Martin, In re
| Decision Date | 17 April 1987 |
| Docket Number | No. 86-1764,86-1764 |
| Citation | 817 F.2d 175 |
| Parties | , 16 Collier Bankr.Cas.2d 672, 16 Bankr.Ct.Dec. 112, Bankr. L. Rep. P 71,759 In re Larry T. & Cynthia J. MARTIN d/b/a A & W Drive-In Restaurant & Martin's Exxon, Debtors. Appeal of Larry T. & Cynthia J. MARTIN. |
| Court | U.S. Court of Appeals — First Circuit |
Matthew L. Caras, with whom Verrill & Dana, Portland, Me., was on brief, for appellants.
Stanley Greenberg, with whom Greenberg & Greenberg, Portland, Me., was on brief, for appellee Chapter 11 Creditors' Committee.
Before COFFIN, Circuit Judge, ROSENN, * Senior Circuit Judge, and SELYA, Circuit Judge.
This case deals with the right of a lawyer, preliminary to submitting a client's petition under chapter 11 of the 1978 Bankruptcy Code (Code), to take security for the payment of attorneys' fees to be incurred while representing the client in connection with the bankruptcy proceedings. It likewise inevitably deals with the propriety of such an act. Apropos of the central point at issue, directly pertinent precedent ranges from slim to none. So, we write on what amounts to a clean slate.
The facts relevant to this matter are not now in serious dispute. They have been elucidated both by the bankruptcy court, In re Martin, 59 B.R. 140 (Bankr.D.Me.1986) (Martin I ), and by the district court, In re Martin, 62 B.R. 943 (D.Me.1986) (Martin II ), and we draw heavily upon these earlier rescripts in our decurtate narration of the pivotal events.
On November 27, 1984, Larry T. Martin and Cynthia J. Martin, then husband and wife, sought the advice of Verrill & Dana (V & D), a law firm. The chief reason for the consultation was that the Martins found themselves in precarious financial straits because of the poor performance of their restaurant business. The outcome of this and a subsequent meeting was the debtors' election to file a chapter 11 petition to reorganize the business in bankruptcy court. But, they were unable to muster sufficient ready cash to pay V & D the $5000 retainer which the law firm demanded.
A bargain was struck between lawyers and clients whereby the Martins invested a mere $500 in a cash retainer and signed an open-ended demand note (Note) payable to V & D for $100,000. The Note provided for the payment of all indebtedness of the makers to the payee existing prior to (or created simultaneously with) execution and delivery, as well as all indebtedness to be incurred in futuro by reason of legal services to be rendered. The Note was secured by a second mortgage (Mortgage) on certain improved real estate owned by the debtors, located at 258 Summit St., Portland, Maine. These premises were used neither as the debtors' principal residence nor for any business purpose associated with the running of the restaurant. According to their counsel, the land and buildings on Summit St. comprised property which the debtors did not intend to liquidate in the anticipated course of the chapter 11 reorganization. The bankruptcy court found that the debtors "enjoyed a substantial equity" in this real estate. Martin I, 59 B.R. at 141.
On December 11, 1984, not by coincidence, two events occurred: the Mortgage was recorded and V & D escorted Mr. and Mrs. Martin through the portals of chapter 11. Acting through the attorneys, the petitioners then sought permission from the bankruptcy court to employ V & D to represent them as debtors in possession. The application made a clean breast of the terms and conditions of the retainer and the other accoutrements of the fee arrangement as required by Bankruptcy Rule 2016(b). The particulars of the Note and Mortgage were revealed fully. On December 14, 1984, the bankruptcy court issued an order (Engagement Order) authorizing the employment of counsel "under general retainer of $500 at ... usual hourly rates." The court did not mention the Note or Mortgage at that time. And, V & D proceeded to undertake the assignment without any reiteration to the bankruptcy judge of the request that the Mortgage be sanctioned.
The debtors' flirtation with chapter 11 was short-lived. Within six months, they voluntarily converted the action to a straight bankruptcy proceeding under chapter 7 of the Code. A trustee was appointed. Then, a flurry of activity took place as the parties in interest struggled to wind up the aborted chapter 11 case and to process the neoteric chapter 7 case. Among other things, V & D applied for interim fees anent the services it had rendered. The trustee, apparently believing that the Summit St. property was bereft of equity (if one counted the Mortgage as valid), sought permission to abandon it. The creditors' committee objected.
The bankruptcy court found that the Mortgage constituted an interest adverse to the bankrupts' estate. Martin I, 59 B.R. at 142-44. Accordingly, the court reasoned, V & D ran afoul of the mandate of Sec. 327(a) of the Code which (with certain exceptions not germane to this case) allows the "employ[ment of] one or more attorneys ... that do not hold or represent an interest adverse to the estate, and that are disinterested persons,...." 11 U.S.C. Sec. 327(a) (1978). 1 The court concluded that V & D was not "disinterested" and "should not have been employed as attorney[ ] for the debtors in possession ... without divesting itself of its interest in the debtors' property." Martin I, 59 B.R. at 144. Though invalidating the Note and Mortgage, the court allowed V & D's application for compensation and reimbursed expenses in large part, deleting only such items as were unreasonable, unnecessary, or prohibited (such as services and disbursements directly related to the preparation and recordation of the Note and Mortgage). Id. at 144-45.
This decree pleased no one. It was greeted by the filing of cross-appeals. The district court overruled the debtors' appeal, albeit prudently declining to endorse the formulation of any broad or sweeping rule. Martin II, 62 B.R. at 946-48. The district court found that it was "appropriate in this instance to defer to the expertise of the Bankruptcy Court in determining the severity" of the potential conflicts in interest between a given debtor and a lienholder lawyer. Id. at 948. The cross-appeal promoted by the creditors' committee was rejected and the allowance of partial compensation to V & D was approved. Id. at 948-49.
The creditors' committee has taken no appeal to this court. The debtors, appellants before us, do press their claim that the Mortgage should not have been set aside. The point is not academic. If the Mortgage is upheld, the law firm will presumably be entitled to the now excluded fees for time spent on the Note and Mortgage. It will also have an improved chance of being paid whatever it has earned. Without the Mortgage, the priority accorded to an administrative expense item, see infra n. 6, may not be enough. If the real estate equity must be shared with other administrative expense claimants, the bankrupt estate could prove insufficient to pay all of V & D's fees. A preferred position vis-a-vis the Summit St. property would afford V & D an appreciably better likelihood of full payment. 2
There are, essentially, two issues presented in connection with this appeal. First, the creditors' committee, as appellee, asserts that the debtors' failure to appeal the bankruptcy court's initial Engagement Order barred them from challenging the later decrees which purported specifically to invalidate the Mortgage. Second, the appellants ask us to address the soundness of the decisions countermanding the Mortgage. We discuss each issue separately.
The asseveration that the debtors, by failing to appeal from the Engagement Order, somehow lost the right to complain of the subsequent invalidation of the Mortgage, is jejune. The Engagement Order merely authorized the employment of V & D "under general retainer of $500 at [the firm's] usual hourly rates." It did not purport to pass directly or indirectly on the propriety of the Mortgage. Although the appellee argues that the "implication" of the Engagement Order was to deny the debtors' request for approval of the Mortgage, that implication--like many implications--lies mainly in the mind of the implier. It is based on the sheer gossamer of speculation and surmise, without the slightest record support.
We need not linger long over the matter. We note, first, that the appellee chose not to raise this ground before either of the lower courts. That, in itself, is likely dispositive of any argument: we have made it plain, as a usual rule, that points not raised below cannot be voiced for the first time on appeal. Curran v. Department of Justice, 813 F.2d 473, 477 (1st Cir.1987); United States v. Ven-Fuel, Inc., 758 F.2d 741, 760 (1st Cir.1985); Nogueira v. United States, 683 F.2d 576, 580 (1st Cir.1982); Johnston v. Holiday Inns, Inc., 595 F.2d 890, 894 (1st Cir.1979). We reaffirm this principle today. There is no call in the present circumstances to depart from such a salutary practice.
In any event, the appellee's claim of waiver is too wobbly to withstand even the mild breezes of cursory examination. At the time of, and after, the Engagement Order, there was nothing to appeal. The Mortgage remained intact and encumbered the property. V & D's security interest, for what it might prove to be worth, was unimpaired. At that point in time, there was no reorganization plan and it was unclear whether the Summit St. property would enter into the chapter 11 calculus at all. It is not difficult to imagine that, had there been a successful reorganization within chapter 11, fee provisions might have been included and the lien issue might have become moot. It was not until the case slid onto the rocky lee shore of straight bankruptcy--well after the entry of the Engagement Order--that the Mortgage became a matter of unavoidable...
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