Ostensibly to avoid a conflict with its own client, the attorneys for a creditors’ committee forfeited the right to appeal because the firm did not explicitly lodge an objection on its own behalf to a structured dismissal that left the estate with nothing to pay fees.
In an opinion on July 25, the Ninth Circuit expounded on a circuit split the appeals court had widened on May 29 in deciding Harkey v. Grobstein (In re Point Center Financial Inc.), 890 F.3d 1188 (9th Cir. May 29, 2018); rehearing and rehearing en banc denied July 12, 2018. To read ABI’s discussion of Point Center, click here.
The proposed settlement before the Ninth Circuit in the new appeal may have been defective under Czyzewski v. Jevic Holding Corp., 137 S. Ct. 973 (2017). To lodge and preserve a Jevic objection, counsel for the committee might have been required first to withdraw as attorneys for the creditors, then oppose a transaction that was beneficial to its former clients. Laudably more loyal to unsecured creditors than to its own financial interest, the committee’s counsel did not withdraw and did not object on their own behalf, thus losing the ability to appeal, according to the Ninth Circuit.
The New Ninth Circuit Case
A chapter 11 trustee had been appointed for a corporate debtor that owned valuable real estate. The trustee negotiated a so-called structured dismissal where the lender would take title to the property in exchange for secured debt. The lender agreed to carve out $150,000 for distribution to unsecured creditors and another $350,000 to pay the trustee and his professionals.
With dismissal the eventual result, the estate would have nothing to pay other chapter 11 administrative expenses, such as fees earned by counsel for the debtor and the committee. The $350,000 was couched as a surcharge against the lender’s collateral under Section 506(c). By skipping over administrative claimants, the $150,000 payment to unsecured creditors had no similar statutory justification.
The bankruptcy court approved the sale before the Supreme Court handed down Jevic.
At the hearing to approve the sale, counsel for the debtor and committee filed objections for their clients. However, the firms did not file written objections on their own behalf. At the hearing, both firms stated that they were representing their clients and never said they objected to the sale in their own right as administrative creditors.
After the bankruptcy court approved the sale, the two firms filed notices of appeal on their own. No appeal was filed on behalf of the debtor or the committee. There being no stay pending appeal, the sale closed.
On a first appeal, the district court dismissed the appeal, finding that the two firms did not have standing because they had not appeared and objected on their own in bankruptcy court.
Point Center
While the appeal was pending from the district court’s dismissal, the Ninth Circuit decided Point Center. On a circuit split, the Ninth Circuit took the side holding that attendance or objection are not prerequisites to being an aggrieved person with standing to appeal. Although the appellant had standing, the Ninth Circuit held in Point Center that the appellant’s failure to object in bankruptcy court nevertheless could result in waiver or forfeiture. The circuit court remanded the case for the lower courts to determine whether the appellant had forfeited the right to appeal.
Forfeiture Found in the New Case
On the question of whether the firms had forfeited their right to appeal, the opinion for the Ninth Circuit by Sixth Circuit Judge John M. Rogers, sitting by designation, said that neither firm had “explicitly objected” to the sale in bankruptcy court. Ordinarily, he said, the circuit would remand for the lower court to determine whether there was forfeiture.
According to Judge Rogers, the case at hand was “unusual” because the elements of forfeiture had been thoroughly briefed and argued, albeit in the context of “attendance and objection” in bankruptcy court. The record, he said, was therefore “sufficient” for deciding whether there had been forfeiture.
Although the bankruptcy court on its own was concerned with how other administrative claims would be paid, Judge Rogers said there was no “clear indication” at the approval hearing that the two firms were appearing or objecting on their own behalf. He said there was a “total failure to inform the bankruptcy court that they intended to pursue their own interests.”
Despite the bankruptcy judge’s concern that committee counsel would not be paid, Judge Rogers said that the “contextual evidence . . . is simply not enough to undo what the record makes clear: the law firms were at the hearing and objecting on behalf of their clients.”
Avoiding a conflict was also used against the committee’s counsel. Like the district court, Judge Rogers doubted that the committee’s counsel would have created a conflict with its own client by raising an objection that the money earmarked for unsecured creditors instead should be applied to chapter 11 administrative expenses. The “logical conclusion,” Judge Rogers said, was that the firm was appearing and objecting only on behalf of the committee, which believed that the sale price was too low.
For Judge Rogers, the dispositive fact was the lack of “any evidence” that someone appeared or objected in bankruptcy court on behalf of the firms or “otherwise informed the bankruptcy court” that someone was representing the two firms.
Having decided that the firms forfeited their objection, Judge Rogers added belt and suspenders by reaching the merits and finding no clear error by the bankruptcy court in ruling that the trustee and his professionals were entitled to payment under Section 506(c), which allows a surcharge against a lender’s collateral. He also ruled that the settlement was in the best interests of unsecured creditors because the trustee had been unsuccessful in selling the property to anyone aside from the secured lender.
The Unresolved Jevic Question
Were the committee’s counsel oblivious to a conflict with its own clients, the firm could have argued that earmarking for unsecured creditors violated the principle that Jevic later ratified.
Here are ethics questions that are left unresolved: (1) During negotiations on the sale, how could the committee’s counsel have avoided an ethical problem by negotiating on the firm’s own behalf and seeking to redirect some or all of the $150,000 to the payment of administrative expenses?; (2) Since the committee was objecting to the sale price as inadequate, could the firm have objected on Jevic grounds without violating an ethical obligation?; (3) After the deal was struck, could the firm have withdrawn as counsel for the creditors’ committee before the approval hearing and opposed a settlement that was beneficial to its own former client? (N.B.: The bankruptcy judge, according to Judge Rogers, refused to allow committee counsel to withdraw alongside filing an appeal.); and (4) Did appealing violate an ethical obligation to the committee?