Ronnie Desormeaux LLC v. Sikes
| Decision Date | 07 May 2021 |
| Docket Number | CASE NO. 2:20-CV-01472 |
| Citation | 631 B.R. 234 |
| Parties | RONNIE DESORMEAUX LLC v. Lucy G. SIKES et al. |
| Court | U.S. District Court — Western District of Louisiana |
Adam G. Young, Meade Young, Lafayette, LA, for Ronnie Desormeaux LLC.
Paul Douglas Stewart, Jr., Stewart Robbins et al., Baton Rouge, LA, for Lucy G. Sikes.
Richard Harmon Drew, U.S. Trustee's Office, Shreveport, LA, Beth Ann Levene, U.S. Dept. of Justice Trustee's Office, Washington, DC, for US Trustee.
MEMORANDUM RULING
Before the Court is an Appeal from the Bankruptcy Court wherein Appellant, Ronnie Desormeaux, LLC appeals the Final Order which denied its Applications for Administrative Expenses. In the bankruptcy matter of In re Patel , Desormeaux, an unsecured creditor, filed two administrative-expense applications. The first application was based on an alleged substantial contribution while the case was in Chapter 11, and the second application was based on substantial contribution after the case was converted to Chapter 7.
This appeal raises the following issues:
1. Whether the bankruptcy court abused its discretion in denying as untimely Desormeaux's administrative-expense claim based on its alleged substantial contribution in the Chapter 11 case.
2. Whether the bankruptcy court clearly erred in finding that Desormeaux did not bear its burden to prove it made a substantial contribution in the Chapter 11 case.
3. Whether the bankruptcy court abused its discretion in denying Desormeaux's request to continue the substantial-contribution hearing.
4. Whether the bankruptcy court erred in holding that 11 U.S.C. § 503(b)(3)(D), which permits substantial-contribution claims for expenses incurred "in a case under Chapter 9 or 11," does not permit such claims for expenses incurred in Chapter 7 cases.
Girish P. Patel ("Debtor") filed a voluntary bankruptcy petition under Chapter 11 of the Bankruptcy Code on June 13, 2016.1 Debtor disclosed ownership interest in the business which owned interests in three (3) hotels in and around Lake Charles, Louisiana.2 Appellant, Ronnie Desormeaux, LLC ("Desormeaux") is an unsecured creditor of the bankruptcy estate.3 After investigating Debtor's finances, Desormeaux moved to convert the Chapter 11 bankruptcy to Chapter 7. Before the hearing on the conversion, Debtor voluntarily converted his Chapter 11 bankruptcy to a Chapter 7.
The Chapter 7 Trustee filed a Notice of Assets and the Notice to File Proofs of Claim on April 9, 2018, and set the last day to file proof of claims ("Bar Date") as July 8, 2018.4 Desormeaux filed his first application for attorneys' fees and expenses on July 8, 2018, seeking a priority designation for attorneys' fees and expenses incurred in making a substantial contribution to the Chapter 11 case pursuant to Section 503(b) of the Bankruptcy Code.5
Desormeaux maintained an adversary case against the Debtor from May 27, 2018 through July 7, 2020, which Desormeaux alleges yielded additional assets to the estate.6 On July 18, 2020, Desormeaux filed a supplement administrative application for expenses incurred in prosecuting the adversary case pursuant to Section 503(b).7 On November 30, 2020, the bankruptcy court entered a final order denying both applications for administrative claims and also denying Desormeaux's motion to continue.8
The district court has appellate jurisdiction over this case pursuant to 28 U.S.C. § 158(a)(1) which grants district courts jurisdiction to hear appeals from final judgments, orders, and decrees of bankruptcy judges. The bankruptcy court had jurisdiction over Girish P. Patel's bankruptcy case under 28 U.S.C. §§ 157(a) and (b), and 1334(a).
The Bankruptcy Code sets priorities of paying claims, dictating that certain kinds of claims get paid before others. See 11 U.S.C. § 507(a) ; Czyzewski v. Jevic Holding, Corp. , ––– U.S. ––––, 137 S.Ct. 973, 983, 197 L.Ed.2d 398 (2017). Section 507 lists the type of claims that are entitled to priority of payment over other claims, meaning that they must be paid in full before claims of lesser priority receive anything. See 11 U.S.C. §§ 507, 726, 1129(a)(9). Administrative expenses, as defined in section 503(b), receive second priority and are paid before any payments are made to most other unsecured creditors. 11 U.S.C. § 507(a)(2).
Under the American Rule, creditors must bear their own attorney's fees and costs, unless a Bankruptcy Code provisions specifies otherwise. See Baker Botts L.L.P. v. ASARCO LLC , 576 U.S. 121, 126, 135 S.Ct. 2158, 192 L.Ed.2d 208 (2015). Congress created a narrow exception to this general rule in 11 U.S.C. § 503(b)(3)(D) and (b)(4) which allows creditors that have made a "substantial contribution" in a case "under Chapter 9 or 11" to recover their actual, necessary expenses, including their attorney's fees and expenses, as a priority administrative expense. See 11 U.S.C. § 507(a) (priority of distribution).
Section 503(a) and Bankruptcy Rule 1019 govern when requests for administrative expenses must be filed. Section 503(a) provides: "An entity may timely file a request for payment of an administrative expense or may tardily file such request if permitted by the court for cause." 11 U.S.C. § 503(a). Rule 1019(6) of the Federal Rules of Bankruptcy Procedure provides that "[a] request for payment of an administrative expense incurred before conversion of the case is timely filed under § 503(a) of the Code if it is filed before conversion or a time fixed by the court."
On February 8, 2018, the bankruptcy court entered an order to convert the Chapter 11 case to a Chapter 7 case.9 On July 8, 2018, Desormeaux (Appellant) sought $24,658.90 as a priority administrative expense based on substantial contribution to the Chapter 11 case (hereinafter referred to as the "Original application").10 On July 18, 2020, Desormeaux sought an additional $29,599.09 as a priority administrative expenses on his substantial contribution on the Chapter 7 case (hereinafter referred to as the "Supplemental Application"). 11
On November 3, 2020, the bankruptcy court denied the substantial-contribution claims of creditor, Appellant Ronnie Desormeaux LLC ("Desormeaux") under 11 U.S.C. § 503.12
On October 22, 2020, the bankruptcy court rendered an oral ruling denying Desormeaux's applications.13 The court denied Desormeaux's application for pre-conversion expenses because it was untimely, and even if it was timely, Desormeaux had not shown cause for the untimely filing, and even if it had, Desormeaux failed to show a substantial contribution.14
Bankruptcy Rule 1019 (6) provides that when a case is converted from Chapter 11 to Chapter 7, applications seeking allowance of administrative expenses must be filed prior to conversion of the case.
Consequently, the Court found that Desormeaux's application for pre-conversion expense, filed five-months post conversion, was not timely under Bankruptcy Rule 1019.15 The Court acknowledged that before the hearing on Desormeaux's motion to convert, Mr. Patel voluntarily converted to a Chapter 7.16 The court found that Desormeaux "received notice of this conversion, yet waited five months before submitting the application for an administrative expense claim based on a substantial contribution."17 The Court remarked that Desormeaux had failed to explain or give cause for filing his application beyond the deadline. The bankruptcy court also independently denied Desormeaux's Chapter 11 substantial contribution claim because he failed to show that he made a substantial contribution. The bankruptcy court denied Desormeaux's Chapter 7 administrative claim for substantial contribution as not authorized by statute.
Desormeaux seeks to have this Court reverse the bankruptcy court's decision on the legal issues pertaining to the First and Second Applications, and remand the case to the bankruptcy court with instructions to permit Desormeaux to conduct limited discovery on the Trustee's objections, followed by an evidentiary hearing on the applications for compensation/administrative expense.
Timeliness of the application
Rule 503(a) provides that "[a]n entity may timely file a request for payment of an administrative expense or may tardily file such request if permitted by the court for cause." Timeliness of the request in this particular matter is addressed in Rule 1019(6) of the Federal Rules of Bankruptcy Procedure, which governs matters when a case under Chapter 11 has been converted to a case under Chapter 7. Rule 1019(6) provides, in pertinent part:
Desormeaux maintains that there is no per se bar under Rule 1019(6) of the Federal Rule of Bankruptcy Proceeding that would prohibit filing an administrative application after the date of conversion. The Debtor filed a Notice of Conversion to Chapter 7 on January 23, 2018,18 and the Bankruptcy Court entered the Conversion Order on February 9, 2018.19 The United States Trustee and the Chapter 7 Trustee (collectively referred to as the "Trustees") maintain that in order to be timely, Desormeaux must have filed the Original Application on February 9, 2018.
This Court must determine if the bankruptcy court abused its discretion in finding that Desormeaux did not show cause for filing the application five (5) months after the deadline. The Trustees argue that Desormeaux failed to provide a valid reason for the delay in filing the application. See In re DPH Holdings , 494 F.App'x 135, 136 (2nd Cir. 2012) (); ...
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...avoided by appealing to the non-exclusive nature of § 503(b).") (footnote and citations omitted); Ronnie Desormeaux LLC v. Sikes, Case No. 2:20-CV-01472, 631 B.R. 234 (W.D. La. May 7, 2021) (creditor lack standing to assert substantial contribution claim for expenses incurred during Chapter......
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