Blackwood Associates, L.P., In re

Decision Date21 August 1998
Docket NumberNo. 97-5029,97-5029
Citation153 F.3d 61
Parties, Bankr. L. Rep. P 77,789 In re BLACKWOOD ASSOCIATES, L.P., Debtor, HARVIS TRIEN & BECK, P.C., Plaintiff-Appellant, v. FEDERAL HOME LOAN MORTGAGE CORPORATION, Defendant-Appellee, Blackwood Associates, L.P., Herbert Brien, Lismarc Realty Management Corp., and Public Service Electric & Gas Company, Defendants.
CourtU.S. Court of Appeals — Second Circuit

Robert M. Trien, New York City (Harvis Trien & Beck, P.C., New York City, of counsel), for Plaintiff-Appellant.

Christopher P. Spera, McLean, VA (Federal Home Loan Mortgage Corporation, McLean, VA, of counsel; Carla E. Craig, Hertzog, Calamari & Gleason, New York City, of counsel and on the brief), for Defendant-Appellee.

Before: OAKES, CARDAMONE, and PARKER, Circuit Judges.

PARKER, Circuit Judge:

Plaintiff-Appellant Harvis Trien & Beck, P.C. ("HT & B") appeals from a judgment entered April 18, 1997, in the United States District Court for the Eastern District of New York (Thomas C. Platt, Judge ), dismissing its claims against Defendant-Appellee Federal Home Loan Mortgage Corporation ("FHLMC" or "Freddie Mac"). This judgment was entered in accordance with a Memorandum and Order of the district court, dated April 15, 1997, which affirmed a Decision and Order of the United States Bankruptcy Court for the Eastern District of New York (Robert John Hall, Judge ) granting summary judgment to Freddie Mac in a Chapter 11 adversary proceeding commenced by HT & B. HT & B had commenced this adversary proceeding seeking payment from Freddie Mac of certain counsel fees it had charged to Blackwood Associates, L.P. ("Blackwood" or "Debtor"), of whom Freddie Mac was a secured creditor. These fees related to HT & B's representation of Blackwood during the pendency of Blackwood's Chapter 11 petition while Blackwood was operating under a cash collateral stipulation prior to confirmation of a plan of reorganization.

I. BACKGROUND

Blackwood is a Delaware limited partnership whose sole asset was a multifamily apartment complex in Irvington, NJ, consisting of eight ten-story buildings containing 1,744 apartments (the "Property"). Freddie Mac held two perfected mortgages on the Property, in an aggregate principal amount of approximately $30 million. Freddie Mac also held a perfected absolute assignment and security interest in all rents and profits derived from the Property.

By 1991, Blackwood was experiencing severe financial problems. Blackwood was $800,000 behind in its mortgage payments, had insufficient funds to pay for necessary capital improvements to the Property (including replacing an inoperative heating system), was so far behind in property taxes that a tax sale of the Property was scheduled, and faced substantial regulatory fines for failure to keep the Property up to code. These problems caused Blackwood to file a petition for protection under Chapter 11 of the Bankruptcy Code (the "Code"), 11 U.S.C. §§ 1101-74, on August 29, 1991 (the "Petition"). Blackwood retained HT & B to represent it in relation to the Petition, pursuant to a general retainer authorized by the bankruptcy court on October 8, 1991.

Pursuant to § 363(c) of the Code, 11 U.S.C. § 363(c), during the pendency of the Petition, Blackwood could not use any "cash collateral," as that term is defined in § 363(a), without either the consent of Freddie Mac, which held a security interest in both the Property and the rents and profits derived therefrom, or authorization of the bankruptcy court. In this case, the cash collateral consisted of all rents and profits from the Property.

After the filing of the Petition, HT & B and Freddie Mac began negotiations concerning a consensual plan of reorganization for Blackwood. To allow Blackwood to function during the course of these negotiations, HT & B and Freddie Mac, through its counsel, entered into a Cash Collateral Stipulation, dated July 28, 1992 (the "Stipulation"). The Stipulation was drafted primarily by HT & B but incorporated changes proposed by Freddie Mac and its counsel.

As relevant to this appeal, the Stipulation provided as follows. Blackwood was authorized to collect all cash collateral, defined in the Stipulation consistent with the Code as all "proceeds, products, rents, and profits," from the Property, and was obligated to deposit the cash collateral into a specified account. Stipulation p 1. Blackwood was obligated to use the cash collateral to pay for the reasonable and necessary expenses incurred in operating the Property, including interest payments on a second mortgage not held by Freddie Mac, and escrow payments for property taxes. Id. pp 2-4. In addition, beginning in July 1992, Blackwood was obligated to make a monthly payment in the amount of $271,663 to Freddie Mac (the "Adequate Protection Payment"). Id. p 5.

Paragraphs 8 and 9 of the Stipulation, delineated Freddie Mac's rights and remedies if Blackwood failed to comply with its obligations under the Stipulation. Specifically, p 8 provided that if Blackwood failed to comply with its obligations, Freddie Mac was permitted, upon affording Blackwood ten days to cure any default, to move the bankruptcy court to lift the automatic stay imposed by § 362 of the Code, so as to allow Freddie Mac to pursue whatever remedies at law it may have. Paragraph 9, in turn, provided that upon any lifting of the automatic stay, Blackwood's "authorization to use Cash Collateral shall immediately terminate at FHLMC's option ... [and] all Cash Collateral shall be immediately paid in full to FHLMC."

Paragraph 13 of the Stipulation provided for payment of professional fees:

FHLMC agrees that ... Debtor's counsels fees and disbursements approved by the Court upon requisite notice and application as required by the Bankruptcy Code and Rules shall be paid from the Cash Collateral. Nothing contained herein shall constitute a waiver of FHLMC's right to object on a substantive basis to particular amounts requested in any such fee application.

The Stipulation also provided that either party could seek modification of the Stipulation via motion to the bankruptcy court. Id. p 14. By its terms, the Stipulation applied to all cash collateral received after, and all expenses incurred after, July 1, 1992. Id. p 15 (A 46). The bankruptcy court, by Order dated August 31, 1992, approved the Stipulation, and authorized the use of the cash collateral consistent with its terms.

On March 5, 1993, HT & B filed an application with the bankruptcy court seeking a second interim allowance of compensation, in the amount of $535,556 for professional services rendered and out-of-pocket disbursements incident thereto for the period from May 16, 1992 through February 28, 1993. 1 The relationship between the parties had apparently soured somewhat by this time, and Freddie Mac objected to this application. The bankruptcy court held a hearing on the application on March 30, 1993, at the conclusion of which it reserved decision. The next day, the bankruptcy court held hearings on motions by Blackwood to confirm a plan of reorganization and to eliminate its obligations to make the Adequate Protection Payments, which it had already stopped making, and on a motion by Freddie Mac to lift the automatic stay for failure by Blackwood to make the Adequate Protection Payments pursuant to p 8 of the Stipulation. At the conclusion of this hearing, the bankruptcy court granted Freddie Mac's motion to lift the automatic stay and denied as moot both of Blackwood's motions.

Blackwood appealed this decision to the district court. The district court affirmed the bankruptcy court's decision lifting the automatic stay and imposed sanctions on Blackwood for filing and pursuing a frivolous appeal. Blackwood then appealed to this Court. That appeal was withdrawn by stipulation of the parties, however, on the condition that Freddie Mac agree not to seek to enforce the award of sanctions.

Following the lifting of the automatic stay, Freddie Mac obtained the appointment of a receiver for the Property in the United States District Court for the District of New Jersey, and also subsequently obtained a judgment of foreclosure with respect to the Property. At the foreclosure sale of the Property, Freddie Mac bid and acquired title to the Property.

In a Decision and Order, dated March 30, 1994 (the "March 30 Order"), the bankruptcy court granted HT & B the fees it requested in its May 5, 1993 application, and directed Freddie Mac to pay HT & B these fees by April 19, 1994. In re Blackwood Assocs., L.P., 165 B.R. 108 (Bankr.E.D.N.Y.1994). In granting HT & B's application, the bankruptcy court held that Freddie Mac's argument that the payment of such fees out of the cash collateral was impermissible under § 363 failed. The court noted that Freddie Mac had authorized the use of cash collateral to pay the fees in p 13 of the Stipulation, and had retained the right only to object on a substantive basis. See id. at 111. The bankruptcy court also dismissed Freddie Mac's substantive objections to the particular fees requested. Id. at 111-14.

Freddie Mac then moved for reconsideration. In this motion, Freddie Mac argued that HT & B had failed to sustain its burden of reasonableness in regard to its fees, that the award was excessive in light of the results achieved, and that because the automatic stay had been lifted on March 31, 1993, HT & B was no longer entitled to be paid its fees and disbursements from the cash collateral. In its reply brief, Freddie Mac also argued that there was no cash collateral available, and that it would therefore have to disgorge monies received as Adequate Protection Payments to pay the fees.

While the motion for reconsideration was pending, HT & B submitted a proposed judgment seeking payment pursuant to the March 30 Order to the bankruptcy court. The bankruptcy court signed this proposed judgment on May 5, 1994, granting HT &...

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