In re: 5900 Assoc v. ( 2006 )

RECOMMENDED FOR FULL-TEXT PUBLICATION
Pursuant to Sixth Circuit Rule 206
File Name: 06a0413p.06
UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
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Debtor. -
In re: 5900 ASSOCIATES, INC.,
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No. 05-1838
,
FRED J. DERY, Trustee, >
Plaintiff-Appellant, -
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v.
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Defendant-Appellee. -
CUMBERLAND CASUALTY & SURETY CO.,
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N
Appeal from the United States District Court
for the Eastern District of Michigan at Detroit.
No. 04-74770—Paul D. Borman, District Judge.
Submitted: May 30, 2006
Decided and Filed: November 7, 2006
Before: KEITH and BATCHELDER, Circuit Judges; ALDRICH, District Judge.*
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COUNSEL
ON BRIEF: Terrance A. Hiller, Jr., KUPELIAN ORMOND & MAGY, Southfield, Michigan, for
Appellant. Ryan D. Heilman, Daniel J. Weiner, SCHAFER & WEINER, Bloomfield Hills,
Michigan, for Appellee.
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OPINION
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ALICE M. BATCHELDER, Circuit Judge. Fred J. Dery, the trustee of the bankruptcy estate
of 5900 Associates, Inc., seeks to set aside the debtor’s transfer of property to Cumberland Casualty
& Surety Co. (“Cumberland”) as a fraudulent transfer under M.C.L. § 566.35. Dery may prevail
under the statute only if the debtor was insolvent at the time of the transfer. The debtor’s solvency
in this case turns on the enforceability of a claim for attorney’s fees from a prior bankruptcy case
*
The Honorable Ann Aldrich, United States District Judge for the Northern District of Ohio, sitting by
designation.
1
No. 05-1838 In re 5900 Associates Page 2
that was dismissed. The bankruptcy court in the instant case held that the claim for fees from the
prior case was unenforceable because the debtor’s attorney never sought bankruptcy court approval
of those fees under 11 U.S.C. § 330(a). The district court affirmed. We agree that 11 U.S.C. § 330
establishes the exclusive means of allowing a claim for professional fees in a bankruptcy proceeding.
We therefore affirm the judgment of the bankruptcy court.
Attorney Todd Halbert began representing the debtor’s principal in 1996. He handled
matters related to at least three separate entities and three parcels of real property, only one of which
was owned by the debtor. Nonetheless, the debtor received all of Halbert’s legal bills. In 1997, the
debtor filed a voluntary Chapter 11 petition. Although the bankruptcy court authorized Halbert’s
representation of the debtor, Halbert never submitted a fee application. The bankruptcy was
dismissed in June 1997. At that point, Halbert’s fees totaled $101,119.81, of which, Halbert
testified, the debtor owed him approximately $39,000 for services rendered in the bankruptcy.
Halbert said that he later billed the debtor an additional $65,000 as a premium for results he had
achieved in state court litigation. The bankruptcy court found, and the record supports the finding,
that at a minimum, $55,000 of those fees were for services related to the bankruptcy. After dismissal
of its Chapter 11 petition, the debtor executed a promissory note in favor of Halbert for $166,119.81.
Some six years later, the instant bankruptcy proceeding was instituted.
The parties agree that if the portion of Halbert’s fees allocable to the prior bankruptcy is
unenforceable, the trustee has no redress under M.C.L. § 566.35. The trustee argues that the
bankruptcy court erred by finding the fees unenforceable. Specifically, he asserts that the fees are
enforceable under state law because they were incurred pursuant to a written fee arrangement and
later confirmed by a promissory note. Further, the trustee argues that 11 U.S.C. § 330, which
permits the bankruptcy court to award reasonable compensation to attorneys, applies only to claims
for fees against the bankruptcy estate. The trustee argues that because the first bankruptcy estate
ceased to exist when that case was dismissed, Halbert’s claim was not against the bankruptcy estate
but against the debtor. He asserts that 11 U.S.C. § 330 is therefore inapplicable. Finally, the trustee
argues that, upon dismissal of a case, a bankruptcy court is divested of its approval power under 11
U.S.C. § 330 unless it explicitly retains jurisdiction over fees.
We review the bankruptcy court’s decision directly, according no deference to the district
court. Brady-Morris v. Schilling (In re Knight Trust), 303 F.3d 671, 676 (6th Cir. 2002). The
bankruptcy court’s findings of fact are reviewed for clear error, and questions of law are reviewed
de novo. Stamper v. United States (In re Gardner), 360 F.3d 551, 557 (6th Cir. 2004). In this case,
both the bankruptcy court and the district court held that the portion of Halbert’s claim for fees
allocable to the debtor’s first bankruptcy was unenforceable.
We agree with the bankruptcy court and the district court that Halbert was required to seek
the court’s approval of attorney’s fees incurred during the prior proceeding. Under 11 U.S.C. § 327,
a trustee in bankruptcy or the debtor in a proceeding under Chapter 11, see 11 U.S.C. § 1107
(providing that a debtor in possession shall have the rights and perform the functions of a trustee),
is permitted to appoint an attorney with the court’s approval, and Halbert’s appointment was
approved by the prior bankruptcy court. The court’s order stated, “Todd M. Halbert, Esq. is hereby
authorized to act as counsel for the Debtor in this case . . . . Compensation shall be paid after
application and Court Order . . . .”
The payment of attorneys who are appointed pursuant to 11 U.S.C. § 327 is governed by 11
U.S.C. § 330, which provides that “[a]fter notice to the parties in interest and the United States
Trustee and a hearing, and subject to sections 326, 328 and 329, the court may award to a . . .
professional person employed under section 327 . . . reasonable compensation for actual, necessary
services rendered by [an] . . . attorney.” 11 U.S.C. § 330(a)(1). In order to receive payment under
§ 330, an attorney must comply with Federal Rule of Bankruptcy Procedure 2016, which requires
No. 05-1838 In re 5900 Associates Page 3
professional service providers to submit to the court a detailed statement of services rendered and
expenses incurred. Reporting is also required under 11 U.S.C. § 329:
(a) Any attorney representing a debtor in a case under this title, or in connection with
such a case, whether or not such attorney applies for compensation under this title,
shall file with the court a statement of the compensation paid or agreed to be paid,
if such payment or agreement was made after one year before the date of the filing
of the petition, for services rendered or to be rendered in contemplation of or in
connection with the case by such attorney, and the source of such compensation.
(b) If such compensation exceeds the reasonable value of any such services, the court
may cancel any such agreement, or order the return of any such payment, to the
extent excessive . . . .
11 U.S.C. § 329.
The trustee claims that 11 U.S.C. § 330, 11 U.S.C. § 329, and Fed. R. Bankr. P. 2016 do not
apply to Halbert’s fees because, for state law purposes, the debtor’s promissory note converted the
fees into an enforceable debt. We are not convinced by this argument. Fees in a bankruptcy
proceeding are governed by federal, not state, law. Halbert and the debtor cannot, simply by
entering into a state law contract, abrogate the bankruptcy court’s duty to monitor such fees. See
In re Inslaw, Inc., 106 B.R. 331, 333 (Bankr. D.D.C. 1989) (“In a bankruptcy case fees are not a
matter for private agreement. There is an inherent public interest that must be considered in
awarding fees.”).
Nor are we convinced by the trustee’s assertion that 11 U.S.C. § 330 applies only to fees that
will be drawn from the bankruptcy estate. The language of that statute contains no such limitation.
Furthermore, we have held that 11 U.S.C. § 329 permits the bankruptcy court to order disgorgement
of fees even when the fees were not paid from the bankruptcy estate. Henderson v. Kisseberth (In
re Kisseberth), 273 F.3d 714, 718-19 (6th Cir. 2001) (court had jurisdiction under § 329 to order
disgorgement of fees where attorney retained insurance proceeds not included in the estate). See
also In re Greco, 246 B.R. 226, 233 (Bankr. E. D. Pa. 2000) (court had jurisdiction under § 329 to
review fees paid by an individual who was not the debtor). The results in Kisseberth and Greco
would not be possible if, as the trustee suggests, the bankruptcy court has no jurisdiction over fees
not paid from the bankruptcy estate.
Having dealt with the trustee’s first two contentions, we arrive at the crux of the matter:
whether the bankruptcy court retains jurisdiction to approve attorney’s fees under 11 U.S.C. § 330
after the underlying case is dismissed. We hold that it does.
A number of courts have held that the bankruptcy court may retain jurisdiction over matters
related to the bankruptcy even after the underlying case has been adjudicated or dismissed. The
Third Circuit has held that a bankruptcy court retained jurisdiction, following discharge, to decide
whether foreclosure against the debtor’s property was an unfair and deceptive trade practice. Smith
v. Commercial Banking Corp. (In re Smith), 866 F.2d 576, 578 (3d Cir. 1989). The court wrote,
“[a]s a general rule, the dismissal of a bankruptcy case should result in the dismissal of ‘related
proceedings’ because the court’s jurisdiction of the latter depends, in the first instance, upon the
nexus between the underlying bankruptcy case and the related proceedings.” Id. at 580. The court
then found that the general rule “is not without exception” where the related proceedings satisfy the
test applicable to pendant jurisdiction. Id. See also Fidelity & Deposit Co. v. Morris (In re Morris),
950 F.2d 1531, 1534 (11th Cir. 1992) (“dismissal of an underlying bankruptcy case does not
automatically strip a federal court of jurisdiction over an adversary proceeding which was related
to the bankruptcy case.”); Shop Television Network, Inc. v. Chodos (In re Shop Television Network,
No. 05-1838 In re 5900 Associates Page 4
Inc.), No. 94-56225, 79 F.3d 1154, 1996 WL 102580 (9th Cir. March 6, 1996) (unpublished
decision) (bankruptcy court’s explicit retention of jurisdiction over attorney’s fees after dismissal
of the underlying case affirmed).
We find the case for retained jurisdiction over fees to be clear. Unlike the post-discharge
matter described in Smith, a bankruptcy court’s decision on attorney’s fees is not a “related
proceeding[].” Smith, 866 F.2d at 578. It is part of the original proceeding. The Bankruptcy Code
assigns to courts a comprehensive duty to review fees in a particular case, and 11 U.S.C. § 330 is
the sole mechanism by which fees may be enforced. Dismissal of a case, or a private agreement
between the debtor and its attorney, cannot abrogate the bankruptcy court’s statutorily imposed duty
of review. See Jensen v. Gantz (In re Gantz), 209 B.R. 999, 1002 (10th Cir. B.A.P. 1997) (attorney
entitled only to fees awarded by the bankruptcy court under § 330); In re Jeanes, No. 01-00760,
2004 WL 1718093, at *2 (Bankr. N.D. Iowa June 17, 2004) (“Because § 330(a) requires court
approval to create the obligation to pay the attorney’s fees, absent court approval neither the debtor
nor the estate is ever liable. Court approval under § 330(a) is what creates the liability, not the
performance of the services.”) (citations omitted); In re Marin, 256 B.R. 503, 507 (Bankr. D. Colo.
2000) (“There is no other way for an attorney to be paid! An attorney who extracts payments from
debtors other than pursuant to proper disclosure, or to allowance under section 330, stands in
violation of the provisions of the bankruptcy Code, and may properly be stripped of all fees.”)
(emphasis original). As an attorney appointed under 11 U.S.C. § 327, Halbert was required to seek
approval of his fees from the court under 11 U.S.C. § 330. Because he did not do so, his fees are
unenforceable, and the bankruptcy court did not err when determining that the debtor was solvent
at the time of the transfer to Cumberland. We therefore affirm the decision of the bankruptcy court.