Bank v. Lazzo (In re Schupbach Invs., LLC)

• Decision Date: 25 November 2014
• Docket Number: KS–13–078.,Nos. KS–13–077,BR 11–11425,s. KS–13–077
• Citation: 521 B.R. 449 (Table)
• Parties: In re SCHUPBACH INVESTMENTS, LLC, Debtor. Rose Hill Bank, Appellant, v. Mark J. Lazzo, P.A., Appellee. In re Schupbach Investments, LLC, Debtor. Carl B. Davis, Trustee of the Schupbach Investments Liquidation Trust, Appellant, v. Schupbach Investments, LLC, Rose Hill Bank, Bank of Commerce & Trust Company, Central National Bank, Community Bank of Wichita, Inc., First National Bank of Hutchinson, formerly known as Bank Haven, Kansas State Bank of Manhattan, Kansas, Legacy Bank, Meritrust Credit Union, and Mark J. Lazzo, P.A., Appellees.
• Court: U.S. Bankruptcy Appellate Panel, Tenth Circuit

521 B.R. 449 (Table)

In re SCHUPBACH INVESTMENTS, LLC, Debtor.

Rose Hill Bank, Appellant

v.Mark J. Lazzo, P.A., Appellee.

In re Schupbach Investments, LLC, Debtor.

Carl B. Davis, Trustee of the Schupbach Investments Liquidation Trust, Appellant

v.Schupbach Investments, LLC, Rose Hill Bank, Bank of Commerce & Trust Company, Central National Bank, Community Bank of Wichita, Inc., First National Bank of Hutchinson, formerly known as Bank Haven, Kansas State Bank of Manhattan, Kansas, Legacy Bank, Meritrust Credit Union, and Mark J. Lazzo, P.A., Appellees.

Nos. KS–13–077

BR 11–11425

KS–13–078.

United States Bankruptcy Appellate Panel of the Tenth Circuit.

Nov. 25, 2014.

OPINION^*

PER CURIAM.^**

In bankruptcy court, as in most areas of life, if you want to get paid, you have to get hired, and you must perform work your boss (or whoever is paying you) deems valuable. These appeals involve the post facto approval of the employment of debtor's counsel and the allowance of attorney's fees for certain services.¹ Specifically, the appellants argue the bankruptcy court erred by: 1) applying the wrong standard in granting employment of counsel post facto under 11 U.S.C. § 327² and allowing fees for services rendered prior to filing of the employment application; 2) allowing fees for services that did not benefit the estate; and 3) allowing fees for services rendered postconfirmation. After carefully considering the record, we REVERSE in part and AFFIRM in part.³

I. FACTUAL BACKGROUND

Schupbach Investments, L.L.C. (“SILLC”) was engaged in the purchase, renovation, rental, and sale of residential real properties in low income areas of Wichita, Kansas. Jonathan Schupbach owned 50 percent of SILLC and was its manager. His wife, Amy Schupbach, owned the other 50 percent and was active in the business. SILLC's assets included 165 rental properties valued at $ 4,616,900, which had been mortgaged to eleven different creditors, with the underlying debts personally guaranteed by the Schupbachs. Appellant Rose Hill Bank (“RHB”) was SILLC's largest creditor.

In March 2011, SILLC retained Mark J. Lazzo, P.A. as bankruptcy counsel (“Appellee” or “Lazzo”).⁴ In April 2011, SILLC paid Lazzo a $10,000 retainer. Between March 17 and May 11, 2011, SILLC accrued $9,760 in attorney's fees. Lazzo billed SILLC for that amount on May 12, 2011, and applied the retainer to that bill. SILLC filed a Chapter 11 petition on May 16, 2011,⁵ followed by the Schupbachs' filing for personal bankruptcy protection shortly thereafter.

A. Employment Applications

SILLC did not submit an application to employ Lazzo as its attorney with its Chapter 11 petition. A month later, after the United States Trustee's Office advised Lazzo that an employment application had not been filed, SILLC filed one on June 17, 2011 (“Initial Employment Application”).⁶ Although an employment application was prepared along with the petition, Lazzo explained it was not filed at that time because:

... there was a whole bunch of first day motions that I had to prepare and file regarding rents involving eight different creditors and ... it got lost in that work. I had it prepared and why it wasn't filed, I don't have a reason other than ... it just didn't get done. It should have been done.⁷

The Initial Employment Application failed to address the issue of legal services Lazzo provided to SILLC prior to its filing.

On July 8, 2011, creditor Central National Bank (“CNB”) objected to the Initial Employment Application to the extent it sought retroactive approval of employment or any fees incurred prior to June 17, 2011. CNB argued that the Initial Employment Application did not comply with Kansas Local Bankruptcy Rule 2014.1 because it was not timely filed with the petition and it did not include the required Disclosure of Compensation of Attorney for Debtor, Official Form B203.⁸ Lazzo did not file a supplemental employment application to clarify that he was seeking approval of his employment post facto to the petition date (“Supplemental Employment Application”)⁹ until September 1, 2011, when he also filed SILLC's first application for allowance of attorney's fees and expenses. CNB and RHB objected to the Supplemental Employment Application, arguing that it was untimely and that post facto approval of Lazzo's employment should be denied because the case presented no extraordinary circumstances warranting retroactive approval.¹⁰

Objections to the Initial and Supplemental Employment Applications were heard by the bankruptcy court on November 8, 2011.¹¹ The bankruptcy court granted both Employment Applications and overruled the objections to retroactive approval of employment, stating:

[Lazzo] substantially complied with all of the requirements in terms of the disclosures that he needed to file ... which is probably more important than actually filing the actual application. And there was a great many things going on at that time which I think were handled promptly and timely ... I think he substantially complied with the requirements and so I am going to grant the application to employ Mr. Lazzo as of the date this case was filed.¹²

...

[B]asically my finding is he was in substantial compliance with all of the requirements. He filed the necessary disclosures and, in essence, ... I think the ... timing of the filing of the disclosures are as important as the actual application itself and I think he's in substantial compliance.

All the facts and circumstances surrounding the filing of this case and everything that was going on are sufficient justification for not filing the application.¹³

I also ... give weight to the U.S. Trustee's [sic] not objecting to this. They have an internal policy that if it's not filed[,] they contact the lawyer and suggest to the lawyer that they file it within a certain period of time ... the U.S. Trustee's Office contacted Mr. Lazzo and he immediately filed his application. And, therefore, I think the failure to file it has been adequately explained and that he substantially complied with the requirements.¹⁴

On November 15, 2011, the bankruptcy court entered a written order granting the application to employ Lazzo post facto for the reasons stated on the record (“Employment Order”).¹⁵

B. Motion to Consolidate and Competing Plans

On October 3, 2011, SILLC and the Schupbachs filed a motion to consolidate and/or to jointly administer their respective bankruptcy cases (“Motion to Consolidate”).¹⁶ SILLC then submitted a Chapter 11 plan (“Debtor's Plan”), accompanied by a Disclosure Statement.¹⁷ Debtor's Plan provided for: 1) the consolidation of SILLC's and the Schupbachs' bankruptcy cases; 2) vesting of the retained assets of the combined estates at confirmation in the Schupbachs; 3) full payment by the Schupbachs of all allowed administrative, secured and priority claims; and 4) partial payment for general unsecured claims.¹⁸ The Schupbachs wanted to retain their ownership and control of SILLC. RHB and CNB objected to the Motion to Consolidate;¹⁹ RHB and CNB plus an additional five creditors objected to the Disclosure Statement.²⁰ At a November 8, 2011, hearing, the bankruptcy court deferred ruling on the Motion to Consolidate pending its ruling on a motion to convert the Schupbachs' Chapter 13 case to a Chapter 11.²¹

On July 24, 2012, a group of secured creditors filed a competing plan providing for liquidation of SILLC (“Creditors' Plan”).²² The Creditors' Plan called for transfer of the secured collateral to the respective creditors and all other assets to a liquidating trust (“Liquidating Trust”).²³ The secured creditors would fund the Liquidating Trust and pay all allowed administrative expenses. Carl B. Davis was named as the trustee of the Liquidating Trust (“Liquidating Trustee”).²⁴

On August 17, 2012, the bankruptcy court issued its order on the Motion to Consolidate, denying consolidation, but granting the request for joint administration (“Joint Administration Order”).²⁵ Thereafter, SILLC filed an amended Chapter 11 Plan and corresponding disclosures (“Amended Plan”).²⁶ The Amended Plan abandoned consolidation, but continued to seek cramdown on the secured creditors. It provided for limited payments over seven years to unsecured creditors and an auction of the Schupbachs' ownership interest in SILLC. Several creditors filed objections to the Amended Plan. After a hearing, the Bankruptcy Court confirmed the Creditors' Plan, as amended, by written order on November 21, 2012 (“Confirmation Order”).²⁷

C. Fee Applications

SILLC's filed its first fee application on September 1, 2011 (“First Fee Application”),²⁸ requesting $27,980 for fees and $1,039 for expenses, which covered the period May 13, 2011, through July 20, 2011. CNB and RHB objected to the First Fee Application to the extent it sought $14,960 in fees incurred from the petition date to the date the Initial Employment Application was filed (hereafter “Gap Fees” or “Gap Period”).²⁹ CNB and RHB also argued the $ 10,000 retainer Lazzo secured from SILLC prior to filing of the petition, which had not been properly disclosed, was property of the estate and could not be applied to disallowed fees.

After a hearing, the bankruptcy court entered an order on November 15, 2011, granting SILLC's First Fee Application in its entirety (“First Fee Order”).³⁰ SILLC subsequently filed a second fee application on December 23, 2011 (“Second Fee Application”), and a third fee application on July 26, 2012 (“Third Fee Application”).³¹ A substantial portion of the fees were for services rendered in connection with the Motion to Consolidate. In absence of objection, the bankruptcy court allowed the fees and expenses requested in the Second and Third Fee Applications in their entirety.³²

SILLC filed a fourth application for fees and expenses, seeking $14,100 for the period June 7, 2012 through October 24, 2012 (“Fourth Fee Application”).³³ RHB objected to the fees related to a nondischargeability complaint filed in the Schupbachs' bankruptcy...