In Re: East Coast Foods, Inc. ( 2019 )

1 2 3 4 5 6 UNITED STATES DISTRICT COURT 7 CENTRAL DISTRICT OF CALIFORNIA 8 LOS ANGELES DIVISION 9 IN RE: EAST COAST FOODS, INC. CASE NO. CV 18-10098 MWF 10 11 ORDER RE: THE BANKRUPTCY 12 COURT’S ORDER 13 14 15 16 17 Before the Court is an appeal from the United States Bankruptcy Court (the 18 Honorable Sheri L. Bluebond, United States Bankruptcy Judge). Appellant Clifton 19 Capital Group, LLC (“Clifton Capital”) appeals from the Bankruptcy Court’s Order 20 granting the Trustee’s Fourth and Final Application for Compensation and 21 Reimbursement of Fees and Expenses (the “Final Fee Application”) in the amount 22 of $1,155,944.71. The Order was issued on November 19, 2018. 23 Clifton Capital submitted its Opening Brief (“OB”) on March 6, 2019. 24 (Docket No. 11). On May 22, 2019, Appellee Bradley D. Sharp, Chapter 11 25 Trustee, submitted his Brief (“AB”). (Docket No. 16). On July 1, 2019, Appellant 26 submitted its Reply Brief (“RB”). (Docket No. 23). The Court has read and 27 considered the papers filed in this appeal, and held a hearing on November 6, 2019. 1 The Order is AFFIRMED in part, REVERSED in part, and REMANDED 2 for further proceedings. The Bankruptcy Court did not make the required findings 3 to determine that the Trustee is entitled to a fee award that exceeds the lodestar 4 figure. However, the Bankruptcy Court did not abuse its discretion in awarding 5 compensation for services performed by Development Specialists, Inc. (“DSI”). 6 I. BACKGROUND 7 On March 25, 2016, East Coast Foods, Inc. (the “Debtor”) filed for 8 bankruptcy under Chapter 11. (Appellant’s Excerpts of Record (“ER”) 60 (Docket 9 No. 11)). On April 29, 2016, the Office of United States Trustee (the “U.S. 10 Trustee”) appointed the Official Committee of Unsecured Creditors (the 11 “Committee”). (ER 84). Clifton Capital is a member of the Committee. (Id.). 12 On September 28, 2016, the Bankruptcy Court appointed Bradley D. Sharp as 13 the Chapter 11 Trustee (the “Trustee”). (ER 90). The Trustee handled numerous 14 issues during his appointment, including state court actions, tax disputes, landlord 15 disputes, accounting practices, and return of intellectual property assets. (ER 967- 16 70; AB 10-14). The Trustee employed his company, DSI, to help him perform some 17 of his duties as the Trustee. (ER 102, 258, 331, 879). 18 On July 3, 2018, the Bankruptcy Court entered an order confirming a joint 19 Plan of Reorganization (the “Plan”). (ER 715-26). On September 10, 2018, the 20 court granted non-material modifications to the Plan, and on September 14, 2018, 21 the Plan became effective. (ER 715-34). 22 The Trustee filed four fee applications during the bankruptcy case. In the first 23 three applications, the Trustee sought approval of fees and costs on an interim basis. 24 (ER 102 et seq., ER 258 et seq., ER 331 et seq.). In the fourth and final application, 25 the Trustee sought final approval of his fees and costs. (ER 879 et seq.). 26 In each Fee Application, the Trustee sought fees incurred by himself as well 27 as by DSI personnel. Specifically, each Application contained the disclosure: “This 1 Application includes the time records for employees of [DSI] . . . who assisted the 2 trustee in the performance of his duties of this case.” (ER 102, 258, 331, 879). 3 The Committee filed an objection to the First Fee Application, arguing that 4 the court never authorized DSI’s employment, and therefore, fees to DSI totaling 5 $202,767.59 should be disallowed. (ER 189). The Bankruptcy Court overruled the 6 Committee’s objection and approved the First Fee Application in full. (SER 41). 7 The Committee did not object to DSI’s fees in the second and third applications, and 8 the Bankruptcy Court approved both Fee Applications in full. (SER 43-44; ER 52- 9 53; AB 20). 10 The Trustee filed the Final Fee Application in October 2018. The Final Fee 11 Application disclosed that the Trustee and his staff at DSI had worked 1,692.2 hours 12 during the case, which would equate to $758,955.50 if billed at normal hourly rates. 13 (ER 885). However, the Trustee requested a fee of $1,155,844.71, which is the 14 maximum fee permitted under 11 U.S.C. § 326(a) (“§ 326(a)”). (Id.). 15 Clifton Capital filed an objection to the Final Fee Application. (ER 936 et 16 seq.). It did not object to the Trustee’s request for fees associated with work 17 performed by his staff at DSI. However, Clifton Capital argued that the Trustee 18 should not be paid the maximum amount under § 326(a), which is a limit and not a 19 presumption of reasonableness. (ER 942-44). Clifton Capital argued that the 20 Trustee had the burden of establishing his requested compensation was reasonable 21 under 11 U.S.C. § 330(a) (“§ 330(a)”), and that the proper way to establish 22 reasonable compensation is by applying the lodestar method. (Id.). 23 The Bankruptcy Court granted the Trustee’s Final Fee Application and 24 entered an order granting the Final Fee Application (the “Final Fee Order”). (ER 25 58). The court provided two alternative grounds for granting the Fee Application. 26 First, the court determined that the requested fee was reasonable because it equaled 27 the amount set forth under § 326(a). The court explained: “Congress has really tried 1 commission” and “it takes some pretty extraordinary circumstances for me to revisit 2 the Trustee compensation that’s provided by formula” under § 326(a). (ER 47). 3 The court then provided an alternative basis for its decision: “[I]n the 4 alternative – aside from my discussion of how I read the compensation formula for 5 trustees, in the alternative, even if I look at it simply as reasonable compensation, I 6 think this was an exceptional case.” (ER 51). The court noted that “[t]his case was 7 a mess,” and “there were a number of problems with the way Mr. Hudson had run 8 the business, resulting in multi-million dollar judgments and tax claims.” (Id.). 9 Because the Trustee ran the Debtor’s business in a professional manner, “had an 10 awful lot of cleanup to do and an awful lot of challenges facing him in doing that,” 11 the court held that the compensation the Trustee was seeking as “reasonable for the 12 circumstances, under the circumstances and for the results achieved.” (ER 52). 13 Appellant filed the instant appeal of the Final Fee Order. 14 II. STANDARD OF REVIEW 15 A bankruptcy court’s conclusions of law are reviewed de novo and findings 16 of fact are reviewed for clear error. Zurich Am. Ins. Co. v. Int’l Fibercom, Inc., 503 17 F.3d 933, 940 (9th Cir. 2007). Pertinent to this appeal, the bankruptcy court’s award 18 of professional fees “will not [be] disturb[ed] … unless the bankruptcy court abused 19 its discretion or erroneously applied the law.” In re Strand, 375 F.3d 854, 857 (9th 20 Cir. 2004). “A bankruptcy court abuses its discretion if it applies the wrong legal 21 standard or its findings are illogical, implausible or without support in the record.” 22 In re Cook Inlet Energy LLC, 583 B.R. 494, 500 (B.A.P. 9th Cir. 2018). 23 III. DISCUSSION 24 A. Standing 25 “In order to have standing to appeal, a party must be directly and adversely 26 affected pecuniarily by the bankruptcy court decision.” In re 240 N. Brand 27 Partners, Ltd., 200 B.R. 653, 657 (B.A.P. 9th Cir. 1996). The Trustee argues that 1 100% of its alleged claim” under the Plan. (AB at 6). In support of this claim, the 2 Trustee points to a declaration made by Clifton Capital’s principal, who testified 3 that the Plan “ensure[s] 100% payment to creditors.” (AB at 6; SER 63). 4 In response, Clifton Capital argues that it is aggrieved because “[t]here are not 5 yet enough funds on hand to pay all creditors, including Clifton Capital, in full, and 6 there are outstanding contingencies under the Plan that must occur before those 7 funds become available.” (RB at 3). In fact, Clifton Capital notes that it “has not 8 been paid any amount on its allowed claim.” (Id.). At the hearing, Clifton Capital 9 confirmed that there are not sufficient funds to pay back all the creditors. Clifton 10 Capital further argues that “[a]llowing the Trustee to receive and retain 11 compensation beyond which he is entitled subordinates Clifton Capital’s claim more 12 than it should be.” (RB at 4). 13 Although neither party provides case law directly on point on the issue, the 14 Court finds Clifton Capital’s argument to be more persuasive. Clifton Capital’s 15 claim is “subordinated to . . . all allowed and secured and unsecured claims and 16 approved administrative expenses.” (SER 46; AB at 15-16). This is important 17 because to date, there is not sufficient capital to pay all creditors. Because the 18 increased compensation to the Trustee will further subordinate Clifton Capital’s 19 claim, the Court concludes that Clifton Capital is directly and adversely affected by 20 the Final Fee Order, giving it standing to pursue this appeal. See Salomon v. Logan 21 (In re International Envtl. Dynamics, Inc.), 718 F.2d 322, 326 (9th Cir.1983) (“[I]n 22 a case involving competing claims to a limited fund, a claimant has standing to 23 appeal an order disposing of assets from which the claimant seeks to be paid.”); In 24 re P.R.T.C., Inc., 177 F.3d 774, 778 (9th Cir. 1999) (“A creditor does . . . have a 25 direct pecuniary interest in a bankruptcy court’s order transferring assets of the 26 estate.”). 27 The Court thus turns to the merits. 1 B. The Fee Order 2 Clifton Capital argues that the Fee Order was an abuse of discretion for two 3 reasons. First, Clifton Capital argues that the Bankruptcy Court erred in 4 determining that the Trustee’s requested fees were reasonable. Second, Clifton 5 Capital argues that the Bankruptcy Court erred in awarding the Trustee 6 compensation for services performed by DSI. The Court agrees with Clifton Capital 7 that the Bankruptcy Court erred in determining that the Trustee’s requested fees 8 were reasonable because the court did not make detailed findings as to why the 9 Trustee is entitled to an amount significantly higher than the lodestar figure. 10 However, the Court concludes that the Bankruptcy Court did not abuse its discretion 11 in awarding the Trustee compensation for services performed by DSI. 12 1. Reasonableness of the Trustee’s Fee 13 Clifton Capital argues that the Bankruptcy Court committed two errors when 14 it determined the reasonableness of the Trustee’s fee. 15 The Wrong Legal Standard: Clifton Capital first argues that the Bankruptcy 16 Court applied the wrong legal standard. (OB at 12-19). According to Clifton 17 Capital, the Bankruptcy Court concluded that the Trustee’s requested fee was 18 reasonable because it equaled the amount provided under § 326(a). (OB at 12-13). 19 But § 326(a) sets a statutory cap for trustee compensation, not what is presumptively 20 reasonable compensation. Therefore, Clifton Capital argues that the Bankruptcy 21 Court should have considered “all relevant factors” listed under § 330(a) to 22 determine whether the Trustee’s requested compensation was reasonable. (OB at 23 15-16). In response, the Trustee argues that the Bankruptcy Court did precisely that; 24 it provided an alternative ground for finding the requested fee to be reasonable 25 under all relevant factors as stated in § 330(a). (AB at 27-28). 26 The Court does not find Clifton Capital’s argument to be persuasive. The 27 Bankruptcy Court provided two separate bases for determining the reasonableness 1 requested fee was reasonable because the fee should be treated as a “commission” 2 that is equal to the § 326(a) statutory cap. (See ER 47-48). If this was the only basis 3 for the Bankruptcy Court’s determination, Clifton Capital’s argument would have 4 merit. 5 However, the Bankruptcy Court also provided an alternative basis for its 6 decision. The Bankruptcy Court stated: “in the alternative, even if I look at it 7 simply as reasonable compensation, I think this was an exceptional case.” (ER 51). 8 The Bankruptcy Court then explained the challenges the Trustee faced in this case 9 and concluded that “the compensation that [the Trustee] is requesting here in 10 accordance with the formula is reasonable for the circumstances, under the 11 circumstances and for the results achieved.” (ER 52). Even Clifton Capital appears 12 to acknowledge that this is the correct legal standard for determining the 13 reasonableness of the Trustee’s fees. Therefore, the Court determines that the 14 Bankruptcy Court did not err by applying the wrong legal standard. 15 Exceeding the lodestar figure: Even if the Bankruptcy Court articulated the 16 correct legal standard, Clifton Capital further argues that the court erred by 17 awarding a fee amount that far exceeded the lodestar figure without providing 18 sufficient reasoning for the deviation. (RB at 15-19). Both parties appear to agree 19 that the Bankruptcy Court was not required to apply the lodestar. (See RB at 11). 20 Nonetheless, Clifton Capital argues that lodestar approach is the “primary method” 21 for determining reasonableness of the Trustee’s compensation and argues that the 22 court should not have granted the Trustee an award beyond the lodestar amount 23 without “specific evidence that an award based on his standard hourly rate and 24 actual hours worked does not fairly compensate for the work done.” (OB at 28). 25 In response, the Trustee argues that the Bankruptcy Court has provided 26 sufficient reasoning for why this case was exceptional. The Trustee notes that the 27 Bankruptcy Court explained that “there were a number of problems with the way 1 tax claims,” “[t]here were other labor problems,” and “it was apparent to this Court 2 that [the Debtor] did not know how to run a business with multiple locations in a 3 professional manner.” (ER 51-52). The Bankruptcy Court also observed that the 4 Trustee came in and ran the business and “had an awful lot of cleanup to do and an 5 awful lot of challenges facing him in doing that.” (ER 52). According to the 6 Trustee, this record demonstrates that the Bankruptcy Court considered the 7 circumstances of this case and appropriately determined a reasonable amount of 8 fees. 9 The Court agrees with Clifton Capital. In In re Manoa Finance Co., Inc., the 10 Ninth Circuit explained that “[t]here is a strong presumption that [an award based on 11 the lodestar] was ‘reasonable compensation.’” 853 F.2d 687, 692 (9th Cir. 1988). 12 Therefore, “[i]n order to justify a bonus [beyond the lodestar figure], appellant must 13 come forward with specific evidence showing why the results obtained were not 14 reflected in either his standard hourly rate or the number of hours allowed. He must 15 also show that the bonus is necessary to make the award commensurate with 16 compensation for comparable nonbankruptcy services.” Id. Moreover, [i]f the 17 bankruptcy court determines that a bonus is justified, it must make detailed findings 18 in support of that determination.” Id. (emphasis added). 19 Here, the parties dispute what the correct lodestar amount is. However, after 20 correcting for a typographical error in the Final Fee Application, it appears that the 21 lodestar amount would have been $758,977.50. (AB at 22; RB at 16, n.10). It is 22 undisputed that the Bankruptcy Court awarded $1,155,844.70. Therefore, the 23 Bankruptcy Court appears to have determined that a significant enhancement or 24 bonus to the lodestar figure was appropriate. However, the Court cannot identify 25 any detailed findings in support of this determination in the record. Moreover, 26 while the Bankruptcy Court observed that the Trustee faced various challenges in 27 this action, it is not clear why such considerations would not have been 1 Accordingly, the Court vacates the Order granting $1,155,944.71 in fees to 2 the Trustee. On remand, the Bankruptcy Court should either (i) definitively 3 establish the lodestar figure and award fees accordingly, or (ii) make detailed 4 findings to determine whether a fee award beyond the lodestar figure is warranted. 5 2. Compensation for Services Performed by DSI 6 Clifton Capital also argues that the Bankruptcy Court erred in awarding the 7 Trustee compensation for services performed by DSI, which were not properly 8 employed pursuant to 11 U.S.C. § 327. (OB at 29). Clifton Capital argues that DSI 9 was never employed by the bankruptcy estate, but still billed and was awarded 10 $286,998 for its services. (Id.). Clifton Capital argues that this award was 11 reversible error. 12 As a preliminary matter, the Trustee argues that Clifton Capital’s objection 13 has been waived because it did not raise this argument in its objection to the Final 14 Fee Application. (AB at 35). Even though the Trustee disclosed that he was 15 seeking fees for services rendered by DSI personnel, and even though Clifton 16 Capital recognized this fact, Clifton Capital did not object to the Final Fee 17 Application on those grounds. (Id.). In fact, the Trustee asserts that Clifton Capital 18 did the opposite by asking the Bankruptcy Court to approve the Trustee’s fees in the 19 amount of $810,661.24, which included compensation for services rendered by DSI 20 personnel. (Id.) 21 In response, Clifton Capital argues that “there was no reason—or need—to 22 continue to raise the issue on each subsequent fee application.” (RB at 20, n.11). 23 Clifton Capital argues that it did not need to raise this issue because the Committee 24 had raised this exact objection in the First Fee Application, but the Bankruptcy 25 Court overruled the objection and approved the award to DSI. (See SER 41). 26 Although Clifton Capital did not raise this objection to DSI in response to the 27 Final Fee Application, the Court determines that the argument was sufficiently 1 Mercury Interactive Corp., 618 F.3d at 922. (“Although no bright line rule exists to 2 determine whether a matter has been properly raised below, an issue will generally 3 be deemed waived on appeal if the argument was not raised sufficiently for the trial 4 court to rule on it.”) (internal quotation marks and citation omitted). Accordingly, 5 the Court examines the merits. 6 “In bankruptcy proceedings, professionals who perform services for a debtor 7 in possession cannot recover fees for services rendered to the estate unless those 8 services have been previously authorized by a court order.” In re Atkins, 69 F.3d 9 970, 973 (9th Cir. 1995); see 11 U.S.C. § 327(a) (with court approval, the trustee 10 may employ “professional persons” who do not hold an adverse interest to the 11 estate). “The bankruptcy courts in this circuit possess the equitable power to 12 approve retroactively a professional’s valuable but unauthorized services,” but “such 13 retroactive approval should be limited to situations in which ‘exceptional 14 circumstances’ exist.” In re Atkins, 69 F.3d at 973-74. “To establish the presence 15 of exceptional circumstances, professionals seeking retroactive approval must 16 satisfy two requirements: they must (1) satisfactorily explain their failure to receive 17 prior judicial approval; and (2) demonstrate that their services benefitted the 18 bankrupt estate in a significant manner.” Id. at 974. 19 Here, it is undisputed the Trustee never filed an employment application 20 under § 327 for DSI. Nonetheless, the Trustee argues that it was not required to 21 employ DSI under § 327 because there is no prohibition on a trustee utilizing the 22 services of his or her staff to assist him or her in performing administrative tasks. 23 (AB at 35-36). The Trustee further notes that Clifton Capital did not show that any 24 of the services provided by DSI personnel did not constitute trustee services. (Id. at 25 37-38). Finally, the Trustee argues that even if he should have formally sought to 26 employ DSI, his failure to do so was harmless because there can be no question that 27 the Bankruptcy Court would retroactively authorize DSI’s employment. (Id. at 38). 1 In response, Clifton Capital argues that DSI should still have been employed 2 under § 327 because under the plain language of the statute, a professional cannot be 3 paid by the bankruptcy estate unless the services rendered were previously approved 4 by court order. (RB at 20). Clifton Capital further argues that DSI personnel are 5 professionals. 6 The critical issue appears to be whether DSI personnel should be considered a 7 “professional” within the meaning of § 327(a). Neither party has provided a clear 8 definition of the term, and there appears to be limited case law on the issue. 9 However, the Court notes that “[n]ot every person employed by a trustee is a 10 ‘professional person’ within the meaning of § 327.” In re Blair, 329 B.R. 358 11 (B.A.P. 9th Cir. 2005). “A ‘professional person’ is one who takes a central role in 12 the administration of the bankruptcy estate and in the bankruptcy proceedings[.]” 13 Id. (internal quotation marks and citation omitted). “Individuals or entities that 14 perform mechanical, nondiscretionary tasks are not ‘professional persons’ within the 15 meaning of § 327.” Id.; see also In re Fretheim, 102 B.R. 298, 299 (Bankr. D. 16 Conn. 1989) (To qualify as a professional under § 327(a), “it must be determined 17 whether an employee is to be given discretion or autonomy in some part of the 18 administration of the debtor's estate.”). 19 Here, the Trustee detailed the services that DSI personnel provided to assist 20 him, and the Bankruptcy Court determined that these services should be included as 21 part of trustee services and should be paid as part of the trustee fees. (SER 41). 22 Therefore, it appears that the Bankruptcy Court implicitly determined that DSI 23 personnel are not professionals that must be employed under § 327. The Court 24 determines that this finding was neither illogical nor implausible. It appears that the 25 DSI personnel assisted the Trustee by performing mostly administrative tasks, 26 including implementing new cash controls, a point of sale system, and improved 27 financial reporting. (ER 113-114). Even Clifton Capital does not appear to dispute 1 || While Clifton Capital emphasizes that the DSI personnel’s hourly rates are higher 2 || than what one would expect from lower-hourly rate staff, the Court does not find 3 || this fact to be determinative. 4 Accordingly, the Bankruptcy Court did not abuse its discretion in awarding 5 || the Trustee compensation for services performed by DSI. 6/|IV. CONCLUSION 7 The Final Fee Order is AFFIRMED in part, REVERSED in part, and 8 || REMANDED for further proceedings consistent with this Order. Specifically, the 9 || Bankruptcy Court in its discretion may either enter an order awarding fees 10 || consistent with the lodestar figure (which may be recalculated) or make detailed 11 || findings sufficient to justify a higher amount. 12 IT IS SO ORDERED. 13 14 DATED: December 18, 2019. we 16 17 MICHAEL W. FITZGERALD 18 United States District Judge 19 20 CC: Bankruptcy Court 21 22 23 24 25 26 27 28