In re American Thrift & Loan Ass'n
| Citation | 137 BR 381 |
| Decision Date | 31 January 1992 |
| Docket Number | Bankruptcy No. 90-04754-B11. |
| Court | United States Bankruptcy Courts. Ninth Circuit. U.S. Bankruptcy Court — Southern District of California |
| Parties | In re AMERICAN THRIFT & LOAN ASSOCIATION, a California corporation, fka Interstate Thrift & Loan Association, Debtor. |
R.J. Coughlan, Coughlan, Semmer & Lipman, San Diego, Cal., for Saxon, Dean, Mason, Brewer & Kincannon.
Alan I. White, Drummy, King & White, Costa Mesa, Cal., for Thrift Guar. Corp.
Raymond F. Burg, Dept. of Corporations, San Diego, Cal., for Dept. of Corporations.
ORDER ON APPLICATION FOR FEES AND COSTS
This matter is before the Court on the final application of Saxon, Dean, Mason, Brewer & Kincannon (hereinafter, the firm) for fees and costs as counsel for the debtor. The application seeks $98,885.25 in fees and $32,782.40 in costs. Thrift Guaranty Corporation objects to allowance of any fees, on several grounds. Discovery was conducted and an evidentiary hearing was held, focused on the threshold question of whether any fees should be allowed. The Court and the parties deferred consideration of the issue of the reasonableness of certain fees. Following the hearing, the matter was taken under submission after receipt of simultaneously submitted proposed findings of fact and conclusions of law.
This case is an unusual one, and a brief review of its origins is warranted. At the time the petition in bankruptcy was filed, American Thrift & Loan Association was a state licensed thrift and loan regulated under the Industrial Loan Law by the Commissioner of Corporations. Thrift Guaranty Corporation was and is a nonprofit corporation created to guarantee certificates of investment up to a maximum amount at thrifts such as American.
California law required that thrifts licensed under the Industrial Loan Law obtain deposit insurance from FDIC on or before July 1, 1990, or close their doors. American applied for FDIC insurance, but the application was denied the end of May, 1990. In the meantime, the Commissioner commenced administrative proceedings against American which would normally culminate in a conservatorship. On June 6, 1990 American filed its petition under Chapter 11, freezing that process.
Within a week of the bankruptcy filing, American filed a notice of intent to distribute to certificate holders 25% of the balance of sums owed those holders. On June 22, 1990 American filed an ex parte motion for approval of the sale of certain assets. That motion was granted on June 28, 1990. On July 2, 1990 the Commissioner of Corporations filed its motion to dismiss or to abstain, which was set for expedited hearing. Thrift Guaranty filed its own motion for substantially the same relief on the same date. On July 5, 1990 American filed a motion to sell certain FHA Title I loans.
By Order dated July 25, 1990 this Court filed its Report and Recommendation, that abstention should be ordered and the state proceedings be allowed to go forward, subject to a few conditions. One such condition was that the Court would retain jurisdiction to determine administrative claims. The present fee application is such a claim. For the foregoing reasons, this Court has subject matter jurisdiction pursuant to 28 U.S.C. § 1334 and General Order No. 312-D of the United States District Court for the Southern District of California. This is a core proceeding under 28 U.S.C. § 157(b)(2)(B).
One of the major assertions of Thrift Guaranty is that American sought the protection of the Bankruptcy Code for an improper purpose. Thrift Guaranty argues that it was always American's intent to liquidate its assets and any resulting deficit would be borne by Thrift Guaranty. Thrift Guaranty asserts that the real reason the bankruptcy was filed was to try to protect the principals of the debtor, rather than its creditors. In support, Thrift Guaranty introduced evidence of pre-filing discussions in which the debtor's principals, through counsel (the firm), offered to turn over the debtor to Thrift Guaranty in return for a waiver of any civil liability of the debtor's principals. In addition, there was some evidence that at least at the outset the principals also sought immunity from criminal liability. When those proposals were rejected by the Commissioner and Thrift Guaranty, the debtor filed for bankruptcy protection.
Testimony was received about other parts of some of the pre-bankruptcy discussions between the debtor's principals, counsel and a representative for the Commissioner, and Thrift Guaranty personnel. They included conversations about the ability of current management of American to liquidate assets of the debtor at the highest value, contrasted with sale of those assets by an identified liquidator, Thrift Guaranty. The firm represented American in the foregoing discussions.
Based on all the evidence adduced at the hearings, this court finds that the primary reason the bankruptcy petition was filed was to attempt to reduce or eliminate the exposure of the principals of the debtor for any losses which might result after liquidation, and the firm was aware of that reason. In itself, however, this Court is not persuaded that such a reason is necessarily improper. Indeed, if it were improper it is difficult to see how many Chapter 11 liquidation cases would be permissible.
In the instant case, the single most effective way for the debtor's principals to reduce or eliminate their exposure was to promptly liquidate the debtor's assets for maximum value. That is not inconsistent with the interests of the certificate holders or other creditors of American, even if their interests were only coincidentally considered in the determination to file bankruptcy.
Thrift Guaranty has argued that the debtor's principals wanted Bankruptcy court protection so they could obstruct and delay investigation of their conduct by the Commissioner and Thrift Guaranty. This Court is not persuaded. No evidence was offered to directly support such an allegation, and this Court believes that the debtor's prompt stipulation to appointment of an examiner with expanded powers without the need for a motion or hearing belies such an argument, or at least the firm's complicity in any such efforts.
Thrift Guaranty has also argued that fees should be denied because the firm was not disinterested, as required by §§ 327 and 101(14) of Title 11. The premise of this argument appears to be that payments received by the firm in the 90 days immediately preceding the filing of the bankruptcy may have constituted avoidable preferential transfers. Had the transfers been avoided, the firm would have had an unsecured claim for a prepetition debt and as a creditor would not have satisfied the statutory test of 11 U.S.C. § 101(14) for disinterestedness. It is true that § 101(14) states that a creditor is not disinterested, and it is also true that § 327(a) requires a professional to be disinterested in order to be eligible to be employed by the estate. Some courts take the strict view. Others, however, recognize that some flexibility is necessary. In re Martin, 817 F.2d 175 (1st Cir.1987).
This Court declines to conclude that a creditor can never be employed to represent a debtor under § 327(a). To hold otherwise would create multiple levels of problems. A person or entity contemplating bankruptcy would consult an attorney. Unless counsel dispenses advice pro bono, some fees will be incurred in counseling the client and preparing papers necessary for filing. If the client does not have the cash to pay the incurred fees prepetition, the attorney is a creditor. Conversely, if the client does pay the prepetition fees, but within 90 days of filing, Thrift Guaranty's position would be that counsel is ineligible because counsel received payment within the preference period and the transfer might be avoidable. Under such a rule, the only counsel eligible to be employed under § 327 would be counsel who took over the case upon filing, with no knowledge of the debtor, its affairs or its economic viability. Such a rule would be counterproductive as an absolute fiat, and this Court declines to adopt such a position.
In this Court's view, the central issue raised by Thrift Guaranty's opposition to the fee application concerns the disclosures not made by either the debtor or the firm in the application to be employed. At the time of their application, Bankruptcy Rule 2014(a) provided in relevant part:
An order approving the employment of attorneys . . . pursuant to § 327 or § 1103 of the Code shall be made only on application of the trustee or committee, stating the specific facts showing the necessity for the employment, the name of the person to be employed, the reasons for the selection, the professional services to be rendered, any proposed arrangement for compensation, and, to the best of the applicant\'s knowledge, all of the person\'s connections with the debtor, creditors, or any other party in interest, their respective attorneys and accountants. The application shall be accompanied by a verified statement of the person to be employed setting forth the person\'s connections with the debtor, creditors, or any other party in interest, their respective attorneys and accountants.
Supplementing Rule 2014, the United States Trustee promulgated Guideline 3 which required an application to be detailed. In pertinent part it provides:
It must state whether the person to be employed is a disinterested person or holds or represents an interest adverse to the debtor or the estate. It must be accompanied by a verified statement of the person to be employed setting forth the person\'s connections, if any, with the debtor, creditors, and other party in interest, or their respective attorneys and accountants. The verified statement should not merely state legal conclusions, but it should set forth facts disclosing connections with the parties, past or present. It should also state whether the professional person rendered services...
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