In re Crimson Investments, NV
| Decision Date | 05 October 1989 |
| Docket Number | Bankruptcy No. B-88-5647-PHX-SSC. |
| Citation | 109 BR 397 |
| Parties | In re CRIMSON INVESTMENTS, N.V., a Netherlands Antilles corporation, Debtors. |
| Court | U.S. Bankruptcy Court — District of Arizona |
John C. Hover, Phoenix, Ariz., for debtor.
Joseph C. McDaniel, I. Marshall Gan, McDaniel & Lee P.C., and Gary J. Jaburg, Jaburg & Wilk, P.C., Phoenix, Ariz., Formerly Proposed Counsel to Debtor-in-Possession.
This matter comes before the Court on the Application of McDaniel & Jaburg, now the two separate firms of McDaniel & Lee and Jaburg & Wilk (hereinafter "Applicant"), for compensation of legal fees and costs.
The initial Application was filed with this Court on July 21, 1988. An oral Objection to the Application was noted by Craftsmanship Development, Inc., the secured creditor of the Debtor, at the initial Hearing on the issue of retention, which Hearing was held on December 8, 1988.
On January 13, 1989, the Managing Agent of the Debtor filed an Affidavit with this Court attempting to explain further the fee arrangement.
On May 1, 1989, Craftsmanship filed a written Objection and Memorandum of Points and Authorities on the Applicant's retention request.
On May 2, 1989, the law firm of McDaniel & Lee filed a withdrawal of their request to be retained as counsel for the Debtor.
Irrespective of the fact that Applicant had withdrawn its request to represent the Debtor, the Applicant still requested that it be paid its legal fees and costs. To this end, Applicant filed on July 14, 1989 a Joint Application of McDaniel & Lee and Jaburg & Wilk containing detailed billing statements supporting the request for compensation.
On July 19, 1989 Craftsmanship filed a Memorandum Opposing any Compensation be paid to Applicant, and requesting that the retainer received by Applicant be turned over to the Clerk of the Court.
Numerous Hearings were conducted on this matter. They were held on December 8, 1988; April 7, 1989; May 2, 1989; and June 15, 1989. An evidentiary hearing was held on the legal fees and costs requested by Applicant on July 20, 1989.
Applicant requested that this Court defer its decision until Applicant could obtain a copy of the transcript of the Hearing before this Court on December 8, 1988. On August 3, 1989, Applicant filed a Statement with this Court waiving its request that the Court defer decision, because Applicant conceded that the Court's recollection of the December 8, 1988 Hearing was correct.
This Court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 1334 and 157. This decision shall constitute this Court's findings of fact and conclusion of law pursuant to Bankruptcy Rule 7052.
On or about July 21, 1988, Frank R. Zunick, as attorney-in-fact for Crimson Investments, N.V., entered into a fee agreement with McDaniel & Jaburg, P.C. to represent Crimson Investments, N.V. in connection with filing a Chapter 11 petition on the corporation's behalf.
On July 21, 1988, the petition initiating the above-captioned case was filed in this Court.
On or about July 21, 1988, the Debtor in Possession filed, through its attorney-in-fact, Frank R. Zunick, an Application to Employ Counsel Subject to Order of Explicit Approval of Terms of Employment.
On or about July 21, 1988, the Debtor in Possession, acting through its attorney-in-fact, Frank R. Zunick, and Applicant McDaniel & Jaburg, P.C., filed a Joint Motion for Explicit Approval of Terms of Employment of Legal Counsel ("Joint Motion"). In the Joint Motion, Applicant only disclosed that the terms of employment for which approval was sought entailed the prepetition payment to Applicant of $7,500.00 from "non-estate funds" and a postpetition payment of $12,500.00 from "non-estate funds," with both payments to serve as a retainer for fees to be earned in this case. The Joint Motion also sought immediate authorization to apply the retainer to fees billed the Debtor in Possession, pending subsequent Court review of the fees charged.
On August 2, 1988, Debtor's Counsel filed an Affidavit of Proposed Attorney for Debtor in Possession Pursuant to Rules 2014 and 2016 of the Rules of Bankruptcy Procedure (the "Affidavit"), which stated: "None of the members of Debtor's Counsel's firm, nor Debtor's Counsel's firm itself, has any connection with the Debtor, creditors or any other party-in-interest herein, or their respective attorneys or accountants." The following day, August 3, 1988, Debtor filed a Statement of Financial Affairs for Debtor Engaged in Business indicating that Debtor's sole shareholder was Hussain H.A. Behbehani ("Behbehani"), a resident of Spain, and that Debtor's two largest unsecured creditors were Behco Investment Corporation and Driffield Corporation, both corporations being under the control of Behbehani.
Because of the unusual billing procedure requested by Applicant in a routine Chapter 11 proceeding concerning undeveloped land in an area thirty-five (35) miles West of Phoenix (which area is the 48,000 acre development known as "Sun Valley"), the Court set a hearing (upon notice to all creditors and interested parties) for December 8, 1988.
The Applicant had requested that it be able to setoff against the retainer on a monthly basis, with a detailed fee application to be filed with the Court and noticed to creditors and interested parties every 120 days. Under this procedure, the legal fees and costs would be paid on a current basis, with Court scrutiny only every 150 to 180 days. This procedure had been developed by Applicant who was allegedly relying on the then recent Bankruptcy Appellate Panel decision of In re Knudsen, 84 B.R. 668 (9th Cir.1988). Applicant's reliance on Knudsen was misplaced. There was nothing unusual or unique about this Chapter 11 proceeding which would have warranted this Court's adoption of Knudsen to the facts presented in this Chapter 11.
At the time, this Court also had insufficient information about the source of Applicant's funds without having a hearing on the matter.
Therefore, the Hearing on December 8, 1988 was to address two points: the unusual procedure requested by Applicant to pay its legal fees and expenses, and the source of the funds from which Applicant had received its retainer.
At the December 8, 1988 Hearing, the secured creditor, Craftsmanship, orally objected to the Joint Motion concerning retention of counsel. Craftsmanship stated it needed to do additional discovery to determine (1) the source of the retainer funds; (2) how Mr. Behbehani, the Debtors' sole shareholder, was involved in the Chapter 11 proceedings; (3) what, if any, action he had pursued on behalf of the Debtor; and (4) whether Debtor's proposed counsel (given the potential actions on behalf of Mr. Behbehani and other parties) was, in fact, disinterested.
At the December 8, 1988 Hearing the Court's concerns were not addressed. Although the Court was advised that the retainer had been received from third parties, the Court was still not advised as to the source of the funds. It was unclear to the Court whether Mr. Behbehani, the Debtor's sole shareholder, was acting on behalf of himself, unsecured creditors, or the Debtor. Depending on how Mr. Behbehani was involved in the Chapter 11 proceedings, a serious issue could be, or already had been, raised as to whether Debtor's proposed counsel was "disinterested" pursuant to 11 U.S.C. § 101(13).
The Court was also concerned as to whether the Debtor's proposed counsel was willing to waive any claim against the Debtor's estate, since its legal fees and costs were being paid by a third party.
On January 11, 1989, Debtor's Managing Agent revealed to the Court, for the first time, that Mr. Behbehani was the sole owner of Driffield Corporation ("Driffield) and the owner of 47 percent of Behco Investment Corporation (Behco"), the two principal unsecured creditors of the Debtor. At a Status Hearing on April 7, 1989, the Court was advised that Debtor's proposed counsel waived any claim against the estate for legal fees and costs. However, on April 7, 1989, the Court stated it still had insufficient information as to the interrelationship between Mr. Behbehani, the unsecured creditors, and the Debtor, and the source of funds of the retainer for Debtor's proposed counsel to make a determination as to whether Debtor's proposed counsel was disinterested.
On April 21, 1989, the Debtor first revealed to Craftsmanship that Debtor's proposed counsel had received prepetition and postpetition payments, constituting its retainer, from Behco and Driffield, Debtor's largest unsecured creditors.
At the May 2, 1989 Hearing, the Court stated that since Debtor's proposed counsel was withdrawing, the retainer should be held by the Debtor as property of the estate. Debtor's proposed counsel stated that the funds should be paid to the third parties which had advanced the funds. Subsequently, counsel requested that it be paid its legal fees and costs even though counsel had never been appointed as counsel for the Debtor.
The other documentation filed with this Court, and the Hearings held by this Court are fully set forth in the Preliminary Statement.
I. WHETHER THE RETAINER CONSTITUTES PROPERTY OF THE DEBTOR'S ESTATE.
II. WHETHER APPLICANT SHOULD BE PAID ITS LEGAL FEES AND COSTS, ALTHOUGH IT WAS NOT APPOINTED COUNSEL FOR THE DEBTOR.
I
The Bankruptcy Court is obligated, upon the request of a party-in-interest, or sua sponte, to review the fee arrangement entered into by Debtor's counsel with the Debtor, irrespective of the source of compensation of Debtor's counsel. 11 U.S.C. § 329, Bankruptcy Rule 2017, In re Leff, 88 B.R. 105, 106 (Bankr.N.D.Tex.1988); In re Chapel Gate Apartments, Ltd., 64 B.R. 569, 574 (Bankr.N.D.Tex.1986).
The Bankruptcy Court may order the return to the Debtor of any payment made to an attorney representing the Debtor...
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