Pongetti v. Barron ( 2003 )

United States Court of Appeals
Fifth Circuit
F I L E D
IN THE UNITED STATES COURT OF APPEALS April 4, 2003
Charles R. Fulbruge III
FOR THE FIFTH CIRCUIT Clerk
_____________________
No. 02-60070
_____________________
IN THE MATTER OF: REBECCA MITCHELL BARRON,
Debtor
CYNTHIA DANIELS,
Appellant,
versus
REBECCA MITCHELL BARRON; JOHN A. BARRON; CHARLES EASLEY,
Appellees.
__________________________________________________________________
Appeal from the United States District Court
for the Northern District of Mississippi
_________________________________________________________________
Before REAVLEY, JOLLY, and JONES, Circuit Judges.
E. GRADY JOLLY, Circuit Judge:
Cynthia Daniels appeals the award of attorneys’ fees by the
bankruptcy judge for her representation of a bankrupt’s estate.
Though we have previously addressed the issue in this case, it
appears that, although the bankruptcy judge approved a one-third
contingency fee for Daniels’ agreeing to pursue a disputed claim
for the bankrupt’s estate, and she was 100% successful in obtaining
and collecting the judgment, the bankruptcy judge reduced her fee.
The bankruptcy court relied on an exception to Section 328, which
permits a bankruptcy court to deviate from a previously-approved
compensation plan if the “terms and conditions prove to have been
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). The district court affirmed the
bankruptcy court and Daniels appealed to this court. We reversed
and remanded, finding the bankruptcy court applied the wrong
standard to determine whether circumstances satisfied the exception
to Section 328. See In re Barron, 225 F.3d 583 (5th Cir. 2000).
On remand, the bankruptcy court clarified its earlier opinion,
indicated that it had originally applied the correct legal
standard, and reaffirmed its previous award. See In re Barron, No.
95-10538, slip op. at 3 (Bankr. N.D. Miss. May 22, 2001). Daniels
appealed to the district court, which affirmed. See In re Barron,
No. 1:99CV21-S (N.D. Miss., Jan. 2, 2002). Daniels again appeals
to this court and, because we find that the bankruptcy court has
abused its discretion, we reverse and remand for entry of judgment.
I
The factual background of this case is stated succinctly in
this Court’s previous opinion in this case, In re Barron, 225 F.3d
583, 584-585 (5th Cir. 2000). In pertinent part, Attorney Cynthia
Daniels sought approval of a fee arrangement from the bankruptcy
court to pursue an action on behalf of the bankruptcy estate, which
arose from a divorce and remarriage of the debtor and her husband.
Daniels’ application stated she was willing to work on a one-third
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(1/3) contingency basis of the amount recovered in the filing of
any preferential and/or fraudulent complaints, if warranted.
Various parties objected to her appointment, arguing that such
representation and the fee arrangement were premature because of
the potential ease of collection of the debt owed to Mrs. Barron’s
estate by Mr. Barron. The bankruptcy court found that there was a
high likelihood of litigation in the matter and, over objections,
approved of the arrangement with recovery of Daniels’ contingency
predicated on “an actual suit being filed against Mr. Barron
following the filing of a demand letter.” In re Barron, 225 F.3d
at 584. Daniels agreed to take no fee if a demand letter proved
effective in collecting the obligation.
After the arrangement was approved, Daniels sent the
contemplated demand letter to Mr. Barron, and received no response.
At this point, Daniels filed a complaint against Mr. Barron. After
unsuccessful attempts by Mr. Barron to settle for less than the
amount owed, Daniels moved for summary judgment after conducting
three depositions. After a hearing, the court granted judgment
against Mr. Barron for the full balance of $160,000 in August 1997.
In re Barron, 225 F.3d at 584-85. Mr. Barron immediately tendered
full payment to the court.
Daniels then filed an application seeking $53,333.33, one-
third of the recovered judgment, in attorneys’ fees. The Barrons
objected to the application, as did a creditor who objected to her
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payment in priority to his claim. After a hearing, the bankruptcy
court acknowledged it had approved Daniels’ employment and
contingency arrangement, but then noted the sizeable loss to Mrs.
Barron if Daniels was awarded her requested compensation. The
court noted that the legal issue in the underlying dispute had been
straightforward and thus resolution was “relatively” easy.
Understandably, the court stated that it would try to do what was
fair to all sides, and eventually awarded Daniels compensation of
$24,341.25 with an additional expense allowance of $2,500.00.
Daniels appealed to the district court which affirmed the award.
On appeal, after careful consideration, this court reversed,
finding that the bankruptcy court had abused its discretion,
misinterpreting the applicable exception to 11 U.S.C. § 328 by
failing to find that the circumstances relied on were incapable of
being anticipated at the time the plan was approved.
On remand, the judge essentially reiterated his earlier
holding, writing: “With all due respect, [the standard mandated by
the Fifth Circuit] is the standard that was applied by this court
when rendering its decision.” In re Barron, No. 95-10538, slip op.
at 3 (Bankr. N.D. Miss., May 22, 2001). The court added the
additional observation that Daniels had had a relatively easy time
collecting the judgment from Mr. Barron and thus the reduction in
her fee award was reasonable. The district court affirmed the
compensation award, and Daniels timely appeals to this court.
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II
This court reviews a bankruptcy court’s determination of
attorneys’ fees for abuse of discretion. In re Fender, 12 F.3d
480, 487 (5th Cir. 1994). This “abuse of discretion standard
includes review to determine that the discretion was not guided by
erroneous legal conclusions.” In re Coastal Plains, Inc., 179 F.3d
197, 205 (5th Cir. 1999) (quoting Koon v. United States, 518 U.S.
81, 100 (1996)). Consistent with this review, this court reviews
a bankruptcy court’s conclusions of law de novo. In re Texas
Securities, Inc., 218 F.3d 443, 445 (5th Cir. 2000). Specific
findings of fact are reviewed for clear error. Fender, 12 F.3d at
487.
Sections 328 and 330 of the Bankruptcy Code govern attorneys’
fees in representing bankruptcy estates. Under 11 U.S.C. § 330,
attorneys’ fees are reviewed for their reasonableness after
representation has concluded. In contrast, Section 328 of the
Bankruptcy Code allows an attorney seeking to represent a
bankruptcy estate to obtain prior court approval of her
compensation plan. As this Court has noted, “able professionals
were often unwilling to work for bankruptcy estates where their
compensation would be subject to the uncertainties of what a judge
thought the work was worth after it had been done. That
uncertainty continues under the present § 330 . . . .” In re
National Gypsum Co., 123 F.3d 861, 862 (5th Cir. 1997). Under
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Section 328, an attorney or other professional may avoid that
uncertainty by obtaining court approval of her representation and
fee arrangement prior to performing the contemplated services.
Section 328 provides that once a compensation plan has been
approved by the bankruptcy court, “the court may allow compensation
different from the compensation provided under such terms and
conditions after the conclusion of such employment, if such terms
and conditions prove to have been 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).
The case law of this circuit, as reflected in National Gypsum
and In re Texas Securities, 218 F.3d at 445-46, has not always
clearly delineated Section 328(a)’s requirement that the
intervening circumstances must have been incapable of anticipation,
not merely unanticipated. This distinction is not insignificant.
As the court in Barron noted, previous Fifth Circuit cases
addressed the question whether Sections 330 or 328 applied; Barron
was the first case in this circuit to specifically address Section
328(a) in relevant part. In that decision, this Court expressly
noted the limitations on bankruptcy courts’ ability to revise
approved fee plans. We held that the bankruptcy court applied the
incorrect legal standard by finding that the circumstances were
merely unforeseen; instead, the bankruptcy court should have
determined whether developments, which made the approved fee plan
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improvident, had been incapable of anticipation at the time the
award was approved. In re Barron, 225 F.3d 586.
On remand, the bankruptcy court relied on three factors to
find the previously approved compensation improvident. First, that
it “did not anticipate the substantial amount of the subsequent
recovery;” second, that 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).
As its first factor, the bankruptcy court candidly admits that
it “did not anticipate the substantial amount of the subsequent
recovery . . . .” However, the bankruptcy court does not explain
why this factor was incapable of being foreseen. On remand, the
bankruptcy judge addresses this ‘development’ by stating that
“[t]his court could have and perhaps should have quoted the
language of Section 328(a), adding after the word ‘improvident’ on
page 9 of the initial opinion the following, ‘in light of
developments not capable of being anticipated at the time’ . . ..
Unfortunately, it did not do so.” See In re Barron, No. 95-10538,
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slip op. at 3 (Bankr. N.D. Miss. May 22, 2001).
Indeed, the amount of eventual recovery was reasonably
foreseeable; the bankruptcy court had a copy of the disputed
property settlement agreement, which clearly contemplated a
bargained-for consideration of $210,000 for the parcels of real
estate exchanged between the Barrons. Because $50,000 had been
paid on that debt, the balance that remained was $160,000.
Moreover, the Barrons never disputed the amount, only the validity
of the obligation. Mr. Barron was not insolvent and it never
appeared that he would not be able to pay the judgment.
Consequently, this ground for departing from the approved fee
arrangement is inadequate.
Second, the bankruptcy court stated that the adversary
proceedings became a “slam dunk” to justify its conclusion that the
fee arrangement was improvident. However, it has not been said how
this development was incapable of being anticipated. In fact, the
record indicates that this argument could have been anticipated.
Creditors argued to the bankruptcy judge before the plan’s adoption
that Daniels’ services were not needed, precisely because the
proceedings would prove easy. One creditor even stated “all that
is needed is a demand letter.” Thus, the exchange demonstrates
that not only was ease of litigation capable of being foreseen,
there is evidence that it actually was foreseeable. Although the
judge stated that “...[t]o me this was not a doubtful case. The
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results were fairly well predictable that there was going to be
recovery for this estate”, the bankruptcy court has offered no
reason why the alleged ease of enforcement was incapable of being
anticipated at the time of the hearing before the contingency award
was approved.
Finally, the bankruptcy judge added another ground to support
his conclusion that the fees were improvidently awarded: the ease
with which collection was effectuated by Daniels. “In many cases,
obtaining a judgment is the easiest step. . . . The attorney for
the trustee was not required to issue garnishment, levy execution,
or force the sale of the remaining parcels of property.” However,
the bankruptcy judge does not articulate how this development was
incapable of being anticipated; nor does it appear that it was in
fact incapable of being anticipated. There is no evidence that Mr.
Barron did not have funds with which to pay an eventual judgment or
that he would be inclined to avoid his obligation. Although there
was no certainty that Daniels would be able to collect the
judgment, it seems to us one could equally reasonably anticipate
that he might not unreasonably avoid payment, even if there was
some possibility that collection would not be easy. On the
evidence before the bankruptcy court either scenario was capable of
being anticipated, and neither was incapable of being anticipated.
Thus, this ground is inadequate to demonstrate that a pre-approved
fee arrangement was “improvident.”
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III
In sum, we think that the bankruptcy court departed from the
contingency fee arrangement approved under 11 U.S.C. § 328. There
appear to be no intervening circumstances that were incapable of
anticipation by the bankruptcy court at the time it approved the
award. Although the court’s reasoning has some force when viewed
through today’s lenses, the factors relied upon to find the award
improvident were foreseeable. Because the bankruptcy court’s
application of Section 328(a) was legally incorrect, the court
abused its discretion. On the facts of this case the bankruptcy
court has not demonstrated circumstances that satisfy the exception
provided in Section 328(a). Accordingly, Cynthia Daniels is
entitled to the one-third contingency fee approved by the
bankruptcy court. We therefore reverse and remand to the district
court for entry of judgment in favor of Cynthia Daniels.
REVERSED and REMANDED for entry of judgment.
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EDITH H. JONES, Circuit Judge, concurring:
A pox on all their houses! The panel’s discussion
euphemizes what was going on here -- a useless and blatant
perversion of bankruptcy. Mrs. Barron filed this Chapter 7
bankruptcy case to avoid paying a judgment owed to her divorce
lawyers after she remarried Mr. Barron. She then tried,
unsuccessfully, to have the case dismissed, but the trustee pleaded
on behalf of “the creditors’ interest.” Four of the six creditors
are attorneys, one a private investigator, and they were altogether
owed less than $50,000. Mrs. Barron was due to receive, either in
real property or in unmatured installments, $160,000 from her then-
and-again husband as part of their divorce settlement. For unknown
reasons, Mr. Barron refused to pay off his wife’s debts.
Understandably, there was confusion at the outset as to
the enforceability of a divorce property settlement for a couple
who have remarried. The inexorable bankruptcy-driven “logic” of
this situation led to the appointment of Ms. Daniels as special
counsel, on a contingency fee, with the mission of recovering value
from Mr. Barron to pay off the attorney-creditors.
With the same sort of bankruptcy-driven logic, the panel
concludes that the bankruptcy court should not have cut Ms.
Daniels’ fee, even after she recovered ‘way more than was necessary
to pay the creditors and the trustee, and herself became the
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beneficiary of a sizeable windfall. Were the events in the
adversary proceeding “capable of being anticipated”? Although I
concur with the opinion, I think this is a close question.*
But what definitely should have been anticipated was the
needless cost in time and administrative fees generated by Mrs.
Barron’s bad-faith resort to bankruptcy in the first place. See 11
U.S.C. § 707(a) (court may dismiss a case “for cause”). She had
assets. He is wealthy. She or her husband could pay the attorneys
for their mutual misstep into divorce court. This case is a prime
example of how bankruptcy is misused.
*
A transcript from an early hearing in the case suggests considerable
uncertainty surrounding the legal status of the divorce property settlement in
this unusual situation. Further, as the bankruptcy court pointed out in his
opinion on remand, merely enforcing the property settlement would have required
considerable additional work by Ms. Daniels, since she would have had to sell or
file further proceedings to obtain the real property in question, or she would
have had to await the payment of installments due under the agreement. The
bankruptcy court was legitimately surprised when Mr. Barron finally paid off the
court’s judgment against him with a check.
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