Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caed-1_04-cv-06040/USCOURTS-caed-1_04-cv-06040-3/pdf.json

Nature of Suit Code: 422
Nature of Suit: Bankruptcy Appeals Rule 28 USC 158
Cause of Action: 28:0158 Notice of Appeal re Bankruptcy Matter (BAP)

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1

IN THE UNITED STATES DISTRICT COURT FOR THE

EASTERN DISTRICT OF CALIFORNIA

CHESTER S. AND EMILIA T. )

GARBER, )

)

)

)

Appellant, )

)

vs. )

)

)

NATIONAL UNION FIRE INSURANCE )

COMPANY OF PITTSBURGH, PA., )

)

)

Appellee. )

)

)

No. CV-F-04-6040 REC

ORDER DENYING MOTIONS FOR

SANCTIONS (Docs. 21 and 27)

AND OPINION AFFIRMING

DECISION OF BANKRUPTCY COURT

Debtors and appellants Chester and Emilia Garber

(hereinafter referred to as the Garbers) have appealed three

orders issued by the United States Bankruptcy Court (Judge Rimel)

on June 19, 2003, December 17, 2003, and January 14, 2004 wherein

the Bankruptcy Court granted an administrative expense claim

filed by National Union Fire Insurance Co. of Pittsburgh, PA

(hereinafter referred to as National Union), granting National

Union’s claim for attorneys’ fees incurred in National Union’s

action against the Garbers in this court, No. CV-F-94-5414 REC

Case 1:04-cv-06040-REC Document 40 Filed 01/24/06 Page 1 of 26
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Both the Garbers and National Union filed motions for 1

sanctions in connection with this appeal. However, at oral

argument, National Union denied that it had filed such a motion and

the Garbers did not address their motion for sanctions.

Accordingly, the court hereby denies both motions for sanctions.

2

(hereinafter referred to as the Fraudulent Conveyance Action). 

1

A. Garbers’ Objections to Excerpts of Record Submitted by

National Union.

The Garbers object to National Union’s submission of and

reference to items 1 through 4 (NU00001-NU000028) set forth in

National Union’s Excerpt of Record filed on May 4, 2005. The

documents to which the Garbers object are:

1. Complaint to Set Aside Fraudulent

Conveyance; Demand for Jury Trial (U.S.D.C.

Doc. No. 1);

2. National Union’s Opposition to Motion to

Approve Stipulation and Agreement in

Connection with Pending Federal District

Court Action (Bank. Doc. No. 15);

3. Order on Motion for Relief from the

Automatic Stay to Proceed with Litigation

(Bank. Doc. No. 33);

4. Amended Judgment (U.S.D.C. Doc. No. 269)

In so objecting, the Garbers assert: “Only Appellants designated

the record in connection with this appeal. Appellee had the

right to do so but did not. Appellees cannot do so now.” 

Rule 8006, Bankruptcy Rules, provides in pertinent part:

Within 10 days after filing the notice of

appeal as provided by Rule 8001(a) ..., the

appellant shall file with the clerk and serve

on the appellee a designation of the items to

be included in the record on appeal and a

statement of the issues to be presented. 

Case 1:04-cv-06040-REC Document 40 Filed 01/24/06 Page 2 of 26
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Within 10 days after the service of the

appellant’s statement the appellee may filed

and serve on the appellant a designation of

additional items to be included in the record

on appeal ....

The Garbers’ Notice of Appeal was filed in the Bankruptcy

Court on January 16, 2005. The Garbers filed a designation of

record setting forth specific documents to be included on the

appeal on January 22, 2005. The Garbers filed a designation of

record setting forth transcripts of hearings to be included on

the appeal on February 11, 2005. No designation of record was

filed by National Union.

The court’s research could no locate a decision specifically

addressing the remedy to the appellant because of the appellee’s

failure to timely comply with Rule 8006. Most of the cases

involve the appellant’s failure to comply. However, from the

court’s review of the cases involving the appellant’s failure to

timely comply, the reviewing court’s decision regarding remedy is

a matter of discretion. Clearly, there is no prejudice to the

Garbers if the court allows the contested items to be considered

on this appeal. The documents at issue are documents of which

this court may take judicial notice and are documents with

respect to which the Garbers are familiar. Furthermore, the

Garbers describe no prejudice to them if the court considers the

documents. 

If the court denies the Garbers’ objections to these

documents, the Garbers “designate and submit as a proposed

excerpt of record”, the transcript of the proceeding in the

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Bankruptcy Court on June 3, 1996 involving National Union’s

motion for relief from the automatic stay, which hearing resulted

in the “Order on Motion for Relief from the Automatic Stay to

Proceed with Litigation (Bank. Doc. No. 33)” provided by National

Union as Item No. 3 in its Excerpt of Record.

Given National Union’s untimely designation of record, the

court grants the Garbers’ request to include this transcript as

part of the record on appeal. 

B. BACKGROUND.

During the 1980's, National Union issued a surety bond

guaranteeing payment by the Garbers on a note used to purchase an

interest in a limited partnership. After the Garbers defaulted

on the note, National Union made payments on their behalf. 

National Union filed an action against the Garbers for

reimbursement that was eventually transferred to this court and

prosecuted as National Union v. Garber, No. CV-F-88-088 REC

(hereinafter referred to as the Bond Case). In 1992, this court

entered summary judgment for National Union in the amount of

$51,031.40 in principal, $30,906.91 in interest accrued as of

November 15, 1991, and awarded attorneys’ fees in the amount of

$69,389.08. The court’s judgment and award were affirmed by the

Ninth Circuit and the Ninth Circuit awarded National Union’s

attorneys’ fees on appeal in the amount of $4,310. National

Union filed abstracts of judgment in Fresno and Monterey

Counties. In May, 1993, National Union conducted a debtor’s

examination of the Garbers. National Union learned for the first

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time that the Garbers had either pledged or transferred all of

their assets, both business and personal, to Emilia Ting Garber’s

sister, Betty Ting, and that some of their assets were encumbered

by liens in favor of Betty Ting, including property in Pacific

Grove, which was jointly owned by the Garbers and Betty Ting. On

April 29, 1994, National Union filed the Fraudulent Conveyance

Action in this court. The Garbers filed a Counterclaim and Third

Party Complaint against National Union and others. On September

23, 1994, the Garbers filed a petition for bankruptcy. Ellen

Briones was appointed trustee of the Garbers estate.

On February 3, 1995, National Union’s attorneys sent a

letter to Ms. Briones, offering to serve as special counsel for

the purpose of prosecuting a complaint to deny the discharge and

to prosecute a complaint to avoid the transfers and further

stating:

If we are appointed as special counsel our

fees will be paid by National Union. Out of

the recovery National Union would be

reimbursed as an administrative expense

pursuant to 11 U.S.C. 503. 

We believe that this would be a positive step

for the Trustee and the creditors of this

estate because we understand that the assets

transferred have a value significantly in

excess of the judgment claim of our client. 

After payment of the fees and judgment claim

there would, we are told, be substantial sums

to be administered by the estate.

Ms. Briones declined National Union’s offer. Instead, Ms.

Briones and the Garbers and Betty Ting filed a “Stipulation and

Agreement in Connection with Pending Federal District Court

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Action”, the purpose of which was “(1) to permit the Debtors to

prosecute their counter-claim against NU, all for the benefit for

this estate, and (2) to abate any prosecution of the action to

set aside a fraudulent conveyance against Ting pending

prosecution of the counter-claim.” Although opposed by National

Union, the Stipulation was approved by the Bankruptcy Court on

May 15, 1995. This court thereupon heard National Union’s

motions to dismiss the Garbers Counterclaim and Third Party

Complaint in the Fraudulent Conveyance Action. This court’s

dismissal of the Counterclaim and Third Party Complaint was

affirmed on appeal. National Union v. Garber, 1998 WL 30810 (9th

Cir. 1998). 

In March, 1996, the Trustee requested that National Union

prosecute the Fraudulent Conveyance Action as special counsel for

the benefit of the estate. According to the Declaration of

Richard Russell, counsel for National Union’s previous counsel,

D’Amato and Lynch, the Trustee’s proposal that National Union act

as special counsel was conditioned upon National Union waiving

its secured claim and its rights under the abstracts of judgment,

thereby resulting in National Union having an unsecured claim. 

By letter dated April 19, 1996, National Union declined the

Trustee’s proposal because National Union “does not see that

there would be any benefit to it.” 

On June 18, 1996, the Bankruptcy Court granted relief from

the automatic stay in the Garbers’ bankruptcy. The Garbers

appealed that order to this court in No. CV-F-96-5858 and then to

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the Ninth Circuit, where this court’s ruling was affirmed. 

Garber v. National Union, 2000 WL 674749 (9 Cir. 2000). In the th

meantime, National Union proceeded to obtain summary judgment in

the Fraudulent Conveyance Action.

The property in Pacific Grove was sold for $1,310,000 in

2001. The Garbers’ bankruptcy estate received approximately

$500,000 net proceeds. From that amount National Union’s

$218,095.75 judgment lien was satisfied. 

On September 11, 2002, National Union filed an

administrative expense claim in the amount of $359,185.36 for

reimbursement of attorneys’ fees and costs associated with

recovering assets and returning them to the estate.

The Trustee filed a “Motion Objecting to Administrative

Claim Filed by National Union Fire Insurance Company”. 

A hearing on the Trustee’s motion was held before Judge

Rimel on April 16, 2003. On June 19, 2003, Judge Rimel issued

Findings of Fact and Conclusions of Law with regard to the

Trustee’s motion, denying the Trustee’s motion but reducing

National Union’s administrative claim (hereinafter referred to as

the June 19 Order). In the June 19 Order, Judge Rimel rejected

National Union’s contention that the order granting National

Union’s request for relief from the automatic stay constituted

prior judicial authorization within the meaning of 11 U.S.C. §

503(b)(3)(B), holding in pertinent part: “Section 503 is not

mentioned in the relief from stay order entered by Judge Ford. 

Had the order contemplated authorization under § 503(b), it would

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have said so.” The June 19 Order then addressed National Union’s

request that “extraordinary circumstances exist such that a ‘nunc

pro tunc’ order should be entered retroactively authorizing its

pursuit of the fraudulent transfer action.” In granting National

Union’s motion, the June 19 Order rules in pertinent part:

Applicants who have failed to obtain prior

court approval for their services to a

bankruptcy estate may seek retroactive court

approval. In re THC Financial Corp., 837

F.2d 389, 392 (9 Cir. 1987). Retroactive th

approval, however, is limited only to

applicants who can establish: (1) a

satisfactory explanation for their failure to

obtain prior court approval; and (2) that the

services significantly benefitted the

bankruptcy estate. Id. See also In re Emco

Enterprises, Inc., 94 B.R. 184

(Bankr.E.D.Cal. 1988). Although THC

Financial Corp. and Emco Enterprises arose in

the context of § 327 or its predecessor, the

reasoning of those cases is equally

applicable to requests for compensation under

§ 503. Therefore, the court will analyze

whether National Union has provided a

satisfactory explanation for its failure to

obtain prior court approval and whether its

services significantly benefitted the

bankruptcy estate.

It is impossible for this court to second

guess at this late date the reasoning that

impelled the prior chapter 7 trustee to

pursue the crossclaim along with the debtor

rather than to pursue the fraudulent transfer

action with National Union. In retrospect,

it was the wrong decision. Whether it was a

decision that a prudent chapter 7 trustee

should have made at the time is impossible,

based on the record before the court, to

determine. Nonetheless, National Union did

pursue the fraudulent transfer action for the

benefit of the estate and, under the

circumstances, the court finds that the

former trustee’s declining to pursue the

action is a satisfactory explanation. The

record is replete with evidence of the

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hostility between the Garbers and National

Union. The prior chapter 7 trustee chose to

throw in her lot with the Garbers in the

district court litigation. This is

satisfactory explanation for National Union’s

not obtaining prior court approval.

National Union did provide a substantial

benefit to the estate through the recovery in

the fraudulent transfer action. Absent

National Union’s efforts, this would indeed

be a no asset case, and no creditors would

recover anything. 

The Garbers and the Trustee filed a Motion for

Reconsideration and New Trial. The Motion for Reconsideration

and New Trial was heard by Judge Rimel on September 10, 2003. On

December 17, 2003, Judge Rimel issued the following Findings of

Fact and Conclusions of Law Regarding Motion of Debtors for New

Trial and Reconsideration of Order (hereinafter referred to as

the December 17 Order), ruling in pertinent part:

The third ground for the motion is that the

court’s ruling constitutes a manifest error

of law. According to the debtors, the court

used the wrong standard for retroactive

approval of employment of attorneys. The

debtors assert that the court did not utilize

the exceptional circumstances standard

required by the Ninth Circuit. Instead, the

debtors argue that the court held that a

‘satisfactory explanation’ for failure to

obtain court authorization was enough.

...

Manifest Error of Law.

...

The court’s findings of fact and conclusions

of law appropriately stated the standard for

approval of fees to applicants who failed to

obtain prior court approval for their

services. As the Ninth Circuit has stated:

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‘In this circuit, a retroactive

award of fees for services rendered

without court approval is not

necessarily barred. [citation

omitted] A court may exercise its

discretion to award fees for

valuable but unauthorized services. 

[citation omitted] ... [S]uch

awards should be limited to

exceptional circumstances where an

applicant can show both a

satisfactory explanation for the

failure to receive prior judicial

approval and that he or she has

benefitted the bankrupt estate in

some significant manner.’

In re THC Financial Corp., 837 F.2d 389, 392

(9 Cir. 1988). This is the standard that th

the court utilized.

Another relevant case is In re Gutterman, 239

B.R. 828 (Bankr.N.D.Cal. 1999). In that

case, the United States Trustee had moved for

reconsideration of an order of the bankruptcy

court allowing employment of counsel on a

nunc pro tunc basis. The court denied the

United States Trustee’s motion. The trustee

in that case had retained Kornfield. Through

inadvertence, Kornfield had failed to file

his application to be employed. Kornfield

provided valuable services to the bankruptcy

estate. The bankruptcy court, in denying the

United States Trustee’s motion for

reconsideration, found it important to

analyze whether the estate had suffered any

prejudice as a result of the delay.

‘Based on [Pioneer Inv. Services

Co. v. Brunswick Assocs. Ltd.

Partnership, 507 U.S. 380 (1993),

the Court concludes that, in

determining whether a professional

applying for nunc pro tunc

employment has provided a

satisfactory explanation for its

delay, the Court may consider not

just the reason for the delay but

also the prejudice (or lack

thereof) to the estate as a result

of the delay.’

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Gutterman, at 831.

Here, the failure of National Union to obtain

approval to pursue the fraudulent transfer

action resulted in no prejudice to the

estate.

In examining whether exceptional

circumstances exist, it is appropriate for

the court to consider the equities involved. 

In re Atkine, 69 F.3d 970, 973 (9 Cir. th

1995).

The debtors’ argument here focuses on the

fact that the court’s findings of fact and

conclusions of law specifically analyze the

two prongs of the THC Financial Corp. test -

a satisfactory explanation for failure to

obtain prior court approval and that the

services significantly benefitted the

bankruptcy estate. It is these two prongs

that must be satisfied for exceptional

circumstances to be shown. Also relevant, as

expressed in the Gutterman and Atkins

decisions, are the factors of whether any

prejudice arose from failure to seek prior

court approval and the other equities in the

case. Here, no prejudice arose from National

Union’s failure to seek court approval, and

the equities argue in favor of National Union

being allowed an administrative expense

claim.

The Garbers again filed a Motion for Reconsideration and New

Trial which was heard by Judge Rimel on January 14, 2004. At the

January 14, 2004 hearing, the following occurred:

MR. HERTZ: ... Your Honor, I really regret

having to file a second motion like this, but

as you understand - what I understand your

decision on December 17 is that it varies th

from the decision previously made.

And the argument that there was a lack of

prejudice to the estate in the failure of

National Union to seek authority was never

argued by anyone, and there is no evidence. 

At least that’s our position.

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But briefly, Your Honor, you start off with

503(b)(2). It requires authorization in

advance of services. And that’s clear, it’s

a failure to obtain the authorization in

advance.

The applicant has the burden of showing the

exceptional circumstances which excuses preservice authorization. Acceptable services

can be shown by showing substantial benefits

to the estate plus - and a satisfactory

explanation. That satisfactory explanation

must be given by the applicant, not by the

Court.

Atkins, 69 F.3d 970, 974 says ‘to establish

the presence of exceptional circumstances,

professionals seeking retroactive approval

must satisfy two requirements. They must

satisfactorily explain their failure to

receive prior judicial approval.’ 

The applicant has never given an explanation

for their failure to comply with the court

back in 1996, 1997. That the trustee and

National Union were at loggerheads was

suggested by the Court in its first opinion. 

It was not suggested by the other party. And

there’s no evidence that National Union was

dissuaded from following the law by anything

that the trustee did or did not do.

And, in fact, the time record says - and

National Union seems to suggest in its last

argument before the court that it made a

considered decision not to apply, for

whatever purposes it may have had for doing

so, so there’s no explanation.

Well, the court apparently considered that

argument and spent a considerable amount of

time before issuing its December 17th

opinion.

And in that December 17 opinion, the Court th

does not really address the issue which we

raised. And the Court says, in effect, here

the failure of National Union to obtain

approval to pursue the fraudulent transfer

action resulted in no prejudice to the

estate. And the Court relies on a case,

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which although we cited it, we did not cite

it for that purpose.

Secondly, nobody argued lack of prejudice. 

the Court simply finds that there was no

prejudice. Now, there’s nothing in the

opinion on December 17 that points to th

actual facts that show there was no

prejudice.

And we have pointed out, paragraphs 24 to 26

of our motion, that there was likely to have

been prejudice. In fact, we don’t have the

burden of showing lack of prejudice. We

don’t have to show prejudice. We don’t have

to show anything. We’re simply showing that

there’s likely to have been prejudice, and

there’s no evidence of lack of prejudice.

So the burden is not on us. The burden is on

the other party.

And Mr. Reddie, in his response, does not

show any lack of prejudice. He doesn’t even

argue about it, as far as I can tell.

So that is our position, Your Honor. We

don’t see how the Court can arrive at the

conclusion that it did, and, therefore, it’s

a manifest error of law, there being no

evidence whatsoever on either of these

critical issues.

THE COURT: Thank you. Mr. Reddie?

MR. REDDIE: Your Honor, I didn’t hear

anything new that wasn’t in his papers, and I

don’t have anything to add at this point.

THE COURT: Thank you. I’m going to rule now. 

This is a motion that was brought on an

emergency basis for reconsideration because,

as Mr. Hertz observed, the time - the second

motion for reconsideration does not toll the

period to appeal.

I’ve read the motion, I’ve read the arguments

in support of the motion, I’ve read the

opposition, I’ve reread both findings of fact

and conclusions of law, and I’m not persuaded

that there was a manifest error of law, and

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I’m not persuaded that anything new is argued

here.

I will say that to the extent Mr. Hertz is

concerned that lack of prejudice is raised

for the first time here, my ruling does not

require the lack of prejudice statement to

stand on its own. I don’t think there is any

evidence of any prejudice to the estate, but

that’s not the - is not the primary reason

why I made my ruling. It’s an add-on reason,

and I think the findings bear that out.

I think if the parties - if the party who is

aggrieved here is unhappy with the ruling, as

the Garbers obviously are, they will have to

take that to the next court.

In any event, your motion is denied.

C. STANDARD OF REVIEW.

A bankruptcy court’s entry of a nunc pro tunc approval is

reviewed for abuse of discretion or erroneous application of law. 

In re Atkins, 69 F.3d 970, 973 (9 Cir. 1995). An abuse of th

discretion is “a plain error, discretion exercised to an end not

justified by the evidence, a judgment that is clearly against the

logic and effect of the facts as are found.” Int’l Jensen, Inc.

V. Metrosound U.S.A., Inc., 4 F.3d 819, 822 (9 Cir. 1993). th

When reviewing for abuse of discretion, the reviewing court

cannot reverse unless if has a “‘definite and firm conviction

that the court below committed a clear error of judgment in the

conclusion it reached ....’” DaRonde v. Shirley (In re Shirley),

134 B.R. 940, 943 (9 Cir.BAP 1992). As long as findings are th

plausible in light of the record viewed in its entirety, a

reviewing court may not reverse even if convinced it would have

reached a different result. Wardley Int’l Bank, Inc. v. Nasipit

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Bay Vessel, 841 F.2d 259, 262 n.1 (9 Cir. 1988). th

D. Merits of Appeal.

Allowance of administrative expense claims are governed by

11 U.S.C. § 503. Section 503 provides in pertinent part:

(a) 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.

(b) After notice and a hearing, there shall

be allowed administrative expenses ...

including -

...

(3) the actual, necessary 

expenses ... incurred by -

...

(B) a creditor that

recovers, after the court’s approval, for the

benefit of the estate any property

transferred or concealed by the debtor;

...

An administrative expense allowed under Section 503 entitles the

holder to priority in distribution. The burden of proving an

entitlement to an administrative expense is on the claimant. 

While the Bankruptcy Court has broad discretion to grant

administrative expense requests, it is required to construe §

503(b) narrowly to keep costs to a minimum and preserve the

limited assets of the bankruptcy estate for the benefit of

unsecured creditors. In re Central Idaho Forest Products, 317

B.R. 150, 155 (Bankr.Idaho 2004). 

1. National Union’s Claim That It Obtained Prior Court

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Approval.

As noted, National Union argued to the Bankruptcy Court that

it’s motion for relief from the automatic stay constituted

approval by the Bankruptcy Court to proceed with the Fraudulent

Conveyance Action for the benefit of the estate. In the June 19,

2003 Order, Judge Rimel rejected National Union’s position.

In its opposition brief to this appeal, National Union

argues that it obtained prior court approval, contending:

In light of the fact that National Union was

proceeding on its own, and the trustee was

not prepared to pursue claims against the

Garbers and Ting, that request for relief

from stay clearly constituted a request for

court approval to proceed with an action that

would benefit the estate ... In this

instance, National Union’s noticed motion

seeking relief from the stay so that it could

pursue an action that would benefit the

estate clearly conforms to the spirit and

intent of the requirement for court approval. 

Given the statute’s silence on the method of

gaining court approval, it is certainly

within the Court’s discretion to find that

National Union’s motion for relief from stay

fulfilled that requirement.

Although no objection to the court’s consideration of this

issue is made by the Garbers, it is noted that National Union did

not file a notice of appeal from Judge Rimel’s decision nor did

National Union file a cross-appeal. From the court’s research,

this court has the discretion to consider this issue

notwithstanding the absence of a notice of appeal by National

Union. See In re Hessco Industries, Inc., 295 B.R. 372, 376-377

(9 Cir.BAP 2003), citing Mendocino Environmental Center v. th

Mendocino County, 192 F.3d 1283, 1297-1298 (9 Cir. 1999). In th

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Mendocino Environmental Center, the Ninth Circuit ruled that a

notice of cross-appeal is a rule of practice that can be waived

at the court’s discretion, rather than a jurisdictional

requirement. 192 F.3d at 1298. The Ninth Circuit further ruled:

In deciding whether to allow a cross-appeal

that has not been properly noticed, courts

have considered factors such as the

interrelatedness of the issues on appeal and

cross-appeal (particularly whether they

involve the same parties), whether a notice

of cross-appeal was merely late or not filed

at all, whether the nature of the district

court opinion should have put the appellee on

notice of the need to file a cross-appeal,

[and] the extent of any prejudice to the

appellant caused by the absence of notice

....

192 F.3d at 1299. Looking to these factors, the court will 

consider the issue raised by National Union. The parties are the

same, the issues are interrelated, National Union could not have

filed an appeal (except concerning the amount of the

administrative expense claim allowed), the Garbers have not

objected to the court’s consideration of the issue and, because

the Garbers were able to respond to the issue in their reply

brief, will not be prejudiced by the court’s review of the issue.

The court affirm Judge Rimel’s ruling. The court has

reviewed the record in connection with National Union’s motion

for relief from the stay to proceed with the Fraudulent

Conveyance Action. Although the court is not provided with a

copy of National Union’s motion for relief from stay, the court

is provided with the transcript of the hearing on the motion for

relief from stay. There is no discussion at that hearing that

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National Union was seeking relief from stay in order to proceed

with the Fraudulent Conveyance Action for the benefit of the

estate and there is no discussion of Section 503. At that

hearing on June 3, 1996, National Union contended as follows:

MR. WALTER: ... As I stated what we are

seeking here today is relief from the

automatic stay so that pending litigation can

go forward. As the record will reflect it is

actually a fairly common fact pattern,

National Union brought an action against the

debtor seeking to establish a claim and was

granted a judgment by the district court some

years ago. Thereafter, National Union

learned how the certain transfers from the

debtor to the sister of Mrs. Garber. 

National Union thereafter filed a fraudulent

transfer suit in the district court. The

debtors filed Chapter 7 and thereafter

National Union filed a second 523 and 727

actions. Then there was a lot of procedural

wrangling, discovery disputes, a motion for

summary judgment was filed by the debtors and

denied. At the same time the debtors filed a

cross-complaint against National Union in the

fraudulent transfer action that was pending

in the district court. National Union moved

to dismiss that cross-complaint, the crosscomplaint was dismissed and the court, the

district court withdrew the reference of the

523 and 727 actions to the district court

where it now sits. The Garbers have appealed

that matter on a number of different grounds. 

Basically we are taking the position that

there is no stay and that we can go to the

district court and seek to have the matter

set for trial. The debtors have on several

occasions raised questions and insisted that

we have to get relief from stay first. So

out of an abundance of caution we brought

this motion seeking relief to the extent that

it is needed to allow the district court to

proceed.

...

MR. WALTER: Your Honor, just so there is no

confusion, there are two actions.

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MR. HERTZ: Yes, and this is the problem.

MR. WALTER: There is the withdrawn matter the

reference has been withdrawn as to the 523

and 727 action but there is still pending the

fraudulent transfer action as to which there

may well be a stay. I am only asking for

permission to proceed with both -

THE COURT: Okay. I didn’t understand that.

MR. HERTZ: Okay. Now we have a problem.

THE COURT: What is the problem?

MR. HERTZ: The problem is that I don’t want

them to go ahead with a case which was

withdrawn improperly and combined it with a

case that is a pre-petition case in which I

wasn’t even involved. That is the problem. 

If the Court rejects - I think, Your Honor,

let me say that I think a fair resolve of

this case, a fair result since we didn’t even

have the opportunity to argue the withdrawal

reference before Judge Coyle because we were

never even given notice. I was not given

notice at any time.

THE COURT: It’s irrelevant. He withdrew it.

MR. HERTZ: That’s fine.

THE COURT: Your complaint is with the

district court.

MR. HERTZ: And that is exactly it and I agree

with that totally. I think what these folks

should do is go to the district court and ask

the district court to solve the problem if

there is a problem.

THE COURT: And does he need relief from stay

to do that?

MR. HERTZ: No. We can go to the district

court, we can make a motion for withdrawal

with whatever is necessary so that he can get

relief from the district court, the district

court judge is perfectly capable of entering

a relief from stay order if he wants to, but

at least we get an opportunity at that time

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to argue which we never had a chance to do. 

And I think that is a fair result. 

Otherwise, you are getting half of a case

here without really understanding all the

things that are going on and I just think

that that is a fair way for this to be

handled.

THE COURT: Mr. Walter?

MR. WALTER: ... This is not really a matter

of fairness. This is an attempt by the

debtor to obtain a stay pending appeal

without going through that process. What I

think would be a fair way to proceed here is

for Your Honor to lift the stay to the extent

that there is a stay, let us make the motion

in the district court to set the matter for

trial and they can raise any arguments that

they wish there, but -

THE COURT: Why would you need permission to

set the matter for trial there if it is

already there?

MR. WALTER: Because there is a fraudulent

transfer action as to which no stay has been

lifted yet. We were suing the debtor before

filing and there has never been any relief

from stay as to that bit of litigation.

THE COURT: But the district court gave you

that and combine the cases so that it does

not have to be partly heard here, which is

not going to be, and partly heard in the

district court.

MR. WALTER: And we are just asking Your Honor

to confirm that to the extent that there is a

stay the district court can determine the

outcome of the case.

THE COURT: Okay. My order is that there is

no stay here because the case has been

withdrawn.

MR. WALTER: As to any litigation -

THE COURT: As to any of these matters.

By Order filed on June 18, 1996, Judge Ford ruled in pertinent

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part:

1. There is no stay which precludes Movant

from proceeding to trial on its adversary

proceeding to deny Debtors’ discharge or for

denial of dischargeability (Adv. Proc. No.

94-1361) nor as to the Complaint to Avoid

Fraudulent Transfers (Case No. CV-F-94-5414-

REC), each of which is pending in the United

States District Court. The reference of the

adversary proceeding has been withdrawn and

the Complaint was originally commenced in the

U.S. District Court.

2. The Motion be, and hereby is, granted to

the extent required to proceed with the said

litigation.

As the Garbers contend, there is no evidence that a request

for authorization under Section 503(b)(3)(B) was made to Judge

Ford and there is no indication in the record from which such an

intent can be inferred. Therefore, Judge Rimel’s denial of

National Union’s administrative expenses claim on this ground was

not error.

2. The Garbers’ Claim That National Union Failed to

Provide Evidence Explaining It’s Failure to Obtain Timely

Approval.

The Garbers argue that Judge Rimel’s authorization of

National Union’s administrative expense claim nunc pro tunc is

error because National Union failed to provide any evidence

establishing the reason for National Union’s failure to seek

prior approval from the Bankruptcy Court.

In In re THC Financial Corp., 837 F.2d 389, 392 (9 Cir. th

1988), the Ninth Circuit held:

In this circuit, a retroactive award of fees

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for services rendered without court approval

is not necessarily barred ... A court may

exercise its discretion to award fees for

valuable but unauthorized services ....

The district court concluded correctly that

such awards should be limited to exceptional

circumstances where an applicant can show

both a satisfactory explanation for the

failure to receive prior judicial approval

and that he or she has benefitted the

bankrupt estate in some significant manner. 

In In re Atkins, supra, 69 F.3d at 974, the Ninth Circuit again

ruled:

To establish the presence of exceptional

circumstances, professionals seeking

retroactive approval must satisfy two

requirements: they must (1) satisfactorily

explain their failure to receive prior

judicial approval; and (2) demonstrate that

their services benefitted the bankrupt estate

in some significant manner.

The Garbers argue that Judge Rimel abused her discretion in

approving National Union’s administrative expense claim because

no evidence has been provided by National Union establishing a

satisfactory reason for failing to obtain prior judicial approval

for the attorneys’ fees incurred in the Fraudulent Conveyance

Action. The Garbers are objecting that there is no evidence by

way of declaration from counsel for National Union which actually

states that National Union did not seek prior approval under

Section 503 because the Trustee rejected National Union’s offer

to act as special counsel to litigate the Fraudulent Conveyance

Action, elected to litigate with the Garbers’ their Counterclaim

and Third Party Complaint, and, after the Garbers’ Counterclaim

and Third Party Complaint were dismissed and that dismissal

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affirmed on appeal, conditioned the Trustee’s request that

National Union act as special counsel on National Union waiving

its secured claim and its rights under the abstracts of judgment,

thereby resulting in National Union having an unsecured claim. 

Although all of this evidence was before Judge Rimel, the Garbers

essentially contend that Judge Rimel’s discretion does not extend 

to inferring the reason for National Union’s failure to seek

prior approval from this evidence. In other words, absent a

declaration or contemporaneous explanation, the Garbers argue

that Judge Rimel’s finding that National Union provided a

satisfactory explanation for the failure to seek prior approval

is unsupported by any evidence. The Garbers argue that National

Union “has presented no admissible evidence that it either

considered and rejected proceeding under Section 503(b)(3)(B) or

failed to consider it.” 

The Garbers are contending that the Bankruptcy Court is not

permitted to draw inferences from the evidence presented to it. 

The court is aware of no authority precluding a court from

drawing reasonable inferences from the evidence and, in

exercising discretion, reaching a conclusion based on those

inferences. As Judge Rimel ruled in three instances, she was

satisfied with the explanation of the reason why National Union

did not seek prior court approval. Consequently, even though

there was no “smoking gun”, so to speak, the evidence considered

by the Bankruptcy Court supports the inference that she drew from

it. 

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The Garbers further argue that Judge Rimel abused her

discretion when, in denying their first motion for

reconsideration, she “raised (on its own and without any points

and authorities or statement from NU) the case of In re

Gutterman, 239 B.R. 828 (Bankr.N.D.Cal. 1999).” The Garbers

admit that they cited In re Gutterman to the Bankruptcy Court in

their first motion for reconsideration but assert that the case

was cited in a footnote with a group of cases discussing the

tests for “exceptional circumstances”. The Garbers complain

that, because neither National Union nor they suggested that

“lack of prejudice” to the estate excuses the party requesting

nunc pro tunc approval from “providing any explanation”. The

Garbers contend: 

Because the Court raised the theory of ‘no

prejudice’ on its own, neither Debtors nor

the Trustee had any opportunity to refute it. 

The only evidence on either side is the

evidence incidentally in the record. The

lower court erred in proceeding on a theory

which no party even discussed without

allowing either party to adduce evidence in

response. In doing so, the court abused any

discretion it might have to consider its own

theory.

Because Judge Rimel’s reference to Gutterman was made in

response to the citation of the case to her by the Garbers, Judge

Rimel cannot be faulted for reviewing the case and considering

it. More importantly, as Judge Rimel notes in denying the

Garbers’ second motion for reconsideration, her reference to

Gutterman was made in the context of denying the Garbers’ first

motion for reconsideration. In other words, Judge Rimel did not

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At oral argument before this court, the Garbers referred the 2

court to In re Morad, 328 B.R. 264 (1 Cir. BAP 2005). The Garbers st

appeared to argue, based on Morad, that National Union’s claim for

administrative expenses should be denied because the Fraudulent

Conveyance Action was commenced before the Garbers filed the

bankruptcy petition. Because In re Morad was cited for the first

time at oral argument and because the Garbers’ argument based on In

re Morad was not previously made to the Bankruptcy Court or to this

court, the court does not consider it in resolving this appeal.

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grant National Union’s application for administrative expenses

nunc pro tunc because Judge Rimel sua sponte concluded that the

estate was not prejudiced. Rather, as she explained in denying

the second motion for reconsideration, the lack of prejudice was

just another reason why her initial ruling would not be

reconsidered, i.e., she was standing by her original ruling. 

Therefore, the Garbers’ contention that Judge Rimel abused her

discretion by relying sua sponte on a “theory” of lack of

prejudice without giving the Garbers the opportunity to contest

such a finding is not a basis for reversal of Judge Rimel’s

decision to grant National Union’s application because that

finding was not a basis for granting the application. Although

the Garbers argue at length that National Union’s failure to

obtain prior approval for the administrative expenses prejudiced

the estate, those arguments are not relevant to the resolution of

this appeal because, as noted, Judge Rimel made the finding in

denying a motion for reconsideration.2

ACCORDINGLY:

1. The parties’ respective motions for sanctions are

denied.

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2. Appellant’s appeal is denied and the rulings of the

Bankruptcy Court affirmed.

IT IS SO ORDERED.

Dated: January 20, 2006 /s/ Robert E. Coyle 

668554 UNITED STATES DISTRICT JUDGE

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