In re Grivas
| Decision Date | 24 October 1989 |
| Docket Number | Bankruptcy No. 87-01131-LM11. |
| Citation | 105 BR 954 |
| Court | U.S. Bankruptcy Court — Southern District of California |
| Parties | In re William L. GRIVAS, Debtor. |
Hill & MacKinnon, San Diego, Cal., Cappello & Foley, Santa Barbara, Cal., for debtor.
Milberg, Weiss, Bershad, Specthrie and Lerach, San Diego, Cal., Sp. Litigation Counsel in Lender Liability Action.
Daughton Hawkins & Bacon, Phoenix, Ariz., Sp. Litigation Counsel in Lender Liability Action.
Lillick & McHose, San Diego, Cal., for Sec. Pacific Bank.
Greenberg and Bass, Encino, Cal., for Official Creditors' Committee.
Edward Infante, San Diego, Cal., U.S. Trustee.
Like a modern day Juliet, this Court must ponder whether that which we call a "settlement" in an application to employ special counsel is the same as that "settlement" embodied in a confirmed reorganization plan. Although the semantic construction may appear to be less ethereal than that engaged in by Juliet, the stakes are high. At issue is the entitlement of three law firms to fees in excess of $865,000.
Hill & Baskin are general counsel for William L. Grivas, an individual in Chapter 11 proceedings since February 1987. Shortly after the commencement of this Chapter 11 case, the debtor filed a lender liability lawsuit against Security Pacific National Bank ("SPNB"). The lawsuit alleged that SPNB's precipitous action in shutting down Grivas' line of credit a mere 45 days after commencing the lender-borrower relationship drove his successful electronics assembly business into Chapter 11 proceedings. To say that this litigation and, indeed, every aspect of this Chapter 11 case, was fought with the ferocity of Armageddon is an understatement.
For a period of time, Hill & Baskin represented the debtor in both the Chapter 11 case and the state court lender liability action. Then, in September 1987, the debtor submitted his Application by Debtor-In-Possession to Employ Special Litigation Counsel and to Supplement and Modify Terms of Employment of Hill and Baskin. By that application, the debtor sought to employ Hill & Baskin, Milberg, Weiss, Bershad, Specthrie and Lerach ("Milberg, Weiss") and Daughton, Hawkins & Bacon (the "Daughton firm") as special litigation counsel in the lender liability action. The September 1987 application converted the debtor's representation in the lender liability action from a part-hourly, part-contingent arrangement to a full contingency basis, providing for a sliding scale contingent fee in the event of recovery.1 The application further stated:
(d) In the event of a settlement of all or any part of the Security Pacific litigation, special litigation counsel shall have the option of choosing to be paid either at their normal hourly rates or in accordance with the contingency fee basis as set forth above. .)
The Court approved this arrangement by order entered September 30, 1987 (the "September 30 Employment Agreement"), which in addition to authorizing the Milberg, Weiss and Daughton firms to be employed, modified and supplemented the original employment order of Hill & Baskin.
In October 1988, the debtor filed an Application by Debtor to Retain Special Litigation Counsel. The application recited that the Daughton firm had been forced to withdraw as special litigation co-counsel and the debtor wanted to substitute Cappello & Foley, noted experts in lender liability litigation, for the now-disqualified Daughton firm. The application was made on terms similar to those employing Hill & Baskin and the Milberg, Weiss firm. The same sliding contingent fee scale was employed. In relevant part, the exhibit to the application further stated:
The Court approved the retention of Cappello & Foley by Order entered October 25, 1988.
While the lender liability action raged in federal and state court (it was removed to federal court and remanded twice during its pendency) the Chapter 11 case became the battleground for competing plans of reorganization filed by SPNB and the debtor. It was SPNB's plan which creates this dispute over fees. That plan provided for SPNB to pay the estate's unsecured creditors $1.75 million plus pay all administrative expenses (including attorney's fees) and priority claims in full in exchange for compulsory dismissal of the debtor's lender liability action. Needless to say, the debtor vigorously opposed submission of this plan to the creditor body.
At a hearing held on approval of the disclosure statement for the SPNB plan, the debtor raised numerous arguments against a compulsory settlement, including the point that the bank's plan was not a "settlement" because the term "settlement" implied a consensual termination of the controversy. The bank countered with equally forceful arguments, including that contained in its Reply filed July 8, 1988, in which it stated:
The settlement which is at the heart of the Joint Plan2 is designed to achieve the principles and purposes of the Bankruptcy Code. emphasis added (Reply of Security Pacific National Bank filed July 8, 1988, p. 11, 11. 3-5)
The Official Creditors' Committee joined SPNB's argument stating:
The debtor says that Section 1123 doesn\'t give this court any power to confirm a plan that provides for a settlement of the lender liability action, because the debtor is not a part of that settlement. It seems to me that would render meaningless and useless provisions in the Bankruptcy Code in Chapter 11 that can provide for compromises of disputed claims. It is clear from the cases cited by Mr. Morrison SPNB\'s attorney that time and time again the bankruptcy courts in confirmation hearings have settled claims over the objections of debtors and the equity security holders. (Transcript, Hearing re Approval of Debtor\'s and/or Security Pacific National Bank\'s Disclosure Statements, July 12, 1988, p. 73, 11. 21-25; p. 74, 11. 1-2)
Ultimately, the Court was persuaded by case authority cited by the Joint Plan proponents—namely, Matter of Texas Extrusion, 844 F.2d 1142 (5th Cir., 1988) and Holywell Corp. v. Bank of New York, 59 B.R. 340 (S.D.Fla.1986); aff'd on other grounds 820 F.2d 376 (11th Cir.1987) — that the Bankruptcy Code authorized the court to consider and, if appropriate, approve a plan proposing settlement of litigation over the debtor's objection. The Court approved the dissemination of the Disclosure Statement and Second Amended Joint Plan of Reorganization at the same time as the debtor's Amended Disclosure Statement and Second Amended Plan of Reorganization. Balloting was conducted and, when it became apparent that creditor support for the Joint Plan was overwhelming, the debtor withdrew his plan from consideration.
Because impaired classes (the debtor's insiders and the debtor as an equity holder) had rejected the Joint Plan which subordinated and provided nothing for their claims, the Court was nevertheless required to hold extensive confirmation hearings. Since the debtor claimed the value of the lender liability suit could be as much as $80 million and at best, the bank's plan was offering $3.25 million,3 the Court was required to determine whether the Joint Plan was fair and equitable as to the impaired dissenting classes. The Court bifurcated the confirmation hearing into two parts: One part was a five-day summary jury trial or mini-trial held before an advisory jury for the purpose of determining the likely value of the lender liability action; the other part was a number of days reserved for court trial of the equitable defenses to the bank's counterclaim and an evaluation of the acceptability of the advisory jury verdict in the lender liability action, as well as remaining the confirmation issues.
When the advisory jury returned a $1.2 million judgment in favor of the bank and against the debtor on the counterclaim to the lender liability action, the confirmation scenario rapidly changed. The debtor and insider creditors withdrew their objections to the Joint Plan, the Joint Plan was modified to provide for some of the insider creditors to participate pro rata in distribution with other unsecured creditors, the plan proponents withdrew their objections to the debtor's exemption claims, letter agreements of settlement and mutual releases were executed by the bank, the OCC and the debtor. The Court was not required to rule upon the equitable defenses, the acceptability of the advisory jury verdict or any of the other confirmation issues reserved for the second part of the bifurcated confirmation hearing. Instead, an order confirming the modified Joint Plan was entered after a brief hearing.
However, predictably for this case, this was not the end of the dispute. When debtor's special litigation counsel applied for fees on an hourly basis in reliance upon the above-quoted sections of the orders approving their employment, the bank opposed an award in any amount, arguing, "counsel's request to be paid for any legal fees in connection with the lender liability lawsuit should be denied." Vol. I, Objections of SPNB to Final Fee Application of Hill and Baskin ("SPNB Objections") filed May...
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