In re Lupton Consulting LLC

• Decision Date: 22 March 2022
• Docket Number: Case No. 20-27482-beh
• Citation: 638 B.R. 897
• Parties: IN RE: LUPTON CONSULTING LLC, et al., Debtors in possession.
• Court: U.S. Bankruptcy Court — Eastern District of Wisconsin

638 B.R. 897

IN RE: LUPTON CONSULTING LLC, et al.,¹ Debtors in possession.

Case No. 20-27482-beh

United States Bankruptcy Court, E.D. Wisconsin.

Signed March 22, 2022

Laura D. Steele, Michelle S. Y. Cramer, Office of the U.S. Trustee, Milwaukee, WI, for U.S. Trustee.

Kirk M. Fedewa, Watton Law Group, Michael J. Watton, Milwaukee, WI, for Debtor.

Jan S. Pierce, Jan Pierce, S.C., Milwaukee, WI, Trustee, Pro Se.

DECISION AND ORDER APPROVING FINAL FEE APPLICATION, IN PART

Beth E. Hanan, United States Bankruptcy Judge

Counsel for two debtors that operate three fitness clubs and unsuccessfully sought confirmation of their combined Chapter 11 plan has filed its final application for fees and costs for work performed in these cases. After the Court denied confirmation of the debtors’ plan, the debtors voluntarily requested their cases be dismissed. The Court granted the debtors’ motion while counsel's application for compensation was pending.

The United States Trustee has objected to counsel's fee application, asserting that the fees and costs incurred did not benefit the debtors’ estates. The U.S. Trustee also contends that the fees were not necessary to the administration of the cases, nor does the application comply with standards set forth in Bankr. E.D. Wis. Local Rule 2016.

After reviewing the applicable Code and Rule sections, the relevant caselaw, and the detail of invoices submitted, the Court will grant the fee application in part, in the amount of $44,614.58.

JURISDICTION

Despite the dismissal of the debtors’ cases, the Court maintains jurisdiction to examine counsel's fees and decide whether to award the requested compensation. A bankruptcy court has ancillary—or "clean-up"—jurisdiction to take care of "minor loose ends" remaining after a case has been dismissed, including the determination of fee-and-expense awards under 11 U.S.C. § 330(a)(1). See In re Sweports, Ltd. , 777 F.3d 364, 367 (7th Cir. 2015) (noting a "critical difference" between determining an entitlement to fees after dismissal—which falls within a bankruptcy court's ancillary jurisdiction—and ordering payment of those fees); see also Dery v. Cumberland Cas. & Surety Co. (In re 5900 Assocs., Inc.) , 468 F.3d 326, 330–31 (6th Cir. 2006) ("The Bankruptcy Code assigns to courts a comprehensive duty to review fees in a particular case, and 11 U.S.C. § 330 is the sole mechanism by which fees may be enforced. Dismissal of a case, or a private agreement between the debtor and its attorney, cannot abrogate the bankruptcy court's statutorily imposed duty of review."); In re Petrovic , 560 B.R. 312, 315 (Bankr. N.D. Ill. 2016) ("A bankruptcy court ... has ancillary jurisdiction to examine the fees of counsel for a debtor under section 329 post-dismissal.") (citing cases).

FACTUAL BACKGROUND

Debtor Lupton Consulting, LLC is a sole-member LLC owned and managed by Lawrence Lupton. Debtor Anytime Partners, LLC is owned 50% by Mr. Lupton, and 50% by Darren Enger; Mr. Lupton acts as its managing member. The debtors operate three Anytime Fitness gyms in the Milwaukee area: (1) the "Milwaukee Gym" (located at 6015 West Forest Home Avenue, Milwaukee, Wisconsin 53220); (2) the "West Allis Gym" (located at 2229 S. 108th Street, West Allis, Wisconsin 53227); and (3) the "Hartland Gym" (located at 520 Hartbrook Drive, Hartland, Wisconsin 53029). Mr. Lupton owns the franchises for each of the three gyms and operates and oversees them on a daily basis. Mr. Enger has not been involved in the day-to-day operation of any of the gyms since early 2020.

Each debtor filed a voluntary Chapter 11 petition on November 16, 2020. The next day, they both filed an application to employ Watton Law Group as bankruptcy counsel, as well as a motion seeking joint administration of their cases. The applications to employ Watton Law Group represented that "WLG has experience representing debtors and has familiarity with complex reorganization cases," but did not detail any experience specifically in Chapter 11 cases. The applications also identified the range of hourly rates to be charged by the firm's professionals providing service and estimated its fees per category of service. In the affidavits filed in support of the applications, counsel disclosed that the firm had received $20,000 from the debtors for work performed up to the filing of the petition, which counsel had applied against prepetition fees ($13,283 due from Lupton Consulting and $3,283 due from Anytime Partners) and costs ($1,717 from each debtor for the Chapter 11 filing fee), leaving unpaid prepetition fees of $6,179.65.² Counsel also disclosed that the Watton firm had received $6,532 from Mr. Lupton in his individual capacity for prepetition work completed on Mr. Lupton's personal behalf. No one objected to the applications, and the Court approved the employment of Watton Law Group to represent the debtors in these cases under a general retainer on December 23, 2020. The Court granted the request for joint administration on December 29, 2020.

Within the first two weeks of filing their cases, the debtors sought and obtained interim authorization to use the cash collateral of Byline Bank (the largest secured creditor of each debtor) and the U.S. Small Business Administration. In December 2020, the debtors attended their 11 U.S.C. § 341 meeting of creditors, at which Mr. Lupton testified. Based on that testimony, as well as the U.S. Trustee's review of the debtors’ pre- and post-petition bank records, the U.S. Trustee became concerned with the accuracy and completeness of disclosures and the commingling of the debtors’ business expenses with the personal expenses of Mr. Lupton. When the debtors sought to obtain final authorization to use Byline's and the SBA's cash collateral, the U.S. Trustee objected, citing Mr. Lupton's testimony as well as information suggesting that the debtors had made post-petition credit card payments to satisfy prepetition debt without Court approval and without disclosing the payments on their monthly operating reports. The Court adjourned the hearing so that the debtors could address the U.S. Trustee's concerns, ultimately granting the final cash collateral request, with conditions.

The U.S. Trustee later conducted a Rule 2004 examination of Mr. Lupton to inquire into prepetition transfers between the debtors and insiders. In March 2021, Lupton Consulting amended its Statement of Financial Affairs (SOFA) to disclose additional prepetition transfers made to or for the benefit of Mr. Lupton (SOFA questions 4 and 30).

The debtors requested several extensions of time to file their plan(s). These requests were based on efforts to reach agreement with Byline Bank about how the debtors would apply payments from the SBA. See ECF Nos. 77, 87, and 98. In their third request, the debtors advised that they and Byline

have made a great deal of progress finalizing their agreement as to the treatment of Byline's various claims and the application of the three payments that have been made by the Small Business Administration ("SBA") already and those that the parties expect to be made in the next two months. The Debtors and Byline need additional time to finalize the terms of the Chapter 11 Plan so that it comports to the requirements of the Bankruptcy Code and existing SBA rules and guidance.

ECF No. 98, at 2–3.

On April 30, 2021, the debtors filed a single plan of reorganization; they filed a slightly revised version of that plan on May 13, 2021, which is the version the debtors sent to creditors for balloting. See ECF No. 110. The plan did not provide for the prepetition legal fees of debtors’ counsel ($4,803.65 owed by Lupton Consulting, LLC, and $1,376 owed by Anytime Partners, LLC), or a claim filed by the Internal Revenue Service against Anytime Partners. A significant feature of the debtors’ plan was Article 10, which included several injunctive provisions concerning certain debts guaranteed by non-debtor third parties.

Both the U.S. Trustee and Byline Bank objected to the injunctive relief provisions contained in Article 10 of the plan. Several other creditors consented to the injunctive provisions that affected their loans. The U.S. Trustee also objected to confirmation of the debtors’ plan on grounds of feasibility and lack of good faith and questioned the reliability of the debtors’ projections, as well as the necessity of some of the budgeted expenses. The lack of clear financial records permeated the plan deficits. Lack of records made it impossible to trace and verify substantial transfers between the debtors and Mr. Lupton.

Shortly after the two-part evidentiary hearing on confirmation, the Court received written oral argument from the parties, and later issued its decision sustaining the U.S. Trustee's and Byline's objections and denying confirmation of the debtors’ plan. The Court concluded that denial was appropriate based on "multiple improper injunctive provisions that benefit insiders (and soon to be outsiders), vague and ultimately infeasible plan funding and distribution terms, and a lack of good faith" per 11 U.S.C. § 1129(a)(3). ECF No. 138, at 1.

Three weeks later, the debtors filed a motion for voluntary dismissal because the debtors "believe[d] that neither of them [wa]s able to propose a feasible plan that c[ould] be confirmed by the Court." ECF No. 140, at 2. They further asserted that dismissal of their cases "will benefit[ ] creditors and the estates because it will [ ] allow the Debtors to finalize agreements with their creditors and make payments without delay," and that "[d]ismissal of the cases preserves the value of the Debtors as going concerns if they are able to work out agreements with their creditors directly. This allows for the possibility of payment to all creditors, rather than just the secured creditors." Id. at 2–3. The debtors own little in the way of hard assets; their plan to pay creditors had depended on continuing to generate monthly membership dues and other fees...