Court Opinion

ID: 4665625
Source: CourtListenerOpinion
Date Created: 2021-03-08 16:00:33.484444+00
Date Added: 2024-06-11T08:02:44.241438
License: Public Domain

Case: 20-60718     Document: 00515768757        Page: 1   Date Filed: 03/05/2021

           United States Court of Appeals
                for the Fifth Circuit
                                                                   United States Court of Appeals
                                                                            Fifth Circuit

                                                                          FILED
                                                                      March 5, 2021
                                 No. 20-60718                        Lyle W. Cayce
                                                                          Clerk

   In the Matter of: Community Home Financial Services,
   Incorporated,

                                                                        Debtor,

   Edwards Family Partnership, L.P.; Beher Holdings
   Trust,

                                                                    Appellees,

                                     versus

   Kristina M. Johnson, Trustee for Community Home Financial Services,
   Incorporated,

                                                                   Appellants.

                  Appeal from the United States District Court
                    for the Southern District of Mississippi
                            USDC No. 3:18-CV-158

   Before Elrod, Willett, and Engelhardt, Circuit Judges.
   Jennifer Walker Elrod, Circuit Judge:
         The bankruptcy court awarded fees to the bankruptcy debtor’s
   counsel for work performed prior to the appointment of a trustee. Creditors
Case: 20-60718         Document: 00515768757              Page: 2       Date Filed: 03/05/2021

                                          No. 20-60718

   appealed the fee award to the district court. After a two-and-a-half-year
   delay, the district court vacated the fee award. Because the district court
   improperly assessed the benefit of counsel’s services to the estate from
   hindsight, rather than assessing the reasonableness and likely benefit from
   the time the services were rendered, we REVERSE the district court’s
   judgment and REMAND.
                                                I.
           This dispute arises from the bankruptcy proceedings for Community
   Home Financial Services, Inc. (CHFS), which is not a party to this appeal.
   Heavily indebted to the appellants—Edwards Family Partnership, Inc. and
   Beher Holdings Trust—and others, CHFS entered Chapter 11 bankruptcy to
   restructure its debts in May of 2012. In re Cmty. Home Fin. Servs., No. 12-
   1703, 2015 WL 8113699, at *2–3 (Bankr. S.D. Miss. Dec. 7, 2015). 1
           Throughout the bankruptcy, the two largest creditors were the
   appellants, Edwards Family and Beher. 2 CHFS remained the debtor in
   possession, and CHFS’s president acted as its designated representative. Id.
   at *2. With the approval of the bankruptcy court, Derek A. Henderson and
   Wells Marble & Hurst, PLLC represented CHFS. Id.; see 11 U.S.C. § 327.

           1
              The parties have made it difficult to construct an accurate factual and procedural
   history by omitting record citations, including incorrect record citations, and making
   slightly incorrect factual assertions. We remind counsel of their duty to support “[e]very
   assertion in briefs regarding matter in the record . . . by a reference to the page number of
   the original record.” 5th Cir. R. 28.2.2; see also Fed. R. App. P. 28(a)(6), (b).
           2
             The bankruptcy court’s opinion notes that the two entities tried to characterize
   themselves as a single entity called the “Edwards Entities.” “The advantage of this tactic
   is the suggestion that there is only a single creditor in the Bankruptcy Case.” But Edwards
   Family and Beher are, in fact, distinct, with the former being “a limited partnership formed
   under the laws of Delaware” and the latter being a “trust formed under Bermuda law.”

                                                2
Case: 20-60718      Document: 00515768757         Page: 3   Date Filed: 03/05/2021

                                   No. 20-60718

           As counsel for CHFS, Henderson and Wells Marble initiated a series
   of adversary proceedings against Edwards Family and Beher between August
   2012 and November 2013 challenging the priority of certain claims.
   Meanwhile, Henderson and Wells Marble proposed a reorganization plan on
   January 29, 2013. 2015 WL 8113699, at *9.
           Both Edwards Family and Beher objected to the plan and moved to
   appoint a trustee and to convert the bankruptcy to a Chapter 7 case. Id. The
   bankruptcy court held confirmation of the proposed reorganization plan in
   abeyance. Id. As a result, Henderson and Wells Marble responded to these
   motions as they continued to pursue the adversary proceedings. Id. Wells
   Marble withdrew as counsel for CHFS on November 13, 2013.
           As the bankruptcy case proceeded, CHFS’s president transferred “all
   but approximately $7,500.00 from” CHFS’s account—over $9 million in
   cash—to a Panamanian account. In re Cmty. Home Fin. Servs., 571 B.R. 714,
   718 (Bankr. S.D. Miss. 2017). CHFS’s president then fled the country and
   “set up a ‘rogue’ operation of CHFS’s business” out of new branch offices
   in Panama and Costa Rica. Id.
           On December 20, 2013, Henderson filed a disclosure informing the
   bankruptcy court that CHFS’s president had transferred those funds and
   moved CHFS’s principal place of business from Jackson, Mississippi to
   Panama. Id. Three days after the disclosure, the bankruptcy court appointed
   an emergency trustee, and then it appointed Kristina Johnson as Trustee on
   January 21, 2014. Id. at 719. Henderson withdrew as counsel on March 6,
   2014.
           Both Henderson and Wells Marble sought fees for the services they
   performed in connection with the adversary proceedings before Johnson was
   appointed as Trustee. Wells Marble sought fees for its services from May 1,
   2013 through October 31, 2013, approximately two weeks before Wells

                                        3
Case: 20-60718        Document: 00515768757              Page: 4       Date Filed: 03/05/2021

                                         No. 20-60718

   Marble withdrew as counsel. Henderson sought fees for his services from
   September 2, 2013 through December 28, 2013, approximately three weeks
   before Johnson was appointed as Trustee.
           The bankruptcy court awarded fees to both Henderson and Wells
   Marble in December 2015 and January 2016. Edwards Family and Beher
   timely appealed the awards. In September of 2017, the district court affirmed
   in part but remanded for further findings of fact regarding the fees awarded
   for “commencing and then litigating certain Adversary Proceedings in the
   bankruptcy matter.”
           On February 27, 2018, the bankruptcy court once again awarded fees
   to Henderson and Wells Marble in connection with the adversary
   proceedings. The bankruptcy court concluded that those services “were
   necessary to the administration of the bankruptcy case and reasonably likely
   to benefit the bankruptcy estate.” The bankruptcy court emphasized that
   the adversary proceedings were necessary “to create a clear path for an exit
   strategy in the Bankruptcy Case” and to “reduc[e] and reclassif[y]” certain
   claims.”
           Edwards Family and Beher filed a notice of appeal to the district court
   on March 13, 2018. 3 On August 5, 2020, the district court vacated the fee
   award. In the district court’s view, Henderson and Wells Marble’s decision
   to pursue adversary proceedings “was not a good gamble.”

           3
              Consolidated appeals of the bankruptcy court’s rulings on the merits of the
   adversary proceedings were also pending in the district court. In response to a petition for
   writ of mandamus, we advised the district court to rule on those consolidated appeals
   within 60 days. In re Johnson, Trustee for Cmty. Home Fin. Servs. Corp., 814 F. App’x 881
   (5th Cir. 2020). The district court’s ruling on the fee award at issue in this case came two
   days after our order on the petition for writ of mandamus.

                                                4
Case: 20-60718      Document: 00515768757          Page: 5   Date Filed: 03/05/2021

                                    No. 20-60718

          Henderson, Wells Marble, and the Trustee appealed, arguing that the
   district court improperly evaluated the benefit of the adversary proceedings
   retrospectively. Edwards Family and Beher moved to dismiss the Trustee
   for lack of standing. We carried that motion with the case.
          Henderson and Wells Marble then settled their fee dispute with
   Edwards Family and Beher, and those parties jointly moved to dismiss
   Henderson and Wells Marble from the appeal on October 13, 2020. We
   granted that motion on October 14, 2020. The only remaining appellant is
   the Trustee.
          With the Henderson and Wells Marble fee disputes settled, Edwards
   Family and Beher moved to dismiss the appeal as moot. The Trustee
   opposed the motion. In the Trustee’s view, the case remains live because the
   Trustee has an ongoing duty throughout the pendency of a bankruptcy
   proceeding to represent the interests of the bankruptcy estate in the award of
   fees. In the alternative, the Trustee moved to vacate the district court’s
   judgment if we should dismiss this appeal as moot. We carried those motions
   with the case.
                                         II.
          In reviewing a district court’s ruling on a bankruptcy court’s fee
   award, we review the bankruptcy court’s decision using the same standard of
   review as the district court. Okla. State Treasurer v. Linn Operating, Inc. (In
   re Linn Energy, L.L.C.), 927 F.3d 862, 866 (5th Cir. 2019). “We therefore
   review the bankruptcy court’s award of attorneys’ fees for abuse of
   discretion.” In re Cahill, 428 F.3d 536, 539 (5th Cir. 2005). “[A]s a second
   review court,” we review “the bankruptcy court’s conclusions of law de
   novo and its findings of fact for clear error.” 927 F.3d at 866 (quoting
   Viegelahn v. Lopez (In re Lopez), 897 F.3d 663, 668 (5th Cir. 2018)).

                                          5
Case: 20-60718         Document: 00515768757       Page: 6   Date Filed: 03/05/2021

                                    No. 20-60718

                                        III.
          Edwards Family and Beher contend that their settlement with
   Henderson and Wells Marble mooted this appeal. The Trustee, however,
   asserts that the case remains live notwithstanding the settlement. For the
   reasons stated herein, we agree with the Trustee.
          “Article III’s ‘case or controversy’ requirement permits federal
   courts to adjudicate only live disputes—a party must retain a ‘legally
   cognizable interest in the outcome’ of an issue, or its resolution is moot.”
   Hinkley v. Envoy Air, Inc., 968 F.3d 544, 548 (5th Cir. 2020) (quoting
   Campanioni v. Barr, 962 F.2d 461, 464 (5th Cir. 1992)). “A controversy
   becomes moot where, as a result of intervening circumstances, there are no
   longer adverse parties with sufficient legal interest to maintain the
   litigation.” Scruggs v. Lowman (In re Scruggs), 392 F.3d 124, 128 (5th Cir.
   2004) (quoting Chevron U.S.A., Inc. v. Traillour Oil Co., 987 F.2d 1138, 1153
   (5th Cir. 1993)).
          In the view of Edwards Family and Beher, there is no longer any party
   with sufficient legal interest in this case because the Trustee did not have a
   legal interest to begin with:
          The dispute regarding the fee awards has now been fully
          resolved by compromise between the only parties with a legally
          cognizable interest in the dispute: Henderson and Wells
          Marble on one side (the parties who applied for fees), and the
          Edwards Entities on the other (the creditors who objected to
          the fees). . . . The Trustee has filed a principal brief on the
          merits, but the Trustee always lacked a direct interest in the
          judgment, and the underlying dispute is now moot.
   Thus, Edwards Family and Beher effectively collapse the mootness question
   with the question of the Trustee’s standing. Edwards Family and Beher,
   however, have an incorrect understanding of trustee standing.

                                         6
Case: 20-60718      Document: 00515768757           Page: 7    Date Filed: 03/05/2021

                                     No. 20-60718

          Edwards Family and Beher point to the test for standing for interested
   parties in a bankruptcy: “a bankruptcy appellant must . . . show that he was
   ‘directly and adversely affected pecuniarily by the order of the bankruptcy
   court.’” Furlough v. Cage (In re Technicool Sys., Inc.), 896 F.3d 382, 385 (5th
   Cir. 2018) (quoting Fortune Nat. Res. Corp. v. U.S. Dep’t of Interior, 806 F.3d
   363, 365 (5th Cir. 2015)). A bankruptcy trustee, however, is distinct from all
   other bankruptcy parties because the trustee is responsible for the
   administration of the bankruptcy estate.
          The Fourth Circuit has noted that trustees can never establish that
   they were pecuniarily affected by a bankruptcy order because trustees “never
   have pecuniary interests in cases.” U.S. Trustee for the W. Dist. of Va. (In re
   Clark), 927 F.2d 793, 795 (4th Cir. 1991) (involving a United States trustee);
   see also Richman v. First Woman’s Bank (In re Richman), 104 F.3d 654, 657
   (4th Cir. 1997) (determining that the bankruptcy trustee had standing as “the
   representative of the bankrupt’s estate”). Trustee standing does not arise
   from the trustee’s pecuniary interest, but rather from the trustee’s “official
   duty to enforce the bankruptcy law in the public interest.” In re Clark, 927
   F.2d at 796 (citing Sec. & Exch. Comm’n v. U.S. Realty & Improvement Co.,
   310 U.S. 434, 460 (1940)).
          The First, Sixth, and Ninth Circuits have also recognized the
   inadequacy of a pecuniary-interest test for trustee standing. See In re Plaza
   de Diego Shopping Ctr., Inc., 911 F.2d 820, 824 (1st Cir. 1990) (citing
   Morgenstern v. Revco D.S., Inc. (In re Revco), 898 F.2d 498, 499 (6th Cir.
   1990)) (determining that the United States trustee had standing without a
   pecuniary interest); Moneymaker v. CoBen (In re Eisen), 31 F.3d 1447, 1451 n.2
   (9th Cir. 1994) (quoting Hancock Bank v. Jefferson, 73 B.R. 183, 185 (Bankr.
   S.D. Miss. 1986)) (“Once appointed a trustee, the debtor’s assets and claims
   pass to the trustee, making the trustee ‘the proper party in interest . . . .’”).

                                           7
Case: 20-60718      Document: 00515768757           Page: 8     Date Filed: 03/05/2021

                                     No. 20-60718

          Our own cases have implicitly recognized that trustee standing does
   not depend on a pecuniary interest. For example, we have previously held,
   in a Chapter 7 case, that “[i]n the bankruptcy context, the bankruptcy trustee
   is the real party in interest with respect to claims falling within the bankruptcy
   estate.” United States ex rel. Spicer v. Westbrook, 751 F.3d 354, 362 (5th Cir.
   2014). A trustee’s standing comes from the trustee’s duties to administer
   the bankruptcy estate, not from any pecuniary interest in the bankruptcy. See
   id.
          In light of the explicit statements from our sister circuits and the
   implicit guidance from our own caselaw, we hold that the Trustee in this case
   has standing and this case is not moot because the payment of fees to
   Henderson and Wells Marble directly affects the administration of the
   bankruptcy estate. Even though Henderson and Wells Marble have settled
   their fee dispute with Edwards Family and Beher, the Trustee remains tasked
   with ensuring that only proper payments are made from the bankruptcy
   estate. It is immaterial whether the Trustee or Edwards Family and Beher
   will ultimately prevail on this appeal. See Texas v. United States, 945 F.3d 355,
   383 (5th Cir. 2019) (“[C]ourts cannot fuse the standing inquiry into the
   merits.”).    Rather, the district court order presents an issue of the
   administration of the estate, meaning the Trustee has a “sufficient legal
   interest to maintain the litigation,” such that this appeal is not moot. In re
   Scruggs, 392 F.3d at 12.
                                          IV.
          In In re Woerner, we held that “if a fee applicant establishes that its
   services were ‘necessary to the administration’ of a bankruptcy case or
   ‘reasonably likely to benefit’ the bankruptcy estate ‘at the time at which [they
   were] rendered,’ then the services are compensable.” Barron & Newburger,
   P.C. v. Texas Skyline, Ltd. (In re Woerner), 783 F.3d 266, 276 (5th Cir. 2015)

                                           8
Case: 20-60718      Document: 00515768757             Page: 9   Date Filed: 03/05/2021

                                       No. 20-60718

   (internal citation omitted) (quoting 11 U.S.C. § 330(a)(3)(C), (4)(A)). In
   awarding fees, 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.
          Despite clear Fifth Circuit law that the services must be reasonable at
   the time they were rendered, the district court vacated the fee awards to
   Henderson and Wells Marble for their services related to the adversary
   proceedings. The district court determined that the decision to pursue
   adversary proceedings “was an expensive course of action from the outset.
   . . . [I]t would have been more cost-effective, faster, and better for the estate
   to pay off the few unsecured creditors rather than hire professionals to litigate
   Adversary Proceedings quibbling about their priority.” “This was not a good
   gamble.”
          The district court was wrong to vacate the bankruptcy court award
   based on its own retrospective assessment of the propriety of the adversary
   proceedings without giving the “the deference that is the hallmark of abuse-
   of-discretion review.” Gen. Elec. Co. v. Joiner, 522 U.S. 136, 143 (1997). The
   district court should have looked at the reasonableness of pursuing the
   adversary proceedings from the time Henderson and Wells Marble provided
   their services. See, e.g., In re Raygoza, 556 B.R. 813, 824 (Bankr. S.D. Tex.
   2016); 1 Bankruptcy Law Manual § 4:38 n.10 (5th ed. 2020). Viewed
   prospectively, pursuit of the adversary proceedings was “necessary to the
   administration of the case” to resolve otherwise unsettled disputes about the
   priority of claims. See 11 U.S.C. § 330(a)(1)(A), (a)(3), (a)(4)(A)(ii).
                                   *        *         *
          We REVERSE the judgment of the district court and REMAND for
   the district court to reinstate the bankruptcy court’s fee award. Accordingly,

                                            9
Case: 20-60718   Document: 00515768757          Page: 10   Date Filed: 03/05/2021

                                 No. 20-60718

   the appellees’ motion to dismiss the Trustee from the appeal for lack of
   standing is DENIED, and the appellees’ motion to dismiss the appeal as
   moot is DENIED.       The appellant’s alternative motion to vacate the
   judgment of the district court is DENIED AS MOOT.

                                      10