Opinion
NOT FOR PUBLICATION
Argued and Submitted at Orange, California: January 25, 2008
Appeal from the United States Bankruptcy Court for the Central District of California. Honorable Ernest M. Robles, Bankruptcy Judge, Presiding. Bk. No. LA 02-17320-ER.
Before: DUNN, MONTALI and PAPPAS, Bankruptcy Judges. PAPPAS, Bankruptcy Judge, concurring.
MEMORANDUM
The debtors, Won Ho Song and Eun Ja Song (" debtors"), appeal the bankruptcy court's order granting the interim fee application of Sung Bae Park (" Park") and Shapero, Shapero & Hurst (" SS& H"). Over the debtors' objections, the bankruptcy court approved $2.5 million in fees and $71,003.66 in costs for services rendered by Park and SS& H in behalf of the chapter 7 trustee (" Trustee") as special counsel.
Unless otherwise indicated, all chapter, section and rule references are to the Bankruptcy Code, 11 U.S.C. § § 101-1330, and to the Federal Rules of Bankruptcy Procedure, Rules 1001-9037, as enacted and promulgated prior to the effective date (October 17, 2005) of the provisions of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Pub. L. 109-8, April 20, 2005, 119 Stat. 23.
For the reasons set forth below, we AFFIRM the bankruptcy court's award of fees and REVERSE the bankruptcy court's award of costs.
I. FACTS
A. The debtors' prepetition state court action
Prior to their bankruptcy filing, the debtors filed a claim with Cigna Property & Casualty Insurance Company (" Cigna") for losses sustained in a fire that substantially damaged the debtors' shopping center. Cigna denied their claim, asserting that the debtors started the fire.
The debtors later lost the shopping center to foreclosure.
On April 26, 1996, Won Ho Song (" Song") filed a state court action against Cigna for denying the claim (" State Court Action").
Joseph M. Fredrics (" Fredrics") and Mazursky, Schwartz & Angelo (" MS& A") initially represented Song in the State Court Action. MS& A eventually withdrew. Song later employed Park.
While the State Court Action was pending, a criminal complaint was filed against the debtors for felony arson, grand theft and insurance fraud (" Criminal Action"). Song pleaded no contest to the charges of grand theft and insurance fraud. Song later filed a motion to withdraw his pleas, which was denied. On July 9, 1999, Song was sentenced to two years imprisonment and was ordered to pay Cigna $521,375 in restitution in the Criminal Action.
The charges against Eun Ja Song were dropped.
One month later, Cigna moved for summary judgment in the State Court Action on the ground that Song's plea to insurance fraud in the Criminal Action voided the insurance policy. The state trial court granted summary judgment in favor of Cigna. Song appealed.
Park became Song's attorney when Song moved to withdraw his pleas in the Criminal Action. He then represented Song in the appeal of the summary judgment in the State Court Action.
Park also represented the debtors in a matter involving Golden Eagle Insurance Company (" Golden Eagle Matter"). The record is not clear, however, as to what the Golden Eagle Matter entailed. According to Song, Park represented the debtors in administrative hearings and appeals against Golden Eagle Insurance Company for fire damages to the shopping center. According to Park, he represented debtor Eun Ja Song in a conservatorship hearing involving Golden Eagle Insurance Company.
B. The debtors' bankruptcy case
While the appeal of the summary judgment was pending, the debtors, acting pro se, filed their voluntary chapter 7 petition on March 13, 2002. They did not include the State Court Action as an asset in their schedules. The debtors received their discharge on June 24, 2002. The case closed as a no asset case on July 12, 2002.
One week later, the state appellate court reversed summary judgment in favor of Cigna. On December 17, 2002, the debtors moved to reopen their bankruptcy case to add the State Court Action to their schedules. On the same day, Park substituted in as bankruptcy counsel for the debtors. The bankruptcy court entered an order reopening the case on April 4, 2003.
1. The chapter 7 trustee's application to employ Park & SS& H as special counsel
On August 18, 2003, the Trustee filed an application to employ (" Employment Application") Park and SS& H as his special counsel (collectively, " Special Counsel") to prosecute the State Court Action. The debtors were served with a copy of the Employment Application.
The captions on both the notice of the Employment Application (" Employment Application Notice") and the Employment Application cited § 327(a), instead of § 327(e), as the statutory basis for employment. However, both the Employment Application Notice and the Employment Application explicitly stated that the Trustee sought to employ Park and SS& H to act as his special counsel, as of June 17, 2003, and that " [i]t [was] necessary for [the Trustee] to employ [them] . . . to prosecute [the State Court Action]."
The Employment Application also stated that " [a]uthority for this application comes from 11 U.S.C. § 327(a) and 11 U.S.C. § 328(a) which allows for the employment of professional persons on any reasonable terms and conditions of employment."
The Employment Application Notice and the Employment Application disclosed that Special Counsel was to be paid on a contingent basis. Specifically, the Employment Application disclosed that Special Counsel did not receive a retainer and would not be paid at an hourly rate or recover costs. Instead, Special Counsel would be paid, subject to court approval, a contingent fee of 50% of any funds collected in behalf of the bankruptcy estate. The Employment Application also disclosed that Special Counsel would be compensated only as approved by the bankruptcy court. The Employment Application Notice made no mention as to recovery of costs.
The Employment Application included statements of disinterestedness from E. Rich Hurst, a principal of SS& H (" Hurst Statement"), and from Park (" Park Statement"). The Hurst Statement and the Park Statement (collectively, " Statements") both disclosed that Special Counsel " [would] not be paid at an hourly rate or recover costs[, ]" but would be paid a contingency fee of 50% of the funds recovered in the State Court Action. (Emphasis added.)
Per the Statements, Park and Hurst asserted that they were disinterested parties in the bankruptcy case with no existing conflicts of interest, as they did not represent any persons or interests, past or present, adverse to the interests of the debtors or the bankruptcy estate.
Park and Hurst also set forth in their respective Statements an account of all of their connections with the debtors, which Park and Hurst asserted was a complete account. Hurst disclosed that SS& H had no connections with the debtors. Park disclosed that he was attorney of record for the debtors in the bankruptcy case. Park also disclosed that he had " represented [Song] in the State Court Action, on appeal, and . . . in related criminal proceedings." Park did not mention the Golden Eagle Matter.
On August 29, 2003, the bankruptcy court entered the Employment Application Order. The Employment Application Order authorized the Trustee " to employ the law firm of Shapero, Shapero & Hurst and Sung Bae Park to act as his special bankruptcy counsel as of June 17, 2003, at the expense of the Estate, under the contingency fee arrangement as described in the Employment Application . . . with the amount of compensation to be determined by [the bankruptcy court] upon proper application(s) therefore."
The debtors did not contest either the Employment Application or the Employment Application Order. No amendments to the Employment Application or Employment Application Order were ever proposed, noticed and/or adopted.
On September 12, 2006, the debtors filed a substitution of attorney, replacing Park with another attorney. The substitution of attorney reflected that Park consented to the substitution on August 22, 2006.
The debtors subsequently filed two more substitutions of counsel. Jaenam Coe currently is attorney of record for the debtors and is representing the debtors in the appeal before us.
2. The interim fee application of Park and SS& H
The State Court Action proceeded to a seven-week jury trial. Although prior counsel had performed services with respect to preparing the State Court Action for trial, Special Counsel conducted further extensive discovery, retained and prepared expert witnesses, and briefed and argued approximately 35 motions in limine over a period in excess of two years prior to the trial, at which the jury rendered a verdict in Song's favor. On December 21, 2005, a judgment was entered against Cigna in the amount of approximately $6.2 million. Cigna appealed.
On July 13, 2006, the Trustee and Cigna entered into mediation and settled the State Court Action. Under the terms of the settlement, Cigna agreed to pay the Trustee $5 million in cash and to cancel as satisfied the restitution award it obtained against Song in the Criminal Action. Song signed the settlement agreement.
On September 19, 2006, the Trustee filed a motion for approval of the settlement. The debtors opposed, arguing that, as they obtained judgment against Cigna, they intended to move to dismiss their bankruptcy case and to pay their creditors in full with proceeds from the judgment. After notice and a hearing, the bankruptcy court entered an order approving the settlement (" Settlement Order") over the debtors' opposition. The debtors did not appeal the Settlement Order.
The debtors filed their opposition to the Trustee's motion to approve the settlement and the motion to dismiss on the same day. In the motion to dismiss, the debtors advanced the same arguments as those given in their opposition to the Trustee's motion to approve the settlement. After holding a separate hearing on the motion to dismiss, the bankruptcy court denied the motion to dismiss.
On December 19, 2006, Special Counsel filed their interim fee application (" Fee Application"), requesting $2,943,665 in fees and $71,003.66 in costs. Special Counsel calculated the fees by including 50% of the restitution award obtained by Cigna in the Criminal Action and waived by Cigna as part of the settlement, with 50% of the $5 million cash settlement proceeds.
Although the original restitution obligation was $521,375, Special Counsel added interest, which increased the amount of the restitution obligation to $887,331.
The Fee Application included, as an exhibit, a copy of the legal services agreement between the Trustee and Special Counsel (" Service Agreement"). The Service Agreement, dated and signed by the Trustee on September 15, 2003, after the Employment Application Order was entered, provided that the attorney's fees would be 50% of the recovery - that is, the total amount received, including attorney's fees, after reduction for costs. It further provided that the Trustee was to pay all costs in connection with Special Counsel's representation of the Trustee in the State Court Action. The Fee Application also included, as an exhibit, a breakdown of the costs incurred by Special Counsel in prosecuting the State Court Action.
The Service Agreement described costs as court and arbitration filing fees, deposition costs, expert fees and expenses, investigation costs, computer legal research, and other similar expenses.
The debtors opposed both the fees and costs requested by Special Counsel in the Fee Application.
The debtors filed an opposition (" Original Opposition"), a supplemental opposition (" Supplemental Opposition") and a second supplemental opposition (" Second Supplemental Opposition")(collectively, " Oppositions") to the Fee Application. Special counsel filed a reply to the debtors' opposition (" Reply to Opposition") and a reply to the debtors' supplemental and second supplemental oppositions (" Reply to Supplemental Oppositions").
With respect to the issue of fees, the debtors advanced several arguments. The debtors contested the inclusion of 50% of the restitution obligation in the calculation of fees, arguing that the restitution waiver was not a part of the recovery as described in the Fee Application.
The debtors also argued that the bankruptcy court should deny Special Counsel's fees on the basis that Special Counsel had a conflict of interest which disqualified Special Counsel from representing the Trustee. Specifically, the debtors averred that Park was not disinterested and held interests adverse to the debtors when he became employed as special counsel to the Trustee while still employed as attorney for the debtors.
The debtors asserted that, under § 327(c), a bankruptcy court may deny the fees of a professional if, during employment, that professional was not a disinterested person, or held an interest adverse to the interests of the estate. Park was no longer a disinterested person once he began representing the Trustee as special counsel. Specifically, because Park was to receive a substantial contingent fee as the Trustee's special counsel, he favored the Trustee's interests over the debtors' interests. The debtors cited a number of examples of Park's lack of disinterestedness. For instance, the debtors claimed, Park pushed Song to sign on to the settlement and " agreed, " along with SS& H, to reduce the fees to $2.25 million to induce Song to sign on to the settlement.
According to Song, Special Counsel agreed to reduce their fees by $250,000 to defray the fees and costs of Fredrics and MS& A, as well as to induce Song to agree to the settlement.
The debtors further contended that, because the Trustee held an interest in conflict with the debtors, Special Counsel represented an adverse interest in serving as attorneys for the Trustee. The debtors asserted that the Trustee and the debtors had conflicting interests in the State Court Action. According to the debtors, the Trustee merely wanted sufficient funds to pay creditors; he had no interest in obtaining any additional amounts to provide the debtors with a surplus. The debtors, on the other hand, wanted to obtain as large a recovery as possible.
The debtors also claimed that Rule 2014 required an attorney to disclose fully all of his or her connections with the debtor in an application for employment for purposes of determining whether the attorney should be disqualified. Here, the debtors pointed out, Park did not fully disclose all of his connections with the debtors in the Employment Application by omitting his prior representation of the debtors in the Golden Eagle Matter. Park conceded this point, admitting in his declaration attached to the Supplemental Reply that he did not disclose his representation of debtor Eun Ja Song in the Golden Eagle Matter in the Employment Application.
Rule 2014(a) provides, in relevant part:
With respect to the issue of costs, the debtors essentially argued that they were unaware that Special Counsel would recover $71,003.66 in costs, in addition to their contingent fee. The debtors understood that the reduced fees agreed upon by Special Counsel at mediation would be the total amount that Special Counsel would receive for services in the State Court Action. According to the debtors, Special Counsel never mentioned recovery of costs at the mediation. The debtors further contended in their Oppositions that Special Counsel neither listed nor explained the costs incurred in the Fee Application.
The debtors further claimed that, when the Trustee moved to employ Special Counsel, " in making the application, [they were] deceived of the terms of the fee agreement by [their] bankruptcy attorney, Mr. Park" and discovered the " actual terms of the agreement much later." The debtors asserted that " [t]he fee application now [was] totally contrary to [the] agreed deal . . . [and] the fee application ask[ed] for numbers [they had] never seen or been told [about] before."
The debtors made this argument in the Supplemental Declaration of Won Ho Song attached to the Supplemental Opposition. In explicitly referencing the declarations (" Supplemental Declarations") attached to the Supplemental Opposition and the Second Supplemental Opposition, Song made them a part of his Oppositions. Per the Supplemental Declarations, Song filed them " to point out factual errors in the [Fee Application] . . . and to further supplement" the Supplemental Opposition and the Second Supplemental Opposition.
At the January 10, 2007 hearing on the Oppositions to the Fee Application, the bankruptcy court found that the restitution waiver was not part of the monies collected, as described in the Employment Application, and the cancellation of the restitution obligation simply was " an attempt to avoid further complications of having to administer a proof of claim in the bankruptcy estate." Tr. of January 10, 2007 Hr'g, 2:11-14. Accordingly, the bankruptcy court did not award fees to Special Counsel based on the restitution waiver.
The bankruptcy court rejected the debtors' assertion that Special Counsel had reduced their fees to induce Song to agree to the settlement on the ground that the debtors should have raised the issue at the hearing on the Trustee's motion to approve the settlement.
The bankruptcy court then addressed the issue of Park's concurrent representation of the Trustee and the debtors. The bankruptcy court expressed concern that, in light of Tevis v. Wilke, Fleury, Hoffelt, Gould & Birney, LLP (In re Tevis), 347 B.R. 679 (9th Cir. BAP 2006), which the bankruptcy court believed was directly applicable, Park's concurrent representation of the Trustee and the debtors may have created a conflict of interest.
According to the bankruptcy court, Tevis provided, in part, that attorney's fees cannot be awarded where an attorney, who had been employed as general counsel under § 327(a), concurrently represents the trustee and the debtor. By representing both the trustee and the debtor, the attorney had a conflict of interest and was no longer a disinterested person as required under § 327(a). The bankruptcy court asked for further briefing on the issue.
In their brief, the debtors advanced an additional argument. The debtors asserted that Rule 3-310 of the California Rules of Professional Conduct (" California RPC") requires that, before undertaking the representation of another client with a possibly conflicting interest, the attorney must obtain his or her client's informed written consent. Park neither advised the debtors of the potential conflict of interest nor obtained the debtors' written consent when he became special counsel for the Trustee.
The debtors earlier touched on this argument in the Oppositions and elaborated on it in the Debtors' Reply Brief.
After the parties submitted their briefs, the bankruptcy court took the matter under submission. On March 26, 2007, the bankruptcy court issued its Memorandum of Decision (" Memorandum Decision").
In its Memorandum Decision, the bankruptcy noted the debtors' argument regarding Park's alleged violation of the California RPC in failing to inform them of the potential conflict and to obtain the debtors' written waiver of the potential conflict. The bankruptcy court then summarily addressed the issue as to whether Tevis applied to the instant case, given that it involved the employment of general bankruptcy counsel under § 327(a). The bankruptcy court reasoned that, as both § 327(a) and (e) included the requirement that an attorney hold no adverse interest, Tevis applied to the instant case and could " provide guidance herein whether [Special Counsel] was retained pursuant to § 327(a) or § 327(e)." Memorandum Decision, 11:2-9.
The bankruptcy court then focused on the issue concerning Park's concurrent representation of the Trustee and the debtors in light of Tevis. The bankruptcy court found that Tevis, upon closer reading, suggested that the concurrent representation of the trustee and the debtor by an attorney " necessarily and automatically result[s]" in conflict only where the attorney " represents one client in litigation against another of his or her clients, that he or she represents or represented in a related or unrelated matter or matters." Memorandum Decision, 11:10-17, 12:1-2.
Applying this rationale, the bankruptcy court determined that, under the circumstances of the instant case, " [this] automatic disqualification rule for concurrent representation [did] not readily apply." Memorandum Decision, 13:2-7. The bankruptcy court found that Park did not represent any interest adverse to either the Trustee or the debtors because neither the Trustee nor the debtors had sued the other on any matter. Thus, the bankruptcy court concluded, no conflict of interest arose when Park concurrently represented the Trustee and the debtors.
As additional support, the bankruptcy court pointed out the fact that, upon filing for bankruptcy, the Trustee succeeded the debtors as the plaintiff in the State Court Action.
The bankruptcy court further reasoned that the Trustee and the debtors were actually aligned in their interests as to the State Court Action. Both the Trustee and the debtors " wanted to maximize the settlement amount; the Trustee wanted to maximize the return for the estate and the Debtors wanted a surplus for themselves." Memorandum Decision, 13:21-24. The bankruptcy court found that the debtors did not demonstrate that their interest in the State Court Action was adverse to that of the Trustee.
The bankruptcy court did not address the issue of Park's failure to disclose his representation of the debtors in the Golden Eagle Matter.
On April 12, 2007, the bankruptcy court entered its order approving the Fee Application (" Fee Application Order") to the extent of 50% of the monies collected plus costs for the reasons set forth in its Memorandum Decision. The bankruptcy court also authorized the Trustee to make payment upon entry of the Fee Application Order.
On April 4, 2007, the debtors filed a notice of appeal of the Memorandum Decision. On April 23, 2007, the debtors filed a notice of appeal of the Fee Application Order. We consolidated the appeals and decided to review the consolidated appeal, determining the Fee Application Order to be sufficiently final and, to the extent that it was not final, granting leave to appeal.
Our clerk issued an order, questioning the finality of the Fee Application Order. The debtors filed a letter in response, arguing that the Fee Application was for final fees, not interim fees. Our clerk then issued another order, inviting Special Counsel to file a response to the debtors' letter. Special Counsel instead filed a motion to dismiss the appeal, which we denied.
We consolidated the appeal of the Memorandum Decision, BAP No. CC-07-1137, and the appeal of the Fee Application Order, CC-07-1160, under BAP No. CC-07-1137.
II. JURISDICTION
The bankruptcy court had jurisdiction pursuant to 28 U.S.C. § § 1334 and 157(b)(1) and (b)(2)(A) and (O). We have jurisdiction pursuant to 28 U.S.C. § 158.
III. ISSUES
(1) Whether the bankruptcy court abused its discretion in awarding $2.5 million as compensation to Special Counsel.
(2) Whether the bankruptcy court abused its discretion in awarding $71,003.66 in costs to Special Counsel.
IV. STANDARDS OF REVIEW
We review orders on employment, disqualification, and compensation of professionals for abuse of discretion. Movitz v. Baker (In re Triple Star Welding, Inc.), 324 B.R. 778, 788 (9th Cir. BAP 2005); COM-1 Info, Inc. v. Wolkowitz (In re Maximus Computers, Inc.), 278 B.R. 189, 194 (9th Cir. BAP 2002). An abuse of discretion occurs if the bankruptcy court bases its ruling upon an erroneous view of the law or clearly erroneous factual findings. Hansen v. Moore (In re Hansen), 368 B.R. 868, 875 (9th Cir. BAP 2007). To reverse for abuse of discretion, we must have a definite and firm conviction that the bankruptcy court committed a clear error of judgment in the conclusion it reached. Id.
We review de novo the bankruptcy court's legal conclusions. Triple Star Welding, 324 B.R. at 788. We review de novo the bankruptcy court's statutory interpretations. Maximus Computers, 278 B.R. at 194.
V. DISCUSSION
A. The bankruptcy court did not abuse its discretion in awarding fees to Special Counsel
The debtors argue that the bankruptcy court abused its discretion in awarding fees to Special Counsel in light of the conflict of interest between Special Counsel and the debtors. As in their Oppositions before the bankruptcy court, the debtors contend that there was a conflict of interest because: (1) Park was not a disinterested party; and (2) Special Counsel held an interest adverse to the debtors.
1. Park did not need to be a disinterested party to qualify for employment as special counsel under § 327(e)
Section 327 governs the trustee's employment of attorneys and other professionals to represent or aid the trustee in carrying out his or her duties. 3 Collier on Bankruptcy ¶ 327.01 (Alan N. Resnick & Henry J. Sommer, eds., 15th ed. rev. 2007). Section 327(a) authorizes the trustee to employ an attorney for general purposes in administering the bankruptcy estate. 3 Collier on Bankruptcy ¶ 327.02. To qualify for employment under § 327(a), the attorney must be a disinterested person and cannot hold or represent an interest adverse to the estate.
Section 327(a) provides:
Section 327(e), on the other hand, authorizes the trustee to employ, for a specified purpose, other than to represent the trustee generally in fulfilling his duties in the case, an attorney who has represented the debtor. 3 Collier on Bankruptcy ¶ 327.04[9]. Unlike § 327(a), § 327(e) does not require disinterestedness. Film Ventures Int'l, Inc. v. Asher (In re Film Ventures Int'l, Inc.), 75 B.R. 250, 252 (9th Cir. BAP 1987). Rather, § 327(e) only requires that the employment of an attorney be in the best interest of the estate and that the attorney not represent or hold an interest adverse to the debtor or the estate with respect to the matter on which the attorney is to be employed.
Section 327(e) provides:
The debtors assert that the disinterestedness standard under § 327(a), which is not present under § 327(e), applies because the Employment Application set forth § 327(a) as the statutory basis for employment. Due to Park's concurrent representation of the Trustee and the debtors, Park was not a disinterested person for § 327(a) purposes. Because Park was not a disinterested person, the debtors argue, the bankruptcy court should have denied Special Counsel fees pursuant to § 328(c).
Section 328(c) provides:
We disagree. Although the Employment Application and the Employment Application Notice cited § 327(a) as the statutory basis for employment, both the Employment Application and the Employment Application Notice expressly described the limited nature and purpose of the retention of Park and SS& H - to serve as special counsel to prosecute the State Court Action. Also, the Employment Application Order confirmed the limited nature of the retention; the Employment Application Order stated that " the Trustee is hereby authorized to employ the law firm of [SS& H] and [Park] to act as his special bankruptcy counsel . . . at the expense of the Estate, under a contingency fee arrangement as described in the Application[.]" (Emphasis added.) Given the explicit language of the Employment Application and the Employment Application Order, there is no question that the Trustee employed Park and SS& H as special counsel. The standard of disinterestedness under § 327(a) does not apply.
By extension, we disagree with the bankruptcy court that Tevis applies to the instant case. In Tevis, the chapter 7 trustee had employed appellant law firm as his general counsel pursuant to § 327(a). Tevis, 347 B.R. at 685. In Tevis, we stated, in dictum, that had the appellant law firm concurrently represented the trustee as his general counsel and the debtors, it would not have been a disinterested party under § 327(a). Tevis, 347 B.R. at 691. However, Tevis is inapplicable to the instant case because Park and SS& H were employed as special counsel under § 327(e) and were not subject to the disinterestedness standard under § 327(a).
Specifically, we stated that " [i]f [the debtors] had been current clients of Wilke Fleury at the same time that it was counsel for the trustee, it clearly would have failed the 'hold or represent' requirement of § 327(a)." (Emphasis added and in original.)
2. Special Counsel did not have interests adverse to the debtors
The phrase " adverse interest" is not defined in the Bankruptcy Code, Tevis, 347 B.R. at 688, but
[a] generally accepted definition of " adverse interest" is the (1) possession or assertion of an economic interest that would tend to lessen the value of the bankruptcy estate; or (2) possession or assertion of an economic interest that would create either an actual or potential dispute in which the estate is a rival claimant; or (3) possession of a predisposition under circumstances that create a bias against the estate.
Dye v. Brown (In re AFI Holding, Inc.), 355 B.R. 139, 148-49 (9th Cir. BAP 2006). To represent an adverse interest means to serve as an attorney for a party who holds an adverse interest. Tevis, 347 B.R. at 688.
The debtors contend that the substantial surplus they might receive from the State Court Action created a conflict of interest between the debtors and the Trustee. According to the debtors, the debtors' interest in the State Court Action - to obtain as large a recovery as possible - conflicted with the Trustee's interest to obtain a sufficient recovery to pay the allowed claims of creditors. Thus, in acting as attorneys for the Trustee in the State Court Action, Special Counsel was representing an adverse interest.
Under § 726(a)(6), the debtors will receive those estate assets remaining after payment of all allowed claims and administrative fees and expenses.
The debtors rely on In re Mercury, 280 B.R. 35 (Bankr. S.D.N.Y. 2002), aff'd, 122 Fed.Appx. 528 (2d Cir. 2004), in support of their argument. The bankruptcy court in Mercury denied fees and costs to a law firm that had represented the debtors in a state court action and in their bankruptcy case, but later withdrew as bankruptcy counsel for the debtors and became special counsel to the chapter 7 trustee.
The debtors do not demonstrate, however, that either the Trustee or Special Counsel had an adverse interest, as described in Tevis. Nothing in the record indicates that Special Counsel or the Trustee has an economic interest that would lessen the value of the estate or create a dispute in which the estate is a rival claimant to the debtors, or that either Special Counsel or the Trustee has a predisposition under the circumstances for a bias against the debtors. Indeed, under § 704(a)(1), the trustee has a duty to " collect and reduce to money the property of the estate . .., and close such estate as expeditiously as is compatible with the best interests of parties in interest, " including the debtors. See Pereira v. Centel Corp. (In re Argo Commc'ns Corp.), 134 B.R. 776, 783 (Bankr. S.D.N.Y. 1991)(" It is a fundamental concept within the Bankruptcy Code that the trustee is empowered to 'collect and reduce to money the property of the estate . . . [in] the best interest of parties in interest.' These words constitute the trustee's main duty to both the debtor and the creditors to realize from the estate all that is possible for distribution among the creditors.")(citations omitted); Obuchowski v. State of Vermont (In re Henry), 135 B.R. 6, 11 (Bankr. D. Vt. 1991)(citing 4 Collier on Bankruptcy § 704(1) (15th ed. 1987)). See also 6 Collier on Bankruptcy ¶ 704.04[3] at 704-17 (" [T]he trustee has a duty to distribute any surplus to the debtor under section 726, and a failure to perform this duty is treated similarly to a failure to make proper distributions to creditors.").
Under BACPA, § 704(1) has been redesignated as § 704(a)(1).
As the bankruptcy court noted, there was no conflict between the debtors and the Trustee with respect to the State Court Action. Both the debtors and the Trustee wanted the same outcome - to obtain as substantial a recovery as possible. Simply because the debtors and the Trustee have different motives in wanting the same outcome does not signify that they have adverse interests. Thus, as there was no conflict of interest between the debtors and the Trustee with respect to prosecution of the State Court Action, Special Counsel was not representing an adverse interest.
3. The bankruptcy court granted Special Counsel fees in full though it had the discretion to deny the fees for Park's failure to disclose all of his connections with the debtors
The debtors contend that Park's failure to disclose his representation of the debtors in the Golden Eagle Matter constitutes grounds for denial of fees under Rule 2014(a). The debtors assert that failure to comply with Rule 2014(a) is a sanctionable violation, regardless of the harm to the estate and even if the omission was inadvertent. Thus, contrary to Park's assertion, even if his representation of the debtors in the Golden Eagle Matter was irrelevant or trivial, he nonetheless was required to disclose it.
Rule 2014(a) requires a professional to state in the application for employment, to the best of his or her knowledge, " all of [his or her] connections with the debtor." Fed.R.Bankr.P. 2014(a)(West 2002)(emphasis added). The verified statement accompanying the employment application also must set forth the professional's connections with the debtor. Id.
Essentially, Rule 2014(a) imposes on the professional seeking employment " an affirmative duty to disclose all of his [or her] connections with the [d]ebtor." Film Ventures Int'l Inc., 75 B.R. at 252 (emphasis added). See also Mehdipour v. Marcus & Millichap (In re Mehdipour), 202 B.R. 474, 480 (9th Cir. BAP 1996)(" Pursuant to § 327, a professional has a duty to make full, candid and complete disclosure of all facts concerning his transactions with the debtor."); Triple Star Welding, 324 B.R. at 788-89 (" Full disclosure is an essential prerequisite for both employment and compensation.").
" Complete disclosure is for the court's benefit so that it can scrutinize any adverse interests of the attorney." First Interstate Bank, NA v. CIC Inv. Corp. (In re CIC Inv. Corp.), 175 B.R. 52, 54 (9th Cir. BAP 1994). Thus, professionals must disclose all connections with the debtor, no matter how irrelevant or trivial those connections seem. Mehdipour, 202 B.R. at 480.
However, the bankruptcy court has discretion to excuse a failure to disclose. CIC Inv. Corp., 175 B.R. at 54. Once the bankruptcy court acquaints itself with the true facts, it " has considerable discretion in determining to allow all, part or none of the fees and expenses of a properly employed professional." Triple Star Welding, 324 B.R. at 789. See also Film Ventures Int'l Inc., 75 B.R. at 253 (" [T]he trial court is in the best position to resolve disputes over legal fees."). If the bankruptcy court finds no need to take remedial measures, it appropriately can do so in the exercise of its discretion. CIC Inv. Corp., 175 B.R. at 54 (citing Film Ventures Int'l, Inc., 75 B.R. at 253).
Here, Park admitted that he did not disclose his representation of the debtors in the Golden Eagle Matter. Thus, at the time of hearing on the debtors' Oppositions to the Fee Application, the bankruptcy court was aware from the record of Park's failure to disclose this connection. Though the bankruptcy court had the discretion to deny all or a portion of the fees for Park's failure to disclose, it nonetheless awarded nearly all of the fees requested by Special Counsel, disallowing only that portion of the fee that included 50% of the restitution obligation, as it was not part of the funds actually collected.
Because the bankruptcy court awarded Special Counsel a substantial contingent fee in spite of Park's failure to comply fully with Rule 2014(a), we assume that the bankruptcy court found no need to take remedial measures against Special Counsel, and we will not second guess the bankruptcy court's decision on that basis. See, e.g., Film Ventures Int'l, Inc., 75 B.R. at 253.
4. Rule 3-310 of the California Rules of Professional Conduct
Rule 3-310 provides:
As an additional ground for denying the award of fees to Special Counsel, the debtors argue that California RPC 3-310(C) required Park to obtain an informed written consent from the debtors before accepting employment for the Trustee.
State rules of professional responsibility apply, as long as they do not conflict with the Bankruptcy Code and/or the Bankruptcy Rules. See generally AFI Holding, 355 B.R. at 153 n.15.
We first look to the local rules of the United States Bankruptcy Court, Central District of California, as a source of ethical standards for attorneys. See Paul E. Iacono Structural Engineer, Inc. v. Humphrey, 722 F.2d 435, 439-40 (9th Cir. 1983). Local Rule 2090-1(e) of the Local Rules for the United States Bankruptcy Court, Central District of California, provides that any attorney who appears before the bankruptcy court shall be subject to the standards of professional conduct as set forth in Local Rule 83-3.1.2 of the District Court Rules.
Rule 3-310(C)(1) of the California RPC provides that an attorney shall not, without the informed written consent of each client, accept representation of more than one client in a matter in which the interests of the clients potentially conflict. Zador Corp. v. Kwan, 31 Cal.App.4th 1285, 1295, 37 Cal.Rptr.2d 754 (Cal.Ct.App. 1995). Rule 3-310(C)(2) provides that an attorney shall not, without the informed written consent of each client, accept representation of more than one client in a matter in which the interests of the clients actually conflict. Id . If a conflict of interest exists, the attorney must disclose the conflict to each client and either obtain written waivers or withdraw. See Gulf Ins. Co. v. Berger, 79 Cal.App.4th 114, 132, 93 Cal.Rptr.2d 534 (Cal.Ct.App. 2000).
In addition, Rule 3-310(B)(3) provides that, where the attorney has a legal or professional relationship with another person that the attorney knows or reasonably should know would be affected substantially by resolution of the subject matter, the attorney must provide the client with written disclosures before the attorney accepts representation of the client.
A violation of Rule 3-310 does not automatically preclude an attorney from obtaining his or her fees, as there is nothing in Rule 3-310 that mandates a denial of fees. Pringle v. La Chapelle, 73 Cal.App.4th 1000, 1006, 87 Cal.Rptr.2d 90 (Cal.Ct.App. 1999). However, the court may refuse to grant an attorney fees for services rendered if his or her relations with the client are tainted with fraud or unfairness, or if the attorney commits acts of impropriety inconsistent with the character of the legal profession and incompatible with the faithful discharge of his or her duties. Clark v. Millsap, 197 Cal. 765, 785, 242 P. 918 (Cal. 1926); Mardirossian & Assocs., Inc. v. Ersoff, 153 Cal.App.4th 257, 278, 62 Cal.Rptr.3d 665 (Cal.Ct.App. 2007)(" In certain circumstances, a violation of the Rules of Professional Conduct may result in a forfeiture of an attorney's right to fees."); Cal Pak Delivery, Inc. v. United Parcel Serv., Inc., 52 Cal.App.4th 1, 14, 60 Cal.Rptr.2d 207 (Cal.Ct.App. 1997)(" It is the general rule in conflict of interest cases that where an attorney violates his or her ethical duties to the client, the attorney is not entitled to a fee for his or her services."). See also Huskinson & Brown, LLP v. Wolf, 32 Cal.4th 453, 463, 9 Cal.Rptr.3d 693, 84 P.3d 379 (Cal. 2004)(noting that courts have, on occasion, disallowed quantum meruit recoveries to attorneys who violated the California Rules of Professional Conduct)(citing Jeffry v. Pounds, 67 Cal.App.3d 6, 136 Cal.Rptr. 373 (Cal.Ct.App. 1977); Goldstein v. Lees, 46 Cal.App.3d 614, 120 Cal.Rptr. 253 (Cal.Ct.App. 1975)). In the exercise of such discretion, some courts have allowed partial recoveries of attorney's fees where there was no objection by the client, where the client's recovery was a direct result of the attorney's services, or for services rendered prior to the violation of the rule. Cal Pak Delivery, Inc., 52 Cal.App.4th at 16 (citations omitted).
At least three California appellate courts read Clark to suggest that, before a court can require an attorney to forfeit his or her fees, it should determine whether the violation of the rules was sufficiently serious to warrant such a forfeiture. See Pringle, 73 Cal.App.4th at 1006; Mardirossian, 153 Cal.App.4th at 278; Sullivan v. Dorsa, 128 Cal.App.4th 947, 965, 27 Cal.Rptr.3d 547 (Cal.Ct.App. 2005).
In this case, Park ideally would have obtained the debtors' written consent at the outset of his representation of the Trustee as special counsel. At the latest, following the trial in the State Court Action, during the mediation and the settlement negotiations encompassed thereby, Park would have advised the debtors of the potential for conflict with the Trustee and the bankruptcy estate in terms of the timing and amount of a negotiated settlement and secured their informed written consent to his continued representation. There is nothing in the record before us showing that Park obtained the debtors' written consent.
It was within the bankruptcy court's discretion to determine whether a potential conflict existed and whether a violation by Park of Rule 3-310 constituted an act contrary to his ethical and moral responsibilities as an attorney. In considering the Employment Application, the bankruptcy court chose not to disqualify Park, even though Park expressly disclosed that he was bankruptcy counsel for the debtors at the time. The bankruptcy court allowed the Trustee to employ Park because, as set forth in the Employment Application, Park was employed for a limited, specific purpose - to prosecute the State Court Action. Park was not helping the Trustee in administering the bankruptcy estate. The work that Park was performing as special counsel for the Trustee in the State Court Action and the work that he was performing for the debtors as their bankruptcy attorney were two discrete matters. The bankruptcy court, aware of Park's representation of the debtors at that time, still approved his employment as special counsel pursuant to § 327(e).
Arguably, the debtors no longer had any interest in the State Court Action. Upon filing for bankruptcy, all of the debtors' legal and equitable interests became property of the estate. See 11 U.S.C. § 541(a)(1). " Once the estate is created, no interests in property of the estate remain in the debtor." 5 Collier on Bankruptcy ¶ 541.04. Only after all claims have been paid and if funds remain do the debtors receive the surplus. See 11 U.S.C. § 726(a)(6).
When considering the Fee Application, the bankruptcy court had the discretion to deny Special Counsel their fees in full or in part, if it determined that Park had violated his ethical duties. Although the bankruptcy court denied recovery of 50% of the restitution waiver as part of Special Counsel's fees, it awarded fees of 50% of the $5 million cash recovered in the settlement, even though the bankruptcy court was aware, as demonstrated in its Memorandum Decision, of Park's failure to obtain the debtors' written consent after disclosure, pursuant to Rule 3-310.
Rule 3-310, in effect, encourages attorneys to make full written disclosures of any conflicts, actual or potential, and to obtain their clients' written consent prior to, or during the course of continuing, representation. Park did not obtain such written consent from the debtors.
However, when they took on the role as special counsel for the Trustee, Park and SS& H took on a very difficult case in the State Court Action for a contingent fee and litigated the State Court Action through trial to a highly favorable result. That result ultimately made the settlement, that will allow for payment in full of all administrative expenses and allowed creditor claims in the debtors' bankruptcy with a substantial surplus to the debtors, possible. In these circumstances, even though Park may not have complied strictly with the California Rules of Professional Conduct, we nevertheless do not have a " definite and firm conviction" that the bankruptcy court committed a clear error of judgment in approving compensation to Special Counsel. We conclude that the bankruptcy court did not abuse its discretion in awarding the contingent fee of 50% of monies collected to Special Counsel.
B. The bankruptcy court abused its discretion in awarding costs to Special Counsel
The debtors contend that the bankruptcy court abused its discretion in awarding costs to Special Counsel when Special Counsel expressly stated in the Employment Application and in the Statements that they would not recover costs.
Special Counsel claims that the debtors never once opposed the request for costs on such grounds before the bankruptcy court. Rather, the debtors opposed the request for costs on the grounds that Special Counsel neither listed nor explained the costs incurred in the Fee Application. Therefore, Special Counsel argues, because the debtors never raised the issue before the bankruptcy court, the debtors cannot raise it now on appeal.
We disagree. The debtors made various arguments against Special Counsel's recovery of costs before the bankruptcy court -- that Special Counsel's $2.5 million fee included costs, that Special Counsel never mentioned recovery of costs at mediation, that the debtors were deceived as to the terms of the fee arrangement at the time of the Employment Application, that the fee application set forth amounts unknown or unreviewed by the debtors. Although the debtors articulated different reasons for denying Special Counsel's costs, by simply disputing the costs, the debtors called the bankruptcy court's attention to the issue. See, e.g., United States v. One Urban Lot Located at 1 Street A-1 Valparaiso, Bayamon, Puerto Rico, 885 F.2d 994, 1001 (1st Cir. 1989).
As the debtors point out, the Employment Application and the Statements expressly stated that Special Counsel would not recover costs. Also, the Employment Application Order made no mention that Special Counsel would recover costs; rather, it authorized the Trustee to employ Park and SS& H to act as special counsel under the contingency fee arrangement as described in the Employment Application. The bankruptcy court cannot award costs where none were authorized in the Employment Application Order. We conclude that the bankruptcy court abused its discretion in awarding costs when Special Counsel failed to request them in the Employment Application.
Indeed, in the Employment Application, Special Counsel's representation that they would " not be paid at an hourly rate or recover costs" could be interpreted as justifications for their request for a super priority lien on any recovery from the State Court Action.
We note that the recovery of costs is a fairly standard form of compensation for contingent fee attorneys. The Service Agreement between the Trustee and Special Counsel typifies such an arrangement; the Service Agreement explicitly provides for the recovery of costs by Special Counsel, but also provides for their deduction from the overall recovery prior to the calculation of Special Counsel's contingent fee. Since the Trustee and Special Counsel formalized the terms of compensation after the bankruptcy court entered the Employment Application Order, Special Counsel could have amended the Employment Application and requested amendment of the Employment Application Order to provide for the recovery of costs pursuant to the Service Agreement, after providing notice and opportunity for objection to interested parties, including the debtors. Special Counsel did not amend the Employment Application or seek such an amendment to the Employment Application Order.
VI. CONCLUSION
Contrary to the debtors' assertions, Special Counsel did not have a conflict of interest that would warrant the denial of fees. Nor did the debtors demonstrate that Park's failure to comply with Rule 3-310 of the California RPC requires denial of Special Counsel's fees. Therefore, we conclude that the bankruptcy court did not abuse its discretion in awarding fees to Special Counsel and AFFIRM.
We determine, however, that the bankruptcy court abused its discretion in awarding costs to Special Counsel. The Employment Application and the Statements indicated that Special Counsel would not recover costs. The Employment Application Order, which was based on the Employment Application, did not authorize Special Counsel to recover costs. Therefore, we REVERSE the bankruptcy court's award of costs to Special Counsel.
PAPPAS, Bankruptcy Judge, concurring:
I disagree with the majority's conclusion that Park's conduct in this case did not run afoul of the Bankruptcy Code. Park served as the debtors' bankruptcy attorney from December 17, 2002 until September 16, 2006, just a few days before Trustee filed his motion to approve the Cigna settlement. When Park undertook to serve as Special Counsel for Trustee in August 2003, while simultaneously representing the debtors in the bankruptcy case, he held at least a potential adverse interest as to debtors. Park disclosed his " connection" with debtors and they did not challenge his employment. Of course, since Park was also advising the debtors at the time, their lack of objection to his dual role is hardly surprising. While later problems could have been avoided by prohibiting Park from also representing Trustee, in an apparent exercise of discretion, the bankruptcy court signed onto the arrangement.
Park's potential adverse interest blossomed into a full-blown, actual conflict of interest when, in July 2006, Cigna laid a $5 million settlement offer on the negotiating table to avoid possible liability for an even larger verdict. A settlement at that amount was more than sufficient to pay all claims in the bankruptcy case in full, so it is understandable that Trustee would instruct " his" attorneys, including Park, to accept the deal. On the other hand, whether the proposed compromise was sufficient to compensate Song for the injuries he had suffered over the years was a different, more difficult, question. According to the record, Song acquiesced to the deal, but he apparently did so based upon the advice of " his" attorney, Park.
To me, it is clear that, from the time the settlement offer was made, Park's ability to give objective, reliable advice, and his loyalty to Song, could be questioned. Park's continued participation in this process violated § 327(e)'s prescription that special counsel for a trustee " not hold any interest adverse to the debtor or to the estate . . . ." Since he was simultaneously representing both Song and Trustee, and because their respective interests as to Cigna's settlement offer potentially conflicted, Park should have played no further role as either Special Counsel or as the debtors' attorney. Instead, as it turns out, Park aligned with Trustee and against Song.
I agree with the majority that, in advising Trustee and Song about whether to settle, Park also violated California's Rule 3-310. Subsection (C) of that rule prohibited Park from continuing to represent more than one client in a matter in which the interests of the clients actually conflicted, and subsection (D) prohibited him from entering into an " aggregate settlement" of the Cigna claim without the " informed written consent of each client."
Given this record, were I to substitute my judgment for that of the bankruptcy court, perhaps a reduction in the amount of Park's fees may have been in order to address his failure to abide by the Code and ethical rules. But while Park's approach was problematic, I do not have the firm conviction that it was an abuse of discretion for the bankruptcy court to approve full fees for Special Counsel in this case. Special Counsel obtained a significant verdict for the bankruptcy estate and the debtors against Cigna, which obviously motivated it to settle their claim for a significant sum. As a result, under our deferential standard of review, I concur in the majority's decision to affirm the bankruptcy court's award of compensation.
An order approving the employment of attorneys . . . pursuant to § 327 . . . of the Code shall be made only on application of the trustee . . . . 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, or 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.
Except as otherwise provided in this section, the trustee, with the court's approval, may employ one or more attorneys, accountants, appraisers, auctioneers, or other professional persons, that do not hold or represent an interest adverse to the estate, and that are disinterested persons, to represent or assist the trustee in carrying out the trustee's duties under this title.
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.
Except as provided in section 327(c), 327(e), or 1107(b) of this title, the court may deny allowance of compensation for services and reimbursement of expenses of a professional person employed under section 327 or 1103 of this title if, at any time during such professional person's employment under section 327 or 1103 of this title, such professional person 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 professional person is employed.
Mercury is distinguishable from the instant case. Unlike the case before us, in Mercury, neither the employment application nor the motion to withdraw was served on the debtors. Further, the law firm serving as special counsel for the chapter 7 trustee in Mercury was employed to seek approval of a settlement that the debtors always opposed.
Here, the bankruptcy court specifically found that the debtors were served with the Employment Application. The debtors themselves filed the substitution of attorney, replacing Park with another attorney. In addition, up until the settlement negotiations, which took place after the jury trial in the State Court Action, there was no conflict, actual or potential, in Special Counsel's representation of the debtors and the Trustee, and Song signed the settlement agreement with Cigna.
(A) For purposes of this rule:
(1) " Disclosure" means informing the client or former client of the relevant circumstances and of the actual and reasonably foreseeable adverse consequences to the client or former client; (2) " Informed written consent" means the client's or former client's written agreement to the representation following written disclosure; (3) " Written" means any writing as defined in Evidence Code section 250. (B) A member shall not accept or continue representation of a client without providing written disclosure to the client where: (1) The member has a legal, business, financial, professional, or personal relationship with a party or witness in the same matter; or(2) The member knows or reasonably should know that: (a) the member previously had a legal, business, financial, professional, or personal relationship with a party or witness in the same matter; and(b) the previous relationship would substantially affect the member's representation; or (3) The member has or had a legal, business, financial, professional, or personal relationship with another person or entity the member knows or reasonably should know would be affected substantially by resolution of the matter; or(4) The member has or had a legal, business, financial, or professional interest in the subject matter of the representation. (C) A member shall not, without the informed written consent of each client: (1) Accept representation of more than one client in a matter in which the interests of the clients potentially conflict; or(2) Accept or continue representation of more than one client in a matter in which the interests of the clients actually conflict; or(3) Represent a client in a matter and at the same time in a separate matter accept as a client a person or entity whose interest in the first matter is adverse to the client in the first matter. (D) A member who represents two or more clients shall not enter into an aggregate settlement of the claims of or against the clients without the informed written consent of each client. (E) A member shall not, without the informed written consent of the client or former client, accept employment adverse to the client or former client where, by reason of the representation of the client or former client, the member has obtained confidential information material to the employment. (F) A member shall not accept compensation for representing a client from one other than the client unless: (1) There is no interference with the member's independence of professional judgment or with the client-lawyer relationship; and(2) Information relating to representation of the client is protected as required by Business and Professions Code section 6068, subdivision (e); and(3) The member obtains the client's informed written consent, provided that no disclosure or consent is required if:
(a) such nondisclosure is otherwise authorized by law; or(b) the member is rendering legal services on behalf of any public agency which provides legal services to other public agencies or the public.
Local Rule 83-3.1.2 of the District Court Rules for the United States District Court, Central District of California, provides that " each attorney shall be familiar with and comply with the standards of professional conduct required of members of the State Bar of California and contained in the State Bar Act, the Rules of Professional Conduct of the State Bar of California and the decisions of any court applicable thereto."