Court Opinion

ID: 767294
Source: CourtListenerOpinion
Date Created: 2012-04-18 08:31:24+00
Date Added: 2024-06-11T08:07:57.015614
License: Public Domain

200 F.3d 1070 (7th Cir. 2000)
In the Matter of:  Kids Creek Partners, L.P.,  Debtor.Appeals of:  David R. Herzog, Trustee, and Belofsky & Belofsky, P.C. (formerly known as David A. Belofsky & Associates, P.C.),  Special Counsel for the Trustee
Nos. 99-1749 & 99-1803
In the  United States Court of Appeals  For the Seventh Circuit
Argued November 29, 1999Decided January 10, 2000

Appeals from the United States District Court for the  Northern District of Illinois, Eastern Division.  No. 98 C 3852 (94 B 23947)--Charles P. Kocoras, Judge.
Before Bauer, Easterbrook, and Evans, Circuit Judges.
Easterbrook, Circuit Judge.

1
When Kids Creek  Partners entered bankruptcy, its only valuable  asset was an option to acquire a 450-acre parcel  of land at a bargain price. In November 1994 Kids  Creek reached an agreement that would result in  the profitable sale of one part of the parcel to  the County of Grand Traverse, Michigan, and  Munson Healthcare. The buyers threatened to call  off the deal unless Kids Creek conveyed  unencumbered title by the end of the year, which  it could do only by persuading Leighton Holdings,  Ltd., to release a mortgage Leighton held on the  entire parcel. Leighton was unwilling to do this  until its debt had been repaid; Kids Creek could  not pay until it had exercised the option and  sold the land, which it could not do without  Leighton's cooperation--for evenif the  bankruptcy court had the power to approve the  exercise of the option and a sale free from  Leighton's lien, see 11 U.S.C. sec.363(f)(3), the  lien extended to other interests that could not  be so readily cleared. And Kids Creek did not  want to handle the transaction the most obvious  way--repaying Leighton out of the profits of the  sale--because it contemplated suit against  Leighton on a lender-liability theory and feared  that it might have trouble collecting a judgment  rendered years later. (Leighton is a Cayman  Islands corporation that does not maintain  substantial assets in the United States.)

2
At the very last moment, on December 30, 1994,  Leighton and Kids Creek (through David Herzog,  its Interim Trustee) struck a bargain. Kids Creek  would exercise the option and immediately  reconvey the land to the buyers for about $2.9  million; this would produce the $2.1 million  needed to repay Leighton, which would release its  liens; Leighton would provide Kids Creek with a  letter of credit to assure satisfaction of any  judgment Kids Creek might secure against  Leighton. Bankruptcy Judge Schmetterer entered a  lengthy order providing for the purchase and  conveyance of the property, payment of the debt,  release of the liens, and posting of the letter  of credit. A handwritten addendum (initialed by  Judge Schmetterer) provides:

3
If the Trustee initiates such a lawsuit     and [Leighton] prevails, then [Leighton]     shall have an allowed super-priority     administrative claim, prior to the claim     of any holder of a claim otherwise     allowable under section 507(a) of the     Bankruptcy Code, for (a) all costs and     fees associated with the issuance of the     letter of credit; (b) all legal fees and     expenses incurred in the defense of the     lawsuit; (c) all other fees and expenses     reasonably incurred in connection with the     collection of [Leighton's] claim; and (d)     any and all funds previously drawn by the     Trustee under the letter of credit,     together with interest at [Leighton's]     contractual default rate.

4
The deal closed, leaving Kids Creek with  approximately $500,000 in cash to satisfy  creditors other than Leighton. (The surplus was  less than $800,000, because Kids Creek had to pay  the seller of the land.) Instead of paying its  debts, Kids Creek (through Herzog, by then the  permanent Trustee) decided to use the money to  fund a suit (technically an adversary proceeding  in the bankruptcy) against Leighton, which  prevailed after a lengthy battle. Herzog v.  Leighton Holdings, Ltd., 212 B.R. 898 (Bankr.  N.D. Ill. 1997), affirmed, 239 B.R. 497 (N.D.  Ill. 1999). Judge Schmetterer summed up:

5
Plaintiff complains that the [real estate     development] project was doomed by the     refusal of Leighton as lender to fund the     last advance involved in a series of     loans. But the evidence showed that the     project failed due to mismanagement,     breach of contractual obligations owed by     Debtor to the lender, a lower offered sale     price than was hoped for, and [a] capital     gains tax problem, among other reasons not     caused by Defendants. If the final loan     advance had been extended, the project     still would have failed, and there were     ample contractual grounds to deny the final funding.

6
212 B.R. at 904. Having kept its part of the  bargain by maintaining the letter of credit  throughout the litigation, Leighton called on  Kids Creek to reimburse its costs and attorneys'  fees. As a practical matter this meant turning  over the estate's remaining assets. But Trustee  Herzog and the law firm he hired to prosecute the  suit (Belofsky & Belofsky, P.C.) contended that  their bills should be paid instead. By this time,  all thought of distributing anything to Kids  Creek's original creditors and investors had  evaporated; Herzog had devoted all of the  estate's assets to the doomed suit against  Leighton. Herzog and the Belofsky firm contended  that the deal with Leighton in 1994 is invalid  because the Code does not allow such a super-  priority administrative claim.

7
Judge Schmetterer was not amused by this  belated attempt to turn a business arrangement  into the equivalent of a gift by Leighton to its  adversaries. He ordered the estate's remaining  assets distributed to Leighton, leaving Herzog  and the Belofsky firm without compensation for  their services. 220 B.R. 963 (Bankr. N.D. Ill.  1998). (In a later order, the bankruptcy judge  required Herzog and the law firm to disgorge all  interim fees they had received. 236 B.R. 871  (Bankr. N.D. Ill. 1999).) Because Leighton's  claim substantially exceeds the estate's  remaining assets, Judge Schmetterer did not have  any occasion to conduct a close analysis of its  claim; even the lowest estimate of reasonable  attorneys' fees exceeds what is available for  distribution. District Judge Kocoras affirmed,  233 B.R. 409 (N.D. Ill. 1999), holding that  Herzog and the Belofsky firm are estopped to  contest the validity of the 1994 super-priority  order. Other creditors might be entitled to  object, for they did not receive notice of the  December 30 proceeding at which the order was  entered. But Herzog negotiated and approved the  order, and the law firm undertook the  representation with knowledge of it. They are in  no position to complain, the judge held. And of  course no one else has appeared to protest;  unsecured creditors (and the original partners)  know that their claims are worthless and have no  interest in the dispute among administrative  claimants.

8
Herzog and the Belofsky firm devote much of  their appeal to semantic quibbles. Why, it was  the Interim Trustee and his Counsel who approved  the deal in 1994, they say. Neither the Interim  Trustee nor his Counsel is a claimant today.  Rather it is the Trustee and the estate's Special  Counsel who seek payment. That the Trustee and  the Interim Trustee are the same person, and that  the Interim Trustee's lawyer later joined the  Belofsky firm, are dismissed as mere details. Yet  if arrangements to which an interim trustee gave  consent may be avoided as soon as the permanent  trustee is appointed, then contracts with debtors  in bankruptcy would be worthless, and estates in  bankruptcy would be worse off. No one wants to  transact with an entity that may repudiate its  promise. Once an interim trustee has (with  judicial approval) made a bargain on behalf of an  estate in bankruptcy, then the estate is bound.  Replacing one trustee with another may change who  speaks for the estate in the future, but it does  not alter the estate's obligations. As for the  fact that the Special Counsel was appointed after  the 1994 arrangement: a lawyer takes his client  as he finds it. If the estate lacks the assets to  pay for the legal services, then the lawyer has  agreed to work on contingent fee. That was Kids  Creek's situation when Belofsky & Belofsky signed  on as Special Counsel in 1995. If the estate sued  Leighton and won, then the Belofsky firm could  expect full compensation; but if it sued and  lost, then the firm had to expect little or no  compensation, because Leighton would have first  claim. This is an ordinary transaction for the  plaintiffs' bar, and the firm must accept the  consequences.

9
Herzog and the Belofsky firm advance many  reasons why, in their view, even their personal  consent should not be enough to validate  Leighton's super-priority claim. The district  court found these arguments wanting; we find them  irrelevant, because, once Herzog failed to appeal  from the December 30 order, all claims that could  have been raised at that time were forfeited. If  the December 30 order was a final decision,  appealable to the district court under 28 U.S.C.  sec.158(a), then failure to take a timely appeal  puts that order beyond review. The district judge  thought that the order was not final because its  full effects could not be known until later:  whether the estate would sue Leighton, and if so  whether Leighton would prevail, and if it  prevailed the amount of its super-priority claim,  all depended on events that postdated the order.  That's true enough, but why does it render the  order non-final? Think of a judgment in a quiet-title action:  the judge decrees that A has a life interest in  the property, with remainder to B and C in that  order. C could appeal immediately, contending  that he should be superior to B-- even though B  may predecease A, so that the sequence between B  and C turns out not to matter. An order in a  declaratory judgment action concerning insurance  coverage requiring Insurer to indemnify Insured  if it should lose an underlying tort suit is  appealable, even though Insured may win the suit.  An order specifying that Insurer must provide  coverage (i.e., that a policy is valid) is  appealable even though Insured may never suffer  a casualty and even though, if it does, the  nature of the casualty and the amount of the loss  are variable. Coverage itself has value; indeed,  coverage is a property right, valuable to someone  who fears that a bad event may happen. A judgment  that A must indemnify B if a described event  occurs--a standard disposition of a declaratory-  judgment action about the scope or validity of an  insurance policy-- is final and appealable when  entered. The order of December 30 is similar; it  gives Leighton assurance that if a specified  event occurs, then indemnity will be forthcoming.  Provision for indemnity is the kind of order that  would be final in a stand-alone suit outside of  bankruptcy.

10
Orders of the form "if X, then Y" are common in  litigation. They are routinely treated as  immediately appealable, so that the nature of the  property rights these orders determine may be  respected; indeed it would be absurd to say that  the finality of such a judgment depends not on  when it is entered, but on when (if at all) event  X occurs. The decision of December 30, 1994, is  an "if-then" order: if Leighton is sued and  prevails, then its expenses are treated as a  super-priority administrative claim. Such an  order is final, and appealable, if an order  establishing a creditor's priority is generally  appealable even though the amount of the claim,  and its value given other creditors' claims,  remain to be determined. And a priority-fixing  order is indeed treated as final under sec.158.  See, e.g., In re Morse Electric Co., 805 F.2d 262  (7th Cir. 1986).

11
Perhaps the trustee could reply that an if-then  disposition is not final when the additional  contingencies occur in the same litigation. See  McMunn v. Hertz, 791 F.2d 88, 90 (7th Cir. 1986);  In re Lytton's, 832 F.2d 395, 399-400 (7th Cir.  1988); State Street Bank v. Brockrim, 87 F.3d  1487 (1st Cir. 1996). But bankruptcy comprises  many disparate proceedings that would not be a  single case in ordinary litigation and are not  lumped together to determine finality. That's the  essential conclusion of Morse Electric. The  super-priority order was entered as part of the  core bankruptcy proceeding; the claim by the  Trustee against Leighton was an adversary  proceeding that for our purposes might as well  have been a separate suit. The best way to  understand the proceedings, we think, is that  Leighton sought and obtained in the core  bankruptcy case an indemnity agreement whose full  effect depended on the outcome of a separate  adversary proceeding. Because the decision in the  core case finally determined Leighton's priority,  it was appealable under the rationale of Morse  Electric.

12
There is another reason why the order of  December 30 was final. The super-priority clause  is part of a comprehensive order that includes a  direction to exercise the option, sell the  property, and distribute the proceeds in a  particular way. Usually we ask whether a decision  is "final," not whether an isolated passage  standing alone would be final. The administrative  super-priority cannot be divorced from the sale,  for it is a condition of the sale. If an order  approving a sale of property from an estate in  bankruptcy is final, then any dispute about the  conditions attached to the sale must be appealed  at the same time. It would undermine the validity  of the interests transferred by the sale to allow  an appeal about the conditions to be deferred. So  all we need to decide is the basic question: is  an order approving the sale of assets from an  estate in bankruptcy final under sec.158? The  answer is yes. In re Gould, 977 F.2d 1038 (7th  Cir. 1992); In re Met-L-Wood Corp., 861 F.2d 1012  (7th Cir. 1988); In re Sax, 796 F.2d 994 (7th  Cir. 1986).

13
Requiring an immediate appeal makes good sense.  How could estates in bankruptcy reach beneficial  arrangements for the sale of their assets if  terms and conditions crucial to the transaction  could be reopened years later? Only a fool would  deal with the estate under those circumstances,  and the estate's inability to make conclusive  arrangements would reduce the amount available  for distribution to creditors. Thus we do not ask  whether the super-priority order was authorized  by the Code, or whether the use of the power to  create such interests (if that power exists) was  prudently exercised here; nor do we ask whether  some equitable principle prevents Herzog and the  Belofsky firm from welching on their promise.  Instead we hold that once the period for appeal  expired early in 1995, any party who had notice  of the December 30 order was forever barred from  questioning its terms. That the Interim Trustee  agreed to the order, and therefore could not  appeal because he was not aggrieved by it, does  not permit a later appeal; it shows instead that  the Trustee simply had to live with it, rather  than wage what amounts to a collateral attack  after losing the adversary action against  Leighton.

14
Events since the expiration of the time for  appeal may create separate controversies. Just as  a declaratory judgment resolving an insurance  coverage issue would not be conclusive on a later  dispute about the valuation of the casualty, so  the order of December 30, 1994, would not be  conclusive on a dispute about the reasonableness  of Leighton's fees and costs. As we have  mentioned, the assets available for distribution  are less than any amount that would be deemed  reasonable, so no dispute of this kind has  arisen. But the Belofsky firm does contend that  it is entitled to keep $2,500 that it received as  a sanction in the adversary proceeding. The  bankruptcy judge ordered Cecil McNab, one of the  defendants in the adversary proceeding, to pay  $2,500 to the law firm as a sanction under Fed.  R. Civ. P. 37(a)(4)(A) (applied to bankruptcy  cases by Fed. R. Bankr. P. 7037). If the award  was property of the Kids Creek estate, then it  must be turned over for the benefit of other  administrative creditors. This is what the  bankruptcy judge and the district judge  concluded. But if the money never became Kids  Creek's property, then the turnover order was  mistaken.

15
Rule 37(a)(4)(A) provides that "the court shall,  after affording an opportunity to be heard,  require the party or deponent whose conduct  necessitated the motion [to compel] . . . to pay  to the moving party the reasonable expenses  incurred in making the motion, including  attorney's fees" (emphasis added). Payment is to  "the moving party"--which is to say the litigant,  for a law firm is an agent, not a "party" to the  case. This is the norm; fees awarded under fee-  shifting statutes belong to the litigant, not the  lawyer, though the litigant may agree by contract  to pass them on to the lawyer. See Central States  Pension Fund v. Central Cartage Co., 76 F.3d 114  (7th Cir. 1996). Here the moving party was the  bankruptcy estate of Kids Creek, so the award is  property of the estate under 11 U.S.C. sec.541.  Any agreement by the estate to remit those funds  to its law firm is subject to the claims of other  creditors, and Leighton holds a higher priority.

Affirmed