Gibbs & Bruns LLP v. Coho Energy Inc.

United States Court of Appeals
Fifth Circuit
F I L E D
REVISED DECEMBER 30, 2004
December 20, 2004
IN THE UNITED STATES COURT OF APPEALS
Charles R. Fulbruge III
FOR THE FIFTH CIRCUIT Clerk
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Nos. 03-10268, 04-10173
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In The Matter Of: COHO ENERGY INC
Debtor
___________________________________________________
GIBBS & BRUNS LLP
Cross-Appellee,
versus
COHO ENERGY INC
Appellee – Cross-Appellant,
versus
THOMAS & CULP LLP
Appellant – Cross-Appellee.
___________________________________________________
COHO ENERGY INC
Appellee – Cross-Appellant,
versus
GIBBS & BRUNS LLP
Cross-Appellee,
THOMAS & CULP LLP
Appellant – Cross-Appellee.
__________________________________________________________________________
In The Matter Of: COHO ENERGY, INC; COHO RESOURCES, INC
Debtors
___________________________________________________
GIBBS & BRUNS, LLP
Appellee,
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versus
THOMAS & CULP LLP
Appellant.
___________________________________________________
Appeals from the United States District Court
For the Northern District of Texas
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Before BENAVIDES, DENNIS, and CLEMENT, Circuit Judges.
EDITH BROWN CLEMENT, Circuit Judge:
The following case arises from two law firms’ consecutive representation of a single debtor
in a settlement of a breach of contract by a capital venture firm. Both firms and the debtor appeal the
firms’ fee awards from bankruptcy court, and one firm appeals the subsequent settlement between
the other two parties. For the reasons below, this Court dismisses the settlement appeal and affirms
the district court’s fee award.
I. FACTS AND PROCEEDINGS
Coho Energy, Inc. (“Coho”) is a publicly traded oil and gas exploration and production
company. In March, 1999, after a contract dispute for an infusion of capital from Hicks, Muse, Tate
& Furst Equity (“Hicks Muse”), Coho hired law firm Thomas & Culp (“Thomas”) to represent Coho
in the resulting litigation. Thomas agreed to represent Coho for a thirty-percent contingent fee.
Approximately three months later, Coho filed for Chapter 11 bankruptcy protection. The bankruptcy
court approved Thomas as counsel in the Hicks Muse litigation and approved the contingent fee
arrangement under 11 U.S.C. § 328 (authorizing the bankruptcy court to approve professionals’
fees).
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Upon confirmation of Coho’s Chapter 11 Plan of Reorganization, the bankruptcy court
appointed a new CEO and President, Michael Y. McGovern. He immediately wrote to the
bankruptcy judge to address “problems that have arisen in the relationship between Coho and its
counsel in the litigation involving Hicks, Muse.” Coho subsequently fired Thomas and hired another
law firm, Gibbs & Bruns (“Gibbs”) to continue the Hicks Muse litigation. The bankruptcy court
again approved a thirty-percent contingency fee arrangement, this time with Gibbs.
Coho and Thomas could not agree on what fees Thomas was owed for its work to prepare
the litigation before it was fired. The fee agreement between Coho and Thomas contained an
arbitration clause. Thomas moved the bankruptcy court for arbitration of the fee dispute in October,
2000. The court largely adopted Thomas’s recommended order in January, 2001, which identified
three discrete issues for the panel of arbitrators to decide: first, whether Thomas was terminated “for
cause;” second, the reasonable fee that Thomas would be paid under a theory of quantum meruit; and
third, the reasonably estimated sum of money Thomas would have earned under the contingent fee
contract if it had not been fired (damages). The panel concluded in July, 2001 that Thomas was fired
for cause, that the value of quantum meruit was $2.9 million and that, in the alternative, full contract
damages were equal to $5.9 million. During the arbitration, Coho, represented by Gibbs, settled with
Hicks Muse for $8.5 million. The arbitrators had not been informed of this settlement.
In January, 2002, the bankruptcy court heard a motion by Thomas to enforce the arbitration
panel’s quantum meruit finding, a motion by Coho to approve its $8.5 million settlement with Hicks
Muse, and the application of Gibbs for its thirty-percent stake in the outcome of the Hicks Muse
settlement according to its fee agreement. There was no objection either to Gibbs’s application for
$2.55 million—the thirty percent of the $8.5 million settlement—and the court awarded the amounts
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on January 10, 2002. Also on January 10, 2002, the bankruptcy court reduced Thomas’s arbitrated
award of $2.9 million to $2.55 million due to the “unanticipated developments” of the low settlement
amount, according to 11 U.S.C. § 328(a). On January 22, 2002, Thomas objected in the Northern
District of Texas to the bankruptcy court’s reduction of the arbitration award. On January 28, 2002,
Coho moved the bankruptcy court to set aside the judgment and recommended that Thomas receive
$956,000 in fees. Thomas replied, again arguing for the original arbitration award of $2.9 million.
On March 11, the bankruptcy court issued its final order, providing that the two law firms
would split a single fee of $2.55 million. It calculated the fees using the $2.9 million amount that the
arbitration panel awarded to Thomas and then adding to that amount $1.9 million, which the court
believed would be an equally reasonable fee to pay Gibbs. Then, the bankruptcy court took the
percentage of the total $4.9 million of each firm’s quantum meruit amount and multiplied those
percentages by $2.55 million, which is 30% of the Hicks Muse settlement amount. Based on this
calculation, it ordered that $1,540,625 be paid to Thomas and $1,009,375 to Gibbs. Thomas and
Coho cross-appealed this decision. On February 28, 2003, the district court found that, as to
Thomas’s fees, the bankruptcy court acted on a timely-filed motion and did not abuse its discretion.
Thomas and Coho then appealed to this Court.
Also on February 28th, 2003, the district court vacated the bankruptcy court’s reduction in
Gibbs’s fees for lack of jurisdiction. Co ho appealed that decision. On March 7, 2003, Gibbs and
Coho settled for $2.3 million. The bankruptcy court denied this settlement agreement on June 16,
2003. Gibbs appealed that decision to the district court, which affirmed the settlement, awarding
Gibbs $2.3 million. Thomas then appealed that settlement and that appeal was challenged by Gibbs
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for lack of standing. Both sides briefed the motion to dismiss the appeal for lack of standing and that
appeal was consolidated into the instant case.
II. DISCUSSION
A. Thomas Has No Standing to Appeal the Gibbs/Coho Settlement
1. Standard of Review
“In ruling on a motion to dismiss for want of standing, bot h the trial and reviewing courts
must accept as true all material allegations of the complaint, and must construe the complaint in favor
of the complaining party.” Rohm & Hass Tex., Inc. v. Ortiz Bros. Insulation, Inc., 32 F.3d 205, 207
(5th Cir. 1994) (quoting Warth v. Seldin, 422 U.S. 490, 501 (1975)) (internal quotations omitted).
This Court uses a permissive standard to assess the actuality of the harm alleged by appellant for the
purpose of standing. Id.
2. Analysis
Bankruptcy courts are not authorized by Article III of the Constitution, and as such are not
presumptively bound by traditional rules of judicial standing. Rohm , 32 F.3d at 210 n.18. Instead,
standing in bankruptcy court originally was governed by the statutory “person aggrieved” test. 11
U.S.C. § 67(c) (1976) (“A person aggrieved by an order of a referee may . . . file with the referee a
petition for review . . . .”) (repealed 1978). Congress did not include this provision when the code
was revamped in 1978. Notwithstanding its repeal, courts subsequently have found that this test
continues to govern standing. Rohm, 32 F.3d at 210 n.18 (“Although the applicable statute has since
been repealed, bankruptcy courts still limit appellate standing to those ‘aggrieved.’”); In re Hipp, Inc.,
859 F.2d 374, 375 (5th Cir. 1988) (citing a pre-1978 case, In re First Colonial Corp., 544 F.2d 1291,
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1296 (5th Cir. 1977)); see also In re Westwood Cmty. Two Ass’n, 293 F.3d 1332, 1335 (11th Cir.
2002); In re P.R.T.C., Inc., 177 F.3d 774, 777 (9th Cir. 1999).
The “person aggrieved” test is an even more exacting standard than traditional constitutional
standing. See, e.g., P.R.T.C., 177 F.3d at 777 (“To prevent unreasonable delay, courts have created
an additional prudential standing requirement in bankruptcy cases: The appellant must be a ‘person
aggrieved’ by the bankruptcy court’s order.”) (emphasis added). The “case or controversy” limitation
of Article III dictates that the alleged harm is “fairly traceable” to the act complained of. See, e.g.,
Logan v. Burgers Ozark Country Cured Hams, Inc., 263 F.3d 447, 460 (5th Cir. 2001). Because
bankruptcy cases typically affect numerous parties, the “person aggrieved” test demands a higher
causal nexus between act and injury; appellant must show that he was “directly and adversely
affected pecuniarily by the order of the bankruptcy court” in order to have standing to appeal. In re
Fondiller, 707 F.2d 441, 443 (9th Cir. 1983).
Thomas fails to demonstrate standing because Thomas is not “directly and adversely affected
pecuniarily by” the order. In re Cajun Elec. Power Co-op., Inc., 69 F.3d 746, 749 (5th Cir. 1995);
see also Rohm, 32 F.3d at 210 n.18. In Rohm, a debtor that had disavowed any claims to an
interpleaded fund disputed the bankruptcy court’s order of priority for the distribution to debtor’s
creditors, arguing for standing based on the different remedies available to the each of the creditors,
not all of whom would have their claims satisfied. 32 F.3d at 207. This Court denied standing
because the debtor was not a claimant to the fund and, as such, was only indirectly affected by the
order establishing priority. Id. at 212.
Thomas’s claim to injury due to exhaustion of the fund through the settlement is both indirect
and improbable. Even Thomas’s appellate brief admits that its best argument for standing is
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speculative: “[I]f it prevails on appeal, [Thomas’s] interest is more than $3.4 million plus accruing
attorneys’ fees and interest. Because [Thomas’s] interest has no ceiling given its claim for accruing
attorneys’ fees, the possibility exists, albeit perhaps remotely, that monies payable to the attorneys
could exceed monies held in the registry of the court.” (emphasi s added). According to Coho’s
bankruptcy plan, three groups are entitled to a share of the Hicks Muse litigation settlement: Gibbs,
Thomas and the Former Coho Shareholders. The Former Coho Shareholders’ twenty-percent interest
of the $8.5 million settlement equals $1.7 million. Thus, after the subtraction of the proposed Gibbs
settlement and the Former Coho Shareholders’ share, there would remain $4.5 million out of which
to pay Thomas’s high estimate of $3.4 million plus interest. A remote possibility does not constitute
injury under Rohm’s “person aggrieved” test.
Thomas argues that because it is a claimant to the funds, the facts of Rohm are distinguishable
and, instead, Ergo Science, Inc. v. Martin should apply. 73 F.3d 595 (5th Cir. 1996). In Ergo, the
party seeking standing, ETI, was, like Thomas, a claimant of the disputed funds. Id. at 596. After
disavowing its interest in the funds deposited in the court’s registry, ETI attempted to revive its claim
on the funds after it failed to settle with a creditor. Id. at 596–97. The court affirmed ETI’s standing
to object to the court’s finding that it had no interest in the funds, but denied the appeal on the merits.
Id. at 597–99. Regardless, even under Ergo, Thomas’s conjectural injury as a claimant to the fund,
described supra, is too tenuous to support “aggrieved person” standing.1 The Court in Ergo
determined that Ergo was “not faced with a hypothetical or indirect injury as in Rohm, but a real and
1
Moreover, Thomas’s argument fails because the arbitration was not binding and the
bankruptcy court judge did not abuse his discretion in reducing Thomas’s fee. That fee could not
be exhausted by the proposed settlement. This conclusion is discussed infra.
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immediate injury.” Ergo Science v. Martin, 73 F.3d 595, 597 (5th Cir. 1996). Even a claimant to
a fund must show a realistic likelihood of injury in order to have standing. Thomas has not done so.
Because Thomas’s appeal of the Gibbs-Coho settlement fails, there are no remaining issues
as to the Gibbs-Coho settlement, which was appealed to this Court as Gibbs & Bruns, L.L.P. v.
Thomas & Culp, L.L.P., No. 04-10173. The resolution of this case also renders moot the remaining
issues with regard to Gibbs’ fee in Gibbs & Bruns, L.L.P. v. Coho Energy, Inc. v. Thomas & Culp,
L.L.P., No. 10268. As such, t he only remaining issue is the bankruptcy court’s modification of
Thomas’s fee award.
B. The Bankruptcy Court Appropriately Modified Thomas’s Attorney’s Fees Award
1. Standard of Review
We review the award of attorneys’ fees for abuse of discretion. In re Barron, 225 F.3d 583,
585 (5th Cir. 2000); In re Fender, 12 F.3d 480, 487 (5th Cir. 1994). The legal conclusions that
guided the bankruptcy court’s determinations, however, we review de novo. In re Barron, 225 F.3d
at 585 (citing In re Coastal Plains, Inc., 179 F.3d 197, 205 (5th Cir. 1999)); Tex. Secs., Inc., 218
F.3d 443, 445 (5th Cir. 2000). To this end, we must be certain to determine that the discretion
employed by the lower courts was based on appropriate determinations of law.
2. Analysis
Thomas argues that the arbitration to which Thomas and Coho submitted was binding and,
in the alternative, t hat the bankruptcy court abused its discretion in reducing the award. The
bankruptcy code manifests a strong policy of maintaining jurisdiction and control over the payment
of professionals’ fees. E.g., 11 U.S.C. § 330 (setting forth the factors for “reasonable compensation”
of professionals). When this fee discretion began to dissuade professionals from offering their
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services to debtors, Congress passed section 328(a) of the bankruptcy code, which allowed
professionals to have greater certainty as to their eventual payment. In re Nat’l Gypsum Co., 123
F.3d 861, 862 (5th Cir. 1997). Under section 328(a), a fee agreement approved by the bankruptcy
court could be reduced only if the terms of the contract were “improvident in light of developments
not capable of being anticipated at the time of the fixing of such terms and conditions.” 11 U.S.C.
§ 328(a). So, even if the bankruptcy court acts to “guarantee” attorney’s fees, it reserves the power
to alter them. Moreover, in the instant case, the bankruptcy court did not even appear to aim to cede
control over the award to the arbitration panel because it sought counsel from the arbitration panel
on only three questions.
Thus, the relevant argument from Thomas is not whether or not the arbitration was found to
be binding; rather, it is whether this arbitration award can be modified under the unanticipatable
developments exception of 11 U.S.C. § 328(a). Thomas argues that this Court has set a high
standard for proving that the terms and conditions of a professional’s court-approved employment
contract are improvident in light of unanticipatable developments. In Barron, this Court vacated the
bankruptcy court’s reduction of the fees of an attorney’s court-approved contract because that court
used the wrong legal standard. 225 F.3d at 586. The bankruptcy court corrected its mistake on
remand, identifying specific developments that it had not anticipated. In re Barron, 325 F.3d 690,
693 (5th Cir. 2003) (explaining that the bankruptcy court indicated that it had not anticipated (1) the
amount of the recovery, (2) the relative ease of the success, and (3) the ease of collection). Again
this Court reversed, noting that no reason was given that these developments could not be
anticipated, and that, therefore, the lower court had abused its discretion by finding these facts to be
developments incapable of being anticipated. Id.
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This Court has iterated the improvident exception rule on a number of occasions and in
several different contexts, including (1) the interplay between Section 328 and Section 330, see, e.g.,
In re Nat’l Gypsum Co., 123 F.3d 861, 862–63 (5th Cir. 1997); (2) the correct standard for the
improvidence exception, see, e.g., Barron, 225 F.3d at 586; and (3) mandating the presence of
findings, see, e.g., Tex. Secs., 218 F.3d at 446. When Barron returned to this Court on appeal, with
the original “unforeseen developments” recast as developments incapable of being anticipated, this
Court rejected the bankruptcy court’s reasoning. Barron, 325 F.3d at 694. That case gives guidance,
however, only as to what developments do not fall into the category in the statute of “not capable of
being anticipated”:
First, that it “did not anticipate the substantial amount of the subsequent recovery;”
second, t hat the adversary proceedings became a “slam dunk;” and third, that the
judgment was collected from Mr. Barron with “relative ease.” The bankruptcy court
stated that it did not actually anticipate these developments at the time, but,
apparently because of the lack of clarity in our previous opinion, it failed to explain
why these developments were incapable of being anticipated at the time the award
was approved. We hold, as a matter of law, that none of these facts or developments
was “not capable of being anticipated” within the meaning of Section 328(a).
Id.
The final order of the bankruptcy court in the instant case used the correct legal standard and
cited three developments not capable of being anticipated: “(1) the arbitration panel finding that
[Thomas] was terminated for ‘cause;’ (2) the amount of hours that [Thomas] had put into the case
prior to [Gibbs] employment, which was not known to the Debtor or the Court at the time [Gibbs’s]
employment application was approved; and (3) the amount of compensation under quantum meruit
found by the arbitration panel . . . .” In its appeal, Thomas does not argue effectively as to why the
bankruptcy court did not appropriately categorize these developments as unanticipatable. As to the
size of the quantum meruit compensation awarded by the arbitration panel, which was 114% the size
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of the full contingency fee that Thomas would have received if it had seen the case to completion,
Thomas simply states, “it is anticipatable that a judge might disagree with the results of arbitration
. . . .”
Although Barron set a high standard fo r a Section 328(a) adjustment, the findings of the
bankruptcy court in the instant case, employing the correct legal standard, do not amount to an abuse
of discretion. One of the findings of the arbitration panel was that the full amount Thomas would be
entitled to under t he contract would be $5.9 million. This shows that the arbitration panel was
operating on the assumption that the total settlement would be approximately $20 million. That the
arbitration panel would be kept so ill-informed as to use figures two and a half times in excess of the
actual amount qualifies as an unanticipatable development within the discretion of a bankruptcy
court’s findings of fact.
III. CONCLUSION
For the foregoing reasons, Thomas’s appeal of the Coho-Gibbs settlement is DISMISSED
and the decision of the district court regarding Thomas’s fees is AFFIRMED.
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