In re Island Indus.
| Docket Number | 23-8007 |
| Decision Date | 23 August 2023 |
| Parties | In re: Island Industries Inc. Debtor. Glankler Brown, PLLC, Movant-Appellant. |
| Court | Bankruptcy Appellate Panels. U.S. Bankruptcy Appellate Panel, Sixth Circuit |
NOT RECOMMENDED FOR PUBLICATION
Appeal from the United States Bankruptcy Court for the Western District of Tennessee at Memphis. No. 22-bk-20380-Jennie D Latta, Bankruptcy Judge.
ON BRIEF:
Michael P. Coury, Ricky L. Hutchens, GLANKLER BROWN, PLLC Memphis, Tennessee, for Appellant.
Before: BAUKNIGHT, DALES, and MASHBURN, Bankruptcy Appellate Panel Judges.
This appeal concerns the bankruptcy court's sua sponte 25% reduction of debtor's bankruptcy counsel's fees without notice. The appellant asks the Panel to determine whether the reduction was made pursuant to the court's independent review of counsel's fee application pursuant to 11 U.S.C. § 330 with consideration of the "results obtained" in the dismissed Chapter 11 case, or as a sanction, and in either case, whether counsel was denied due process. Given the bankruptcy court's reliance on the concept of deterrence in making the reduction, the Panel finds that the reduction was a sanction for which counsel was denied notice and an opportunity to respond to the court's concerns and, thus, denied due process. Although the appeal also raises due process issues in the context of fee applications generally, the Panel finds it unnecessary to resolve those questions in view of the bankruptcy court's heavy emphasis on sanctions-related reasoning in its decision.
Appellant Glankler Brown, PLLC ("Glankler" or "Appellant"), bankruptcy counsel to debtor Island Industries, Inc., asks the Panel to review whether the bankruptcy court denied it due process by (i) reducing its compensation as a sanction without notice and (ii) holding a hearing on its unopposed fee application without notice and in contravention of a local rule. Because the Panel holds that the bankruptcy court imposed the fee reduction as a sanction without affording counsel due process, the Panel does not address the second issue. Additionally, because the Panel is remanding the matter to the bankruptcy court for further proceedings, the Panel declines to review the merits of the fee reduction in this appeal.
The Bankruptcy Appellate Panel of the Sixth Circuit (the "BAP" or the "Panel") has jurisdiction to decide this appeal. The United States District Court for the Western District of Tennessee has authorized appeals to the Panel, and no party has timely elected to have this appeal heard by the district court. See 28 U.S.C. § 158(b)(6), (c)(1).
A final order may be appealed as of right pursuant to 28 U.S.C. § 158(a)(1). "Orders in bankruptcy cases qualify as 'final' when they definitively dispose of discrete disputes within the overarching bankruptcy case." Ritzen Grp., Inc. v. Jackson Masonry, LLC, 140 S.Ct. 582, 586 (2020) (citing Bullard v. Blue Hills Bank, 575 U.S. 496, 501, 135 S.Ct. 1686 (2015)). This appeal involves a post-dismissal, final application for approval of debtor's counsel's fees and what counsel contends is a sua sponte imposition of sanctions by the bankruptcy court.
The matters were fully resolved by an order of the bankruptcy court with no further proceedings anticipated for the professional fee and sanctions matter or in the dismissed bankruptcy case. Under a Bullard and Ritzen analysis, the order denying Appellant's fee request and/or imposing sanctions against it is a final order.
Topically, the finality of the order is also supported by Sixth Circuit and BAP jurisprudence. An order on a professional's fee application is considered final when the applicant's role in the proceeding is at an end. Dean v. Lane (In re Lane), 598 B.R. 595, 598 (B.A.P. 6th Cir. 2019); see also Cupps &Garrison, LLC v. Rhiel (In re Two Gales, Inc.), 454 B.R. 427, 429 (B.A.P. 6th Cir. 2011) (). Orders imposing sanctions are also considered final orders once the monetary sanctions are assessed. See Spradlin v. Richard, 572 Fed.Appx. 420, 428 (6th Cir. 2014); Hoover v. Jones (In re Jones), 546 B.R. 12, 15 (B.A.P. 6th Cir. 2016).
The Panel reviews the question of whether the bankruptcy court has committed a due process violation de novo. Haffey v. Crocker (In re Haffey), 576 B.R. 540, 543 (B.A.P. 6th Cir. 2017); see also Adell v. John Richards Homes Bldg. Co., L.L.C. (In re John Richards Homes Bldg. Co., L.L.C.), 439 F.3d 248, 265 (6th Cir. 2006).
Island Industries, Inc. ("Island" or "Debtor") filed a petition for relief under Chapter 11, Subchapter V in February 2022. Island's president, Mr. R. Glenn Sanders, signed the petition. Glankler, and specifically Michael P. Coury and Ricky L. Hutchens of that firm, represented Island with its bankruptcy filing and throughout its bankruptcy case.
In May 2022, shortly after Island had filed its proposed plan of reorganization, Sigma Corporation ("Sigma") filed an adversary proceeding against Island seeking $40 million for alleged violations of various trade secret acts (the "Trade Secret Litigation"). At Island's request, the U.S. District Court withdrew the reference from the bankruptcy court in October 2022, thus assuming jurisdiction over the Trade Secret Litigation.
Sigma moved to dismiss Island's bankruptcy case on grounds of bad faith in July 2022, and ASC Engineered Solutions, LLC ("ASC"), another creditor, joined the motion. Sigma and ASC asserted that Island filed the bankruptcy in bad faith as a litigation tactic. Island opposed the motion to dismiss. The bankruptcy court conducted an evidentiary hearing in October 2022 and dismissed Island's bankruptcy case as a bad faith filing on November 15, 2022. Island did not appeal the dismissal.
On December 13, 2022, Glankler filed its final application for allowance of compensation and reimbursement of expenses, requesting total fees of $249,306.75 and expenses of $7,813.17. Glankler asserts that approximately $100,000 of the fees related to representing Debtor in the bankruptcy case and approximately $150,000 related to defending Debtor against trade secret claims asserted by Sigma both before and after Sigma filed the Trade Secret Litigation. The bankruptcy court made no finding about the allocation of fees.
The next day, the Court issued a Notice of Hearing on the Fee Application. ("Notice of Hearing," Bankr. Case No. 22-20380, ECF 224.) The Notice of Hearing was issued in accordance with Local Rule 9013-1[1]and stated:
(Id. (emphasis original).) On January 16, 2023, Glankler filed a Certificate of Compliance with LBR 9013-1 stating that there had been no objection to its Fee Application.
Meanwhile, Sigma had filed a Motion for Sanctions on December 20, 2022, seeking monetary sanctions against Debtor and its president, Mr. Sanders, pursuant to 11 U.S.C. § 105(a) and Federal Rule of Bankruptcy Procedure 9011 based on Debtor's bad faith filing of bankruptcy. ("Motion for Sanctions," Bankr. Case No. 22-20380, ECF 227.) Sigma sought a monetary sanction of $200,000 to be assessed against Debtor and Mr. Sanders jointly and severally but did not seek sanctions against any other party or any attorney. Glankler objected to the Motion for Sanctions on behalf of Debtor and Mr. Sanders, and Sigma filed a reply. The court set the Motion for Sanctions for hearing on January 19, 2023, in the event of any timely-filed objection - in the same manner that the court had set the hearing on Glankler's Fee Application. Because an objection was filed to the Motion for Sanctions, it was clear under both the local rule and the notice of hearing for the Motion for Sanctions that a hearing would be held on that motion on January 19.
In contrast to the situation with the Motion for Sanctions, Glankler could not have anticipated or prepared for any hearing on the Fee Application. With no objection to the Fee Application, the local rule and the express language in the Notice of Hearing indicated there would be no actual hearing on the Fee Application on the tentative hearing date of January 19, 2023. The court provided no other notice on the case docket that the hearing on Glankler's Fee Application would go forward on January 19 despite the lack of a filed objection. However, the court did proceed to hold a hearing that day immediately after the hearing on the Motion for Sanctions.[2]Mr. Coury was in the courtroom at that time only because he was there in his role as Debtor's counsel opposing the Motion for Sanctions.
At the hearing, Glankler's counsel and the court had this exchange about notice:
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