Barron & Newburger, P.C. v. Tex. Skyline, Ltd. (In re Woerner)

• Decision Date: 09 April 2015
• Docket Number: No. 13–50075.,13–50075.
• Parties: In the Matter of Clifford J. WOERNER; Gail S. Woerner, Debtors. Barron & Newburger, P.C., Appellant v. Texas Skyline, Limited; Pecos & 15th, Limited; United States Trustee; Skyline Interests, L.L.C., Appellees.
• Court: U.S. Court of Appeals — Fifth Circuit

783 F.3d 266

In the Matter of Clifford J. WOERNER; Gail S. Woerner, Debtors.

Barron & Newburger, P.C., Appellant

v.Texas Skyline, Limited; Pecos & 15th, Limited; United States Trustee; Skyline Interests, L.L.C., Appellees.

No. 13–50075.

United States Court of Appeals, Fifth Circuit.

April 9, 2015.

Stephen W. Sather (argued), Barbara M. Barron, Barron & Newburger, P.C., Austin, TX, for Appellant.

William Paul Johnson (argued), Duggins Wren Mann & Romero, L.L.P., Arthur A. Stewart, Office of the Attorney General, Deborah A. Bynum, U.S. Department of Justice, Austin, TX, Noah Mariano Schottenstein, Trial Attorney (argued), P. Matthew Sutko, Associate General Counsel, U.S. Department of Justice, Washington, DC, for Appellees.

Appeals from the United States District Court for the Western District of Texas.

Before STEWART, Chief Judge, REAVLEY, JOLLY, DAVIS, JONES, SMITH, DENNIS, CLEMENT, PRADO, OWEN, ELROD, SOUTHWICK, HAYNES, GRAVES, HIGGINSON and COSTA, Circuit Judges.

Opinion

EDWARD C. PRADO, Circuit Judge:

This case concerns a bankruptcy court's order reducing the fees a debtor's counsel received under 11 U.S.C. § 330. On May 13, 2010, on the eve of a major state-court judgment against him, Debtor Clifford Woerner¹ filed a voluntary petition under Chapter 11 of the Bankruptcy Code. Appellant Barron & Newburger (“B & N”), a law firm, represented Woerner in his Chapter 11 bankruptcy. On April 20, 2011, the bankruptcy court converted the case to Chapter 7.

Its services terminated, B & N filed an application for fees in excess of $130,000. The bankruptcy court allowed approximately $20,000 and disallowed the remainder, finding that the additional fees were unreasonable. The district court affirmed. B & N appealed, contending that the bankruptcy court misapplied Fifth Circuit precedent and 11 U.S.C. § 330 in reducing the fees awarded to it. In an opinion issued on July 15, 2014, a panel of this Court affirmed the district court's judgment. In re Woerner, 758 F.3d 693, 702 (5th Cir.2014). However, all three members of the panel specially concurred to call for en banc reconsideration of In re Pro–Snax Distributors, Inc., 157 F.3d 414 (5th Cir.1998), the opinion interpreting § 330 that controlled the appeal. In re Woerner, 758 F.3d at 702–06 (Prado, J., specially concurring).

We granted rehearing en banc to reexamine our decision in Pro–Snax. In re Woerner, 771 F.3d 820 (5th Cir.2014) (per curiam). We now recognize that the retrospective, “material benefit” standard enunciated in Pro–Snax conflicts with the language and legislative history of § 330, diverges from the decisions of other circuits, and has sown confusion in our circuit. Correspondingly, we overturn Pro–Snax 's attorney's-fee rule² and adopt the prospective, “reasonably likely to benefit the estate” standard endorsed by our sister circuits.

I. FACTUAL AND PROCEDURAL BACKGROUND

A. Events Before Woerner Filed for Bankruptcy

In 2006, Woerner and Texas Skyline, Ltd. formed a limited partnership for the purpose of undertaking a real estate venture. Within the partnership, DPRS—a company Woerner owned—was the sole general partner, Woerner was a limited partner with a 49.99% interest in the partnership, and Texas Skyline was the sole investor and a limited partner in the project. Over the course of the next three years, Woerner misappropriated funds from the partnership for personal use. When Texas Skyline discovered Woerner's activities, it sued him in state court for breach of the partnership agreement and breach of fiduciary duties. The case proceeded to a bench trial on April 27, 2010. After the parties rested, the state court announced an oral ruling in favor of Texas Skyline and set a remedies hearing for May 14, 2010.

Woerner and his state-court trial counsel met with B & N on May 4, 2010 to discuss filing for bankruptcy. B & N agreed to the representation and filed Woerner's voluntary petition for Chapter 11 bankruptcy relief on May 13—the night before the state-court remedies hearing. That filing triggered the Bankruptcy Code's automatic stay provision, which brought the state-court proceeding to a halt. See 11 U.S.C. § 362(a).

B. B & N Litigates Woerner's Chapter 11 Case

In the ensuing eleven months, B & N provided services that it claimed were worth $134,800 in legal fees. On May 18, 2010, with B & N's assistance, Woerner filed mandatory disclosure documents with the bankruptcy court—namely, schedules and a statement of financial affairs.

B & N also defended Woerner in adversary proceedings that were brought to prevent Woerner from discharging liabilities. On August 4, 2010, Texas Skyline initiated an adversary proceeding with the bankruptcy court under 11 U.S.C. § 523(a)(4) for breach of fiduciary duty. Texas Skyline then fought to lift the stay of the state-court judgment. Woerner contested and lost, and the stay of state-court proceedings was lifted. Woerner also contested adversary proceedings brought by John Baker II, one of the other active creditors in this case. On November 2, 2010, Woerner filed Amended Schedules (b) and (c) and also amended his Statement of Financial Affairs.

B & N helped Woerner negotiate with his creditors. Woerner and the adversarial creditors agreed to mediation with a bankruptcy judge. Talks with Texas Skyline broke down, but on December 17, 2010, B & N filed a Joint Motion to Compromise with the bankruptcy court, which B & N maintained would have resolved this case. Yet Baker insisted that the settlement was merely a proposal, objected to it, and refused to execute it. For these negotiation services, B & N sought over $6,000.

B & N also investigated the concealment of some of Woerner's assets and subsequently amended Woerner's financial disclosures to include approximately $9,000 of additional personal assets, including investments, jewelry, firearms, and fur coats that were not originally disclosed. This concealment prompted Baker to move to convert Woerner's case from a Chapter 11 reorganization to a Chapter 7 trustee-administered liquidation. See 11 U.S.C. § 1112(b)(1) (requiring the bankruptcy court to convert or dismiss a Chapter 11 case upon finding “cause”). Texas Skyline moved to intervene in the motion to convert. B & N litigated Woerner's attempts to press for a motion to approve the settlement and oppose the motion to convert. The billing records show that the firm (1) prepared a motion to sell some of Woerner's personal property for the purpose of funding an appeal from the state-court judgment; (2) started investigating potential causes of action against Texas Skyline and Baker; (3) drafted a disclosure statement and reorganization plan; and (4) deposed a representative from Texas Skyline about potential mismanagement of partnership assets.

C. Woerner's Case Is Converted to Chapter 7, Ending B & N's Representation

The bankruptcy court conducted a hearing on the pending motions, denying the motion to approve the settlement and granting the motion to convert on April 20, 2011. As the bankruptcy court summarized in its oral ruling on the fee application, “the Court found that it was appropriate to convert this case to Chapter 7 because the Court was of the opinion ... that [Woerner] w[as] not forthright as [a] Debtor[ ] under the Bankruptcy Code in terms of listing [his] assets and giving proper evaluations.” On September 3, 2011, B & N filed an application for approximately $134,000 in fees under § 330. Following the U.S. Trustee's objection, B & N amended its fee application. B & N ultimately sought $130,656.50 in fees, and $5,793.37 in expenses. The Trustee renewed its objection to the fees. Texas Skyline also objected, arguing that all of the fees were unreasonable because (1) Woerner never had the means to fund a Chapter 11 reorganization and (2) B & N's actions were dilatory and required creditors to incur unnecessary attorney's fees.

D. The Bankruptcy Court Disallows Most of B & N's Requested Fees

The bankruptcy court then conducted a hearing on the fee request. B & N offered testimony from Woerner's nonbankruptcy counsel and two attorneys from B & N to prove that (1) Woerner brought the case for a legitimate purpose and (2) the litigation costs were driven up by Texas Skyline's alleged intransigence.

The bankruptcy court took the fee application under advisement and entered an oral ruling on April 11, 2012. Citing Pro–Snax, the bankruptcy court explained that, for a service to be compensable under § 330, fee applicants must prove that the service resulted in an “identifiable, tangible, and material benefit to the bankruptcy estate,” Pro–Snax, 157 F.3d at 426. Applying that standard, the bankruptcy court awarded the expenses in full but only $19,409.00 in fees—an 85% reduction. The bankruptcy court arrived at $19,409.00 by considering separately each category of fees (such as case administration, resisting a motion to lift the stay, preparing bankruptcy schedules, and similar categories), granting some in whole and some in part, and denying others. Most of the disallowed fees were denied due to B & N's lack of success. Specifically, the bankruptcy court found much of B & N's billed time was not of identifiable benefit to the estate. The district court entered its final order affirming the bankruptcy court on January 17, 2013. It ruled that the record supported finding that B & N's fees were unreasonable under § 330 and Pro–Snax. The district court observed that the bankruptcy court “specifically invoked Pro–Snax at the hearing on fees, and appears to have relied upon it in determining to reduce [B & N]'s fees based on the limited success and lack of benefit to the estate.” It declined to entertain B & N's argument that Pro–Snax was wrongly decided and rejected B & N's contention that the opinion's operative language was dicta, concluding that Pro–Snax supplied the governing standard for attorney compensation under Chapter 11 in the Fifth Circuit. Correspondingly, the district court found no error in the bankruptcy court's...