In re HL Builders, LLC

• Decision Date: 30 October 2020
• Docket Number: Case No: 19-32825
• Citation: 630 B.R. 32
• Court: U.S. Bankruptcy Court — Southern District of Texas
• Parties: IN RE: HL BUILDERS, LLC; aka CD Homes, LLC, Target Debtor

630 B.R. 32

IN RE: HL BUILDERS, LLC; aka CD Homes, LLC, Target Debtor

Case No: 19-32825

United States Bankruptcy Court, S.D. Texas, Houston Division.

Signed October 30, 2020

Richard L. Fuqua, II, Fuqua & Associates, PC, Houston, TX, for Debtor.

MEMORANDUM OPINION

Eduardo V. Rodriguez, United States Bankruptcy Judge

Following the dismissal of the involuntary petition filed against HL Builders, LLC emanated a single matter self-styled as "Application for Attorney's Fees and Costs Upon Dismissal of Involuntary Petition Pursuant to 11 U.S.C. § 303(i)(1)" filed by HL Builders, LLC, f/k/a CD Homes LLC and Fuqua & Associates P.C. seeking $99,333.50 in legal fees and $2,809.35 in costs for a total request of $102,142.85. On June 10, 2020, the Court held a hearing on the fee application. For the reasons stated below, the Court finds that the fee application should be granted in part and denied in part. HL Builders, LLC is awarded $79,968.50 in legal fees and $2,344.35 in expenses for a total award of $82,312.85.

I. FINDINGS OF FACT

This Court makes the following findings of fact and conclusions of law pursuant to Federal Rule of Civil Procedure 52, which is made applicable to adversary proceedings pursuant to Federal Rule of Bankruptcy Procedure 7052. To the extent that any finding of fact constitutes a conclusion of law, it is adopted as such. To the extent that any conclusion of law constitutes a finding of fact, it is adopted as such. This Court made certain oral findings and conclusions on the record. This Memorandum Opinion supplements those findings and conclusions. If there is an inconsistency, this Memorandum Opinion controls.

On May 20, 2019, HOUTEX Builders, LLC, 2203 Looscan Lane, LLC, and 415 Shadywood, LLC (collectively "Petitioning Creditors ")¹ filed an involuntary petition against HL Builders, LLC f/k/a CD Homes LC ("HL Builders "). The involuntary petition was subsequently amended on July 11, 2019 ("Amended Involuntary Petition "), and after a full trial on the merits the Court found that the Petitioning Creditors lacked standing to file the Amended Involuntary Petition, dismissed the Amended Involuntary Petition, and because HL Builders neither consented to entry of an order for relief nor waived its right to judgment under § 303(i), the Court permitted HL Builders to file an application for fees and expenses pursuant to § 303(i)(1). On March 19, 2020, HL Builders filed its "Application for Attorney's Fees and Costs Upon Dismissal of Involuntary Petition Pursuant to 11 U.S.C. § 303(i)(1)" ("Fee Application "). On April 9, 2020, Petitioning Creditors filed an objection ("Fee Objection ") to the Fee Application and on June 10, 2020, the Court held a hearing on the Fee Application and Fee Objection.² At the conclusion of the hearing, the Court took the matter under advisement. The Court now issues the instant Memorandum Opinion.

II. CONCLUSIONS OF LAW

A. Jurisdiction and Venue

This Court holds jurisdiction pursuant to 28 U.S.C. § 1334, which provides "the district courts shall have original and exclusive jurisdiction of all cases under title 11." Section 157 allows a district court to "refer" all bankruptcy and related cases to the bankruptcy court, wherein the latter court will appropriately preside over the matter.³ Because this Order supplements the Court's February 18, 2020 judgment to the extent it determines reasonable attorney's fees, the matter is a core proceeding under 28 U.S.C. § 157(b)(2). This suit is also core under the general "catch-all" language because an application for fees in an involuntary bankruptcy is the type of proceeding that can only arise in the context of a bankruptcy case.⁴ Therefore, awarding reasonable fees and expenses in an involuntary bankruptcy proceeding pursuant to 11 U.S.C. § 303(i) can only occur in a bankruptcy court and there is no state law equivalent for this action.

This Court may only hear a case in which venue is proper.⁵ Section 1409(a) provides that "a proceeding arising under title 11 or arising in or related to a case under title 11 may be commenced in the district court in which such case is pending."⁶ The instant matter stems from Debtor's involuntary chapter 7 case and the filing of the Amended Involuntary Petition; therefore, venue of this proceeding is proper.

B. Constitutional Authority to Enter a Final Judgment

This Court has an independent duty to evaluate whether it has the constitutional authority to sign a final order.⁷ In Stern, which involved a core proceeding brought by the debtor under § 157(b)(2)(C), the Supreme Court held that a bankruptcy court "lacked the constitutional authority to enter a final judgment on a state law counterclaim that is not resolved in the process of ruling on a creditor's proof of claim."⁸ As indicated above, the pending dispute before this Court is a core proceeding pursuant to § 157(b)(2). The ruling in Stern was only limited to the one specific type of core proceeding involved in that dispute, which is not implicated here. Accordingly, this Court concludes that the narrow limitation imposed by Stern does not prohibit this Court from entering a final judgment here.⁹ Alternatively, even if Stern applies to all of the categories of core proceedings brought under § 157(b)(2),¹⁰ this Court still concludes that the limitation imposed by Stern does not prohibit this Court from entering a final judgment in the dispute at bar. In Stern, the debtor filed a counterclaim based solely on state law; whereas, here, the claim brought by HL Builders is based on an express provision of the Bankruptcy Code— § 303(i)(1) —and judicially-created bankruptcy law interpreting this provision. This Court is therefore constitutionally authorized to enter a final judgment on the fee application filed by HL Builders.

Finally, in the alternative, this Court has the constitutional authority to enter a final judgment regarding the Fee Application because Petitioning Creditors and HL Builders have consented, impliedly if not explicitly, to adjudication of this dispute by this Court.¹¹ Here, the parties have never objected to this Court's constitutional authority to enter a final judgment. Moreover, the parties engaged in extensive motion practice and participated in two separate trials. The first trial on the involuntary petition lasted three days and the second one on the fee application lasted one full day in this Court, and not once did they ever object to this Court's constitutional authority to enter a final judgment. If these circumstances do not constitute consent—implied, if not express—it is inconceivable what does.

C. Petitioning Creditors' Objections to HL Builders Fee Application

Petitioning Creditors listed several objections to the Fee Application.¹² Petitioning Creditors advance three general objections and six specific objections, each containing specific arguments therein. The Court will discuss each in turn.

1. Whether HL Builders Should Be Awarded Attorney's Fees

Absent a specific fee-shifting statutory or contractual authorization, federal courts apply the so-called "American Rule," which requires that each side in a lawsuit bear liability for its attorney's fees.¹³ The Supreme Court imparted in Alyeska that Congress had reserved for itself the task of determining when exceptions should be allowed to the American Rule.¹⁴ Under the Bankruptcy Code, Congress has, in § 303(i), established an exception to the American Rule by granting the court discretion to award attorney's fees upon dismissal of an involuntary petition. Under § 303(i), in relevant part:

If the court dismisses a petition under this section other than on consent of all petitioners and the debtor, and if the debtor does not waive the right to judgment under this subsection, the court may grant judgment—

(1) against the petitioners and in favor of the debtor for—

(A) costs; or

(B) a reasonable attorney's fee.

The use of the discretionary term "may" has resulted in different analytical approaches to the ways in which courts have awarded costs and fees under § 303(i).¹⁵ Some courts have used the "automatic award" approach where an award of attorney's fees is the normal result after dismissal of an involuntary petition.¹⁶ In other words, the loser pays. At the other end of the spectrum, some courts have adopted the "straight discretion" approach where there is no presumption applied, and the court only examines the totality of the circumstances in awarding fees.¹⁷

Next, with subtle differences in its application, a majority approach has emerged in harmonizing the two views described above. Under the majority view followed by many bankruptcy courts in Texas,¹⁸ § 303(i) creates a presumption that attorney's fees will be awarded against unsuccessful petitioning creditors, with the presumption being rebuttable based on the "totality of the circumstances" test.¹⁹ The burden of rebutting the presumption and establishing that the fees were unwarranted under the totality of the circumstances test falls on the unsuccessful petitioning creditor. Under the totality of the circumstances test, the court considers four key factors in determining whether a petitioning creditor has rebutted the presumption that fees should be awarded.²⁰ Those four factors include: (1) the merits of the involuntary petition; (2) the role of any improper conduct on the part of the alleged debtor; (3) the reasonableness of the actions taken by the petitioning creditors; and (4) the motivation and objectives behind filing the involuntary petition.²¹ The Court may also consider any other additional material factors that it chooses to consider and deems relevant.²²

In their Fee Objection, Petitioning Creditors argue that under the four-factor totality of the circumstances test, the Court should decline to award attorney's fees. Petitioning Creditors allege that the following three factors weigh in favor of not awarding fees in this case: (i) the merits of the involuntary petition; (ii) the reasonableness of the...