Court: United States Bankruptcy Court, M.D. Louisiana; January 22, 2007; Us Bankruptcy; United States Bankruptcy Court
The reorganization of Charis Hospital, L.L.C. began in 2001 and was marked by significant conflicts, ultimately leading the court to convert the reorganization into a chapter 7 liquidation after a previously confirmed liquidating plan collapsed. The deviations from the confirmed plan only became apparent during hearings regarding compensation applications from CalMed Consulting, Inc., the appointed liquidator, and its legal counsel. The procedural history highlights that International Cooperative Consultants, Inc. filed an amended plan, confirmed on September 28, 2001, which included unclear provisions.
Notably, Article 16.14 of the confirmed plan states that all immaterial modifications supersede any conflicting plan language, which is crucial for understanding the liquidator's role. The original plan anticipated a sale of Charis Hospital, permitting a liquidating trustee to hire professionals without court approval if the sale did not occur. In contrast, the modified plan required the appointment of an independent entity by the IRS to liquidate accounts receivable, with quarterly reporting obligations to the court.
Post-confirmation, the IRS moved to appoint CalMed as the liquidator for all matters except the sale of movable property, which the court approved on October 26, 2001. The order detailed CalMed's responsibilities, including ensuring tax-efficient dissolution of the debtor, billing and liquidating outstanding claims, and adhering to the reporting requirements established in the confirmed liquidating plan.
The application to appoint liquidators specified that compensation terms would be submitted post-appointment. On January 7, 2002, CalMed sought approval for its compensation and reimbursement arrangement, leading to a May 14, 2002 court order that defined these terms while mandating bankruptcy court review for all compensation and expenses. CalMed also sought to retain Jones Walker as counsel, with fees subject to bankruptcy court approval, as confirmed by a verified statement from Jones Walker. The January 15, 2002 order authorized this retention under the same court approval stipulation.
Subsequently, the liquidator initiated multiple lawsuits to recover avoidable transfers, which were largely resolved within nine months. However, CalMed failed to file required status reports between January 15, 2002, and July 11, 2003, despite a February 8, 2002 order mandating bi-monthly updates. This lack of reporting raised concerns among former insiders who objected to compensation payments due to non-compliance with reporting orders. In response, the court mandated the liquidator to resume regular status reports and required comprehensive documentation from CalMed, which was to be submitted following a hearing on August 8, 2003. CalMed filed its first report on September 11, 2003, which was met with further objections from insiders, leading to additional court orders for financial transparency.
On December 31, 2003, the liquidator submitted reports for October and November 2003, but CalMed failed to file any subsequent reports for three months. William Carroll, III moved to compel report production, prompting the IRS to seek termination of the liquidator and a final accounting, asserting that CalMed's liquidation was ineffective. The United States Trustee supported this motion, citing lack of disbursement information and unpaid quarterly fees. After a hearing on April 23, 2004, the court terminated the liquidator and converted the case to chapter 7 liquidation, ordering a final accounting within 30 days, which was later extended to July 30, 2004.
Further disputes ensued, leading the United States Trustee to compel CalMed to provide specified information. CalMed eventually filed its Liquidator’s Report of Administration and several monthly reports, which prompted additional objections and requests for relief. In November 2005, the United States Trustee moved to compel CalMed to file for compensation, resulting in a court order setting a deadline of December 21, 2005. In December 2005, motions were made to examine Jones Walker’s fees and to compel the liquidator to account for proceeds from the debtor’s assets.
At a subsequent hearing, Stacy Calvaruso, CalMed’s CEO, testified on the liquidator’s compensation and final report, detailing challenges in collecting accounts receivable, such as missing documentation and difficulties with physicians. CalMed deposited all collected funds, including from the Charis hospital sale, into a single account for claims payment and partially settled an IRS claim based on legal advice. However, CalMed failed to comply with court orders regarding a fidelity bond, which it did not obtain, believing its errors and omissions insurance sufficed.
CalMed admitted it failed to file required status reports every 60 days as mandated by the court, although Ms. Calvaruso claimed she misunderstood the order's intent. She also did not recognize the obligation to submit fee applications. There was no evidence to justify CalMed's noncompliance, nor was there corroboration for the liquidator's assertion that the judge intended to alter the reporting order. Glyn Miller, a financial analyst for the U.S. Trustee, reported that CalMed's monthly fees exceeded deposits into the Charis account from November 2002 to July 2003, except for April 2003. He suggested CalMed should have ceased collection efforts on accounts receivable when they became unprofitable. CalMed accrued $178,210.27 in attorney's fees and paid itself a liquidator's fee of $188,732.17, despite stopping its monthly fee in mid-2003. The court approved only $72,729.68 of the legal fees. Miller concluded that in May 2002, CalMed had sufficient funds to fully pay the IRS claim, but only made a partial payment, leading to an increase in penalties and interest by $62,000 due to noncompliance with a court order. However, he could not determine the reserve needed for unresolved chapter 11 administrative claims. The UST introduced a February 11, 2002 court order that set deadlines for claims and a March 15, 2002 hearing to address claims payment. At that hearing, CalMed's counsel was directed to prepare orders for approved claims and reserves for disputed claims, but there is no evidence that these orders were ever submitted or signed, resulting in CalMed lacking authorization to pay the identified claims. Regarding compensation, the Original Plan initially provided for a liquidating trustee only if the sale of Charis Hospital failed, which did not happen, leading to a revised plan where independent parties would liquidate remaining assets without granting the liquidator trustee powers. Two court orders from January and May 2002 stipulated that CalMed's and Jones Walker's fees were subject to court approval, and no subsequent orders modified this requirement.
The record lacks any orders approving payment of fees or expenses for CalMed or Jones Walker. Jones Walker contends that court approval for their post-confirmation compensation was not required, citing a statement by Judge Phillips during a February 8, 2002 hearing suggesting that approval would not be necessary until the liquidator's final report. However, no transcript of this hearing was provided, leaving the veracity of Jones Walker's claim uncertain. Regardless, the controlling written orders from January 5, 2002, and May 14, 2002, dictate the terms, superseding any oral statements made by the judge.
The court had approved Jones Walker's employment as counsel for CalMed under 11 U.S.C. § 327, which subjects their reasonable compensation to court review according to 11 U.S.C. § 330. While bankruptcy courts have broad discretion over professional fees, their jurisdiction post-confirmation is limited. Nevertheless, they retain authority over matters related to the implementation of the plan, including reviewing fees for post-confirmation legal services and ordering disgorgement of fees when necessary.
CalMed's payments to Jones Walker and itself, made without court approval, are subject to disgorgement due to noncompliance with court orders requiring such approval. CalMed also failed to follow directives from the Confirmed Plan, which mandated regular reporting on the collection of receivables and resulted in inconsistent payments of administrative priority claims. As a consequence of these violations, the court will order CalMed to return all fees received.
Jones Walker's representation of the liquidator has been criticized for several significant oversights. The firm neglected to ensure the submission of the liquidator’s required monthly reports and failed to prepare key orders, including those related to a fidelity bond and court rulings from March 15, 2002. Consequently, there is no available bond for parties to pursue unpaid claims, and the status of allowed administrative claims remains uncertain. Despite these failures, CalMed's counsel managed to initiate and conclude various avoidance actions to facilitate the liquidation process.
The court reviewed Jones Walker’s fee application, which totaled $92,245.23, with $76,260.04 already paid. While many fees were deemed reasonable based on the Johnson standard, several deficiencies were noted. The firm charged $1,803.75 for pre-approval services, billed hours over $200 for Michael Perry despite a set rate of $200, and combined time entries for separate tasks, violating bankruptcy court practices. Adjustments were made, reducing fees by $3,675.10 for the billing rate discrepancy and disallowing $6,520 for the lumped time entries.
Furthermore, Jones Walker billed $34,728 for litigation involving Bank One and the Carrolls, which ultimately provided no benefit to the Charis creditors. The court ordered a reduction of $13,884 for these litigation fees. In total, the court approved compensation of $66,362.38 to Jones Walker, disallowed $15,985.19 in unpaid fees, and mandated the firm to disgorge $9,897.66 of fees already received.
Regarding the liquidator's performance, CalMed was found to have miscalculated the workload involved in managing Charis's accounts receivable, leading to inadequate resources and less income than anticipated. Despite these challenges, CalMed did not seek to resign from its appointment and instead impeded the process by resisting requests for progress information.
CalMed had a clear obligation to provide regular reports on its progress regarding the collection of debtor receivables and the payment of claims, as mandated by the Confirmed Plan and a February 8, 2002 court order. The company failed to substantiate its claim that it was relieved of this duty by Judge Phillips. Consequently, other parties had to repeatedly seek court intervention to compel CalMed to submit monthly reports following its initial report in January 2002. Had these reports been shared, stakeholders could have evaluated CalMed's progress and potentially devised a remedy that would have minimized costs and improved outcomes.
Additionally, CalMed, based on its counsel’s advice, paid only $350,000 against a $457,000 IRS Chapter 11 administrative claim. This resulted in penalties and interest that increased the claim by $62,000. The United States Trustee demonstrated that CalMed could have satisfied the IRS claim in full by May 2002, had it not prioritized its own and its attorneys’ unapproved fees and other administrative expenses. CalMed also neglected to reserve funds for disputed claims, jeopardizing payment to similarly situated administrative priority creditors. These missteps by CalMed and its counsel raised significant doubts about the integrity of the liquidator's final report, leading the court to deny its approval.
The situation highlights the risks associated with unsupervised liquidations post-plan confirmation and the necessity for diligence among all parties involved. While a negative outcome for many creditors was likely unavoidable, better engagement in the liquidation process might have mitigated the impact. Consequently, CalMed will be ordered to return all fees and expenses to the chapter 7 trustee, while its counsel, Jones Walker, will be awarded $66,362.38 in fees, $2,543.73 in costs, and must return $9,897.66 of its received fees. The court will also formally deny the approval of the liquidator's final report. Furthermore, while the confirmed plan required a motion for final decree within 45 days, no such motion has been filed by any party. The confirmed plan is treated as a contract, and any ambiguities are interpreted according to standard contract principles and Louisiana law, which aims to uphold contractual provisions. The potential misnumbering in the articles of the plans appears to be an error rather than a substantive issue.
The document outlines various legal proceedings and motions related to the liquidation of the debtor's assets under the Confirmed Plan. It emphasizes that modifications to the Original Plan take precedence over any conflicting terms. Bonnette Auction Company, L.L.C. was appointed as the liquidator, but the method of compensation for the liquidators remains unspecified, with ongoing disputes evident even four months post-confirmation. The liquidator's counsel submitted an order that was delayed until a new bankruptcy judge was appointed.
CalMed's rationale for employing Jones Walker under 11 U.S.C. 327 is unclear. The liquidator filed complaints to recover avoidable transfers in March 2003. The Carrolls and Alonsos raised concerns about the liquidator's July 2003 report, motivated by fears of potential liability regarding unpaid payroll taxes during the Chapter 11 process. The court ruled that the Carrolls lacked standing to contest counsel fees, as they would not receive any distribution on their claims.
Subsequent court proceedings led to the IRS compelling the liquidator to file federal tax returns for 2000-2003 and included multiple motions from various parties to compel financial disclosures and accountability from the liquidator. These motions highlight ongoing scrutiny of the liquidator's actions and the financial management of the debtor's estate.
A motion was filed by the U.S. Trustee (UST) to compel CalMed to comply with a court order and seek sanctions, alongside objections to the Liquidator’s Final Report from William and Carolyn Carroll. William Carroll, III also filed a related document. The court issued an order on January 23, 2006, granting the UST's motion to examine fees related to Jones, Walker, Waechter, Poitevent, Carrére, De-negre, L.L.P., the legal counsel for CalMed Consulting, Inc., which was identified as having been dissolved, although no documentation was provided to verify this dissolution. An order to show cause regarding a fidelity bond was noted, and during a hearing on February 2, 2002, the liquidator’s counsel was tasked with submitting a bond order for CalMed. The court had not approved any fee awards for CalMed or its attorney, both of whom only applied for compensation when ordered by the court in late 2005 and early 2006. A clarification was made regarding Mr. Miller's misunderstanding—the court's January 14, 2002 order did not direct payment of the IRS claim but merely allowed it. Additionally, the application for Jones Walker's employment as CalMed's counsel was approved under 11 U.S.C. § 327(a), emphasizing disinterestedness. The document referenced an unpublished opinion that could be persuasive in guiding legal principles relevant to the case, outlining criteria for evaluating attorney fees based on various factors, including the complexity of the case, customary fees, and the results obtained.
