FILED AUG 20 2024 NOT FOR PUBLICATION SUSAN M. SPRAUL, CLERK U.S. BKCY. APP. PANEL OF THE NINTH CIRCUIT UNITED STATES BANKRUPTCY APPELLATE PANEL OF THE NINTH CIRCUIT
In re: BAP Nos. CC-23-1202-CLS MEHR GROUP OF COMPANIES CC-23-1203-CLS HOLDING, INC., (Related Appeals) Debtor. Bk. No. 8:23-bk-10760-SC LAW OFFICES OF JAENAM COE, PC, Appellant, v. MEMORANDUM* KAREN S. NAYLOR, former Chapter 11 Trustee; MEHR GROUP OF COMPANIES HOLDING, INC.; JAVAD MEHRVIJEH; UNITED STATES TRUSTEE, SANTA ANA, Appellees.
Appeal from the United States Bankruptcy Court for the Central District of California Scott C. Clarkson, Bankruptcy Judge, Presiding
Before: CORBIT, LAFFERTY, and SPRAKER, Bankruptcy Judges.
* This disposition is not appropriate for publication. Although it may be cited for whatever persuasive value it may have, see Fed. R. App. P. 32.1, it has no precedential value, see 9th Cir. BAP Rule 8024-1. INTRODUCTION
This case involves two related appeals. In the first, the Law Offices of
Jaenam Coe PC (“Coe 1”), the law firm for the now dismissed chapter 11 2
debtor appeals the bankruptcy court’s order awarding it $5,000 in attorney’s
fees and costs and directing it to remit the balance of its retainer funds to
the former chapter 11 trustee. Because the fee award was not an abuse of
discretion, we AFFIRM.
In the second, Coe appeals the bankruptcy court’s order sanctioning
the debtor and the debtor’s principal. However, Coe is appearing solely on
its own behalf, Coe is not representing the debtor in these appeals, and Coe
was not sanctioned. Because Coe cannot establish standing to appeal the
sanctions order we DISMISS this appeal.
FACTS3
A. The Debtor’s bankruptcy case.
Mehr Group of Companies Holding, Inc. (the “Debtor”) leased and
remodeled commercial real estate and sublet the spaces to professionals in
1 For the sake of clarity and to distinguish Jaenam Coe from the Law Offices of Jaenam Coe, the memorandum refers to Jaenam Coe as Mr. Coe and the law firm as Coe. As detailed in the Facts section, the bankruptcy court did not always distinguish between the law firm and Mr. Coe. 2 Unless specified otherwise, all chapter and section references are to the
Bankruptcy Code, 11 U.S.C. §§ 101–1532, all “Rule” references are to the Federal Rules of Bankruptcy Procedure, and all “Civil Rule” references are to the Federal Rules of Civil Procedure. 3 We exercise our discretion to take judicial notice of documents electronically
filed in Debtor’s proceeding and the main bankruptcy case. See Atwood v. Chase Manhattan Mortg. Co. (In re Atwood), 293 B.R. 227, 233 n.9 (9th Cir. BAP 2003). 2 the beauty and health industry. On April 17, 2023, Debtor filed a chapter 11
petition. Javad K. Mehrvijeh (the “Debtor’s Principal”) signed the petition
as CEO and Mr. Coe signed the petition as attorney for Debtor. In a status
report, Debtor informed the bankruptcy court that Debtor leased ten
properties (“Leased Premises”), that Debtor was behind in paying rent for
some of the Leased Premises, and some of the lessors (“Landlords”) had
begun pursuing state law remedies including filing unlawful detainer
actions against Debtor in state court. Consequently, Debtor’s bankruptcy
plan included rejecting four leases so Debtor could retain the most
profitable locations.
1. The United States Trustee’s motion to dismiss or convert.
Less than a month after Debtor filed its bankruptcy case, the United
States Trustee (“UST”) filed a motion to dismiss or convert the case to
chapter 7 based upon Debtor’s failure to provide evidence of insurance on
the Leased Premises. Debtor subsequently provided the UST with
certificates of insurance for each of the Leased Premises listing the UST as
an interested party. Believing that Debtor had cured the deficiencies, the
UST voluntarily dismissed the motion.
The Debtor filed amended monthly operating reports for April, May,
and June that included the insurance information, affirming that Debtor had
casualty/property insurance and general liability insurance for each of the
Leased Premises. Debtor also affirmed that the insurance premiums were
current for each of the Leased Premises. Each of Debtor’s monthly operating
3 reports (as originally filed or as amended) were signed by both Debtor’s
Principal and Mr. Coe.
2. The Bankruptcy court orders Coe to hold disputed rent funds in a trust account.
Following a July 21, 2023, status conference that addressed numerous
irregularities and disputes in the management of the Debtor’s case, the
bankruptcy court entered an order prohibiting the Debtor from making any
further rent payments directly to the Landlord for the Leased Premises
(referred to as “Masters”). The order stated that “Debtor shall not make any
rent payments to MASTERS directly, but shall make all rent payments . . . to
[Coe’s] IOLTA Client-Trust Account . . . beginning August 1, 2023.” The
court further ordered that any such rent funds (“Disputed Rent Funds”)
should remain in Coe’s “IOLTA account until further order of the Court.”
3. The Bankruptcy court enters an order appointing a chapter 11 trustee.
The bankruptcy court held another status conference on August 2,
2023. Despite appropriate notice of the hearing, Coe failed to attend the
status conference. At the hearing, the bankruptcy court was presented with
evidence and testimony demonstrating that the Debtor was making
payments to insiders without authority and full disclosure, and Debtor was
using a non-debtor entity as a disbursing agent.
At the conclusion of the hearing, the bankruptcy court found that
“there have been several missteps in the initial stages of this chapter 11 case
4 by Debtor’s counsel,” and stated that it was “very concerned that Debtor’s
counsel had not appeared for the hearing.” The bankruptcy court
determined that, based on the facts and the record, a chapter 11 trustee was
necessary. Consequently, on August 8, 2023, the bankruptcy court entered
an order approving the UST’s application and appointed Karen Sue Naylor
as the chapter 11 Trustee (“Trustee”).
B. Debtor’s bankruptcy case dismissed for bad faith.
1. Trustee’s motion to dismiss.
On August 22, 2023, Trustee filed an emergency motion for an order
dismissing the case with a 180-day bar to refiling (the “Motion” or “Motion
to Dismiss”). The Motion to Dismiss was premised primarily upon the
submission of falsified certificates of insurance and bank account statements
to UST, Trustee, and the bankruptcy court. In the Motion and at the hearing,
Trustee described the deceptive conduct and documents that necessitated
the emergency Motion.
a. The falsified insurance documents.
In the Motion, Trustee stated that although Debtor’s Principal and
Coe repeatedly represented that Debtor maintained insurance on the Leased
Premises, those representations were false, and the Leased Properties were
uninsured, notwithstanding the continued business operations at the
Leased Properties. Trustee noted that insurance on the Leased Premises had
been an issue from the outset. Trustee referenced the initial motion to
dismiss for lack of insurance that was withdrawn after the UST was
5 provided certificates of insurance for all Leased Properties and amended
monthly operating reports were filed, each indicating that all Leased
Premises were fully insured and premiums paid.
Trustee stated that after she was appointed, Debtor’s Principal made a
comment about a lapse of insurance. According to Trustee, Debtor’s
Principal then made “shifting representations . . . regarding the nature and
extent of the lapse in insurance.” Trustee explained the comments were
troubling and confusing because the certificates of insurance previously
provided to the UST showed that the Leased Premises were fully insured.
Upon further questioning, at an August 16, 2023, meeting, Debtor’s
Principal admitted that the Leased Premises were not insured. Trustee
informed the “Principal that if he did not provide proof of insurance by the
following day, she would shut down” all of the Leased Premises. The
following day, the Principal provided Trustee with certificates of insurance
with an expiration date of May 2024, and listing the Trustee as an additional
insured. The certificates of insurance were identical to the certificates of
insurance previously provided to the UST except the new certificates listed
Trustee an additional insured.
Despite the alleged evidence of insurance, Trustee began investigating
the status of insurance for the Leased Premises, and attempted to determine
when the next policy payments were due. When Trustee called the
insurance broker, Trustee was informed that every “certificate of insurance
6 that had been provided,” both initially to the UST and later to the Trustee,
was “falsified” and that the Debtor had no insurance with that broker.
A subsequent email from the insurance company confirmed that the
“certificates provided by [the Debtor were] all fraud.” The policy number
listed on the fraudulent certificates of insurance was for a different
company and expired in 2020. When confronted, Debtor’s Principal
“admitted that the insurance documents had been falsified, that he had
created them and submitted them” to the UST and to Trustee. Debtor’s
Principal later admitted that “there had been no insurance on any of the
Debtors Leased Premises for the entire case.” Thus, all the certificates of
insurance provided had been forged.
b. The falsified bank account statements.
In addition to the sham insurance documents, Trustee also detailed
evidence of forged bank statements submitted to the UST, Trustee, and filed
with the bankruptcy court. Trustee explained that there were forged bank
statements related to three Wells Fargo bank accounts ending in x0901,
x7376, and x4761.
Early in the case, Debtor’s Principal certified to the UST that Debtor’s
prepetition bank account (x0901) had been closed, and that Debtor had
opened a new debtor in possession (“DIP”) account (x7376). For the DIP
account, Coe provided the UST with copies of the account application and
signature card showing the DIP account was opened in April 2023. Trustee
explained that after she was appointed, as part of her review of the case, she
7 noticed that all of the DIP bank statements (for account x 7376) which Coe
had attached to monthly operating reports filed for April, May, and June,
were incomplete and that the pagination of the statements was inconsistent.
Trustee explained she was also unable to reconcile the bank account
statements to the information provided in the monthly operating reports,
including an unauthorized and undisclosed transfer of $120,000 to a non-
debtor affiliated company, Optima Franchising, Inc.
On August 9, 2023, Mr. Coe and Debtor’s Principal advised Trustee
that Debtor had transferred all funds from the DIP account x7376, to a
“new” DIP account ending in x4761 and that they closed DIP account x7376
in July 2023.
On August 9, 2023, Trustee sent a letter to Wells Fargo seeking to take
control of the current DIP account x4761. Trustee also requested bank
statements from January 2021 to the present for all three bank accounts
(x7376, x4761, and x0901). Wells Fargo informed Trustee that DIP account
x7376, which Mr. Coe and Debtor stated they had closed in July 2023 was
actually closed two years earlier, in July 2021. Thus, Mr. Coe had
represented to the court that a closed bank account was a current DIP
account in the monthly operating reports for April-July 2023. Trustee
argued in her Motion that it was logical to conclude that all the bank
statements for DIP account x7376 were falsified because the “Wells Fargo
bank account ending in 7376 was closed in 2021.” Wells Fargo also informed
Trustee that the current DIP account x4761 had only $43.62 in funds, an
8 amount significantly less than the rent revenue reported on the monthly
operating reports.
Trustee’s investigation also uncovered that Debtor’s scheduled
prepetition account x0921, was not the Debtor’s; rather, the name on the
account was Optima Franchising Companies Holding. Additionally,
account x0921 was never closed, despite assurances by Coe and Debtor’s
Principal. Debtor had transferred significant funds to account x0921
throughout the case. Trustee argued that based on the information provided
by Wells Fargo, all statements for x0921 which were provided to the UST
and the Trustee were likewise false because the statements had been altered
in both the name on the account and the numbers.
Based on the fraudulent filings, the failure to maintain insurance, and
the gross mismanagement of the estate, Trustee argued that the case should
be immediately dismissed or converted to chapter 7 for cause pursuant to
§ 1112(b).
2. The bankruptcy court’s order of dismissal.
Debtor did not respond to Trustee’s Motion to Dismiss. At a hearing
on the Motion, Trustee’s counsel reiterated the facts as described in the
Motion and supporting declarations. The bankruptcy court expressed its
grave concern:
I have never seen in my 30-plus years of practice any situation like this before. I mean, I’ve seen Chapter 11 cases where there was no insurance. I’ve seen Chapter 11 cases where insurance
9 has expired. But the alleged fraud that the Trustee has pointed out through two declarations is rather astounding to me.
Hr’g Tr. 3:17-22, Aug. 24, 2023.
When the bankruptcy court asked Mr. Coe to respond, Mr. Coe stated
that the “Debtor’s not opposed to the Trustee’s . . . motion to dismiss the
case.” Based on Mr. Coe’s representation of Debtor’s agreement to the
dismissal, the bankruptcy court made an oral ruling dismissing the case.
On August 25, 2023, the bankruptcy court entered an order, consistent
with its oral ruling, dismissing the case pursuant to § 1112(b) and barring
Debtor from filing a bankruptcy case for a period of 180 days pursuant to
§ 349(a) (“Dismissal Order”). In the Dismissal Order, the bankruptcy court
expressly held that based on the bad faith conduct, all pre-dismissal estate
funds would remain estate property rather than revesting in the Debtor.
The bankruptcy court expressly retained jurisdiction over several matters,
including all motions regarding sanctions and the disposition of estate
funds.
The Debtor did not appeal the Dismissal Order.
C. Trustee’s motion for sanctions.
On November 9, 2023, Trustee 4 filed a motion (the “Sanctions
Motion”) seeking an order (1) awarding sanctions pursuant to the court’s
4 At the time of filing the motion for sanctions, the Trustee was the former chapter 11 trustee given that the bankruptcy case had been dismissed. However, for ease of reading, the memorandum continues to refer to her as Trustee. 10 inherent power under § 105 against Debtor and Debtor’s Principal; (2)
issuing an order to show cause why Coe should not be sanctioned and/or all
funds paid to or held by Coe disgorged; and (3) directing Coe to deliver all
estate funds he was holding in its trust account, including its retainer and
the Disputed Rent Funds, to Trustee.
The Sanctions Motion was based on the aforementioned misconduct,
i.e. creating and submitting fraudulent documents which Trustee argued
demonstrated bad faith and an intent to deceive Trustee, the UST, and the
bankruptcy court regarding the operation of the Debtor’s business in
bankruptcy. Trustee requested sanctions against the Debtor and the
Debtor’s Principal in an amount of $83,422 to compensate Trustee and
Trustee’s counsel for fees and costs directly attributable to investigating and
addressing the misconduct of Debtor, Debtor’s Principal, and Coe
(“Misconduct Fees”). Trustee excluded from the sanctions request any fees
and costs incurred in ordinary case administration.
Trustee acknowledged that she was “not aware of any evidence that
[Mr.] Coe knew of or was involved in Debtor’s Principal’s willful
misconduct.” Nevertheless, Trustee argued that Mr. Coe acted with extreme
negligence and recklessness and breached his fiduciary duties to the estate.
Trustee argued that Mr. Coe failed to conduct a reasonable investigation to
ensure that all the documents he filed were true and accurate, and that this
failure resulted in the dismissal of Debtor’s case. Trustee maintained that
Coe filed documents that were deceptive on their face. Trustee included
11 several examples that she alleged demonstrated fraud or at least issues of
concern that a reasonable and diligent attorney would have noticed and
investigated.5 Although Coe had yet to file a fee application, Trustee
maintained that Coe should not be awarded any fees.
Trustee sought to pay the Misconduct Fees in part by using the cash
amounts held by the estate, including the amounts held in Coe’s trust
account.
D. Coe’s first and final fee application.
On November 15, 2023, after Trustee filed the Sanctions Motion, Coe
filed a first and final fee application (“Fee Application”). The Fee
Application sought an award of $93,661.54 ($91,325 in fees and $2,336.54 in
expenses). The Fee Application disclosed that Coe held $18,262 from its
prepetition retainer ($20,000 retainer less $1,738 filing fee). The Fee
Application sought compensation for 6 different categories of work: (1)
$1,380 for “administration”; (2) $46,035 for “case administration”;
(3) $27,720 for “asset analysis and recovery”; (4) $4,675 for preparation of
Coe’s employment application; (5) $1,375 for “business operations”; and
(6) $9,460 for the preparation of the plans and disclosure statements.
5 The examples included (1) a Status Report filed on July 28, 2023 in which Coe represented that the Debtor’s monthly revenue was $175,687 and the total rent amount was $92,940, however, there was only $44.00 in the Debtor’s bank account when the Trustee was appointed; and (2) an amended June monthly operating report which listed total receipts of $34,362 and disbursements of $34,362, but the attached bank statements represented that there were $128,607.28 in deposits and $128,386.24 in disbursements.
12 The UST objected to the Fee Application, stating that it was
“representative of the substandard work performed” by Coe. The UST
argued Coe’s failure to categorize tasks in the Fee Application as required
by the Local Bankruptcy Rules and the UST Guidelines prevented the UST
from determining the reasonableness of the fees requested. The UST listed
additional reasons why Coe’s representation was substandard and why the
Fee Application was excessive: (1) the initial schedules were materially
inaccurate and had to be amended despite the case having a simple debt
structure with less than 20 creditors; (2) Coe’s employment application was
initially denied and had to be refiled because Coe failed to properly explain
the terms and conditions of his employment; (3) the plan form used by Coe
was outdated and incorrect; (4) the case never made it far enough to have a
hearing on the proposed plan and disclosure statement; (5) the “motions to
assume leases were templates that merely interchanged some basic
information about the leases, but the motions were never granted”; (6) Coe’s
failure to appear at the status conference led to Trustee’s appointment and
the “ultimate dismissal of this case without a single penny paid on pre-
petition claims.”
Trustee also filed an objection to the Fee Application. Trustee joined
the UST in its objection. Additionally, Trustee “object[ed] to the approval of
any of the fees” sought by Coe and incorporated by reference the evidence
and argument submitted in support of the Sanctions Motion.
13 E. Coe’s opposition to the Sanctions Motion.
Coe did not submit an amended Fee Application or otherwise
respond to the Fee Application objections. In Coe’s opposition to the
Sanctions Motion, Coe requested its Fee Application be heard at the same
time as the Sanctions Motion.
In his opposition to the Sanctions Motion, Mr. Coe argued his actions
were not “akin to contempt” because his law firm merely filed the
documents provided by Debtor’s Principal and he “could not have known”
that the documents were falsified. In addition to refusing to take
responsibility for the accuracy of the documents provided by Debtor’s
Principal, Mr. Coe took no responsibility for failing to verify the accuracy of
the documents it filed related to its own records, instead blaming its
bankruptcy software for filing documents showing that it received two
prepetition retainer payments of $20,000 when Coe only received one
payment.
Coe, citing to out-of-circuit case law, maintained that the Trustee had
no rights to its prepetition retainer or the Disputed Rent Funds. Coe also
argued that pursuant to § 326, the bankruptcy court could not award
Trustee compensatory attorney’s fees because Trustee’s fees could not
exceed $4,303.32. The only argument put forth on behalf of the Debtor was
the assertion that the “dismissal of the case with a bar to refiling was the
ultimate sanction to the Debtor,” and therefore, no further sanctions were
warranted. 14 F. The court’s hearing and orders related to the Fee Application and the Sanctions Motion.
The court held a hearing on the Fee Application and the Sanctions
Motion on December 6, 2023. At the hearing, Mr. Coe appeared on behalf of
both the Debtor and the law firm. Debtor’s Principal did not appear.
As to the Fee Application, when questioned by the court, Trustee
argued that Coe should not be awarded any fees. First, Trustee argued that
the insurance issues should have alerted Coe to a possible problem and
therefore, Coe was not entitled to simply rely on Debtor’s Principal for
information. Rather, Coe had a duty to engage in additional due diligence
and investigate the current status of insurance on each of the Leased
Premises.
Second, Trustee argued that the bank statements evidenced obvious
deficiencies and a diligent attorney would have discovered the falsity of the
documents. By way of example, Trustee pointed to several details in the
April monthly operating report bank statement that a diligent attorney
would have noticed, found concerning, and investigated. Trustee described
that although the bank statement: (1) stated it had 4 pages, both the first and
second pages showed “page 1 of 4” and there was no page 2 or page 4 of 4;
(2) showed a balance on April 1, 2023 (prepetition) even though Coe had
stated that the account wasn’t opened until after the bankruptcy petition
was filed on April 17, 2023; (3) showed a statement date (closing date) of
15 April 21, 2023, but the body of the statement showed transactions after this
date.
Mr. Coe responded by arguing that he had never called an insurance
company to confirm insurance because he had no duty beyond accepting
the certificates of insurance provided by Debtor’s Principal. Mr. Coe did not
address the fraudulent bank accounts specifically. However, he generally
argued that he should not be penalized for submitting fraudulent
documents because those documents were provided by Debtor’s Principal.
After hearing from the parties, the bankruptcy court determined that
based on the evidence presented and the totality of circumstances, a
reasonable reflection of the value of Coe’s efforts was $5,000 in attorney’s
fees.
The bankruptcy court also determined that the Debtor and the
Debtor’s Principal had committed fraud upon the court, were in contempt
of court, and thus, sanctions against the Debtor and Debtor’s Principal in
the amount of the Misconduct Fees were appropriate. The bankruptcy court
subsequently entered orders consistent with its oral rulings.
The order awarding Coe’s attorney’s fees and costs (“Fee Award
Order”) stated that the court found by “clear and convincing evidence that
based upon the reasonable value of the services performed and their benefit
to the estate,” Coe’s fees and expenses were allowed in the amount of
$5,000. The court further ordered Coe to remit to Trustee the sum of $13,262
16 which represented the balance of the retainer after deducting the authorized
$5,000 in fees (“Excess Retainer Funds”).
The order imposing sanctions (“Sanctions Order”) stated the sanctions
were “awarded pursuant to the Court’s inherent authority as established by
Section 105(a) against the Debtor and the Principal, jointly and severally, in
the total amount of [the Misconduct Fees] $83,422.00 . . . payable to the
Trustee and her counsel . . . which amount comprises the value of the
reasonable fees . . . that are directly attributable to the Debtor’s misconduct
in this case.” (Emphasis added).
Coe, solely on its own behalf, appeals both the Fee Award Order and
the Sanctions Order.
JURISDICTION
The bankruptcy court had jurisdiction under 28 U.S.C. §§ 1334 and
157(b)(2)(A). We have jurisdiction under 28 U.S.C. § 158.
ISSUES
Whether the bankruptcy court abused its discretion in awarding Coe
$5,000 in fees and costs.
Whether the bankruptcy court abused its discretion in ordering Coe to
disgorge and remit the Excess Retainer Funds to Trustee.
Whether Coe has standing to appeal the Sanctions Order.
STANDARDS OF REVIEW
We review the bankruptcy court’s decision regarding the proper
amount of legal fees to be awarded to the debtor’s attorney for an abuse of
17 discretion. Shalaby v. Mansdorf (In re Nakhuda), 544 B.R. 886, 898 (9th Cir.
BAP 2016), aff’d, 703 F. App’x 621 (9th Cir. 2017). A bankruptcy court’s
disgorgement order directed to a debtor’s attorney is also reviewed for
abuse of discretion. Hale v. U.S. Tr. (In re Basham), 208 B.R. 926, 930 (9th Cir.
BAP 1997), aff’d sub nom. In re Byrne, 152 F.3d 924 (9th Cir. 1998). Under the
abuse of discretion standard, we affirm unless the court below “applied the
wrong legal standard or its findings were” clearly erroneous.
TrafficSchool.com, Inc. v. Edriver Inc., 653 F.3d 820, 832 (9th Cir. 2011) (citing
United States v. Hinkson, 585 F.3d 1247, 1262 (9th Cir. 2009) (en banc)).
Factual findings are not clearly erroneous unless they are illogical,
implausible, or without support from the facts in the record. Hinkson, 585
F.3d at 1262. We may not reverse simply because we would have decided
the factual issue differently. See Anderson v. City of Bessemer City, N.C., 470
U.S. 564, 573 (1985).
Questions of standing are reviewed de novo. Motor Vehicle Cas. Co. v.
Thorpe Insulation Co. (In re Thorpe Insulation Co.), 677 F.3d 869, 879 (9th Cir.
2012). “De novo review requires that we consider a matter anew, as if no
18 decision had been made previously.” Francis v. Wallace (In re Francis), 505
B.R. 914, 917 (9th Cir. BAP 2014).
We may affirm on any ground supported by the record. Fresno Motors,
LLC v. Mercedes Benz USA, LLC, 771 F.3d 1119, 1125 (9th Cir. 2014).
DISCUSSION
A. Legal standards governing fee applications
The Bankruptcy Code contains several provisions designed to ensure
that attorneys are compensated only for services that are actually and
necessarily rendered for the benefit of the estate. See Law Offices of Nicholas
A. Franke v. Tiffany (In re Lewis), 113 F.3d 1040, 1045 (9th Cir. 1997). First,
§ 329(b) authorizes the court to examine the reasonableness of a retainer
agreement and, if such compensation exceeds the reasonable value of any
such services, the court may cancel the agreement, or order the return of a
payment, to the extent excessive. See Hale, 509 F.3d at 1147. Next, § 330(a)(1)
limits an award of fees to “reasonable compensation for actual, necessary
services” and § 330(a)(2) authorizes the court to “award compensation that
is less than the amount of compensation that is requested” if the requested
amount is unreasonable. (Emphasis added). To determine the
reasonableness of the requested compensation a bankruptcy court is
directed to consider the following issues: (1) whether the legal services were
authorized; (2) whether the legal services were necessary or beneficial to the
administration of the estate at the time they were rendered; (3) whether the
legal services were adequately documented; (4) whether the requested fees
19 were reasonable, taking into consideration the factors set forth in
§ 330(a)(3)6; and (5) whether the professional exercised reasonable billing
judgment. Leichty v. Neary (In re Strand), 375 F.3d 854, 860 (9th Cir. 2004)
(citing Roberts, Sheridan & Kotel, P.C. v. Bergen Brunswig Drug Co. (In re
MEDNET, MPC Corp.), 251 B.R. 103, 108 (9th Cir. BAP 2000)).
The reasonable value of services rendered by a debtor’s attorney “is a
question of fact to be determined by the particular circumstances of each
case.” In re Nakhuda, 544 B.R. at 902 (quoting In re Spickelmier, 469 B.R. 903,
914 (Bankr. D. Nev. 2012)). “The burden is upon the applicant to
demonstrate that the fees are reasonable.” In re Basham, 208 B.R. at 931-32
(citation omitted). “[A] bankruptcy court has broad discretion to determine
the number of hours reasonably expended.” Wechsler v. Macke Int’l Trade,
Inc. (In re Macke Int’l Trade, Inc.), 370 B.R. 236, 254 (9th Cir. BAP 2007).
“[E]ven where evidence supports [that] a particular number of hours [were]
worked, the court may give credit for fewer hours if the time claimed is
‘excessive, redundant, or otherwise unnecessary.’” Id. (quoting Dawson v.
Wash. Mut. Bank, F.A. (In re Dawson), 390 F.3d 1139, 1152 (9th Cir. 2004)
6 Section 330(a)(3) recognizes the following as relevant factors: (A) the time spent on the services; (B) the rates charged for the services; (C) whether the services were necessary or beneficial at the time the services were rendered; (D) whether the services were performed within a reasonable amount of time commensurate with the complexity, importance, and nature of the problem, issue, or task addressed; (E) whether the person demonstrated skill and experience in the bankruptcy field; (F) whether the compensation is reasonable based on the customary compensation charged by comparably skilled practitioners in cases other than bankruptcy cases. 20 (abrogated on other grounds)); see also In re Spickelmier, 469 B.R. at 914
(affirming the reduction of compensation for work done that was excessive
or of poor quality); In re Basham, 208 B.R. at 933 (disgorgement upheld for
incomplete and inaccurate schedules, improperly claimed exemptions,
improperly noticed plan confirmation hearing). Indeed, the “bankruptcy
court has broad and inherent authority to deny any and all
compensation . . . .” In re Lewis, 113 F.3d at 1045; see also; In re Wilde Horse
Enters., Inc., 136 B.R.830, 844-47 (Bankr. C.D. Cal. 1991) (disallowing all fees
where counsel breached fiduciary duty to act in the best interests of the
estate and failed to act competently). The bankruptcy court is prohibited
from awarding compensation for unnecessary duplication of services or for
services that were not reasonably likely to benefit the debtor’s estate, or
necessary to the administration of the case. § 330(a)(4)(A).
B. The bankruptcy court did not abuse its discretion in awarding Coe $5,000 in attorney’s fees.
On appeal, Coe makes a variety of arguments as to why the
bankruptcy court erred in limiting the award of fees to $5,000. Coe argues
that the amount awarded was either a reduction without a factual basis,
was the result of a 9011 sanction, or was erroneously punishing Coe for
Debtor’s actions. Coe’s arguments lack merit.
When reducing fees, the court must “provide a concise but clear
explanation of its reasons for the fee award,” Hensley v. Eckerhart, 461 U.S.
424, 437 (1983), and must also “articulate with sufficient clarity the manner
21 in which it makes its determination.” Chalmers v. City of L.A., 796 F.2d 1205,
1211 (9th Cir. 1986), amended, 808 F.2d 1373 (9th Cir. 1987). The court is not
required to include detailed calculations in its explanations, but “something
more than a bald, unsupported amount is necessary.” Id. at 1211 n.3.
Here, the bankruptcy court determined that fees requested by Coe
were unreasonable but did not specify what factors it considered when
determining the “reasonable” fee award for Coe. See In re Strand, 375 F.3d at
860. Rather, the bankruptcy court set forth a bottom-line amount of $5,000
that it determined represented “reasonable” compensation for Coe’s fees
and costs in the case.
While we do not condone such a “meat-axe approach7” and we are
frustrated by the bankruptcy court’s lack of detailed analysis, we
nevertheless determine that remand is not necessary because the
bankruptcy court’s findings, combined with the record, are “explicit enough
on the ultimate issues to give the appellate court a clear understanding of
the basis of the decision and to enable it to determine the grounds on which
the trial court reached its decision.” Amick v. Bradford (In re Bradford), 112
B.R. 347, 353 (9th Cir. BAP 1990) (citation omitted). See also Amantea-Cabrera
v. Potter, 279 F.3d 746, 750 (9th Cir. 2002) (“If the district court’s findings are
sufficient to indicate the factual basis for its ultimate conclusion, in light of
the record viewed in its entirety, then it is not clearly erroneous.”); Simeonoff
7 See Gates v. Deukmejian, 987 F.2d 1392, 1398-1400 (9th Cir. 1992). 22 v. Hiner, 249 F.3d 883, 891 (9th Cir. 2001) (“Conclusory and unhelpful
findings of fact do not necessarily require reversal if the record supports the
district court’s ultimate conclusion.”); Optyl Eyewear Fashion Int’l Corp. v.
Style Cos., 760 F.2d 1045, 1051 (9th Cir. 1985) (“A district court’s failure to
make express findings does not require a remand if ‘a complete
understanding of the issues may be had [from the record] without the aid of
separate findings.’”) (quoting Swanson v. Levy, 509 F.2d 859, 861 (9th Cir.
1975).
Importantly, we review fee awards through a lens of broad deference
to the bankruptcy court “because of its ‘superior understanding of the
litigation and the desirability of avoiding frequent appellate review of what
essentially are factual matters.’” Phillips v. Gilman (In re Gilman), BAP No.
CC-18-1101-STaL, 2019 WL 3074607, at *3 (9th Cir. BAP July 12, 2019)
(quoting Rodriguez v. Disner, 688 F.3d 645, 653 (9th Cir. 2012)), aff’d sub nom.
Phillips v. Gilman, 836 F. App’x 511 (9th Cir. 2020). See also Gates, 987 F.2d at
1398 (holding the bankruptcy court enjoys considerable discretion in
determining the reasonableness of the time spent given its familiarity with
the case); Moreno v. City of Sacramento, 534 F.3d 1106, 1116 (9th Cir. 2008)
(“court has discretion to determine the appropriate fee award, because its
familiarity with the case allows it to distinguish reasonable from excessive
fee requests”). As explained in Gilman,
This deference is especially appropriate in the context of fee awards because the bankruptcy court has the benefit of two
23 distinct but equally valid perspectives concerning the reasonableness of the fees requested: first, the bankruptcy court observes, in an immediate, particularized, and firsthand basis, the delivery of services in connection with particular matters or hearings, and can thus assess the difficulty of the tasks presented and other factors that should dictate the likely time and skill necessary to produce the services, as well as the quality of the services; second, the bankruptcy court has the added perspective of presiding over the matter in a cumulative sense, and is therefore also uniquely able to assess the overall reasonableness of fees measured by the entirety of the aggregate task. Both perspectives are valid, and the bankruptcy court may employ either, or both, in any given instance.
In re Gilman, 2019 WL 3074607, at *4.
From the bankruptcy court’s findings and a review of the record, the
bankruptcy court’s determination of the reasonable value of Coe’s
representation appears to be based on the bankruptcy court’s findings that
Coe failed to: (1) competently perform its legal services; (2) provide a
sufficiently detailed and accurate fee application; and (3) ensure the
documents and information filed with the court were accurate and not
falsified.
First, the bankruptcy court found that Coe acted without the
necessary competence in performing its legal services throughout the case.
“Competent representation of one’s client is a part of an attorney’s ethical
responsibility . . . [and] failure to use reasonable diligence . . . is a breach of
the attorney’s fiduciary duty to the client.” In re Wilde Horse Enterprises, Inc.,
136 B.R. at 844. Services incompetently performed have no value and cannot 24 be compensated. Id. Relatedly, failure of counsel to conduct a reasonable
inquiry when information places counsel on notice of matters that could
adversely impact the bankruptcy estate may warrant a disgorgement of
fees. See In re Count Liberty, LLC, 370 B.R. 259, 287 (Bankr. C.D. Cal. 2007).
Here, the bankruptcy court found that Coe’s legal performance
throughout the case was “troubling,” deficient, and that Coe had
“mishandled” the case from the beginning. Specific examples of subpar
performance cited by the bankruptcy court either expressly or through its
incorporation of the facts and evidence presented by the Trustee and UST in
the Motion to Dismiss included: (1) Coe opening the case with “materially
inaccurate” statements despite the case being relatively simple with few
creditors; (2) Coe’s continued filing of documents throughout the case that
contained errors which required multiple corrections, revisions, and
refiling;8 (3) Coe failing to provide the UST with insurance information for
the Leased Premises causing the UST to file a motion to dismiss or convert;
(4) Coe’s failure to attend a scheduled status hearing which resulted in the
court appointing a chapter 11 trustee; (5) Coe’s use of an outdated form
plan that did not conform to current statutory requirements; and (6) the
dismissal of the case before a hearing on a plan and disclosure statement
and before any payments were made to unsecured creditors.
8 Coe’s timesheet showed that Coe billed over $9,500 for time Coe spent “revising,” and $8,500 for time spent “reviewing.” 25 Second, the bankruptcy court implicitly determined that it was unable
to be more specific as to which charges included in the Fee Application
were reasonable because Coe had “failed miserably with respect” to its Fee
Application by failing to explain what it “did in the categories, the billing
categories, of administration, case administration, asset analysis and
recovery.” On appeal, Coe does not point to evidence showing these factual
findings to be clearly erroneous, and the record supports the findings.
In addition to being vague, the Fee Application contained a litany of
inaccurate and untrue “facts.” It appears that Coe reused a previously
submitted fee application and failed to change several sections. For
example, in the narrative section, Coe cited to false facts including: (1) in the
section discussing “the novelty and difficulty of the questions involved,”
Coe stated that the case “represent[ed] [sic] a single asset real estate and
three restaurants,” with “complex issues, including issues relating to the
interplay of the rights and responsibilities of the various secured lenders
with no controlling agreement, the impending judgment and execution,
which resulted in the adversary proceeding”; (2) Coe “negotiated and
obtained authorization to use cash collateral during the pendency of the
case, both by various emergency cash collateral motions and various
stipulations with Bank of Hope for use of that cash collateral; (3) in the
section describing the “skill requisite to perform the legal services properly”
Coe stated that this “chapter 11 started with disputes between various
creditors both secured and unsecured as well as a judgment holder, who
26 wanted to control the debtor’s business”; and (4) in the section describing
the “amount involved and the results obtained,” Coe stated that the case
resolution involved “the final sale of the business without closing by the
Chapter 11 Trustee.”
None of the above facts are accurate. The case was not filed because a
judgment holder wanted to control the Debtor’s business; rather, it was
commenced because Debtor was behind in rent and wanted to reject several
leases. Additionally, Coe did not present any motions for use of cash
collateral and Coe did not negotiate with Bank of Hope because Bank of
Hope was not a creditor in the case.
Finally, the bankruptcy court found that Coe had failed to properly
review the debtor’s finances and record. Specifically, counsel failed to verify
the insurance certificate and bank records provided by the debtor. The
Trustee subsequently discovered that these records were false. The
bankruptcy court believed Coe should have discovered that the debtor
lacked insurance and had falsified its banking records well before the
Trustee. 9 The salient point here is that Coe failed to adequately represent
the debtor such that his services provided little benefit to the estate. Under
the “significantly deferential” review standard, the bankruptcy court’s
findings are plausible in light of the record viewed in its entirety and we are
The issue of when an attorney for a debtor in possession should investigate the 9
information provided by his or her client, or the level of inquiry required, is not before us and we make no determination as those issues. 27 not left with a “definite and firm conviction that a mistake has been
committed.” United States v. U.S. Gypsum Co., 333 U.S. 364, 395 (1948).
Based on the foregoing, the bankruptcy court’s $5,000 fee award was
within its discretion: the court employed the correct legal standard and its
application of that standard to the facts was not illogical, implausible, or
without support in inferences that may be drawn from the facts in the
record.
C. The award of fees and costs was not a sanction.
Coe argues in the alternative that the Fee Award Order was an
improper sanction. Beyond that conclusory allegation, Coe fails to provide
any legal or factual support for this argument. Contrary to Coe’s assertions,
the bankruptcy court’s decision to award Coe $5,000 was not a sanction. The
Sanctions Order is clear as to whom the bankruptcy court sanctioned −
sanctions were ordered against Debtor and Debtor’s Principal jointly and
severally. Coe was not included in the parties who were sanctioned. This is
consistent with the bankruptcy court’s statements at the hearing in which it
stated that it was intending to sanction only Debtor and Debtor’s Principal.
The bankruptcy court explained that the fee award was a reflection of Coe’s
performance and repeated that the amount was not a sanction and not
meant to punish Coe for Debtor’s misconduct.
28 D. The bankruptcy court’s order instructing Coe to remit the excess retainer funds was not an abuse of discretion. 10
Coe also argues that the bankruptcy court erred in requiring it to
remit all but $5,000 of its retainer because it “had a security interest [in the
retainer] that was not subject to subordination” and therefore it was entitled
to keep the entire retainer. Coe misstates the law.
Before representing a debtor in a Chapter 11 case, counsel often
require a retainer. In general, three types of retainers exist: (1) classic or true
retainers, (2) security retainers, and (3) advance payment retainers. Rus,
Miliband & Smith, APC v. Yoo (In re Dick Cepek, Inc.), 339 B.R. 730, 736 (9th
Cir. BAP 2006). A “security” retainer is held to secure payment of fees for
future services the attorney is expected to render. However, all retainers, no
matter how described, are property of the bankruptcy estate and not of the
professional, and are subject to the bankruptcy court’s review, modification,
and approval. See In re Hathaway Ranch P'ship, 116 B.R. 208, 217 (Bankr. C.D.
Cal. 1990); Kun v. Mansdorf (In re Woodcraft Studios, Inc.), 464 B.R. 1, 11 (N.D.
Cal. 2011), aff’d, 558 F. App’x. 755 (9th Cir. 2014).
Because Coe’s retainer secures payment for fees and costs specifically
allowed by the bankruptcy court pursuant to the procedures and guidelines
set forth in §§ 330 and 331, any retainer remaining after the bankruptcy
10 The Fee Award Order directed Coe to “remit” the balance of the retainer after application of the $5,000 in allowed fees. Trustee and Coe also use the terms turnover and disgorge. Regardless of the terminology, the analysis and review are the same. 29 court has ruled on a fee application is property of the estate subject to
turnover. Coe’s Application to Employ acknowledged this statutory rule,
specifically stating that “compensation in the Case is subject to prior
approval of the Court. No compensation will be paid except upon
application to and approval by the Court after notice and a hearing in
accordance with sections 330 and 331 . . . .”
In this case, Debtor gave Coe a $20,000 retainer with $18,262.00
remaining at the time it filed the Fee Application.11 As detailed in the
previous section, in response to the Fee Application, the bankruptcy court
awarded Coe $5,000. Accordingly, Coe was authorized to deduct that
amount from the retainer. The court ordered Coe to remit to Trustee all
funds remaining from the retainer after deduction of the fee award (the
Excess Retainer Funds).
Beyond conclusory statements, Coe fails to direct the Panel to specific
legal errors or erroneous factual findings by the bankruptcy court. Because
we find that the bankruptcy court applied the correct law and its factual
findings are not illogical, implausible, or without support in the record, the
bankruptcy court did not abuse its discretion in ordering Coe to remit the
Excess Retainer Funds to Trustee.
11 This amount reflects the payment of the $1,738 filing fee. 30 Based on the foregoing, we AFFIRM the Fee Award Order.
E. Coe lacks standing to appeal the Sanctions Order.
Trustee argues that Coe does not have standing to appeal the
Sanctions Order because it was not a party sanctioned by the court. We
agree.
Standing is a threshold jurisdictional requirement derived from the
“case-or-controversy” requirement of Article III of the Constitution. Clifton
Cap. Grp., LLC v. Sharp (In re E. Coast Foods, Inc.), 80 F.4th 901, 905-06 (9th
Cir. 2023). The Ninth Circuit recently clarified that Article III jurisdiction
must be determined before analyzing the prudential “person aggrieved”
requirement. Id. at 906. To demonstrate Article III standing, a plaintiff must
have “(1) suffered an ‘injury in fact’ that is concrete, particularized, and
actual or imminent, (2) the injury is ‘fairly traceable’ to the defendant's
conduct, and (3) the injury can be ‘redressed by a favorable decision.’” Id.
(quoting Lujan v. Defs. of Wildlife, 504 U.S. 555, 560-61 (1992)). Under the
prudential standing doctrine “only a person aggrieved, that is, someone
who is directly and adversely affected pecuniarily by a bankruptcy court’s
order, has standing to appeal that order.” Harkey v. Grobstein (In re Point Ctr.
Fin., Inc.), 890 F.3d 1188, 1191 (9th Cir. 2018) (internal quotation marks and
citation omitted). “An order that diminishes one’s property, increases one’s
burdens, or detrimentally affects one’s rights has a direct and adverse
pecuniary effect for bankruptcy standing purposes.” Id. (citation omitted).
31 Here, Coe is not representing the Debtor on appeal, and instead is
appearing solely on its own behalf. 12 Therefore, to appeal the Sanctions
Order, Coe must establish its own injury resulting from the Sanctions
Order. See Warth v. Seldin, 422 U.S. 490, 499 (1975). Coe fails to demonstrate
that the Sanctions Order injured Coe or affected any of its legally cognizable
rights or interests. See Raines v. Byrd, 521 U.S. 811, 819 (1997). This is because
even if the Panel were to vacate the Sanctions Order, there is no evidence
that Coe’s “injury will be redressed,” (where the injury is the amount of fees
awarded) because the Excess Retainer Funds and the Disputed Rent Funds
would not revert to Coe, nor would a vacation of the Sanctions Award
increase the amount of fees award to Coe. Rather, any funds held in Coe’s
trust account would likely revest with Debtor. See Nash v. Kester (In re Nash),
765 F.2d 1410, 1414 (9th Cir. 1985) (explaining when a case is dismissed,
property of the estate ordinarily revests in the debtor). Accordingly, Coe
fails to demonstrate it has suffered an injury in fact as a result of the
Sanctions Order. Without any demonstrable injury to the rights or interests
at issue in the Sanctions Order, Coe has failed to meet its standing burden.
See Raines, 521 U.S. at 819.
Based on the foregoing, Coe’s appeal of the Sanctions Order is
DISMISSED for lack of standing.
12 Neither the Debtor nor the Debtor’s Principal have appeared in the appeals. 32 CONCLUSION
We AFFIRM the bankruptcy court’s Fee Award Order, BAP No. CC-
23-1202. We DISMISS the appeal of the bankruptcy court’s Sanctions Order,
BAP No. CC-23-1203 based on Coe’s lack of standing.