THOMAS M. RENN, Bankruptcy Judge.
The matter before the Court concerns the propriety of a settlement between the case trustee and a law firm that provided services to the estate. The Office of the United States Trustee (UST) and various creditors (Objecting Creditors) objected to the settlement. For the reasons that follow, the objections will be overruled and the settlement approved.
Debtor herein, Berjac of Oregon (Berjac), filed a voluntary Chapter 11 petition on August 31, 2012. Thomas Huntsberger (Huntsberger) was appointed Chapter 11 trustee. On October 2, 2013, the case was converted to a Chapter 7 liquidation. Huntsberger remained as trustee.
With Court approval, Huntsberger employed the firm of Bullivant Houser Bailey, PC (BHB), as his general counsel in both the Chapter 11 and 7 portions of the case. BHB filed fee applications totaling $1,215,286.51 (the Fee Applications). Huntsberger informally disputed BHB's fees and eventually came to a mediated settlement whereby BHB agreed to a significant reduction. Huntsberger filed a motion, and then an amended motion for approval of the settlement (Amended Settlement Motion). The UST and Objecting Creditors objected.
The UST moved to abate the Amended Settlement Motion pending resolution of the Fee Objections and Motion to Set Aside. The Court denied that motion. Instead, it abated the Fee Objections and Motion to Set Aside pending resolution of the Amended Settlement Motion.
Huntsberger and BHB moved for summary judgment on the Amended Settlement Motion, which the Court denied. The Court then convened a multi-day evidentiary hearing. The Objecting Creditors were given a post-hearing opportunity to file further comments, which several have done. The Amended Settlement Motion is ripe for decision.
Berjac began in the early 1960s as two separate general partnerships, "Berjac of Oregon" and "Berjac of Portland." Fred Holcomb (Fred) was one of the founding general partners. The businesses originally provided insurance premium financing. Fred's sons, Michael and Gary Holcomb, eventually became managing partners of Berjac of Oregon and Berjac of Portland respectively. To raise capital, both entities offered unregistered securities at a guaranteed interest rate to investors, most of whom were the Holcombs' business associates or friends. An account was set up for each investor who would make deposits and withdrawals like a quasi-bank account. Many investors had their life savings tied up in these accounts.
Huntsberger, as well as a large group of investors in a separate state court class action filed against related Berjac entities (the Class Action Plaintiffs), have alleged that Berjac's account activity constituted a Ponzi scheme, whereby new investor deposits were solicited to pay returns to prior investors in an effort to maintain the guise of a legitimate profit-making business. Allegedly, Berjac receipts were funneled to insiders and speculative real estate investments instead of to prudent and legitimate business activities. When cash was insufficient to cover investor "calls," Berjac allegedly drew on credit-lines with various banks. Umpqua Bank (Umpqua) was one of Berjac's banks.
In July 2012, the month before Berjac's Chapter 11 filing, BHB switched banks to Umpqua and opened numerous checking and trust accounts.
The credit was issued on arms-length commercial terms and managed by conventional account managers.
Shortly after merging the two businesses, Berjac filed its Chapter 11 petition. It scheduled over $43,000,000 in general unsecured debt owing to more than 400 investors. On September 19, 2012, an order was entered approving Huntsberger's appointment as Chapter 11 trustee, and the next day the UST made the appointment.
On September 26, 2012, Huntsberger applied to employ BHB as his general counsel (BHB Employment Application), and specifically named Thomas A. Gerber (Gerber) who was "of counsel" to the firm. The BHB Employment Application was accompanied by Gerber's Declaration and Bankruptcy Rule 2014 Verified Statement. The Declaration stated Gerber held no "interest adverse to the bankruptcy estate" and was a "disinterested person as defined in 11 USC § 101(13)
On October 2, 2012, the Court entered an order authorizing Huntsberger to employ Gerber and BHB as his general counsel with an effective date of September 19, 2012.
On October 4, 2012, the § 341(a) meeting of creditors was convened.
Between December 2012 and March 2013, BHB obtained various orders under FRBP 2004 requiring many of the third parties, including Umpqua, to produce records. As a matter of courtesy, BHB decided to forewarn Umpqua if and when it would be served with discovery requests. In January 2013, Hutchinson sent Huntsberger an analysis of potential third-party claims. In this analysis, and in internal e-mails, BHB labeled Umpqua as a litigation target.
On October 2, 2013, the case was converted to a Chapter 7 liquidation. Orders were entered retaining Huntsberger as trustee and BHB as his counsel.
Because discovery was exceptionally voluminous and Berjac's records were in complete disarray, BHB proceeded against the third party "targets" with caution. The litigation team was aware, however, that the statute of limitations on many claims would likely run on August 31, 2014, the two-year anniversary of the Chapter 11's filing.
Huntsberger recalled first becoming aware of BHB's and Umpqua's banking relationship in April 2014. During that month, BHB declined the opportunity to represent Umpqua in an unrelated matter because it felt it had a potential conflict. On April 28, 2014, BHB's Board of Directors (Board) met and decided BHB should not sue Umpqua. According to the testimony, this was a decision based on business, not ethical, considerations. The Board was concerned that because of BHB's banking relationship with Umpqua, Huntsberger's decisions going forward would be second-guessed and that this might become a distraction.
On May 16, 2014, Hutchinson sent Huntsberger a letter recommending that he retain separate counsel to evaluate and pursue claims against Umpqua. The letter acknowledged BHB's relationship with Umpqua and stated that "[a]lthough our trial team is dedicated to zealously advocating for you and the Estate, we are concerned about the potential that it could appear that our firm was not completely zealous in its evaluation and pursuit of any claims against Umpqua because of this relationship." BHB Ex. 352 at 1. Hutchinson offered the firm's assistance to enable any transition to new counsel free of charge.
In light of Hutchinson's letter, Huntsberger decided to transfer all Berjac matters to another firm, Tarlow Naito & Summers, LLP (TNS), and notified BHB to cease all work by June 1, 2014, not coincidentally, the date Gerber joined TNS. Orders were subsequently entered authorizing TNS' employment as the trustee's general counsel.
On August 28, 2014, Huntsberger, through Kent & Johnson, filed an adversary complaint against three banks, including Umpqua, and against Berjac's former accountant (the Adversary Proceeding).
From the beginning of their banking relationship, BHB has seen Umpqua as a possible source of referrals and has not been shy about marketing itself toward that end. While BHB served as the trustee's general counsel, some firm members socialized with Umpqua executives. One of BHB's Board members, Dick Whittemore (Whittemore), maintained a personal friendship with an Umpqua executive, Brad Bleything. The friendship predated BHB's relationship with Umpqua and continued until Whittemore's death in 2015. Whittemore, however, did not work on any Berjac matter.
During the course of BHB's engagement, one of its standby letters of credit with Umpqua expired. The highest intra-month balance on the operating credit-line was $476,454. That line had month-end zero balances except for three months, where the balances were $6,585, $59,382, and $99,638 respectively. The operating credit-line has been renewed annually. BHB never drew against its capital expenditure line. It paid the two term notes according to their terms, with payoffs in August 2015.
BHB filed an interim fee application for $630,039.25 (which it subsequently stipulated to reduce to $603,111.25), and a final fee application for an additional $266,925.67, for a total of $870,036.92 in Chapter 11 fees and expenses. It also filed a fee application for $345,249.59 in Chapter 7 fees and expenses. It thus sought a total of $1,215,286.51, of which it has received $587,063.53 on an interim basis.
At the UST's behest, Huntsberger directed TNS to review BHB's fees. TNS concluded the fees were objectionable on multiple grounds including FRBP 2014 disclosure and § 327(a) adverse interest/lack of disinterestedness issues. In September 2015, and before any formal objections were filed, Huntsberger and BHB participated in a two-day mediation with Hon. Michael Hogan (ret.), and bankruptcy attorney and trustee Ford Elsaesser. The UST declined an invitation to participate. Before the mediation, TNS did extensive settlement preparation, exhaustively examining the merits and deficiencies of the objections, as well as the costs to the estate of litigating them. As a result of the mediation, Huntsberger and BHB reached a settlement whereby BHB agreed to reduce its fees by $300,000. That settlement is the subject of the Amended Settlement Motion.
With the Court's encouragement, on November 16, 2015, BHB filed its 1st Supplemental Rule 2014 Statement. The 1st Supplemental Statement disclosed BHB's banking and lending relationship with Umpqua. It noted that certain firm members, including a member of the Board, had personal relationships with certain Umpqua executives. It also advised of the Board's decision in April 2014 not to prosecute claims against Umpqua and of its subsequent recommendation that special counsel be retained.
Huntsberger eventually reached a court-approved settlement with Umpqua that will result in an $11 million payment to be split between the estate (40%) and Class Action Plaintiffs (60%).
The guideposts for court approval of a settlement are set out in
In assessing a compromise, the court need not rule on disputed facts and questions of law, but rather need only canvass the issues.
Before turning to the
Further, Huntsberger, a bankruptcy trustee for 36 years and himself an attorney, independently weighed the various factors. His testimony convincingly demonstrated his bona fides and loyalty to the creditor body. He was especially aware that time was of the essence because many of the investors are elderly and had been devastated financially.
A & C Factor #1: Probability of success:
Factor #1 requires examination of the probability of success in the litigation. Based on the parties' submissions, the Court must probe three main areas:
a) BHB's qualification:
Attorneys cannot have divided loyalties. This is especially true for those who work for bankruptcy estates. Thus, an attorney employed by an estate: 1) cannot hold or represent an interest adverse to the estate, and 2) must be a disinterested person. § 327(a). In turn, a "disinterested person" in pertinent regard is someone who "does not have an interest materially adverse to the interest of the estate . . . by reason of any direct or indirect relationship to, connection with, or interest in, the debtor, or for any other reason." § 101(14)(C).
The "no adverse interest" and "disinterestedness" criteria substantially overlap,
Neither the Bankruptcy Code nor Rules define "adverse interest." Several courts have used the state bar ethical rules of the forum court as guidance.
First, it is undisputed BHB never
As to the first two bases, clearly the credit arrangements in and of themselves did not lessen the estate's value or create an actual or potential dispute in which the estate was a rival. BHB was not the estate's debtor, it was Umpqua's. The last disjunctive test asks whether BHB held a "predisposition under circumstances that create[d] a bias against the estate,"
A merits determination after a fact-intensive review would likely find BHB had no disqualifying adverse interest; that is, there was no significant risk, i.e., likelihood,
At bottom line, BHB was never beholden to Umpqua in any way.
The UST points to certain firm e-mails, especially from Whittemore, which purportedly show BHB's divided loyalty.
Even if BHB was found in a merits hearing to have an adverse interest on matters relating to Umpqua, the Court would still have discretion to compensate it for services unconnected to the conflict.
b) BHB's disclosures:
FRBP 2014(a) requires that an application to employ a professional, as well as the professional's accompanying verified statement, disclose among other things "all of . . . [the proposed professional's] connections with the debtor, creditors, [and] any other party in interest." All such connections, no matter how irrelevant or trivial they seem, must be disclosed.
It is highly likely the Court would conclude in a merits hearing that BHB violated its continuing duty to disclose. BHB argues that, as a matter of practice in this District, professionals do not disclose commercial banking relationships. One of its witnesses conducted a survey of Rule 2014 statements between 2010-2012, and found only a few instances where such relationships were disclosed. That evidence, while perhaps relevant to BHB's intent, is irrelevant to the legal standard which requires the disclosure of all connections, no matter how trivial. Even though at arms-length and in the ordinary commercial course, considering the extent of its then-current and potential borrowings, it is highly probable BHB's credit relationship with Umpqua rose to the level of a "connection" that was beyond trivial.
However, at absolute minimum there should have been disclosure immediately after the Board's April 28, 2014, decision which led directly to BHB's termination. It took more than a year and half, and at the Court's suggestion, for BHB to make that disclosure.
Bankruptcy courts have wide discretion in designing appropriate remedies for disclosure violations,
Several of these factors cut against a significant sanction, some cut in favor. As discussed above, it is highly unlikely BHB's connections were disqualifying. Further, it is highly unlikely its non-disclosure was willful. There was simply no "smoking gun" or even circumstantial evidence that BHB attempted to conceal its relationship with Umpqua from the Court, Huntsberger, or the estate's creditors. The firm dutifully ran conflicts checks. The "third-party claim" litigators were not bankruptcy specialists and relied on Gerber to make the required disclosures. In turn, Gerber believed the relationship was "routine" and, as such, did not believe disclosure was necessary. That commercial banking relationships are not, as a matter of course, disclosed in this District is also probative of BHB's lack of intent to conceal. And, as discussed below, BHB's services significantly benefitted the estate.
On the other hand, the undisclosed connections were likely material,
The Court, thus, finds it likely a sanction would be imposed in a merits hearing. However, that sanction would come nowhere near the total fee denial advocated by the UST and most of the Objecting Creditors. Rather, a 15-25% sanction would seem more appropriate.
c) BHB's fees:
Although the UST's initial objections to both the Amended Settlement Motion and the Fee Applications specifically attacked many of the applied-for fees, those objections were largely abandoned at the evidentiary hearing. Nevertheless, the Court will touch on the probability of approving BHB's fees in a merits hearing.
Section 330(a)(1) authorizes the court to award an attorney employed under § 327 "reasonable compensation for actual, necessary services," § 330(a)(1)(A), and "reimbursement for actual, necessary expenses." § 330(a)(1)(B). In making its award the court must consider "the nature, the extent, and the value" of the services, "taking into account all relevant factors." § 330(a)(3). Several of those factors are listed in the statute. § 330(a)(3)(A)-(F), (4)(A)(i)-(ii). The services need not necessarily result in a material benefit to the estate to be compensable. Instead, given the plain language of § 330(a)(3)(C), the attorney "need demonstrate only that the services were reasonably likely to benefit the estate at the time rendered."
BHB performed a wide range of legal services during its 21-month retention, including: (1) analyzing Berjac's extensive and various types of assets, (2) identifying and pursuing preferential transfers, (3) investigating
The great majority of BHB's fees were unrelated to the estate's claims against Umpqua. Under the above standards, it is highly probably in a merits hearing the Court would allow the bulk of "non-Umpqua" fees. The evidence adduced indicates that almost $12 million in cash and claim credits was collected/negotiated by the estate outside of the Adversary Proceeding. Much of that credit goes to Mr. Gerber, and much of his work was while with BHB. Further, Huntsberger testified the transition from BHB to TNS was seamless.
As for fees related to the third-party claims, there is also no reason to conclude the great bulk would not be approved. Although the Board's timing could have been better, it is evident BHB's work was not wasted. A simple review of the theories pled in the Adversary Proceeding confirms this.
One other issue deserves brief discussion. The UST has argued at one point or another that issues concerning BHB's qualification and disclosures, as well as those involving the reasonableness of its fees, cannot be "settled" as a matter of law. It argued that by approving the settlement, the Court would be shirking its independent duty to review those matters. Early in these proceedings, the Court held otherwise, citing instances where the UST itself had settled such matters,
Since the settlement was noticed, the UST took at least nine depositions. Thousands of pages of documents were produced in discovery. The evidentiary hearing on the settlement lasted four and a half days. Seventeen witnesses were called and over 250 exhibits admitted. At the hearing's end, the UST conceded it would produce no additional evidence in a merits hearing. The Court has carefully reviewed the evidence, and finds it deficient even on a merits review.
A & C Factor #2: Difficulties in collection:
Factor #2 requires consideration of the difficulties, if any, to be encountered in collection. To a certain extent this factor is irrelevant as the present matter involves an administrative fee claim against the estate, not a claim by the estate against a third party. However, to the extent collection might involve disgorgement of interim fees paid, the issue was resolved on summary judgment where the Court found as an established fact under FRCP 56(g) that BHB could respond in full satisfaction to any disgorgement order.
A & C Factor #3: Complexity, expense, inconvenience, and delay:
Factor #3 looks to the complexity of the litigation involved, and the expense, inconvenience, and delay necessarily attending it. Based on the evidence presented, these factors weigh heavily in favor of approving the settlement.
That the merits of the underlying fee and employment issues are complex is, frankly, an understatement. The UST's own investigation belies any claim to the contrary. The Court gives little regard to any argument that, in light of the evidence now in the record, the issues have been greatly simplified. One cannot conduct exhaustive discovery and force a multi-day hearing, and then rely, in essence, on a fait accompli. To do so would allow an objector to scuttle a settlement by engaging in the very behavior the settlement was meant to avoid. Further, BHB has not conceded its own discovery is complete, and has reserved the right to adduce further testimony and documentary evidence at a full evidentiary hearing on the merits, should the settlement not be approved.
So far, the estate has incurred over $200,000 in fees on this matter. While those fees are subject to review and allowance, they are nevertheless telling. The UST has argued the bulk of the fees could have been avoided had the estate simply stepped aside and let the UST prosecute its fee and employment objections.
A & C Factor #4: Paramount interest of creditors; proper deference:
Factor #4 requires consideration of the paramount interests of creditors and deference to their reasonable views. The creditors' paramount interest "reflects not only [their] desire to obtain the maximum possible recovery but also their competing desire that recovery occur in the least amount of time."
The Court must also accord proper deference to creditors' reasonable views. It need not, however, give all such views equal weight,
The great majority of claimants, either by number or amount, did not object to the notice of the Amended Settlement Motion. In ruling on summary judgment, the Court cited caselaw describing this silence as connoting an "equivocal" position.
The Objecting Creditors both in number and amount, represent a distinct minority of the creditor body. That said, according proper deference requires more than simply counting the number of claimants or dollar amount of claims for and against the settlement. The Court appreciates the Objecting Creditors' positions, and recognizes the time, often at personal expense, each of them has taken to promote those positions.
The root of the word "credit" comes from the latin "credere,"
The Adversary Proceeding was pending during the dispute over BHB's fees. Huntsberger and his counsel soon realized that his attorney-client privilege with BHB (including the protection of work-product) would be waived once formal fee objections were filed, and that, as a result, certain information might come to light that would jeopardize the estate's position in the Adversary Proceeding. There was, thus, a tactical reason to settle aside from compromising the discrete dispute with BHB. That more than $16,000,000 (gross), two-thirds of which came from Umpqua, will eventually be obtained for creditors as a result of settlements of the Adversary Proceeding claims is at least circumstantial evidence that Huntsberger's strategy was a sound one.
The law favors compromise.
This Opinion constitutes the Court's findings of facts and conclusions of law under FRBP 7052.