Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca8-07-02430/USCOURTS-ca8-07-02430-0/pdf.json

Parties Involved:
John S. Lovald
Appellee
Murphy Brothers
Appellee
Tri-State Financial, LLC
Appellant

Document Text:

United States Court of Appeals

FOR THE EIGHTH CIRCUIT

___________

 No. 07-2430

___________

Tri-State Financial, LLC, *

*

Appellant, *

*

 v. *

*

John S. Lovald; Murphy Brothers, *

*

Appellees. *

___________

Appeals from the United States

 No. 07-2433 District Court for the District

___________ of South Dakota. 

Tri-State Financial, LLC, *

*

Appellant, *

*

 v. *

*

Robert E. Hayes; Davenport, *

Evans, Hurwitz & Smith, *

*

Appellees. *

___________

Submitted: March 12, 2008

Filed: May 13, 2008

___________

Appellate Case: 07-2430 Page: 1 Date Filed: 05/13/2008 Entry ID: 3433583
1

The Honorable Irvin N. Hoyt, Bankruptcy Judge for the United States

Bankruptcy Court for the District of South Dakota.

2

TSF also complains the bankruptcy court erred under Bankruptcy Rule 9019(a)

when the court permitted the settlement creditor to participate as a party in the

settlement approval proceeding, offering evidence and presenting argument. The

bankruptcy court did not exceed its considerable equitable discretion, and finding no

error, we conclude this complaint by TSF lacks merit. 

3

The Honorable Charles B. Kornmann, United States District Judge for the

District of South Dakota.

-2-

Before RILEY, GRUENDER, and SHEPHERD, Circuit Judges.

___________

RILEY, Circuit Judge.

These consolidated cases arise out of the 2003 bankruptcy filing by Tri-State

Ethanol Company, LLC (TSE), the owner of an ethanol plant near Rosholt, South

Dakota. Tri-State Financial, LLC (TSF) purchased the ethanol plant from the

bankruptcy estate and appeals, asserting the bankruptcy court1

 (1) abused its discretion

in denying TSF’s motion seeking the recusal of the bankruptcy judge; (2) erred in (a)

approving a settlement negotiated by the bankruptcy trustee with an oversecured

creditor contrary to TSF’s objection, and (b) in denying TSF a hearing regarding the

settlement approval; and (3) exceeded its authority and abused its discretion in

allowing Robert E. Hayes (Hayes), an attorney retained by the bankruptcy trustee, to

collect his fees in full despite a conflict of interest arising from Hayes’s representation

of both the trustee and an unsecured creditor.2

 The district court3 affirmed the

decisions of the bankruptcy court. We affirm.

I. BACKGROUND

The William F. Murphy Self-Declaration of Trust and Mike D. Murphy

(collectively, Murphy) loaned money to TSE to finance the construction of a pipeline

to TSF’s South Dakota ethanol plant. On May 23, 2003, TSE filed a Chapter 11

bankruptcy which was later converted to a Chapter 7 proceeding on July 29, 2004.

Appellate Case: 07-2430 Page: 2 Date Filed: 05/13/2008 Entry ID: 3433583
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The Trustee discovered several accounting errors and other discrepancies in

Murphy’s claim. The settlement agreement estimated the benefits to the debtor’s estate

were approximately $800,000. 

-3-

On January 28, 2005, bankruptcy trustee John S. Lovald (Trustee) filed a motion in

the bankruptcy court seeking authority to pay certain secured claims, including a

partial payment to Murphy of $1,986,000 on Murphy’s secured claim. On February

15, 2005, the bankruptcy court granted the Trustee authority to make the requested

partial payment to Murphy on Murphy’s secured claim. No unresolved objection to

this payment was ever filed in the bankruptcy court. 

On August 8, 2005, Murphy filed an amended proof of claim as an oversecured

creditor in the amount of $2,526,324.75, plus post-petition interest and attorney fees.

In August 2005, the Trustee negotiated a settlement with Murphy on Murphy’s

outstanding claims for $675,886.80 and filed a motion to have the settlement approved

on August 25, 2005.4

 The bankruptcy court held a telephonic status conference on

October 12, 2005, involving representatives of TSF, the Trustee, and Murphy where

the parties agreed that, in lieu of an evidentiary hearing scheduled for the next day, the

parties would submit written arguments and agreed exhibits by November 14, 2005.

The parties then had until November 29, 2005, to submit any responsive arguments.

The parties accordingly submitted written briefs and responsive arguments. On

January 22, 2007, this settlement was approved by the bankruptcy court over TSF’s

objections. The bankruptcy court found the settlement was a compromise which fell

“within the range of reasonableness and [was] in the best interests of the estate.” 

TSF not only took exception to the Murphy settlement, but also took exception

to many of the other actions of the bankruptcy court and also of the Trustee,

eventually filing a motion on June 29, 2006, asking the bankruptcy judge to recuse

himself. On September 1, 2006, the bankruptcy judge denied the motion in a thorough

117 page decision. 

Appellate Case: 07-2430 Page: 3 Date Filed: 05/13/2008 Entry ID: 3433583
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In August 2003, the Trustee retained Hayes to represent the Trustee in the TSE

bankruptcy proceedings. Hayes also represented Clapper Corporation (Clapper), an

unsecured creditor. Hayes disclosed this potential conflict, and both the Trustee and

Clapper waived any conflict. The August 2003 attorney retention application

disclosed to the court and creditors Hayes “is counsel for unsecured creditor Clapper

Corporation.” This appointment was approved without objection. Later, when Hayes

sought payment for his services, TSF objected on the basis of a conflict in Hayes’s

representation of both the Trustee and Clapper. The bankruptcy court approved

Hayes’s fee request over TSF’s objection. 

 TSF appealed to the district court the recusal motion denial; the Murphy

settlement; and Hayes’s fee approval. The district court affirmed the bankruptcy

court’s decisions. These appeals followed. 

II. DISCUSSION

“As the second reviewing court, we apply the same standards of review that the

district court applied . . . review[ing] the bankruptcy court’s factual findings for clear

error and its conclusions of law de novo.” In re Clark, 223 F.3d 859, 862 (8th Cir.

2000).

A. Recusal

Motions for recusal under 28 U.S.C. § 455 “will not be considered unless timely

made.” Fletcher v. Conoco Pipe Line Co., 323 F.3d 661, 664 (8th Cir. 2003) (citation

omitted). The timeliness doctrine under § 455 “requires a party to raise a claim at the

earliest possible moment after obtaining knowledge of facts demonstrating the basis

for such a claim.” Id. (internal quotation marks and citation omitted). A party is

required to bring its recusal motion promptly to avoid the risk that the party might

hold its application as an option in the event the trial court rules against it. See In re

Apex Oil Co., 981 F.2d 302, 304-05 (8th Cir. 1992). 

Appellate Case: 07-2430 Page: 4 Date Filed: 05/13/2008 Entry ID: 3433583
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TSF’s motion was not timely. The issues TSF discusses as the bases for its

motion were: (1) the December 12, 2003, denial of TSE’s motion for multifaceted

relief; (2) the court’s July 28, 2004, comments and ruling related to the conversion of

the case to Chapter 7; (3) the court’s actions at the October 26, 2004, auction of the

ethanol plant and private comments the court made following the auction; and (4) a

November 18, 2005, hearing where TSF’s counsel intimated the court was being

unfair. While these events occurred as early as December 2003 and then in 2004 and

2005, TSF did not make its recusal motion until June 29, 2006. The actions and

comments TSF asserts for its recusal motion first occurred thirty months before the

motion and last occurred seven months before the motion. Even measuring from the

most recent event, a relatively lengthy seven months elapsed. TSF’s motion is

untimely and, on this basis alone, the district court’s decision to affirm the bankruptcy

court’s denial of the recusal motion is affirmed. See In re Kansas Pub. Employees

Retirement Sys., 85 F.3d 1353, 1360-61(8th Cir. 1996) (finding a ten-month delay

from the initial awareness of a potential conflict rendered the motion untimely).

B. Murphy Settlement Approval

“A bankruptcy court’s approval of a settlement will not be set aside unless there

is plain error or abuse of discretion.” In re Martin, 212 B.R. 316, 319 (B.A.P. 8th Cir.

1997) (citing In re New Concept Housing, Inc., 951 F.2d 932, 939 (8th Cir. 1991)).

“An abuse of discretion occurs if the court bases its ruling on an erroneous view of the

law or on a clearly erroneous assessment of the evidence.” In re Racing Servs., 332

B.R. 581, 584 (B.A.P. 8th Cir. 2005) (citing Cooter & Gell v. Hartmarx Corp., 496

U.S. 384, 405 (1990)). The standard for evaluation of a settlement “is whether the

settlement is fair and equitable and in the best interests of the estate.” Martin, 212

B.R. at 319 (internal quotation marks and citation omitted) (relying, in part, on

Protective Comm. for Indep. Stockholders of TMT Trailer Ferry, Inc. v. Anderson,

390 U.S. 414, 424 (1968)). A settlement is not required to constitute “the best result

obtainable.” Id. 

Appellate Case: 07-2430 Page: 5 Date Filed: 05/13/2008 Entry ID: 3433583
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Rather, the court need only . . . determine that the settlement does not fall

below the lowest point in the range of reasonableness. 

. . . 

In assessing the reasonableness of a settlement, the factors to be

considered can be summarized as follows: 

(A) the probability of success in the litigation;

(B) the difficulties, if any to be encountered in the matter of 

collection; 

(C) the complexity of the litigation involved, a[n]d the expense,

inconvenience and delay necessarily attending it; and 

(D) the paramount interest of the creditors and a proper deference

to their reasonable views in the premises. 

Id. (internal quotation marks and citations omitted). Both the bankruptcy court and

the district court considered this four factor test and found the first three factors

weighed in favor of the settlement because (1) Murphy had a good chance of success

in litigation considering Murphy was entitled to be paid both principal and interest

under the contractual terms of the notes; (2) Murphy is an oversecured creditor and

therefore would not have any difficulty in collecting the monies owed; (3) the

litigation necessary to dispute Murphy’s claim would be complex and protracted, and

Murphy would be entitled to recover attorney fees and expenses from the petition date

of May 23, 2003, through the appellate process; and (4) even though 52 entities were

given notice of the proposed settlement, TSF was the only entity filing an objection.

The lower courts also found Murphy made significant concessions in (1) waiving preand post-petition attorney fees available under § 506; and (2) settling its claim for

$675,886.80 which is almost $115,000 less than the amount of principal, interest and

late charges accrued as shown in Trustee’s Revised Exhibit 4 of $790,000. Based on

a review of the four factor test and the totality of the circumstances, neither the

bankruptcy court, nor the district court, abused its discretion in approving the Murphy

settlement. 

Appellate Case: 07-2430 Page: 6 Date Filed: 05/13/2008 Entry ID: 3433583
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The bankruptcy court also did not abuse its discretion in denying TSF a hearing

regarding the Murphy settlement. Rule 9019 states, “[o]n motion by the trustee and

after notice and a hearing, the court may approve a compromise or settlement.” The

term “after notice and a hearing,” 

(A) means after such notice as is appropriate in the particular

circumstances, and such opportunity for a hearing as is appropriate in the

particular circumstances; but (B) authorizes an act without an actual

hearing if such notice is given properly and if—(i) such a hearing is not

requested timely by a party in interest . . . .

11 U.S.C. § 102(1). Here, a hearing was scheduled and notice of the hearing was

properly given to TSF. TSF then agreed with the other parties and the court, or did

not object to the proposed procedure, to cancel the scheduled hearing and to instead

present the issue to the bankruptcy judge on written arguments. TSF submitted its

written argument opposing the settlement and also submitted a written response to the

opposing argument. As such, TSF was properly notified of the proposed settlement

and had an opportunity to participate in a hearing which was scheduled specifically

to address the Murphy settlement. TSF was “heard” when TSF submitted its written

arguments and evidence and the bankruptcy court considered the submitted evidence

and arguments. Where TSF agreed to the cancellation of the formal hearing and was

given the opportunity to submit its arguments in writing, the court did not abuse its

discretion when it did not hold a formal hearing regarding the Murphy settlement. 

C. Hayes’s Attorney Fees

“[A] decision regarding [the award of] attorney fees [is reviewed] for an abuse of

discretion.” In re Clark, 223 F.3d 859, 862 (8th Cir. 2000) (citation omitted). “The

bankruptcy court has the broad power and discretion to award or deny attorney fees,

and, indeed, a duty to examine them for reasonableness.” Id. at 863 (citations

omitted). An assessment of the reasonableness of the compensation sought “is always

a question of fact for the court.” Id. (citation omitted). TSF does not challenge the

reasonableness of Hayes’s hourly rate or that Hayes did the work claimed. Instead,

Appellate Case: 07-2430 Page: 7 Date Filed: 05/13/2008 Entry ID: 3433583
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The Trustee and Clapper both formally waived any conflict. We acknowledge

nonbinding authority exists indicating the limitations in § 327 cannot be waived. See

In re American Energy Trading, Inc., 291 B.R. 154, 158 (Bankr. W.D. Mo. 2003)

(“The adverse interest and disinterested person limitations set forth in § 327 governing

the employment of professionals cannot be excused by waiver.” (citing In re

Envirodyne Indus., Inc., 150 B.R. 1008 (Bankr. N.D. Ill. 1993)). Section 327(a)

permits the trustee, with court approval, to employ attorneys “that do not hold or

represent an interest adverse to the estate.” Section 327(c) mandates, upon objection

by another creditor or by the trustee, “the court shall disapprove such employment if

there is an actual conflict of interest.” The court in American Energy Trading found

an actual conflict of interest. Id. at 156-57 (“[T]he actual conflict that has been

represented to the Court at the hearing, provides ample support for this Court to revisit

its previous ruling.”). Here, no actual conflict of interest existed. Because no actual

conflict of interest exists, it is unnecessary for us to determine the effectiveness of the

waiver by the Trustee and Clapper. 

-8-

TSF argues the fees should have been reduced (or not paid at all) because of the

conflict arising from Hayes’s representation of both the Trustee and Clapper, an

unsecured creditor. 

Under 11 U.S.C. § 327(c), an attorney is not disqualified from representing the

Trustee solely because the attorney represents a creditor unless a creditor objects to

the employment and an actual conflict of interest exists. On August 3, 2004, when the

Trustee filed an application with the court seeking to employ Hayes, the application

disclosed Hayes “is counsel for unsecured creditor Clapper.” At this time there was

no actual conflict.5

 Hayes’s appointment was approved without objection. Only later,

in 2006, when Hayes sought payment for his services, did TSF object on the ground

of a conflict in Hayes’s representation of both the Trustee and Clapper.

At no time did Hayes represent the bankruptcy estate in connection with any claims

by Clapper. The Trustee employed a different attorney to represent the estate in

challenging any claim by Clapper. No financial harm was suffered by the bankruptcy

estate or any other party from this alleged conflict. Where TSF only challenges the

fee award on the basis of a conflict, effectively not contesting whether the work was

Appellate Case: 07-2430 Page: 8 Date Filed: 05/13/2008 Entry ID: 3433583
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done or whether the hourly rate charged was reasonable, the court did not abuse its

discretion in awarding Hayes the fees sought. 

III. CONCLUSION

For the foregoing reasons, we affirm the district court and the subject challenged

decisions of the bankruptcy court.

______________________________

Appellate Case: 07-2430 Page: 9 Date Filed: 05/13/2008 Entry ID: 3433583