Matter of Crisp, Bankruptcy No. 82-02162-2-3.

• Decision Date: 26 August 1986
• Docket Number: Bankruptcy No. 82-02162-2-3.
• Citation: 64 BR 351
• Parties: In the matter of N. Denny CRISP, and Sandra A. Crisp, Debtors.
• Court: U.S. Bankruptcy Court — Western District of Missouri

64 B.R. 351 (1986)

In the matter of N. Denny CRISP, and Sandra A. Crisp, Debtors.

Bankruptcy No. 82-02162-2-3.

United States Bankruptcy Court, W.D. Missouri, W.D.

August 26, 1986.

Dennis J.C. Owens, John H. Trader, Kansas City, Mo., for debtors.

DENNIS J. STEWART, Chief Judge.

AMENDED ORDER DENYING SUPPLEMENTAL APPLICATIONS FOR ATTORNEY'S FEES OF DENNIS J.C. OWENS, ESQUIRE, AND JOHN H. TRADER, ESQUIRE, FILED ON MAY 14, 1986, AND HEARD ON JUNE 9, 1986

Now before the court for resolution, after the completion of a full and fair hearing on the subject on June 9, 1986, in Kansas City, Missouri, is the application of Dennis J.C. Owens, Esquire and John H. Trader, appointed by former bankruptcy judge Joel Pelofsky as the general counsel for the debtor when these title 11 proceedings were originally filed as reorganization proceedings under chapter 11 of the Bankruptcy Code.¹ Mr. Owens was appointed as special counsel to continue the prosecution of two civil actions in which the debtor was plaintiff and Mr. Owens and Mr. Trader had acted as his counsel before the filing of the chapter 11 proceedings.² In this capacity, Mr. Owens and Mr. Trader had built up, by the time of the filing of the chapter 11 proceedings, a claim for unpaid attorney's fees in the amount of some $12,000, for which they had, shortly before bankruptcy³, taken a security interest in real property of the debtor and then promptly after bankruptcy filed a proof of secured claim against the bankruptcy estate. Otherwise, the evidence which was adduced on June 9, 1986, demonstrated that, in respect to one of the civil actions being prosecuted at the inception of these title 11 proceedings, a compromise and settlement of some $95,000 in favor of the bankruptcy estate was achieved; that, from this sum, Mr. Owens and Mr. Trader were paid the sum of $28,500 on account of a 30% contingent fee contract which was honored by the prior bankruptcy judge; that, otherwise, for services performed in connection with these bankruptcy proceedings after their inception, Mr. Owens and Mr. Trader, or both, have received an additional sum of $15,200⁴; that, with respect to a second civil action which was pending at the commencement of these title 11 proceedings, the attorney for the bankruptcy trustee brought about a compromise and settlement of it for the sum of $15,000⁵; that with respect to this action, Mr. Owens also had a 30% contingency fee contract, but he contends that this will in no way approach paying for his services rendered in connection with that action, some 177 hours, he contends, at an average billing rate of $85 per hour⁶; that nearly all the 177 hours for which he seeks to make such charges were consumed in reading the files and acquainting himself with the case⁷; that, further, he has rendered services in connection with the other civil action which was settled for the sum of $95,000 which were not fully compensated, some 700 hours, he contends, which, at his average billing rate, should have produced a fee many times the $28,500 contingent fee which was awarded⁸; and that Mr. Trader is also due certain sums of attorney's fees for duties which he performed postpetition in his capacity as counsel for the debtor.⁹

Out of the melange of facts demonstrated by the documentary and testimonial evidence before the court, one looms out as being of paramount significance. That is the fact that Mr. Owens and Mr. Trader were prepetition creditors of the debtor. This is now clearly evidenced by the existence of a filed proof of claim with the bankruptcy court. Accordingly, under the governing law, neither counsel can command awards of attorney's fees for services alleged to have been rendered for the chapter 11 estate generally. This is so because counsel who are themselves prepetition creditors are disqualified by reason of a conflict of interest from acting as counsel for a debtor-in-possession. See, e.g., In re Roberts, 46 B.R. 815, 849 (Bkrtcy.D.Utah 1985), to the following effect:

"If, however, the law firm is owed by a petitioning client, on the date of filing, a pre-petition debt for legal fees for services not rendered in contemplation of or in connection with the bankruptcy case, then the law firm would be a creditor of the debtor to the extent of those fees and costs and, therefore, would run afoul of the `no adverse interest\' and `disinterestedness\' requirements of Section 327(a). In such a circumstance, the conflict of interest would not be eliminated if the law firm obtained from the client a prepetition payment of these fees and costs because such a payment would likely constitute a preference that may be avoided for the benefit of other creditors, thus involving the law firm in a conflict of interest as the holder of an interest adverse to the estate in violation of Section 327(a)."

This irrefutable logic has been followed in a medley of other decisions.¹⁰ It serves the necessary prophylactic purpose of preserving the interests of chapter 11 debtors and creditors from those who would have a motive for self-dealing, if permitted to serve as a fiduciary for all creditors and debtors when in fact their self-interest would dictate otherwise. And it is axiomatic that those who have conflicts of interest which disqualify them from serving the estate cannot be awarded attorney's fees for such alleged service. "When compensation is sought for past legal services not rendered in contemplation of or in connection with a case under the Code, the claim of the attorney is in no better position than that of any other creditor." 2 Collier on Bankruptcy Para. 329.03, p. 329-13 (15th ed. 1985). Therefore, insofar as the applicants seek awards from the estate for generally aiding in administration during the course of the chapter 11 proceedings¹¹, their applications can only be denied.

The court is mindful that the rule can be and has been relaxed when a counsel who previously represented the debtor is permitted to serve as counsel, subsequent to commencement of the chapter 11 proceedings, for a special and limited purpose, when that special purpose is without the ambit of the potential conflict of interest. "Thus section 327(a) makes provision, when it is in the best interest of the estate, for the trustee to employ, for a `specified purpose,' other than to represent the trustee in `conducting the case,' an attorney who has represented the debtor. Such an attorney need not be `disinterested,' as is otherwise required by section 327(a), provided that the attorney represents or holds no interest adverse to the debtor or to the estate in the matter upon which the attorney is engaged." 2 Collier on Bankruptcy Para 327.03, p. 327-28 (15th ed. 1985). Thus, according to Mr. Owens' implied contentions, he has acted as special counsel for a limited purpose consistent with this self-interest in aiding in the prosecution of the two civil actions in other courts and he should be compensated for his role. The trouble with this contention is that Mr. Owens' fee for his services as special counsel were to be regulated by his contingent fee contracts with the debtors. Judge Pelofsky so ruled¹² and, according to governing legal principles which are further amplified below, the undersigned is without any warrant in law or fact to change Judge Pelofsky's decision. And Mr. Owens has, according to his own testimony before the court on June 9, 1986, already received all he is entitled to receive under the contingent fee agreements. He has received 30% of the $95,000 settlement in the first of the civil actions. As to the other civil action — the one settled by trustee's counsel for the sume of $15,000 — the contingent fee contract provides a fee for Mr. Owens only in the event that he had been required to go to trial as counsel for the plaintiff.¹³

Otherwise, Mr. Owens must seek any excess in fees from the estate and on account of his having generally rendered services "in aid of administration." See 2 Collier on Bankruptcy Para. 330.04, p. 330-18 (15th ed. 1985), to the following effect:

"Under the Act, in order for the debtor\'s attorney to be entitled to an award of compensation from the estate, the services were required to be rendered `in aid of administration of the estate.\' This requisite constituted at least a clarification of the benefit principle as based on Randolph v. Scruggs, 190 U.S. 533 23 S.Ct. 710, 47 L.Ed. 1165 (1903), inasmuch as it did not presuppose a benefit to the estate as such, but to its administration."

But the applicants are barred from collecting such compensation principally by reason of the doctrine of conflict of interest adverted to above. And, even if they were not, — as they may not be with respect to services alleged to have been performed — it could not now be held that they have demonstrated that the services for which they now seek compensation were "in aid of administration" of the estate. According to Mr. Owens' own testimonial admission, the uncompensated services which relate to both civil actions—the one settled for $95,000 and the one settled for $15,000 —for which he now seeks compensation were nearly all hours spent aquainting himself with the case, literally hundreds upon hundreds¹⁴ of hours allegedly reading the files. But, in some part, the fees must be measured by the benefit conferred on the bankruptcy estate, and, to the extent that it can be shown that his efforts produced such a benefit, his efforts have been amply compensated. He received $28,500, as observed above, as his contingent fee on the first case. And it was the attorney for the trustee on the second case who—in the face of an examiner's report that the case...