Edwards Family Partnership v. Johnson, et a ( 2021 )

Case: 20-60718 Document: 00515768757 Page: 1 Date Filed: 03/05/2021
United States Court of Appeals
for the Fifth Circuit
United States Court of Appeals
Fifth Circuit
FILED
March 5, 2021
No. 20-60718 Lyle W. Cayce
Clerk
In the Matter of: Community Home Financial Services,
Incorporated,
Debtor,
Edwards Family Partnership, L.P.; Beher Holdings
Trust,
Appellees,
versus
Kristina M. Johnson, Trustee for Community Home Financial Services,
Incorporated,
Appellants.
Appeal from the United States District Court
for the Southern District of Mississippi
USDC No. 3:18-CV-158
Before Elrod, Willett, and Engelhardt, Circuit Judges.
Jennifer Walker Elrod, Circuit Judge:
The bankruptcy court awarded fees to the bankruptcy debtor’s
counsel for work performed prior to the appointment of a trustee. Creditors
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appealed the fee award to the district court. After a two-and-a-half-year
delay, the district court vacated the fee award. Because the district court
improperly assessed the benefit of counsel’s services to the estate from
hindsight, rather than assessing the reasonableness and likely benefit from
the time the services were rendered, we REVERSE the district court’s
judgment and REMAND.
I.
This dispute arises from the bankruptcy proceedings for Community
Home Financial Services, Inc. (CHFS), which is not a party to this appeal.
Heavily indebted to the appellants—Edwards Family Partnership, Inc. and
Beher Holdings Trust—and others, CHFS entered Chapter 11 bankruptcy to
restructure its debts in May of 2012. In re Cmty. Home Fin. Servs., No. 12-
1703, 2015 WL 8113699, at *2–3 (Bankr. S.D. Miss. Dec. 7, 2015). 1
Throughout the bankruptcy, the two largest creditors were the
appellants, Edwards Family and Beher. 2 CHFS remained the debtor in
possession, and CHFS’s president acted as its designated representative. Id.
at *2. With the approval of the bankruptcy court, Derek A. Henderson and
Wells Marble & Hurst, PLLC represented CHFS. Id.; see 11 U.S.C. § 327.
1
The parties have made it difficult to construct an accurate factual and procedural
history by omitting record citations, including incorrect record citations, and making
slightly incorrect factual assertions. We remind counsel of their duty to support “[e]very
assertion in briefs regarding matter in the record . . . by a reference to the page number of
the original record.” 5th Cir. R. 28.2.2; see also Fed. R. App. P. 28(a)(6), (b).
2
The bankruptcy court’s opinion notes that the two entities tried to characterize
themselves as a single entity called the “Edwards Entities.” “The advantage of this tactic
is the suggestion that there is only a single creditor in the Bankruptcy Case.” But Edwards
Family and Beher are, in fact, distinct, with the former being “a limited partnership formed
under the laws of Delaware” and the latter being a “trust formed under Bermuda law.”
2
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As counsel for CHFS, Henderson and Wells Marble initiated a series
of adversary proceedings against Edwards Family and Beher between August
2012 and November 2013 challenging the priority of certain claims.
Meanwhile, Henderson and Wells Marble proposed a reorganization plan on
January 29, 2013. 2015 WL 8113699, at *9.
Both Edwards Family and Beher objected to the plan and moved to
appoint a trustee and to convert the bankruptcy to a Chapter 7 case. Id. The
bankruptcy court held confirmation of the proposed reorganization plan in
abeyance. Id. As a result, Henderson and Wells Marble responded to these
motions as they continued to pursue the adversary proceedings. Id. Wells
Marble withdrew as counsel for CHFS on November 13, 2013.
As the bankruptcy case proceeded, CHFS’s president transferred “all
but approximately $7,500.00 from” CHFS’s account—over $9 million in
cash—to a Panamanian account. In re Cmty. Home Fin. Servs., 571 B.R. 714,
718 (Bankr. S.D. Miss. 2017). CHFS’s president then fled the country and
“set up a ‘rogue’ operation of CHFS’s business” out of new branch offices
in Panama and Costa Rica. Id.On December 20, 2013, Henderson filed a disclosure informing the
bankruptcy court that CHFS’s president had transferred those funds and
moved CHFS’s principal place of business from Jackson, Mississippi to
Panama. Id. Three days after the disclosure, the bankruptcy court appointed
an emergency trustee, and then it appointed Kristina Johnson as Trustee on
January 21, 2014. Id. at 719. Henderson withdrew as counsel on March 6,
2014.
Both Henderson and Wells Marble sought fees for the services they
performed in connection with the adversary proceedings before Johnson was
appointed as Trustee. Wells Marble sought fees for its services from May 1,
2013 through October 31, 2013, approximately two weeks before Wells
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Marble withdrew as counsel. Henderson sought fees for his services from
September 2, 2013 through December 28, 2013, approximately three weeks
before Johnson was appointed as Trustee.
The bankruptcy court awarded fees to both Henderson and Wells
Marble in December 2015 and January 2016. Edwards Family and Beher
timely appealed the awards. In September of 2017, the district court affirmed
in part but remanded for further findings of fact regarding the fees awarded
for “commencing and then litigating certain Adversary Proceedings in the
bankruptcy matter.”
On February 27, 2018, the bankruptcy court once again awarded fees
to Henderson and Wells Marble in connection with the adversary
proceedings. The bankruptcy court concluded that those services “were
necessary to the administration of the bankruptcy case and reasonably likely
to benefit the bankruptcy estate.” The bankruptcy court emphasized that
the adversary proceedings were necessary “to create a clear path for an exit
strategy in the Bankruptcy Case” and to “reduc[e] and reclassif[y]” certain
claims.”
Edwards Family and Beher filed a notice of appeal to the district court
on March 13, 2018. 3 On August 5, 2020, the district court vacated the fee
award. In the district court’s view, Henderson and Wells Marble’s decision
to pursue adversary proceedings “was not a good gamble.”
3
Consolidated appeals of the bankruptcy court’s rulings on the merits of the
adversary proceedings were also pending in the district court. In response to a petition for
writ of mandamus, we advised the district court to rule on those consolidated appeals
within 60 days. In re Johnson, Trustee for Cmty. Home Fin. Servs. Corp., 814 F. App’x 881
(5th Cir. 2020). The district court’s ruling on the fee award at issue in this case came two
days after our order on the petition for writ of mandamus.
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Henderson, Wells Marble, and the Trustee appealed, arguing that the
district court improperly evaluated the benefit of the adversary proceedings
retrospectively. Edwards Family and Beher moved to dismiss the Trustee
for lack of standing. We carried that motion with the case.
Henderson and Wells Marble then settled their fee dispute with
Edwards Family and Beher, and those parties jointly moved to dismiss
Henderson and Wells Marble from the appeal on October 13, 2020. We
granted that motion on October 14, 2020. The only remaining appellant is
the Trustee.
With the Henderson and Wells Marble fee disputes settled, Edwards
Family and Beher moved to dismiss the appeal as moot. The Trustee
opposed the motion. In the Trustee’s view, the case remains live because the
Trustee has an ongoing duty throughout the pendency of a bankruptcy
proceeding to represent the interests of the bankruptcy estate in the award of
fees. In the alternative, the Trustee moved to vacate the district court’s
judgment if we should dismiss this appeal as moot. We carried those motions
with the case.
II.
In reviewing a district court’s ruling on a bankruptcy court’s fee
award, we review the bankruptcy court’s decision using the same standard of
review as the district court. Okla. State Treasurer v. Linn Operating, Inc. (In
re Linn Energy, L.L.C.), 927 F.3d 862, 866 (5th Cir. 2019). “We therefore
review the bankruptcy court’s award of attorneys’ fees for abuse of
discretion.” In re Cahill, 428 F.3d 536, 539 (5th Cir. 2005). “[A]s a second
review court,” we review “the bankruptcy court’s conclusions of law de
novo and its findings of fact for clear error.” 927 F.3d at 866 (quoting
Viegelahn v. Lopez (In re Lopez), 897 F.3d 663, 668 (5th Cir. 2018)).
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III.
Edwards Family and Beher contend that their settlement with
Henderson and Wells Marble mooted this appeal. The Trustee, however,
asserts that the case remains live notwithstanding the settlement. For the
reasons stated herein, we agree with the Trustee.
“Article III’s ‘case or controversy’ requirement permits federal
courts to adjudicate only live disputes—a party must retain a ‘legally
cognizable interest in the outcome’ of an issue, or its resolution is moot.”
Hinkley v. Envoy Air, Inc., 968 F.3d 544, 548 (5th Cir. 2020) (quoting
Campanioni v. Barr, 962 F.2d 461, 464 (5th Cir. 1992)). “A controversy
becomes moot where, as a result of intervening circumstances, there are no
longer adverse parties with sufficient legal interest to maintain the
litigation.” Scruggs v. Lowman (In re Scruggs), 392 F.3d 124, 128 (5th Cir.
2004) (quoting Chevron U.S.A., Inc. v. Traillour Oil Co., 987 F.2d 1138, 1153
(5th Cir. 1993)).
In the view of Edwards Family and Beher, there is no longer any party
with sufficient legal interest in this case because the Trustee did not have a
legal interest to begin with:
The dispute regarding the fee awards has now been fully
resolved by compromise between the only parties with a legally
cognizable interest in the dispute: Henderson and Wells
Marble on one side (the parties who applied for fees), and the
Edwards Entities on the other (the creditors who objected to
the fees). . . . The Trustee has filed a principal brief on the
merits, but the Trustee always lacked a direct interest in the
judgment, and the underlying dispute is now moot.
Thus, Edwards Family and Beher effectively collapse the mootness question
with the question of the Trustee’s standing. Edwards Family and Beher,
however, have an incorrect understanding of trustee standing.
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Edwards Family and Beher point to the test for standing for interested
parties in a bankruptcy: “a bankruptcy appellant must . . . show that he was
‘directly and adversely affected pecuniarily by the order of the bankruptcy
court.’” Furlough v. Cage (In re Technicool Sys., Inc.), 896 F.3d 382, 385 (5th
Cir. 2018) (quoting Fortune Nat. Res. Corp. v. U.S. Dep’t of Interior, 806 F.3d
363, 365 (5th Cir. 2015)). A bankruptcy trustee, however, is distinct from all
other bankruptcy parties because the trustee is responsible for the
administration of the bankruptcy estate.
The Fourth Circuit has noted that trustees can never establish that
they were pecuniarily affected by a bankruptcy order because trustees “never
have pecuniary interests in cases.” U.S. Trustee for the W. Dist. of Va. (In re
Clark), 927 F.2d 793, 795 (4th Cir. 1991) (involving a United States trustee);
see also Richman v. First Woman’s Bank (In re Richman), 104 F.3d 654, 657
(4th Cir. 1997) (determining that the bankruptcy trustee had standing as “the
representative of the bankrupt’s estate”). Trustee standing does not arise
from the trustee’s pecuniary interest, but rather from the trustee’s “official
duty to enforce the bankruptcy law in the public interest.” In re Clark, 927
F.2d at 796 (citing Sec. & Exch. Comm’n v. U.S. Realty & Improvement Co.,
310 U.S. 434, 460 (1940)).
The First, Sixth, and Ninth Circuits have also recognized the
inadequacy of a pecuniary-interest test for trustee standing. See In re Plaza
de Diego Shopping Ctr., Inc., 911 F.2d 820, 824 (1st Cir. 1990) (citing
Morgenstern v. Revco D.S., Inc. (In re Revco), 898 F.2d 498, 499 (6th Cir.
1990)) (determining that the United States trustee had standing without a
pecuniary interest); Moneymaker v. CoBen (In re Eisen), 31 F.3d 1447, 1451 n.2
(9th Cir. 1994) (quoting Hancock Bank v. Jefferson, 73 B.R. 183, 185 (Bankr.
S.D. Miss. 1986)) (“Once appointed a trustee, the debtor’s assets and claims
pass to the trustee, making the trustee ‘the proper party in interest . . . .’”).
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Our own cases have implicitly recognized that trustee standing does
not depend on a pecuniary interest. For example, we have previously held,
in a Chapter 7 case, that “[i]n the bankruptcy context, the bankruptcy trustee
is the real party in interest with respect to claims falling within the bankruptcy
estate.” United States ex rel. Spicer v. Westbrook, 751 F.3d 354, 362 (5th Cir.
2014). A trustee’s standing comes from the trustee’s duties to administer
the bankruptcy estate, not from any pecuniary interest in the bankruptcy. See
id.In light of the explicit statements from our sister circuits and the
implicit guidance from our own caselaw, we hold that the Trustee in this case
has standing and this case is not moot because the payment of fees to
Henderson and Wells Marble directly affects the administration of the
bankruptcy estate. Even though Henderson and Wells Marble have settled
their fee dispute with Edwards Family and Beher, the Trustee remains tasked
with ensuring that only proper payments are made from the bankruptcy
estate. It is immaterial whether the Trustee or Edwards Family and Beher
will ultimately prevail on this appeal. See Texas v. United States, 945 F.3d 355,
383 (5th Cir. 2019) (“[C]ourts cannot fuse the standing inquiry into the
merits.”). Rather, the district court order presents an issue of the
administration of the estate, meaning the Trustee has a “sufficient legal
interest to maintain the litigation,” such that this appeal is not moot. In re
Scruggs, 392 F.3d at 12.
IV.
In In re Woerner, we held that “if a fee applicant establishes that its
services were ‘necessary to the administration’ of a bankruptcy case or
‘reasonably likely to benefit’ the bankruptcy estate ‘at the time at which [they
were] rendered,’ then the services are compensable.” Barron & Newburger,
P.C. v. Texas Skyline, Ltd. (In re Woerner), 783 F.3d 266, 276 (5th Cir. 2015)
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(internal citation omitted) (quoting 11 U.S.C. § 330(a)(3)(C), (4)(A)). In
awarding fees, hindsight is irrelevant; retrospect is irrelevant; “material
benefit to the bankruptcy estate” is irrelevant. Id. at 273–74. “What matters
is that, prospectively, the choice to pursue a course of action was
reasonable.” Id. at 274.
Despite clear Fifth Circuit law that the services must be reasonable at
the time they were rendered, the district court vacated the fee awards to
Henderson and Wells Marble for their services related to the adversary
proceedings. The district court determined that the decision to pursue
adversary proceedings “was an expensive course of action from the outset.
. . . [I]t would have been more cost-effective, faster, and better for the estate
to pay off the few unsecured creditors rather than hire professionals to litigate
Adversary Proceedings quibbling about their priority.” “This was not a good
gamble.”
The district court was wrong to vacate the bankruptcy court award
based on its own retrospective assessment of the propriety of the adversary
proceedings without giving the “the deference that is the hallmark of abuse-
of-discretion review.” Gen. Elec. Co. v. Joiner, 522 U.S. 136, 143 (1997). The
district court should have looked at the reasonableness of pursuing the
adversary proceedings from the time Henderson and Wells Marble provided
their services. See, e.g., In re Raygoza, 556 B.R. 813, 824 (Bankr. S.D. Tex.
2016); 1 Bankruptcy Law Manual § 4:38 n.10 (5th ed. 2020). Viewed
prospectively, pursuit of the adversary proceedings was “necessary to the
administration of the case” to resolve otherwise unsettled disputes about the
priority of claims. See 11 U.S.C. § 330(a)(1)(A), (a)(3), (a)(4)(A)(ii).
* * *
We REVERSE the judgment of the district court and REMAND for
the district court to reinstate the bankruptcy court’s fee award. Accordingly,
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the appellees’ motion to dismiss the Trustee from the appeal for lack of
standing is DENIED, and the appellees’ motion to dismiss the appeal as
moot is DENIED. The appellant’s alternative motion to vacate the
judgment of the district court is DENIED AS MOOT.
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