Source: https://law.justia.com/cases/federal/appellate-courts/F2/809/1356/385714/
Timestamp: 2019-07-23 22:43:03
Document Index: 14459921

Matched Legal Cases: ['§ 545', '§ 327', '§ 545', '§ 545', '§ 545', '§ 545', '§ 545', '§ 545', '§ 327', '§ 327', '§ 101', '§ 101', '§ 327', '§ 328', '§ 328', '§ 586', '§ 105', '§ 1107', '§ 327', '§ 328', '§ 328', '§ 1107']

Bankr. L. Rep. P 71,586in Re Kevin Pierce, Individually and As a Partner of Piercefarms, Debtor.in Re Wayne Pierce, Individually and As a Partner of Piercefarms, Debtor.in Re Michael Pierce, Individually and As a Partner Ofpierce Farms, Debtor.lyle Pierce, Individually and As a Partner of Pierce Farms, v. Aetna Life Insurance Company, Creditors Committee, Creditorsschmalz, Fitzsimmons & Cassavan, Farmers Home Administration& Commodity Credit Corporation, General Motors Acceptancecorp., Wayne Drewes, Ch. 7 Trustee, National Farmers Unionproperty & Casualty Company.neil A. Mcewen, Appellant, v. William P. Westphal, U.S. Trustee and Wayne Drewes,bankruptcy Trustee, Appellees, 809 F.2d 1356 (8th Cir. 1987) :: Justia
Justia › US Law › Case Law › Federal Courts › Courts of Appeals › Eighth Circuit › 1987 › Bankr. L. Rep. P 71,586in Re Kevin Pierce, Individually and As a Partner of Piercefarms, Debtor.in R...
Bankr. L. Rep. P 71,586in Re Kevin Pierce, Individually and As a Partner of Piercefarms, Debtor.in Re Wayne Pierce, Individually and As a Partner of Piercefarms, Debtor.in Re Michael Pierce, Individually and As a Partner Ofpierce Farms, Debtor.lyle Pierce, Individually and As a Partner of Pierce Farms, v. Aetna Life Insurance Company, Creditors Committee, Creditorsschmalz, Fitzsimmons & Cassavan, Farmers Home Administration& Commodity Credit Corporation, General Motors Acceptancecorp., Wayne Drewes, Ch. 7 Trustee, National Farmers Unionproperty & Casualty Company.neil A. Mcewen, Appellant, v. William P. Westphal, U.S. Trustee and Wayne Drewes,bankruptcy Trustee, Appellees, 809 F.2d 1356 (8th Cir. 1987)
U.S. Court of Appeals for the Eighth Circuit - 809 F.2d 1356 (8th Cir. 1987)
Submitted Dec. 8, 1986. Decided Jan. 27, 1987. Rehearing Denied Feb. 19, 1987
On October 11, 1985, the bankruptcy court issued an order denying most of McEwen's claims for compensation. As to the state court fees, the court held that McEwen was not entitled to compensation because the costs of that litigation were not administrative expenses of the estate. In re Pierce, 53 B.R. 825, 827 (Bankr.D. Minn. 1985). Although McEwen also argued that he was entitled to his state fees because he had an attorney's lien in the proceeds of the state court judgment, the court held that because McEwen failed to perfect the lien pursuant to Minn.Stat. Sec. 481.13, the trustee could avoid it under 11 U.S.C. § 545(2). Id. at 827-28.
As to the bankruptcy-related fees, the court held that McEwen did not qualify for employment under 11 U.S.C. § 327(a) because he did not meet the definition of a disinterested person. Id. at 828. Accordingly, the court denied McEwen's fees for his post-petition work on the bankruptcy cases. Id. at 828-29.9 The court did, however, award McEwen $8,000 in administrative expenses as the reasonable value of his prepetition services rendered in the bankruptcy cases. Id. at 829.10
At the outset, we note that the bankruptcy court's findings of fact are subject to the clearly erroneous standard, but its legal conclusions are subject to de novo review. In re Martin, 761 F.2d 472, 474 (8th Cir. 1985).
McEwen does not appeal the bankruptcy court's denial of his state court fees on the ground that they did not qualify as administrative expenses. Rather, McEwen argues that the district court erred in holding that he had to file notice of his attorney's lien under Minn.Stat. Sec. 481.13 in order to perfect his interest. He therefore maintains that his lien was not subject to the trustee's avoidance powers under 11 U.S.C. § 545(2).
Under 11 U.S.C. § 545(2), the trustee in bankruptcy has the power to avoid a statutory lien on a debtor's property if the lien "is not perfected or enforceable at the time of the commencement of the case against a bona fide purchaser that purchases such property at the time of the commencement of the case, whether or not such a purchaser exists." 11 U.S.C. § 545(2) (1979 & Supp.1985). This section gives the trustee the status of a hypothetical bona fide purchaser as of the date the bankruptcy petitions were filed. 4 Collier on Bankruptcy p 545.04, at 545-19 (15th ed. 1986). Thus, if a statutory attorney's lien is not perfected or enforceable, the trustee can avoid the lien under Section 545(2). See, e.g., In re Burnham, 12 B.R. 286, 291 (Bankr.N.D. Ga. 1981).
The nature, extent, and validity of the statutory lien are matters governed by state law. See In re Sea Catch, Inc., 36 B.R. 226, 228-30 (Bankr.D. Alaska 1983); 4 Collier on Bankruptcy p 545.04, at 545-19. In this case, the applicable law is that of Minnesota.
Furthermore, the Minnesota Court of Appeals has recently indicated that under Minn.Stat. Sec. 481.13, an attorney's lien can be enforced only after it is established, see Boline, 345 N.W.2d at 289, and that "prior to establishing the lien a notice of attorney's lien must be filed in accordance with the requirements of Minn.Stat. Sec. 481.13, subd. 4." Id. (citing Schroeder, Siegfried, Ryan and Vidas v. Modern Electronic Products, Inc., 295 N.W.2d 514, 515 (Minn.1980)). Thus, whether notice is required to perfect the lien against third parties, as the bankruptcy and district courts held, or whether notice is required to establish the lien and thus make it enforceable, as the Minnesota Court of Appeals has stated, it is clear that McEwen's failure to file notice allows the trustee to avoid the lien. See 11 U.S.C. § 545(2) (trustee may avoid statutory lien if it is not perfected or enforceable).15
Alternatively, McEwen argues that he is entitled to his state court fees because the trustee had actual and constructive notice of the contingent fee arrangement, and presumably therefore, notice of his lien. This claim, however, is without merit. Under Section 545(2) of the Code, the trustee has the power to avoid a statutory lien if the lien "is not perfected or enforceable at the commencement of the case against a bona fide purchaser * * *." 11 U.S.C. § 545(2). It is clear, therefore, that notice is irrelevant in this case; McEwen's lien was never perfected or enforceable against the trustee, who is given the status of a hypothetical bona fide purchaser as of the date the petitions are filed. See 4 Collier on Bankruptcy p 545.04, at 545-19.
In summary, we hold that the bankruptcy court did not err in allowing the trustee to avoid McEwen's lien. Because McEwen failed to file notice of his lien under Minn.Stat. Sec. 481.13, the lien was either unperfected, or not established and therefore unenforceable. Thus, the trustee could avoid the lien under 11 U.S.C. § 545(2).
The bankruptcy court, with the district court affirming, held that McEwen was not entitled to compensation for his post-petition work because he was not a disinterested person. Under 11 U.S.C. § 327(a), the trustee could employ,17 with the court's approval, an attorney who did "not hold or represent an interest adverse to the estate, and [was a] disinterested person * * *." 11 U.S.C. § 327(a). Although framed conjunctively, the conditions are applied disjunctively; failure to meet either will result in disqualification. See In re Leisure Dynamics, Inc., 32 B.R. 753, 754 (Bankr.D. Minn.) (supplemental opinion to 32 B.R. 751), aff'd, 33 B.R. 121 (D. Minn. 1983).
(E) does not have an interest materially adverse to the interest of the estate or of any class of creditors or equity security holders, by reason of any direct or indirect relationship to, connection with, or interest in, the debtor * * * [.]
11 U.S.C. §§ 101(13) (A), (E) (emphasis added). Specifically, the court held that McEwen was not disinterested because " [h]e was a prepetition creditor of these estates, and he held a mortgage on the Debtors' real property to secure payment of prepetition and post-petition services." In re Pierce, 53 B.R. at 828. The court also stated that this placed McEwen "in an untenable position adverse to both the Debtors and other interests in the cases." Id. Because McEwen failed to meet the definition of a disinterested person, and thus failed to qualify for employment under Section 327(a), the court denied McEwen's post-petition fees. Id. at 828-29 (citing In re Leisure Dynamics, Inc., 33 B.R. 121 (D. Minn. 1983)).18
Despite the express statutory language disqualifying an attorney who is a creditor, McEwen argues that these rules should not be applied blindly, and that the test for disinterestedness should be whether the attorney possesses an interest that would color his independent judgment and impartial attitude. See In re O'Connor, 52 B.R. 892, 899 (Bankr.W.D. Okla. 1985). Although McEwen's argument is not without merit, the intent of the statute is clear; if a professional is a creditor, then that person is not disinterested under 11 U.S.C. § 101(13) and is subject to disqualification under Section 327(a). As this court recently noted, the professional's complaint in this area lies with Congress, not the courts. In re Daig Corp., 799 F.2d 1251, 1253 n. 5 (8th Cir. 1986), aff'g, 48 B.R. 121 (Bankr.D. Minn. 1985).
Moreover, there are two other grounds upon which the court could have denied McEwen's fees. First, under Section 327(a), an attorney may be disqualified not only because he or she is not disinterested, but also because the attorney holds an "interest adverse to the estate." 11 U.S.C. § 327(a). At least one court has held that an attorney's pre-petition mortgage on the debtor's real estate constitutes an "adverse interest" under Section 327(a). In re Martin, 59 B.R. 140, 143 (Bankr.D.Maine 1986); see also In re Roberts, 46 B.R. 815, 849 (Bankr.D. Utah 1985) (attorney's pre-petition debt for legal fees for services not rendered in connection with bankruptcy case would constitute an adverse interest). Thus, the court could have denied compensation on this ground.19
Second, by failing to disclose the secured mortgage in either the statement of attorney or in the application for employment filed on October 11, 1984, McEwen committed a classic violation of the disclosure requirements embodied in 11 U.S.C. § 328(a) and Bankruptcy Rule 2014(a).20 Many courts have denied compensation to professionals where, in addition to other factors, they failed to previously disclose a relationship with the debtor that could have presented a potential area of conflict. See, e.g., In re Gray, 64 B.R. 505, 508 (Bankr.E.D. Mich. 1986); In re Roberts, 46 B.R. at 850; In re Patterson, 53 B.R. 366, 373, 374 (Bankr.D. Neb. 1985); In re Guy Apple Masonry Contractor, Inc., 45 B.R. 160, 162-63, 168 (Bankr.D. Ariz. 1984).21
In summary, we find that the bankruptcy court could have denied McEwen his fees on any of the three aforementioned grounds. The court, however, determined that because McEwen was not disinterested, it would deny his post-petition fees. Because denial of compensation is within the court's discretion, see 11 U.S.C. § 328(c), and because we perceive no abuse of that discretion, we affirm the bankruptcy court's denial of McEwen's post-petition fees.
Finally, as alluded to previously, it is apparent that because of our affirmance on this issue, McEwen's claim that he should be awarded his bankruptcy fees nunc pro tunc for the period preceding his application of employment is, in effect, mooted. Even if we had determined that the bankruptcy court abused its discretion in not issuing the order nunc pro tunc, although we would probably not do so under the facts of this case and in light of the deference given to the bankruptcy courts in this area, see J.L. Lavender v. Wood Law Firm, 785 F.2d 247 (8th Cir. 1986), to allow the total amount of the bankruptcy-related fees would obviously conflict with our prior determination that McEwen is not entitled to his post-petition fees.III. CONCLUSION.
The bankruptcy court's decision is reported as In re Pierce, 53 B.R. 825 (Bankr.D. Minn. 1985) (O'Brien, J.). The cases were originally assigned to the Honorable William A. Hill, Bankruptcy Judge for North Dakota, who was handling Northwestern Minnesota cases at the time. The cases were subsequently transferred to the bankruptcy court in Minnesota, where they were briefly assigned to the Honorable John Connelly and then to the Honorable Margaret A. Mahoney, before final assignment to the Honorable Dennis D. O'Brien
McEwen alleges that he filed the application for his employment nunc pro tunc, although nowhere on its face does the application request this type of approval. Additionally, the bankruptcy court's order stated only that McEwen was "authorized to be employed by the [four] debtors as their attorney under a general retainer, subject to the limitations on compensation provided by 11 USC 328." Order Authorizing Employment of Attorney Under General Retainer (Bankr.D. Minn. Nov. 2, 1985) (Connelly, J.)
We note that in his supervisory capacity, the United States Trustee has standing to object to and challenge various matters such as allegedly excessive fee applications. See 28 U.S.C. § 586; Bankruptcy Rules X-1008(a) (3), -1009(a)
In a footnote, the court noted that it had flexibility under 11 U.S.C. § 105 to authorize a pre-petition creditor attorney to represent the estate. However, the court further noted that the prerequisites to issuing such an order had not been met. In re Pierce, 53 B.R. at 829 n. 8
There appears to be a bit of confusion in this case because of the existence of a contingent fee contract. The contract itself, however, only represents the promise of the debtors to pay McEwen; it does not constitute a lien in and of itself. Rather, in Minnesota, the lien arises only when the attorney complies with the attorney's lien statute. Compare Jamison, 278 N.W.2d at 324, with In re Armando Gerstel, Inc., 43 B.R. 925, 929 (Bankr.S.D. Fla. 1984) (under Florida law, attorney's contract for compensation to be paid from client's recovery results in an equitable lien which is based on common law rather than statute)
Pursuant to 11 U.S.C. § 1107(a), the debtors-in-possession have the same authority as the trustee does under 11 U.S.C. § 327(a)
Although not cited by the bankruptcy court, it is clear that the court had the authority to deny McEwen's post-petition fees pursuant to 11 U.S.C. § 328(c), which provides:
11 U.S.C. § 328(c) (emphasis added). Although the bankruptcy court denied McEwen's post-petition fees, the court concluded that McEwen was not disqualified to receive compensation for his work in preparing the debtors' petitions and schedules since this work was done before filing and before the requirements of Section 327(a) became applicable. In re Pierce, 53 B.R. at 829 (citing Kotts v. Westphal, 746 F.2d 1329, 1330 (8th Cir. 1984)).
McEwen argues, as he did before the district court, that he cannot be denied compensation under Section 328(c) solely because of his prior employment by the debtors on the state case. See 11 U.S.C. § 1107(b) (person may not be disqualified from employment under Section 327(a) solely because of that person's employment by or representation of the debtor before the commencement of the case). Although this is a correct statement of law, the bankruptcy court did not deny McEwen's fees solely because he represented the debtors in a different case. Rather, the court also stated that McEwen was disinterested because the mortgage placed him in a position adverse to other parties. In re Pierce, 53 B.R. at 828; see also In re Leisure Dynamics, Inc., 32 B.R. at 755 (attorneys not disqualified solely because of their prepetition representation of the creditor, but also because they were insiders).