A trustee has standing to appeal even without a financial interest in the outcome, according to the Fifth Circuit. In ruling on an application for compensation, hindsight is “irrelevant,” Circuit Judge Jennifer Walker Elrod said in her March 5 opinion.
Two law firms were retained to represent a chapter 11 debtor. The lawyers filed and began prosecuting lawsuits against the two primary creditors challenging the priority of their claims.
The lawyers reported to the court that the debtor’s chief executive had fled to Panama, allegedly taking $9 million of estate cash with him to set up the debtor’s business abroad. Naturally, the bankruptcy court appointed a chapter 11 trustee.
Having been superseded by the trustee, the law firms filed final applications for reimbursement of fees they incurred in connection with the adversary proceedings prior to the appointment of the trustee.
The bankruptcy court granted the fee applications, but the district court remanded with instructions for the bankruptcy court to make findings about the commencement and litigation of the adversary proceedings.
After remand, Bankruptcy Judge Neil P. Olack of Jackson, Miss., again awarded compensation for work in the adversary proceedings because the services were reasonably likely to benefit the estate. On the second appeal, the district court reversed and vacated the fee award, saying that the adversary proceedings were “not a good gamble.”
The chapter 11 trustee and the two firms appealed to the circuit. While the appeal was pending in the circuit, the two firms settled with the creditors. The Fifth Circuit granted a motion to dismiss the two firms from the appeal.
Neither the bankruptcy court, district court nor the circuit court approved the settlement. The terms of the settlement are not disclosed on the docket of any court.
With the two law firms no longer in the appeal, the creditors urged the Fifth Circuit to dismiss the appeal as moot.
Judge Elrod first addressed mootness. She said that the creditors had conflated mootness with the trustee’s standing. In other words, the question was more about the trustee’s standing, not mootness.
The creditors argued that the trustee lacked standing because the trustee had no pecuniary interest in the outcome following the settlement. Be that as it may, Judge Elrod said that the trustee “is distinct from all other bankruptcy parties because the trustee is responsible for the administration of the bankruptcy estate.”
Judge Elrod cited the First, Sixth and Ninth Circuits for recognizing “the inadequacy of a pecuniary-interest test for trustee standing.” She cited the Fourth Circuit for saying that a trustee never has a pecuniary interest.
Judge Elrod said that the Fifth Circuit had “implicitly recognized” the same principle. She observed that a “trustee’s standing comes from the trustee’s duties to administer the bankruptcy estate, not from any pecuniary interest in the bankruptcy.”
Judge Elrod held that the appeal was not moot and the trustee had standing because “the payment of fees to [the two firms] directly affects the administration of the bankruptcy estate” and the trustee’s responsibility for “ensuring that only proper payments are made from the bankruptcy estate.”
Having decided the appeal was alive after settlement, Judge Elrod turned to the merits.
In the Fifth Circuit, the touchtone for an allowance is the reasonably likely benefit to the estate at the time the services were rendered. Barron & Newburger, P.C. v. Texas Skyline, Ltd. (In re Woerner), 783 F.3d 266, 276 (5th Cir. 2015).
In ruling on a fee allowance, Judge Elrod said that “hindsight is irrelevant; retrospect is irrelevant; ‘material benefit to the bankruptcy estate’ is irrelevant. Id. at 273–74. ‘What matters is that, prospectively, the choice to pursue a course of action was reasonable.’ Id. at 274.”
Fifth Circuit law is “clear,” Judge Elrod said, that “the services must be reasonable at the time they were rendered.”
Judge Elrod held that the district court was wrong in vacating “the bankruptcy court award based on its own retrospective assessment of the propriety of the adversary proceedings without giving . . . ‘the deference that is the hallmark of abuse-of-discretion review.’” In other words, the “district court should have looked at the reasonableness of pursuing the adversary proceedings from the time [the two firms] provided their services.”
Judge Elrod reversed and remanded for “the district court to reinstate the bankruptcy court’s fee award.”
Observations
But what about the settlement? How can the bankruptcy court grant fee allowances in full and fulfill the mandate of the Fifth Circuit if the two law firms settled with the creditors? If the trustee pays the firms in full, will the firms effectuate the settlement and pay back some part, and if so, to whom?
Here’s the answer. The settlement may be a nullity, and the mandate must be followed.
As we said, the settlement was not approved in any court, nor were the terms of settlement disclosed. The trustee was not a party to the settlement.
The settlement entailed the very issue on appeal, namely, the amount of compensation to be paid to the two firms.
Properly speaking, the parties to the settlement should have gone to the bankruptcy court for approval of the settlement. When presented with the settlement, the bankruptcy judge would have said, “But wait, this very issue is on appeal. The appeal divests me of jurisdiction to change the fee allowance. You must ask the circuit court to remand the matter to me to pass on the settlement.”
Because the bankruptcy court would not have had jurisdiction to approve the settlement, the parties did not have power to effect a valid and enforceable settlement. Therefore, the settlement might be invalid and binding on no one.
And there is another problem. Presumably, the settlement called for the two firms to give back some of the compensation that had been allowed. Who would receive the refund? Would it go to the estate or to the creditors who took the appeal?
Because the settlement was neither approved by nor disclosed to the bankruptcy court, the settlement might be seen as unauthorized and undisclosed fee-sharing.
The Fifth Circuit obviated the problems described above by having remanded with instructions to reinstate the awards by Bankruptcy Judge Olack.
A trustee has standing to appeal even without a financial interest in the outcome, according to the Fifth Circuit. In ruling on an application for compensation, hindsight is “irrelevant,” Circuit Judge Jennifer Walker Elrod said in her March 5 opinion.
Two law firms were retained to represent a chapter 11 debtor. The lawyers filed and began prosecuting lawsuits against the two primary creditors challenging the priority of their claims.
The lawyers reported to the court that the debtor’s chief executive had fled to Panama, allegedly taking $9 million of estate cash with him to set up the debtor’s business abroad. Naturally, the bankruptcy court appointed a chapter 11 trustee.
Having been superseded by the trustee, the law firms filed final applications for reimbursement of fees they incurred in connection with the adversary proceedings prior to the appointment of the trustee.
The bankruptcy court granted the fee applications, but the district court remanded with instructions for the bankruptcy court to make findings about the commencement and litigation of the adversary proceedings.