In re Pro-Snax Distributors, Inc.

• Decision Date: 04 September 1997
• Docket Number: Bankruptcy No. 395-34918-RCM-7,Civil Action No. 3:96-CV-3444-G.
• Citation: 212 BR 834
• Parties: In re PRO-SNAX DISTRIBUTORS, INC., Debtor. FAMILY SNACKS, INC. d/b/a Guy's Foods, et al., Appellants, v. ANDREWS & KURTH, L.L.P., Appellee.
• Court: U.S. District Court — Northern District of Texas

212 B.R. 834 (1997)

In re PRO-SNAX DISTRIBUTORS, INC., Debtor FAMILY SNACKS, INC. d/b/a Guy's Foods, et al., Appellants, v. ANDREWS & KURTH, L.L.P., Appellee.

Bankruptcy No. 395-34918-RCM-7, Civil Action No. 3:96-CV-3444-G.

United States District Court, N.D. Texas, Dallas Division.

September 4, 1997.

J. Maxwell Tucker, Winstead Sechrest & Minick, P.C., Dallas, TX, for Appellants.

J. Van Oliver, Andrews & Kurth, L.L.P., Dallas, TX, for Appellee.

MEMORANDUM ORDER

FISH, District Judge.

This appeal from the bankruptcy court presents a single issue: can counsel for the debtor be compensated, from assets of the estate, for services rendered after the appointment of a trustee? The bankruptcy court, acknowledging that generally the answer is no, nevertheless decided that this case was exceptional, and made an award. In re Pro-Snax Distributors, Inc., 204 B.R. 492 (Bankr.N.D.Tex.1996). The general creditors appeal. Although the matter is not free from doubt, this court concludes that the bankruptcy court was in error and reverses its decision.

I. BACKGROUND

The factual background is correctly stated in the opinion of the bankruptcy court, Pro-Snax Distributors, 204 B.R. at 493-94, and will not be repeated here in any detail. A brief summary is in order, however, to bring the legal issue into focus.

This bankruptcy began when several general creditors (appellants here) filed an involuntary petition under chapter 7. Approximately one month later, the debtor consented to relief under Chapter 11, and the case was converted to Chapter 11. Barely another month went by before the court appointed a Chapter 11 trustee. Although the debtor proposed a plan of reorganization some months later, it was unable to obtain confirmation of a plan. The case was thereupon converted, upon motion of the creditors, to a Chapter 7 case.

The bankruptcy court authorized the employment nunc pro tunc of the appellee Andrews & Kurth, L.L.P. ("A & K") as counsel for the debtor in possession, 204 B.R. at 493, and A & K applied for fees of $44,368 and expenses of $10,725.37. Following an objection by the creditors on which a hearing was held, the bankruptcy court made an award to A & K of $30,000 in fees and $7,500 in expenses. This appeal resulted.

II. STANDARD OF REVIEW

In reviewing the decision of the bankruptcy court, this court functions as an appellate court and applies the same standards of review generally applied in federal court appeals. Matter of Webb, 954 F.2d 1102, 1103-04 (5th Cir.1992); Matter of Coston, 991 F.2d 257, 261 n. 3 (5th Cir.1993) (en banc) (citing Matter of Hipp, Inc., 895 F.2d 1503, 1517 (5th Cir.1990)). Conclusions of law are reviewed de novo. Matter of Herby's Foods, 2 F.3d 128, 131 (5th Cir.1993). Findings of fact, on the other hand, whether based on oral or documentary evidence, are not to be set aside unless clearly erroneous, and due regard must be given to the opportunity of the bankruptcy court to judge the credibility of the witnesses. Bankruptcy Rule 8013; Herby's Foods, Inc., 2 F.3d at 130-31.

However, if the bankruptcy court misapprehends the governing legal standard in making a factual finding, that finding loses the insulation of the "clearly erroneous" rule. Armco, Inc. v. Armco Burglar Alarm Co., Inc., 693 F.2d 1155, 1162 (5th Cir.1982); see also Matter of Coston, 991 F.2d at 261 n. 3; Fuji Photo Film Company, Inc. v. Shinohara Shoji Kabushiki Kaisha, 754 F.2d 591, 595 n. 4 (5th Cir.1985). Thus, although the bankruptcy judge has "`broad discretion in determining' appropriate attorneys' fees in bankruptcy proceedings," an award of such fees will be reversed "where that discretion is abused by `failing to apply proper legal standards . . . or by basing the award upon findings of fact that are clearly erroneous.'" Matter of Braswell Motor Freight Lines, Inc., 630 F.2d 348, 350 (5th Cir.1980) (quoting Matter of First Colonial Corporation of America, 544 F.2d 1291, 1298 (5th Cir.), cert. denied, 431 U.S. 904 (1977)).

III. ANALYSIS

A. The "American Rule" Generally Prohibits Fee Shifting

The "American Rule" with respect to attorney fees is that each party must bear its own litigation expenses, unless a statute authorizes the shifting of those expenses to another party. A corollary of the American Rule, therefore, is that each party in civil litigation usually must bear its own counsel fees. E.g., Alyeska Pipeline Service Company v. Wilderness Society, 421 U.S. 240, 247, 269, 95 S.Ct. 1612, 1627, 44 L.Ed.2d 141 (1975) ("It appears to us that the departure from the American Rule suggested here . . . would make major inroads on a policy matter that Congress has reserved for itself."); Rogers v. Air Line Pilots Association, International, 988 F.2d 607, 615 (5th Cir.1993) ("Under the `American rule' successful litigants are generally not entitled to recover attorney's fees from the losing party, except where (1) the losing party is found to have pursued the litigation in bad faith, (2) the fee award would spread the cost of the lawsuit among members of a class who benefited from the litigation, or (3) the fees are a proper element of damages.") (citation and footnote omitted).

The American Rule applies in bankruptcy proceedings. See In re Acequia, Inc., 34 F.3d 800, 819 (9th Cir.1994); Matter of Love, 577 F.2d 344, 351-52 (5th Cir.1978); In re County of Orange, 179 B.R. 195, 202 (Bankr.C.D.Cal.1995) ("The American rule ordinarily applies to bankruptcy proceedings."). Exceptions to the American Rule are narrowly construed and generally must be authorized by statute. Richardson v. Alaska Airlines, Inc., 750 F.2d 763, 765 (9th Cir.1984); see Key Tronic Corporation v. United States, 511 U.S. 809, 814, 114 S.Ct. 1960, 1965, 128 L.Ed.2d 797 (1994) ("Our cases establish that attorney's fees generally are not a recoverable cost of litigation `absent explicit congressional authorization'") (citation omitted); Fogerty v. Fantasy, Inc., 510 U.S. 517, 533, 114 S.Ct. 1023, 1033, 127 L.Ed.2d 455 (1994) ("it is the general rule in this country that unless Congress provides otherwise, parties are to bear their own attorney's fees") (emphasis added) (citation omitted). See also Matter of W.T. Grant Company, 85 B.R. 250, 265 (Bankr.S.D.N.Y. 1988) ("in the instant case there is no statutory authorization for fees to bring the controversy within that narrow exception to the American Rule"), aff'd in part and rev'd in part, 119 B.R. 898 (S.D.N.Y.1990), aff'd, 935 F.2d 1277 (2d Cir.1991) (table).

B. Does The Bankruptcy Code Authorize A & K's Fees?

Section 503 of the Bankruptcy Code creates an exception to the American Rule in bankruptcy cases by shifting certain expenses of litigation to the general creditors. This is done by permitting such expenses (including attorney fees) to be paid — as an "administrative expense" from the assets of the bankruptcy estate — ahead of the general creditors.¹ The fact that the claims of general creditors are subordinate to the payment of such administrative expenses means that the amount of such expenses is important to those creditors, as it reduces the funds available to pay their claims. See In re Hooker Investments, Inc., 188 B.R. 117, 120 (S.D.N.Y.1995) ("The amount of administrative expenses is a significant issue in bankruptcy liquidation . . . proceedings, because they are paid first, before any distribution to creditors."), aff'd, 104 F.3d 349 (2d Cir.1996) (table).

A & K asserted in the bankruptcy court that its fee application was filed pursuant to 11 U.S.C. § 330,² which provides that

after notice to the parties in interest and the United States Trustee and a hearing, . . . the court may award to a trustee, an examiner, or a professional person employed under section 327 or 1103 —

(A) reasonable compensation for actual, necessary services rendered by the trustee, examiner, professional person, or attorney . . . employed by any such person; and

(B) reimbursement for actual, necessary expenses.

The creditors (now appellants) object that since A & K was neither a trustee nor an examiner, § 330 authorized A & K to receive fees from the estate only if it qualified as a professional employed under 11 U.S.C. § 327.³

§ 327(a) of the Bankruptcy Code provides:

(a) Except as otherwise provided in this section, the trustee, with the court\'s approval, may employ one or more attorneys, accountants, appraisers, auctioneers, or other professional persons, that do not hold or represent an interest adverse to the estate, and that are disinterested persons to represent or assist the trustee in carrying out the trustee\'s duties under this title.

11 U.S.C. § 327(a).

By its terms, § 327(a) applies only to counsel employed by the "trustee." It does not expressly apply to counsel for "the debtor."⁴ The Order of Employment signed by the bankruptcy judge on November 20, 1996 authorized A & K's "employment by the debtor."⁵

The objecting creditors maintain that the only way A & K is eligible for fees under the express language of § 330, therefore, is by claiming to be counsel for a "debtor in possession" which, by virtue of 11 U.S.C. § 1107(a), has "all the rights . . . of a trustee serving in a case under this chapter." In their view, A & K's right to counsel fees at the expense of the bankruptcy estate (i.e., as an administrative priority under § 503(b)(2)) ended with the appointment of a Chapter 11 trustee, which automatically terminated Pro-Snax's status as a debtor in possession.

The position of A & K, on the other hand, which the bankruptcy court accepted, is that this is too narrow a reading of § 330(a)(1). Pro-Snax Distributors, 204 B.R. at 494-96. The bankruptcy judge agreed with the creditors that "normally attorneys' fees are not compensable after a trustee is appointed," but he concluded that "in this case it was reasonable for debtor to try to confirm a plan." Transcript of Findings of Fact and Conclusions of Law, September 16, 1996 at 4. While expressing misgivings about...