Court Opinion

ID: 2768659
Source: CourtListenerOpinion
Date Created: 2015-01-09 19:00:53.288279+00
Date Added: 2024-06-11T13:24:06.014729
License: Public Domain

In the

    United States Court of Appeals
                 For the Seventh Circuit
                     ____________________
No. 14-2423
IN RE: SWEPORTS, LTD.,
                                                   Debtor-Appellee.

APPEAL OF: MUCH SHELIST, P.C., et al.,
                                              Creditors-Appellants.
                     ____________________

       Appeal from the United States Bankruptcy Court for the
            Northern District of Illinois, Eastern Division.
       No. 12-14254 — A. Benjamin Goldgar, Bankruptcy Judge.
                     ____________________

  ARGUED DECEMBER 12, 2014 — DECIDED JANUARY 9, 2015
                     ____________________

   Before POSNER, WILLIAMS, and TINDER, Circuit Judges.
   POSNER, Circuit Judge. Before us is a direct appeal from
the bankruptcy court for the Northern District of Illinois
pursuant to 28 U.S.C. § 158(d)(2). The question it presents is
the authority of a bankruptcy judge to make an award of
fees after dismissal of the bankruptcy proceeding and the
consequent revesting of the assets of the debtor’s estate in
the debtor. 11 U.S.C. § 349(b)(3). The fees in question are
sought by the counsel (Neal L. Wolf) for, and a financial ad-
visor (Pierre Benoit, whom Wolf also represents) to, an Offi-
2                                                  No. 14-2423

cial Committee of Unsecured Creditors that the U.S. Trustee
had appointed during the bankruptcy proceeding. 11 U.S.C.
§ 1102(a)(1). Wolf’s law firms (he has been a member of two
law firms during this litigation) and Benoit’s financial advi-
sory firm (Pierre Benoit & Associates, Inc.) are also parties to
the appeal, but seek no additional relief and can therefore be
ignored. To simplify the opinion further we’ll pretend that
Wolf is the only appellant.
    The bankruptcy judge denied the awards on the ground
that, the bankruptcy having been dismissed, he had no ju-
risdiction to make such awards. He reasoned that the
awards could be paid only out of the assets of the debtor’s
estate, and there were no such assets now that the bankrupt-
cy had been dismissed and consequently all the assets of the
debtor’s estate had been returned to the debtor. There is,
however, as we’ll see, a critical difference, missed by the
bankruptcy judge, between determining an entitlement to
fees and ordering payment of fees.
    Sweports, Ltd., owns patents and a subsidiary called
UMF Corporation that manufactures antimicrobial cleaning
products; UMF apparently is Sweports’ principal asset. In
April 2012 several judgment creditors of Sweports, repre-
sented by attorney Wolf, petitioned the bankruptcy court in
Chicago to place Sweports in Chapter 11 bankruptcy (reor-
ganization). Sweports consented, and became the debtor in
possession, with its assets therefore constituting a debtor’s
estate in bankruptcy. Sweports objected to Wolf’s retention
as counsel to the Official Committee of Unsecured Creditors,
on the ground that he had a conflict of interest because he
was continuing to represent several of Sweports’ judgment
creditors. But the bankruptcy judge ruled that there was no
No. 14-2423                                                    3

conflict. Judgment creditors are unsecured; Wolf did not
represent any judgment creditors whose claims were ad-
verse to those of the unsecured creditors represented by the
Official Committee—indeed it’s unclear whether Wolf was
still representing any judgment creditors or other creditors
when he agreed to represent the Official Committee.
   Both Sweports and the Official Committee filed plans of
reorganization. The bankruptcy judge rejected the plans. The
U.S. Trustee then moved that Sweports’ bankruptcy either
be converted from Chapter 11 to Chapter 7 (liquidation) or
dismissed. Neither Sweports nor the creditors favored con-
version, and so the bankruptcy judge dismissed the bank-
ruptcy.
    That was on April 30, 2014, and several weeks later Wolf
filed with the bankruptcy court a motion seeking an award
of attorney’s fees and expenses totaling some $780,000 (we’re
rounding off all dollar figures to the nearest $10,000), all for
his work for the Official Committee of Unsecured Creditors.
This was his second fee request for that work. An interim
request for an award of fees and expenses of some $410,000
had been made and granted earlier, while Sweports was in
bankruptcy, but very little of it had been paid. As a result
Wolf’s final request, superseding the earlier request, sought
a total of more than $1.13 million—plus some $100,000 in
fees and expenses for Benoit, the financial consultant whom
Wolf was and is representing.
    The creditors wanted the bankruptcy dismissed because
they would of course remain creditors of Sweports and
thought they would do better suing it in state court immedi-
ately rather than waiting to scramble for pieces of it if it were
liquidated. That was not an option for Wolf except with re-
4                                                  No. 14-2423

spect to his interim request for fees, since that had been
granted before the bankruptcy proceeding was dismissed
(and in fact Wolf has sued Sweports in an Illinois state court
for the unpaid portion of those fees). Until and unless he re-
ceived a fee award from the bankruptcy judge, the remain-
ing amount of fees and expenses that he was seeking would
not be a debt of Sweports, and so he would have no basis for
pursuing a claim against the company in state court. Wolf
had not become a creditor of Sweports as a result of being
hired by the Official Committee of Unsecured Creditors, ex-
cept with respect to the interim fee award, an administrative
expense that the bankruptcy judge had already—before
dismissing the bankruptcy—ordered Sweports to pay. With
the dismissal of the bankruptcy, Sweports became liable in
the ordinary way (that is, outside of bankruptcy proceed-
ings) to pay the debts that it had had as debtor in possession.
For “on dismissal a bankrupt is reinvested with the estate,
subject to all encumbrances which existed prior to the bank-
ruptcy. After an order of dismissal, the debtor’s debts and
property are subject to the general laws, unaffected by bank-
ruptcy concepts.” In re Income Property Builders, Inc., 699 F.2d
963, 965 (9th Cir. 1982). The problem for Wolf is that the
bankruptcy judge did not order Sweports to pay the rest of
the fee that Wolf had earned for his work for the Official
Committee.
    The bankruptcy judge refused to issue such an order not
because he thought Wolf’s claim to the rest of the fee with-
out merit, but because he thought that having dismissed the
bankruptcy he had no authority to issue any further order
relating to it. There was no longer a debtor in possession, no
longer a debtor’s estate in bankruptcy, no longer any assets
under the control of the bankruptcy court, and therefore, he
No. 14-2423                                                   5

decided, no possible relief that he could grant Wolf. That
was incorrect. It’s true that with the bankruptcy dismissed
the bankruptcy judge could no longer disburse assets of the
debtor’s estate to anyone; it had no assets; it was defunct.
But the judge could determine that Wolf had a valid claim to
a fee in the amount he was seeking. Such a ruling would
create a debt of Sweports to Wolf, and if Sweports refused
(as Wolf expects it would) to pay, he could, like any other
creditor, sue Sweports in state court. Sweports thus is wrong
to say as it does in its brief “that in the absence of an estate
[in bankruptcy] to pay fees and expenses, the Bankruptcy
Court could not grant meaningful relief to Wolf.” An order
that Wolf could take into state court as a basis for obtaining
damages from Sweports would be meaningful relief. There
would be nothing novel about such an order. Almost every
damages suit that is resolved in favor of the plaintiff ends
not with a disbursement of money but with a judgment that
establishes a debt. If the defendant fails to pay, the plaintiff
must initiate a further proceeding to collect the judgment
debt. The judgment to which Wolf was and is entitled would
merely establish a debt; to collect it he will undoubtedly
have to initiate a collection suit in state court.
    The Bankruptcy Code authorizes fee-and-expense
awards to persons who provide assistance in a bankruptcy
proceeding, see 11 U.S.C. § 330(a)(1), and the Judicial Code
grants federal jurisdiction over all civil proceedings “arising
in or related to cases under” the Bankruptcy Code. 28 U.S.C.
§ 1334(b). Wolf has a civil proceeding, arising in and related
to Sweports’ bankruptcy, in which he is seeking from a
bankruptcy court an order that he can use to obtain cash
elsewhere. The order, if granted, would confer a real value.
6                                                 No. 14-2423

It would therefore not be “moot,” as the bankruptcy judge
said in embroidering his jurisdictional ruling.
   Had Wolf sought such an order a few weeks earlier, be-
fore the bankruptcy proceeding was dismissed, the judge
would doubtless have issued it. What caused Wolf to delay,
he explains, was his ethical obligations to the unsecured
creditors that he represented as counsel to the Official
Committee of Unsecured Creditors. All Sweports’ unsecured
creditors wanted the bankruptcy proceeding dismissed
posthaste so that they could pursue their state remedies
against Sweports, which they couldn’t do until the proceed-
ing was dismissed because until then litigation against Swe-
ports in other courts was stayed. 11 U.S.C. §§ 362(a)(1), (2).
Had Wolf moved before dismissal of the bankruptcy for his
fee award for services to the Official Committee of Unse-
cured Creditors, dismissal of the bankruptcy would have
been delayed while the bankruptcy judge considered his re-
quest and Sweports’ opposition. The delay would have hurt
the unsecured creditors—Wolf’s direct or indirect clients. So
as not to delay the dismissal of the bankruptcy, he held off
on requesting an order for payment of the fees he was due.
    The postponement in filing his request until the bank-
ruptcy was dismissed hurt no one. It merely gave Sweports a
shot at a windfall—eliminating, by appealing to a wooden
concept of jurisdiction, a debt that it had incurred. A court
loses jurisdiction over a case when it issues a final judgment,
which is to say a judgment that resolves the controversy be-
tween the parties. The order dismissing the bankruptcy
didn’t do that. There was a loose end, left dangling—Wolf’s
claim for fees. He needed that ruling to be able to enforce the
entitlement in state court.
No. 14-2423                                                    7

    There is no novelty to the idea that a court has besides its
ordinary jurisdiction a “clean-up” jurisdiction (“ancillary”
jurisdiction, it is commonly called) to take care of minor
loose ends. It is implicit in two of the statutory provisions
we cited earlier, 11 U.S.C. § 330(a)(1) and 28 U.S.C. § 1334(b).
Most though not all cases recognize that bankruptcy courts
have such authority. Compare In re 5900 Associates, Inc., 468
F.3d 326, 330–31 (6th Cir. 2006); In re Taylor, 884 F.2d 478, 481
(9th Cir. 1989), and In re Dahlquist, 751 F.2d 295, 298–99 (8th
Cir. 1985), with In re Advanced Computer Technology Act, Inc.,
2013 WL 5661203 (D. Puerto Rico Oct. 15, 2013), and Iannini
v. Winnecour, 487 B.R. 434, 438–40 (W.D. Pa. 2012). If the
bankruptcy judge in this case, realizing that a request for
fees would be coming from Wolf, had delayed the bankrupt-
cy, the creditors would as we said have been hurt. So a sen-
sible course of action was to dismiss the bankruptcy and
leave for later a determination of how much Sweports owed
Wolf. An alternative would have been to lift the automatic
stay of suits by creditors of a debtor that is in bankruptcy.
The creditors, including Wolf, could then have proceeded
with efforts to collect their debts even though the bankrupt-
cy hadn’t yet been dismissed. But there’s no reason why
dismissing the bankruptcy and leaving for later a determina-
tion by the bankruptcy judge of how much Sweports owed
Wolf should be thought an alternative outside the judge’s
jurisdiction. The judge suggested no reason—just the bare,
formalist conclusion that with dismissal he had lost jurisdic-
tion to do anything further that would be related to the bank-
ruptcy.
   Sweports argues that Wolf should have asked the bank-
ruptcy judge to “reserve” jurisdiction over his fee request
when the judge dismissed the bankruptcy. The bankruptcy
8                                                  No. 14-2423

judge made clear that he would refuse to reserve jurisdic-
tion. And we can’t see what an explicit reservation would
have done for anybody.
    We’re left with no reason to think that Wolf should be
disentitled, whether as a matter of statutory or constitutional
interpretation or good sense, to pursue in the bankruptcy
court his request for an award (not payment, but a determi-
nation of what he is owed) of fees for his services to the Offi-
cial Committee of Unsecured Creditors.
                                    REVERSED AND REMANDED.