission that exceeds the payout to unsecured creditors primarily benefits the trustee and does not leave enough for a meaningful distribution.”
The HAR Parties argued that the compensation sought by the Trustee, LEA, and SBFB was excessive, given that the Trustee‘s administration of TBH19‘s estate “wrapped up” after six months. They implied that the Property sale and the remaining litigation were not particularly difficult.
With regard to SBFB‘s fees, the HAR Parties argued that the amount was not reasonable compensation for actual, necessary services because “[i]ncurring $1.5 million in fees to distribute $700,000 to creditors is not reasonable.” They complained about the various categories of SBFB‘s work, claiming that the work done and amount requested were not reasonable or necessary.
With regard to LEA‘s fees, the HAR Parties argued that the requested fees for services in a single-asset real estate case were facially unreasonable. They also complained that LEA‘s application for employment limited its services to tax-related matters, but “[i]n an apparent bait and switch,” LEA did much more expansive work outside the original description of services. They contended that much of LEA‘s work was part of the Trustee‘s core duties.
Finally, the HAR Parties argued that the court should reduce the Trustee‘s statutory fees because there were “extraordinary circumstances” that rebutted the presumption of reasonableness. They again urged the court to adopt the analysis of Scoggins and hold that the disproportionate fee requests were extraordinary circumstances. They argued that “the reasonableness of the compensation should be measured by the amount of the carve-out for the estate, not the proceeds disbursed to the secured creditors.”
At the hearing on the final fee applications, the bankruptcy court provided a detailed and comprehensive oral ruling.
Second, the court distinguished the carveout from the $700,000 set-aside for unsecured creditors and declined to force the Trustee and his professionals to increase the voluntary set-aside.
The court stated that “[t]he test for allowing fees and expenses for the Chapter 7 trustee and his professionals is not whether it provides for a . . . ‘meaningful distribution to unsecured creditors’ . . . .” It found that, “but for the carveout that was negotiated by the trustee with the senior secured creditor, there would be no distribution at all.”
Third, the court rejected the HAR Parties’ assertion that this was a straightforward case, stating that “nothing could be farther from the truth.” It recounted the “large amount of litigation over the simplest things.” It noted the difficulties caused by the COVID-19 pandemic and by the “badly managed Chapter 11 bankruptcy case . . . .”
Fourth, the court addressed the individual fee applications. Starting with the Trustee‘s application, the bankruptcy court stated that the statutory commission is presumed reasonable, and the objecting party must offer evidence to overcome that presumption. It ruled that the HAR Parties failed to provide specific and convincing evidence that the commission fee should be reduced. It stated that it had presided over the bankruptcy case in its entirety, reviewed the case, and found that “the trustee carried out his duties appropriately and effectively with all the constraints that he faced and that the compensation requested is reasonable ....”
The HAR Parties argued that they did not have evidence to support their objection because the Trustee improperly refused to turn over documents that they had requested. But in response to the court‘s questions, counsel for the HAR Parties conceded that they did not take any action beyond a meet-and-confer to require the Trustee to comply with their discovery requests pursuant to the local bankruptcy rules, apparently because they thought it was not their burden to disprove the reasonableness of the fees.
Turning to SBFB‘s fee application, the bankruptcy court found that SBFB‘s services were necessary and appropriate, that SBFB did not duplicate the Trustee‘s duties, and that the amount of services and fees “were exacerbated by the grossly and overly litigious behavior of many parties in the case.”
Finally, regarding LEA‘s fee application, the bankruptcy court relied on its earlier ruling on the interim fee application. It found that LEA did not perform any of the Trustee‘s functions.
The HAR Parties timely appealed.
JURISDICTION
The bankruptcy court had jurisdiction under
ISSUE
Whether the bankruptcy court abused its discretion in approving the final fee applications for the Trustee, LEA, and SBFB.
STANDARD OF REVIEW
We review for an abuse of discretion the bankruptcy court‘s award of fees
To determine whether the bankruptcy court has abused its discretion, we conduct a two-step inquiry: (1) we review de novo whether the bankruptcy court “identified the correct legal rule to apply to the relief requested” and (2) if it did, we consider whether the bankruptcy court‘s application of the legal standard was illogical, implausible, or without support in inferences that may be drawn from the facts in the record. United States v. Hinkson, 585 F.3d 1247, 1262 (9th Cir. 2009) (en banc).
DISCUSSION
The HAR Parties contend that the fees awarded to the Trustee, LEA, and SBFB were not reasonable, because they bore no “rational relationship” to the work done and exceeded the unsecured creditors’ share of the carveout. We see no abuse of discretion.
A. The bankruptcy court did not abuse its discretion in approving the Trustee‘s final fee application.
A chapter 7 trustee‘s compensation is a commission set by a statutory formula: “In determining the amount of reasonable compensation to be awarded to a trustee, the court shall treat such compensation as a commission, based on section 326.”
We have repeatedly stated that trustee compensation calculated under
In Salgado-Nava, the bankruptcy court reduced a chapter 7 trustee‘s commission because it found that the requested fees were unreasonable in light of the work performed. We reversed. We closely examined the language of
In other words, the analysis must start with the presumption that the trustee‘s fees pursuant to
We have never defined “extraordinary circumstances.” In Salgado-Nava, we left “for another day the issue of what facts might qualify as extraordinary for purposes of activating the bankruptcy court‘s duty to determine the reasonableness of the
We also implied that a disproportion between the statutory commission and the trustee‘s services is not an “extraordinary circumstance.” Under Salgado-Nava, the proportionality of the commission to the work performed only comes into play if extraordinary circumstances exist. Id. at 921. Therefore, such a disproportion cannot, by itself, be an extraordinary circumstance.
We have provided one example of a circumstance that is not extraordinary per se: the mere fact that the trustee‘s requested compensation exceeds the proposed distribution to unsecured creditors. In re Ruiz, 541 B.R. at 897 (“The fact that the Trustee‘s requested compensation exceeded the proposed distribution to unsecured creditors was not sufficient, standing alone, to establish extraordinary circumstances.“).
1. Extraordinary circumstances
The HAR Parties argue that the bankruptcy court erred in approving the Trustee‘s statutory commission, because the case presented extraordinary circumstances that overcame the presumption of reasonableness. They contend that the Trustee delegated most of his core trustee duties to LEA and SBFB; that the statutory commission is twice the amount of the distribution to unsecured creditors; that the commission is high compared to the Trustee‘s actual services; and that the Trustee sold fully encumbered property pursuant to a carveout agreement.
The HAR Parties rely heavily on Scoggins, where the bankruptcy court for the Eastern District of California extensively criticized the Panel‘s decision in Salgado-Nava and provided a list of circumstances that would qualify as “extraordinary.” Among other things, the Scoggins court held that “the question is whether trustee fees requested are disproportionate [compared to distribution to unsecured creditors]. If there is a material disproportion sufficient to rebut the presumption in favor of the
We are not bound by Scoggins, and we are bound by our own prior decisions.
The bankruptcy court concluded that this case did not present extraordinary circumstances warranting deviation from the statutory commission. The court recounted that the case was “a mess” and detailed the Trustee‘s various undertakings. It found that, without the Trustee‘s efforts, the case would likely have been a no-asset case and the unsecured creditors would have received nothing, as opposed to the guaranteed $700,000 set-aside. It reviewed the case in its entirety and found that the Trustee “carried out his duties appropriately and effectively with all the constraints that he faced . . . .” These findings were not clearly erroneous.
The bankruptcy court specifically rejected the HAR Parties’ argument that the Trustee improperly delegated his duties to LEA or SBFB. Likewise, this finding was not clearly erroneous.
Similarly, the bankruptcy court found no fault in the Trustee‘s actual services. It repeatedly pointed out that, but for the Trustee‘s efforts, the case was “going quickly into oblivion” and would not have resulted in a distribution to unsecured creditors. It dismissed the HAR Parties’ characterization of the case as a simple matter involving only the sale of a single asset. Rather, the court enumerated the extensive litigation (both in bankruptcy court and in state court), the difficulties created by an obstinate chapter 11 debtor-in-possession, the unique challenges in selling the Property, and the roadblocks erected by the HAR Parties and others. It stated that the HAR Parties had failed to provide any evidence that the Trustee‘s work was unreasonable or subpar. Again, these findings were not clearly erroneous.
The HAR Parties also complain that the Trustees’ sale of a fully-encumbered property pursuant to a carveout agreement is an extraordinary circumstance. They rely on Scoggins for the proposition that the fees are unreasonable if the carveout does not result in a “meaningful distribution” to unsecured creditors. Scoggins held that there exists a “rebuttable presumption that a
We disagree with any per se approach to a definition of extraordinary circumstances. The Scoggins tests are untethered from the language of the statute. Bankruptcy courts should be free to evaluate all relevant circumstances of a case, not just a laundry list of factors, when considering whether a case is extraordinary. Here, the bankruptcy court properly examined the facts of this convoluted and over-contested case and found that the amount of the fees claimed from the carveout by the Trustee and his professionals was reasonable.
Further, the HAR Parties’ argument amounts to a back-door attack on the carveout. As we held in KVN Corp., the court must not approve a carveout unless it will result in a “meaningful distribution to unsecured creditors.” 514 B.R. at 8. But as the bankruptcy court noted, it had already approved the sale and the carveout, and the HAR Parties consented to those orders.3 The bankruptcy court correctly refused to relitigate the propriety of the carveout and to allow the HAR Parties to challenge it by objecting to the fee applications.
We therefore reaffirm our holding in Ruiz and decline the HAR Parties’ invitation to define or enumerate any circumstances that are extraordinary per se. We leave it to the bankruptcy courts to exercise their sound discretion to determine whether extraordinary circumstances exist in a particular case.
2. Evidentiary support for the fee request
The HAR Parties argue that the Trustee failed to offer evidence to support his fee request, including proof of the actual services provided.
The bankruptcy court did not err. We have held, and the HAR Parties appear to concede, that the Trustee has the burden to substantiate his billed services only if extraordinary circumstances are present. As we explained above, there were no extraordinary circumstances in this case that would rebut the presumption of reasonableness.4
The HAR Parties failed to offer the court any evidence to rebut the presumption
B. The bankruptcy court did not abuse its discretion in approving LEA‘s or SBFB‘s final fee applications.
A different standard governs compensation for the Trustee‘s professionals.
In determining the amount of reasonable compensation to be awarded..., the court shall consider the nature, the extent, and the value of such services, taking into account all relevant factors, including -
(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;
(E) with respect to a professional person, whether the person is board certified or otherwise has demonstrated skill and experience in the bankruptcy field; 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.
The bankruptcy court may “award compensation that is less than the amount of compensation that is requested.”
In an appeal concerning an award of a professional‘s fees, “it is necessary to determine whether such services were reasonable, actual, and necessary.
The HAR Parties repeatedly argue that the bankruptcy court erred in awarding fees to LEA and SBFB because the fees were more than twice the amount distributed to unsecured creditors. The court correctly rejected the objectors’ arguments. A trustee‘s professionals are under no obligation to guarantee any particular result for unsecured creditors. (By promising to reduce their fees to provide $700,000 for unsecured creditors, the Trustee and the professionals went above and beyond the call of duty.) The question is whether the services were reasonable and necessary at the time they were rendered. The court did not err in finding that they were.
The HAR Parties contend that the $1.8 million awarded to LEA and SBFB is “facially unreasonable and excessive” because the professionals knew how much the estate would receive through the carveout, so they should have performed services “commensurate with that expected amount.” In other words, they argue that, because LEA and SBFB knew the estate would only receive $3.75 million, it was unreasonable to bill so much at the expense of unsecured creditors.6 The HAR Parties assume that the professionals could have done less work and produced the same result. The record does not support this assumption. The bankruptcy court did not clearly err when it found that, but for the professionals’ work, unsecured creditors would have received nothing.
The HAR Parties point to eight tasks performed by SBFB that they claim were unreasonable. But they fail to explain why any of those tasks were improper. In hindsight, not all of SBFB‘s undertakings were successful, but the HAR Parties fail to establish that they were unnecessary or, at the time they occurred, not “reasonably likely to benefit the debtor‘s estate.”
As to LEA‘s fees, the HAR Parties contend that the Trustee was the primary beneficiary of the fees, since he is a partner at LEA. But the Trustee fully disclosed his relationship with LEA, and the HAR Parties did not object to LEA‘s employment application. It is too late to complain of their relationship.
The HAR Parties argue that LEA‘s scope of employment was limited to tax matters, but LEA eventually billed for a host of other tasks, including real estate analysis and litigation support activities.
CONCLUSION
The bankruptcy court did not abuse its discretion when it approved the final fee applications. We AFFIRM.
Notes
(a) Is the burden of the probable cost of legal services disproportionately large in relation to the size of the estate and maximum probable recovery?
(b) To what extent will the estate suffer if the services are not rendered?
(c) To what extent may the estate benefit if the services are rendered and what is the likelihood of the disputed issues being resolved successfully?
Id. at 959. The HAR Parties cursorily address only the first factor and fail to otherwise explain why the professionals exercised poor billing judgment.