Court Opinion

ID: 2973828
Source: CourtListenerOpinion
Date Created: 2015-09-22 17:08:56.258006+00
Date Added: 2024-06-11T15:32:35.718009
License: Public Domain

File Name: 06a0427n.06
                              Filed: June 22, 2006
                 NOT RECOMMENDED FOR FULL-TEXT PUBLICATION

                                          No. 05-1873

                         UNITED STATES COURT OF APPEALS
                              FOR THE SIXTH CIRCUIT

In re: VELTRI METAL PRODUCTS, INC.,             )
                                                )
       Debtor.                                  )
                                                )
_______________________________                 )   ON APPEAL FROM THE UNITED
                                                )   STATES DISTRICT COURT FOR THE
                                                )   EASTERN DISTRICT OF MICHIGAN
KEMP, KLEIN, UMPHREY, ENDELMAN                  )
AND MAY,                                        )
                                                )
       Appellant,                               )
                                                )
v.                                              )
                                                )
BANKRUPTCY ESTATE OF VELTRI                     )
METAL PRODUCTS, INC.,                           )
                                                )
       Appellee.                                )

       Before: BOGGS, Chief Judge; MOORE and COOK, Circuit Judges.

       COOK, Circuit Judge. Kemp, Klein, Umphrey, Endelman and May, a law firm that

represented the unsecured creditors’ committee in a Chapter 11 bankruptcy proceeding, appeals the

bankruptcy court’s denial of its application for fees. Because the bankruptcy court applied an

erroneous legal standard in denying Kemp Klein’s application, we reverse and remand for further

consideration.
No. 05-1873
Veltri Metal v. Kemp, Klein

                                                   I

       Kemp Klein served as counsel to the unsecured creditors’ committee during voluntary

bankruptcy proceedings initiated by Veltri Metal Products. Kemp Klein received interim awards

of attorneys’ fees totaling $53,344.80. When the bankruptcy court converted Veltri’s bankruptcy

from a Chapter 11 proceeding to a Chapter 7 liquidation, Kemp Klein submitted its final request for

fees in the amount of $83,638.92, less the amount it had already received in interim awards. The

bankruptcy court denied Kemp Klein’s fee request, concluding that the firm’s services were not

reasonably likely to benefit the estate because the unsecured creditors were unlikely to receive a

distribution. But the court pointed to one potential exception: Kemp Klein’s investigation into

fraudulent and preferential conveyances. Thus the court denied Kemp Klein’s fee application

“without prejudice to the applicant’s right to file an application for fees identifying specifically the

services rendered in investigating preferences and fraudulent conveyances.” The firm moved the

court to reconsider, but the court denied the motion. Kemp Klein appealed to the district court, and

that court affirmed. Kemp Klein now appeals to this court, arguing that the bankruptcy court applied

the wrong legal standard and clearly erred in its findings of fact.

                                                   II

                                           A. Jurisdiction

                                                 -2-
No. 05-1873
Veltri Metal v. Kemp, Klein

        Before we reach the merits of Kemp Klein’s appeal, we must determine whether we properly

may exercise appellate jurisdiction. “The courts of appeals . . . only have jurisdiction to hear

bankruptcy appeals when both the bankruptcy and district courts’ orders are ‘final.’” Taunt v.

Vining (In re M.T.G., Inc.), 403 F.3d 410, 413 (6th Cir. 2005); see 28 U.S.C. § 158(d)(1). This

appeal asks whether the bankruptcy court’s order denying Kemp Klein’s application “without

prejudice” to its submitting a more limited application is a final order.

        In bankruptcy proceedings, we consider the finality requirement “in a more pragmatic and

less technical way . . . than in other situations.” Lindsey v. O’Brien (In re Dow Corning Corp.), 86
F.3d 482, 488 (6th Cir. 1996) (quotation omitted); see also Millers Cove Energy Co. v. Moore (In

re Millers Cove Energy Co.), 128 F.3d 449, 451 (6th Cir. 1997) (“The authors of one treatise note

. . . that ‘[v]irtually all decisions agree that the concept of finality applied to appeals in bankruptcy

is broader and more flexible than the concept applied in ordinary civil litigation.’” (quoting 16

Charles Alan Wright & Arthur R. Miller, Federal Practice and Procedure § 3926.2 (2d ed. 1996)

(alternation original)). The “more relaxed rule of appealability in bankruptcy cases . . . avoid[s] the

waste of time and resources that might result from reviewing discrete portions of the action only

after a plan of reorganization is approved.” In re Dow Corning Corp., 86 F.3d at 488 (quotation

omitted). Two general principles affect our analysis of this relaxed finality standard: first, an

interim fee award is not a final order, see Boddy v. U.S. Bankr. Court (In re Boddy), 950 F.2d 334,

336 (6th Cir. 1991); and second, a denial of fees is a final order, see Beneke Co. v. Economy Lodging

Sys., Inc. (In re Economy Lodging Sys., Inc.), 234 B.R. 691, 693 (B.A.P. 6th Cir. 1999).

                                                  -3-
No. 05-1873
Veltri Metal v. Kemp, Klein

          The first rule, that interim fees are not final (and thus not appealable), operates to avoid

piecemeal appeals. An applicant awarded an interim fee likely will continue to provide services,

incur costs, and apply for fees for its future services. Interim fees awarded to an applicant remain

subject to re-examination, adjustment, and disgorgement. See Specker Motor Sales Co. v. Eisen, 393
F.3d 659, 662-63 (6th Cir. 2004). In essence, an interim fee award is an advance on a later-

determined total fee award. See In re Four Seas Ctr., Ltd., 754 F.2d 1416, 1419 (9th Cir. 1985).

So long as fee applicants reasonably expect to render additional services in a bankruptcy proceeding,

appeals of interim fee awards undermine judicial economy. But circumstances foretelling the likely

cessation of an applicant’s role in the proceedings may support the exercise of jurisdiction. See, e.g.,

In re Spillane, 884 F.2d 642, 645 (1st Cir. 1989) (“The attorney for the trustee was appointed

specifically to handle the appeal on the transfer of venue. When we dismissed the appeal for lack

of jurisdiction, the attorney’s authorized services were terminated. Thus, further applications will

not be forthcoming . . . . [W]e conclude that the award of attorney’s fees should be treated as final.”).

          This case does not present the piecemeal-appeal problem associated with interim fee awards

because Kemp Klein’s role under 11 U.S.C. § 1103, as counsel to the unsecured creditors’

committee, effectively ended with the conversion of the case to a Chapter 7 liquidation. The denied

application—titled “Kemp Klein’s First and Final Application for Allowance of Fees and

Expenses”—as in In re Spillane, lacked the circumstantial features of an interim (non-appealable)

fee application. The general rule regarding interim fees, then, does not prevent us from hearing this

appeal.

                                                  -4-
No. 05-1873
Veltri Metal v. Kemp, Klein

       The second general rule, that a denial of fees is a final order, validates our exercise of

jurisdiction. See, e.g., Speights & Runyan v. Celotex Corp. (In re Celotex Corp.), 227 F.3d 1336,

1337-38 (11th Cir. 2000); In re Economy Lodging Sys., Inc., 234 B.R. at 693. Though the fees denial

here preserved the applicant’s right to reapply for a limited type of fees, that aspect of the judgment

did not render it non-final.

       “[I]t is well settled that the fact that a judgment is subject to reservations or conditions does

not automatically deprive a judgment of finality.” Futernick v. Sumpter Twp., 207 F.3d 305, 311

(6th Cir. 2000). Nor does the mere possibility of future fee applications necessarily determine

finality. See, e.g., In re Boddy, 950 F.2d at 336 (permitting a post-confirmation appeal of an interim

fee award because, even though “the law firm [could] request additional fees for post-confirmation

services, the bankruptcy court [could] not increase the interim fee award due to the express . . .

limitation [that it applied to the interim award]”).

       Beyond the bankruptcy context, finality under these circumstances would be a close call.

The First Circuit, in a non-bankruptcy case, found that a situation very similar to this one

“present[ed] a particularly difficult problem.” Garcia-Goyco v. Law Envtl. Consultants, 428 F.3d
14, 18 (1st Cir. 2005) (declining to decide the question of finality, but noting that it “view[ed] the

district court’s order as being ‘with prejudice’ to another [fee] request based on the same evidence,

but ‘without prejudice’ to a new motion based on additional evidence,” and “[i]n such

circumstances, a single judgment can preclude further litigation of particular issues, while still

                                                 -5-
No. 05-1873
Veltri Metal v. Kemp, Klein

permitting further litigation on other issues and the underlying claim itself”). But because “the

‘finality’ requirement applies differently in the bankruptcy context,” the non-bankruptcy dilemma

need not detain us. In re Saco Local Dev. Corp., 711 F.2d 441, 443 (1st Cir. 1983) (holding that,

although the issue would be close outside of bankruptcy, the bankruptcy court’s order was final).

The bankruptcy court reached a final determination that Kemp Klein could not recover its requested

fees because its services lacked a reasonable likelihood of benefitting the estate. The reservations

the bankruptcy court appended to its initial denial of Kemp Klein’s fee request, permitting a limited

refiling for specific services, do not alter the finality of the order.1 And given that this case does not

present an interim-award piecemeal-appeal problem, we conclude that the bankruptcy court’s order

was an appealable final order. Cf. Tiboni v. Cleveland Trinidad Paving Co., 36 F.3d 533, 534 (6th

Cir.1994) (assuming jurisdiction without discussing finality where district court’s order dismissed

an action without prejudice subject to reopening upon motion by either party).

                                             B. The Merits

        We now turn to the merits of Kemp Klein’s appeal. We apply direct review to the

bankruptcy court’s determination, Bank of Montreal v. Am. HomePatient, Inc. (In re Am.

HomePatient, Inc.), 414 F.3d 614, 617 (6th Cir. 2005), and we reverse only for abuse of discretion.

Nischwitz v. Miskovic (In re Airspect Air, Inc.), 385 F.3d 915, 920 (6th Cir. 2004). “An abuse of

        1
        Addressing Kemp Klein’s motion for reconsideration, the bankruptcy court noted that the
firm “did not accept” its invitation to resubmit a more specific fees application. This implicit
withdrawal of the invitation further supports our jurisdiction in this case.

                                                  -6-
No. 05-1873
Veltri Metal v. Kemp, Klein

discretion occurs when the bankruptcy court relies upon clearly erroneous findings of fact,

improperly applies the law, or uses an erroneous legal standard.” Id.

       The Bankruptcy Code permits bankruptcy courts to award attorneys “reasonable

compensation for actual, necessary services rendered.” 11 U.S.C. § 330(a)(1)(A). The Code

prohibits a court from awarding fees, however, for: “(i) unnecessary duplication of services; or (ii)

services that were not—(I) reasonably likely to benefit the debtor’s estate; or (II) necessary to the

administration of the case.” Id. § 330(a)(4)(A).

       The bankruptcy court determined that § 330(a)(4)(A) prevented it from awarding Kemp

Klein fees because the firm’s services were not “reasonably likely to benefit the debtor’s estate.”

Specifically, the court concluded that “there has been and will be no distribution to the unsecured

creditors, nor does it appear that there ever was a reasonable likelihood of a distribution.” In

initially examining only the benefit to the debtor’s estate, the court overlooked administrative

necessity as an alternative basis for awarding fees. But the court briefly turned to administrative

necessity in denying Kemp Klein’s motion for reconsideration:

       [T]he court remains satisfied that the record of this proceeding does not justify a
       finding that the services for which the applicant seeks compensation were necessary
       to the administration of the estate or reasonably likely to benefit the estate. The
       record firmly establishes that . . . the assets were of insufficient value for the
       unsecured creditors to reasonably expect any dividend . . . .

                                                -7-
No. 05-1873
Veltri Metal v. Kemp, Klein

Assuming that the bankruptcy court’s mention of administrative necessity remedied its failure to

consider it in the first instance, we nevertheless reverse, faulting the court’s view that neither benefit

to the estate nor administrative necessity can be demonstrated in the absence of a likelihood of a

distribution to the unsecured creditors.

        Many courts have held that a benefit to the estate need not be a direct economic benefit. See,

e.g., In re Holder, 207 B.R. 574, 584 (Bankr. M.D. Tenn. 1997) (collecting cases reaching this

conclusion). And even if the benefit to the estate must be economic, it does not follow that

counsel’s services must result in an economic benefit to the unsecured creditors. The Code speaks

of a “benefit [to] the debtor’s estate,” and “the . . . estate is comprised of ‘all legal or equitable

interests of the debtor in property as of the commencement of the case.’” McCafferty v. McCafferty

(In re McCafferty), 96 F.3d 192, 196 (6th Cir. 1996) (quoting 11 U.S.C. § 541(a)(1) (1988)). An

attorney’s actions may benefit the estate even where, under the payment priorities established in the

Bankruptcy Code, no reasonable probability of a distribution to the unsecured creditors exists.2

        Further, the bankruptcy court erroneously equated administrative necessity with a

distribution to unsecured creditors (or a reasonable likelihood of such a distribution). Services may

be “necessary to the administration of the case” without financially benefitting the estate. See, e.g.,

Van Cott, Bagley, Cornwall & McCarthy v. B.R. & F., L.C. (In re Ricci Inv. Co., Inc.), 217 B.R. 901,

        2
       For instance, where a bankruptcy estate experiences continuing diminution during the
pendency of a Chapter 11 petition, a motion by counsel to convert the bankruptcy to Chapter 7
pursuant to 11 U.S.C. § 1112 will almost certainly benefit the estate, even though the estate’s assets
may be insufficient to result in a distribution to unsecured creditors.

                                                  -8-
No. 05-1873
Veltri Metal v. Kemp, Klein

906-07 (D. Utah 1998) (reversing the bankruptcy court’s denial of fees incurred in defending an

earlier fee application because, although the reorganization plan was already confirmed and the

applicants’ actions did not benefit the estate, the fees were “unavoidably incurred”); In re Thrifty

Oil Co., 205 B.R. 1009, 1019 (Bankr. S.D. Cal. 1997) (“Services of the type rendered by [the

creditors’ committee’s accountant] were not undertaken with an expectation of monetary benefit.

Rather, they were rendered in furtherance of the [official creditors’ committee’s] duties under 11

U.S.C. § 1103(c)(2) and (3).”). The absence of a reasonable likelihood of a distribution to the

unsecured creditors may be relevant in determining an award of fees, see generally Thrifty, 205 B.R.

at 1019-20, but it is not the sole consideration in examining whether services were necessary “to the

administration of the case.” 11 U.S.C. § 330(a)(4)(A)(ii)(II).

       Kemp Klein additionally argues that the bankruptcy court relied on a clearly erroneous

finding of fact when it determined that the unsecured creditors never enjoyed a reasonable likelihood

of distribution from the bankruptcy estate. The firm points out that the bankruptcy court reached

an apparently contradictory conclusion in a later fee award. Our conclusion that the bankruptcy

court applied the wrong legal standard to Kemp Klein’s fee request obviates our consideration of

Kemp Klein’s argument, which the bankruptcy court may address on remand.

                                                -9-
No. 05-1873
Veltri Metal v. Kemp, Klein

                                               III

       Because the bankruptcy court abused its discretion in determining that § 330(a)(4)(A)(ii)

prohibited it from awarding fees to Kemp Klein, we reverse the district court’s judgment affirming

the bankruptcy court, and remand for further consideration in accordance with this opinion.

                                              - 10 -