Opinion
Civil Action No: 01-1163, c/w 01-1760 Section: "J"(3)
March 27, 2002
Order and Reasons
Before the Court is Appellant, I.G. petroleum L.L.C.'s Motion for Reconsideration (Rec. Doc. 16), requesting the Court reconsider its earlier order, dated November 14, 2001, dismissing Appellant's appeal as premature. The Motion for Reconsideration was set for hearing on February 13, 2002, on the briefs.
In light of the Bankruptcy Court's Order of January 15, 2002, clarifying that its previous orders, granting the contested fee applications, constituted final and appealable judgments, the Court hereby GRANTS Appellant's Motion to Reconsider. Further, upon considering the various briefs filed, the Bankruptcy Court's orders, and the applicable law, the Court concludes that the Bankruptcy Court's orders allowing the contested fees of Mr. Hof, Mr. Fenasci, and Mr. Butler in full, should be AFFIRMED in part; and REVERSED and REMANDED in part.
Background
West Delta Oil Company ("West Delta") is a Louisiana corporation engaged in the oil drilling business. At the time of West Delta's incorporation, the principal stockholders were W. Clay Kimbrell and John T. Connally. On September 9, 1994, James R. Ingersoll, Jr. ("Ingersoll") acquired all 100 shares of West Delta stock.
On September 13, 1994, West Delta entered into an operations agreement with S Parish Oil Company, Inc. ("S Parish"), a company that was in bankruptcy proceedings, whereby S Parish agreed to allow West Delta to use S Parish's equipment located at an area known as West Delta Block 84 Field. The contract between West Delta and S Parish granted West Delta the exclusive right to operate West Delta Block 84 Field.
On November 7, 1994, Ingersoll's shares were redeemed and three new stock certificates were issued: (1) a certificate for 47.5 shares issued to Ingersoll; (2) a certificate for 47.5 shares issued to the DKCCB Family Trust with Steven Medo ("Medo") as trustee; and (3) a certificate for 5 shares issued to Donald Muller ("Muller"). The re-issuance of these 100 shares was pursuant to an
agreement between Ingersoll, Donald Arnoult ("Arnoult") of Arnoult Equipment and Construction Company, and Muller. Under the agreement, Arnoult and Ingersoll agreed to share in the funding for the re-working of S Parish's state mineral lease at West Delta Block 84 Field.
West Delta operated the West Delta Block 84 Field until December 1998, when one of West Delta's creditors, Marvin's Engine Service, Inc., notified West Delta's production purchaser, Murphy Oil USA, Inc., that it had a lien and privilege against the production proceeds of West Delta Block 84 Field. Murphy Oil then placed the amount due West Delta in escrow and refused to make any additional payments directly to West Delta. As a result of these payments being discontinued, West Delta found itself unable to continue production.
Because Muller and Arnoult suspected Ingersoll of acts of mismanagement, at a special meeting on January 15, 1999 at which Ingersoll was not present, Muller, using the proxy to constitute a quorum, removed Ingersoll as president and as an officer. Muller also voted his shares and the proxy's shares to place West Delta into Chapter 11. When West Delta filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code on January 26, 1999, Muller was president and owner of 5% of West Delta's stock.
Before this time, at various meetings of West Delta's management, Muller voted his five shares of stock, Ingersoll voted his 47.5 shares, and Medo voted the 47.5 shares which were placed in the DKCCB trust. At Arnoult's request, Medo alone granted to Muller an irrevocable proxy for the 47.5% of stock that belonged to Ingersoll. At subsequent meetings, Muller and Medo voted their stock without objection from Ingersoll.
After the debtor filed bankruptcy, Ingersoll filed a motion to dismiss the bankruptcy case on the basis that a majority of the debtor's shareholders did not authorize the filing of the case. Ingersoll's motion was denied by the bankruptcy court, and this Court affirmed.
Since the filing, West Delta has retained its property and continues to operate its business as a debtor-in-possession. After its voluntary filing, West Delta retained Ronald J. Hof ("Hof") of the firm Landwehr and Hof as counsel on January 28, 1999, and later retained The Slater Firm, Kevin Wheeler, and Malcom Stevenson. West Delta also later retained Michael Fenasci and Perrin Butler as special counsel to handle the motion to dismiss filed by Ingersoll and all other matters relating to Ingersoll. Later, the scope of Mr. Fenasci's employment-was broadened to include all matters relating to the Investor Group ("I.G."), which later became I.G. Petroleum, L.L.C., Appellant herein.
West Delta's exclusive period to file a plan under Bankruptcy Code § 1121(b) expired without West Delta filing a plan. On January 31, 2000, West Delta filed its first proposed plan for reorganization. Pursuant to the proposed plan, all of West Delta's assets would have been transferred to Crescent Oil Company ("Crescent Oil"), a company wholly owned by Muller. West Delta amended its proposed plan, then withdrew it on July 24, 2000. Although it was not disclosed at the time, both Fenasci and Butler were apparently investors in Burrwood Oil, a company that planned to post collateral so that Crescent Oil could obtain the necessary credit to fund West Delta's plan of reorganization if the court approved the plan. After withdrawing its own plan, West Delta endorsed a competing liquidating plan filed by I.G. On July 28, 2000, the Bankruptcy Court confirmed I.G.'s plan. Pursuant to that plan, I.G. was to pay West Delta's attorneys' fees.
Another liquidating plan filed by Source Energy Corporation but not endorsed by West Delta was never confirmed.
Hof applied for compensation on four occasions for professional services rendered by him. On June 28, 1999, and on December 3, 1999, respectively, the Bankruptcy Court ordered Hof be paid for his first and second applications for compensation for professional services rendered and expenses incurred. On March 7, 2001, the bankruptcy court ordered Hof be paid for his third and fourth applications.
Also on March 7, 2001, the bankruptcy court: (1) granted Fenasci's first application for compensation; (2) granted in part and denied in part his second application because of his failure to properly disclose prepetition claims he had against West Delta for professional services rendered to West Delta; and (3) denied without prejudice Butler's first application because of Butler's failure to attach a list sufficiently detailing the services and fees for which he was seeking compensation. However, on rehearing, the bankruptcy court allowed Butler's fees for the period prior to March 30, 2000, and disallowed his fees after that date, because of his failure to disclose his prepetition claim.
I.G. filed a separate appeal for review of the bankruptcy court's order granting Mr. Butler's application on rehearing, under Civil Action No. 01-1760. That action was consolidated with I.G.'s original appeal from the March 21, 2001, order.
The bankruptcy court also excused Fenasci and Butler's failure to disclose their involvement with Burrwood Oil because: (1) West Delta's plan was never confirmed; (2) Fenasci's and Butler's tentative plans were never reduced to any firm agreement; and (3) Mr. Fenasci and Mr. Butler were unfamiliar with bankruptcy law. Finally, the court forgave in part Mr. Fenasci's and Mr. Butler's failure to disclose their claims against West Delta for prepetition attorneys' fees based on their lack of familiarity with bankruptcy law.
I.G. appealed the Bankruptcy Court's March 7, 2001, ruling, arguing that all of the applications for compensation should have been denied. I.G. alleges that Mr. Fenasci and Mr. Butler, among other things engaged in serious misconduct and conflicts of interest because of their involvement with Burrwood Oil, and that Hof was aware of Fenasci's and Butler's involvement with Burrwood Oil but failed to disclose it. Because it appeared that the contested applications may have only been for interim compensation this Court originally dismissed I.G.'s appeal as premature on November 14, 2001. However, since that time, the bankruptcy court issued an order clarifying that its order granting the fee applications was a final and appealable order. Accordingly, the Court grants Appellant, I.G.'s Motion to Reconsider and addresses herein the merits of the arguments raised on appeal.
I.G. specifically argues on appeal that the bankruptcy court abused its discretion by granting the attorneys' fees because: (1) several of the applications were untimely; (2) Mr. Fenasci and Mr. Butler failed to disclose their interest in Burrwood Oil and their prepetition claims; (3) Mr. Fenasci and Mr. Butler exceeded the scope of their employment; (4) much of Mr. Fenasci's time was spent protecting his own or Muller's interest rather than the interest of the estate; (5) much of the work performed by Mr. Fenasci and Mr. Butler was duplicative; (6) Mr. Hof failed to disclose Mr. Fenasci's and Mr. Butler's conflicts of interest; (7) Mr. Hof failed to correct inaccurate statements in pleadings filed by West Delta; (8) Mr. Hof failed to prevent the unauthorized use of cash by West Delta; (9) Hof failed to investigate and pursue an obvious avoidance action on behalf of the estate; and (10) all of the applications contained deficiencies.
Upon reviewing the record in this matter, the briefs, the bankruptcy court's orders, and the applicable law, the Court concludes that the bankruptcy court's order should be affirmed in part and reversed in part.
standard of Review
This Court reviews the bankruptcy court's findings of fact under the clearly erroneous standard. See In re: Consolidated Bancshares, Inc., 785 F.2d 1249, 1252 (5th Cir. 1986). The bankruptcy court's conclusions of law, however, are reviewed de novo. Id. Further, a bankruptcy judge has wide discretion in determining attorneys' fees in proceedings before them, and such awards should not be reversed unless the bankruptcy judge abuses his discretion. Matter of U.S. Gulf. Corp., 639 F.2d 1197, 1201 (5th Cir. 1981). A bankruptcy court abuses its discretion if it fails to apply the proper legal standard or bases an award on findings of fact that are clearly erroneous. Id.
Discussion
I. Timeliness of Fee Applications
The bankruptcy court set a bar date for filing all administrative claims on March 30, 2000. See Bankr. Doc. 157. Mr. Hof filed a third application for compensation on June 29, 2000, seeking compensation for services rendered from October 27, 1999 through April 30, 2000, in the amount of $27,387.50, $21,805.00 of which was for services rendered prior to the March 30, 2000, bar date.
Mr. Hof filed his fourth and final application, which is also in dispute, on August 30, 2000; however, that application sought compensation for services performed entirely after the March 30, 2000, bar date. Accordingly, Appellant does not challenge the bankruptcy court's decision to allow those fees on the grounds of untimeliness.
Mr. Fenasci also filed an untimely application for services performed prior to the bankruptcy court's bar date. His second application was filed on September 1, 2000 and sought compensation for services rendered between February 8, 2000, and July 13, 2000. Finally, Mr. Butler also filed an untimely application on September 1, 2000, seeking compensation for services rendered between March 15, 1999, and June 27, 2000.
The bankruptcy court only addressed Appellant's objections regarding timeliness with respect to Mr. Hof. The bankruptcy court rejected Appellant's argument that Mr. Hof's untimely application for services provided prior to March 30, 2000, should be denied on the grounds that "[a]dministrative claims generally need not be filed by the bar date for filing unsecured proofs of claim," and that it was more in keeping with the intent of section 503(a) to consider Mr. Hof's untimely application. See Bankruptcy Court's Reasons for Order, Bankr. Doc. 518, at 2-3. Alternatively, the bankruptcy court simply stated that "[t]o the extent that the March 30, 2000 bar date applied to the fees sought in the [untimely] third application and made such fees untimely, the court finds that there was cause for the untimely filing." Id. at 3, n. 8.
Title 11 U.S.C. § 503 (a) provides: "An entity may timely file a request for payment of an administrative expense, or may tardily file such request if permitted by the court for cause." That statute further defines administrative expenses as including compensation for services rendered by an attorney. 11 U.S.C. § 503 (b)(4). In addition, Fed.R.Bankr.Proc. 9006(b) states that:
[W]en an act is required or allowed to be done at or within a specified period . . . by notice given . . . by the court, the court for cause shown may at any time in its discretion (1) with or without motion or notice order the period enlarged if the request therefor is made before the expiration of the period originally prescribed or as extended by a previous order or (2) on motion made after the expiration of the specified period permit the act to be done where the failure to act was the result of excusable neglect.
Because the Bankruptcy Code does not itself specify a time for the filing of applications for reimbursement of administrative expenses, it is generally left to the discretion of the bankruptcy judge to set a deadline for filing such requests. See In re Gurley, 235 B.R. 626, 631-32 (Bankr. W.D.Tenn. 1999). Section 503(a) of the Code also does not specify what is acceptable "cause" to permit a tardily filed request for administrative compensation. See id. However, even when considering its own deadline, bankruptcy courts generally apply Rule 9006(b), which permits the court to enlarge a deadline after the deadline has passed when the request is made by motion and "where the failure to act was the result of excusable neglect." Id. (quoting F.R.Bankr.P. 9006(b)). Courts have, therefore, applied the "excusable neglect" standard to the filing of late administrative claims under Section 503(a). See, e.g., In re Gurley, supra; In re Gottschalk, 78 F.3d 593, 1996 WL 83877 (9th Cir. 1996) (unpublished opinion); In re Anderson, 253 B.R. 14 (Bankr. E.D.Mich. 2000). Accordingly, a bankruptcy court may permit late administrative claims either for cause, under section 503(a), or upon motion where there was "excusable neglect" for missing the deadline, pursuant to Rule 9006(b).
The Supreme Court articulated Rule 9006(b)'s excusable neglect standard in Pioneer Servs. Co. v. Brunswick Assoc. Ltd. P'ship, 507 U.S. 380, 113 S.Ct. 1489, 123 L.Ed.2d 74 (1993). The Court concluded that Rule 9006(b) grants parties "a reprieve to out-of-time filings that were delayed by `neglect.'" Id. at 388, 113 S.Ct. at 1494. "Neglect" was found by the Court to include both simple, faultless omissions to act, as well as omissions caused by carelessness. See id. In deciding whether neglect is "excusable" under Rule 9006(b), courts should make an equitable determination, "taking account of all relevant circumstances surrounding the party's omission." Id. at 395, 113 S.Ct. at 1498.
The Court in Pioneer went on to identify some factors that should be considered in making the determination of whether a deadline should be enlarged for excusable neglect under Rule 9006(b): (1) the danger of prejudice to the opposing party; (2) the length of delay and its potential impact on judicial proceedings; (3) the reason for the delay, including whether it was in the control of the moving party; and (4) whether the moving party acted in good faith. See Pioneer, 507 U.S. at 395, 113 S.Ct. at 1498. See also In re Anderson, 253 B.R. at 19 (applying thePioneer factors and concluding that attorney's excuses as to why he untimely filed several applications for fees did not meet the "excusable neglect" standard and therefore should be disallowed
Furthermore, Rule 9006(b) also contains a motion requirement when the deadline for acting has already passed, in order for the bankruptcy court to consider whether there was excusable neglect for missing the deadline. However, courts have liberally construed the requirement, especially when the circumstances of the case demonstrate that concerns regarding notice and opportunity to respond are satisfied. See, e.g., In re Sheehan, 253 F.3d 507, 515 (9th Cir. 2001). Finally, if a bankruptcy court entertains a motion to enlarge a deadline, but does not apply the excusable neglect standard or articulate what cause was shown for the tardy filing, courts have found reversible error and remanded for consideration of the untimely filings or acts under the appropriate legal standard. See, e.g., In re Sheehan, Supra; In re Gottschalk, supra.
In the instant case, the bankruptcy court granted all of the untimely filed applications for attorneys' fees. The transcript of the hearing on the applications reveals that there was no discussion regarding why the applicants did not file their claims until after the March 30, 2000, bar date. Furthermore, in the bankruptcy court's Reasons for Order, the court simply notes in a footnote, with respect to Mr. Hof's application, that if cause is required to consider an untimely application, the court finds, there is such cause. That is the only discussion by the court regarding the fact that Mr. Hof, Mr. Fenasci, and Mr. Butler all filed untimely applications seeking compensation for services performed before the March 30, 2000, bar date.
Accordingly, this Court finds that the bankruptcy court abused its discretion in granting all of the untimely applications in that it failed to apply the appropriate legal standard for deciding whether there was cause or excusable neglect for the attorneys failing to act within the specified time. Therefore, the bankruptcy court's orders granting the untimely applications to the extent the applications seek fees for services performed prior to the March 30, 2000, bar date are reversed. The case is remanded for the bankruptcy court to reconsider whether Mr. Hof's third application, Mr. Fenasci's second application, and Mr. Butler's first application should be granted in light of the fact those applications were filed outside of the bar date established by the bankruptcy court.
II. Appellant's Arguments Regarding Mr. Fenasci and Mr. Butler
A. Attorneys' Role in Burrwood Oil
Appellant, I.G., argues on appeal that the bankruptcy court erred in excusing certain actions of Mr. Fenasci and Mr. Butler and in not denying them compensation. Specifically, Appellant asserts that both attorneys attempted to acquire personal interest in the debtor's assets and failed to disclose their interest as required by Bankruptcy Rule 2014(a).
Federal R. Bankr. P. 2014(a) provides in relevant part:
An order approving the employment of attorneys shall be made only on application of the trustee or committee. . . . The application shall state the specific facts showing the necessity for the employment, the name of the person to be employed, the reasons for the selection, the professional services to be rendered, any proposed arrangement for compensation, and, to the best of the applicant's knowledge, all of the person's connections with the debtor, creditors, any other party in interest, their respective attorneys and accountants, the United States trustee, or any person employed in the office of the United States trustee. The application shall be accompanied by a verified statement of the person to be employed setting forth the person's connections with the debtor, creditors, any other party in interest, their respective attorneys and accountants, the United States trustee, or any person employed in the office of the United States trustee.
The bankruptcy court made the following factual findings regarding Mr. Fenasci and Mr. Butler's alleged failure to disclose that they were attempting to gain an interest in the debtor's assets:
At one time, Burrwood Oil company was negotiating to provide collateral to secure a loan to West Delta. Mr. Fenasci and Mr. Butler agreed, at some time that cannot be fixed with any degree of accuracy, to participate as passive investors with other investors in Burrwood Oil. If called upon to save the debtor from ceasing operations as a result of a failure to file a plan, Burrwood Oil would have posted collateral so that Crescent Oil could obtain a line of credit of $960,000 to fund the debtor's plan of reorganization as described in the debtor's disclosure statement. These negotiations, however, never came to fruition.
Reasons for Order, Bankr. Doc. 518, at 7. The bankruptcy court
explained that it based these factual findings on both Mr. Fenasci's and Mr. Butler's "unequivocal" testimony that no agreement ever existed between them and Burrwood Oil, that they never signed anything, never pledged any collateral at the bank, and never acquired an interest in Crescent Oil. See id.
The bankruptcy court made the following legal conclusions with respect to this issue:
The disclosure statement probably should have disclosed the possible participation of Mr. Fenasci and Mr. Butler, and it certainly would have had to have been disclosed at any confirmation hearing on the debtor's plan of reorganization. The failure to disclose can be excused in this case because:
(1) the tentative plans by Mr. Fenasci and Mr. Butler were never reduced to any firm agreement;
(2) the debtor's plan (and any participation by Burrwood Oil and/or Crescent Oil) never came on for confirmation; and
(3) Mr. Fenasci and Mr. Butler are unfamiliar with bankruptcy law.Id. at 7-8.
The Bankruptcy Code provides for the employment of attorneys to assist the trustee in carrying out the trustee's duties under Title 11 who "do not hold or represent an interest adverse to the estate, and that are disinterested persons." 11 U.S.C. § 327 (a). Additionally, as was the case with Mr. Fenasci and Mr. Butler, an attorney who has represented the debtor may be employed "for a specified special purpose . . . if such attorney does not represent or hold any interest adverse to the debtor or to the estate with respect to the matter on which such attorney is to be employed." 11 U.S.C. § 327 (e).
As courts of equity, bankruptcy courts have broad discretion in awarding attorneys' fees. See In re Lawler, 807 F.2d 1207, 1211 (5th Cir. 1987). However, the bankruptcy court "may deny allowance of compensation for services and reimbursement of expenses of [an attorney], . . . if at any time during [the attorney's] employment, . . . [the attorney] is not a disinterested person, or represents or holds an interest adverse to the interest of the estate with respect to the matter on which such [attorney] is employed." 11 U.S.C. § 328 (c).
The term "adverse interest" is not defined by the Bankruptcy Code. However, courts have defined "to hold an adverse interest" as: (1) to possess an economic interest that would tend to lessen the value of the bankruptcy estate or that would create either an actual or potential dispute in which the estate is a rival claimant; or (2) to possess a predisposition under circumstances that render such a bias against the estate. See In re Roberts, 46 B.R. 815, 827 (Bankr. D.Utah 1985), rev'd in part on other grounds, 75 B.R. 402 (D.Utah 1987).
Failure to comply with disclosure rules has often warranted the denial of compensation to debtors' counsel. See, e.g., In re Anderson, 936 F.2d 199, 204 (5th Cir. 1991); In re Consolidated Bancshares, Inc., 785 F.2d 1249, 1256, n. 7 (5th Cir. 1986). Additionally, when an attorney fails to remain disinterested or holds an adverse interest at any time during the case, all fees may be denied. See Consolidated Bancshares, 785 F.2d at 1256. The Fifth Circuit has explained that it "is sensitive to preventing conflicts of interest and requires a `painstaking analysis of the facts and precise application of precedent.'" Id. (quoting Brennan's v. Brennan's Restaurant, Inc., 590 F.2d 158, 173-74 (5th Cir. 1979)). The Court in Consolidated Bancshares also emphasized that the Bankruptcy Code imposes numerous limitations upon compensation of court-appointed counsel, in order "to insure the highest standards of ethical conduct and minimize the overhead expenses which can easily deplete a debtor's estate." Id. at 1255. "Vigilance is required by and among court-appointed counsel in particular to enforce the standards of the Code." Id.
However, the Fifth Circuit has also stated that, while a court is empowered to deny attorneys' fees in situations where a conflict of interest exists, it is not compelled to do so under the pertinent bankruptcy statutes. In re Hudson Shipbuilders, Inc., 794 F.2d 1051, 1059 (5th Cir. 1986). A bankruptcy court's decision to allow fees notwithstanding an apparent conflict of interest is not necessarily an abuse of discretion given the "broad equity powers vested in the bankruptcy court." Id. Therefore, there is no per se rule mandating a denial of fees for conflict of interest or failure to disclose in this Circuit, and this Court must review the bankruptcy court's decision to allow fees in such circumstances under the abuse of discretion standard.
The Court in the instant matter is troubled by the fact that Mr. Fenasci and Mr. Butler were attempting to obtain an interest in the debtor's assets, but did not make any disclosure to the bankruptcy court. As noted earlier, the debtor company filed its first proposed reorganization plan on January 31, 2000, whereby all of the debtor's production would be transferred to Crescent Oil Company, wholly owned by Muller, the debtor's president. Apparently, Mr. Fenasci and Mr. Butler were part of a group of investors who formed Burrwood Oil, and agreed, albeit not in writing, to pledge collateral through Burrwood to secure a line of credit at Hibernia for Crescent Oil Company. Mr. Fenasci and Mr. Butler, however, never disclosed to the court that they were potential investors.
The bankruptcy court stated that the disclosure statement filed by the debtor probably should have disclosed the attorneys' possible participation, but that the attorneys' failure to disclose was excused because the agreement to participate and pledge collateral was "tentative", the plan never came on for confirmation, and the two attorneys were unfamiliar with bankruptcy law. The bankruptcy court did not discuss whether Mr. Fenasci's and Mr. Butler's involvement created an adverse interest to the debtor or the estate in relation to their handling of the matters for which they were employed.
In the Court's view, it is certainly a valid concern that these two attorneys' interest in Crescent Oil's plan being successful may have constituted an adverse interest to the debtor in their handling of certain matters, particularly with respect to Mr. Fenasci's working on matters involving I.G., who proposed a competing plan. The bankruptcy court, however, failed to make that necessary inquiry. While excusing the attorneys' failure to disclose their interests was within the bankruptcy court's discretion, the court should also have asked whether Mr. Fenasci's and Mr. Butler's roles, even as passive investors, created an adverse interest that may have affected their ability to perform the services for which they were enrolled as counsel in an unbiased manner and in the best interest of the debtor. Accordingly, the Court concludes that the bankruptcy court failed to make the proper factual findings regarding the attorneys' possible adverse interests and failed to apply the correct legal standard as to whether attorneys' fees should be allowed if an adverse interest existed. Therefore, the section of the bankruptcy court's order rejecting Appellant's arguments concerning Mr. Fenasci's and Mr. Butler's role in Burrwood Oil is reversed and remanded for consideration in light of the foregoing discussion.
B. Failure to Disclose pre-petition Claims for Compensation
Appellant also argues that the bankruptcy court abused its discretion by not denying all compensation to Mr. Fenasci and Mr. Butler based on their failure to disclose prepetition fees in their applications for employment, which totaled $187,000 by Mr. Fenasci and $69,400 by Mr. Butler. Rather, these fees were disclosed when Mr. Fenasci and Mr. Butler filed proofs of claim on March 30, 2000.
The bankruptcy court agreed with I.G. to some extent, concluding that the prepetition fees did, in fact, constitute interests adverse to the estate that should have been disclosed in the two attorneys' original affidavits filed in support of the motions to be appointed as special counsel. The bankruptcy court noted that, while the affidavits of both did disclose that they had performed legal services for West Delta, the attorneys did not specify that they were owed anything. Furthermore, the bankruptcy court found that at some time prior Mr. Butler and Mr. Fenasci actually filing the claims, Mr. Hof had become aware of the claims and had advised both attorneys to disclose the fees immediately.
The bankruptcy court concluded that, while the two attorneys' failure to disclose those claims in their original affidavits "can perhaps be excused in this case by the unfamiliarity of these two attorneys with bankruptcy law," their "failure to disclose the existence and amount of these fees after Mr. Hof specifically advised them. to do so . . . is inexcusable." Reasons for Order, Bankr. Doc. 518, at 9. Accordingly, the bankruptcy court disallowed any fees earned after March 30, 2000, as a form of a sanction, but declined to deny their fees entirely, explaining that it would be too harsh a remedy under the circumstances. See id. at 9.
Upon reviewing the record, this Court concludes that the bankruptcy court's factual findings are not clearly erroneous. Further, the bankruptcy court applied the correct legal standard as it specifically took into consideration that there was some failure to disclose on the part of Mr. Fenasci and Mr. Butler, and then appropriately exercised its discretion to deny some fees as a sanction for their failure. The bankruptcy court also specifically stated that a complete denial of fees would be too harsh a remedy given the circumstances.
Even if this Court would have resolved the issue differently in the first instance, it does not find that the bankruptcy court's findings were clearly erroneous or that the bankruptcy court applied the wrong legal standard. The bankruptcy court explicitly recognized that the attorneys failed to disclose the adverse interests, balanced the attorneys' failure against the equity of their receiving compensation for work performed, and resolved the issue by granting in part and denying in part the applications. Accordingly, this Court concludes that the bankruptcy court did not abuse its discretion in refusing to deny Mr. Fenasci's and Mr. Butler's fees entirely due to their failure to disclose the prepetition claims in a timely manner.
C. Scope of Employment
I.G. also argues that Mr. Fenasci and Mr. Butler surpassed the scope of their employment as special counsel and that they should not receive compensation for any services they performed outside of the limited scope for which special counsel can be enrolled. Alternatively, I.G. asserts that, if Mr. Fenasci and Mr. Butler are to be compensated for handling matters reserved for general bankruptcy counsel even though they were originally employed as special counsel, then they should be held to the standards in 11 U.S.C. § 327 (a) and 328(c), which require professionals to maintain "disinterested" status.
As the bankruptcy court notes in its order, Mr. Fenasci and Mr. Butler were employed as special counsel under 11 U.S.C. § 327 (e), which provides:
The trustee, with the court's approval, may employ, for a specified special purpose, other than to represent the trustee in conducting the case, an attorney that has represented the debtor, if in the best interest of the estate, and if such attorney does not represent or hold any interest adverse to the debtor or to the estate with respect to the matter on which such attorney is to be employed.
Mr. Fenasci and Mr. Butler were employed to work on matters concerning the: motion to dismiss the bankruptcy filed by Ingersoll and "any other matters involving Mr. Ingersoll." I.G. 10, at 2. Later, Mr. Fenasci was also allowed to represent the debtor in matters relating to the Investor Group. I.G. 11. While Appellees concede that these areas are broad and at times may have overlapped with matters reserved for general counsel, Appellant has not demonstrated that Mr. Fenasci or Mr. Butler handled any matters completely outside the scope of the matters for which they were employed. At the hearing on the applications, Mr. Fenasci explained to the bankruptcy court how each matter he and Mr. Butler handled fell within the scope of their role as special counsel. See Transcript of September 22, 2000, Hearing, Bankr. Doc. 425, at 53-65. The bankruptcy court found Mr. Fenasci's explanation persuasive and cited his testimony in the court's Reasons for Order. Bankr. Doc. 518, at 10, n. 22. Upon reviewing that testimony, this Court does not find that the bankruptcy court abused its discretion in concluding that both Mr. Fenasci's and Mr. Butler's work was within the scope of matters for which they were employed.
"I.G." is used to designate I.G.'s exhibits introduced at the hearing before the bankruptcy court on the applications, which were included as exhibits on appeal to this Court.
D. Other Arguments
Appellant additionally objects to the bankruptcy court's granting Mr. Fenasci's and Mr. Butler's tees because (1) Mr. Butler allegedly performed duplicative work; (2) they billed for time I.G. argues they spent protecting Mr. Muller's interests rather than the debtor's; (3) they billed for time during which they supposedly threatened other plan proponents and bidders with litigation; (4) Mr. Fenasci billed for time related to the court-ordered inspection of the debtor's equipment and a consequential motion for contempt filed against him by I.G. for allegedly disrupting the inspection; and (5) the fee applications are not sufficiently specific or detailed.
All of these arguments involve factual determinations by the bankruptcy court, and this Court defers to those factual determinations as long as they are not clearly erroneous based on the evidence in the record. The bankruptcy court is very familiar with this case and all of the issues raised in these objections by I.G. In light of the evidence presented to this Court on appeal, it cannot be said that the-bankruptcy court's rejection of these arguments based on the facts of the case and the applications presented to it constituted an abuse of discretion, as there is evidence in the record to support the bankruptcy court's findings that the work performed by Mr. Fenasci and Mr. Butler was not duplicative and was "essential to the debtor's continued operation," and that the fee applications were sufficiently detailed.
III. Appellant's Arguments Regarding Mr. Hof's Applications A. Failure to Disclose Conflicts of Fenasci and Butler
Appellant argues that Mr. Hof's fees should have been limited because he knew of Mr. Butler's and Mr. Fenasci's conflict regarding their involvement in Burrwood Oil and had a duty to disclose the conflict. The bankruptcy court concluded that, had Mr. Hof "had knowledge of the conflict regarding the identity of the investors, he should have disclosed it." Reasons for Order, Bankr. Doc. 518, at 3. However, the bankruptcy court accepted Mr. Hof's claim that he had no knowledge regarding the identity of the investors who made up Burrwood Oil and, therefore, concluded that I.G. had failed to demonstrate a failure to disclose a known conflict on Mr. Hof's part. Id. at 3.
While I.G. points to a letter written by Mr. Hof and addressed to counsel for I.G., which demonstrates that he thought Butler and Fenasci might have been involved as investors in Burrwood (I.G. 17), the bankruptcy court's finding that Mr. Hof had no actual knowledge of their roles is not clearly erroneous. Further, the bankruptcy court did not apply the wrong legal standard in exercising its discretion not to deny fees because of a possible failure to disclose the other attorneys' roles, in the absence of actual knowledge. Accordingly, the Court finds this argument to be without merit.
I.G. further asserts that Mr. Hof had a duty to disclose the existence of the prepetition fees incurred by Mr. Fenasci and Mr. Butler. With respect to this argument, the bankruptcy court found that Mr. Hof did not know about the prepetition claims held by Mr. Fenasci and Mr. Butler at the time Mr. Hof made disclosures. The bankruptcy court further found that, when Mr. Hof learned of the claims, he advised the other two attorneys to disclose those claims. The court concluded that the fact Mr. Fenasci and Butler failed to do so is no basis for limiting Mr. Hof's fee.
This court has reviewed Mr. Hof's testimony at the hearing on this issue. Mr. Hof testified that, while he had some knowledge of the claims in the beginning, Mr. Butler and Mr. Fenasci had indicated to him that they were not going to pursue the claims. Subsequently, when Mr. Hof learned that there was a good possibility that the claims would be pursued, he stated that he advised both Mr. Fenasci and Mr. Butler to file their proof of claims. See Transcript of Hearing, Bankr. Doc. 425, at 44-45. It was certainly within the bankruptcy court's discretion to accept that testimony as true and reject I.G.'s argument regarding Mr. Hof's duty to disclose.
B. Other Arguments Regarding Mr. Hoff
Appellant next asserts that Mr. Hof's fees should be reduced because he failed to correct inaccurate statements and misleading representations made in disclosure statements. Specifically, I.G. complains that Mr. Hof included in the debtor's disclosure statement that Crescent Oil had secured a line of credit with Hibernia Bank in the amount of $960,000.00, when Crescent Oil did not have the credit. Additionally, I.G. asserts that Mr. Hof included a balance sheet for Crescent Oil that was inaccurate, and misrepresented the value of stock in S Parish.
Mr. Hof responded that he included the relevant financial information that was given by the debtor and the debtor's accountant and that he had no reason to question that the information was true and accurate. The bankruptcy court was well within its discretion to believe Mr. Hof's testimony and stated that it was persuaded by his statement. This Court concludes that the bankruptcy court's factual finding that Mr. Hof was unaware of the inaccuracies is not clearly erroneous. Accordingly, the bankruptcy court's decision not to reduce fees for that reason is affirmed.
Next, Appellant contends that Mr. Hof failed to support the plan which maximized the value of the debtor's, i.e., I.G.'s plan. The bankruptcy court rejected that assertion, concluding that Mr. Hof was under no duty to support I.G.'s plan until he was convinced it was the best plan possible. "When Mr. Hof reached that conclusion (after I.G. filed its third amended plan) he did support I.G.'s plan, which was subsequently confirmed." Reasons for Order, Bankr. Doc. 518, at 4). While this Court finds some of I.G.'s assertions on this issue persuasive and may have found differently in the first instance, it does not conclude that the bankruptcy court's factual findings were clearly erroneous given that I.G's factual assertions were disputed by Mr. Hof.
Next, Appellant argues that the bankruptcy court erred by not denying or reducing Mr. Hof's fees because Mr. Hof failed to obtain court approval to use cash collateral in a timely manner and failed to prevent the unauthorized use of cash by West Delta. Appellant points out that unless a debtor is authorized by the creditor, in this case Promar, the debtor has to file a motion to obtain court approval to use cash collateral. Appellant further asserts that Mr. Hof knew that Promar had a lien on the debtor's cash collateral, but that Mr. Hof did not timely file a motion to use Promar's cash collateral or to obtain Promar's consent at that time.
As the bankruptcy court and Mr. Hof note, Promar was the party in interest concerning the use of cash collateral, not Appellant. The bankruptcy court made the factual findings that when Promar raised the issue and moved to restrict the use of its cash collateral, the parties worked out a consent order that allowed the debtor to use the cash collateral to continue to operate under an approved budget. See Reasons for Order, Bankr. Doc. 518, at 4-5. The bankruptcy court concluded that "I.G. did not prove that West Delta was not authorized to use cash collateral of Promar, let alone that Mr. Hof should have prevented it."Id. at 5. The bankruptcy court did not abuse its discretion in making those findings and in rejecting Appellant's argument that Mr. Hof's fees should be denied or reduced.
Appellant also asserts that the bankruptcy court abused its discretion by not limiting Mr. Hof's fees because he failed to pursue the avoidance action on behalf of the estate and opposed I.G.'s pursuit of the action. The bankruptcy court rejected I.G.'s argument, noting that, had the debtor's proposed plan been successful, the avoidance action would have been moot. Therefore, the bankruptcy court concluded, Mr. Hof was not required to bring the avoidance action on-the demand of I.G., who proposed a competing plan. Finally, after confirmation of I.G.'s plan, I.G. could assert the avoidance action as of right. Upon reviewing the bankruptcy court's order, the parties' arguments, and the record, this Court finds that the bankruptcy court did not abuse its discretion in making these findings and in not denying Mr. Hof fees based on this argument.
This argument arises out of the debtor's transfer of its stock in S Parish to Muller, four months prior to the debtor filing bankruptcy. I.G. asserts that it was justifiably reluctant to pay more for the debtor's assets because it believed there was uncertainty as to the owner of S Parish. Accordingly, I.G. formally requested that Mr. Hof pursue avoidance actions to recover the alleged ownership interest in S Parish on behalf of the debtor. When Mr. Hof refused, I.G. filed a motion to pursue the avoidance action on behalf of the estate, which motion was opposed by Mr. Hof. The motion was ultimately denied by the bankruptcy court as moot, after I.G.'s plan was confirmed, as I.G. could then pursue the action as part of its plan.
Finally, Appellant challenges the bankruptcy court's failure to provide a detailed explanation for its conclusion that all of Mr. Hof's fees were reasonable and necessary under 11 U.S.C. § 303. Appellant objected to a number of specific entries in Mr. Hof's statements, arguing that no compensation should be paid for various deficiencies. In its order, the bankruptcy court cited Section 330(a)(3), which provides many of the relevant factors to be considered in awarding reasonable compensation, and stated that Mr. Hof's fees were reasonable and necessary. See Reasons for Order, Bankr. Doc. 518, at 5.
This Court agrees with Appellant to the extent that this Court's review of the specific objections to Mr. Hof's statements would have been facilitated if the bankruptcy court had supplied a more detailed explanation and analysis on I.G.'s specific objections. However, upon reviewing Mr. Hof's third and fourth applications, I.G.'s specific objections to certain entries, and Mr. Hof's responses to the objections, the Court does not find that I.G. has demonstrated that the bankruptcy court abused its discretion in overruling I.G.'s objections and allowing Mr. Hof to recover fees for all the services he performed. Again, the bankruptcy court has broad discretion in this matter. Further, the bankruptcy court is much more familiar with the facts of the case than is this Court, so that the bankruptcy court is clearly in the best position to determine whether work performed by counsel was reasonable and compensable. See Matter of Evangeline Refining Co., 890 F.2d 1312, 1327 (5th Cir. 1989). Appellant has not demonstrated that the bankruptcy court's finding, that all of Mr. Hof's services were reasonable and necessary, was clearly erroneous.
Conclusion
The Court concludes that the bankruptcy court failed to apply the proper legal standard to determine whether the untimely-filed claims filed by Mr. Hof, Mr. Fenasci, and Mr. Butler, seeking compensation for services performed prior to the March 30, 2000, bar date, should have been allowed. Accordingly, the bankruptcy court's order granting those applications is hereby REVERSED and the case is REMANDED for the bankruptcy court to determine if the tardily-filed applications should be allowed under the appropriate legal standards as detailed herein.
This Court is cognizant that, depending on the bankruptcy court's determination of this issue on remand, many of the other issues may become moot as to certain of the attorneys' applications. For example, if the bankruptcy court concludes that Mr. Butler's untimely claims for services performed prior to March 30, 2000, should be denied, then there are no other relevant issues to discuss regarding Mr. Butler, as the bankruptcy court has already denied Mr. Butler's fees for the period following March 30, 2000.
Furthermore, the Court determines that the bankruptcy court failed to make the proper legal inquiry regarding Mr. Fenasci's and Mr. Butler's role as investors in Burrwood Oil and whether their roles created an adverse interest to the debtor, which may justify a reduction or denial of fees. Accordingly, the bankruptcy court's order rejecting I.G.'s arguments with respect to Mr. Fenasci's and Mr. Butler's roles in Burrwood Oil is also REVERSED and REMANDED for the bankruptcy court to apply the correct legal standard to determine if Mr. Fenasci and Mr. Butler were qualified to be employed as special counsel given their role in Burrwood Oil.
However, the bankruptcy court's findings and conclusions regarding all other aspects of Mr. Hof's, Mr. Fenasci's, and Mr. Butler's applications for fees are hereby AFFIRMED.
Accordingly, the bankruptcy court's order granting Mr. Hof's third and fourth applications, Mr. Fenasci's first and second applications, and Mr. Butler's first application is AFFIRMED in part; and REVERSED and REMANDED in part.