In re Dynamic Drywall Inc.
| Decision Date | 14 September 2016 |
| Docket Number | Case No. 14-11131 |
| Parties | IN RE: DYNAMIC DRYWALL INC Debtor. |
| Court | U.S. Bankruptcy Court — District of Kansas |
A discharged Kansas lawyer who is working for a stipulated fee can claim the value of service as quantum meruit. But when that agreement has been approved by the bankruptcy court under 11 U.S.C. § 328, it can only be altered in very unusual circumstances. Even if quantum meruit is an available remedy, the lawyer's services must still benefit the estate.
Debtor Dynamic Drywall, Inc. (DDI) employed the Law Offices of Ron D. Beal, PA ("Beal") as special counsel to pursue a variety of construction related actions on behalf of the bankruptcy estate. Beal was to paid an hourly rate for all of that work.1 DDI separately employed Beal to pursue a breach of contract claim against Building Construction Enterprises, Inc. ("BCE") and The Hartford Fire Insurance Company ("HFI"), the bond surety, that arose from an alleged breach of a settlement agreement reached in state court construction litigation over a public works project in Olathe, Kansas. Beal also defended DDI against an attorney's lien on certain DDI assets claimed by its former counsel, Stinson Leonard Street ("SLS"), as a result of the same litigation. In connection with this litigation, DDI filed an application for approval of Beal's employment on September 25, 2014.2 The motion described a 40% contingent fee arrangement, but did not include a copy of the proposed Attorney-Client Agreement ("Agreement"). The Court entered an order approving the employment on October 20, 2014.3 In pertinent part, the Agreement, as later amended, provided that Beal would receive 40% of any recovery on the claims described in the scope of representation section of the Agreement. Neither the Application, the Order, nor the Agreement referenced § 328.
After Beal commenced an adversary proceeding in this Court to pursue those claims,4 DDI fired the debtor's lead bankruptcy counsel, Mark J. Lazzo, and hired Jeffrey A. Deines to replace him. Lazzo told Beal that both he and Beal had been terminated. The record is not so clear. After Lazzo's demise, Beal attempted tonegotiate a revised contingency fee agreement containing an additional provision assuring Beal of an hourly fee recovery if certain "compromising events" transpired. When DDI refused to agree, Beal moved to withdraw. He now claims the value of his time and expenses up to the withdrawal date as an administrative expense on the basis that he was thwarted from successfully pursuing a meritorious claim for the estate.5 Even if Beal was discharged, which I question, it does not appear that his work on the HFI adversary proceeding benefitted the debtor.6 DDI did not economically benefit from the action. The Kansas Court of Appeals ultimately held that DDI wasn't entitled to collect any fees from HFI under the state court settlement agreement.7 DDI and HFI stipulated to a dismissal of the HFI litigation, making it unlikely that the debtor ever will benefit from the HFI adversary proceeding.8 Beal did demonstrate that he stored numerous files and records of the debtor in his office for over a year and he should be reimbursed for that service. For the reasons set out below, Beal's motion must otherwise be denied.9
Dynamic Drywall filed this chapter 11 case on May 21, 2014. Mark J. Lazzo was employed as debtor-in-possession counsel in the first-day orders. RandallSalyer signed the petition as president of DDI, a position he accepted at the behest of Legacy Bank, DDI's senior secured lender. Salyer's role was as a restructuring or workout officer. The Bank sponsored the petition's filing to preserve DDI's accounts receivable and prosecute certain contractual claims of DDI, including some potential claims against DDI insiders, mostly for the Bank's benefit. The Bank had a security interest in these claims.
Beal, DDI, and Legacy Bank signed an Attorney-Client Agreement ("Agreement") on July 24, 2014. The Agreement provided for Beal to pursue claims against BCE and HFI for allegedly breaching their settlement agreement not to object to attorney fees in the Johnson County, Kansas litigation, and to defend against SLS's claimed attorney's lien on the breach claim. Lazzo filed a motion to employ Beal under this Agreement in September and the Court entered an order approving the employment in October.10 The Agreement is straightforward. Beal is to receive "professional fees" when the debtor receives an "economic benefit," regardless when the benefit is conferred and whether it is conferred by settlement, judgment, or after an appeal. The fees equal 40% of the benefit, calculated after deduction of Beal's expenses. Beal was entitled to recover those first. In any event, DDI was obligated to reimburse Beal for his expenses, regardless of the outcome of the case.11 Beal commenced the adversary proceeding on behalf of DDI against HFI (and SLS) on February 3, 2015.12 The Agreement was later revised in April of 2015,adding that Beal was authorized to pursue affirmative claims against SLS in the pending HFI adversary proceeding.13 The adversary complaint was then amended to assert a malpractice or breach of fiduciary duty claim against SLS related to its billing practices in the Johnson County action.14
This Court has twice discussed the underlying state court case in prior orders.15 BCE was a general contractor on a public works project in Olathe. DDI was one of BCE's subcontractors and HFI wrote the public works surety bond that assured subcontractors they would be paid. Payment disputes among various parties to the contract ensued, resulting in a lawsuit being filed in Johnson County in 2006. In 2010, BCE, HFI and DDI settled all their claims except for DDI's "prevailing party" claim for attorney fees and expenses under BCE's subcontract and HFI's bond. At some point, BCE became insolvent, focusing DDI's collection efforts on HFI. DDI's attorney fee claim was tried in 2011, but the state court did not grant DDI judgment until April of 2014. When it did, it awarded DDI $378,662.10 in fees against BCE, but found that HFI was not liable for any of DDI's fees for two reasons: first, because attorney fees are not reimbursable expenses under KAN. STAT. ANN § 60-1111; and, second, because the Settlement Agreement did not make HFI contractually liable for them. DDI's state court counsel, SLS,perfected a timely appeal of this ruling to the Kansas Court of Appeals, but, after DDI filed its bankruptcy case, debtor-in-possession counsel Lazzo took that over.
HFI and BCE requested relief from the bankruptcy automatic stay here to pursue post-judgment remedies in state court and to defend the appeal. All parties were granted partial stay relief to pursue their rights in the state court appeal.16 On October 22, 2014, in a reasoned order, I denied HFI and BCE stay relief to pursue any effort to reduce BCE's liability for fees in state district court.17 On December 11, 2015, in an unpublished opinion, the Kansas Court of Appeals affirmed the district court's judgment that DDI's attorney fees weren't covered either by the terms of HFI's payment bond or by KAN. STAT. ANN. § 60-1111(a). It also held that the Settlement Agreement did not create a separate or independent duty on HFI's part to pay DDI's fees.18
Meanwhile, on February 3, 2015, Beal had filed the adversary proceeding on behalf of DDI against HFI and SLS.19 The complaint alleged that HFI breached a provision in the 2010 Settlement Agreement in which it agreed that it would "not contest that Dynamic is entitled to recover attorney fees," but could contest the amount of the fees requested "based on the Subcontract and applicable Kansaslaw."20 HFI claimed in state court that it had no legal liability to pay DDI's attorney fees because those fees are not included in the scope of the bond's coverage under Kansas law and the state court agreed. Thus, DDI alleged that HFI's legal opposition to the state court's fee award breached the Settlement Agreement. DDI also alleged that SLS had not represented DDI in the breach of settlement dispute against HFI and because no judgment was entered against HFI, DDI sought a declaration that SLS didn't have a valid attorney's lien against the proceeds of the HFI breach action.21 Beal amended this complaint on April 8, 2015 to include an affirmative professional liability claim for damages against SLS, asserting that the law firm had breached its fiduciary duty and duty of care in failing to segregate recoverable and non-recoverable attorney fees under DDI's subcontract with BCE.22 HFI responded to the complaint with a motion to dismiss under Fed. R. Civ. P. 12(b)(6), as did SLS.23 I granted SLS's motion to dismiss on August 14, 2015.24 DDI and HFI then submitted a joint stipulation of dismissal of the proceeding without prejudice on September 1, 2015 and the adversary proceeding was closed.25 Nothing in the docket reflects that discovery ever began.
On March 23, 2015, the Court confirmed DDI's First Amended Plan of Liquidation dated November 24, 2014. Sometime between October of 2014 and Juneof 2015, Legacy Bank and Randall Salyer decided to replace Mr. Lazzo as debtor-in-possession counsel. On June 22, Salyer visited Lazzo in his office and fired him. According to Lazzo, Salyer told him that only Lazzo and Beal were making any money in the case. No one from DDI or the Bank visited or communicated with Beal. He learned of the termination from Lazzo who wrote Salyer a letter that day, stating his understanding that Salyer had fired both lawyers and requesting reconsideration of the decision.26 He copied that letter to Beal. On June 25, both Lazzo and Beal moved to withdraw as counsel in a combined pleading.27
I question whether Beal was ever actually "fired."28 Salyer...
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