In re BES Concrete Products, Inc.

• Decision Date: 08 August 1988
• Docket Number: Bankruptcy No. 287-05895-C-11,Motion Control No. WGH-1.
• Citation: 93 BR 228
• Court: U.S. Bankruptcy Court — Eastern District of California
• Parties: In re B.E.S. CONCRETE PRODUCTS, INC., Debtor.

93 B.R. 228 (1988)

In re B.E.S. CONCRETE PRODUCTS, INC., Debtor.

Bankruptcy No. 287-05895-C-11, Motion Control No. WGH-1.

United States Bankruptcy Court, E.D. California.

August 8, 1988.

Weintraub, Genshlea, Hardy, Erich & Brown, Sacramento, Cal., for Benjamin and Isabelle Swartz.

Hoge, Fenton, Jones & Appel, Inc., San Jose, Cal., McDonough, Holland & Allen, Sacramento, Cal., for creditor, Atlas Concrete Products of Cal.

Law Offices of Melvyn J. Coben, Sacramento, Cal., for Unsecured Creditor's Committee.

Moore & Bennett, Sacramento, Cal., for debtor in possession, B.E.S. Concrete Products.

Bardwil & Dahl, Sacramento, Cal., for Administrating Claimant, Eng Trucking Rentals.

ORDER DENYING APPLICATION BY SPECIAL COUNSEL FOR COMPENSATION AND REIMBURSEMENT OF EXPENSES AND REVOKING APPOINTMENT AS SPECIAL COUNSEL

CHRISTOPHER M. KLEIN, Bankruptcy Judge.

The law firm appointed to defend debtor in a lawsuit ("Special Counsel") has applied for interim fees and expenses totaling $55,287.38. Objections were filed by the largest creditor and by the creditors' committee. A hearing was held on July 14, 1988.

The objections raise three issues. First, whether to permit retroactive payment for the five months before Special Counsel discovered that it had "overlooked" "through excusable neglect and/or clerical error" the requirement for judicial appointment. Second, the effect of apparent ineligibility to be appointed special counsel due to simultaneous representation of other nondebtor codefendants whose positions are adverse to the estate. Finally, the effect of failure to disclose facts pertinent to identify that conflict as required by Bankruptcy Rule 2014.

Analytically, the request falls into two categories: $41,053.01 in fees and expenses incurred before obtaining approval to act as special counsel, which sum is denied, with prejudice; and $14,234.37 after such appointment, which sum is denied, also with prejudice. Finally, the authorization to act as special counsel is revoked, for cause.

1. Background.

This chapter 11 case revolves around an asset acquisition gone awry. Atlas Concrete Products, Inc., a California corporation ("Atlas-California"), sold its Hollister, California, concrete box manufacturing plant, Atlas Concrete Products, Inc., an unrelated Nevada corporation ("Atlas-Nevada"), in a secured transaction involving promissory notes. Atlas-California has not been paid.¹

Atlas-Nevada and B.E.S. Concrete Products ("B.E.S. Concrete") are sister corporations, the capital stock of which is owned by Benjamin and Isabelle Swartz. When Atlas-California was not paid and discovered that the assets sold to Atlas-Nevada had been transferred to B.E.S. Concrete, and perhaps from there to other entities controlled by Swartz children, a holy war ensued. Atlas-California sued Atlas-Nevada, B.E.S. Concrete, and Benjamin and Isabelle Swartz, the latter three as comakers or guarantors on the note to Atlas-California. The defendants counterclaimed alleging fraud. Special Counsel's efforts in the defense of that lawsuit are the subject of this opinion.

Atlas-California has been an aggressive and unyielding plaintiff. It attached assets of defendants and related entities supposedly controlled by Swartz children. This chapter 11 case ensued. Hard feelings, exacerbated by more than the usual amount of acrimony, prevail.

B.E.S. Concrete filed its voluntary chapter 11 petition on October 16, 1987. This court promptly approved the appointment of the law firm of Borton, Petrini & Conron to represent the debtor in the then-pending case of Atlas Concrete Products, Inc., a California corporation v. B.E.S. Concrete Products, Benjamin E. Swartz, Isabelle L. Swartz, Atlas Concrete Products, Inc., a Nevada corporation, and Does I-X, No. 14949, Superior Court, San Benito County, California ("Atlas-California lawsuit"). Benjamin and Isabelle Swartz are sued as guarantors (or comakers) of the putative indebtedness of Atlas-Nevada and B.E.S. Concrete to plaintiff.

On November 2, 1987, the debtor and Benjamin and Isabelle Swartz executed a substitution of attorneys in the Atlas-California lawsuit, replacing Borton, Petrini & Conron with the present Special Counsel. No approval was obtained from this court. Two months later the Atlas-California lawsuit was removed to the United States Bankruptcy Court, Northern District of California, San Jose Division.²

On March 18, 1988, the debtor filed its ex parte application to employ Special Counsel "from and after October 28, 1987" to which was attached a declaration purporting to comply with Bankruptcy Rule 2014(a). Both the application and declaration asserted that Special Counsel did not represent an interest adverse to the estate in the matter with respect to which it was to be employed. Neither revealed the existence of multiple defendants or of adverse claims among them.³

On March 21, 1988, I authorized the requested employment of Special Counsel but declined to make the appointment retroactive.

On June 21, 1987, Special Counsel filed this motion, seeking $52,827.50 in fees and $2,459.88 in expenses for the period October 23, 1987 — May 31, 1988. The fees and expenses for the period before approval of appointment as special counsel are $41,053.01 ($39,615.50 fees; $1,437.51 expenses). The remaining $14,234.37 ($13,212.00 fees; $1,022.37 expenses) are for the period after appointment. Exhibit A attached to the motion is a detailed accounting of Special Counsel's services and expenses. Atlas-California has objected. The creditors' committee has objected.

2. Ninth Circuit Standard for Retroactive Award of Fees for Services as Special Counsel.

The Ninth Circuit permits a retroactive award of fees for services rendered without court approval only in exceptional circumstances where an applicant can show both a satisfactory explanation for the failure to receive prior judicial approval pursuant to 11 U.S.C. § 327 and Bankruptcy Rule 2014 and that he or she has benefitted the bankrupt estate in some significant manner. In re THC Financial Corp., 837 F.2d 389 (9th Cir.1988) ("THC Financial"); In re Laurent Watch Co., Inc., 539 F.2d 1231 (9th Cir.1976). The burden of proof is on the applicant to demonstrate the satisfactory explanation and the significant benefit to the estate. The ultimate decision is within the discretion of the court.

Mere negligence is not sufficient to establish the requisite exceptional circumstances. In re Downtown Investment Club III, 89 B.R. 59, 63 (9th Cir. BAP 1988); In re Kroeger Properties & Dev., Inc., 57 B.R. 821 (9th Cir. BAP 1986). It is no hardship to require that attorneys observe the strict requirements of 11 U.S.C. § 327 since lawyers are charged with knowledge of the law. In re Kroeger, 57 B.R. at 823; In re Downtown Investment Club III, 89 B.R. at 63-64.

The exceptional circumstances that the Ninth Circuit requires are not lightly to be divined lest it be too easy to circumvent the statutory requirement of prior approval. It is in that context that one must take the Ninth Circuit BAP's requirement that the court conduct the type of equitable balancing analysis found in In re Twinton Properties Partnership, 27 B.R. 817, 819-20 (M.D.Tenn.1983), or in In re Freehold Music Center, Inc., 49 B.R. 293, 296 (D.N.J.1985). In re Kroeger, 57 B.R. at 823; In re Crest Mirror & Door Co., 57 B.R. 830 (9th Cir. BAP 1986).

The Ninth Circuit, subsequent to those BAP cases, decided in THC Financial that the key factors are (1) a satisfactory explanation for the failure to receive prior judicial approval and (2) a benefit to the bankrupt estate in some significant manner. It agreed generally with the Fifth Circuit's decision in In re Triangle Chemicals, Inc., 697 F.2d 1280, 1289 (5th Cir.1983). It cited In re Twinton Properties for the proposition that the key factors are applicable. Significantly, it also noted parenthetically that the In re Twinton Properties court would look to other factors as well. In re THC Financial, 837 F.2d at 392.

The Ninth Circuit's THC Financial decision and the manner in which it dealt with In re Twinton Properties have an important impact narrowing the factors, to satisfactory explanation and significant benefit, that are to be taken into account when a court in this circuit decides whether there are exceptional circumstances. This diminishes or eliminates the importance of the other factors cited in In re Twinton Properties.⁴ The net effect is to increase the role of such policies as deterrence and to emphasize that exceptional means exceptional. Since THC Financial establishes the law of this circuit, the earlier Ninth Circuit BAP references to In re Twinton Properties factors must be read in that context.

Indeed, the first post-THC Financial decision by the BAP on an appointment of counsel issue emphasizes the importance of deterrence and avoidance of general nonobservance of section 327. In re Downtown Investment Club III, 89 B.R. at 63. Although that case dealt with an attempted end-run by way of 11 U.S.C. § 503, the panel expressly relied upon its prior appointment of counsel decisions and emphasized the difficult hurdle that a late applicant must surmount. Other courts agree with this approach. See, e.g., In re Arkansas Co., 798 F.2d 645, 649-50 (3rd Cir.1986); In re Aladdin Petroleum Co., 85 B.R. 738 (W.D.Tex.1988).

As suggested above, deterrence is another reason for applying strict rules to implement 11 U.S.C. § 327. In re Downtown Investment Club III, 89 B.R. at 63; In re Aladdin Petroleum Co., 85 B.R. at 740 ("If for no other reason than to discourage professionals from placing the court in the `uncomfortable position' to which the Lynnan court makes reference, this application should be denied."). All of these considerations coalesce to make retroactive appointments and retroactive compensation difficult to establish.

3. Amount of Fee Requested Makes No Difference.

Whether the amount of the fee requested should be a...