DEBTOR
CYNTHIA DANIELS
APPELLANT
V.
REBECCA MITCHELL BARRON; JOHN A BARRON; CHARLES EASLEY
APPELLEES
| [1] | IN THE UNITED STATES COURT OF APPEALS FOR THE FIFTH CIRCUIT |
| [2] | No. 99-60833 |
| [3] | Keywords: attorneys' fees, 328, 330, professional fees, contingency
fee |
| [4] | August 28, 2000 |
| [5] | IN THE MATTER OF: REBECCA MITCHELL BARRON DEBTOR CYNTHIA DANIELS APPELLANT V. REBECCA MITCHELL BARRON; JOHN A BARRON; CHARLES EASLEY APPELLEES |
| [6] | Before King, Chief Judge, and Parker, Circuit Judge, and FURGESON*fn1,
District Judge. |
| [7] | The opinion of the court was delivered by: King, Chief Judge |
| [8] | Appeal from the United States District Court for the Northern District
of Mississippi |
| [9] | Attorney Cynthia Daniels seeks review of a district court order
affirming a bankruptcy court order approving her compensation in
an amount less than that prayed for in her application for compensation.
For the reasons that follow, we reverse and remand. |
| [10] | I. FACTUAL AND PROCEDURAL BACKGROUND |
| [11] | Rebecca Mitchell Barron and John Barron were divorced in 1994. Under
the terms of their separation agreement, Mrs. Barron conveyed her
interest in five tracts of real property to Mr. Barron. As part of the
same agreement, Mr. Barron was to make four installment payments to Mrs.
Barron totaling $210,000. Mr. Barron paid the first installment of
$50,000, but failed to make any subsequent payments. |
| [12] | In February 1995, the Barrons remarried. Mr. Barron did not re-deed
any interest in the five properties to Mrs. Barron. Mrs. Barron,
however, forgave the balance of the $210,000 owed her under the
separation agreement. Shortly thereafter, she filed a voluntary Chapter
7 bankruptcy case. |
| [13] | In September 1995, the Chapter 7 trustee (the "Trustee")
filed an application seeking the appointment of Daniels as Attorney for
the Trustee. The application stated that Daniels was "willing to
work on a one-third (1/3) contingency basis of the amount recovered in
the filing of any preferential and/or fraudulent complaints, if
warranted." Application For Employment of Attorney Specially, filed
Sept. 28, 1995, at 1, In re Barron, No. 95-10538 (Bankr. N.D. Miss.).
Both Randolph Lipscomb, Mrs. Barron's divorce attorney and a creditor of
the Chapter 7 estate, and Mrs. Barron filed objections to the
application. At a hearing on the Trustee's application to employ
Daniels,*fn2 Lipscomb's attorney
argued that appointment was premature because this was likely an easy
case that would simply require Daniels to make a demand for the sums due
under the settlement agreement. Also, the attorney drew to the court's
attention the extent of the debt owed to Mrs. Barron under the
settlement agreement. See Transcript of Hearing, Nov. 17, 1995, at 5, In
re Barron, No. 95-10538 (Bankr. N.D. Miss.) ("[I]f the court will
look to page four which is paragraph 8A in the separation agreement,
part of a court order approving divorce, and it provides for two hundred
10 thousand [sic] dollars in lump sum alimony, the money in four
scheduled payments, the first of which was [due on] June 22, 1994, the
second June 22, 95, [sic] the third installment in 1996 and the 4th in
97 [sic]."). In November 1995, the bankruptcy court approved
the Trustee's application, conditioning approval of Daniel's contingency
fee upon an actual suit being filed against Mr. Barron following filing
of a demand letter.*fn3 |
| [14] | In March 1996, Daniels, acting on behalf of the Trustee, filed a
complaint against Mr. Barron. In April 1997, she moved for summary
judgment. After Mr. Barron filed a responsive pleading, the bankruptcy
court held a telephonic hearing, during which it informed the parties
that the terms of the separation agreement remained in effect even after
the Barrons' remarriage. Accordingly, in August 1997, the court granted
judgment against Mr. Barron in the amount of $160,000, the amount owed
Mrs. Barron under the separation agreement. |
| [15] | Daniels then filed an application for compensation seeking $53,333.33,
one-third of the recovery. Objections were filed by the Barrons and a
creditor who objected to payment of Daniels's fee in priority to his
claim. The bankruptcy court held a hearing, at the conclusion of
which Daniels was asked to prepare an itemization of her charges. In
November 1997, the bankruptcy court entered an order approving
compensation for Daniels in the amount of $24,431.25 with an additional
expense allowance of $2,500.00. In an accompanying opinion, the bankruptcy
court concluded that its approval of the contingency fee had been
improvident. Daniels appealed from this order to the district court. The
district court affirmed, and Daniels filed this timely appeal. |
| [16] | II. DISCUSSION |
| [17] | A bankruptcy court's determination of attorney's fees is
reviewed for abuse of discretion. See In re Fender, 12 F.3d 480, 487
(5th Cir. 1994). "'The abuse of discretion standard includes review
to determine that the discretion was not guided by erroneous legal
conclusions.'" In re Coastal Plains, Inc., 179 F.3d 197, 205 (5th
Cir. 1999) (quoting Koon v. United States, 518 U.S. 81, 100 (1996))
(alteration in original). "The bankruptcy court's
conclusions of law are reviewed de novo." In re Texas Securities,
Inc., No. 99-11012, 2000 WL 955621, at *2 (5th Cir. Jul. 7, 2000). |
| [18] | Section 328 of the Bankruptcy Code allows an attorney seeking
to represent a bankruptcy estate to obtain prior court approval
of her compensation plan. See 11 U.S.C. § 328(a) ("The trustee . .
. may employ or authorize the employment of a professional person under
section 327 or 1103 of this title . . . on any reasonable terms and
conditions of employment, including on a retainer, on an hourly basis,
or on a contingent fee basis."); In re National Gypsum Co., 123
F.3d 861, 862 (5th Cir. 1997) ("Under present § 328 the
professional may avoid . . . uncertainty by obtaining court approval of
compensation agreed to with the trustee (or debtor or
committee)."). Under § 328, once a compensation plan has received bankruptcy
court approval, "the court may allow compensation different from
the compensation provided under such terms and conditions after the
conclusion of such employment, if such terms and conditions prove to
have been improvident in light of developments not capable of being
anticipated at the time of the fixing of such terms and
conditions." 11 U.S.C. § 328(a) (emphasis added). |
| [19] | On appeal, Daniels argues that the bankruptcy court erred in
modifying her pre-approved compensation plan absent a proper finding to
support a conclusion that the contingency fee was "improvident in
light of developments not capable of being anticipated at the time of
the fixing of such terms and conditions." Id. In its opinion on the
matter, the bankruptcy court stated its understanding of the
applicable law as follows: |
| [20] | The law, applicable to the issue now before this court, has been
clearly delineated by the Fifth Circuit Court of Appeals in Matter of
Nat. Gypsum Co., 123 F.2d 861 (5th Cir. 1997) decided October 8, 1997.
Judge Reavley, writing for the court, stated the following: |
| [21] | Prior to 1978 the most able professionals were often unwilling to work
for bankruptcy estates where their compensation would be subject
to the uncertainties of what a judge thought the work was worth after it
had been done. [Footnote omitted] That uncertainty continues under the
present § 330 of the Bankruptcy Code, which provides that the
court award to professional consultants "reasonable
compensation" based on relevant factors of time and comparable
costs, etc. Under present § 328 the professional may avoid that
uncertainty by obtaining court approval of compensation agreed to with
the trustee (or debtor or committee). Thereafter, that approved
compensation may be changed only for the following reason:
"Notwithstanding such terms and conditions, the court may allow
compensation different from the compensation provided under such terms
and conditions after the conclusion of such employment, if such terms
and conditions prove to have been improvident in light of developments
not capable of being anticipated at the time of the fixing of such terms
and conditions." |
| [22] | The court must therefore set the compensation award either according
to § 328 or § 330. If prior approval is given to a certain
compensation, § 328 controls and the court starts with that approved
compensation, modifying it only for developments unforeseen when
originally approved. If the most competent professionals are to be
available for complicated capital restructuring and the development of
successful corporate reorganization, they must know what they will
receive for their expertise and commitment. Courts must protect those
agreements and expectations, once found to be acceptable. In re Barron,
No. 95-10538, at 6 (Bankr. N.D. Miss. Nov. 4, 1997) (quoting National
Gypsum, 123 F.3d at 862-63) (emphasis added). |
| [23] | It is obvious from the bankruptcy court's discussion in its
opinion that it relied on our statement in National Gypsum that approved
compensation could be modified for "developments unforeseen when
originally approved." The bankruptcy court stated: |
| [24] | At the time of the approval of the contingency fee arrangement, the
court did not anticipate the substantial amount of the subsequent
recovery resulting from the fraudulent conveyance cause of action
against Mr. Barron. . . . |
| [25] | The fraudulent conveyance suit never went to trial. Once the court
reviewed the motion for summary judgment filed on behalf of the trustee,
the outcome was easily determined . . . . |
| [26] | Speaking in sports parlance, this adversary proceeding became a
"slam dunk." It was not perceived as such when the contingency
fee application was approved. Id. at 7-8. In doing so, the bankruptcy
court applied the incorrect legal standard. |
| [27] | Although both National Gypsum and Texas Securities, which cites
National Gypsum, involved a challenge to the bankruptcy court's
determination of the appropriate amount of compensation to award an
attorney, each of those cases turned on the question of whether the bankruptcy
court had erred by applying § 330 rather than § 328. In neither case
were we required to construe § 328 or determine whether developments
relied upon by the bankruptcy court were of the type contemplated by the
provision. Our mention in both cases of "developments
unforeseen" was simply a shorthand reference to the appropriate
standard set forth in the statute: a bankruptcy court may only
depart from a compensation scheme approved under § 328(a) "if such
terms and conditions prove to have been improvident in light of
developments not capable of being anticipated at the time of the fixing
of such terms and conditions. 11 U.S.C. § 328(a) (emphasis added); see
also In re Reimers, 972 F.2d 1127, 1128 (9th Cir. 1992). The bankruptcy
court here should have relied upon the plain language of the statute
rather than our shorthand reference to it. It is not enough that the
developments were simply unforeseen. We leave to the bankruptcy
court the task of applying the correct legal standard in the first
instance. |
| [28] | III. CONCLUSION |
| [29] | For the foregoing reasons, we REVERSE the district court's affirmance
of the bankruptcy court's order and REMAND for further
proceedings consistent with this opinion. |
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| Opinion Footnotes | |
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| [30] | *fn1 . District Judge of the Western District of Texas, sitting by
designation. |
| [31] | *fn2 . Mrs. Barron withdrew her
objection prior to the hearing. |
| [32] | *fn3 . The bankruptcy court
found that there was an "extreme likelihood of litigation in this
matter at some point in time," but expressed no view on the
expected length or difficulty of any such litigation. In re Barron, No.
95-10538 (Bankr. N.D. Miss. Nov. 30, 1995) (Order Approving Employment
of Attorney Specially). |