In re On-Site Fuel Serv., Inc.
| Decision Date | 26 February 2021 |
| Docket Number | Case No. 18-04196-NPO |
| Parties | IN RE: ON-SITE FUEL SERVICE, INC., Debtor. |
| Court | United States Bankruptcy Courts. Fifth Circuit. U.S. Bankruptcy Court — Southern District of Mississippi |
William Liston, III, William Lawrence Deas, Liston & Deas PLLC, Ridgeland, MS, Rosamond Hawkins Posey, Mitchell, McNutt & Sams, P.A, Oxford, MS, for Trustee.
Eileen N. Shaffer, Jackson, MS, Pro se.
Kristina M. Johnson, Jones Walker, Jackson, MS, for Debtor.
This matter came before the Court for a telephonic hearing on February 1, 2021 (the "Hearing"), on the Amended First Application for Allowance of Compensation Filed by Liston & Deas, PLLC for Services Related to Claims Against Capitala/Harbert (the "L&D Fee Application") (Bankr. Dkt. 409)1 filed by Liston & Deas, PLLC ("L&D") as special counsel for Eileen N. Shaffer, the chapter 7 trustee (the "Trustee") for the bankruptcy estate of On-Site Fuel Service, Inc. ("On-Site"); the United States Trustee's Objection to Amended First Application for Allowance of Compensation Filed by Liston & Deas, PLLC for Services Related to Claims Against Capitala/Harbert (the "UST Objection") (Bankr. Dkt. 419) filed by David W. Asbach, Acting U.S. Trustee for Region 5 ("UST"); the letter response (the "Griffin Objection") (Bankr. Dkt. 422) filed by Andrea K. Griffin ("Griffin"), acting pro se (without representation of counsel); and the Liston & Deas PLLC's Reply to Objections to Amended First Application for Allowance of Compensation Filed by United States Trustee and Andrea Griffin (the "L&D Reply") (Bankr. Dkt. 427) filed by L&D in the Bankruptcy Case. Three (3) exhibits are attached to the L&D Fee Application: the Joint Venture Co-Counsel Agreement (the "JV Agreement") (Bankr. Dkt. 409-1) signed by L&D, Mitchell, McNutt & Sams ("MMS"), and the Trustee on October 28, 2019; an itemization of hours billed by L&D from December 2, 2019 through November 13, 2020 (the "Fee Itemization") (Bankr. Dkt. 409-2); and an itemization of expenses incurred by L&D during the same time period (the "Itemization of Expenses") (Bankr. Dkt. 409-3). At the Hearing, William L. Liston, III represented L&D Donald Andrew Phillips represented MMS; the Trustee, a licensed attorney, represented herself; Christopher J. Steiskal, Sr. represented the UST; Griffin represented himself; and E. Barney Robinson III represented Harbert Mezzanine Partners III SBIC, L.P. ("Harbert") and John C. Harrison ("Harrison").
A component of the fees sought by L&D in the L&D Fee Application is a contingent fee based on the amount of funds saved On-Site's bankruptcy estate. The Court instructed L&D and the UST to file letter briefs addressing whether it is proper for an attorney retained under 11 U.S.C. § 327 to charge a "reverse" contingent fee, that is, a fee based on the amount saved the client rather than the amount of the client's net recovery. See Contingent Fee , BLACK'S LAW DICTIONARY (11th ed. 2019). L&D submitted its letter brief on February 8, 2021 (the "L&D Letter Brief") (Bankr. Dkt. 442), and the UST filed his letter brief on February 10, 2021 (the "UST Letter Brief") (Bankr. Dkt. 446).
The Court has jurisdiction over the parties to and the subject matter of this matter pursuant to 28 U.S.C. § 1334 and 28 U.S.C. § 157. This is a core proceeding as defined in 28 U.S.C. § 157(b)(2)(A) and (O). Notice of the Hearing was proper under the circumstances.
On October 30, 2018, Mansfield Oil Company of Gainesville, Inc. ("Mansfield") filed a chapter 7 involuntary petition (the "Involuntary Petition") (Bankr. Dkt. 1) against On-Site, a fuel-supply business. The Involuntary Petition was contested and litigated for several months. After a trial, the Court entered the Order for Relief (the "Order for Relief") (Bankr. Dkt. 159) on May 24, 2019, and Stephen Smith was appointed the chapter 7 trustee. He resigned on September 13, 2019, and the current Trustee was appointed to replace him that same day. (Bankr. Dkt. 255, 256).
Capitala Finance Corp., Capitala South Partners Fund II, L.P., Capitala South Partners SBIC Fund III, L.P., and Harbert (collectively, "Capitala/Harbert") filed proofs of claim 49, 50, 51 and 54 (Claim #49-51, 54) asserting a total principal debt of $17,044,999.85 incurred by On-Site under various Senior Subordinated Secured Notes. Capitala/Harbert alleged a perfected security interest in substantially all of the assets of On-Site. John F. McGlinn ("McGlinn") and Harrison each filed a proof of claim (Claim #52, 55) asserting unsecured claims in an unknown amount for indemnification and contribution based on their respective rights as members of On-Site's board of directors.
On November 27, 2019, the Court entered the Order (the "Retention Order") (Bankr. Dkt. 287) granting the application of the Trustee to employ L&D as special counsel "to pursue generally all Causes of Action related to equitable and tort theories" in accordance with the JV Agreement. The Retention Order provided that L&D would be entitled to receive compensation and reimbursement of expenses "only after notice and a hearing as contemplated by [ 11 U.S.C.] § 330, Bankruptcy Rule 2016, and any other applicable or related statutes and rules." (Bankr. Dkt. 287 at 3).
The JV Agreement sets forth a hybrid or blended-fee structure. Compensation for legal fees are paid at a reduced hourly rate of $150.00 and "a contingency fee of 27.5% of all sums recovered on behalf of the estate, provided that funds are available to pay the accrued hourly rates set forth in the preceding clause." (Bankr. Dkt. 409-1 ¶ 4). If no funds are available to pay the accrued hourly billings, then L&D and MMS shall receive "from any funds recovered on behalf of the estate" a forty percent (40%) contingent fee. (Bankr. Dkt. 409-1 ¶ 4). L&D and MMS agreed to divide any contingent fees sixty percent (60%) to L&D and forty percent (40%) to MMS. (Bankr. Dkt. 409-1 ¶ 7). The JV Agreement also provides for reimbursement of all actual and necessary expenses. Notwithstanding these provisions, the Trustee agreed to pay L&D and MMS an hourly rate of $350.00 plus expenses from the date of the Order for Relief entered on May 24, 2019 through the date of the JV Agreement signed on November 28, 2019. (Bankr. Dkt. 409-1 ¶ 4).
On February 3, 2020, L&D initiated an adversary proceeding on behalf of the Trustee against Capitala/Harbert for equitable subordination pursuant to 11 U.S.C. § 510(c).3 (Tr. Adv. Dkt. 1). Under that statute, "the court may ... under principles of equitable subordination, subordinate for purposes of distribution all or part of an allowed claim to all or part of another allowed claim... or ... order that any lien securing such subordinated claim be transferred to the estate." Id . The Fifth Circuit Court of Appeals in In re Mobile Steel Co. , 563 F.2d 692 (5th Cir. 1977), created a three-part test for equitable subordination under § 510(c) : (1) the claimant engaged in some inequitable conduct; (2) the conduct resulted in injury to creditors of the bankruptcy estate or conferred an unfair advantage on the claimant; and (3) equitable subordination of the claim is not inconsistent with a provision of the statutory bankruptcy law. Mobile Steel Co. , 563 F.2d at 700.
With the Court's permission, the Trustee filed the First Amended Complaint (the "Amended Complaint") (Tr. Adv. Dkt. 27) asserting the same equitable subordination claim and a new claim for declaratory relief regarding the extent of Capitala/Harbert's lien on certain assets of the estate. In the twenty-five (25) page Amended Complaint, the Trustee alleged that McGlinn and Harrison, acting at the behest of Capitala/Harbert, directly participated in inequitable conduct that harmed On-Site and was intended to harm or defraud Mansfield. According to the Trustee, Capitala/Harbert exercised control over On-Site's assets and business decisions through their appointment of four members of On-Site's five-member board of directors. (Tr. Adv. Dkt. 27 ¶ 25(a)). McGlinn, a senior managing director and chief operating officer of Capitala, served as chairman of On-Site's board of directors. (Tr. Adv. Dkt. 27 ¶ 26). Harrison, a senior managing director of Harbert, also served as a member of On-Site's board of directors. (Tr. Adv. Dkt. 27 ¶ 27). In 2017, McGlinn and Harrison formed a two-member "Special Committee" for the purpose of pursuing strategic options for On-Site, and, in particular, a strategic alliance with Mansfield, a nationwide supplier of petroleum products. (Tr. Adv. Dkt. 27 ¶ 30).
The Trustee alleged that during discussions with Mansfield concerning the proposed strategic alliance, On-Site disclosed 2017 financial statements that reflected positive EBITDA of approximately $300,000.00 per month. (Tr. Adv. Dkt. 27 ¶ 31). Also, McGlinn, or others under his direction, allegedly prepared On-Site's 2018 budget forecasting positive EBITDA of approximately $4.3 million. The Trustee asserted that this information was materially inaccurate. (Tr. Adv. Dkt. 27 ¶ 32). Mansfield and On-Site signed the Strategic Alliance and Acquisition Option Agreement (the "SAA") on April 12, 2018. Under the SAA, Mansfield became the exclusive supplier of fuel to On-Site and assumed the responsibility of billing On-Site's customers.
At some point, McGlinn informed Mansfield that On-Site's lender, PNC Financial Services Group, Inc. ("PNC Bank"), would not agree to the strategic alliance unless On-Site paid off its debt to PNC Bank. (Tr. Adv. Dkt. 27 ¶ 35). Mansfield thereafter agreed to loan On-Site $4.8 million for this purpose. The resolution of PNC Bank's objection allowed the strategic alliance to become effective on that same date. The Trustee contends that McGlinn persuaded Mansfield to enter into the loan by representing that On-Site...
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