In re Morreale

• Decision Date: 03 July 2019
• Docket Number: Bankruptcy Case No. 13-27310 TBM
• Parties: In re: SAMUEL JESSE CHRISTIAN MORREALE, Debtor.
• Court: United States Bankruptcy Courts. Tenth Circuit. U.S. Bankruptcy Court — District of Colorado

In re: SAMUEL JESSE CHRISTIAN MORREALE, Debtor.

Bankruptcy Case No. 13-27310 TBM

UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF COLORADO

July 3, 2019

Bankruptcy Judge Thomas B. McNamara

Chapter 7

MEMORANDUM ORDER AND OPINION ON "FEE DEFENSE ATTORNEYS' FEES" PORTION OF BROWNSTEIN HYATT FARBER SCHRECK, LLP'S THIRD INTERIM APPLICATION FOR PROFESSIONAL COMPENSATION

I. Introduction.

This difficult and lengthy Chapter 7 liquidation is slowly nearing the end. All creditors have already been paid in full. The final skirmishes are playing out over administrative expenses. Years ago, the Chapter 7 Trustee, Tom Connolly (the "Trustee"), retained the law firm of Brownstein Hyatt Farber Schreck, LLP ("BHFS") as legal counsel. The Court approved such engagement. Recently, BHFS submitted its "Third Interim Application for Allowance of Fees and Expenses for the Period from June 1, 2016 through January 1, 2019" (Docket No. 988, the "Third BHFS Application").¹ In the Third BHFS Application, BHFS requests, among other things, $22,850 in fees for defense of a prior BHFS fee application as well as $63,091 for representation of the Trustee in defense of the Trustee's own fee application. Both the Debtor, Samuel Jesse Christian Morreale (the "Debtor"), and the United States Trustee objected to the Third BHFS Application on multiple grounds, including that BHFS may not be awarded fees for fee defense under recent United States Supreme Court precedent: Baker Botts L.L.P. v. ASARCO LLC, 135 S. Ct. 2158 (2015).

This decision focuses only on the fees for fee defense objections, while leaving the rest of the objections for another day. Fee disputes are difficult, especially where, as in this case, a professional has done good work and helped achieve an exceptional result - full payment of creditors and a surplus potentially available for return to the Debtor. But the question is whether, as a matter of law, BHFS can be allowed compensation for defending its own prior fee application and the Trustee's own fee application. Under the applicable statutory framework as interpreted by the SupremeCourt in ASARCO, the answer is no.

II. Jurisdiction and Venue.

The Court has jurisdiction to enter final judgment on this professional compensation dispute pursuant to 28 U.S.C. § 1334. This matter is a core proceeding under 28 U.S.C. § 157(b)(2)(A), since it concerns administration of the bankruptcy estate. Venue is proper in the Court pursuant to 28 U.S.C. §§ 1408 and 1409.

III. Procedural Background and Facts.

A. Employment of BHFS.

The Debtor filed for protection under Chapter 11 of the Bankruptcy Code on October 15, 2013. (Docket No. 1.) On December 9, 2014, the Court converted the case from a Chapter 11 reorganization to a Chapter 7 liquidation. (Docket Nos. 292, 293, 294, and 296.) Tom Connolly was appointed as the Chapter 7 Trustee. (Docket No. 298.) Shortly thereafter, the Trustee moved to employ BHFS as legal counsel pursuant to 11 U.S.C. § 327. (Docket No. 402.) The Court approved the employment of BHFS effective nunc pro tunc to February 27, 2015. (Docket No. 406). Since such time — more than 4 years — BHFS has continued to serve capably and effectively as legal counsel to the Trustee.

B. The First and Second BHFS Applications, Objections, and Partial Interim Approvals

.

Periodically, BHFS sought compensation for its legal services and recovery of its costs. On October 23, 2015, BHFS filed "Brownstein Hyatt Farber Schreck, LLP's First Interim Application for Allowance of Fees and Expenses for the Period from February 27, 2015, through September 30, 2015" (Docket No. 564, the "First BHFS Application"), in which BHFS sought approval of $145,526.50 in legal fees and $8,637.46 in costs incurred in connection with its representation of the Trustee.² The Debtor opposed the First BHFS Application for a variety of reasons. Suffice to say, the Debtor did not agree that all of the services provided by BHFS were reasonably likely to benefit the estate nor that they were necessary to the administration and completion of the case.

After reviewing the briefs and considering legal argument, the Court ultimately approved, on an interim basis, a portion of the fees requested in the First BHFS Application. In its "Order Approving, in Part, Brownstein Hyatt Farber Schreck, LLP's First Interim Application for Allowance of Fees and Expenses" (Docket No. 756, the "Order on First BHFS Application"), the Court stated:

This Court has reviewed carefully and in detail Applicant's First Interim Application and the Supplement, including thebilling records submitted in support thereof (Docket No. 713-1, Exhibits 1-5). This Court's review of the billing records, particularly for services charged in the category titled "Asset Disposition," raises concerns as to whether some of the services provided and charged were of benefit to this estate, or rather, were services provided for the benefit of the separate estate in the bankruptcy case: In re Morreale Hotels, LLC, Case No. 12-35230 TBM. The Applicant has not been approved as counsel for Morreale Hotels, LLC. Benefit to the estate is an essential finding this Court must make in order to comply with its statutory obligations under 11 U.S.C. 330(a)(1). The benefit to the estate requirement is a threshold inquiry under the language of Section 330 according to binding Tenth Circuit precedent. Rubner & Kutner v. U.S. Trustee (In re Lederman Enterprises, Inc.), 997 F.2d 1321 (10th Cir. 1993).

Because the First Interim Application and Supplement are before the Court for allowance on an interim basis, this Court need not confront that concern at this juncture. Instead, the Court will reserve determination of that threshold inquiry until Applicant seeks allowance of its fees and expenses incurred on a final basis. The fees which are of concern represent only a fraction of the fees requested; and Applicant should be allowed the fees and expenses which are not in question. Thus, the Court determines that Applicant should be allowed 75% of the fees and 100% of its expenses requested.

(Order on First BHFS Application at 2.) The Court allowed, on an interim basis, only a portion of the fees and expenses requested in the First BHFS Application, approving fees in the amount of $109,144.87 and expenses in the amount of $8,637.46. (Id.)

Meanwhile, on August 4, 2016, BHFS filed "Brownstein Hyatt Farber Schreck, LLP's Second Interim Application for Allowance of Fees and Expenses for the Period from October 1, 2015 through May 31, 2016" (Docket No. 714, the "Second BHFS Application"), in which BHFS sought approval of $237,516.50 in legal fees and $8,023.28 in costs incurred in its representation of the Trustee. The Debtor objected to the Second BHFS Application. (Docket Nos. 724 and 770.) After reviewing legal briefs on the issues arising from the Second BHFS Application as well as a "Stipulation Regarding Brownstein Hyatt Farber Schreck, LLP's Second Interim Application for Allowance of Fees and Expenses for the Period from October 1, 2015 through May 31, 2016" filed by BHFS and the Debtor (Docket No. 803), the Court approved, on an interim basis, $226,435.00 of the fees and $8,023.28 of the costs requested in the Second BHFS Application. (Docket No. 804.)

C. The Trustee's Application, Objection, Denial, and Appeals

.

Thereafter, on May 4, 2017, the Trustee filed his "First Interim Application of Tom Connolly, Chapter 7 Trustee, for Allowance of Compensation and Expenses" (Docket No. 823, the "Trustee's Application") seeking an interim commission of $260,000.³ The Trustee requested the statutory maximum commission based upon disbursements to creditors in this case. However, he also requested additional compensation based upon $8,432,273.80 in disbursements made to creditors in the related Chapter 11 case of Morreale Hotels, LLC: In re Morreale Hotels, LLC, Case No. 12-35230 (Bankr. D. Colo.) (the "Morreale Hotels Case"). The Debtor objected. (Docket No. 830.) He argued that the Trustee's commission must be limited to a percentage of distributions made in this case.

In the legal briefs and at the hearing that followed on the Trustee's Application, BHFS represented the Trustee, at the Trustee's request and direction. Despite the law firm's ardent advocacy on the Trustee's behalf, the Court determined that the Trustee's Application was contrary to 11 U.S.C. § 326. Concluding that the Trustee's commission could be calculated by using only those disbursements made in this Chapter 7 case, the Court ruled against the Trustee and denied his request for compensation to the extent that it was based on $8,432,273.80 in disbursements made in the separate Morreale Hotels Case. (Docket No. 927, the "Trustee Fee Denial Order.")

The Trustee appealed the Trustee Fee Denial Order to the Bankruptcy Appellate Panel for the Tenth Circuit. (Docket Nos. 937-40.) The Bankruptcy Appellate Panel for the Tenth Circuit affirmed. Connolly v. UST (In re Morreale), 595 B.R. 409 (10th Cir. BAP 2019) (Docket Nos. 986 and 987.) Thereafter, the Trustee appealed to the Tenth Circuit Court of Appeals. (Docket Nos. 990 and 991.) Such further appeal remains pending. BHFS represented the Trustee in both appeals, again, at the Trustee's request and direction.

D. The Third BHFS Application and Objections.

On February 8, 2019, BHFS filed the Third BHFS Application, seeking approval of fees in the amount of $285,615.00 and reimbursement of expenses in the amount of $12,458.51. As set forth in more detail below, in the Third BHFS Application BHFS requested compensation for defending the Second BHFS Application as well as defending the Trustee's Application in the Court and on appeal.

Both the United States Trustee and the Debtor objected on the basis that fees charged for BHFS's defense of the Second BHFS Application as well as the Trustee's Application are not compensable as a matter of law under 11 U.S.C. § 330 and binding United States Supreme Court precedent: Baker Botts L.L.P. v. ASARCO...