Court: Court of Appeals for the Ninth Circuit; September 24, 2002; Federal Appellate Court
Darrel D. Smith, a Chapter 7 debtor, is appealing decisions affirming the bankruptcy court's awards of attorneys' fees to his special counsel, Edwards, Hale, Ltd. (E. H.), and administrative fees to his Chapter 11 counsel, John Peter Lee, Ltd. (JPL), as well as the refusal of the bankruptcy judge to recuse himself. The court affirms all awards and the denial of recusal, noting that much of the fee litigation stemmed from Smith's refusal to acknowledge valid claims by his attorneys, which has wasted bankruptcy resources.
Smith filed for Chapter 11 bankruptcy on March 21, 1991, retaining JPL. His Third Plan of Reorganization, approved on January 11, 1994, included payment avenues from state law claims against his former wife's property and the sale of prints of his painting, Daybreak. However, Smith could only generate $80,000 from litigation instead of the projected $9 million and chose not to sell the prints or the painting itself. Following his default on the Plan, the case was converted to Chapter 7, leading to the sale of Daybreak for $3.9 million.
E. H. was awarded approximately $175,000 for its work on Smith's state litigation, and after the conversion, it hired another firm to recover these fees as administrative expenses. Smith appealed the fee awards, but E. H. successfully defended against all challenges, resulting in additional awards of $43,587 in fees and $3,777 in costs. The bankruptcy court deemed the proceedings regarding fees had become frivolous.
The court awarded fees to Smith’s counsel, contingent on fees awarded to other professionals involved in the case, based on bankruptcy, contract, and Nevada state law. The district court upheld these awards, which Smith is now appealing, focusing on the legal basis rather than the fee amounts. John Peter Lee, Ltd. (JPL) received over $700,000 for services to Smith and sought additional fees post-withdrawal, leading to multiple fee petitions. The bankruptcy court partially granted these petitions, but the district court reversed one and required detailed findings on remand. After a hearing, the bankruptcy court reaffirmed previous awards and added new fees, totaling $353,801.40, which the district court affirmed. Smith is appealing this decision as well, questioning the legal grounds for the fee awards.
In a separate matter, Smith filed a motion in 1992 to enforce a settlement agreement regarding his claims against his ex-wife’s property. After a series of appeals and hearings, Bankruptcy Judge Jones reaffirmed his ruling in 1994, and Smith did not appeal further. Following malpractice claims against JPL in 1999, Smith alleged Judge Jones had a fixed predisposition during earlier hearings and moved for his recusal, which was denied. The district court affirmed this denial, and Smith is now appealing again.
The court has jurisdiction under 28 U.S.C. §§ 158(d) and 1291, reviewing the district court’s decisions de novo. The standard of review for a bankruptcy court's attorney fee awards is for abuse of discretion or erroneous law application, while recusal decisions are similarly reviewed. Legal questions are assessed de novo.
Smith contests the attorneys’ fees awarded to E. H. and JPL, asserting both general and specific objections. He claims that 11 U.S.C. § 330(a) does not authorize fee awards for attorneys representing Chapter 7 or Chapter 11 debtors, thereby arguing that the bankruptcy court lacked the authority to grant fees to E. H. or JPL. Even if fee awards under § 330(a) are permissible, Smith contends that they fail to meet the benefit analysis criteria from Pfeiffer v. Couch (In re Xebec, 147 B.R. 518 (9th Cir. BAP 1992)).
Section 330(a) regulates the compensation of professionals in bankruptcy cases. Prior to the 1994 Bankruptcy Reform Act, it allowed the court to award reasonable compensation for actual, necessary services rendered by trustees, examiners, professionals, and attorneys, as well as reimbursement for necessary expenses. The Reform Act revised § 330, maintaining a similar structure but refining the language. The court may award compensation for necessary services that benefit the case, but it must avoid compensating for unnecessary services or services not likely to benefit the debtor’s estate. Additionally, in Chapter 12 or 13 cases, reasonable compensation for debtor’s attorneys can be awarded based on the services' benefit and necessity. Compensation for preparing fee applications is also limited to the skill and level required for such preparation.
The Reform Act amended section 330(a)(1) by removing “debtor’s attorney” and adding subsection (a)(4)(B), which limits reasonable compensation awards to debtor’s attorneys in Chapter 12 and 13 cases. Consequently, the Fifth and Eleventh Circuits have determined that section 330(a) prohibits awarding administrative fees to counsel for Chapter 7 or 11 debtors, as established in *In re American Steel Product, Inc.* and *In re Pro-Snax Distributors, Inc.* Conversely, the Ninth and Third Circuits have ruled that debtor’s attorneys remain eligible for compensation from the bankruptcy estate post-amendments, as seen in *In re Top Grade Sausage, Inc.* and *In re Century Cleaning Services, Inc.* While Smith requests a reconsideration of *Century Cleaning*, he fails to present new arguments beyond those addressed in Judge Thomas's dissent. Additionally, Smith contends that the bankruptcy court misapplied *In re Xebec* regarding the benefit conferred by E. H. and JPL’s fee applications. The *Xebec* decision established that a debtor’s attorney must show services provided a “identifiable, tangible and material benefit” to the estate after a trustee is appointed. The benefit analysis includes evaluating service duplication, the impact on estate administration, and alignment with debtor duties under 11 U.S.C. § 521. However, since the relevant standards are now codified in section 330(a)(4)(A), that provision governs compensation awards, superseding the older *Xebec* interpretation.
Section 330(a)(4)(A) stipulates that the bankruptcy court cannot allow compensation for services that are unnecessarily duplicative or not reasonably likely to benefit the debtor's estate, nor for services that are not necessary for case administration. It applies broadly to all reasonable compensation awards, with specific scrutiny required for services rendered after a Chapter 11 trustee’s appointment, as they may overlap with the trustee's duties. Unlike the precedent set in Xebec, section 330(a)(4)(A) does not necessitate that an attorney's actions align with the debtor's obligations under 11 U.S.C. 521, although such actions can still support case administration. Furthermore, compensation can be granted for services that are reasonably likely to benefit the estate, even if they do not yield a tangible benefit. This provision supersedes Xebec to the extent of any inconsistency.
In the context of objections raised by Smith regarding the fee awards, it is noted that the Chapter 7 trustee has not supported Smith’s objections. Smith contests fees awarded to Edward Hale, Ltd. for legal work performed after the conversion of his case to Chapter 7, categorized into three areas: preparation of fee applications, defense against Smith's challenges to the fees, and miscellaneous matters related to case administration and opposing Smith’s motion to disqualify Judge Jones.
Fees for miscellaneous matters have been deemed reasonable, as they provided necessary compensation for services that were not duplicative of those performed by the trustee or JPL, benefitted the debtor's estate, and were essential for case administration. For instance, the briefs filed by E. H. and JPL opposing Smith’s motion to recuse Judge Jones showed minimal overlap, indicating no unnecessary duplication. The resolution of the recusal motion was critical for maintaining continuity of court supervision over the estate, avoiding wasteful judicial resource duplication.
Smith's challenge to E. H.'s compensation for preparing fee applications is countered by 11 U.S.C. 330(a), which allows for such compensation based on the necessary skill level needed for preparation. Smith's argument that post-conversion work by E. H. solely benefited the law firms rather than the estate is weakened by the current interpretation of section 330(a), which considers the preparation of fee applications essential for case administration and beneficial to the estate.
E. H. is entitled to administrative fees for services rendered prior to the conversion of Smith's case to Chapter 7. Additionally, E. H.'s preparation of fee applications did not duplicate trustee services, and compensation for these preparations must be upheld. While section 330(a) does not explicitly address compensation for litigation related to fee applications, it does not prohibit it, provided all section requirements are met. Previous rulings, such as in Nucorp, affirm that services related to fee application preparation, including litigation to defend fee awards, are compensable, as failing to do so would undermine the effective compensation of bankruptcy attorneys.
Nucorp's argument for compensating time and expenses related to litigating a fee application was rejected in Boldt v. Crake, where the court determined that while the preparation of a fee application is necessary, there is no obligation for debtor attorneys to oppose objections to their fee applications. The court expressed concern that a blanket rule allowing such expenses could incentivize attorneys to make meritless fee requests. However, the ruling did not categorically reject the possibility of awarding litigation fees under different circumstances. In the present case, E. H. met the criteria under Section 330(a)(4)(A) by providing necessary services that benefited the debtor's estate while avoiding duplication of effort with other professionals. The court found that the context of the case justified the need for litigation, noting that E. H. successfully defended its fee applications, unlike the circumstances in Riverside-Linden. The bankruptcy court's fee awards were viewed as meritorious, and denying E. H. reasonable compensation for defending its awards would undermine the purpose of compensating for actual services rendered. Furthermore, not awarding fees for defending against "frivolous" objections would encourage the filing of such objections by debtors. The court affirmed the fee awards to E. H. and also to John Peter Lee, Ltd. (JPL), for similar reasons, including fees for miscellaneous matters related to opposing a motion to recuse a judge and seeking case conversion. The application of Nucorp or Riverside-Linden in evaluating fee merit is dependent on case-specific circumstances and is largely at the bankruptcy court's discretion.
The bankruptcy court awarded various fees to JPL, which Smith challenges.
1. **Defense of Sale of Masseria Paintings**: JPL submitted a fee application as Chapter 11 counsel, which included $23,000 for defending its handling of the Masseria paintings' sale against Smith's objections. Smith contends these fees were unnecessary and did not benefit the estate. However, the bankruptcy court deemed the fees necessary and beneficial to the estate, aligning with section 330(a)(6) and Nucorp, and affirmed the award.
2. **Suit Against Smith for Abuse of Process**: JPL was awarded $22,333 for its suit against Smith for abusing the appellate process regarding fee awards. The bankruptcy court assessed the evidence and determined the fees benefited the estate and were not duplicative. Although the application of the Xebec standard for attorney compensation was questioned, the court found that it met the requirements of section 330(a)(4)(A), justifying the award.
3. **Opposition to Smith’s Efforts for His Files**: After withdrawing from representing Smith, JPL refused to return Smith's files, which led to a court order for their release. JPL was awarded $4,500 for the costs incurred in reviewing and transferring the files, excluding fees for opposing Smith's motion. These fees were supported under section 330(a)(4)(A) for being not duplicative and beneficial to the estate. The bankruptcy court adjusted the fees to reflect only those related to the file dispute, affirming that it did not abuse its discretion in granting the award.
Smith filed a motion to compel the Chapter 7 trustee to pursue a malpractice claim against JPL after recovering his files, asserting that the claim was an asset of the bankruptcy estate. The bankruptcy court denied the motion, ruling that the malpractice claim was merely an extension of the existing fee dispute between Smith and JPL. Smith appealed, but the Bankruptcy Appellate Panel upheld the lower court's decision. JPL subsequently received $50,000 in fees for defending against the malpractice claim. The court found no abuse of discretion in awarding these fees, affirming that they were compensable under section 330(a)(4)(A) as part of the ongoing fee litigation.
In a separate matter, Smith contends that Judge Jones should have recused himself due to alleged bias against Smith, which he claims warrants voiding the entire bankruptcy proceeding and appointing a new judge. Smith's evidence of bias includes statements made by Judge Jones regarding a settlement agreement and adverse rulings. Specifically, at a February 1999 hearing, Judge Jones indicated that Smith's interests should be resolved in state court, and he reiterated this stance in April 1999. Smith also cites instances of bias in judicial rulings against him, such as labeling his litigation against JPL as frivolous. However, these instances were not part of the recusal motion and thus are not under consideration.
Regarding procedural issues, the appeal of the recusal decision is deemed timely because it is being made after final decisions that Smith claims were affected by bias, including the approval of a settlement agreement and the conversion of his case from Chapter 11 to Chapter 7. Since Smith is appealing from the denial of his recusal motion at the earliest opportunity, this appeal is now considered valid and permissible.
The bankruptcy court determined that Smith's recusal motion was not filed in a timely manner and could be dismissed on that basis. It noted that Smith had ample notice of adverse rulings and should have raised allegations of bias earlier. Smith contended that he only became aware of Judge Jones’s bias from comments made during hearings in February and April 1999. Despite the timeliness issue, the court proceeded to the merits of the motion, assuming for argument's sake that Smith was unaware of prior evidence of bias. Smith argued that the district court incorrectly upheld the bankruptcy court's refusal to recuse Judge Jones, as the district court applied 28 U.S.C. § 144, which is only applicable to district court judges, instead of the correct standard under 28 U.S.C. § 455 that governs bankruptcy court judges. Section 455 mandates disqualification in cases where impartiality could reasonably be questioned. The Supreme Court's ruling in Liteky v. United States clarified that mere judicial rulings do not typically constitute grounds for claims of bias unless they exhibit extreme favoritism or antagonism that prevents fair judgment. Additionally, opinions formed from extrajudicial sources can support a bias claim if they demonstrate a high degree of favoritism or antagonism. The court emphasized that simply having an opinion from an extrajudicial source does not suffice for a recusal claim; the predisposition must show a deep-seated bias to warrant such action.
The district court correctly determined that Smith could only succeed in his claim if he demonstrated that Judge Jones exhibited "deep-seated favoritism or antagonism." However, Smith failed to provide adequate evidence to support this. Judge Jones's comments indicated a preference for resolving the community property claim in state court, but did not suggest a fixed disposition from the beginning. His inclination developed through legal research and subsequent hearings, and while his views became stronger over time, there was no evidence that he was incapable of changing his mind. Smith's assertion that Judge Jones formed a premature opinion does not constitute a valid basis for recusal, as mere stubbornness is insufficient for disqualification. Consequently, the district court's affirmation of Judge Jones's denial of Smith's recusal motion was not erroneous.
Additionally, attorneys for a Chapter 11 debtor may still receive payment under the Fifth and Eleventh Circuit's approach, given that a debtor-in-possession possesses the same rights as a trustee to employ professionals. However, once a trustee is appointed, attorneys would not be compensated, even if they provided substantial benefits to the estate. The case also highlights that 11 U.S.C. 521 requires debtors to file schedules of claims and assets, aiding the trustee in administration. Although the appeal does not address section 330(a)(3) concerning reasonable compensation, the district court's considerations of fee awards were aligned with the pre-1994 version of section 330(a), despite the case’s conversion to Chapter 7 in 1995. Nonetheless, the outcomes would remain consistent under both versions.
If Smith had succeeded in his motion, it would have necessitated nullifying nearly the entire proceeding and restarting the case with a new judge, leading to increased costs that would deplete the bankruptcy estate. Smith required bankruptcy court approval to pay his attorney because the bankrupt had not been discharged. Consequently, proceeds from the sale of Daybreak, utilized for various fee awards, remained part of the bankruptcy estate and were subject to claims from Smith's creditors, including E. H and JPL. Smith contested the fee awards to E. H, arguing that Shea, Carlyon—not E. H—defended the fee awards related to E. H's work in state litigation. However, this claim was deemed frivolous as Smith did not assert that Shea, Carlyon duplicated E. H's work or that their fees were excessive. The court found that as long as the fees were reasonable and necessary under section 330(a)(4)(A), it was irrelevant who rendered the services. Thus, the bankruptcy court acted within its discretion in awarding litigation fees to E. H, even when an outside firm was employed. Smith also objected to fees for miscellaneous work due to vague documentation, but the court determined that JPL provided adequate detail regarding the work performed for the debtor's estate, affirming the fee awards. Judge Jones expressed disbelief at arguments raised by Ms. Allf regarding the agreement's interpretation, clarifying that the court's intent was for the issue to be resolved in state court, not in bankruptcy court, and categorically rejected the notion that the agreement allowed for resolution by stipulation rather than trial.
