In re Trigee Found., Inc.
| Decision Date | 10 February 2017 |
| Docket Number | Case No. 12-00624 |
| Parties | In re TRIGEE FOUNDATION, INC., Debtor. |
| Court | United States Bankruptcy Courts – District of Columbia Circuit |
Not for publication in West's Bankruptcy Reporter.
On December 7, 2016, Nancy A. Durant, M.D., filed a motion (the "Motion to Vacate") (Dkt. No. 517) in the above-captioned bankruptcy case seeking to vacate the Order Granting Final Application for Approval of Compensation for Lerch, Early & Brewer for the Period May 2013 Through June 2013 (the "Fee Order") (Dkt. No. 384). Three creditors joined in the Motion to Vacate. See Dkt. Nos. 27, 29-30. Both Lerch, Early & Brewer, LLC ("Lerch Early"), and Jeffrey M. Sherman opposed the Motion to Vacate. See Dkt. No. 578. The court issued an oral decision at the hearing on the motion to vacate that was held on January 26, 2017, and soon thereafter entered a written order denying Dr. Durant's Motion to Vacate and denying the other creditors' joinders in that motion. See Dkt. No. 541. This Memorandum Decision supplements and amends, to the extent of any inconsistency, the court's oral decision of January 26, 2017.
Pursuant to 11 U.S.C. § 1101, the debtor in the above-captioned chapter 11 bankruptcy case, Trigee Foundation, Inc. ("Trigee"), served as a debtor in possession from the commencement of the case in 2012 through its dismissal on September 10, 2014. The Clerk closed the case on October 14, 2014. On March 2, 2016, Trigee filed a malpractice action in the Superior Court of the District of Columbia (captioned Trigee Foundation, Inc. v. Lerch, Early & Brewer, Chtd., et. al, Case No. 2016 CA 001511 M) against Lerch Early and Sherman, who had represented Trigee for the duration of the bankruptcy proceedings first as an attorney of Lerch Early and then as an individual practitioner. Lerch Early and Sherman then removed the malpractice action to this court on May 23, 2016. Trigee's malpractice action against both parties was docketed as an adversary proceeding in this court and the court eventually ruled that Trigee's malpractice action was barred by the res judicata or collateral estoppel effect of the Fee Order. See Adv. Pro. No. 16-10025, Dkt. Nos. 19-20.
The bankruptcy case itself remained a dismissed case. On July 19, 2016, this court entered a Memorandum Decision and Order Granting Motion to Reopen for Purposes of Entertaining Removed Civil Action, ruling that "[t]he reopening of the case does not amount to vacating the order of dismissal, and vacating the order of dismissal is not required in order to reopen the case." See Dkt. No. 497, at 3; In re Trigee Found., Inc., No. 12-00624, 2016 WL 3971734, at *3 (Bankr. D.D.C. July 19, 2016).
After the case was reopened, Trigee filed a Fed. R. Civ. P. 60(b) motion to vacate the Fee Order. See Dkt. No. 500. The court denied that motion as untimely by an order entered on October 25, 2016. See Dkt. No. 510. Trigee did not appeal that order. On December 7, 2016, Dr. Durant filed her Motion to Vacate. See Dkt. No. 517.
Until Trigee's chapter 11 bankruptcy case was dismissed, under 11 U.S.C. §§ 1101(1) and 1107(a), as a debtor in possession, Trigee remained in possession of the bankruptcy estate throughout the proceedings and was vested with the powers of a trustee acting on behalf of the estate. Upon the dismissal of Trigee's bankruptcy case, there was no longer a bankruptcy estate and Trigee therefore ceased being a debtor in possession. At that time, the property of the estate revested in Trigee pursuant to 11 U.S.C. § 349(b)(3).
Because the bankruptcy case itself remains dismissed, the property of the estate remains revested in Trigee under 11 U.S.C. § 349(b)(3). It remains so despite the reopening of the case because the order reopening the case did not vacate the dismissal order. Accordingly, any unpaid balance of the amounts owed pursuant to the Fee Order must be paid from the debtor's assets, not from the assets of a bankruptcy estate. Similarly, any right to bring a claim on behalf of the estate for excessive attorney's fees revested in Trigee upon dismissal of the bankruptcy case and remains the property of Trigee now. Any recovery of excessive fees now would be by Trigee in its own right, not by Trigee acting in a fiduciary capacity as a debtor in possession on behalf of a bankruptcy estate.
Thus, Trigee had standing to move to vacate the Fee Order in its own right, not as a debtor in possession exercising the powers of a trustee under 11 U.S.C. § 1107(a) and representing the interests of a bankruptcy estate. If Trigee's motion to vacate the Fee Order had succeeded, Trigee would have had the right to recover the excessive fees from the attorneys and to refuse to pay the unpaid balance. Moreover, if the court had vacated the Fee Order, the Fee Order arguably would have no res judicata (claim preclusion) or collateral estoppel (issue preclusion) effect, in which case Trigee would no longer bebarred from pursuing a malpractice claim against Lerch Early and against Sherman on those bases.
Turning to the issue of Dr. Durant's standing to move to vacate the Fee Order, under 11 U.S.C. §§ 330(a)(1) and 1109(b) and Fed. R. Bankr. P. 2002(a)(6), Dr. Durant had standing to object to the fee application that led to the Fee Order during the pendency of the case. Moreover, during the pendency of the case, Dr. Durant had standing to seek to vacate the Fee Order if she wished to challenge the compensation awarded to Lerch Early or to Sherman based on alleged noncompliance with the standards of 11 U.S.C. § 330(a). An argument could be made that Dr. Durant, as a creditor of Trigee, retained standing to seek to vacate the Fee Order even after the bankruptcy case was dismissed. As the court recognized in reopening Trigee's bankruptcy case:
[I]t is inherent in 11 U.S.C. § 329(b) () and 28 U.S.C. § 1334(e)(2) () that the court retains jurisdiction even after dismissal of a bankruptcy case to review the reasonableness of attorney compensation relating to that case to assure that a debtor has not been charged unreasonable fees, and to consider the adequacy of an attorney's compliance with 11 U.S.C. § 327.
In re Trigee Found., Inc., No. 12-00624, 2016 WL 3971734, at *2 (emphasis added). Arguably, that standing was not lost just because, after dismissal of the case, any vacating of the FeeOrder would directly benefit Trigee, and only indirectly benefit Dr. Durant as a creditor of Trigee.
However, 11 U.S.C. § 1109(b) confers standing on creditors in order to protect creditors with respect to the disposition of the res being administered in the case and, once the case is dismissed, the res is no longer being administered in a bankruptcy case and the rationale for § 1109(b) standing might disappear. See In re Jas. Wilson Assocs., 965 F.2d 160, 169 (7th Cir. 1992) (). In this case, the res has been disposed of via a dismissal of the case, with the result that the property of the estate revested in Trigee pursuant to 11 U.S.C. § 349(b)(3). Thus, as the owner of the property of the estate, Trigee, not Trigee's creditors, is arguably the only entity with standing to seek to vacate the Fee Order as affecting its rights outside of bankruptcy.
While the bankruptcy case was still active, creditors like Dr. Durant would have had standing to bring an action challenging fee awards because if such fee awards had been vacated, any excessive fees would have been recovered by the bankruptcy estate rather than by Trigee in its own right. However, now that the bankruptcy case has been dismissed, the vacating of any fee award would result in the recovery of excessive fees by Trigee in itsown right and therefore would only indirectly benefit Dr. Durant as a shareholder and creditor of Trigee. That indirect benefit alone does not suffice to give her standing, for a creditor of a corporation ordinarily does not have standing to pursue a claim of the corporation to recover property or to defend against a claim against the corporation.1 Dr. Durant did not show that she has been authorized to pursue a motion to vacate the Fee Order in a derivative capacity, on behalf of Trigee. Besides, Trigee already unsuccessfully pursued a motion to vacate the Fee Order.
It is likely that Dr. Durant has pursued her Motion to Vacate in order to assist Trigee in pursuing its malpractice claim against Lerch Early and Sherman. Trigee's malpractice claim against both parties revested in Trigee upon the dismissalof the case and the court has already rejected Trigee's attempt to raise its malpractice claims now, ruling in the adversary proceeding (Case No. 16-10025, Dkt. Nos. 19-20), that the claims are barred by the res judicata or collateral estoppel effect of the Fee Order. If the court vacated the Fee Order, the Fee Order would no longer have res judicata or collateral estoppel effect. The court's denial of Trigee's subsequent motion to vacate the Fee Order (Dkt. No. 510) renders Trigee incapable of bringing its malpractice claims against Lerch Early and Sherman. Allowing Dr. Durant to pursue her Motion to Vacate, acting in effect as a surrogate for Trigee, would effectively allow Trigee to have a second opportunity to seek to vacate the Fee Order after the court rejected its first attempt to do so.
Nevertheless, it is easy to imagine circumstances in which a court might be tempted to rule that a creditor has standing to seek to vacate erroneous fee awards after a case has beendismissed.2 The standing issue is a close call, and was not briefed. Accordingly, rather than dismissing Dr. Durant's Motion based solely on lack of standing, I...
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