Opinion
Bankr. No. 03-10194.
November 16, 2007
DECISION RE: TRI-STATE FINANCIAL'S OBJECTION TO WOODS FULLER'S PROOF OF CLAIM NO. 261
The matter before the Court is the Objection to Claim of Woods Fuller, Schultz and Smith, P.C. filed by Tri-State Financial, L.L.C., and the response thereto filed by Woods, Fuller, Schultz Smith P.C. This is a core proceeding under 28 U.S.C. § 157(b)(2). This decision and accompanying order shall constitute the Court's findings and conclusions under Fed.Rs.Bankr.P. 7052 and 9014(c). As set forth below, Tri-State Financial, L.L.C.'s objection will be sustained in part, and the claim will be allowed at $168,000.00. The Amended Memorandum Re: Several Pending Matters entered May 2, 2007, and the order entered with the original memorandum on April 18, 2007; the letter decision and order entered May 2, 2007 on Tri-State Financial, L.L.C.'s motions for reconsideration; and the letter decision and order entered July 10, 2007, on Tri-State Financial, L.L.C.'s Motion to Disqualify Woods, Fuller, Schultz Smith as Attorneys for Trustee are incorporated herein by reference.
I.
Tri-State Ethanol Company LLC ("Tri-State Ethanol" or "Debtor") was formed in 2001. Its primary asset was an ethanol plant. Serving as counsel for Tri-State Ethanol was the law firm of Woods, Fuller, Schultz Smith P.C. ("Woods Fuller"). Attorney Bradley C. Grossenburg and his team from Woods Fuller were initially involved in the formation of Tri-State Ethanol and related financing and construction issues. Attorney Grossenburg later brought in his partner, William G. Taylor, Jr., who headed up a team from the firm that addressed problems for Tri-State Ethanol that arose post-construction.
On May 23, 2003, Tri-State Ethanol filed a Chapter 11 petition in bankruptcy. By order entered December 5, 2003 and later made retroactive to May 23, 2003, Tri-State Ethanol, now a debtor in possession, was authorized to employ Woods Fuller as special counsel to represent it in "various litigation, both as Plaintiff and Defendant involved with the construction of Debtor's [ethanol plant] . . .," as set forth in the employment application.
On May 25, 2004, Woods Fuller filed a proof of claim, no. 261, for unpaid legal services and costs, most of which were incurred pre-petition. It sought "$168,000.00, plus accrued interest in an amount to be determined."
Pursuant to Local Bankr. R. 3001-2, Woods Fuller was not required to submit supporting documentation with its proof of claim until requested to do so by the case trustee or the debtor in possession.
A plan was never confirmed. The case was converted to Chapter 7 on July 29, 2004. John S. Lovald was selected by the United States Trustee to serve as the case trustee. Trustee Lovald was authorized by order entered May 5, 2005, to employ Woods Fuller to handle matters related to the construction of Debtor's ethanol plant and associated claims.
Woods Fuller filed a second proof of claim, no. 395, on January 24, 2005, just a day before the proof of claim deadline. This claim was for $61,242.84 and was described as a priority claim. That same day, Woods Fuller also filed a fee application for the same sum for services and costs from May 27, 2003, through January 10, 2005, for legal work for the Chapter 11 debtor in possession. Two objections to the fee application were filed. One objector was deemed to lack standing. The other objection was resolved by agreement. The fee order entered May 5, 2005, rendered moot Woods Fuller's proof of claim no. 395.
On January 6, 2006, Woods Fuller filed another fee application (captioned "First Interim . . ."). The firm sought total fees of $125,159.94 for services rendered for Trustee Lovald and related costs, including sales tax, from July 30, 2004, through November 30, 2005. No objections were filed, and the application was approved by order entered February 1, 2006.
On December 14, 2006, Tri-State Financial filed an objection to Woods Fuller's proofs of claim nos. 261 and 395. Tri-State Financial argued Debtor and Woods Fuller did not have a written employment agreement and no part of either claim had been approved by Debtor's governing board. In its objection, Tri-State Financial also complained Woods Fuller's legal services were worth substantially less than the $229,242.24 total sought, stating:
Such services provided advice to [Debtor] which is the direct opposite of advice [Woods Fuller] has, on information and belief, provided to the Trustee. For example, Bill Taylor of [Woods Fuller] encouraged [Debtor] not to settle with [North Central] at any sum based on previous experience with [North Central], their contracts, change orders, and other documents he had reviewed. Taylor told [Debtor] they would not owe anything to [North Central] by the time he got done with them. Taylor also said that [North Central's] president, Kim Buchanan, had breached his fiduciary duty to [Debtor] while he was on the Board of Managers of [Debtor] and while he was president of the Board of Managers of [Debtor]. Taylor also said that a counterclaim by [Debtor] against [North Central] would be appropriate because the plant did not work. [Debtor] agreed to have [Woods Fuller] engaged by Trustee Lovald because of their confidence and trust in [Woods Fuller] to follow through on the advice given to [Debtor] concerning [North Central]. However, once hired by Lovald, [Woods Fuller]'s advice has been the opposite — to pay [North Central] $2 million or more. On information and belief, [Woods Fuller] has not advised Lovald regarding [North Central]'s breach of fiduciary duty or the counterclaim against [North Central].
The hearing on Tri-State Financial's objection to Woods Fuller's proofs of claim was originally set for February 8, 2007. It was rescheduled to April 26-27, 2007, at Woods Fuller's request.
Some bases for Tri-State Financial's objection to Woods Fuller's proofs of claim had been repeated in several of Tri-State Financial's other pending pleadings. Since Tri-State Financial had offered little or no case law in support of these common legal arguments, the Court addressed them in an interim decision. In re Tri-State Ethanol Company LLC, Bankr. No. 03-10194, 2007 WL 1174182, slip op. (Bankr. D.S.D. April 18, 2007 and amended May 2, 2007). Therein, the Court overruled Tri-State Financial's objection to Woods Fuller's proof of claim no. 261 (and other pending pleadings) to the extent Tri-State Financial had argued Woods Fuller was not eligible for employment under § 327(e) or may not be paid under §§ 328 or 330 because the firm was not disinterested, because the firm holds an interest adverse to the bankruptcy estate or Debtor, or because the firm counseled Trustee Lovald to settle the claim held by North Central Construction, Inc. ("North Central").
In the April 18, 2007, decision, the Court also advised Tri-State Financial that its objection to Woods Fuller's proof of claim no. 395 was moot since the sum sought had already been addressed in the May 5, 2005, fee order.
In the April 18, 2007 decision, the Court further determined the unresolved issues under Tri-State Financial's objection to Woods Fuller's proof of claim 261 were:
(1) whether Woods Fuller's pre-petition services, as set forth in its proof of claim no. 261, had to be approved by Debtor's board of managers pre-petition before the claim now may be paid by the bankruptcy estate, and if so, whether these pre-petition services were so approved;
(2) whether Woods Fuller had to submit to Debtor pre-petition detailed invoices regarding the sums sought under its proof of claim no. 261 before the claim may now be paid by the bankruptcy estate; and
(3) whether any "law of the case" established by the District Court during an appeal regarding the claim filed by James Jandrain requires the disallowance of Woods Fuller's proof of claim no. 261.
Because the Court was unsure of the nature of Tri-State Financial's "law of the case" argument, it held a pre-hearing conference with counsel to receive clarifying arguments.
On July 10, 2007, the Court entered a decision and order regarding the unresolved issues under Tri-State Financial's motion to have Woods Fuller disqualified as counsel for the estate. In re Tri-State Ethanol Company LLC, Bankr. No. 03-10194, 2007 WL 2033344, slip op. (Bankr. D.S.D. July 10, 2007). The decision further addressed and resolved some of the conflict of interest issues Tri-State Financial had raised against Woods Fuller.
The evidentiary hearing on Tri-State Financial's objection to Woods Fuller's proof of claim no. 261 was held August 23, 2007. The hearing was combined with the evidentiary hearing on Tri-State Financial's objection to a pending fee application filed by Woods Fuller, which encompassed fees for post-conversion services Woods Fuller had rendered for Trustee Lovald between December 5, 2005, and December 7, 2006. (The application was captioned "Second Interim" and is referenced herein the same way.)
Attorney Grossenburg from Woods Fuller testified. On direct examination, he reviewed the nature of the pre-bankruptcy work his firm had performed for Tri-State Corn Processors and then for Tri-State Ethanol. Attorney Grossenburg indicated the firm had helped Tri-State Corn Processors form Tri-State Ethanol and then the firm shifted from representing the corn processors to representing the ethanol company. When asked how clients were advised when an attorney's or paralegal's hourly rate changed, Attorney Grossenburg said an annual rate change would be reflected in bills sent to the client. He also stated the firm's bills include a combined account and matter number. In response to several questions, Attorney Grossenburg said his firm had discussed confidentiality matters with his clients. Finally, when asked by counsel for Tri-State Financial whether there was ever a time when all shareholder-attorneys and all associate attorneys in his firm had charged the same rate, Attorney Grossenburg said that was never the situation regarding attorneys' rates during his 30 years at the firm, though he said paralegals may have charged the same rate at some time.
Attorney Taylor from Woods Fuller also testified about the work he and his team from the firm had performed for Tri-State Ethanol, both before and after Tri-State Ethanol filed bankruptcy. He said he was brought in by Attorney Grossenburg in August 2002 when construction problems at the ethanol plant arose with Gaylor Engineering and North Central and shortly after North Central had filed a mechanic's lien against the plant. Since North Central had a representative, Kim Buchanan, on the board and the law firm and Tri-State Ethanol's representatives wanted to keep some of Woods Fuller's work confidential from Kim Buchanan, Attorney Taylor testified Woods Fuller had set up a new account and sent billing statements to Randy Kramer, as president of Tri-State Ethanol, beginning in late March 2002. He said they continued to send regular bills until March 2003, shortly before Tri-State Ethanol filed bankruptcy.
After the bankruptcy, Attorney Taylor said he made himself available to Debtor's counsel during the summer of 2003, primarily answering questions and giving opinions. Eventually, because the number of questions increased, he asked to be formally employed by Debtor so he would not be working for free. He said the employment application was approved and he continued doing work for the debtor-in-possession. After the case converted to Chapter 7, Attorney Taylor said he was employed by Trustee Lovald to represent the bankruptcy estate regarding the construction-related matters. He said the firm's first interim fee application had been approved without objection.
Attorney Taylor testified the format of the firm's billing materials showed, in narrative form, the work done by each attorney involved, the date of the work performed, the amount of time expended, the rate charged by that lawyer, totals for time and charges, and an itemization for out-of-pocket expenses the firm had advanced during the term of the bill. On cross-examination, Attorney Taylor noted the format of the firm's billing statements had changed a bit when a new computer system was installed. He stated the format for identifying the client and the particular matter being addressed were altered. He did not give specifics except to say the firm did not always assign a "matter" number now.
Attorney Taylor acknowledged about three invoices from the litigation team of Woods Fuller, which he led, were not mailed to Debtor; he estimated they totaled between $50,000.00 and $150,000.00 and were for March, April, and May 2003, which are now a part of the firm's proof of claim no. 261. He said the business team of Woods Fuller, which Attorney Grossenburg had led, billed Debtor all the way through. Attorney Taylor stated Tri-State Ethanol paid the firm's bills until late 2002, when only a portion of an earlier bill was paid.
Attorney Taylor said his firm submitted supporting material to Trustee Lovald for its proof of claim no. 261, set forth in Exhibits B and C. He acknowledged no board meeting minutes for Tri-State Ethanol reflect the pre-petition sum due the firm because the bills had not been paid by Tri-State Ethanol.
James G. Jandrain, an equity member and board of managers member of Tri-State Ethanol since 2001 and an equity member and board of managers member for Tri-State Financial since 2005, testified on behalf of Tri-State Financial. He stated he had not personally seen all of the invoices while a board member for Tri-State Ethanol. He also said he never knew some legal bills from Woods Fuller were confidential. He stated Woods Fuller's itemized billings under Exhibits B and C did not consistently bill the same entity and some were not addressed to a particular client at all. Some were billed to Tri-State Corn Processors or Steve Heesch, who had served for a time as the president of Tri-State Ethanol. Jandrain was not aware of any board resolution, while he was on the board of managers, whereby Tri-State Ethanol agreed to assume the legal bills of Tri-State Corn Processors.
The first page of invoice no. 20055031 was fully labeled at the top while the remaining pages in the same invoice included only reference numbers and consecutive page numbers; the client's name and address were not repeated on the successive pages. All the other invoices in Exhibits B or C were fully labeled on each page.
On rebuttal, Attorney Taylor said the invoices in Exhibit B, pages 0045 through 0083, represented work by his litigation team for Tri-State Ethanol for March, April, and May 2003 that was billed to Steven Heesch, rather than directly to Tri-State Ethanol, at the request of James Jandrain and Randy Kramer, principals of Tri-State Ethanol. He said the invoices were dated September 16, 2005 because that was the date the law firm's computer produced them in support of proof of claim no. 261. This testimony was not disputed.
At Tri-State Financial's suggestion and with Woods Fuller's acquiescence, the testimony and exhibits offered August 23, 2007 were deemed applicable to both Tri-State Financial's objection to Woods Fuller's proof of claim 261 and Woods Fuller's second interim fee application.
Several joint exhibits were received. The majority were minutes from Tri-State Ethanol board of manager meetings held pre-petition. No testimony clearly addressed their relevance to the unresolved issues. From the minutes of May 5-6, 2003, the Court discerned some board of managers were not satisfied with Woods Fuller's performance. One set of minutes offered jointly was from a post-petition meeting held September 25, 2003, while Debtor was in Chapter 11. It referenced work Woods Fuller was doing regarding the construction litigation and the board's decision to present a refinancing/re-engineering agreement to the Bankruptcy Court for approval. A separate exhibit from Tri-State Financial was the Tri-State Ethanol board minutes from May 18, 2002, where the board held payment for services "by anyone" would have to be approved by the board after a purchase order or itemized bill was submitted. None of the minutes offered in evidence were signed.
One joint exhibit was Woods Fuller's second interim fee application, which, of course, was already part of the record. Tri-State Financial also offered Exhibit Q, which was relevant only to Woods Fuller's second interim fee application.
Tri-State Financial offered Exhibits B and C, which were described as the supporting documentation Woods Fuller had provided to Trustee Lovald (and apparently had provided to Tri-State Financial) in support of its proof of claim no. 261, and Exhibit D, which was a copy of the appellate court decision regarding the allowance of James Jandrain's proof of claim. The Court presumes the relevance of the latter went to Tri-State Financial's argument that Woods Fuller's proof of claim no. 261 had to be denied under some "law of the case" established by that decision.
The Court took both contested matters under advisement.
Tri-State Financial's unresolved objections to Woods Fuller's proof of claim no. 261 are discussed below. Three had been raised in the objection, and an additional one was raised during the August 23, 2007 hearing.
II.
(1) Whether Woods Fuller's pre-petition services, as set forth in its proof of claim no. 261, had to be approved by Debtor's board of managers pre-petition before the claim may now be paid by the bankruptcy estate, and if so, whether these pre-petition services were so approved?
(2) Whether Woods Fuller had to submit to Debtor pre-petition detailed invoices regarding the sums sought under its proof of claim no. 261 before the claim may now be paid by the bankruptcy estate?
The record is clear that after May 18, 2002, Woods Fuller needed to submit an itemized bill and have the bill approved by Tri-State Ethanol's board of managers before the firm's fees could be paid. The board clearly adopted a resolution to that effect. The board's resolution, however, only partially resolves these two objections.
The next question is whether the board of manager's May 18, 2002, resolution prevents Woods Fuller from now being paid in light of Tri-State Ethanol's intervening bankruptcy. It does not.
Pursuant to Fed.R.Bankr.P. 3002(a), an unsecured creditor must file a proof of claim or interest for the claim or interest to be allowed. Fed.R.Bankr.P. 3002(a). Even upon objection, [the creditor's] proof of claim provides some evidence as to its validity and amount and is strong enough to carry over a mere formal objection without more. See Wright v. Holm (In re Holm), 931 F.2d 620, 622-23 (9th Cir. 1991). A party objecting to a proof of claim has the burden of going forward to "meet, overcome, or, at minimum, equalize the valid claim." FDIC v. Union Entities (In re Be-Mac Transport Co.), 83 F.3d 1020, 1025 (8th Cir. 1996) (quoting In re Gridley, 149 B.R. 128, 132 (Bankr. D.S.D. 1992)). Once the burden of overcoming the prima facie validity of the proof of claim is met, the ultimate burden of persuasion always rests on the claimant by a preponderance of the evidence. Id. An objection to a proof of claim initiates a contested matter under Fed.R.Bankr.P. 9014(a), even though it is not commenced by motion.
In re Farmland Industries, Inc., 305 B.R. 490, 493 (Bankr. W.D. Mo. 2003). Accordingly, the claim allowance process established by the Bankruptcy Code and Federal Rules of Bankruptcy Procedure supplants the earlier bill-approval process utilized by Tri-State Ethanol's board of managers. If Woods Fuller's pre-petition claim survives the Chapter 7 claims process, which includes timely filing a proof of claim, as Woods Fuller did, and addressing the objections to the claim filed by Tri-State Financial, the claim may be allowed.
(3) Whether any "law of the case" established by the District Court during an appeal regarding the claim filed by James Jandrain requires the disallowance of Woods Fuller's proof of claim no. 261?
James Jandrain sought compensation from the bankruptcy estate for CPA services he had rendered for Debtor pre-petition. Based on oral findings and conclusions entered at the close of an evidentiary hearing on May 4, 2006, this Court disallowed those fees for lack of supporting documentation. Mr. Jandrain appealed. On August 22, 2006, the Hon. Charles B. Kornmann, United States District Court for the District of South Dakota, entered a decision upholding the Bankruptcy Court's denial of Mr. Jandrain's claim. Jandrain v. Lovald, 351 B.R. 679 (D.S.D. 2006). Judge Kornmann concluded Mr. Jandrain had failed to show any express or implied contract with Debtor for CPA services and may have violated certain state laws regarding manager managed companies. Judge Kornmann also held Debtor's board of directors could not retroactively authorize the services since the board had no legal authority to do so post-conversion. Judge Kornmann also denied any request for a quantum meruit allowance because Mr. Jandrain did not come into his circumstances of being unpaid with clean hands.
When the Court held the pre-hearing conference with counsel on July 17, 2007, so Tri-State Financial could clarify its "law of the case" argument regarding Woods Fuller's proof of claim no. 261, Attorney Strasheim, counsel for Tri-State Financial cited three cases. He admitted his cited decisions did not have similar facts, but instead said they were intended to provide general law on the "law of the case" doctrine. Counsel argued the doctrine should be applied in bankruptcy so that rulings are consistent when similar issues are presented regarding different parties. Attorney Strasheim also argued the facts surrounding Woods Fuller's claim were similar to Mr. Jandrain's claim because both had not submitted invoices pre-petition to Debtor; Debtor's schedules did not show either debt; the firm, like Mr. Jandrain, did not file a proof of claim until after the case converted from Chapter 11 to Chapter 7; and both were insiders of Debtor. He argued the only difference was Woods Fuller was not on Tri-State Ethanol's board of managers like Mr. Jandrain.
In his responsive argument, Attorney Taylor, counsel for Woods Fuller disputed Tri-State Financial's rendition of material facts and distinguished Judge Kornmann's ruling regarding Mr. Jandrain's claim from the pre-petition fees sought by Woods Fuller in proof of claim no. 261. He stated Woods Fuller had regularly submitted invoices pre-petition to Debtor, filed its first proof of claim shortly after the bankruptcy was commenced, and filed a second proof of claim after it realized it had not submitted an invoice for a portion of time. Counsel for Woods Fuller further stated Debtor actually did list the firm as a creditor in its initial schedules. Attorney Taylor argued Woods Fuller, unlike Mr. Jandrain, expected to be paid for its legal services and Debtor always expected to pay the firm for them; the law firm, unlike Mr. Jandrain, was always licensed for professional work in South Dakota; and unlike Mr. Jandrain, Debtor's records showed the firm as an account payable. Counsel for Woods Fuller acknowledged the only time the firm "took its chances" on being paid was after the explosion at the ethanol plant when the firm rendered services knowing Debtor's finances might prevent payment of them.
The "law of the case" doctrine provides "that 'when a court decides upon a rule of law, that decision should continue to govern the same issues in subsequent stages of the same case.'" Little Earth of the United Tribes, Inc. v. U.S. Department of Housing and Urban Development, 807 F.2d 1433, 1441 (8th Cir. 1986) (quoting Arizona v. California, 460 U.S. 605, 618 (1983) (quoted in Maxfield v. Cintas Corp., 487 F.3d 1132, 1134-35 (8th Cir. 2007)). The doctrine's purpose is to prevent the re-litigation of settled issues in a case and thus protect the settled expectations of the parties, ensure uniformity of decision, and promote judicial efficiency. Maxfield, 487 F.3d at 1135 (quoting therein Little Earth of the United Tribes, Inc., 807 F.2d at 1440-41 (cites therein omitted)). An issue once decided should be reconsidered during a case only if substantially different evidence is later introduced or the decision is clearly erroneous and works a manifest injustice. Id. The doctrine applies to appellate decisions but does not apply to interlocutory decisions since they may always be reconsidered before the final decision is entered. First Union National Bank v. Pictet Overseas Trust Corp., 477 F.3d 616, 620 (8th Cir. 2007).
This Court concludes Judge Kornmann did not establish any law of the case regarding claims by professionals employed by Debtor pre-petition. Instead, Judge Kornmann made a factual determination that Mr. Jandrain, in particular, did not have a claim against the bankruptcy estate because there were no records held by Mr. Jandrain or Debtor that verified Mr. Jandrain had been employed pre-petition as an accountant for Debtor with the expectation he would receive certain compensation for those services. In other words, Judge Kornmann did not reach any case-specific legal conclusion that must be applied to all claims against Debtor's Chapter 7 estate. Instead, he applied general principles of law regarding pre-petition claims against a bankruptcy estate and concluded Mr. Jandrain did not have an allowable claim.
In contrast to Mr. Jandrain's claim, there is no dispute Debtor retained Woods Fuller pre-petition for various legal work with the expectation it would pay the law firm for this work. There is no dispute Woods Fuller rendered these pre-petition services as requested by Debtor and that it charged Debtor a fee for them. Therefore, the legal standards governing Mr. Jandrain's pre-petition claim and Woods Fuller's pre-petition claims are not different; only the result is different because the facts surrounding Mr. Jandrain's claim and the facts surrounding Woods Fuller's claim are different.
(4) Whether Woods Fuller may be compensated from the bankruptcy estate for pre-petition services billed to Tri-State Corn Processors?
At the hearing, Tri-State Financial pointed out some of Woods Fuller's fee invoices in Exhibits B and C were not addressed to Tri-State Ethanol. Ideally, this issue should have been raised earlier. Had Tri-State Financial not raised it, however, the Court would have. If Woods Fuller had requested more time to find the necessary documentation to establish Tri-State Ethanol had agreed to assume the legal bills of Tri-State Corn Processors, the Court would have granted that extension. Since Woods Fuller did not request an extension, however, and since no evidence contradictory to Mr. Jandrain's testimony and the invoices in Exhibits B and C were received, the Court can only assume such an agreement was never formally made by Tri-State Ethanol's board of managers.
Testimony at the hearing indicated two admitted exhibits were related to Woods Fuller's proof of claim no. 261, Exhibits B and C. Exhibit B included a cover letter and four "packets," which were described in the letter. Packet 1. This packet includes invoice no. 20055031 for services from about February 25, 2003 (the date is partially obliterated by a punch hole) to May 22, 2003, and then four more entries for June 8, 2005, to June 13, 2005. The invoice is addressed to Steven Heesch and Tri-State Ethanol. Obviously, the fees related to the post-petition services in 2005 have to be deducted because those fees have been or need to be considered through a fee application to the estate under § 330(a). With the compensation, sales tax, and costs associated with the June 2005 dates deleted, Woods Fuller sought under Packet 1 $86,645.00 for compensation of services, $5,129.38 for sales tax (at the same 5.92% rate used in the invoice), and $3,238.31 for costs for a total of $95,012.69. This sum will be allowed.
Exhibits B and C, which were provided by Tri-State Financial, had some organizational shortcomings, see footnote 6, and testimony explaining them was limited. The page with Bates no. WFSS 0268 is missing from the official Exhibit C and the Court's two copies of Exhibit C.
Whether by intention or accident, Exhibit B included a cover letter, an internal "Exhibit A" and an internal "Exhibit B." The internal Exhibit A included several minutes from Tri-State Financial's board of managers that were duplicates of Joint Exhibits J1, J2, J3, J4, J5, J6, J7, J9, J10, J11, J12, and J13. This "Exhibit A" within Exhibit B also included board of manager minutes for May 31, 2001; October 29, 2001; September 5, 2002; September 13, 2002; October 19, 2002; January 21, 2003; and February 1, 2003. The Court did not discern anything notable in them. In particular, the Court did not find any resolution whereby Tri-State Ethanol agreed to pay Tri-State Corn Processors legal bills to Woods Fuller. After the minutes, the next subdivision of Exhibit B was the four packets described in the cover letter to Exhibit B, which were collectively labeled as "Exhibit B." Consequently, the Court assumes that at one time, the minutes were intended to stand alone as an Exhibit A and the four packets of fee information and the attendant cover letter were intended to be Exhibit B. Before or at the hearing, however, they somehow were all put together and collectively labeled Exhibit B.
Packet 2. This packet includes invoices from Woods Fuller to Tri-State Ethanol and also either Dan Kafka or Randy Kramer. There were four different invoices: invoice no. 20022764 for April 2, 2002 through April 22, 2002, for $568.75; invoice no. 20027128 for October 2, 2002, through December 2, 2002, for $13,187.73; invoice no. 20030434 for December 3, 2002, through December 19, 2002, for $856.25; and invoice no. 20031084 for January 2, 2003, through January 30, 2003, for $2,494.77. The total sought by Woods Fuller under the entire packet was $17,107.50 less two payments for a final balance of $14,763.58. The Court's calculations did not match the $16,100.40 referenced in the cover letter within Exhibit B. The $14,763.58 will be allowed.
Packet 3. Packet 3 contains five invoices for pre-petition services: invoice no. 20025940 for August 22, 2002, through October 16, 2002, for $13,784.12 (including one payment of $3,776.09 on November 26, 2002); invoice no. 20027035 for October 14, 2002, through December 12, 2002, for $6,960.71; invoice no. 20030444 for November 6, 2002, through December 31, 2002, for $2,964.03; invoice no. 20031085 for January 2, 2003, through January 31, 2003, for $12,418.15; and invoice no. 20031293 for February 3, 2003, through February 28, 2003, for $26,187.87. With one exception, these will be allowed.
In the cover letter that was submitted as part of Exhibit B, an attorney for Woods Fuller stated:
The third packet of information has a cover sheet entitled "Matter Status." This information relates to matter number 145402. Some explanation is in order. You [the letter was directed to Trustee Lovald] will note a payment of $56,836.15 on May 12, 2005, with the remaining balance of $5,478.73 on the same date. The next entry reflects an invoice of $61,242.84. These transactions reflect the addition and deletion of Woods Fuller's Chapter 11 approved and paid compensation. You will recall that $5,478.73 of the application was denied for one reason or another. This leaves $62,314.88 billed but unpaid on matter number 145402.
The Court was able to follow the explanation regarding the Chapter 11 services. However, it appears the matter no. for the four invoices in packet 3 was really 21454, not a new matter no. of 145402. This may have been about the time the firm's new computer system slightly altered how clients and matters were identified by the firm on its bills.
Included in invoice no. 20031085 were four hours of service by Attorney Taylor on January 2, 3, 14, and 17, 2003. These were duplicative entries from invoice no. 20031084, which is part of Packet 2 of Exhibit B. Thus, the compensation and attendant sales tax for the duplicative entries will be subtracted from invoice no. 20031085 and the total allowance under that invoice will be $11,561.41. Accordingly, the total fees allowed under Packet 3 is $61,458.14.
Packet 4. This packet contained several invoices. Invoices nos. 20032072 and 20032073 were both billed to Randy Kramer and Tri-State Corn Processors Cooperative for fees incurred in March 2003. Because these bills were not Tri-State Ethanol's, they will be disallowed.
Invoice no. 20032716 was billed to Randy Kramer and Tri-State Ethanol for services from April 3, 2003 through April 14, 2003. The total sought was $2,114.81. Invoice no. 20032800 was billed to Randy Kramer and Tri-State Ethanol for services on April 22 and April 29, 2003 for $333.37. Invoice no. 20033498 was also billed to Randy Kramer and Tri-State Ethanol for services on May 5, 2003 for $78.44. These invoices, for a total of $2,526.62, will be allowed and are all that will be allowed under Packet 4.
The last two invoices in Packet 4, nos. 20055025 and 20055026, were for post-petition services billed to Steve Heesch and Tri-State Ethanol. One was for just 14 cents on an unknown date in 2004. The other was for $489.88; the dates are not clear but appear to be for November 2003 to February 5, 2004. Both invoices cover a time when the firm was employed by the Chapter 11 debtor in possession. Hence, these fees have been or should be sought through a fee application under § 330(a).
Based on these findings, the total allowable fees under Exhibit B are $173,761.03.
Exhibit C contained 16 invoices for services rendered by Woods Fuller in 2000 and 2001. Each was billed to Tri-State Corn Processors. They will not be allowed.
Exhibit C also contained four additional invoices for legal services billed to Tri-State Ethanol and either Dan Kafka or Randy Kramer. The first was invoice no. 20016520 for November 26, 2001, through December 11, 2001, for $410.10. The next invoice, no. 20021168, for January 2, 2002, through February 7, 2002, is for $308.43. It also indicates the earlier invoice for $410.10 was paid. There is then a gap in dates as the next invoice, no. 20025373 is for services rendered and costs incurred between August 22, 2002, through September 20, 2002, for $4,346.80. It indicates a previous unpaid balance of $568.75, but the Court does not have an invoice delineating that balance. The fourth invoice, no. 20025941, was for the same services and amount as the third. Handwritten, immediately above the October 29, 2002, billing date, on invoice no. 20025941 was the notation, "Pd 11-26-02" and handwritten at the top were the initials "CK." In the absence of another explanation, the Court can only conclude the $4,346.80 has been paid. Accordingly, the unpaid fees allowable under Exhibit C total just $308.43.
The fees itemized in Exhibits B and C that the Court could allow as a pre-petition claim for Woods Fuller total $174,069.46. Since Woods Fuller's proof of claim no. 261 was filed for only $168,000.00, it will be allowed at $168,000.00.
IV.
Several times during the August 23, 2007 evidentiary hearing, counsel for Tri-State Financial raised issues related to Tri-State Financial's objection to Woods Fuller's proof of claim No. 261 that had been addressed in earlier decisions. Though the Court, in response, advised counsel for Tri-State Financial that he could make an offer of proof as to the previously-addressed issues, Tri-State Financial did not do so.
The first time an offer of proof was discussed was mid-morning, at the close of an extended colloquy, which initially related to the admissibility of an unredacted billing statement by Woods Fuller and morphed into Tri-State Financial's raising some of the issues previously addressed by the Court. Attorney Strasheim, counsel for Tri-State Financial, advised the Court he wanted to offer the transcript of the hearing held December 18, 19, and 20, 2006, (Joint Exhibit 14, volumes I, II, and III) on Trustee Lovald's motion to approve his settlement with North Central. He said the transcript was being advanced to show Woods Fuller's services had no value because the firm had breached an alleged duty to Debtor and to show Woods Fuller should forfeit all fees because it had breached this alleged duty to Debtor. The Court advised Attorney Strasheim he could make an offer of proof regarding the previously resolved issues. Attorney Strasheim responded that he would do so during "his case."
Woods Fuller had made available for the hearing an unredacted version of its fee billing for services rendered and costs incurred between January 2000 through June 2003, the time-period covered within its proof of claim no. 261. In anticipation that Tri-State Financial would want the unredacted version of the statement admitted into evidence, Woods Fuller filed, shortly before the hearing, a motion to protect that exhibit from public view. Tri-State Financial did not consent to that.
Part of the extended colloquy regarding this exhibit was whether Woods Fuller had failed to timely provide it to Tri-State Financial under a discovery request. Woods Fuller advised the Court it had made the redacted version of the exhibit available to counsel for Tri-State Financial earlier in the year and, though Woods Fuller had anticipated Tri-State Financial would request the unredacted version, Tri-State Financial did not do so. In response, counsel for Tri-State Financial argued the Court had cut off its discovery attempts. The Court reminded counsel for Tri-State Financial that its earlier order regarding pending discovery matters (entered April 18, 2007) and the attendant decision (originally entered April 18, 2007 and amended on May 2, 2007) had invited renewed discovery motions if the parties were unable to resolve discovery disputes related to the unresolved issues under Woods Fuller's second interim fee application and its proof of claim no. 261 and that no such motions were ever filed.
Late morning, Attorney Strasheim again argued, during cross-examination of Attorney Taylor, that Woods Fuller should forfeit its fees because the firm had breached some continuing duty owed post-conversion to Tri-State Ethanol. When addressing an objection to the relevancy of a question on that topic, counsel for Tri-State Financial argued Tri-State Ethanol was a viable entity, separate from Debtor, though it was in Chapter 7. The Court noted that issue had been resolved in a final order entered July 10, 2007, on Tri-State Financial's Motion to Disqualify Woods, Fuller, Schultz Smith as Attorneys for Trustee and that Tri-State Financial was "plowing old ground." It was also at this point that the Court advised counsel for Tri-State Financial a second time that he could make an offer of proof. In response, counsel for Tri-State Financial offered into evidence the transcript of the hearing held December 18, 19, and 20, 2006 (Joint Exhibit 14, volumes I, II, and III) on Trustee Lovald's motion to approve his settlement with North Central. A relevancy objection was sustained, and the transcripts were not admitted as evidence. Counsel for Tri-State Financial did not then make an offer of proof and explain the relevancy of the transcript in support of Tri-State Financial's argument that Woods Fuller should not be paid because the firm had violated some continuing duty owed to the post-conversion debtor.
Early in the afternoon, both parties rested as to evidence regarding Tri-State Financial's objection to Woods Fuller's proof of claim no. 261. The Court then recessed to allow Tri-State Financial to review the unredacted version of Woods Fuller's fee itemization. The hearing was reconvened, however, when the Court was advised the unredacted fee statement related only to the pre-petition fees under Woods Fuller's proof of claim no. 261. Attorney Strasheim, however, argued the unredacted version of Woods Fuller's fee statements was also relevant to Woods Fuller's second fee application under his theory that Woods Fuller had breached its duty (presumably to the post-conversion debtor). The Court again advised counsel he could make an offer of proof. Attorney Strasheim responded by offering the unredacted fee statements (Woods Fuller's Exhibit 2) into evidence. The Court refused because the unredacted version had not been shown to be relevant to the three unresolved issues under the two contested matters heard that day. Tri-State Financial again did not make an offer of proof.
Counsel stated he was offering the unredacted exhibit in support of Tri-State Financial's objection to Woods Fuller's proof of claim no. 261, not as to both contested matters heard that day, though he may have just misstated his intent. The Court directed Attorney Strasheim to destroy his copy of the unredacted fee statement; the Court kept a copy, at Tri-State Financial's request, for purposes of maintaining the record for any appeal. That action effectively resolved Woods Fuller's August 20, 2007, Motion for Entry of Protective Order.
The record reveals one other instance where Tri-State Financial verged on making a formal offer of proof. Early in the day, Attorney Strasheim asked Attorney Grossenburg if he had reviewed the contract between North Central and Tri-State Ethanol. Attorney Strasheim stated the purpose of the question was to review work the law firm had done and ascertain whether the law firm's contract had to be approved "by the board" [presumably Tri-State Ethanol's board of managers]. Attorney Strasheim then asked Attorney Grossenberg if this particular contract was a "defined-scope contract." The relevancy of this question was raised. In response, Attorney Strasheim stated he "would offer to prove, based on [Attorney Grossenburg's] last answer, that [Attorney Grossenburg] did not understand the meaning of defined scope. I'm about done, your honor." Attorney Strasheim then asked the witness a question on another subject. He did not explain how the "defined-scope" colloquy related to Tri-State Financial's objection to Woods Fuller's proof of claim no. 261 or its objection to Woods Fuller's second interim fee application.
An offer of proof can serve two purposes:
'(1) to inform the court and opposing counsel of the substance of the excluded evidence, enabling them to take appropriate action; and (2) to provide an appellate court with a record allowing it to determine whether the exclusion was erroneous and whether appellant was prejudiced by the exclusion.'
Christinson v. Big Stone County Co-op, 13 F.3d 1178, 1180-81 (8th Cir. 1994 (quoting Thomas v. Wyrick, 687 F.2d 235, 239 (8th Cir. 1982)). Since Tri-State Financial did not make a record expressing the substance of the evidence it would present, if permitted, on the previously resolved issues, nothing in the record indicated to the Court it should revisit its earlier rulings and allow Tri-State Financial to present evidence on those issues. Christinson, 13 F.3d at 1180-81; see Carton v. Missouri Pacific Railroad Co., 46 F.3d 1135 (table) (8th Cir. 1995). The Court is familiar with the three-day hearing held in December 2006 on Trustee Lovald's proposed settlement with North Central. Nothing during that hearing leads the Court to alter its conclusions regarding the "continuing duty to Debtor" issue that Tri-State Financial has raised in several pleadings, including its objection to Woods Fuller's proof of claim no. 261.
Though invited to supply relevant law in support of its "continuing duty to debtor" theory, Tri-State Financial has never done so. Accordingly, the Court's earlier findings and conclusions, including the case law cited therein, regarding Tri-State Financial's objection to Woods Fuller's proof of claim no. 261, Tri-State Financial's motion to have Woods Fuller disqualified, and Tri-State Financial's related motions to reconsider stand as entered, and are incorporated herein.
The offer was made in the April 18, 2007, interim decision when Tri-State Financial's motion to disqualify Woods Fuller was addressed:
What is left is Tri-State Financial's argument that Woods Fuller has violated some continuing fiduciary or professional duty to Debtor. An order will be entered setting a deadline for Tri-State Financial to provide case law support for this argument in a brief. The case law must be relevant to the present circumstances, i.e., a corporate Chapter 11 debtor converted to Chapter 7. In its brief, Tri-State Financial cannot ignore the fact that the Chapter 7 case renders Debtor defunct, Braden v. Tri-R Builders, Inc. (In re Tri-R Builders, Inc.), 86 B.R. 138, 141 (Bankr. N.D. Ind. 1986), and that Trustee Lovald is now in control since Debtor's board of managers has been "completely ousted." Commodity Futures Trading Commission v. Weintraub, 471 U.S. 343, 352-53 (1985). Tri-State Financial also cannot ignore the fact that Trustee Lovald controls any attorney-client privilege held by Debtor. Weintraub, 471 U.S. at 352-56. Finally, Tri-State Financial cannot ignore the fact that while Trustee Lovald holds a fiduciary duty to Debtor's equity holders as well as to the other creditors,
[o]ne of the painful facts of bankruptcy is that the interests of shareholders become subordinated to the interests of creditors. In cases in which it is clear that the estate is not large enough to cover any shareholder claims, the trustee's exercise of the corporation's attorney-client privilege will benefit only creditors, but there is nothing anomalous in this result; rather, it is in keeping with the hierarchy of interests created by the bankruptcy laws. See generally 11 U.S.C. § 726(a).
Id. at 355.
In re Tri-State Ethanol Company LLC, Bankr. No. 03-10194, slip op. at 25-26 (Bankr. D.S.D. April 18, 2007).
As directed by the Court, both parties filed briefs regarding Tri-State Financial's motion to have Woods Fuller disqualified because of an alleged breach of duty to Debtor. In its brief, however, Tri-State Financial failed to reflect the facts of the case or discuss the case law the Court had provided on April 18, 2007. Thus, even assuming the facts as alleged by Tri-State Financial, the Court was not provided with any legal basis to remove Woods Fuller as counsel for Trustee Lovald on the grounds the firm had violated some continuing duty to Debtor. An evidentiary hearing on the motion to disqualify was deemed unwarranted, and the motion was denied in all respects on July 10, 2007. No appeal was taken.
An appropriate order sustaining in part and overruling in part Tri-State Financial's objection to Woods Fuller's proof of claim no. 261 will be entered and Woods Fuller will be allowed a general unsecured claim of $168,000.00