Opinion
Case No. 15-23586-B-7 DC No. HCS-8
10-12-2017
In re: DIANE KAY McCRAY, Debtor(s).
NOT FOR PUBLICATION
MEMORANDUM AND ORDER GRANTING IN PART AND DENYING IN PART APPLICATION FOR COMPENSATION
Before the court is a first and final application for compensation and reimbursement of expenses filed by the attorney ("Counsel") employed by the chapter 7 trustee ("Trustee") to represent the estate in the above-captioned chapter 7 case and the related adversary proceeding identified below. The court authorized and approved Counsel's employment on June 18, 2015.
Counsel's application requests attorney's fees in the amount of $113,209.88 and expenses in the amount of $5,329.15 for total compensation of $118,539.03. Counsel's request is governed by 11 U.S.C. § 330 and Federal Rule of Bankruptcy Procedure 2016.
The fee amount represents a 10% voluntary reduction by Counsel. The actual fee amount is $125,788.75.
A hearing on the § 330 fee application was held on September 19, 2017. Appearances were noted on the record. At the conclusion of that hearing the court stated findings of fact and conclusions of law on the record pursuant to Federal Rule of Civil Procedure 52(a) applicable by Federal Rules of Bankruptcy Procedure 7052 and 9014. This written order amends, supplements, and clarifies the court's oral findings of fact and conclusions of law. To the extent this written order conflicts with the court's oral findings of fact and conclusions of law, this written order controls. Introduction
Starr's Building Supply, Inc., a creditor, and Diana McCray, the debtor, objected to Counsel's § 330 fee application. Both objections concern fees that were incurred, requested, and denied with prejudice in the related adversary proceeding of Richards v. Starr's Building Supply, Inc., Adv. 15-2184. The Trustee commenced that adversary proceeding with a complaint filed on September 17, 2015. That adversary proceeding ended with a memorandum decision and judgment entered after trial on August 22, 2016.
Facts below are taken from the memorandum decision entered in the Starr's adversary proceeding. See Adv. No. 15-2184, Dkt. 69.
Starr's objects to Counsel's request for $22,784.75 as the fees that were incurred after it voluntarily released abstracts of judgment recorded in four California counties and effectively provided the Trustee with the relief sought in the adversary proceeding. Starr's contends that its voluntary release of those abstracts of judgment mooted all remaining claims and, thereafter, rendered the adversary proceeding against it unnecessary and of no benefit to the estate. Because that adversary proceeding was unnecessary, Starr's also contends that the fees after it voluntarily released all of its liens are not reasonable. Starr's further notes that the fees incurred and requested in the adversary proceeding were denied with prejudice
The debtor objects to all fees incurred, requested, and denied with prejudice in the Starr's adversary proceeding. The debtor's objection is similar to Starr's objection except that the debtor contends the entire adversary proceeding against Starr's was unnecessary and resulted in no benefit to the estate The debtor further contends that the § 330 fee application fails to comply with the court's local rules and the order approving Counsel's employment.
The court initially sustained the debtor's objection and in so doing overruled Starr's objection as moot. Upon further consideration, the court amends that ruling as follows: (1) to the extent the debtor objects to all the fees incurred, requested, and denied with prejudice in the Starr's adversary proceeding the objection is sustained up to $59,677.30; and (2) to the extent Starr's objects on the basis that the § 330 fee application includes a request for the same fees incurred, requested, and denied with prejudice in the Starr's adversary proceeding the objection is sustained.
The amount of fees disallowed is also amended. At the conclusion of the hearing on the § 330 fee application the court stated that it intended to disallow $59,827.30 in fees as the amount of fees requested, incurred, and denied with prejudice in the Starr's adversary proceeding. The court adjusts and reduces that amount by $150.00.
The memorandum decision and judgment entered in the Starr's adversary proceeding denied fees only. See Adv. No. 15-2184, Dkt. 69 at 13:18-23, 23:5-6 (memorandum decision); Adv. No. 15-2184, Dkt. 70 at 2:2-3 (judgment). The fees requested in that adversary proceeding were $59,677.30 ($40,825.55 as of June 6, 2016 [Pl. Ex. 63] + $18,851.75 for the period from June 7, 2016, through June 30, 2016 [Pl. Ex. 64]] and not $59,827.30. Therefore, the court will disallow $59,677.30 and not $59,827.30. The court will also deduct that $59,667.30 from Counsel's gross fee request amount of $125,788.75 rather than the $113,209.88 discounted amount which includes Counsel's voluntary 10% reduction. That results in a fee award of $66 ,111.45 ($125,788.75 - $59,677.30) and an expense award of $5 ,329.15 for total compensation of $71 ,440.60 ($66,111.45 + $5,329.15). The reasons for this reduction are set forth below. Background
Except for minor adjustments to Starr's proof of claim, the court ruled against the Trustee and for Starr's on every other claim for relief the Trustee alleged against Starr's in the adversary proceeding. There was no timely motion to alter or amend the memorandum decision or judgment entered in that action. And neither the memorandum decision nor the judgment were appealed. Both are now final.
The Trustee filed the complaint that initiated the Starr's adversary proceeding after Starr's declined to sign documents releasing a prepetition lis pendens and an abstract of judgment recorded against the debtor's "River Road" property so that the Trustee could sell that property to an interested buyer for $612,000.00 shortly after the petition was filed. The Trustee accused Starr's of breaching an agreement to sign those documents and preventing or interfering with the Trustee's sale of the River Road property.
It is true that because Starr's declined to sign lien release documents the Trustee was unable to sell the River Road property to the original buyer for $612,000.00 as initially anticipated. However, the Trustee was able to obtain a state court order expunging Starr's lis pendens on the River Road property and almost immediately thereafter Starr's provided the Trustee with a partial satisfaction of judgment applicable to that property. Thereafter, in January 2016, the Trustee sold the River Road property not to the original buyer for $612,000.00 but to an over-bidder for $730,000.00. Starr's ultimately released all remaining abstracts of judgment in early April 2016.
The Trustee requested $59,677.30 in fees for services that Counsel provided to the estate in the Starr's adversary proceeding. During the hearing on the § 330 fee application the Trustee stated those fees were requested for Counsel's benefit. Those fees were requested on the basis that the Trustee prevailed on § 547 avoidance claims alleged against Starr's. Those fees were denied with prejudice and thereby disallowed on the basis there was no statutory or contractual basis established to support the request. There was no timely motion to alter or amend the memorandum decision or judgment denying the fees with prejudice. And there was no appeal from either.
The § 330 fee application now before the court includes a request for the same fees that were incurred, requested, and denied with prejudice in the Starr's adversary proceeding. Counsel confirmed that in response to a direct question from the court during the hearing on the § 330 fee application. Nevertheless, Counsel argues those same fees may now be recovered in the § 330 fee application for two reasons.
First, Counsel contends the legal theories of recovery differ. Whereas in the Starr's adversary proceeding the fees were requested on a prevailing party theory those same fees are now (again) requested in the § 330 fee application on a necessary and benefit to the estate theory. Second, Counsel also contends that the parties requesting the fees differ. Whereas it was the Trustee who requested fees in the adversary proceeding those same fees are now (again) requested in the § 330 application by Counsel. Neither argument is persuasive. Jurisdiction
The court has jurisdiction. 28 U.S.C. §§ 157, 1334; General Order No. 182 for the U.S. District Court for the Eastern District of California. This is a core proceeding. 28 U.S.C. § 157(b)(2)(A). Venue is proper. 28 U.S.C. § 1409. Applicable Legal Standard
An attorney employed by the bankruptcy estate is entitled to reasonable compensation for "actual, necessary services" and reimbursement for "actual, necessary expenses." 11 U.S.C. § 330(a)(1). The applicant bears the burden of proof. Hensley v. Eckerhart, 461 U.S. 424, 437 (1983). In fixing the amount of a reasonable fee, the court considers all relevant factors. See 11 U.S.C. § 330(a)(3)(A)-(F).
The customary method in the Ninth Circuit for ascertaining a reasonable fee in a bankruptcy case is the lodestar method, which is calculated by multiplying the number of hours reasonably expended by a reasonable hourly rate for the person providing the services. Law Offices of David A. Boone v. Derham-Burk (In re Eliapo), 468 F.3d 592, 598 (9th Cir. 2006); The Margulies Law Firm, APLC v. Placide (In re Placide), 459 B.R. 64, 73 (9th Cir. BAP 2011). However, the lodestar method is not the exclusive method or mandatory and a court may depart from it when appropriate. Eliapo, 468 F.3d at 598-599; Unsecured Creditors' Committee v. Puget Sound Plywood, Inc. (In re Puget Sound Plywood), 924 F.2d 955, 960-961 (9th Cir. 1991); Placide, 459 B.R. at 73; In re South Dairy Farm, 2014 WL 271635, *2 (Bankr. E.D. Cal. 2014). Departure from the lodestar method is appropriate in several circumstances, such as when: (1) the fee application or supporting billing records are inadequate, Unsecured Creditors' Committee, 924 F.2d at 960-961; (2) the fee sought is disproportionate to the potential benefit to the estate, Leichty v. Neary (In re Strand), 375 F.3d 854 (9th Cir. 2004); (3) application of the lodestar method would not yield a numerically precise fee award, Unsecured Creditors' Committee, 924 F.2d at 960; or (4) the professional has not exercised prudent billing judgment, Hensley 461 U.S. at 434; In re Parreira, 464 B.R. 410 (Bankr. E.D. Cal. 2012).
When departing from the lodestar method, the court ultimately may "award compensation that is less than the amount of compensation that is requested." 11 U.S.C. § 330(a)(2). In fact, the court shall not allow compensation for "services that were not- reasonably likely to benefit the debtor's estate," 11 U.S.C. § 330(a)(4)(A)(ii)(I), or "necessary to the administration of the case." 11 U.S.C. § 330(a)(4)(A)(ii)(II). Discussion
I. Reasonableness of the Fees Incurred, Requested, and Denied With Prejudice in the Starr's Adversary Proceeding and Now Again Requested in the § 330 Fee Application
The court finds it appropriate in this case to depart from the lodestar method. Counsel acknowledges that the § 330 fee application includes a request for the same fees that the court previously denied with prejudice and thereby disallowed in the Starr's adversary proceeding. Disallowed fees are not reasonable fees. See Jensen v. U.S. Trustee (In re Abraham), 221 B.R. 782, 785 (10th Cir. BAP 1998). Therefore, the question for purposes of the § 330 fee application is whether the same fees that were denied with prejudice and thereby disallowed in the Starr's adversary proceeding are now disallowed fees for purposes of the § 330 fee application and as such not reasonable. Under the facts and circumstances of this case, and the doctrine of res judicata or claim preclusion, the court concludes they are.
Perhaps the outcome would be different had there been a timely motion to alter or amend the memorandum decision and judgment so that the fees incurred and requested in the Starr's adversary proceeding were denied without prejudice. See In re Bryce, 2013 WL 5676327, *3 (Bankr. W.D. Wa. 2013) (concluding that fees incurred in adversary proceeding that were denied without prejudice and could be later considered under § 330 in the parent bankruptcy case). --------
The doctrine of res judicata, or claim preclusion, "provides that a final judgment on the merits bars further claims by parties or their privies based on the same cause of action." TahoeSierra Pres. Council, Inc. v. Tahoe Reg'l Planning Agency, 322 F.3d 1064, 1077 (9th Cir. 2003) (internal quotation marks, citations, and italics omitted). "Res judicata is applicable whenever there is (1) an identity of claims, (2) a final judgment on the merits, and (3) privity between parties." Id. (internal quotation marks omitted). The doctrine extends to "any claims that were raised or could have been raised in a prior action." Stewart v. U.S. Bancorp, 297 F.3d 953, 956 (9th Cir. 2002) (emphasis in original, internal quotations omitted). "A plaintiff need not bring every possible claim. But where claims arise from the same factual circumstances, a plaintiff must bring all related claims together or forfeit the opportunity to bring any omitted claim in a subsequent proceeding." Turtle Island Restoration Network v. U.S. Dep't of State, 673 F.3d 914, 918 (9th Cir. 2012).
There is an identity of claims. The Ninth Circuit looks to four factors in determining whether claims in successive actions are identical for res judicata purposes: (i) whether rights or interests established in the prior judgment would be destroyed or impaired by prosecution of the second action; (ii) whether substantially the same evidence is presented in the two actions; (iii) whether the two suits involve infringement of the same right; and (iv) whether the two suits arise out of the same transactional nucleus of facts. Turtle Island, 673 F.3d at 917-18 (internal quotation marks omitted). The fourth factor is the most important and the Ninth Circuit has repeatedly described it as "outcome determinative." ProShipLine Inc. v. Aspen Infrastructures Ltd., 609 F.3d 960, 968 (9th Cir. 2010); Mpoyo v. Litton Electro-Optical Sys., 430 F.3d 985, 988 (9th Cir. 2005).
The § 330 fee application includes a request for the same fees that were incurred, requested, and denied with prejudice in the Starr's adversary proceeding. Both fee requests arise out of and are based on the same core facts in that both are identical requests for compensation for services that Counsel provided the estate in the Starr's adversary proceeding. It is true, as Counsel argues, that the legal theories of recovery for the same fees now requested in the § 330 fee application and previously requested in the Starr's adversary proceeding differ. However, it has long been recognized that merely changing the legal theory does not make claims different particularly when, as here, the two claims arise out of (and admittedly are based on) the same nucleus of operative and underlying facts, i.e., services that Counsel provided to the estate in the Starr's adversary proceeding. Costantini v. Trans World Airlines, 681 F.2d 1199, 1201 (9th Cir. 1982).
The other relevant factors also confirm the existence of an identity of claims. The second proceeding, i.e., the § 330 fee application, and the first proceeding, i.e, the Starr's adversary proceeding, rely on the same evidence; namely, counsel's billing records and testimony regarding the services that Counsel provided the estate in the Starr's adversary proceeding. Prosecution of the second proceeding, i.e., the § 330 fee application, also threatens to impair rights established in the first proceeding, i.e., the Starr's adversary proceeding, in that awarding the same fees that were previously denied with prejudice would undermine the finality of the memorandum decision and judgment. Finally, the basis for the relief requested in the § 330 fee application and the Starr's adversary proceeding is the same; namely, Counsel's services to the estate in the prosecution of the Starr's adversary proceeding.
The second element is also satisfied. The memorandum decision and judgment denying the fees incurred and requested in the Starr's adversary proceeding with prejudice are final adjudications disallowing those fees on the merits.
And the third element is satisfied. Privity between parties exists when the parties in both actions are identical or substantially identical, "that is, when there is sufficient commonality of interest." Tahoe-Sierra, 322 F.3d at 1081 (internal quotation marks omitted). It is true, as Counsel argues, that in the § 330 fee application it is Counsel who now requests fees for the Starr's adversary proceeding and in the Starr's adversary proceeding it was the Trustee who requested the same fees for Counsel's services. However, that distinction is not persuasive for two reasons. First, the Trustee and his court-approved Counsel are in privity with one another. See Jenkins v. Ollason (In re JNC Companies), 996 F.2d 1225, *3 (9th Cir. 1993) (table). Second, there is a commonality of interest between the Trustee and Counsel. Both represent the estate but, beyond that, during the hearing on the § 330 fee application the Trustee stated that the fees requested in the Starr's adversary were requested for Counsel's benefit and that they would have come into the estate only to be paid by the estate to Counsel.
In short, the § 330 fee application includes a request for the same fees that were previously denied with prejudice and thereby disallowed in a final memorandum decision and judgment entered in the Starr's adversary proceeding. Under the doctrine of res judicata or claim preclusion those fees are disallowed fees for purposes of the § 330 fee application now before the court. And as disallowed fees, the fees requested for services that Counsel provided to the estate in the Starr's adversary proceeding are not reasonable. Therefore, Counsel's request for compensation will be reduced by $59,677.30.
II. No Meaningful Benefit to the Estate From the Starr's Adversary Proceeding
The court is not persuaded that the estate benefitted from the Starr's adversary proceeding. The court is persuaded that it was reasonably obvious from the outset of that litigation that the Starr's adversary proceeding would not benefit the estate. See In re Auto Parts Club, 211 B.R. 29, 35 (9th Cir. BAP 1997); see also In re Coxeter, 2012 WL 7070198, *11-13 (Bankr. E.D. Cal. 2012).
The Starr's adversary proceeding was not necessary to enforce any agreement between Starr's and the Trustee for the release of Starr's liens on the River Road property so that the Trustee could sell that property because, as the court concluded in the memorandum decision entered in the Starr's adversary proceeding, no such agreement existed in the first instance. The Starr's adversary proceeding also was not necessary to expunge Starr's lis pendens on the River Road property because the Trustee was able to obtain a state court expungement order and very shortly after that Starr's released any other lien on the property.
Once the Starr's liens were removed from the River Road property the Trustee proceeded with the sale of that property, albeit a delayed sale. However, the delay did not harm or damage the estate which means the Starr's adversary proceeding was not necessary to remedy or recover for either. As the court also explained in the memorandum decision entered in the Starr's adversary proceeding, if anything, Starr's refusal to sign lien release documents and the ensuing delay in the sale of the River Road property benefitted the estate by $118,000.00. As a result of Starr's actions, the Trustee was able to sell the River Road property for $730,000.00 rather than for the $612,000.00 originally contemplated.
Finally, Starr's ultimately released all of its remaining abstracts of judgment in early April 2016. However, during the period when the abstracts of judgment remained of record they did not interfere with any sales of estate property because no sales of estate property were pending or contemplated after January 2016 when the Trustee sold the River Road property and April 2016 when Starr's released all of its abstracts of judgment. In fact, during that time the parties stipulated to continue deadlines and trial because they were engaged in settlement discussions. Thus, during the three-month period between the sale of the River Road Property and Starr's release of all of its abstracts of judgment the fact that the abstracts of judgment remained of record caused no harm or damage to the estate. And, of course, once those abstracts of judgment were released, the Starr's adversary proceeding served no purpose whatsoever.
At best, the adversary proceeding resulted in a de minims reduction in the amount of Starr's proof of claim and a reclassification of a portion of the claim in that proof of claim from secured to unsecured. The former, however, could have been achieved through the less-costly claims objection process and the latter is a natural consequence of the release by Starr's of all of its liens which means it would have occurred in any event.
In short, the services that Counsel provided the estate in the adversary proceeding did not benefit the estate. Therefore, on this alternative and independent basis, the court would disallow at least $59,677.30 of the fees in the § 330 fee application requested for services that Counsel provided the estate in the Starr's adversary proceeding. Conclusion
For the foregoing reasons, the § 330 fee application is GRANTED IN PART AND DENIED IN PART as follows:
(1) GRANTED, and attorney's fees in the amount of $66 ,111.45 ($125,788.75 - $59,677.30) and expenses in the amount of $5 ,329.15 are allowed for total compensation allowed in the amount of $71 ,440.60 .Dated: October 12, 2017
(2) DENIED, and attorney's fees in the amount of $59 ,677.30 are not allowed.
/s/ _________
Christopher D. Jaime, Judge
United States Bankruptcy Court
INSTRUCTIONS TO CLERK OF COURT
SERVICE LIST
The Clerk of Court is instructed to send the attached document, via the BNC, to the following parties: Dana A. Suntag
5757 Pacific, #222
Stockton CA 95207 Rick Morin
555 Capitol Mall Suite 750
Sacramento CA 95814 Kevin A. Hughey
980 9th St 16th Fl
Sacramento CA 95814