Davis v. Schupbach Investments , 808 F.3d 1215 ( 2015 )

FILED
United States Court of Appeals
PUBLISH Tenth Circuit
UNITED STATES COURT OF APPEALS November 3, 2015
Elisabeth A. Shumaker
FOR THE TENTH CIRCUIT Clerk of Court
In re: SCHUPBACH INVESTMENTS,
L.L.C.,
Debtor.
No. 14-3277
------------------------------
MARK J. LAZZO, P.A.; MARK J.
LAZZO; SCHUPBACH
INVESTMENTS, L.L.C.,
Appellants,
v.
ROSE HILL BANK; CARL B. DAVIS,
Trustee of the Schupbach Investments
Liquidation Trust,
Appellees.
APPEAL FROM THE UNITED STATES BANKRUPTCY
APPELLATE PANEL FOR THE TENTH CIRCUIT
(BAP Nos. 13-077-KS and 13-078-KS)
Submitted on the briefs:*
*
After examining the briefs and appellate record, this panel has determined
unanimously to honor the parties’ request for a decision on the briefs without oral
argument. See Fed. R. App. P. 34(f); 10th Cir. R. 34.1(G). The case is therefore
ordered submitted without oral argument.
Mark J. Lazzo, Mark J. Lazzo, P.A., Wichita, Kansas, for Appellants.
J. Michael Morris, Klenda Austerman, LLC, Wichita, Kansas, for Appellees.
Before TYMKOVICH, Chief Judge, HOLMES and McHUGH, Circuit Judges.
TYMKOVICH, Chief Judge.
Mark J. Lazzo served as legal counsel for Schupbach Investments, L.L.C.
(Debtor), in its Chapter 11 bankruptcy case. After confirming a liquidation plan for
the Debtor, the bankruptcy court entered a final fee order approving certain disputed
fee applications filed by Mr. Lazzo. Rose Hill Bank (RHB), a creditor of the estate,
and Carl B. Davis, the trustee of the Schupbach Investments Liquidation Trust
(Trust), appealed the final fee order to the Bankruptcy Appellate Panel (BAP). The
BAP reversed those portions of the bankruptcy court’s order that (1) confirmed post
facto approval of Mr. Lazzo’s employment, and allowed fees incurred prior to
approval of his employment, and (2) allowed postconfirmation fees.1 The Debtor,
Mr. Lazzo, and his law firm, Mark J. Lazzo, P.A. now appeal from the BAP’s
decision. We affirm.
1
Reference to “fees” in this opinion includes expenses, where applicable.
-2-
BACKGROUND
The Debtor’s business involved the purchase, renovation, rental, and sale of
residential real estate in Wichita, Kansas. Its primary assets included rental
properties that were mortgaged to creditors. Jonathan and Amy Schupbach
(Schupbachs) owned and operated the Debtor. RHB was its largest creditor.
In March 2011, the Debtor retained Mark J. Lazzo, P.A., as bankruptcy
counsel.2 The Debtor filed its Chapter 11 petition on May 16, 2011. At the time it
filed the petition, it failed to submit an application to employ Mr. Lazzo as its
attorney. Mr. Lazzo did submit a signed “Disclosure of Compensation of Attorney
for Debtor” form at the time of filing, in which he disclosed his representation of the
Debtor, the agreed hourly rate, and the retainer he had received. Aplt. App. at 128.3
I. The Employment Applications
One month after Debtor filed its Chapter 11 petition, the United States Trustee
notified Mr. Lazzo that an application for approval of his employment had not yet
been filed. Mr. Lazzo later explained that he had prepared an employment
application along with the petition, but he had neglected to file it because he had to
2
In the remainder of this order and judgment, we refer to Mr. Lazzo personally
as the party employed by the Debtor and seeking fees for legal services.
3
The Appellant’s Appendix is not consecutively paginated as required by
10th Cir. R. 30.1(D)(1). Instead, the 197-page appendix is numbered and indexed by
its table of contents to documents that contain non-consecutive page numbers from
100 to 970. See Aplt. App. at ii. We have followed this approach in citing to the
appendix, but have found this form of pagination unhelpful to our review.
-3-
prepare and file a “whole bunch of first day motions . . . regarding rents involving
eight different creditors” and the application “got lost in that work.” Aplee. Supp.
App., Vol. I at 166-67. On June 17, 2011, shortly after he received the notice from
the United States Trustee, Mr. Lazzo filed his initial employment application. This
initial application, however, did not explicitly request post facto approval of his
employment from the filing date of the petition.
Mr. Lazzo did not clarify that he sought approval of his employment post facto
to the petition date until several months later, on September 1, 2011, when he filed a
supplemental employment application. Various creditors objected to Mr. Lazzo’s
request for post facto employment. After a hearing, the bankruptcy court granted the
application, reasoning that Mr. Lazzo had “substantially complied” with the
requirement to seek approval because (1) he filed his disclosure form at the time of
the Debtor’s petition, (2) “[a]ll the facts and circumstances surrounding the filing of
this case and everything that was going on are sufficient justification for not [timely]
filing the application,” and (3) the United States Trustee had not objected to the
application. Id., Vol. II at 256-57.
II. The Creditors’ Liquidation Plan
On October 3, 2011, the Debtor filed a proposed Chapter 11 plan, which would
have permitted the Schupbachs to retain their ownership and control of the Debtor. A
number of secured creditors filed a competing plan calling for liquidation of the
Debtor. The Creditors’ Plan of Liquidation (Creditors’ Plan) called for the transfer
-4-
of the Debtor’s secured property to the secured creditors; the cancellation of the
Schupbachs’ ownership interest; the dissolution of the Debtor; and the creation of a
liquidation trust vested with the Debtor’s other property and rights. The Debtor and
the Schupbachs initially objected to the Creditors’ Plan, but they later withdrew their
objections to the plan as amended, and the bankruptcy court confirmed it.
III. The Fee Applications
The Debtor filed a total of seven fee applications, plus two supplemental
seventh applications, which together covered Mr. Lazzo’s work from May 13, 2011
through March 14, 2013. Various creditors objected to all or part of the fourth
through supplemental seventh applications. The bankruptcy court held a hearing on
the unresolved fee issues and on October 3, 2013, it entered its final fee order. In the
final fee order, the bankruptcy court determined that Mr. Lazzo was entitled to
payment for his services on behalf of the Debtor after confirmation of the Creditors’
Plan; declined to reconsider its post facto approval of Mr. Lazzo’s employment;
allowed the disputed portions of the fee applications; and allowed all fees and
expenses, both those previously awarded on an interim basis and those allowed by
virtue of the final fee order, as administrative expenses of the Debtor’s estate.
-5-
IV. The BAP Appeal
RHB and Mr. Davis appealed to the BAP. In rulings pertinent to this appeal,4
the BAP determined that (1) Mr. Lazzo had not shown the “extraordinary
circumstances” required to justify the approval of his employment post facto; and
(2) the confirmation of the Creditors’ Plan, which terminated Debtor’s status as
debtor-in-possession and stripped the Debtor of all rights, powers, and duties of a
bankruptcy trustee, also ended the bankruptcy court’s ability to award compensation
from estate assets for post-confirmation work performed by Mr. Lazzo. (One BAP
judge dissented concerning the disallowance of post-confirmation fees.)
Accordingly, the BAP reversed the bankruptcy court’s allowance of fees incurred
prior to the approval of Mr. Lazzo’s employment and after the confirmation of the
Creditors’ Plan, and remanded to the bankruptcy court to adjust the amount of the
final fee award.5
4
In its order, the BAP also upheld the bankruptcy court’s allowance of certain
fees that RHB and Mr. Davis had contended did not benefit the Debtor’s estate. RHB
and Mr. Davis have not cross-appealed the BAP’s decision affirming the allowance
of these fees.
5
Although the BAP remanded to the bankruptcy court for further proceedings,
that court’s only task on remand was to adjust the amount of the final fee award by
subtracting the disallowed fees. Appellants have therefore appealed from a final
decision that we may review. See Clark v. Zwanziger (In re Zwanziger), 741 F.3d 74,
75 n.1 (10th Cir. 2014) (“The BAP’s final decision is appealable when the BAP does
not remand for significant further proceedings.” (internal quotation marks omitted)).
-6-
DISCUSSION
I. Standard of Review
“When an appeal is taken from a BAP decision, this court independently
reviews the underlying bankruptcy court’s decision.” Market Ctr. E. Retail Prop.,
Inc. v. Lurie (In re Mkt. Ctr. E. Retail Prop., Inc.), 730 F.3d 1239, 1244 (10th Cir.
2013) “[W]e treat the BAP as a subordinate appellate tribunal whose rulings are not
entitled to any deference (although they certainly may be persuasive).” Davis v.
Pham (In re Nguyen), 783 F.3d 769, 772 (10th Cir. 2015) (internal quotation marks
omitted). We review the bankruptcy court’s legal determinations de novo, its factual
findings for clear error, Market Ctr., 730 F.3d at 1244, and its award of attorney’s
fees for an abuse of discretion, Barron & Newburger, P.C. v. Texas Skyline, Ltd.
(In re Woerner), 783 F.3d 266, 270 (5th Cir. 2015).
II. Post Facto Approval of Employment
With court approval, a bankruptcy trustee or debtor-in-possession may employ
professional persons, including attorneys, to assist them in their duties. 11 U.S.C.
§ 327(a).6 Where an attorney has been “employed under section 327,” a bankruptcy
court is empowered to award him compensation from the estate. Id. § 330(a)(1). But
“any professional not obtaining approval is simply considered a volunteer if [he]
6
Section 327(a) refers to employment by a bankruptcy trustee. A
debtor-in-possession has the rights and responsibilities of a trustee, including the
ability to employ professional persons. 11 U.S.C. § 1107(a).
-7-
seeks payment from the estate.” Interwest Bus. Equip., Inc. v. U.S. Tr. (In re
Interwest Bus. Equip., Inc.), 23 F.3d 311, 318 (10th Cir. 1994).
Although neither § 327(a) nor Fed. R. Bank. P. 2014—which implements that
statute—expressly requires that the approval must precede the attorney’s
engagement, courts have generally read such a requirement into the statute as a
matter of judicial administration. See, e.g., Matter of Singson, 41 F.3d 316, 319
(7th Cir. 1994) (“Prior approval is strongly preferred because it permits close
supervision of the administration of an estate, wards off ‘volunteers’ attracted to the
kitty, and avoids duplication of effort.”). Moreover, D. Kan. Local Bankruptcy Rule
2014.1(a) expressly requires that in order to employ an attorney under § 327 to
conduct a Chapter 11 case, the debtor-in-possession “must file with the petition an
application to employ [the] attorney[].”
We have assumed that a bankruptcy court may approve an attorney’s
employment post facto, thereby entitling him to seek fees for work performed prior to
approval. See In re Albrecht, 233 F.3d 1258, 1260 (10th Cir. 2000) (collecting
cases); Land v. First Nat’l Bank of Alamosa (In re Land), 943 F.2d 1265, 1267
(10th Cir. 1991). But Mr. Lazzo argues that we have not yet adopted a standard for
evaluating whether such a post facto application should be approved. He contends
that the appropriate standard for such an application is “excusable neglect.”
In Land, we stated that retroactive approval of an attorney’s employment “is
only appropriate in the most extraordinary circumstances” and that “[s]imple neglect
-8-
will not justify nunc pro tunc approval.” Land, 943 F.2d at 1267-68. Mr. Lazzo
argues that our statements in Land were dicta. We disagree. The appellants in Land
challenged the bankruptcy court’s order requiring their attorney to return certain fees
he had received from third parties. They argued that this result was incorrect because
the bankruptcy court did not conduct an evidentiary hearing and did not determine
that the fees were excessive. See id. at 1267. But we rejected this articulation of the
issue on appeal, observing that the bankruptcy court ordered the attorney to return the
fees not because they were excessive, but because the attorney “had never obtained
the bankruptcy court’s approval of his employment by the debtors.” Id. After stating
the extraordinary circumstances standard, we noted that “[t]his appeal does not
present any extraordinary circumstances,” and determined that the appellants had
therefore not shown that the bankruptcy court abused its discretion in denying post
facto approval to hire the attorney. Id. at 1268.
Our statement concerning the need to show extraordinary circumstances
therefore was not dicta (i.e., a statement not necessarily involved or essential to the
resolution of the appeal, see Rohrbaugh v. Celotex Corp., 53 F.3d 1181, 1184
(10th Cir. 1995)), but instead provided a reason to affirm the bankruptcy court’s
denial of post facto approval for the disputed fees. But even if our statement in Land
were dicta, we would still apply the extraordinary circumstances test here, because it
is the appropriate standard and represents the prevailing approach in the circuits.
See 3 Collier on Bankruptcy ¶ 327.03[3], at p. 327-25 (Alan N. Resnick & Henry J.
-9-
Sommer, eds., Jun. 2015) (“The prevailing approach is that a bankruptcy court should
grant retroactive retention orders [only] in extraordinary or exceptional
circumstances to deter attorneys and other professionals from general nonobservance
of section 327.”).
In arguing for a lesser, “excusable neglect” standard, Mr. Lazzo primarily cites
the minority viewpoint expressed by the Seventh Circuit in Singson, 41 F.3d at
319-20. We note that the Singson court expressly rejected our approach in Land.
See id. at 319 (“We are not persuaded by, and do not follow, cases such as
[Land] . . . , that adopt an ‘extraordinary circumstance’ requirement.”).7 Even if we
found the minority approach in Singson persuasive (which we do not), we would not
repudiate Land in its favor, as a panel of this court generally cannot overrule the
judgment of a prior panel. United States v. White, 782 F.3d 1118, 1126-27 (10th Cir.
2015).
Having determined that the bankruptcy court applied an improper, “substantial
compliance” standard rather than the appropriate “extraordinary circumstances” test,
and that the “excusable neglect” standard contended for by Mr. Lazzo is not the
proper standard, we are left to determine the appropriate remedy. Mr. Lazzo argues
that we should remand to the bankruptcy court for application of the “extraordinary
circumstances” standard in the first instance. We decline to do so. Although we
7
The Seventh Circuit’s express rejection of the test it found we adopted in
Land provides further evidence that the use of the “extraordinary circumstances” test
in Land was not dicta.
- 10 -
recognize that as a general matter the bankruptcy court is vested with discretion in
determining whether an applicant has shown extraordinary circumstances, see Land,
943 F.2d at 1268, here the BAP’s conclusion that Mr. “Lazzo’s inadvertent neglect in
failing to timely file his employment application is not an extraordinary
circumstance,” BAP Opinion at 19, is correct as a matter of law. See, e.g., Ibbetson
v. U.S. Tr., 100 B.R. 548, 551 (D. Kan. 1989) (affirming bankruptcy court’s order
denying post facto retention where attorney asserted that his failure to seek initial
approval of employment was due to a combination of factors including the “farm
financial crisis” and “other pressures” along with the necessity of relying on
“inexperienced, underpaid, and overworked young associates for details not affecting
the welfare of clients” and the “confusion surrounding the departure of the young
associate handling the details of the case,” determining that such factors merely
showed inadvertence or neglect and did not constitute extraordinary circumstances);
In re Lillian Lawrence, Ltd., 136 B.R. 1, 3-4 (Bankr. D.C. 1992) (stating law firm’s
belief that its application was “either misplaced or returned by the clerk’s office for
some reason” did not constitute extraordinary circumstances warranting post facto
employment); and see generally 3 Collier on Bankruptcy ¶ 327.03[3], at p. 327-26
n.40 (collecting cases applying extraordinary circumstances standard). We therefore
affirm the BAP’s decision reversing the bankruptcy court’s allowance of post facto
employment and fees.
- 11 -
III. Post-Confirmation Legal Services8
The bankruptcy court determined that confirmation of the Creditors’ Plan did
not bar the allowance of attorney’s fees incurred after the confirmation date. It
reasoned that the Debtor retained its status as debtor-in-possession even after plan
confirmation and could therefore continue to employ Mr. Lazzo under § 327. The
court relied primarily on 11 U.S.C. § 1101(1), which defines “debtor in possession”
as the “debtor except when a person that has qualified under section 322 of this title
is serving as trustee in the case.” It determined that because the liquidating trustee
did not qualify as a “trustee” under section 322, the Debtor therefore retained
debtor-in-possession status even after confirmation of the Creditors’ Plan. The
bankruptcy court further found that Mr. Lazzo’s post-confirmation services remained
“necessary to the administration” of the estate. 11 U.S.C. § 330(a)(3)(C).
A majority of the BAP disagreed. It concluded that although the bankruptcy
court’s construction of § 1101(1) was reasonable, if one considered Title 11 as a
whole there were other ways to terminate a debtor’s status as debtor-in-possession
besides appointment of a qualified trustee. The BAP reasoned that “[t]o remain a
8
Mr. Lazzo contends that appellant RHB lacks standing to challenge the
portion of his requested fee award that exceeds RHB’s pro rata responsibility for
allowed administrative claims under the Creditors’ Plan. The trustee, who is
defending this appeal and previously appealed to the BAP, is responsible for payment
of all allowed administrative claims and therefore has standing to challenge the entire
amount. Moreover, if Mr. Lazzo’s fees were not allowed, the funds would be
re-vested in the Trust and used to pay creditors, including RHB. We conclude that
the entire amount of the requested fee award is before us on appeal.
- 12 -
debtor-in-possession after confirmation, the debtor must have at least some rights,
powers, and duties of a bankruptcy trustee under [11 U.S.C.] § 1107.” BAP Opinion
at 24. It concluded that under the terms of the Creditors’ Plan and Confirmation
Order, the Debtor’s status as debtor-in-possession terminated upon confirmation,
whereupon the Debtor was stripped of all rights, powers, and duties of a bankruptcy
trustee, including the ability to seek payment from the estate for postconfirmation
attorney’s fees. The BAP’s analysis is persuasive.
The Supreme Court has held that when a debtor’s status as
debtor-in-possession terminates, this also terminates an attorney’s authorization
under § 327 to provide service as an attorney for the debtor-in-possession. Lamie v.
U.S. Tr., 540 U.S. 526, 532 (2004).9 Thus, as the BAP recognized, the relevant issue
here is whether the Debtor retained its status as debtor-in-possession after
confirmation of the Creditors’ Plan. The bankruptcy court appears to have assumed
that the appointment of a qualified trustee was the only way to terminate the debtor’s
status as debtor-in-possession. But that is not what § 1101(1) says.
9
This reasoning effectively undercuts the bankruptcy court’s alternative
reasoning, that even if “the confirmation of the liquidating plan terminated Debtor’s
ability as the debtor-in-possession to take actions beneficial to the estate, the Code
nevertheless allows for compensation for the post-confirmation services of counsel
appointed under § 327 that are necessary for the administration of the estate.” Aplt.
App. at 883-84. To be compensated from the estate, such services must be both
authorized and necessary. See 11 U.S.C. § 330(a)(1), (a)(3)(C). Here, even if
necessary, they were not authorized.
- 13 -
By its plain language § 1101(1) eliminates the debtor-in-possession’s ability
and duty to perform the functions and duties of a trustee in cases where a qualified
trustee is serving those functions. Section 1101(1) thus serves the salutary purpose
of avoiding the logistical difficulties inherent in having two different and possibly
conflicting “trustees” serving simultaneously. But to read § 1101(1) as empowering
the debtor with perpetual debtor-in-possession status in every case where a trustee
has not been formally appointed reads more into the statute than is actually there.
As case law makes clear, debtor-in-possession status terminates not only upon
appointment of a qualified trustee, but also upon confirmation of a Chapter 11 plan.
See, e.g., Dynasty Oil & Gas, LLC v. Citizens Bank (In re United Operating, LLC),
540 F.3d 351, 355 (5th Cir. 2008) (“Upon confirmation of the plan, the estate ceased
to exist, and [the reorganized debtor] lost its status as a debtor ‘in possession.’”).
Mr. Lazzo attempts to distinguish United Operating, reasoning that it “involved a
reorganized debtor, not a liquidating agent.” Aplt. Reply Br. at 8. But that is not a
significant distinction under the circumstances of this case, particularly given the
provisions of the Creditors’ Plan.10
10
Mr. Lazzo argues that a liquidation trust is different from a reorganized
debtor because “a liquidation plan does not create a second, separate entity” upon
confirmation that is no longer administered by the debtor-in-possession. Aplt. Reply
Br. at 9. But there is authority that a liquidating trust can do just that. See Holywell
Corp. v. Smith, 503 U.S. 47, 55 (1992) (stating that where liquidating trust was
established by Chapter 11 reorganization plan and vested with estate assets, “[t]he
plan did not simply substitute the trustee for [the debtor-in-possession] as the
(continued)
- 14 -
“[F]or purposes of Chapter 11 bankruptcies, a ‘debtor-in-possession’ is a
debtor who remains in possession of the pre-petition assets and administers them for
the benefit of the creditor body pursuant to 11 U.S.C. § 1107.” Bowers v. Atlanta
Motor Speedway, Inc. (In re SE Hotel Props. Ltd. P’ship), 99 F.3d 151, 152 n.1
(4th Cir. 1996) (emphasis added). Once the Creditors’ Plan was confirmed, the
Debtor (which had been dissolved) no longer satisfied this description of a
debtor-in-possession. Nor has Mr. Lazzo made a persuasive case that the Debtor
continued to perform the essential duties of a trustee as described in 11 U.S.C. § 704.
The Creditors’ Plan called for all of the Debtor’s secured property to be
transferred to the secured creditors, and the unsecured property to be placed into the
Trust. It vested the Trust with “all rights and powers of a trustee under the
Bankruptcy Code,” Aplt. App. at 458, and charged it with paying “all allowed
administrative and priority claims,” id. at 615. It further provided that the Trustee
would have the authority to liquidate the unsecured property and to employ attorneys
to assist him, without the need for court approval. The Debtor was deemed dissolved
as of the plan’s confirmation date.
The Creditors’ Plan as amended did assign the Debtor (acting through the
Schupbachs) responsibility for certain functions in connection with liquidation of the
Trust property. The plan provided that:
fiduciary of the estate. Rather, it created a separate and distinct trust holding the
property of the estate and gave the trustee control of this property.”).
- 15 -
The Schupbachs will cooperate with all secured creditors to whom
properties are transferred by inter alia (i) turning over all records as to
the properties, including but not limited to all written leases, lease
applications and documents/information, property tax statements,
correspondence from government agencies respecting condition of the
properties and/or eminent domain, records as to collection of past due
and current rents, and documents on any collection or eviction lawsuits;
(ii) meeting with and responding to questions of the creditors respecting
the properties; and (iii) such cooperation will be extended to all agents
of the secured creditors, including any rental agents as may be
designated.
The Debtor will also, through the Schupbachs, execute quit claim
deeds to the various properties transferred . . . to the extent such deeds
are provided by the secured creditors. Creditors receiving such deeds
will promptly file the same.
Id. at 617.
But these mostly ministerial duties fell far short of encompassing the
responsibilities of a debtor-in-possession. The bankruptcy court erred in concluding
that “[w]hen the liquidating plan was confirmed and the liquidating trust created,
Debtor as the debtor-in-possession was not relieved of the duties . . . [of a trustee, as
applicable to debtors-in-possession],” Id. at 883. The Debtor’s obligation to
cooperate with the Trustee and the bankruptcy court to carry out the terms of the
Creditors’ Plan, see 11 U.S.C. § 1142, did not allow the Debtor to retain its status as
debtor-in-possession. For the foregoing reasons, we affirm the BAP’s decision
reversing the bankruptcy court’s determination allowing an award of
post-confirmation fees.
CONCLUSION
The BAP’s judgment is affirmed.
- 16 -