In re Radical Bunny, LLC

• Decision Date: 22 July 2011
• Docket Number: No. 08–13884–CGC.,08–13884–CGC.
• Citation: 459 B.R. 434
• Parties: In re RADICAL BUNNY, LLC, Debtor.
• Court: U.S. Bankruptcy Court — District of Arizona

459 B.R. 434

In re RADICAL BUNNY, LLC, Debtor.

No. 08–13884–CGC.

United States Bankruptcy Court, D. Arizona.

July 22, 2011.

Shelton L. Freeman, Deconcini McDonald Yetwin & Lacy PC, Phoenix, AZ, for Debtor.

UNDER ADVISEMENT DECISION APPROVING CHAPTER 11 TRUSTEE'S FEE APPLICATION

CHARLES G. CASE, II, Bankruptcy Judge.I. Introduction

G. Grant Lyon agreed to become part of a Valley financial soap opera—the downfall of Mortgages Limited. It is a tale that includes suicide, empty buildings, and lost retirement savings. Mr. Lyon's role in the soap opera is that of Chapter 11 Trustee for Radical Bunny—a key investor in Mortgages Limited. Depending on your viewpoint, he is either yet another professional who did little or nothing to protect investors while trying to make money off of the backs of investors, or a dedicated professional who protected investors as best he could in a dire situation who deserves to be compensated for his time and effort. The Court must decide if Mr. Lyon deserves to get paid and, if so, whether he is entitled to payment under the Bankruptcy Code.

II. Background and Facts

The Trustee requests $176,035.00 in fees for his services to the estate from December 29, 2008 through September 3, 2010. The Court appointed Mr. Lyon as the Trustee on December 30, 2008 via a stipulation between the U.S. Trustee's office and the Debtor, with the consent of the Petitioning Creditors ¹ and the Official Unsecured Creditors Committee. Several investors opposed the appointment prior to the stipulation. At its core, the Petitioning Creditors requested the appointment of a trustee based on civil and criminal investigations by the SEC and the State of Arizona of those running Radical Bunny, including Tom Hirsch. This request turned out to be prophetic, at least on a civil basis, as the District Court recently granted summary judgment in the SEC's civil case, finding that Mr. Hirsch and others violated securities law prepetition while operating the Debtor.

This is the Trustee's first and final application for compensation (“Application”). According to the Application, the Trustee spent 307.6 hours on the matter at the rate of $475 per hour, resulting in $176,035.00 in fees. ² The Trustee supplies underlying documentation in support of these hours and claims that both the amount of time and the hourly rate are reasonable. Further, the Trustee claims that he made the following distributions:

1) approximately $162 million (face amount) in membership interests in various loan-specific limited liability companies created as part of the Mortgages, Ltd. bankruptcy case (the “Loan LLCs”);

2) a beneficial interest in the Mortgages, Ltd. liquidating trust of approximately $35 million plus any deficiency from the Loan LLCs; and

3) any potential causes of action and lawsuits against any person or party held by the Debtor's estate.

The Court has reviewed each of the over 275, mostly form, objections to the Application. Though the specifics of the objections varied, they generally fell into one of four categories:

1) excessive fees;

2) lack of return to investors;

3) lack of communication; and

4) basic unfairness.

The Trustee did not respond to the objections in writing. The Court held a hearing on the matter on April 7, 2011 at which counsel for the Trustee and some of the objectors appeared. At the conclusion of the hearing, the Court took the matter under advisement.

III. Analysis

When awarding fees to a Trustee, the Court analyzes the interplay of Sections 330(a)(1), 330(a)(3), 330(a)(7), and 326(a) of the Bankruptcy Code.³ Although the objections make no specific references to the Code, the Court treats the objections as follows:

1) excessive fees—§§ 326(a) and 330(a)(3);

2) lack of return to investors—§ 326;

3) lack of communication—§ 330(a)(3); and

4) basic unfairness—§ 330(a)(1).

Aside from the objections, the “Court has an independent duty to investigate the reasonableness of compensation sought.” In re Pruitt, 319 B.R. 636, 638 (Bankr.S.D.Cal.2004) (citing Rule 2016(a)). As stated in Pruitt:

The public expects, and has a right to expect, that an order of a court is a judge's certification that the result is proper and justified under the law.... Nothing better serves to allay [public perceptions that high professional fees unduly drive up bankruptcy costs] than the recognition that a bankruptcy judge, before a fee application is approved, is obliged to [review it carefully] and find it personally acceptable, irrespective of the (always welcomed) observation of the [United States trustee] or other interested parties.

Id. (quoting In re Busy Beaver Bldg. Ctrs., Inc., 19 F.3d 833, 841 (3rd Cir.1994)). “The applicants have the burden of proof to show their fees and expenses are reasonable.” In re Tan, Lie Hung & Mountain States Investments, LLC, 413 B.R. 851, 856 (Bankr.D.Or.2009). Here, as the Court openly suggested during the hearing, it needs to be satisfied that the Trustee is entitled to any compensation under the limits set forth in §§ 326 and 330.

A. Section 330

“In the Ninth Circuit, the primary method used to determine a reasonable fee in bankruptcy cases is to calculate the lodestar” which is computed “by multiplying the number of hours reasonably expended by a reasonable hourly rate.” In re Buckridge, 367 B.R. 191, 201 (Bankr.C.D.Cal.2007). To receive compensation, a professional need not bring material benefit to the estate, but “need demonstrate only that the services were reasonably likely to benefit the estate at the time rendered.” In re Garcia, 335 B.R. 717, 724 (9th Cir. BAP 2005). Factors to consider when determining reasonableness include:

(a) Were the services authorized?

(b) Were the services necessary or beneficial to the administration of the estate at the time they were rendered?

(c) Are the services adequately documented?

(d) Are the fees required reasonable, taking into consideration the factors set forth in section 330(a)(3)?

(e) In making the determination, the court must consider whether the professional exercised reasonable billing judgment.

Id.

The Court concludes that the fees requested are reasonable under § 330(a). Spending over 370 hours on a case this complex is certainly reasonable. While the rate of $475 per hour is generous, it is well within the bounds of rates charged within this District and has already been approved by the Court. It is beyond doubt that the Trustee's services were necessary, especially in light of the recent SEC civil proceedings. Though the Trustee's services could have been better documented, there is adequate description of his services.

Ultimately, the Court understands that many of the objectors do not think the Trustee was successful in his job because he did not provide an adequate return for them. The Court disagrees. Yes, at best, investors in the Debtor will recover pennies on the dollar. But, this was a highly complex matter where investors in the Debtor faced the real possibility of recovering nothing. The fact that the Trustee garnered almost $200 million in potential assets is an accomplishment.

If the Court only had to analyze § 330 to award the Trustee fees, the result would be easy and the fees would be approved. But, according to § 330(a)(7), when fees are sought by a trustee, they must be treated as a commission under the specific language of § 326. It is to that language that we now turn.

B. Section 326

“[S]tatutory construction is a holistic endeavor” and “cannot be construed in a vacuum. It is a fundamental canon of statutory construction that the words of a statute must be read in their context and with a view to their place in the overall statutory scheme.” In re Ransom, 380 B.R. 799, 807 (9th Cir. BAP 2007) (internal quotations omitted), aff'd, 577 F.3d 1026 (9th Cir.2009), aff'd sub nom. Ransom v. FIA Card Services, N.A., ––– U.S. ––––, 131 S.Ct. 716, 178 L.Ed.2d 603 (2011). The starting point for statutory interpretation is a review of the language used by Congress in the current version of the law. See, e.g., Hughes Aircraft Co. v. Jacobson, 525 U.S. 432, 438, 119 S.Ct. 755, 142 L.Ed.2d 881 (1999). Where the text is plain, the court is to apply the statute as written, unless the application would lead to absurd results. Lamie v. U.S. Trustee, 540 U.S. 526, 534, 124 S.Ct. 1023, 157 L.Ed.2d 1024 (2004). Meaning must be given to a statute's every word. Miller v. United States, 363 F.3d 999, 1008 (9th Cir.2004). A subsection of a statute is defined in the context of the entire statute and the statutory scheme as a whole. In re Rufener Const., Inc., 53 F.3d 1064, 1066–67 (9th Cir.1995).

The key phrase from § 326 that the Court must interpret is that a Trustee's fee is based on a given percentage “upon all moneys disbursed or turned over in the case by the trustee to parties in interest.” “Money” is a medium of exchange or an asset that can easily be converted to cash. See A.R.S. § 47–1201(B)(24); UCC § 201(b)(25); Webster's Third New International Dictionary (Unabridged)) 1458 (Philip Babcock et al. eds., 1993); Black's Law Dictionary 1096 (9th ed. 2009).⁴ Here, the Trustee did not distribute money in the traditional sense. Could then “money,” in the Code, mean something other than it does in plain English?

i. A Brief History of Section 326

Section 326 reads essentially the same as Section 48 of the Bankruptcy Act. Interestingly, the phrase “all moneys disbursed or turned over” has been a part of the Bankruptcy Act and Code since 1910. In re Blair, 313 B.R. 865, 868 n. 4 (Bankr.E.D.Cal.2004); See also Colliers on Bankruptcy (14th ed. 1988) ¶ 48.07[2].⁵

Despite the apparent plain meaning of “money,” courts have found and applied exceptions to the Act and Code. Perhaps the earliest exception is found in In re Toole, 294 F. 975 (D.C.N.Y.1920). In Toole, the administrator of an estate did not distribute cash but instead distributed securities. Judge Augustus Hand found it “reasonable to suppose that the words ‘or turned...