Thomas Stalnaker v. DLC, LTD

United States Court of Appeals
FOR THE EIGHTH CIRCUIT
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No. 03-3096
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Thomas D. Stalnaker, Trustee, *
*
Appellee, *
* Appeal from the United States
v. * Bankruptcy Appellate Panel
* for the Eighth Circuit.
DLC, Ltd., a Nebraska Corporation; *
DLC Family Trust, Ltd., a Nebraska *
Corporation, *
*
Appellants. *
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Submitted: March 8, 2004
Filed: July 22, 2004
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Before RILEY, MCMILLIAN, and MELLOY, Circuit Judges.
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MELLOY, Circuit Judge.
This case arises from bankruptcy proceedings in which a trustee exercised the
rights of an unsecured creditor under 11 U.S.C. § 544(b) to recover fraudulently
transferred assets. The bankruptcy court1 found that the debtor-appellant, DLC, Ltd.
("DLC"), a Tilden, Nebraska farming corporation, transferred assets with the intent
1
The Honorable Timothy J. Mahoney, United States Bankruptcy Judge for the
District of Nebraska.
to hinder, delay or defraud creditors and that the trustee-appellee and his attorneys
properly pursued avoidance of the transfer for the benefit of the estate. In addition,
the court awarded trustee’s and attorneys’ fees and expenses as administrative claims
under 11 U.S.C. § 330, even though the unsecured creditors settled all claims against
the estate on the eve of trial. DLC appeals the judgment of the Eighth Circuit
Bankruptcy Appellate Panel2 that affirmed the order of the bankruptcy court. We find
that the trustee properly pursued avoidance of the transfer and that the bankruptcy
court properly awarded trustee’s and attorneys’ fees and expenses. Further, we find
that DLC waived its argument regarding the unavailability of fees due to a conflict
of interests, because DLC did not raise this argument to the lower courts.
Accordingly, we affirm.
I. Facts
DLC filed Chapter 7 bankruptcy on September 2, 1997. Prior to the filing,
there were a number of unresolved questions regarding liability for DLC’s purchase
and application of herbicide and other crop inputs from Central Farmer’s
Cooperative, Nonstock, formerly known as Farmers Cooperative Exchange of Elgin,
NE (“Cooperative”). There was also a question of liability regarding damage to
DLC’s crops from Cooperative’s inputs. Additionally, there was a dispute over the
damages due from an insurer, Blakely Crop Hail, Inc. (“Blakely”), for damage that
resulted from a hail storm. Finally, there was a question as to whether DLC
fraudulently transferred assets to DLC Family Trust, Ltd. (“Family Trust”).
In 1993, when the shareholders of DLC created Family Trust, DLC transferred
to Family Trust all of its real estate, worth more than $750,000. In exchange, Family
2
The Honorable Robert J. Kressel, United States Bankruptcy Judge for the
District of Minnesota, authored the opinion for a panel that included the Honorable
Barry S. Schermer, United States Bankruptcy Judge for the Eastern District of
Missouri, and the Honorable Nancy C. Dreher, United States Bankruptcy Judge for
the District of Minnesota.
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Trust assumed $395,000 in liabilities and executed an $84,213 promissory note.
Later, in 1995, DLC assigned to Family Trust the legal claims against Blakely and
Cooperative as well as a claim for wrongful replevin. These claims were purportedly
worth a collective face value of $240,000. DLC also forgave the 1993 promissory
note, and Family Trust agreed to prosecute the claims using its own resources. DLC
maintained the right to collect twenty-five percent of any net proceeds of these claims
in excess of the value of the promissory note, plus accumulated interest, plus the total
of fees and expenses incurred in pursuing the claims.
In December 1998, the trustee filed a complaint against DLC and Family Trust
under 11 U.S.C. § 544(b) to avoid the transfer of assets to Family Trust. The trustee
invoked the Nebraska Uniform Fraudulent Transfer Act, Neb. Rev. Stat. §§ 36-701
to 36-712, as the applicable law. At the time, the claims regarding Blakely and
Cooperative remained unresolved.3 On May 4, 2000, Blakely and Family Trust
settled the crop insurance dispute. Then, on October 3, 2001, Cooperative, DLC and
Family Trust entered into a settlement agreement that resolved the crop inputs claim.
After settlement, the trustee’s attorneys filed an application for fees, and DLC filed
a motion to dismiss. DLC argued that trial was unnecessary because all of the
unsecured creditors settled their claims and could not benefit from avoidance of the
transfer. The bankruptcy court determined that a trial was necessary to resolve all
administrative claims and address the issue of fraudulent transfers. The bankruptcy
court denied DLC’s motion to dismiss and held a trial on February 26, 2002.
In March 2002, Koley Jessen, P.C. (“Koley Jessen”), attorneys for the trustee,
contacted DLC about hiring an attorney, Michael Mostek. Mostek previously
practiced with McGill, Gotsdiner, Workman & Lepp, P.C. (“McGill”), the attorneys
for DLC. On June 28, 2002, Koley Jessen submitted an affidavit to the bankruptcy
3
The bankruptcy filing also listed a debt owed to an insider that was
subsequently waived.
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court to explain Mostek’s history with McGill and to explain Koley Jessen’s belief
that DLC would waive any claim resulting from a potential conflict of interest. On
July 9, 2002, DLC submitted a reply affidavit in which it disclaimed any intent to
waive potential claims relating to the hiring of Mostek. DLC never asked to
disqualify Mostek or Koley Jessen. Further, DLC did not argue to the bankruptcy
court that Koley Jessen could not recover a fee due to a conflict of interest.
On December 9, 2002, after a failed attempt at mediation, the bankruptcy court
held that the transfers were fraudulent but withheld final judgment until the trustee
and his attorneys could resubmit an application for fees and expenses. On February
26, 2003, the court issued an order that avoided the transfers for the benefit of the
estate and awarded fees and expenses in the amount of $58,280.25. The Bankruptcy
Appellate Panel affirmed the judgment, and DLC appeals.
II. Standard of Review
We address de novo the legal issues of whether avoidance of the transfers was
a benefit to the estate and whether the conflict of interest issue was timely raised.
Drewes v. Vote (In re Vote), 276 F.3d 1024, 1026 (8th Cir. 2002). We review the
award of fees for abuse of discretion. Brown v. Luker (In re Zepecki), 277 F.3d 1041,
1045 (8th Cir. 2002). We review the bankruptcy court’s factual findings behind these
legal conclusions and award of fees for clear error. In re Vote, 276 F.3d at 1026;
Dahlquist v. First Nat’l Bank in Sioux City, Iowa (In re Dahlquist), 751 F.2d 295, 299
(8th Cir. 1985).
III. Avoidance
11 U.S.C. § 544(b) authorizes the trustee to exercise an existing unsecured
creditor’s right to avoid a transfer if the creditor holds such a right under non-
bankruptcy law. If the trustee identifies such a creditor with an allowable claim and
a valid right to avoid the transfer, the trustee may avoid the claim and recover the
entirety of the property or value of the property “for the benefit of the estate.” 11
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U.S.C. § 550(a). The trustee’s recovery is not limited to the value of the claim of the
unsecured creditor(s) he identifies. Liebersohn v. IRS (In re C.F. Foods, L.P.), 265
B.R. 71, 86 (Bankr. E.D. Pa. 2001) (citing Moore v. Bay (In re Estate of Sassard &
Kimball, Inc.), 284 U.S. 4 (1931)). The trustee identified unsecured creditors with
allowable existing claims under the Nebraska Uniform Fraudulent Transfer Act at the
time of the bankruptcy filing. Having done so, the trustee took over these creditors’
rights. DLC does not dispute that the transfers were fraudulent, and, accordingly, the
trustee may recover the property transferred, or the value of such property, for the
benefit of the estate. 11 U.S.C. § 550(a).
DLC argues that because all creditors’ claims settled, any assets recovered by
the trustee were not recovered “for the benefit of the estate.” DLC incorrectly
characterizes the estate and its unsecured creditors as being synonymous. As noted
by the Bankruptcy Appellate Panel in this case:
“Estate” is a statutory term that Congress uses to denote the asset side
of the bankruptcy balance sheet. 11 U.S.C. § 541 defines what
constitutes property of the estate and what can be credited to the asset
account. In virtually every case, recovery of any property benefits the
estate. In fact, section 541(a)(3) specifically includes in the estate
property recovered under section 550. Creditors are on the opposite side
of the balance sheet.
Stalnaker v. DLC, Ltd. (In re DLC, Ltd.), 295 B.R. 593, 607 (B.A.P. 8th Cir. 2003).
The facts of the present case make clear that the bankruptcy “estate” is not
synonymous with the concept of a pool of assets to be gathered for the sole benefit
of unsecured creditors. Here, administrative claims that relate to over four years of
attorneys’ fees and expenses and trustee’s fees and expenses also exist and are
recoverable under 11 U.S.C. § 330(a). The fact that unsecured creditors settle on the
eve of trial does not extinguish the bankruptcy estate as a legal entity, nor does it
extinguish other claims on the assets of the estate, such as the administrative claims.
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Further, we have no doubt that the trustee’s efforts to litigate the matter created
DLC’s incentive to settle the unsecured claims. We find no authority for the
proposition that a debtor may settle with unsecured creditors on the eve of trial,
thereby thwarting professionals in their attempt to collect fees for at least four years
of work to administer the bankruptcy estate. The trustee and his attorneys reasonably
pursued the avoidance, it was for the benefit of the estate, and they are entitled to
administrative expenses.
DLC relies on McCord v. Agard (In re Bean), 251 B.R. 196, 204 (Bankr.
E.D.N.Y. 2000), aff’d, 252 F.3d 113 (2d Cir. 2001), which stated, “[I]t would be an
abuse of discretion to bring an action to set aside a post-petition transfer if it would
not financially benefit the estate.” Id. It has no application to this case. In In re
Bean, the debtors sold a home for its fair market value, and the transfer did not result
in any damage to the bankruptcy estate. There, avoidance of the transfer was not of
benefit to the estate; it was merely the exchange of home equity for liquid assets
while the estate retained equal value. In this case, the facts are different; avoidance
of these pre-petition fraudulent transfers, which were not of a reasonably equivalent
value, increased the asset pool for the benefit of the estate.
IV. Conflict of Interest
We do not ordinarily review an issue on appeal if the parties did not first raise
it at trial unless it is a strictly legal question and manifest injustice would result from
our failure to review it. Orr v. Wal-Mart Stores, Inc., 297 F.3d 720, 725 (8th Cir.
2002). On February 26, 2002, the bankruptcy court held the trial in this case. As
stated above, on or around March 1, 2002, Koley Jessen informed DLC of an intent
to hire attorney Mostek, who previously practiced with McGill. On June 28, 2002,
Koley Jessen submitted an affidavit to explain the hiring of Mostek and the belief that
DLC would waive any claim of potential conflict of interest. On July 9, 2002, DLC
entered a reply affidavit to disclaim intent to waive potential claims related to the
hiring of Mostek. The reply stated, “DLC received no further information as to what
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‘conflict’ ‘exists’ and therefore refused to sign the ‘Consent & Waiver’ on or about
April 1, 2002.” There is nothing in this reply to suggest that DLC or counsel for the
debtors requested or filed a motion for disqualification or argued to the bankruptcy
court that fees be denied. Additionally, our review of the DLC’s brief submitted to
the Bankruptcy Appellate Panel on April 21, 2003, reveals that DLC did not raise the
issue of conflict of interest at that time.
DLC, in this appeal, suggests that there is an irrebuttable presumption of shared
confidences and impropriety. We do not address that issue or the issue of
disinterestedness because, having been neglected in the early stages of litigation, it
is waived. It suffices to say, “[a]s a general rule, courts do not disqualify an attorney
on the grounds of conflict of interest unless the former client moves for
disqualification.” State v. Ehlers, 631 N.W.2d 471, 479 (Neb. 2001).
V. Attorneys’ Fees
We review the award of fees for abuse of discretion. In re Zepecki, 277 F.3d
at 1045. We review the factual findings that led to the award of fees for clear error.
In re Dahlquist, 751 F.2d at 299. An abuse of discretion occurs if the bankruptcy
court does not apply the proper legal standard or procedures or if the award is based
on clearly erroneous findings of fact. Chamberlain v. Kula (In re Kula), 213 B.R.
729, 735 (B.A.P. 8th Cir. 1997). To consider a finding of fact clearly erroneous, we
must have a definite and firm impression that the lower court made a mistake. Id.
The bankruptcy court awarded fees under 11 U.S.C. § 330(a), which allows a
court to grant “reasonable compensation” for “actual, necessary” services and
expenses. The lodestar method, calculated as the number of hours reasonably
expended multiplied by a reasonable hourly rate, is the appropriate calculation of
fees. In re Kula, 213 B.R. at 736. Compensation may be reasonable though the
trustee’s services do not benefit the estate. The determination of reasonable
compensation under section 330 includes accounting for factors such as hours
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reasonably expended, competitive hourly rates, and the necessity and benefit of the
work to the completion of a case (not simply to the settlement of unsecured creditors’
claims). 11 U.S.C. § 330(a)(3).
We do not find clear error in the bankruptcy court’s determination that the
trustee had a fiduciary obligation to pursue the fraudulent transfer claim, the trustee
was met with opposition every step of the way, the trustee had valid claims to pursue
for more than four years, his services were necessary, and the hourly rate and hours
expended were reasonable. Additionally, after reviewing the record, we are left with
the firm impression that the bankruptcy court properly concluded that, had the trustee
not litigated this matter, DLC likely would not have settled. We do not find the
bankruptcy court’s award of reasonable fees and expenses to be an abuse of
discretion.
We affirm the judgment of the BAP.
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