Opinion
No. CV-F-04-6040 REC.
January 20, 2006
ORDER DENYING MOTIONS FOR SANCTIONS (Docs. 21 and 27) AND OPINION AFFIRMING DECISION OF BANKRUPTCY COURT
Debtors and appellants Chester and Emilia Garber (hereinafter referred to as the Garbers) have appealed three orders issued by the United States Bankruptcy Court (Judge Rimel) on June 19, 2003, December 17, 2003, and January 14, 2004 wherein the Bankruptcy Court granted an administrative expense claim filed by National Union Fire Insurance Co. of Pittsburgh, PA (hereinafter referred to as National Union), granting National Union's claim for attorneys' fees incurred in National Union's action against the Garbers in this court, No. CV-F-94-5414 REC (hereinafter referred to as the Fraudulent Conveyance Action). A. Garbers' Objections to Excerpts of Record Submitted by National Union.
Both the Garbers and National Union filed motions for sanctions in connection with this appeal. However, at oral argument, National Union denied that it had filed such a motion and the Garbers did not address their motion for sanctions. Accordingly, the court hereby denies both motions for sanctions.
The Garbers object to National Union's submission of and reference to items 1 through 4 (NU00001-NU000028) set forth in National Union's Excerpt of Record filed on May 4, 2005. The documents to which the Garbers object are:
1. Complaint to Set Aside Fraudulent Conveyance; Demand for Jury Trial (U.S.D.C. Doc. No. 1);
2. National Union's Opposition to Motion to Approve Stipulation and Agreement in Connection with Pending Federal District Court Action (Bank. Doc. No. 15);
3. Order on Motion for Relief from the Automatic Stay to Proceed with Litigation (Bank. Doc. No. 33);
4. Amended Judgment (U.S.D.C. Doc. No. 269)
In so objecting, the Garbers assert: "Only Appellants designated the record in connection with this appeal. Appellee had the right to do so but did not. Appellees cannot do so now."
Rule 8006, Bankruptcy Rules, provides in pertinent part:
Within 10 days after filing the notice of appeal as provided by Rule 8001(a) . . ., the appellant shall file with the clerk and serve on the appellee a designation of the items to be included in the record on appeal and a statement of the issues to be presented.
Within 10 days after the service of the appellant's statement the appellee may filed and serve on the appellant a designation of additional items to be included in the record on appeal. . . .
The Garbers' Notice of Appeal was filed in the Bankruptcy Court on January 16, 2005. The Garbers filed a designation of record setting forth specific documents to be included on the appeal on January 22, 2005. The Garbers filed a designation of record setting forth transcripts of hearings to be included on the appeal on February 11, 2005. No designation of record was filed by National Union.
The court's research could no locate a decision specifically addressing the remedy to the appellant because of the appellee's failure to timely comply with Rule 8006. Most of the cases involve the appellant's failure to comply. However, from the court's review of the cases involving the appellant's failure to timely comply, the reviewing court's decision regarding remedy is a matter of discretion. Clearly, there is no prejudice to the Garbers if the court allows the contested items to be considered on this appeal. The documents at issue are documents of which this court may take judicial notice and are documents with respect to which the Garbers are familiar. Furthermore, the Garbers describe no prejudice to them if the court considers the documents.
If the court denies the Garbers' objections to these documents, the Garbers "designate and submit as a proposed excerpt of record", the transcript of the proceeding in the Bankruptcy Court on June 3, 1996 involving National Union's motion for relief from the automatic stay, which hearing resulted in the "Order on Motion for Relief from the Automatic Stay to Proceed with Litigation (Bank. Doc. No. 33)" provided by National Union as Item No. 3 in its Excerpt of Record.
Given National Union's untimely designation of record, the court grants the Garbers' request to include this transcript as part of the record on appeal.
B. BACKGROUND.
During the 1980's, National Union issued a surety bond guaranteeing payment by the Garbers on a note used to purchase an interest in a limited partnership. After the Garbers defaulted on the note, National Union made payments on their behalf. National Union filed an action against the Garbers for reimbursement that was eventually transferred to this court and prosecuted asNational Union v. Garber, No. CV-F-88-088 REC (hereinafter referred to as the Bond Case). In 1992, this court entered summary judgment for National Union in the amount of $51,031.40 in principal, $30,906.91 in interest accrued as of November 15, 1991, and awarded attorneys' fees in the amount of $69,389.08. The court's judgment and award were affirmed by the Ninth Circuit and the Ninth Circuit awarded National Union's attorneys' fees on appeal in the amount of $4,310. National Union filed abstracts of judgment in Fresno and Monterey Counties. In May, 1993, National Union conducted a debtor's examination of the Garbers. National Union learned for the first time that the Garbers had either pledged or transferred all of their assets, both business and personal, to Emilia Ting Garber's sister, Betty Ting, and that some of their assets were encumbered by liens in favor of Betty Ting, including property in Pacific Grove, which was jointly owned by the Garbers and Betty Ting. On April 29, 1994, National Union filed the Fraudulent Conveyance Action in this court. The Garbers filed a Counterclaim and Third Party Complaint against National Union and others. On September 23, 1994, the Garbers filed a petition for bankruptcy. Ellen Briones was appointed trustee of the Garbers estate.
On February 3, 1995, National Union's attorneys sent a letter to Ms. Briones, offering to serve as special counsel for the purpose of prosecuting a complaint to deny the discharge and to prosecute a complaint to avoid the transfers and further stating:
If we are appointed as special counsel our fees will be paid by National Union. Out of the recovery National Union would be reimbursed as an administrative expense pursuant to 11 U.S.C. 503.
We believe that this would be a positive step for the Trustee and the creditors of this estate because we understand that the assets transferred have a value significantly in excess of the judgment claim of our client. After payment of the fees and judgment claim there would, we are told, be substantial sums to be administered by the estate.
Ms. Briones declined National Union's offer. Instead, Ms. Briones and the Garbers and Betty Ting filed a "Stipulation and Agreement in Connection with Pending Federal District Court Action", the purpose of which was "(1) to permit the Debtors to prosecute their counter-claim against NU, all for the benefit for this estate, and (2) to abate any prosecution of the action to set aside a fraudulent conveyance against Ting pending prosecution of the counter-claim." Although opposed by National Union, the Stipulation was approved by the Bankruptcy Court on May 15, 1995. This court thereupon heard National Union's motions to dismiss the Garbers Counterclaim and Third Party Complaint in the Fraudulent Conveyance Action. This court's dismissal of the Counterclaim and Third Party Complaint was affirmed on appeal.National Union v. Garber, 1998 WL 30810 (9th Cir. 1998).
In March, 1996, the Trustee requested that National Union prosecute the Fraudulent Conveyance Action as special counsel for the benefit of the estate. According to the Declaration of Richard Russell, counsel for National Union's previous counsel, D'Amato and Lynch, the Trustee's proposal that National Union act as special counsel was conditioned upon National Union waiving its secured claim and its rights under the abstracts of judgment, thereby resulting in National Union having an unsecured claim. By letter dated April 19, 1996, National Union declined the Trustee's proposal because National Union "does not see that there would be any benefit to it."
On June 18, 1996, the Bankruptcy Court granted relief from the automatic stay in the Garbers' bankruptcy. The Garbers appealed that order to this court in No. CV-F-96-5858 and then to the Ninth Circuit, where this court's ruling was affirmed.Garber v. National Union, 2000 WL 674749 (9th Cir. 2000). In the meantime, National Union proceeded to obtain summary judgment in the Fraudulent Conveyance Action.
The property in Pacific Grove was sold for $1,310,000 in 2001. The Garbers' bankruptcy estate received approximately $500,000 net proceeds. From that amount National Union's $218,095.75 judgment lien was satisfied.
On September 11, 2002, National Union filed an administrative expense claim in the amount of $359,185.36 for reimbursement of attorneys' fees and costs associated with recovering assets and returning them to the estate.
The Trustee filed a "Motion Objecting to Administrative Claim Filed by National Union Fire Insurance Company".
A hearing on the Trustee's motion was held before Judge Rimel on April 16, 2003. On June 19, 2003, Judge Rimel issued Findings of Fact and Conclusions of Law with regard to the Trustee's motion, denying the Trustee's motion but reducing National Union's administrative claim (hereinafter referred to as the June 19 Order). In the June 19 Order, Judge Rimel rejected National Union's contention that the order granting National Union's request for relief from the automatic stay constituted prior judicial authorization within the meaning of 11 U.S.C. § 503 (b) (3) (B), holding in pertinent part: "Section 503 is not mentioned in the relief from stay order entered by Judge Ford. Had the order contemplated authorization under § 503(b), it would have said so." The June 19 Order then addressed National Union's request that "extraordinary circumstances exist such that a `nunc pro tunc' order should be entered retroactively authorizing its pursuit of the fraudulent transfer action." In granting National Union's motion, the June 19 Order rules in pertinent part:
Applicants who have failed to obtain prior court approval for their services to a bankruptcy estate may seek retroactive court approval. In re THC Financial Corp., 837 F.2d 389, 392 (9th Cir. 1987). Retroactive approval, however, is limited only to applicants who can establish: (1) a satisfactory explanation for their failure to obtain prior court approval; and (2) that the services significantly benefitted the bankruptcy estate. Id. See also In re Emco Enterprises, Inc., 94 B.R. 184 (Bankr.E.D.Cal. 1988). Although THC Financial Corp. and Emco Enterprises arose in the context of § 327 or its predecessor, the reasoning of those cases is equally applicable to requests for compensation under § 503. Therefore, the court will analyze whether National Union has provided a satisfactory explanation for its failure to obtain prior court approval and whether its services significantly benefitted the bankruptcy estate.
It is impossible for this court to second guess at this late date the reasoning that impelled the prior chapter 7 trustee to pursue the crossclaim along with the debtor rather than to pursue the fraudulent transfer action with National Union. In retrospect, it was the wrong decision. Whether it was a decision that a prudent chapter 7 trustee should have made at the time is impossible, based on the record before the court, to determine. Nonetheless, National Union did pursue the fraudulent transfer action for the benefit of the estate and, under the circumstances, the court finds that the former trustee's declining to pursue the action is a satisfactory explanation. The record is replete with evidence of the hostility between the Garbers and National Union. The prior chapter 7 trustee chose to throw in her lot with the Garbers in the district court litigation. This is satisfactory explanation for National Union's not obtaining prior court approval.
National Union did provide a substantial benefit to the estate through the recovery in the fraudulent transfer action. Absent National Union's efforts, this would indeed be a no asset case, and no creditors would recover anything.
The Garbers and the Trustee filed a Motion for Reconsideration and New Trial. The Motion for Reconsideration and New Trial was heard by Judge Rimel on September 10, 2003. On December 17, 2003, Judge Rimel issued the following Findings of Fact and Conclusions of Law Regarding Motion of Debtors for New Trial and Reconsideration of Order (hereinafter referred to as the December 17 Order), ruling in pertinent part:
The third ground for the motion is that the court's ruling constitutes a manifest error of law. According to the debtors, the court used the wrong standard for retroactive approval of employment of attorneys. The debtors assert that the court did not utilize the exceptional circumstances standard required by the Ninth Circuit. Instead, the debtors argue that the court held that a `satisfactory explanation' for failure to obtain court authorization was enough.
. . .
Manifest Error of Law.
. . .
The court's findings of fact and conclusions of law appropriately stated the standard for approval of fees to applicants who failed to obtain prior court approval for their services. As the Ninth Circuit has stated:
`In this circuit, a retroactive award of fees for services rendered without court approval is not necessarily barred. [citation omitted] A court may exercise its discretion to award fees for valuable but unauthorized services. [citation omitted] . . . [S]uch awards should be limited to exceptional circumstances where an applicant can show both a satisfactory explanation for the failure to receive prior judicial approval and that he or she has benefitted the bankrupt estate in some significant manner.'
In re THC Financial Corp., 837 F.2d 389, 392 (9th Cir. 1988). This is the standard that the court utilized.
Another relevant case is In re Gutterman, 239 B.R. 828 (Bankr.N.D.Cal. 1999). In that case, the United States Trustee had moved for reconsideration of an order of the bankruptcy court allowing employment of counsel on a nunc pro tunc basis. The court denied the United States Trustee's motion. The trustee in that case had retained Kornfield. Through inadvertence, Kornfield had failed to file his application to be employed. Kornfield provided valuable services to the bankruptcy estate. The bankruptcy court, in denying the United States Trustee's motion for reconsideration, found it important to analyze whether the estate had suffered any prejudice as a result of the delay.
`Based on [Pioneer Inv. Services Co. v. Brunswick Assocs. Ltd. Partnership, 507 U.S. 380 (1993), the Court concludes that, in determining whether a professional applying for nunc pro tunc employment has provided a satisfactory explanation for its delay, the Court may consider not just the reason for the delay but also the prejudice (or lack thereof) to the estate as a result of the delay.'Gutterman, at 831.
Here, the failure of National Union to obtain approval to pursue the fraudulent transfer action resulted in no prejudice to the estate.
In examining whether exceptional circumstances exist, it is appropriate for the court to consider the equities involved. In re Atkine, 69 F.3d 970, 973 (9th Cir. 1995).
The debtors' argument here focuses on the fact that the court's findings of fact and conclusions of law specifically analyze the two prongs of the THC Financial Corp. test — a satisfactory explanation for failure to obtain prior court approval and that the services significantly benefitted the bankruptcy estate. It is these two prongs that must be satisfied for exceptional circumstances to be shown. Also relevant, as expressed in the Gutterman and Atkins decisions, are the factors of whether any prejudice arose from failure to seek prior court approval and the other equities in the case. Here, no prejudice arose from National Union's failure to seek court approval, and the equities argue in favor of National Union being allowed an administrative expense claim.
The Garbers again filed a Motion for Reconsideration and New Trial which was heard by Judge Rimel on January 14, 2004. At the January 14, 2004 hearing, the following occurred:
MR. HERTZ: . . . Your Honor, I really regret having to file a second motion like this, but as you understand — what I understand your decision on December 17th is that it varies from the decision previously made.
And the argument that there was a lack of prejudice to the estate in the failure of National Union to seek authority was never argued by anyone, and there is no evidence. At least that's our position.
But briefly, Your Honor, you start off with 503(b)(2). It requires authorization in advance of services. And that's clear, it's a failure to obtain the authorization in advance.
The applicant has the burden of showing the exceptional circumstances which excuses pre-service authorization. Acceptable services can be shown by showing substantial benefits to the estate plus — and a satisfactory explanation. That satisfactory explanation must be given by the applicant, not by the Court.
Atkins, 69 F.3d 970, 974 says `to establish the presence of exceptional circumstances, professionals seeking retroactive approval must satisfy two requirements. They must satisfactorily explain their failure to receive prior judicial approval.'
The applicant has never given an explanation for their failure to comply with the court back in 1996, 1997. That the trustee and National Union were at loggerheads was suggested by the Court in its first opinion. It was not suggested by the other party. And there's no evidence that National Union was dissuaded from following the law by anything that the trustee did or did not do.
And, in fact, the time record says — and National Union seems to suggest in its last argument before the court that it made a considered decision not to apply, for whatever purposes it may have had for doing so, so there's no explanation.
Well, the court apparently considered that argument and spent a considerable amount of time before issuing its December 17th opinion.
And in that December 17th opinion, the Court does not really address the issue which we raised. And the Court says, in effect, here the failure of National Union to obtain approval to pursue the fraudulent transfer action resulted in no prejudice to the estate. And the Court relies on a case, which although we cited it, we did not cite it for that purpose.
Secondly, nobody argued lack of prejudice. the Court simply finds that there was no prejudice. Now, there's nothing in the opinion on December 17th that points to actual facts that show there was no prejudice.
And we have pointed out, paragraphs 24 to 26 of our motion, that there was likely to have been prejudice. In fact, we don't have the burden of showing lack of prejudice. We don't have to show prejudice. We don't have to show anything. We're simply showing that there's likely to have been prejudice, and there's no evidence of lack of prejudice.
So the burden is not on us. The burden is on the other party.
And Mr. Reddie, in his response, does not show any lack of prejudice. He doesn't even argue about it, as far as I can tell.
So that is our position, Your Honor. We don't see how the Court can arrive at the conclusion that it did, and, therefore, it's a manifest error of law, there being no evidence whatsoever on either of these critical issues.
THE COURT: Thank you. Mr. Reddie?
MR. REDDIE: Your Honor, I didn't hear anything new that wasn't in his papers, and I don't have anything to add at this point.
THE COURT: Thank you. I'm going to rule now. This is a motion that was brought on an emergency basis for reconsideration because, as Mr. Hertz observed, the time — the second motion for reconsideration does not toll the period to appeal.
I've read the motion, I've read the arguments in support of the motion, I've read the opposition, I've reread both findings of fact and conclusions of law, and I'm not persuaded that there was a manifest error of law, and I'm not persuaded that anything new is argued here.
I will say that to the extent Mr. Hertz is concerned that lack of prejudice is raised for the first time here, my ruling does not require the lack of prejudice statement to stand on its own. I don't think there is any evidence of any prejudice to the estate, but that's not the — is not the primary reason why I made my ruling. It's an add-on reason, and I think the findings bear that out.
I think if the parties — if the party who is aggrieved here is unhappy with the ruling, as the Garbers obviously are, they will have to take that to the next court.
In any event, your motion is denied.
C. STANDARD OF REVIEW.
A bankruptcy court's entry of a nunc pro tunc approval is reviewed for abuse of discretion or erroneous application of law.In re Atkins, 69 F.3d 970, 973 (9th Cir. 1995). An abuse of discretion is "a plain error, discretion exercised to an end not justified by the evidence, a judgment that is clearly against the logic and effect of the facts as are found." Int'l Jensen, Inc. V. Metrosound U.S.A., Inc., 4 F.3d 819, 822 (9th Cir. 1993). When reviewing for abuse of discretion, the reviewing court cannot reverse unless if has a "`definite and firm conviction that the court below committed a clear error of judgment in the conclusion it reached. . . .'" DaRonde v. Shirley (In re Shirley), 134 B.R. 940, 943 (9th Cir.BAP 1992). As long as findings are plausible in light of the record viewed in its entirety, a reviewing court may not reverse even if convinced it would have reached a different result. Wardley Int'l Bank, Inc. v. Nasipit Bay Vessel, 841 F.2d 259, 262 n. 1 (9th Cir. 1988).
D. Merits of Appeal.
Allowance of administrative expense claims are governed by 11 U.S.C. § 503. Section 503 provides in pertinent part:
(a) 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.
(b) After notice and a hearing, there shall be allowed administrative expenses . . . including —
. . .
(3) the actual, necessary expenses . . . incurred by —
. . .
(B) a creditor that recovers, after the court's approval, for the benefit of the estate any property transferred or concealed by the debtor;
. . .
An administrative expense allowed under Section 503 entitles the holder to priority in distribution. The burden of proving an entitlement to an administrative expense is on the claimant. While the Bankruptcy Court has broad discretion to grant administrative expense requests, it is required to construe § 503(b) narrowly to keep costs to a minimum and preserve the limited assets of the bankruptcy estate for the benefit of unsecured creditors. In re Central Idaho Forest Products, 317 B.R. 150, 155 (Bankr.Idaho 2004).
1. National Union's Claim That It Obtained Prior Court Approval.
As noted, National Union argued to the Bankruptcy Court that it's motion for relief from the automatic stay constituted approval by the Bankruptcy Court to proceed with the Fraudulent Conveyance Action for the benefit of the estate. In the June 19, 2003 Order, Judge Rimel rejected National Union's position.
In its opposition brief to this appeal, National Union argues that it obtained prior court approval, contending:
In light of the fact that National Union was proceeding on its own, and the trustee was not prepared to pursue claims against the Garbers and Ting, that request for relief from stay clearly constituted a request for court approval to proceed with an action that would benefit the estate . . . In this instance, National Union's noticed motion seeking relief from the stay so that it could pursue an action that would benefit the estate clearly conforms to the spirit and intent of the requirement for court approval. Given the statute's silence on the method of gaining court approval, it is certainly within the Court's discretion to find that National Union's motion for relief from stay fulfilled that requirement.
Although no objection to the court's consideration of this issue is made by the Garbers, it is noted that National Union did not file a notice of appeal from Judge Rimel's decision nor did National Union file a cross-appeal. From the court's research, this court has the discretion to consider this issue notwithstanding the absence of a notice of appeal by National Union. See In re Hessco Industries, Inc., 295 B.R. 372, 376-377 (9th Cir.BAP 2003), citing Mendocino Environmental Center v. Mendocino County, 192 F.3d 1283, 1297-1298 (9th Cir. 1999). In Mendocino Environmental Center, the Ninth Circuit ruled that a notice of cross-appeal is a rule of practice that can be waived at the court's discretion, rather than a jurisdictional requirement. 192 F.3d at 1298. The Ninth Circuit further ruled:
In deciding whether to allow a cross-appeal that has not been properly noticed, courts have considered factors such as the interrelatedness of the issues on appeal and cross-appeal (particularly whether they involve the same parties), whether a notice of cross-appeal was merely late or not filed at all, whether the nature of the district court opinion should have put the appellee on notice of the need to file a cross-appeal, [and] the extent of any prejudice to the appellant caused by the absence of notice. . . .192 F.3d at 1299. Looking to these factors, the court will consider the issue raised by National Union. The parties are the same, the issues are interrelated, National Union could not have filed an appeal (except concerning the amount of the administrative expense claim allowed), the Garbers have not objected to the court's consideration of the issue and, because the Garbers were able to respond to the issue in their reply brief, will not be prejudiced by the court's review of the issue.
The court affirm Judge Rimel's ruling. The court has reviewed the record in connection with National Union's motion for relief from the stay to proceed with the Fraudulent Conveyance Action. Although the court is not provided with a copy of National Union's motion for relief from stay, the court is provided with the transcript of the hearing on the motion for relief from stay. There is no discussion at that hearing that National Union was seeking relief from stay in order to proceed with the Fraudulent Conveyance Action for the benefit of the estate and there is no discussion of Section 503. At that hearing on June 3, 1996, National Union contended as follows:
MR. WALTER: . . . As I stated what we are seeking here today is relief from the automatic stay so that pending litigation can go forward. As the record will reflect it is actually a fairly common fact pattern, National Union brought an action against the debtor seeking to establish a claim and was granted a judgment by the district court some years ago. Thereafter, National Union learned how the certain transfers from the debtor to the sister of Mrs. Garber. National Union thereafter filed a fraudulent transfer suit in the district court. The debtors filed Chapter 7 and thereafter National Union filed a second 523 and 727 actions. Then there was a lot of procedural wrangling, discovery disputes, a motion for summary judgment was filed by the debtors and denied. At the same time the debtors filed a cross-complaint against National Union in the fraudulent transfer action that was pending in the district court. National Union moved to dismiss that cross-complaint, the cross-complaint was dismissed and the court, the district court withdrew the reference of the 523 and 727 actions to the district court where it now sits. The Garbers have appealed that matter on a number of different grounds. Basically we are taking the position that there is no stay and that we can go to the district court and seek to have the matter set for trial. The debtors have on several occasions raised questions and insisted that we have to get relief from stay first. So out of an abundance of caution we brought this motion seeking relief to the extent that it is needed to allow the district court to proceed.
. . .
MR. WALTER: Your Honor, just so there is no confusion, there are two actions.
MR. HERTZ: Yes, and this is the problem.
MR. WALTER: There is the withdrawn matter the reference has been withdrawn as to the 523 and 727 action but there is still pending the fraudulent transfer action as to which there may well be a stay. I am only asking for permission to proceed with both —
THE COURT: Okay. I didn't understand that. MR. HERTZ: Okay. Now we have a problem.
THE COURT: What is the problem?
MR. HERTZ: The problem is that I don't want them to go ahead with a case which was withdrawn improperly and combined it with a case that is a pre-petition case in which I wasn't even involved. That is the problem. If the Court rejects — I think, Your Honor, let me say that I think a fair resolve of this case, a fair result since we didn't even have the opportunity to argue the withdrawal reference before Judge Coyle because we were never even given notice. I was not given notice at any time.
THE COURT: It's irrelevant. He withdrew it. MR. HERTZ: That's fine.
THE COURT: Your complaint is with the district court.
MR. HERTZ: And that is exactly it and I agree with that totally. I think what these folks should do is go to the district court and ask the district court to solve the problem if there is a problem.
THE COURT: And does he need relief from stay to do that?
MR. HERTZ: No. We can go to the district court, we can make a motion for withdrawal with whatever is necessary so that he can get relief from the district court, the district court judge is perfectly capable of entering a relief from stay order if he wants to, but at least we get an opportunity at that time to argue which we never had a chance to do. And I think that is a fair result. Otherwise, you are getting half of a case here without really understanding all the things that are going on and I just think that that is a fair way for this to be handled.
THE COURT: Mr. Walter?
MR. WALTER: . . . This is not really a matter of fairness. This is an attempt by the debtor to obtain a stay pending appeal without going through that process. What I think would be a fair way to proceed here is for Your Honor to lift the stay to the extent that there is a stay, let us make the motion in the district court to set the matter for trial and they can raise any arguments that they wish there, but —
THE COURT: Why would you need permission to set the matter for trial there if it is already there?
MR. WALTER: Because there is a fraudulent transfer action as to which no stay has been lifted yet. We were suing the debtor before filing and there has never been any relief from stay as to that bit of litigation.
THE COURT: But the district court gave you that and combine the cases so that it does not have to be partly heard here, which is not going to be, and partly heard in the district court.
MR. WALTER: And we are just asking Your Honor to confirm that to the extent that there is a stay the district court can determine the outcome of the case.
THE COURT: Okay. My order is that there is no stay here because the case has been withdrawn.
MR. WALTER: As to any litigation —
THE COURT: As to any of these matters.
By Order filed on June 18, 1996, Judge Ford ruled in pertinent part:
1. There is no stay which precludes Movant from proceeding to trial on its adversary proceeding to deny Debtors' discharge or for denial of dischargeability (Adv. Proc. No. 94-1361) nor as to the Complaint to Avoid Fraudulent Transfers (Case No. CV-F-94-5414-REC), each of which is pending in the United States District Court. The reference of the adversary proceeding has been withdrawn and the Complaint was originally commenced in the U.S. District Court.
2. The Motion be, and hereby is, granted to the extent required to proceed with the said litigation.
As the Garbers contend, there is no evidence that a request for authorization under Section 503(b)(3)(B) was made to Judge Ford and there is no indication in the record from which such an intent can be inferred. Therefore, Judge Rimel's denial of National Union's administrative expenses claim on this ground was not error.
2. The Garbers' Claim That National Union Failed to Provide Evidence Explaining It's Failure to Obtain Timely Approval.
The Garbers argue that Judge Rimel's authorization of National Union's administrative expense claim nunc pro tunc is error because National Union failed to provide any evidence establishing the reason for National Union's failure to seek prior approval from the Bankruptcy Court.
In In re THC Financial Corp., 837 F.2d 389, 392 (9th Cir. 1988), the Ninth Circuit held:
In this circuit, a retroactive award of fees for services rendered without court approval is not necessarily barred . . . A court may exercise its discretion to award fees for valuable but unauthorized services. . . .
The district court concluded correctly that such awards should be limited to exceptional circumstances where an applicant can show both a satisfactory explanation for the failure to receive prior judicial approval and that he or she has benefitted the bankrupt estate in some significant manner.
In In re Atkins, supra, 69 F.3d at 974, the Ninth Circuit again ruled:
To establish the presence of exceptional circumstances, professionals seeking retroactive approval must satisfy two requirements: they must (1) satisfactorily explain their failure to receive prior judicial approval; and (2) demonstrate that their services benefitted the bankrupt estate in some significant manner.
The Garbers argue that Judge Rimel abused her discretion in approving National Union's administrative expense claim because no evidence has been provided by National Union establishing a satisfactory reason for failing to obtain prior judicial approval for the attorneys' fees incurred in the Fraudulent Conveyance Action. The Garbers are objecting that there is no evidence by way of declaration from counsel for National Union which actually states that National Union did not seek prior approval under Section 503 because the Trustee rejected National Union's offer to act as special counsel to litigate the Fraudulent Conveyance Action, elected to litigate with the Garbers' their Counterclaim and Third Party Complaint, and, after the Garbers' Counterclaim and Third Party Complaint were dismissed and that dismissal affirmed on appeal, conditioned the Trustee's request that National Union act as special counsel on National Union waiving its secured claim and its rights under the abstracts of judgment, thereby resulting in National Union having an unsecured claim. Although all of this evidence was before Judge Rimel, the Garbers essentially contend that Judge Rimel's discretion does not extend to inferring the reason for National Union's failure to seek prior approval from this evidence. In other words, absent a declaration or contemporaneous explanation, the Garbers argue that Judge Rimel's finding that National Union provided a satisfactory explanation for the failure to seek prior approval is unsupported by any evidence. The Garbers argue that National Union "has presented no admissible evidence that it either considered and rejected proceeding under Section 503(b)(3)(B) or failed to consider it."
The Garbers are contending that the Bankruptcy Court is not permitted to draw inferences from the evidence presented to it. The court is aware of no authority precluding a court from drawing reasonable inferences from the evidence and, in exercising discretion, reaching a conclusion based on those inferences. As Judge Rimel ruled in three instances, she was satisfied with the explanation of the reason why National Union did not seek prior court approval. Consequently, even though there was no "smoking gun", so to speak, the evidence considered by the Bankruptcy Court supports the inference that she drew from it.
The Garbers further argue that Judge Rimel abused her discretion when, in denying their first motion for reconsideration, she "raised (on its own and without any points and authorities or statement from NU) the case of In re Gutterman, 239 B.R. 828 (Bankr.N.D.Cal. 1999)." The Garbers admit that they cited In re Gutterman to the Bankruptcy Court in their first motion for reconsideration but assert that the case was cited in a footnote with a group of cases discussing the tests for "exceptional circumstances". The Garbers complain that, because neither National Union nor they suggested that "lack of prejudice" to the estate excuses the party requesting nunc pro tunc approval from "providing any explanation". The Garbers contend:
Because the Court raised the theory of `no prejudice' on its own, neither Debtors nor the Trustee had any opportunity to refute it. The only evidence on either side is the evidence incidentally in the record. The lower court erred in proceeding on a theory which no party even discussed without allowing either party to adduce evidence in response. In doing so, the court abused any discretion it might have to consider its own theory.
Because Judge Rimel's reference to Gutterman was made in response to the citation of the case to her by the Garbers, Judge Rimel cannot be faulted for reviewing the case and considering it. More importantly, as Judge Rimel notes in denying the Garbers' second motion for reconsideration, her reference toGutterman was made in the context of denying the Garbers' first motion for reconsideration. In other words, Judge Rimel did not grant National Union's application for administrative expensesnunc pro tunc because Judge Rimel sua sponte concluded that the estate was not prejudiced. Rather, as she explained in denying the second motion for reconsideration, the lack of prejudice was just another reason why her initial ruling would not be reconsidered, i.e., she was standing by her original ruling. Therefore, the Garbers' contention that Judge Rimel abused her discretion by relying sua sponte on a "theory" of lack of prejudice without giving the Garbers the opportunity to contest such a finding is not a basis for reversal of Judge Rimel's decision to grant National Union's application because that finding was not a basis for granting the application. Although the Garbers argue at length that National Union's failure to obtain prior approval for the administrative expenses prejudiced the estate, those arguments are not relevant to the resolution of this appeal because, as noted, Judge Rimel made the finding in denying a motion for reconsideration.
At oral argument before this court, the Garbers referred the court to In re Morad, 328 B.R. 264 (1st Cir. BAP 2005). The Garbers appeared to argue, based on Morad, that National Union's claim for administrative expenses should be denied because the Fraudulent Conveyance Action was commenced before the Garbers filed the bankruptcy petition. Because In re Morad was cited for the first time at oral argument and because the Garbers' argument based on In re Morad was not previously made to the Bankruptcy Court or to this court, the court does not consider it in resolving this appeal.
ACCORDINGLY:
1. The parties' respective motions for sanctions are denied.
2. Appellant's appeal is denied and the rulings of the Bankruptcy Court affirmed.
IT IS SO ORDERED.