Flynn v. Finch ( 1998 )

F I L E D
United States Court of Appeals
Tenth Circuit
UNITED STATES COURT OF APPEALS
FEB 24 1998
FOR THE TENTH CIRCUIT
PATRICK FISHER
Clerk
In re:
COLORADO MOUNTAIN
CELLARS, INC., a Colorado
corporation, No. 97-1211
(D.C. No. 97-K-474)
Debtor. (D. Colo.)
GARY C. FLYNN,
Appellant,
v.
THOMAS J. FINCH,
Appellee.
ORDER AND JUDGMENT *
Before ANDERSON, McKAY, and LUCERO, Circuit Judges.
*
This order and judgment is not binding precedent, except under the
doctrines of law of the case, res judicata, and collateral estoppel. The court
generally disfavors the citation of orders and judgments; nevertheless, an order
and judgment may be cited under the terms and conditions of 10th Cir. R. 36.3.
After examining the briefs and appellate record, this panel has determined
unanimously that oral argument would not materially assist the determination of
this appeal. See Fed. R. App. P. 34(a); 10th Cir. R. 34.1.9. The case is therefore
ordered submitted without oral argument.
Appellant Gary C. Flynn appeals the district court’s order dismissing his
appeal of a bankruptcy order for lack of standing. We have jurisdiction under
28 U.S.C. § 158(d), and we affirm in part and reverse in part.
I. Background
A. The Bankruptcy Proceedings
Colorado Mountain Cellars filed a Chapter 11 voluntary bankruptcy petition
in 1989, later converted to an involuntary liquidation, at which time a trustee was
appointed. The estate’s only assets were litigation claims, including one against
Thomas Husband. In 1990, the trustee appointed appellee Thomas J. Finch as
special litigation counsel to pursue state law claims on behalf of the estate against
Mr. Husband. See 11 U.S.C. § 327(a) (authorizing the trustee, with the court’s
approval, to employ attorneys to represent or assist the trustee in carrying out the
trustee’s duties). Mr. Finch’s compensation was originally approved by the
bankruptcy court as a contingency fee of fifty percent of the amount recovered.
The Husband litigation became increasingly complex, however, and in 1991, after
Mr. Finch had obtained a jury verdict in favor of the estate, the trustee appointed
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Mr. Flynn as special counsel under § 327 to assist Mr. Finch with the post-trial
aspects of the litigation. Mr. Finch’s compensation agreement was modified to
give Mr. Flynn twenty percent of Mr. Finch’s fifty percent contingency fee; that
is, Mr. Finch would receive a forty percent contingency fee and Mr. Flynn would
receive a ten percent contingency fee.
Mr. Finch was subsequently required to be a fact witness in certain
post-trial Husband proceedings, and, therefore, the trustee asked Mr. Finch to
withdraw and directed Mr. Flynn to proceed as sole counsel. The Husband
litigation was settled in 1995 after numerous post-trial proceedings, including two
motions to amend the judgment, an appeal, two petitions for rehearing and a
petition for certiorari. See Husband v. Colorado Mountain Cellars, Inc., 867 P.2d
57 (Colo. App. 1993). The $74,000 settlement from the litigation was sufficient
to pay off all the unsecured creditors.
Mr. Finch and Mr. Flynn then filed applications for approval of their fees.
The trustee filed an objection to Mr. Finch’s application, asserting any
compensation to Mr. Finch should be disallowed because he failed to disclose that
he had received pre-petition preferential transfers of two judgment liens from
Colorado Mountain Cellars within a year of the bankruptcy. See 11 U.S.C.
§ 328(c) (allowing court to deny allowance of compensation for professional
who is not disinterested or holds an interest adverse to the estate). According
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to the trustee, Mr. Finch misled the trustee about the value of these liens when
Mr. Husband sought to force the trustee to bring a preference action against
Mr. Finch and refused to disgorge to the estate $32,000 that he had collected on
the liens.
Mr. Flynn’s fee application requested an increase of his fee from the
agreed-upon ten percent contingency fee to a forty percent continency fee.
See 11 U.S.C. § 328(a) (allowing court to modify approved compensation “if such
terms and conditions prove to have been improvident in light of developments not
capable of being anticipated at the time of the fixing of such terms and
conditions”). Mr. Flynn argued the agreed-upon compensation was based on the
assumption he would be merely assisting Mr. Finch as co-counsel, and did not
fairly compensate him for the time and effort he spent as sole counsel in a very
protracted and complex litigation matter. His application indicated that he spent
over 1,000 hours on the Husband litigation, and that even if his compensation was
increased to a forty percent contingency fee, his compensation would equal a rate
of only twenty-seven dollars an hour. Mr. Flynn’s fee application stated that the
trustee agreed he should receive a forty percent contingency fee. Mr. Flynn filed
a separate motion objecting to Mr. Finch’s fee application, contending that the
application should be denied because of Mr. Finch’s preferential pre-petition
transfers and conflicts of interest.
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The bankruptcy court issued a single order resolving all three motions.
The court denied the trustee’s and Mr. Flynn’s objections to Mr. Finch’s fee
application and awarded Mr. Finch his full compensation. The bankruptcy court
concluded that Mr. Finch prosecuted the Husband litigation through trial,
obtained a verdict in favor of the estate and, therefore, performed the services for
which he had been hired. The bankruptcy court also concluded that Mr. Finch’s
alleged pre-petition transfers and conflicts of interest with the estate did not place
him in a conflict of interest with respect to his prosecution of the Husband
litigation. The bankruptcy court also denied Mr. Flynn’s request for an increased
fee award, allowing him only the agreed-upon ten percent contingency fee. The
bankruptcy court noted that there had been no effort prior to the final conclusion
of the Husband litigation to modify the terms of the contingency fee agreement.
The court concluded that the contingency fee agreement was reasonable at the
time it was originally authorized and at the time of its ruling on the fee
applications. The trustee did not appeal the bankruptcy court’s order; Mr. Flynn
did.
B. The District Court Proceedings
Mr. Flynn appealed the bankruptcy court’s order, arguing that the
bankruptcy court erred both in granting Mr. Finch’s compensation and in denying
his requested increase in compensation. Mr. Finch moved to dismiss the appeal,
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contending that Mr. Flynn lacked standing to challenge the bankruptcy court’s
order. Mr. Finch argued that even if Mr. Flynn’s compensation was increased,
he would merely be entitled to an enhanced administrative claim against the
bankruptcy estate, not a claim against any portion of Mr. Finch’s fee award.
Mr. Flynn argued he had standing because his fee application and Mr. Finch’s fee
application compete for differing shares of the same contingency fee pool of
funds, and thus his pecuniary interests are directly and adversely affected by the
order granting Mr. Finch’s compensation. The district court summarily dismissed
Mr. Flynn’s appeal for lack of standing.
II. Analysis
“As a general matter, in a Chapter 7 proceeding, the trustee alone has
standing to raise issues before the bankruptcy court and to prosecute appeals.”
Richman v. First Woman’s Bank (In re Richman), 104 F.3d 654, 657 (4th Cir.
1997); see also 11 U.S.C. § 323 (the trustee is the representative of the debtor’s
estate and has the capacity to sue and be sued). In order to have standing to
appeal an order of a bankruptcy court, a litigant must show that “he is a ‘person
aggrieved’ by the challenged bankruptcy court order.” Lopez v. Behles (In re
American Ready Mix, Inc.), 14 F.3d 1497, 1500 (10th Cir. 1994). “That is, only a
person ‘whose rights or interests are directly and adversely affected pecuniarily
by the decree or order of the bankruptcy court’ may appeal.” Id. (quoting Holmes
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v. Silver Wings Aviation, Inc., 881 F.2d 939, 940 (10th Cir. 1989). “‘Litigants
are “persons aggrieved” if the order [appealed from] diminishes their property,
increases their burdens, or impairs their rights.’” Id. (quoting GMAC v. Dykes
(In re Dykes), 10 F.3d 184, 187 (3d Cir. 1993). “The ‘person aggrieved’ test is
meant to be a limitation on appellate standing in order to avoid ‘endless appeals
brought by a myriad of parties who are indirectly affected by every bankruptcy
court order.’” Id. “The standing requirement is more stringent in bankruptcy
appeals than the ‘case or controversy’ standing requirement of Article III.”
Nintendo Co. v. Patten (In re Alpex Computer Corp.), 71 F.3d 353, 357 n.6 (10th
Cir. 1995) (quotation omitted).
“To have standing to appeal, Mr. [Flynn] must demonstrate he has a direct
and adverse pecuniary interest in each order he challenges.” In re American
Ready Mix, 14 F.3d at 1500. We agree with the district court’s conclusion that
Mr. Flynn lacks standing to challenge that portion of the order granting fees to
Mr. Finch because he has no direct interest in the actual funds distributed by that
portion of the order. See id. at 1501. Mr. Flynn seeks to appeal the bankruptcy
court’s decision not to deny Mr. Finch compensation under § 328(c). The denial
of compensation under § 328 is, in essence, an imposition of sanctions. See Gray
v. English, 30 F.3d 1319, 1324 (10th Cir. 1994) (indicating that, in the absence of
actual injury or prejudice to the debtor’s estate, the “sanction” of denial of
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compensation under § 328(c) should not be rigidly applied). The court’s decision
not to impose sanctions on Mr. Finch does not aggrieve Mr. Flynn. We note that
Mr. Flynn cites no authority, nor do we find any, for the proposition that an
administrative claimant has standing to appeal a bankruptcy court’s decision not
to impose sanctions upon another administrative claimant.
Mr. Flynn relies on Salomon v. Logan (In re International Envtl. Dynamics,
Inc., 718 F.2d 322 (9th Cir. 1983), which held that “in a case involving competing
claims to a limited fund, a claimant has standing to appeal an order disposing of
assets from which the claimant seeks to be paid.” Id. at 326. Mr. Flynn points to
the bankruptcy court’s description of his fee as part of a “pool of funds,” which,
if gone “makes it, if not unlikely, at least difficult for Mr. Flynn to be paid
properly if this Court . . . ultimately determines that he is ultimately entitled to
a greater share of the contingent fee that was awarded.” Appellant’s App., ex. 2,
at 5. However, the bankruptcy court’s comment, made in the context of a stay
request, was not a finding that the contingency fee agreement represented a finite
common pool of funds. There is nothing in the record to indicate that the
bankruptcy court could not have modified the original contingency fee agreement
to allow total fees in excess of the fifty percent contingency fee. “[T]he court’s
power [to modify a compensation agreement under § 328] includes the power to
increase as well as decrease the agreed-upon compensation.” In re Western
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Monetary Consultants, Inc., 143 B.R. 780, 782 (Bankr. D.Colo. 1992) (quotations
omitted). The court’s statement was undoubtedly a mere shorthand description of
the two issues: whether Mr. Finch was entitled to full compensation; and whether
Mr. Flynn should receive increased compensation.
Here, unlike the facts in In re International Envtl. Dynamics, 718 F.2d
at 324, Mr. Finch and Mr. Flynn are not competing for undifferentiated portions
of a common fund. Rather, the bankruptcy court authorized an agreement to pay
Mr. Finch a forty percent contingency fee and to pay Mr. Flynn a ten percent
contingency fee. Thus, Mr. Flynn’s entitlement under § 328(a) to any increased
compensation is legally unrelated to whether Mr. Finch is entitled to his requested
fees. If the bankruptcy court did disallow any fee to Mr. Finch under § 328(c),
that money would not go to Mr. Flynn, but rather to the bankruptcy estate.
Likewise, deciding not to sanction Mr. Finch does not mean that Mr. Flynn is not
entitled to an increased fee under § 328(a). We find no basis for concluding that
payment of full compensation to Mr. Finch would legally preclude payment of
increased compensation to Mr. Flynn from the estate. Thus, as was the case in In
re American Ready Mix, Mr. Flynn has failed to demonstrate that he has a
sufficiently direct and adverse pecuniary interest in the bankruptcy court’s order
granting another professional’s application for compensation to have standing to
appeal from the order. See 14 F.3d at 1501.
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However, the district court erred in dismissing Mr. Flynn’s appeal of the
bankruptcy court’s order denying his request for increased compensation under
§ 328(a). Mr. Finch contends Mr. Flynn has waived his right to appeal the denial
of his § 328(a) motion because his only asserted basis for enhanced compensation
is that Mr. Finch is not entitled to his compensation. We disagree. Mr. Flynn’s
designation of the issues on appeal before the district court clearly included his
contentions that the bankruptcy court erred in not awarding him increased fees
as “improvident,” see 11 U.S.C. § 328(a), in light of the unanticipated amount of
responsibility he was required to accept, and the time he was required to spend, in
prosecuting the Husband litigation. Appellant’s Supp. App., doc. 6, at 4-6.
Further, the magistrate judge, to whom this matter had been referred by the
district court, determined that one of the issues on appeal was whether the
bankruptcy court abused its discretion in finding, under § 328, that Mr. Flynn was
not entitled to enhanced fees in excess of the approved ten percent contingency
fee, and whether the bankruptcy court denied Mr. Flynn due process by denying
his fee request without an evidentiary hearing. Id. doc. 9, at 2. Although
Mr. Flynn has made the argument that he is entitled to appeal the award of full
compensation to Mr. Finch because his claim for increased compensation directly
competes for the same pool of contingency fee funds, we do not find that Mr.
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Flynn, in making this argument, ever waived his right to appeal the bankruptcy
court’s denial of his § 328 motion for enhanced fees. 1
In summary, we agree with the district court that Mr. Flynn lacks standing
to appeal the portion of the order granting full compensation to Mr. Finch, but
conclude the district court erred in dismissing Mr. Flynn’s appeal from the
bankruptcy court’s denial of his request for enhanced fees as permitted by
§ 328(a). Accordingly, the judgment of the United States District Court for
theDistrict of Colorado is AFFIRMED in part, and REVERSED in part and
REMANDED for further proceedings.
Entered for the Court
Monroe G. McKay
Circuit Judge
1
We find no merit in Mr. Finch’s contentions that Mr. Flynn’s appeal should
be dismissed because of his failure to appear at a district court hearing--he arrived
ten minutes after its conclusion, having earlier called the court to say he would be
delayed due to a flat tire--or because he failed to appeal an earlier dismissal of the
case--the district court granted his motion for reconsideration of that dismissal.
Likewise, we find no merit to Mr. Finch’s contention that, because this court
denied Mr. Flynn’s request for a stay of the disbursement of funds to Mr. Finch,
Mr. Flynn’s appeal is now moot because the judgment funds have now been paid.
Mr. Finch represented to this court in his opposition to Mr. Flynn’s stay request
that, as an attorney and officer of the court, he would respond to an order of
disgorgement if necessary.
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