Edward Mandel v. Mastrogiovanni Schorch Mersky, et ( 2018 )

Case: 17-40392 Document: 00514632574 Page: 1 Date Filed: 09/07/2018
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
United States Court of Appeals
No. 17-40392
Fifth Circuit
FILED
September 7, 2018
In the Matter of: EDWARD MANDEL, Lyle W. Cayce
Clerk
Debtor
****************************************
EDWARD MANDEL,
Appellant,
v.
MASTROGIOVANNI SCHORSCH & MERSKY; ROSA ORENSTEIN,
Appellees.
Appeal from the United States District Court
for the Eastern District of Texas
USDC 4:12-CV-313
Before JOLLY, DENNIS, and ELROD, Circuit Judges.
PER CURIAM:*
This is yet another appeal arising out of Edward Mandel’s bankruptcy
proceeding. Mandel removed a lawsuit originally filed in Texas state court into
his federal bankruptcy proceeding. There was a receiver appointed by the state
* Pursuant to 5th Cir. R. 47.5, the court has determined that this opinion should not
be published and is not precedent except under the limited circumstances set forth in 5th Cir.
R. 47.5.4.
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court in the removed case. The receiver filed a claim in the bankruptcy
proceeding for fees incurred for her actions in the state court lawsuit and in
the bankruptcy court. The bankruptcy court awarded the receiver fees, and
Mandel disputes that award. Holding that some categories of fees awarded
were proper, but some were improperly awarded, we AFFIRM the district
court’s judgment in part, but VACATE the fee award and REMAND to the
bankruptcy court to recalculate the proper fee award.
I.
Edward Mandel’s bankruptcy proceeding has spawned multiple appeals
before this court. 1 Here, Mandel appeals the bankruptcy court’s fee award to
a receiver appointed in Texas state court litigation over the ownership of White
Nile, a failed search engine start-up company. The receiver was appointed by
the state trial court to protect White Nile’s interests in the ownership dispute.
While the White Nile litigation involved several parties disputing ownership
and obligations, two are relevant here—Mandel and Steven Thrasher, White
Nile’s co-founders. 2
A. The White Nile Receivership and Payment Dispute
A lawsuit over the ownership of White Nile was filed in Texas state court.
As part of the litigation, the parties initially agreed to the appointment of a
receiver to protect White Nile’s interests in the litigation. The state trial court
issued three orders relevant to the receivership before the case was removed
to federal court as part of Mandel’s bankruptcy.
The first state court receivership order set out the scope of the receiver’s
authority and agreed that the parties would propose three attorneys to act as
1See, e.g., In re Mandel, 720 F. App’x 186 (5th Cir. 2018); In re Mandel, 641 F. App’x
400 (5th Cir. 2016); In re Mandel, 578 F. App’x 376 (5th Cir. 2014).
2The White Nile litigation was tried in Mandel’s bankruptcy proceeding and twice
appealed to this court. See In re Mandel, 720 F. App’x 186 (5th Cir. 2018).
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a receiver. The parties were to meet and confer to see if they could agree on
an appointment from the three proposed persons, but the order stated the court
would appoint a receiver if the parties failed to agree. Mandel agreed to pay
52.5% of the receiver’s fees and Thrasher 47.5% of the fees. The order also
stated the receiver was without authority to retain independent counsel
without notice to the parties and court approval.
The second state court receivership order appointed Rosa Orenstein, who
is a bankruptcy attorney and who was one of the parties’ proposed candidates,
as the receiver. The scope of the receiver’s duties were set out as follows: to
“(1) direct and control White Nile’s participation in this litigation; (2) take
actual possession of all White Nile’s books and records . . . and all bank
accounts of White Nile; and (3) take constructive possession of all White Nile’s
other property.” The second order restated the fee-sharing agreement between
Mandel and Thrasher but did not include the prohibition on the retention of
independent counsel. There was no language in the second receivership order
stating that it vacated or supplanted the first receivership order.
The third relevant state court order is a payment order explaining the
terms of payment for Orenstein and her retained counsel. Orenstein retained
the firm Mastrogiovanni Schorsch & Merksy (Mastrogiovanni) to assist her in
her capacity as receiver. Mandel and Thrasher initially agreed to Orenstein’s
retention of counsel, but soon Mandel began to object to the continued retention
of Mastrogiovanni. Over Mandel’s objection, the state court entered a formal
order finding that Mastrogiovanni’s retention was authorized under the
receivership orders and stating Mandel and Thrasher’s terms of payment to
the receiver and Mastrogiovanni. The payment terms stated the percentage of
fees each party was responsible for and the schedule for payment.
Mandel failed to comply with the terms of the payment order and wrote
to the state court claiming an inability to financially comply. Orenstein moved
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to compel compliance and the state court ordered financial discovery from
Mandel. The state court held a hearing after Orenstein alleged that Mandel
was not complying with the ordered financial discovery, but the state court
continued the hearing to allow Mandel another opportunity to voluntarily
comply and did not make a ruling at that time. Subsequently, Mandel initiated
mandamus proceedings concerning the validity of the payment order and was
ultimately denied relief by the Supreme Court of Texas. Orenstein hired an
attorney at Hankinson Levinger to represent her in those mandamus
proceedings. Mandel filed for bankruptcy on the day that the state trial court
was set to resume the hearing on the enforcement of the payment order. Filing
the bankruptcy case initiated a litigation stay halting the state court
proceedings.
B. The Bankruptcy Court White Nile Proceedings
After Mandel filed for Chapter 11 bankruptcy, he removed the White
Nile litigation to federal court. Orenstein and Mastrogiovanni then filed
claims against Mandel’s bankruptcy estate. Orenstein also filed a claim on
behalf of White Nile. Thrasher also filed claims individually and derivatively
on behalf of White Nile. In the bankruptcy case, Orenstein filed three motions
to lift the automatic stay, three corresponding motions to remand, a motion to
appoint a trustee, objections to the appointment of additional counsel for
Mandel, and opposed cash collateral motions. In connection with the motion
to appoint a trustee, Mandel sought to depose Orenstein and she retained
counsel to defend herself.
The White Nile matter was tried as an adversarial proceeding in the
bankruptcy case as a derivative claim of Thrasher. Although Orenstein had
made multiple filings in the bankruptcy case-in-chief, the bankruptcy court
excused her from participating in the actual White Nile ownership adversarial
proceeding. The bankruptcy court did so in a scheduling order on White Nile’s
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claims that excused Orenstein from participation in the adversarial
proceedings unless Thrasher paid all her expenses. After the trial on
Thrasher’s derivative claim in the bankruptcy court, but before the bankruptcy
court issued its opinion, the bankruptcy court severed and remanded
Orenstein’s and Mastrogiovanni’s claims for receivership fees against
Thrasher to the state trial court. The state trial court then approved a
settlement between Orenstein, Mastrogiovanni, and Thrasher, to which
Mandel was not a party.
C. The Bankruptcy Court Claims Hearing
After the bankruptcy court tried the White Nile matter, the bankruptcy
court issued an order in the bankruptcy case on Orenstein and
Mastrogiovanni’s claims for fees. Mandel had filed objections to both Orenstein
and Mastrogiovanni’s claims. He asserted that Orenstein was only entitled to
pre-petition fees of $10,468.42 because she was not entitled to fees for the
duplicative White Nile claim in the bankruptcy case, there was insufficient
documentation of her claim otherwise, and the receivership orders did not
provide recovery for her fee dispute with Mandel.
Following the hearing on Orenstein and Mastrogiovanni’s claims, the
bankruptcy court issued its findings and concluded that, Orenstein was
entitled to $315,553 in total fees for her work as White Nile’s receiver and
Mastrogiovanni was entitled to $155,517 in total fees for its work assisting
Orenstein, as unsecured claims. The award included fees incurred from the
time Orenstein was appointed as receiver through the adversary proceeding in
the bankruptcy court. Encompassed in the award were fees for Orenstein and
Mastrogiovanni’s actions in the state court proceedings, the proceedings in
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bankruptcy court following removal, and representing White Nile as a creditor
of Mandel’s bankruptcy estate. 3
Mandel appealed the award to the district court raising thirteen issues
on appeal. Initially, the district court dismissed the appeal on standing
grounds, but was reversed by this court in In re Mandel, 641 F. App’x 400 (5th
Cir. 2016), which held that Mandel still had standing after the conversion of
his Chapter 11 bankruptcy proceeding to a Chapter 7 proceeding. Id. at 405.
The district court subsequently overruled each of Mandel’s objections on appeal
from the bankruptcy court and affirmed the award. In doing so, the district
court concluded that the bankruptcy court accounted for the retention of
unauthorized attorneys by reducing the award from amount of fees that
Orenstein and Mastrogiovanni had sought. Mandel timely appeals.
II.
“When a court of appeals reviews the decision of a district court, sitting
as an appellate court, it applies the same standards of review to the bankruptcy
court’s findings of fact and conclusions of law as applied by the district court.”
Jacobsen v. Moser (In re Jacobsen), 609 F.3d 647, 652 (5th Cir. 2010) (quoting
Kennedy v. Mindprint (In re ProEducation Int’l, Inc.), 587 F.3d 296, 299 (5th
Cir. 2009)). “This court reviews the bankruptcy court’s findings of fact under
the clearly erroneous standard . . . but the bankruptcy court’s conclusions of
law are subject to de novo review.” Pierson & Gaylen v. Creel & Atwood (In re
Consol. Bancshares, Inc.), 785 F.2d 1249, 1252 (5th Cir. 1986) (citations
omitted).
3 Included in the bankruptcy court’s fee calculation were Orenstein and
Mastrogiovanni’s fees incurred in the state court litigation (including the financial discovery
and mandamus proceedings); all fees incurred in the bankruptcy case (including filings in
the bankruptcy case-in-chief, filings in the removed White Nile matter, and time spent
assisting Thrasher in litigating the White Nile derivative claim); and fees incurred retaining
counsel to assist Orenstein.
6
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III.
Mandel asserts here that he is only contesting the district court’s legal
findings to support the fee award—not the specific numeric amounts awarded. 4
Our review, therefore, looks solely at whether the district court correctly
determined that Orenstein was entitled to certain categories of fees as a matter
of law. As such, we do not address whether the fee amounts have been properly
proven up as supported by the record and evidence within the respective
categories.
The contested categories of fees include: (1) any fees incurred assisting
other claimants in the bankruptcy court White Nile trial; (2) Orenstein’s work
representing White Nile as a creditor in the bankruptcy proceeding; (3) fees
incurred for hiring attorneys not specifically approved by the state court, both
pre-bankruptcy petition in state court and post-petition in bankruptcy court;
and (4) post-petition attorneys’ fees in the bankruptcy court. 5 Mandel does not
contest Orenstein’s entitlement to pre- or post-petition fees incurred while
acting in her capacity as White Nile’s receiver or Mastrogiovanni’s entitlement
to pre- and post-petition fees for acting as counsel to Orenstein in her capacity
as receiver. Mandel acknowledges that Orenstein and Mastrogiovanni are
entitled to some amount of fees from the bankruptcy estate, but insists the
district court erred in affirming the bankruptcy court’s award in full. We
agree, and we remand the case to the bankruptcy court to calculate a fee award
consistent with our opinion as follows.
4 Under the receivership orders, Mandel and Thrasher were responsible for their
respective portions of Orenstein’s fees. Orenstein and Mastrogiovanni settled with Thrasher
for his portion of fees owed.
5 Mandel raised multiple points of error on appeal in his briefing. At oral argument,
he listed these categories as the ones he contests.
7
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IV.
We first turn to the award of fees for Orenstein’s role in the White Nile
adversary proceeding, which was tried as a derivative claim of Thrasher in the
bankruptcy case. Orenstein assisted Thrasher in trying the White Nile matter
as a derivative claim. Mandel argues that because the bankruptcy orders
excused Orenstein from participating in the White Nile trial she was not
entitled to any fees awarded after the bankruptcy court’s order. Orenstein
maintains that any assistance after the order excusing her was done in her
capacity as receiver. The bankruptcy court found that Orenstein was acting in
her capacity as a receiver. “A finding is clearly erroneous if a review of the
record leaves a definite and firm conviction that a mistake has been
committed.” Boudreaux v. United States, 280 F.3d 461, 466 (5th Cir. 2002)
(internal quotations and citations omitted).
The White Nile litigation was tried as a derivate claim of Thrasher. The
bankruptcy court excused Orenstein from participating in the trial itself unless
Thrasher paid her fees. Subsequently, Orenstein responded to discovery
propounded on White Nile and was subpoenaed to testify in her capacity as a
receiver. Explaining the order excusing Orenstein, the bankruptcy court
stated in the opinion awarding fees that: the “court was simply allowing
Orenstein to not appear at trial without violating her fiduciary duties when
the claims she was asserting were duplicative of the derivative claims asserted
by Thrasher for White Nile, and there was a significant risk of nonpayment to
her and her counsel.” The bankruptcy court made a factual finding that
Orenstein was carrying out her duties as a receiver in providing any assistance
to Thrasher, who was representing White Nile’s interests in the adversary
proceeding. Mandel has not shown that this factual finding was clearly
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erroneous. Therefore, there was no error in awarding Orenstein fees for her
work as a receiver in the White Nile adversarial proceeding. 6
V.
The main question of law on appeal is the scope of Orenstein’s authority
under the state court receivership orders and whether Orenstein had the
authority to act as White Nile’s attorney as a claimant in the bankruptcy case-
in-chief. The bankruptcy court concluded that the state court receivership
orders authorized Orenstein to represent White Nile as a claimant in Mandel’s
bankruptcy proceeding in addition to her duties as White Nile’s receiver in the
ownership dispute litigation. The district court agreed. We do not. 7
The removal of the state court litigation in which Orenstein was
appointed as receiver to federal court did not expand the receiver’s powers
under the court order. “A receiver has only that authority conferred by the
Court’s order appointing him.” Ex parte Hodges, 625 S.W.2d 304, 306 (Tex.
1981). “We give effect to an order ‘in light of the literal language used if the
language is unambiguous.’” Clay Exploration, Inc. v. Santa Rosas Operating,
LLC, 442 S.W.3d 795, 800 (Tex. App.—Houston [14th Dist.] Aug. 14, 2014, no
pet.) (quoting Reiss v. Reiss, 118 S.W.3d 439, 441 (Tex. 2003). Judicial orders,
“like other written instruments, are to be construed as a whole toward the end
6Mandel does not contest as a matter of law the award of any fees to Orenstein in her
capacity as a receiver that were incurred post-bankruptcy petition.
7 Because we determine that Orenstein was not entitled to attorneys’ fees for
representing White Nile as a creditor in the bankruptcy proceeding, we do not need to address
Mandel’s arguments that the bankruptcy court’s fee award was erroneous both because it
was not allowed under Texas’s fee shifting provisions and because Orenstein was not
successful in many of her filings. In addition, we note the bankruptcy court already stated
that it did not award any fees for work done solely in Orenstein’s personal capacity post-
petition. To the extent Mandel objected to any work that Orenstein did post-petition in the
bankruptcy proceedings where there was potential overlap between work done in her
personal capacity as a creditor and her capacity representing White Nile as a creditor, that
concern is obviated by our holding that she is not entitled to fees for acting as White Nile’s
attorney in the bankruptcy proceeding.
9
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of harmonizing and giving effect to all the court has written.” Id. (quoting
Constance v. Constance, 544 S.W.2d 659, 660 (Tex. 1976)). Both the first and
second state court receivership orders define the receiver’s powers identically
to:
(1) direct and control White Nile’s participation in this litigation;
(2) take actual possession of all White Nile’s books and records,
including but not limited to all files of White Nile’s current and
prior counsel in this litigation, and all bank accounts of White Nile;
and (3) take constructive possession of all White Nile’s other
property.
The relevant question, therefore, is whether the term “this litigation” conferred
on Orenstein a broad authority to represent White Nile’s interests in all
litigation involving the entity, or authority limited to representing White Nile’s
interests in the ownership dispute, both in the state court and upon the
removal of the matter to federal court. 8 We conclude it is the latter.
“[T]his litigation” is a limiting term in the state court’s receivership
orders. See Newman v. Toy, 926 S.W.2d 629, 631 (Tex. App.—Austin 1996,
writ denied) (explaining that a receiver steps into the shoes of the prior
shareholder except as limited by statute or the “the terms of the trial-court
order”). At the time the receivership orders were agreed to there was no
bankruptcy case. In context, “this litigation” referred to the ownership dispute
in state court over White Nile. Mandel removed the state court dispute to be
tried as an adversarial proceeding in the bankruptcy case. Orenstein was
8Upon removal, the state court receivership orders maintained effect in federal court.
28 U.S.C. § 1450 (“All injunctions, orders, and other proceedings had in such action prior to
its removal shall remain in full force and effect until dissolved or modified by the district
court.”); Nissho-Iwai American Corp. v. Kline, 845 F.2d 1300, 1304 (5th Cir. 1988)
(“[W]henever a case is removed, interlocutory state court orders are transformed by operation
of 28 U.S.C. § 1450 into orders of the federal district court to which the action is removed.”).
Mandel does not assert that removal affected the validity of the receivership order post-
removal, only whether the actions the receiver took post-removal were authorized under
those orders.
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appointed as a receiver for White Nile under the state court orders and not as
White Nile’s counsel. Removing the state court ownership dispute to federal
court to be tried as one component of a larger bankruptcy proceeding did not
confer broader authority on Orenstein than she would have had if the
ownership dispute had remained in state court. The venue for the ownership
dispute litigation simply changed.
The state court’s actions after the bankruptcy court’s remand of
Orenstein’s claims against Thrasher also supports interpreting “this litigation”
narrowly to only refer to the White Nile ownership litigation. After the claims
for Thrasher’s share of the receivership fees were remanded to the state trial
court, Orenstein sought permission from the state court as White Nile’s
receiver to file a lawsuit against Mandel’s former attorneys for
misrepresentations, which was denied. The state trial court, therefore, did not
interpret the receivership orders as giving Orenstein the authority to act
generally on behalf of White Nile. The bankruptcy court did not modify the
receivership orders. Thus, Orenstein did not have authority under the
receivership orders to act generally on White Nile’s behalf in the bankruptcy
case. See 28 U.S.C. § 1450. Representing White Nile as a creditor in the
bankruptcy proceeding was a broader exercise of authority than delegated to
Orenstein by the term “this litigation.” 9 As such, the bankruptcy court erred
to the extent it awarded attorneys’ fees based on the receivership orders to
Orenstein and Mastrogiovanni for work in the bankruptcy proceeding beyond
9 Orenstein’s failure to obtain clarification from either the bankruptcy court or the
state court on the scope of her authority is especially troubling as she was representing
herself and Mastrogiovanni as creditors of the bankruptcy estate at the same time as her
representation of White Nile as a creditor against that same estate.
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work done solely in Orenstein’s capacity as receiver in the White Nile
litigation. 10
VI.
Having determined that the receivership orders did not authorize
Orenstein to represent White Nile as a creditor in the bankruptcy proceeding,
we turn to whether the receivership orders generally authorized the retention
of additional counsel to assist her in duties as receiver, in the mandamus
proceedings, and in representing White Nile as an attorney in the bankruptcy
case. The bankruptcy court ruled that under the state court receivership
orders, as a matter of law, Orenstein had the right to retain counsel to
represent her in her performance of her receivership duties. We conclude that
Orenstein was authorized under the orders to retain counsel to assist her in
her duties as the receiver and that Orenstein’s actions in retaining counsel in
the mandamus proceedings were done in her capacity as the receiver. We
conclude, however, that the retention of counsel to assist in the bankruptcy
case was not authorized because Orenstein was not acting in her capacity as
receiver when representing White Nile as a creditor in the bankruptcy.
We construe the three state court receivership orders “toward the end of
harmonizing and giving effect to all the court has written.” Clay Exploration,
10 Because we are reviewing the bankruptcy and district court’s judgments only for
legal error, we do not express an opinion on the sufficiency of the evidence to support the
award of a particular dollar amount in damages. We do however note that on remand the
bankruptcy court should consider whether Orenstein properly segregated her fees and to
what extent co-mingled fees could support an award of fees to Orenstein in her capacity as
receiver. See, e.g., Bergeron v. Sessions, 561 S.W.2d 551, 554 (Tex. Ct. App.—Dallas, 1977,
writ ref’d n.r.e.) (stating that where a receiver served as both receiver and his own attorney
he was required to segregate his fees); see also Kotz v. Murariu, No. 04-12-00420-CV, 2013
WL 6205457, at *1–2 (Tex. App.—San Antonio Nov. 27, 2013, no pet.) (mem. op., not
designated for publication); Bishop v. Smith, No. 09-08-00185-CV, 2009 WL 5205362, at *6
(Tex. App.—Beaumont, Dec. 31, 2009, no pet.); Hodges v. Peden, 634 S.W.2d 8, 11 (Tex.
App.—Houston [14th Dist.] Apr. 8, 1982, no writ).
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442 S.W.3d at 800. A receiver has only the authority conferred by the order
appointing her. Ex parte Hodges, 625 S.W.2d at 306.
The first state court receivership order expressly prohibited the receiver
from retaining independent counsel “without leave of the court after notice to
all parties and hearing.” The second state court receivership order did not
contain this prohibition. Whether Orenstein had the authority to retain
independent counsel turns on whether the second receivership order gave
effect to the first order or amended the terms of the first order. Mandel argues
the terms of the first order remained in full effect. Orenstein argues that the
state court’s payment order already decided the issue of her power to retain
independent counsel in her favor.
In the payment order, the state court concluded that “the Receiver’s
determination that she required the ongoing services of independent counsel
was appropriate and within her authority and that the parties additionally
acquiesced in and encouraged that engagement.” Harmonizing the payment
order with the receivership orders, Orenstein had authority to retain counsel
to assist her in her duties as receiver. See Clay Exploration, 442 S.W.3d at
800. Orenstein and Mastrogiovanni were acting in their capacities as receiver
and counsel, and not for their own efforts and at their own imperilment, as the
state court acknowledged at the November 12, 2009 hearing on the receiver’s
motion to compel payment. The collection efforts were the result of Mandel
claiming an inability to financially comply with the payment terms of the
receivership orders and the payment order. The bankruptcy court did not err
in awarding fees for attorneys retained in the attempt to collect Mandel’s share
of the receivership payments from when the state court proceedings. 11
11 As the collection efforts were done in Orenstein’s capacity as receiver, the award of
fees to her and Mastrogiovanni for these efforts was not error either.
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As to the retention of counsel in the bankruptcy case, we have already
determined that Orenstein was not authorized to represent White Nile as a
creditor in the bankruptcy proceeding, and therefore, her retention of
independent counsel to assist her in those matters would likewise not be
authorized. However, fees for those attorneys were already excluded from the
award. As the district court noted, the bankruptcy court reduced the award to
reflect that Orenstein brought superfluous attorneys to the bankruptcy court
proceedings. Mandel argues that he is not challenging the award of fees as an
issue of fact, only as a matter of law. Our review is therefore limited to whether
a category of fees was included in the fee award. The district court found that
the bankruptcy court already accounted for the retention of superfluous
attorneys in the bankruptcy proceedings and reduced the fee award
accordingly. Therefore, this category was already excluded.
Therefore, there was no error as a matter of law as to the award of fees
for the retention of independent counsel. The district court properly awarded
fees for independent counsel retained in the state court proceedings and
already excluded fees for the additional counsel retained in the bankruptcy
case.
VII.
Finally, there is no need here to address Mandel’s argument that
attorneys’ fees incurred post-petition are not allowable to an unsecured
creditor under the Bankruptcy Code. Because we hold that Orenstein’s
receivership authority did not allow her to represent White Nile as a creditor,
any attorneys’ fee she incurred post-petition were not authorized by her pre-
petition receivership orders. Therefore, we need not address the legal issue of
whether the award of the post-petition attorneys’ fees is allowed under the
Bankruptcy Code.
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VIII.
The judgment of the district court is AFFIRMED in part. We VACATE
the fee award to Orenstein and Mastrogiovanni and REMAND to the
bankruptcy court with orders to recalculate the award amount to Orenstein
and Mastrogiovanni as is consistent with this opinion.
15