Opinion
8:12-bk-09868-RCT
04-06-2022
In re: HRK HOLDINGS, LLC, Debtor.
ORDER ABSTAINING ON MOTION TO DETERMINE LITIGATION COUNSEL COMPENSATION
Roberta A. Colton Judge.
This matter came before the Court, after a hearing on December 16, 2021, on Morgan & Morgan, P.A.'s Motion to Determine Litigation Counsel Compensation. (Doc. 990). Overchuck & Associate, P.A. opposes the motion (Doc. 994), and Morgan & Morgan, P.A. filed a reply brief (Doc. 996). Thereafter, the parties filed supplemental briefs. (Doc. 1001, 1002). As explained below, the Court abstains from determining litigation counsel's compensation.
A transcript of the hearing is filed at Doc. 998.
I. Factual Background
On June 27, 2012, HRK Holdings, LLC ("Debtor") filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code. Thereafter, Debtor filed an Application 1 to Employ Morgan & Morgan, P.A. ("Morgan & Morgan") and Overchuck & Byron, P.A. ("Overchuck") as Special Litigation Counsel and to Approve Contingency Fee Agreement. (Doc. 149). Debtor attached the Attorneys' Fee Contract setting forth the contingency fee agreement to the Application to Employ. The Attorneys' Fee Contract stated that each attorney assumed joint legal responsibility for the representation, and it delineated the split of compensation among Morgan & Morgan and Overchuck under the contingency fee agreement. On October 5, 2012, this Court entered an order approving the employment of Morgan & Morgan and Overchuck as Special Litigation Counsel and approving the Attorneys' Fee Contract. (Doc. No. 198).
Overchuck & Byron, P.A. changed its name to Overchuck & Associate, P.A. in 2014. Both Overchuck & Byron, P.A. and Overchuck & Associate, P.A. are referred to as "Overchuck."
Morgan & Morgan and Overchuck (collectively, "Special Counsel") were hired to jointly represent Debtor in certain complex matters in Florida state court. Their representation included a lawsuit initiated by Debtor in January of 2013 in Orange County, Florida ("Orange County Action") in Case No. 2013-CA-000098-O, styled as HRK Holdings, LLC v. Ardaman & Associates, Inc., et al. The parties agree that the Attorneys' Fee Contract governed the responsibilities and the split of compensation for Special Counsel litigating the Orange County Action.
The attorneys from Overchuck that originally signed onto the Orange County Action were Paul G. Byron, Esq. and John R. Overchuck, Esq. Paul G. Byron became a federal judge in June of 2014 and left Overchuck. John R. Overchuck passed away on March 19, 2018. As a result, according to Morgan & Morgan, the Overchuck firm stopped contributing to the Orange County Action by the middle of 2014. 2
In its Motion to Reopen this case, Morgan & Morgan argue that it had solely litigated the Orange County Action since late 2016 (Doc. 986, p. 4), but in its Motion to Determine Litigation Counsel Compensation, Morgan & Morgan now argue that it had solely litigated the Orange County Action since the middle of 2014 (Doc. 990, p. 4). This is a hotly disputed fact. The Court notes that Overchuck disputes Morgan & Morgan's contentions and points out that in an order filed on August 19, 2016, this Court awarded attorneys' fees to Morgan & Morgan and Overchuck for their work in settling part of the Orange County Action ("Phase One"). (Doc. 894). Thus, Overchuck argues that it continued to be actively involved in the Orange Count Action through the end of 2016, until Morgan & Morgan made it clear that it did not want Overchuck further involved. (Doc. 998, p. 33).
Thereafter, in 2021, the Orange County Action was mediated and settled, which Morgan & Morgan contend resulted solely from its efforts and that Overchuck did not participate in procuring the settlement. After Overchuck learned of the settlement, it sent Morgan & Morgan a letter demanding its share of the settlement under the contingency fee agreement. The instant Motion to Determine Litigation Counsel Compensation followed.
II. Procedural Background
On August 16, 2016, this Court confirmed Debtor's Plan of Reorganization (the "Plan"). (Doc. 835, 889). Pursuant to Section 12.2.3 of the Plan, this Court retained jurisdiction for certain specified purposes, including:
to determine any and all applications for allowance of compensation of Professionals and reimbursement of expenses under Section 330, 331 or 503(b) of the Bankruptcy Code arising out of or relating to the Reorganization Cases; provided, however, that this retention of jurisdiction shall not require prior Bankruptcy Court approval of the payment of fees and reimbursement of expenses of Professionals employed by the Debtors after Confirmation of the Plan unless an objection to such fees and expenses has been made by the Debtors[.](Doc. 835, p. 41). Pursuant to Section 12.3 of the Plan, this Court also "retain[ed] jurisdiction of the Reorganization Cases to enter an order reopening the Reorganization Cases after they have been closed." (Doc. 835, p. 43).
On February 27, 2017, Debtor filed a Certificate of Substantial Consummation, in which Debtor stated that it had fully resolved all claim objections with the sole exception of Debtor's objection to claim number 31 brought by the Manatee County Port Authority ("MCPA") in the 3 amount of $12 million. (Doc. 982). This Court approved of the agreement between Debtor and the MCPA to abate the claim objection pending: (1) resolution of the Orange County Action and Debtor obtaining funds payable to Class 14 unsecured creditors under the Plan, or (2) further order of the Court. (Doc. 982). On March 20, 2017, this Court issued a Final Decree severing and closing the jointly administered bankruptcy cases and reserving jurisdiction to adjudicate Debtor's objection to the MCPA's claim. (Doc. 984).
The bankruptcy case of Debtor HRK Holdings, LLC, Case No. 8:12-bk-09868-RCT was being jointly administered with the bankruptcy case of HRK Industries, LLC, Case No. 8:12-bk-09869-KRM.
Debtor and the MCPA had until 120 days after the resolution of the Orange County Action to reopen this case for the purpose of adjudicating Debtor's claim objection. (Doc. 984). The Orange County Action was dismissed with prejudice on November 5, 2021. (Doc. 998, p. 32; Doc. 1002, p. 3). Based on the Final Decree and the fact that a motion to reopen this case to adjudicate Debtor's claim objection was not filed, claim 31 will be allowed as filed "solely for purposes of making distributions under the confirmed Plan." (Doc. 984).
On October 11, 2021, Morgan & Morgan filed a motion to reopen this case in order for the Court to determine Special Counsel's compensation. (Doc. 986). This Court granted the motion to reopen under 11 U.S.C. § 350(b). (Doc. 998).
III. Motion to Determine Litigation Counsel Fees
Morgan & Morgan ask the Court to find that Overchuck is not entitled to any portion of the settlement under the contingency fee agreement because Overchuck did not participate in any material way to the Orange Count Action. In response, Overchuck makes three arguments: (1) this Court lacks subject matter jurisdiction over this fee dispute; (2) this Court should abstain from deciding this fee dispute; and (3) if the Court finds that it has jurisdiction and does not abstain, the Court should deny Morgan & Morgan's motion. As explained below, the Court finds that it has 4 subject matter jurisdiction over the fee dispute but that it should abstain from deciding the fee dispute. As such, the Court need not address the merits of Morgan & Morgan's motion.
At the hearing on the motion, Morgan & Morgan stated that Overchuck participated in "Phase One" of the Orange County Action and was paid its attorneys' fees from the "Phase One" settlement for its work on the case. The settlement at issue with regard to the instant motion is for "Phase Two" of the Orange County Action.
A. Subject Matter Jurisdiction
The first issue is whether this Court has subject matter jurisdiction over this fee dispute. The Eleventh Circuit has explained this Court's "related to" jurisdiction under 28 U.S.C. § 1334(b) as follows:
For a civil proceeding to be "related to" a bankruptcy case, there must be some nexus between the related civil proceeding and the Title 11 case. Ordinarily, the question is whether the potential outcome of the dispute . . . would conceivably have an effect on the bankruptcy estate. This is a broad[ ] jurisdictional grant that encompasses cases that could conceivably have an effect on the estate being administered in bankruptcy and includes any action which in any way impacts upon the handling and administration of the bankrupt estate.
[The Eleventh Circuit] ha[s] not addressed, in a published opinion, the scope of "related to" jurisdiction in the post-confirmation context. The Third Circuit, from which the Lemco Gypsum test was derived, has noted that the scope of bankruptcy court jurisdiction diminishes with plan confirmation, though it does not disappear entirely. Consistent with our "related to" test, the Third Circuit has stated that the essential inquiry appears to be whether there is a close nexus to the bankruptcy plan or proceeding sufficient to uphold bankruptcy court jurisdiction over the matter. Matters that affect the interpretation, consummation, execution, or administration of the confirmed plan will typically have the requisite close nexus.
In re Kachkar, 769 Fed.Appx. 673, 679 (11th Cir. 2019) (internal citations and quotation marks omitted).
In this case, the fee dispute involves the compensation to Morgan & Morgan and Overchuck, whose employment and Attorneys' Fee Contract were both approved by this Court. These law firms were retained to monetize one of the two main assets that would be used to pay 5 creditors under the confirmed Plan-the Orange County Action. Not only does this Court have jurisdiction to interpret and enforce its own orders, but 11 U.S.C. § 328(a) gives this Court authority to review the compensation to be paid under the contingency fee agreement under certain circumstances. Specifically, pursuant to § 328(a), if, after the conclusion of the attorneys' employment, the terms and conditions of the contingency fee agreement prove to have been improvident in light of developments not capable of being anticipated when the contingency fee agreement was made, this Court may allow compensation different from that provided by the parties' contingency fee agreement.
The Plan refers to the Orange County Action as the Liner Litigation. Article 8 of the Plan explains that there were two main assets that could be monetized to pay creditors' claims, one of which was the Liner Litigation. (Doc. 835, p. 30-31).
See Kachkar, 769 Fed.Appx. at 679.
Initially, Morgan & Morgan simply argued that Overchuck materially breached the Attorneys' Fee Contract by failing to continue working on the Orange County Action after Byron became a federal judge and John Overchuck died, and thus, the Overchuck law firm was not entitled to any attorneys' fees generated by the latest settlement. However, Morgan & Morgan now argue that it is seeking this Court's review under § 328(a), and it asks that the compensation paid be different than that provided for under the contingency fee agreement due to unforeseen circumstances-specifically, that Overchuck's attorneys working on the Orange County Action would no longer be associated with the firm due to John Overchuck's death and Byron becoming a federal judge. The Court concludes that Morgan & Morgan has shown a sufficient basis for the Court to find that it has "related to" subject matter jurisdiction over the fee dispute.
B. Abstention
The next issue is whether to abstain from deciding this matter, as urged by Overchuck. Under § 1334(c)(1), this Court may, in the interest of justice, or in the interest of comity with state 6 courts or respect for state law, abstain from hearing a particular matter related to a case under title 11. This Court finds that abstention on the issue of whether Overchuck materially breached the Attorneys' Fee Contract is appropriate. However, to the extent that Morgan & Morgan argue that the allocation of fees between the two law firms should be revisited under § 328(a), the Court denies the requested relief.
As here, contingency fee agreements frequently are approved under § 328(a). This statute authorizes the Court to consider and approve the reasonableness of a fee arrangement in advance. When employment is sought under § 328(a), it is incumbent upon the parties in interest to object to the reasonableness of the fee arrangement at the time of appointment-not after the fact. Fee arrangements approved under § 328(a) are rarely set aside in hindsight unless "such terms and conditions prove to have been improvident in light of developments not capable of being anticipated at the time of the fixing of such terms and conditions."
This is very different from the usual situation where professionals are appointed under § 327 and compensation is determined under § 330, usually well after the fact.
Morgan & Morgan argue that John Overchuck's death and Byron becoming a federal judge were developments that were not capable of being anticipated. That view of the events is too myopic-it was certainly foreseeable that these attorneys could retire or otherwise choose to leave the Overchuck law firm and no longer continue working on the Orange County Action. Attorneys switch firms, retire, become judges, and die every day. Just because the parties did not anticipate these developments does not mean that they could not have anticipated the developments. As explained by one court:
A professional may be retained on any reasonable terms; but, once those terms have been approved pursuant to § 328(a), the court may not stray from them at the end of the engagement unless developments subsequent to the original approval that were incapable of being anticipated render the terms7
improvident. Section 328(a) therefore creates a "high hurdle" for a movant seeking to revise the terms governing a professional's compensation ex post facto. Such a movant must show not merely that a compensation adjustment is appropriate in light of subsequent developments that were previously unforeseen or unanticipated by the parties; instead, the movant is tasked with the weightier burden of proving that the subsequent developments were incapable of being anticipated at the time the engagement was approved. Likewise, before a court may revise a compensation agreement, it must explain with specificity why the subsequent developments were "incapable of being foreseen."
Section 328(a)'s establishment of such a "high hurdle" was no accident. Congress enacted § 328(a) to eliminate the previous uncertainty associated with professional compensation in bankruptcy proceedings, even at the risk of potentially underpaying, or, conversely, providing a windfall to, professionals retained by the estate under § 328(a).
In re ASARCO, L.L.C., 702 F.3d 250, 257-58 (5th Cir. 2012) (internal citations omitted); see also In re Fundamental, 626 B.R. 51, 58 (Bankr. M.D. Fla. 2021) (citations omitted).
Morgan & Morgan has not met this "high hurdle" so as to be entitled to a re-allocation of compensation between the two law firms under § 328(a).
That said, Morgan & Morgan also argue that Overchuck is not entitled to attorneys' fees because Overchuck materially breached the Attorneys' Fee Contract. But this remaining dispute is simply a claim under state law, between two non-debtors, that will have no impact on the distributions to creditors under the Plan that was approved by this Court back in 2016.
In determining whether to abstain, the following factors are considered:
(1) the effect, or lack of effect, on the efficient administration of the bankruptcy estate if discretionary abstention is exercised, (2) the extent to which state law issues predominate over bankruptcy issues, (3) the difficulty or unsettled nature of the applicable state law, (4) the presence of related proceedings commenced in state court or other non-bankruptcy courts, (5) the jurisdictional basis, if any, other than § 1334, (6) the degree of relatedness or remoteness of the proceedings to the main bankruptcy case, (7) the substance rather than the form of an asserted "core" proceeding, (8) the feasibility of severing state law claims from core bankruptcy matters to allow judgments to be entered in state court with enforcement left to the8
bankruptcy court, (9) the burden on the bankruptcy court's docket, (10) the likelihood that the commencement of the proceeding in bankruptcy court involves forum shopping by one of the parties, (11)the existence of a right to jury trial, (12) the presence in the proceeding of non-debtor parties, (13) comity, and (14) the possibility of prejudice to other parties in the action.
In re United Container LLC, 284 B.R. 162, 176 (Bankr. S.D. Fla. 2002) (citations omitted); see also In re Wood, 216 B.R. 1010, 1014 (Bankr. M.D. Fla. 1998) (citations omitted).
"No particular factor is controlling and it is within the discretion of the court how much weight, if any, should be given to any particular factor." In deciding whether to abstain, this Court is mindful of the following:
In re All American Semiconductor, Inc., No. 09-1466-BKC-LMI, 2010 WL 2854153, at *2 (Bankr. S.D. Fla. July 20, 2010) (citations omitted).
When determining whether to abstain in a given case, a federal court must remember that "[a]bstention from the exercise of federal jurisdiction is the exception, not the rule" as it is "an extraordinary and narrow exception to the duty of a [federal] court to adjudicate a controversy properly before it." Further, "[a]bdication of the obligation to decide cases can be justified under [the doctrine of abstention] only in the exceptional circumstances where the order to the parties to repair to the state court would clearly serve an important countervailing interest." The countervailing interests that must be considered when a bankruptcy court is deciding whether to abstain are laid out statutorily in 28 U.S.C. § 1334(c)(1). Those are: (1) the interests of justice; (2) the interest of comity with state court; and (3) respect for state law. 28 U.S.C. § 1334(c)(1).
In re Land, No. 11-70023, 2013 WL 414448, at *7 (Bankr. N.D. Ala. Jan. 30, 2013) (internal citations omitted).
After weighing the factors listed above and considering the three countervailing interests listed above, the Court finds that the factors either weigh in favor of abstention or are neutral. For example, the Court finds that the first factor-the effect, or lack of effect, on the efficient administration of the bankruptcy estate if discretionary abstention is exercised-weighs in favor of abstaining. In this case, no one has objected to the total amount of attorneys' fees to be paid from the settlement of the Orange County Action under the contingency fee agreement. Instead, 9 the fee dispute involves whether one or both of the law firms should share in the attorneys' fees generated by the recent settlement. Given that the resolution of the fee dispute does not affect the net amount available to Debtor's remaining creditors under the confirmed Plan, this factor strongly weighs in favor of abstention.
Likewise, the Court finds that the second factor-the extent to which state law issues predominate over bankruptcy issues-weighs in favor of abstaining. The issues to be resolved arise under state law-breach of contract, Florida Bar Rules, and possibly a claim of tortious interference. The fee dispute can be resolved without resort to any bankruptcy related law, rules, or procedure. Thus, the state law issues predominate over bankruptcy issues, and this factor strongly weighs in favor of abstention.
Next, the Court finds that the fourth factor-the presence of related proceedings commenced in state court-also weighs in favor of abstaining. The fee dispute relates to the Orange County Action, a state court proceeding that was just recently resolved. The fact that the Orange County Action was dismissed with prejudice on November 5, 2021 does not undermine the Court's finding as to this factor. The parties can seek to reopen the Orange County Action to resolve this dispute, as the judge in that case is well-versed in the work done in that case, which will be an issue to be addressed in the fee dispute.
See In re 160 Royal Palm, LLC, No. 18-19441-EPK, 2020 WL 4792094, at *2 (Bankr. S.D. Fla. May 14, 2020) (finding the fact that there was not a related state court action pending was not a basis for declining to abstain from deciding the fee dispute).
Next, the Court finds that the eighth factor-the feasibility of severing state law claims from core bankruptcy matters-also weighs in favor of abstaining. The Court has already found that the fee dispute involves only state law issues. "As only state law claims exist, there is no issue pertaining to severance of state law claims from core bankruptcy matters." 10
In re De Mora, No. 13-1719-BKC-AJC-A, 2013 WL 6085969, at *4 (Bankr. S.D. Fla. Nov. 19, 2013).
Next, the Court finds that the ninth factor-the burden on the bankruptcy court's docket- also weighs in favor of abstaining. This bankruptcy case was closed five years ago, and this Court has one of the heaviest bankruptcy dockets in the country. This Court's limited judicial resources should not be spent adjudicating state law issues that can be more efficiently adjudicated by the judge that oversaw the Orange County Action.
See United Container, 284 B.R. at 177.
See Wood, 216 B.R. at 1015 (stating that given the congestion of the Tampa bankruptcy court, the court should focus its efforts "on resolving bankruptcy disputes that only this court can determine").
Next, the Court finds that the twelfth factor-the presence in the proceeding of non-debtor parties-also weighs in favor of abstaining. Debtor has not disputed the total amount of attorneys' fees due under the contingency fee agreement. Instead, the fee dispute consists of a dispute as to how those attorneys' fees should be allocated among the non-debtor attorney-parties to the contingency fee agreement.
Next, the Court finds that the thirteenth factor-comity-also weighs in favor of abstaining. The Orange County state court has a superior interest in the outcome of this fee dispute.
The remaining seven factors are neutral and do not weigh against abstention. Given that the seven factors described above weigh in favor of abstention, this Court finds that in the interests of justice, in the interest of comity with state court, and in respect for state law, abstention is warranted. 11
See, e.g., In re Oteri County Hospital Association, Inc., 617 B.R. 699, 706 (D. N.M. 2020) (finding abstention over a fee dispute between attorneys appropriate, based in part because the estate had been administered long ago, the fee dispute involved only state law claims, and the parties to the dispute were non-debtor parties).
IV. Conclusion
For the reasons explained above, the Court abstains from deciding the fee dispute between Morgan & Morgan and Overchuck. The Clerk is directed to close this case.
It is SO ORDERED. 12