Bankruptcy - W. Homer Drake, Jr. and Michael M. Duclos

• Publication year: 1998

Bankruptcyby W. Homer Drake, Jr.^* and

Michael M. Duclos^**

I. Introduction

Unlike past years when the United States Court of Appeals for the Eleventh Circuit issued a tremendous number of bankruptcy decisions each term, 1997 turned out to be a very quiet year because the Eleventh Circuit issued only eight opinions addressing matters arising under the Bankruptcy Code.¹ This Article is a survey of those 1997 bankruptcy decisions.

II. Fees and Expenses Incurred by Bankruptcy Professionals

A. Reimbursable Expenses

In Stroock & Stroock & Lavan v. Hillsborough Holdings Corp. (In re Hillsborough Holdings Corp.),² the Eleventh Circuit addressed an issue very close to the hearts of all bankruptcy practitioners—reimbursable attorney expenses. According to section 330(a)(1)(B) of the Bankruptcy Code,³ the bankruptcy court may award attorneys employed in the bankruptcy case "reimbursement for actual, necessary expenses."⁴ During the early stages of the complex bankruptcy case involving Hillsborough Holdings, various law firms applied for interim compensation and reimbursement for expenses.⁵ With the first interim applications, the bankruptcy court ruled that it would not reimburse the law firms for certain expenses the court deemed "overhead."⁶ These expenses included: postage, secretarial charges, word processing, local travel expenses, meals, express mail, messenger delivery expenses, copy charges, laundry, office supplies, and computer research charges.⁷ In subsequent fee applications during the course of the case, the bankruptcy court continued to deny "without discussion" these expenses.⁸ The bankruptcy court maintained this position through the final fee application.⁹ In the process, the firm of Stroock & Stroock & Lavan failed to obtain reimbursement for $341,953.01 of requested expenses, and the firm of Kaye, Scholer, Fierman, Hays & Handler failed to obtain reimbursement for expenses totaling $514,636.97.¹⁰ The law firms appealed.¹¹

The Eleventh Circuit noted that an attorney compensation award would be reviewed only for an abuse of discretion, but the failure of the bankruptcy court to apply the proper legal standard would constitute such an abuse.¹² In this case the bankruptcy court determined at the outset (i.e., before most of the expenses actually were incurred) that the subject expenses were "overhead" and not reimbursable because they should have been "built into the applicant's hourly billing rate."¹³ As a result, no evidence or factual finding was ever made by the court that the law firms in question had actually incorporated the costs of those expenses into their hourly rates.¹⁴ In fact, the evidence indicated the contrary because the law firms claimed their hourly rates were set on the assumption that the subject costs and expenses would be billed separately.¹⁵ The Eleventh Circuit concluded that the bankruptcy court's initial declaration that these expenses were "overhead," without making any inquiry into facts, constituted the application of a legal standard and not a finding of fact.¹⁶

The court in Hillsborough then decided that the legal standard applied by the bankruptcy court was incorrect.¹⁷ In reaching this decision, the Eleventh Circuit reviewed the legislative history of section 330(a)(2) and noted that the intent of Congress was "to promote the same billing practices in bankruptcy cases as in other branches of legal practice."¹⁸ In other words, it was customary practice in the legal industry to bill clients for the expenses at issue in this case. Thus, to restrict payment for certain expenses simply by virtue of the fact that this case was a bankruptcy case would run contrary to Congress's intent to promote similar billing practices. While the bankruptcy court had considerable discretion over the amount of fees and expenses awarded to attorneys, this discretion did not include the authority to "arbitrarily exclude by fiat whole categories of otherwise reimbursable expenses."¹⁹ As a result, the Eleventh Circuit remanded the case to the bankruptcy court to allow it to make necessary factual inquiries and findings of fees and expenses.²⁰

B. Professional Accounting Fees

In McMillan v. Joseph Decosimo & Co. (In re Das A. Borden & Co.),²¹ an accounting firm attempted to get court approval for payment of its accounting fees as priority administrative expenses. The bankruptcy court approved employment of Joseph Decosimo & Company as accountants for the Das A. Borden & Company bankruptcy case. During the pendency of the case, however, Decosimo rendered accounting services not only for the debtor, but also for many other related business entities.²² Decosimo requested and received approval from the bankruptcy court for payment as an administrative expense priority of its fees totaling more than ninety-nine thousand dollars for the services it rendered to these other related business entities.²³ The district court reversed the bankruptcy court decision, and Decosimo appealed.²⁴

According to section 330 of the Bankruptcy Code, a professional employed in bankruptcy may receive "reasonable compensation for actual, necessary services rendered" in the bankruptcy case.²⁵ These fees may qualify for administrative expense priority under section 507(a)(1) of the Bankruptcy Code²⁶ provided that the services were "'actual and necessary to the preservation of the [bankruptcy] estate.'"²⁷ The Eleventh Circuit noted that in order for the fees to qualify as administrative expenses, the accounting services must run to the benefit of "'the debtor and be fundamental to the conduct of its business.'"²⁸ In this particular case, however, Decosimo rendered the disputed services to entities other than the debtor, and any benefit from those services ran to those entities and not to the benefit of the bankruptcy estate of Das A. Borden & Company.²⁹ Therefore, Decosimo could not recover payment for these fees as administrative expenses from the Das A. Borden & Company bankruptcy, and its claim was denied.³⁰

III. Bad Faith and Involuntary Bankruptcy Petitions

The question of whether a creditor acted in bad faith by commencing an involuntary bankruptcy petition was before the Eleventh Circuit in General Trading, Inc. v. Yale. Materials Handling Corp.³¹ In actuality, this bankruptcy issue was a mere diversion from the greater dispute between General Trading and Yale Materials involving the termination of a franchise agreement. Yale Materials manufactured forklifts and parts, and General Trading was a dealer. General Trading brought a civil action against Yale Materials alleging wrongful termination of a franchise agreement, and a few months thereafter, Yale Materials filed an involuntary bankruptcy petition against General Trading. The bankruptcy court later dismissed the involuntary petition after concluding that Yale Materials had failed to prove that General Trading was not paying its debts as they became due because the debts in question were subject to a bona fide dispute.³² Thereafter, in the related action involving the franchise agreement claim, the district court ruled that Yale Materials had filed the involuntary bankruptcy petition in bad faith and assessed punitive damages and attorney fees against Yale Materials.³³

On appeal, the Eleventh Circuit noted diverging case authority on the proper standard to determine whether a creditor acted in bad faith by commencing an involuntary petition.³⁴ One line of authority utilized an "improper purpose" test that found bad faith if the petition was motivated by ill will, malice, or the desire to harass or embarrass the debtor.³⁵ A second view found bad faith under an "improper use" test when a creditor improperly used the involuntary petition provisions of the Bankruptcy Code as a substitute for customary collection procedures.³⁶ A third view analyzed bad faith under the requirements of Rule 11 of the Federal Rules of Civil Procedure.³⁷

Unfortunately, instead of resolving this conflict in case authority, the Eleventh Circuit concluded that the facts of this case did not support a finding of bad faith under any of the above tests.³⁸ Specifically, the evidence presented showed that Yale Materials' primary concern in filing the involuntary petition was to protect itself against other creditors receiving a disproportionate share of General Trading's assets. General Trading had been liquidating its assets, including collateral that secured its debts to Yale Materials, without paying off its obligations to Yale Materials. Other evidence indicated General Trading was making payments to insiders and unsecured creditors instead of to Yale Materials.³⁹ The Eleventh Circuit further noted that case authority existed upon which Yale Materials could argue that the debts in question were not subject to a bona fide dispute.⁴⁰ Had the bankruptcy court followed that line of authority, the petition would not have been dismissed. Thus, Yale Materials had a legal basis, in addition to a factual basis, to file the involuntary bankruptcy petition.⁴¹ As a result, bad faith did not exist, and the decision of the district court was reversed.⁴²

IV. Good Faith and Fraudulent Transfers

The availability of a good faith defense in a fraudulent conveyance action was questioned in Torcise v. Community Bank of Homestead (In re Torcise).⁴³ The debtor in that case was one of the largest tomato farmers in Florida. Unfortunately, he began experiencing severe cash flow problems and found himself deeply indebted to Community Bank and various other individuals, including Torcise's two brothers and two stockholders of Community Bank.⁴⁴ The debts to Community Bank, his brothers, and the bank stockholders were unsecured. In order to take care of these debt obligations, a scheme was set up whereby Community Bank would lend $3.55 million to Torcise's brothers and the two stockholders, but Torcise and his business pledged over $7 million in account receivables to secure the debt. The loaned money actually was...