Matter of Patterson
| Decision Date | 30 September 1985 |
| Docket Number | Bankruptcy No. BK84-251. |
| Citation | 53 BR 366 |
| Parties | In the Matter of Ronald F. PATTERSON, Carol J. Patterson, Debtors. |
| Court | U.S. Bankruptcy Court — District of Nebraska |
Thomas Lauritsen, Thomas Stalnaker and James Gleason, Swarr, May, Smith & Andersen, P.C., Omaha, NE, for applicant.
Michael Patrick, Gibson & Patrick, Lincoln, NE, for debtors-in-possession.
This matter comes before the Court on application for allowance of compensation and disbursements as attorneys for debtors-in-possession filed by the firm of Swarr, May, Smith & Andersen, P.C., and objections to such application raised by the debtors-in-possession. The matter was heard before Timothy J. Mahoney on July 2, 1985. Appearing for the applicant were Thomas Lauritson, Thomas Stalnaker and James Gleason, attorneys with the firm of Swarr, May, Smith & Andersen, P.C., of Omaha, Nebraska. Appearing on behalf of the debtors-in-possession was Michael Patrick of the firm of Gibson and Patrick, Lincoln, Nebraska.
The Pattersons filed a petition for relief under Chapter 11 of the Bankruptcy Code on February 9, 1984; schedules were filed on February 24, 1984.
Mr. and Mrs. Patterson were engaged in the farming, commercial and purebred cattle raising and land development business in Sarpy County, Nebraska. For some time prior to filing for relief they had been represented by the law firm of Swarr, May, Smith & Andersen, P.C. The firm had handled many transactions and some litigation for the Pattersons and on the date of the petition the Pattersons were indebted to the firm in the amount of $8,015.26 as shown as Item 20 on Schedule A-3, "creditors having unsecured claims without priority". The total unsecured claims listed on the schedules amount to $111,766.66. The schedules further show that the amount of secured debts on the date of filing was $1,033,898.17.
Schedule B, "the statement of all property of the debtor" shows on entry no. 6 that the debtors have a one-half interest in the 80 acres located in Sarpy County, Nebraska, which they value at $75,000. The Bank of Papillion apparently held a mortgage on all or part of the 80 acres.
On the statement for financial affairs of debtor engaged in business at entry no. 20 "payments or transfers to attorneys" the debtors list that they have consulted during the year immediately preceding the filing of the petition James T. Gleason and Thomas D. Stalnaker of the law firm of Swarr, May, Smith & Andersen, P.C.
On February 9, 1984, in addition to signing the voluntary petition, Thomas Stalnaker and the debtors filed the list of creditors holding the 20 largest unsecured claims, which did not include the claim of the law firm, filed an application to employ attorneys and Mr. Stalnaker filed an affidavit by proposed attorney as required by the Bankruptcy Rule 2014.
The affidavit filed by Mr. Stalnaker stated at Paragraph 3 "Neither I nor any member of my law firm have any connection with Ronald F. Patterson and Carol J. Patterson, the above-named debtors, their creditors or any other party in interest herein, or their respective attorneys except that I represent said debtors in this proceeding and members of my law firm have represented them in various matters for the past ten years and except that my law firm generally represents Gurthal Noell, a creditor herein, in the amount of $2,475. Neither I nor any member of my law firm have represented said creditor in any manner in connection with the debtors . . .
"Neither I nor any member of my law firm represent any interests adverse to Ronald F. Patterson and Carol J. Patterson as the debtors-in-possession herein, or their estate in the matters upon which I am engaged."
No mention is made in the affidavit or in the application that the proposed law firm was owed more than $8,000 for pre-petition, non-bankruptcy related work.
No mention is made in the affidavit that James Gleason, a member of the law firm, owns an undivided one-half interest in the 80 acres listed above.
On March 6, 1984, Bankruptcy Judge David Crawford entered an order approving the appointment of Mr. Stalnaker as attorney for the debtors-in-possession. The order specifically states that no determination is made that the attorneys represent no adverse interest.
Members of Mr. Stalnaker's law firm represented the debtors-in-possession from approximately February 1, 1984, through January 25, 1985, at the time an order was entered permitting the firm to withdraw its representation.
Following the withdrawal of the law firm it filed a proof of claim on February 5, 1985, in the amount of $8,015.26 for legal services rendered to debtors and expenses incurred on behalf of debtors prior to the filing of the petition for relief in this matter. On March 20, 1985, the law firm filed this application for fees and disbursements for legal services rendered as counsel to debtors-in-possession.
The debtors, although not filing a written objection to the fee application, argued at the hearing that the fees should not be allowed for the following reasons:
1. the work was not competently performed and was of no benefit to the estate or the debtors-in-possession;
2. that the co-ownership interest by a member of the law firm in a parcel of debtors' land was an interest adverse to that of the estate or the debtors-in-possession;
3. that the fact that the law firm was a pre-petition creditor made the law firm not "disinterested" and therefore not qualified to be employed as a professional for the debtors-in-possession;
4. that a $450 payment shown as a disbursement by the law firm was actually a personal expense of Mr. Gleason for a survey prepared concerning the 80 acres owned by Mr. Gleason and the debtors-in-possession and should not have been charged to the debtors or, if it was a pre-petition obligation of the debtors, it should not have been paid because such payment permitted a pre-petition unsecured creditor to be paid before the other unsecured creditors;
5. the fee agreement between the law firm and the debtors-in-possession was for an hourly rate of $100 per hour with a maximum fee of $10,000. Since the fee requested is in excess of $10,000, the debtors believe it is in violation of the fee agreement.
The Pattersons had retained the services of Mr. Gleason for several years as their personal and business attorney. They were also apparently personal friends of Mr. Gleason and testified that they trusted his judgment and his legal abilities. They had employed him and members of the law firm of which he was a member to handle various types of litigation for them and to handle real estate transactions.
When it became apparent to the Pattersons that they had a serious financial problem which involved the amount of debt they owed to one bank, they sought the advice of Mr. Gleason. He represented to them that he was not an expert in the bankruptcy or reorganization field and that he felt that Mr. Stalnaker of his firm would be able to help them.
The Pattersons met with Mr. Stalnaker and discussed their financial situation and discussed the proposed fee arrangement. Mr. Stalnaker and Mr. Gleason testified that the fee arrangement was that the debtors would pay, subject to the approval of the Bankruptcy Court, an hourly rate of $100 per hour plus all out-of-pocket expenses. No maximum was agreed upon.
Mr. and Mrs. Patterson, on the other hand, testified that $100 per hour was understood but that they believed a maximum of $10,000 was also agreed upon.
The parties did not enter into a written fee arrangement and no correspondence concerning the fee arrangement was offered into evidence.
Mr. Stalnaker testified concerning the type and extent of the work performed for the Pattersons and testified as to his experience and the experience of the various members of his firm who performed legal services on behalf of the Pattersons. Mr. Stalnaker is an experienced practitioner in the Bankruptcy Court of the District of Nebraska and is familiar with the statutes, rules and local procedure concerned with business reorganizations within the bankruptcy context. Prior to filing the petition for relief and continuing for several months thereafter, Mr. Stalnaker entered into oral and written negotiations with the attorney for the Patterson's lending bank. The position of the bank was that the Pattersons had no authority to use "cash collateral" without the consent of the bank. The bank insisted that the debtors-in-possession provide the bank with regular operating statements and account for the collateral, including livestock.
Mr. Stalnaker wrote to the Pattersons and informed them that they had the right to operate their business but that they could not use cash collateral without consent of the bank and warned the Pattersons that use of such cash collateral without permission of the bank or the Bankruptcy Court could result in severe penalties.
The Pattersons continued to operate their livestock business during the pendency of the Chapter 11 case. They fed grain to the animals and sold some livestock. They used some of the proceeds from the sale of livestock for operating expenses of the business and personal expenses.
Eventually there was a hearing on a motion for relief from the automatic stay under § 362 of the Bankruptcy Code. At that hearing Mr. Gleason represented the debtors-in-possession. Judge Crawford found that the debtors-in-possession had used cash collateral in violation of the Bankruptcy Code and sustained the motion for relief from the stay for cause.
From that moment on the relationship between the debtors-in-possession and the law firm deteriorated and the law firm was eventually permitted to withdraw from representation by an order filed in January of 1985.
Mr. Robert Craig, an attorney practicing exclusively in the bankruptcy field, and not associated with the Swarr, May, Smith & Andersen, P.C., law firm,...
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