In re Scarlet Hotels, LLC, 08-8002.

• Decision Date: 22 August 2008
• Docket Number: No. 08-8002.,08-8002.
• Citation: 392 B.R. 698
• Parties: In re SCARLET HOTELS, LLC, Debtor.
• Court: U.S. Bankruptcy Appellate Panel, Sixth Circuit

392 B.R. 698

In re SCARLET HOTELS, LLC, Debtor.

No. 08-8002.

United States Bankruptcy Appellate Panel of the Sixth Circuit.

Submitted Upon Briefs: August 13, 2008.

Decided and Filed: August 22, 2008.

COPYRIGHT MATERIAL OMITTED

Appeal from the United States Bankruptcy Court for the Middle District of Tennessee. Bankruptcy Case No. 04-09853.

ON BRIEF: Bruce C. Bailey, Harold L. North, Jr., Chambliss, Bahner & Stophel, P.C., Chattanooga, Tennessee, for Appellant.

Gregory A. Cross, Venable LLP, Baltimore, Maryland, Joseph R. Prochaska, Williams & Prochaska, P.C., Nashville, Tennessee, for Appellee.

Before: FULTON, McIVOR and SHEA-STONUM, Bankruptcy Appellate Panel Judges.

OPINION

THOMAS H. FULTON, Bankruptcy Judge.

Scarlet Hotels, LLC (the "Debtor") appeals the bankruptcy court's order awarding attorneys' fees and expenses to an oversecured creditor pursuant to § 506 of the Bankruptcy Code.¹

I. ISSUES ON APPEAL

The issues presented on appeal are (A) whether the bankruptcy court improperly placed the burden upon the Debtor to prove that the oversecured creditor's requested fees were unreasonable; and (B) whether the bankruptcy court abused its discretion in reducing the creditor's $507,046.43 in requested fees and expenses by only $37,200.00.

II. JURISDICTION AND STANDARD OF REVIEW

The Bankruptcy Appellate Panel for the Sixth Circuit (the "Panel") has jurisdiction to decide this appeal. The United States District Court for the Middle District of Tennessee has authorized appeals to the Panel, and neither party elected to have this appeal heard by the district court. 28 U.S.C. § 158(b)(6), (c)(1). A bankruptcy court's final order may be appealed as of right. 28 U.S.C. § 158(a)(1). For the purpose of an appeal, a final order is one that "ends the litigation on the merits and leaves nothing for the court to do but execute the judgment." Midland Asphalt Corp. v. U.S., 489 U.S 794, 798, 109 S.Ct. 1494, 1497, 103 L.Ed.2d 879 (1989).

A bankruptcy court's award of attorneys' fees is a final and appealable order. See, e.g., Boddy v. U.S. Bankr. Court, W.D. Ky. (In re Boddy), 950 F.2d 334, 336 (6th Cir.1991). Whether to award fees and, if so, the reasonable amount of the fees are issues committed to the sound discretion of the trial court. Amer. Commercial Barge Lines Co. v. NLRB, 758 F.2d 1109 (6th Cir.1985). Thus, a bankruptcy court's decision to award fees is reviewed for an abuse of discretion. In re Boddy, 950 F.2d at 336. A bankruptcy court abuses its discretion if it relied upon clearly erroneous findings of fact, improperly applied the law or employed an erroneous legal standard. Id.

A bankruptcy court's finding of fact should not be disturbed simply because another trier of fact might construe the facts differently or reach a different conclusion. See Anderson v. City of Bessemer, 470 U.S. 564, 574, 105 S.Ct. 1504, 84 L.Ed.2d 518 (1985). It is not sufficient that it might have reached a different result if it had been the trier of fact; a finding of fact should be upheld unless, the reviewing court on the entire evidence is left with the definite and firm conviction that a mistake has been committed. U.S. v. Mathews (In re Mathews), 209 B.R. 218 (6th Cir. BAP 1997); In re Brunswick Apartments, 215 B.R. 520 (6th Cir. BAP 1998). In contrast, no deference is given to a bankruptcy court's conclusions of law. In re Eastown Auto Co., 215 B.R. 960, 964 (6th Cir. BAP 1998). "De novo means the appellate court determines the law independently of the trial court's determination." Treinish v. Norwest Bank Minn., N.A. (In re Periandri), 266 B.R. 651, 653 (6th Cir. BAP 2001).

III. FACTS

The Debtor owns and operates a Holiday Inn Hotel in Murfreesboro, Tennessee (the "Hotel"). On or about May 8, 2003, as a part of its purchase of the Hotel, the Debtor assumed certain obligations set forth in a note and deed of trust (collectively, the "Loan Documents") in favor of CW Capital Asset Management, LLC² (the "Trust"). Pursuant to the Loan Documents, the Trust is entitled to recover the actual and necessary costs incurred in defending the Trust's rights under the Loan Documents.

When it purchased the Hotel, the Debtor and Holiday Hospitality Franchising, Inc. ("Holiday Inn") entered into a change of ownership license agreement dated May 8, 2003 (the "License Agreement"). Pursuant to the License Agreement, the Debtor was required to agree to the terms of a property improvement plan (the "PIP"). A dispute developed between the Debtor and Holiday Inn regarding the PIP.

On August 13, 2004, as a result of its dispute with Holiday Inn, the Debtor filed a voluntary petition for relief under chapter 11 of the Bankruptcy Code. In a nutshell, the Debtor's bankruptcy case was a single asset real estate case in which the Trust had the only significant claim and the Trust was oversecured from the inception of this case. The Trust employed two firms as counsel in this case, Venable LLP and Williams & Prochaska.

The bankruptcy court described the case as having three phases. The first phase was the "Holiday Inn phase," from August 2004 to February or March 2005, which was concerned mostly with whether the Hotel would or would not be a Holiday Inn. The second phase was the "PIP phase," from February or March 2005 to November 30, 2006, which was concerned mostly with the Debtor's obligation to make over a million dollars worth of renovations to the Hotel. The third phase was the "confirmation phase," from November 30, 2006 to July 2007, which was concerned with achieving approval of a disclosure statement and confirmation of a plan.

The bankruptcy court found that during the Holiday Inn phase and PIP phase:

the Debtor couldn't seem to get the details right. The details are things like the Debtor's estimates about when work was going to be completed on the project. ... They didn't file a motion to assume the contract [with Holiday Inn], then they did file a motion to assume the contract, then they withdrew the motion, then they filed another motion.³

This inability resulted in disputes between the parties and significant litigation. That dynamic continued through November 2006 when the Debtor assumed the License Agreement and completed the PIP. Venable LLP's fees attributable to the Holiday Inn phase totaled $69,791.17 (for 280.6 hours at an average hourly rate of $249.25) while its fees attributable to the PIP phase totaled $76,561.88 (for 274 hours at an average hourly rate of $279.42).

Disputes continued into the confirmation phase. By this time, however, the Hotel had been renovated. The bankruptcy court saw this phase as one that should have been marked by fewer and less-intense disputes. Venable LLP's fees attributable to the Confirmation phase totaled $39,172.25 (for 159 hours at an average hourly rate of $246.36) while Williams & Prochaska's fees attributable to this phase were approximately $8,500.00. The bankruptcy court found over one-half of these fees, $24,000.00, to be unreasonable.

Cash collateral disputes between the Debtor and the Trust persisted throughout all three phases of the case (August 2004 to July 2007) with no final agreement on the Debtor's use of funds. The bankruptcy court found that, after completion of the PIP, the Trust's continued litigation of issues relating to cash collateral became unreasonable. Venable LLP's fees attributable to cash collateral and other case administration issues totaled $165,158.45 (for 663.7 hours at an average hourly rate of $248.84). The bankruptcy court calculated the total fees related to cash collateral issues arising after the November 30, 2006, completion of the PIP to be $23,000.00. The bankruptcy court found one-half of these fees, $11,500.00, to be unreasonable.

IV. DISCUSSION

The parties do not dispute that, under 11 U.S.C. § 506(b), the holder of an oversecured claim shall be allowed "any reasonable fees, costs, or charges provided for under the agreement or State statute under which such claim arose." This provision is not, however, a blank check for oversecured creditors to act without regard to any limits. In re Irick, 216 B.R. 433 (Bankr.E.D.Cal.1997) ("A creditor who fails to heed § 506(b)'s warning that only reasonable costs can be recovered does so at substantial risk."). The fees must be reasonable. "Reasonable" fees are those that are "necessary to the collection and protection of a creditor's claim," and may include "participation in the bankruptcy proceeding until the collateral is sold, a plan is confirmed or the case is converted or dismissed." In re Kroh Bros. Dev. Co., 105 B.R. 515, 521 (Bankr.W.D.Mo.1989); see also In re Auto Specialties Mfg. Co., 18 F.3d 358, 360 (6th Cir.1994) (oversecured creditors are entitled to reasonable attorneys fees). In addition, courts consider whether a creditor's actions are the kind of reasonable action a similarly situated creditor would have taken. See Ryker v. Current, 338 B.R. 642, 651 (D.N.J.2006).

A. The Burden of Proof

The burden of proof in all fee matters is on the applicant. In re Swartout, 20 B.R. 102 (Bankr.S.D.Ohio 1982), and citations therein; In re Underground Utilities Constr. Co., Inc., 13 B.R. 735 (Bankr.S.D.Fla.1981); In re Olen, 15 B.R. 750 (Bankr.E.D.Mich.1981). Thus, the Trust had the burden of proving that the fees were reasonable.

The Debtor argues that the bankruptcy court did not place the burden of proof on the Trust, but instead incorrectly placed on the Debtor the burden of proving that the fees were unreasonable. The bankruptcy court's oral opinion is quite lengthy, but the following excerpts from the bankruptcy court's oral opinion, beginning at Appendix 00671, shed light on this issue:

It is important for the record to reflect that I have read all of those exhibits, right down to trying to figure out whether the amounts by which bills were reduced corresponded to individual dates, times for travel and other things.

I made charts last night, did some of the same things you...