Sunergy California LLC

• Court: United States Bankruptcy Court, E.D. California
• Decided: November 18, 2022
• Docket: 21-20172
• Status: Unknown

Opinion

1 FOR PUBLICATION 2 UNITED STATES BANKRUPTCY COURT 3 EASTERN DISTRICT OF CALIFORNIA 4 In re: ) ) 5 SUNERGY CALIFORNIA LLC, ) Case No. 21-20172-C-11 ) Docket Control No. RG-20 6 Debtor. ) ________________________________) 7 OPINION 8 CHRISTOPHER M. KLEIN, Bankruptcy Judge: 9 The chapter 11 debtor lost control of this case when a 10 trustee was appointed and a liquidating plan confirmed. 11 Debtor’s counsel seeks a final fee award for services before 12 and after appointment of the chapter 11 trustee. The United 13 States trustee and the plan’s liquidating trustee each oppose. 14 The motion will be bifurcated. Issues regarding services 15 rendered after debtor in possession (DIP) status ceased upon the 16 chapter 11 trustee appointment are discrete, fully litigated, and 17 appropriate for final decision. But, incomplete information about 18 actual DIP services prevents fair determination of the other 19 contested final fees without better factual development and 20 opportunity for the fee applicant to explain itself. 21 This opinion holds: (1) debtor’s counsel’s role as counsel 22 for the DIP performing trustee duties ceases upon appointment of 23 a chapter 11 trustee; (2) an appeal from an unstayed order to 24 appoint a trustee does not delay the loss of DIP status; and (3) 25 fee awards for debtor’s counsel for services rendered after a 26 chapter 11 trustee is appointed, per Lamie v. United States 27 Trustee, 540 U.S. 526 (2004), depend upon employment by the 28 1 trustee under 11 U.S.C. § 327(a) or (e) and benefit to the 2 estate. 3 Facts 4 Sunergy California LLC, a solar photovoltaic module 5 manufacturer in the business of producing and selling solar 6 panels operating out of leased facilities, filed this voluntary 7 chapter 11 case on January 20, 2021. 8 Gonzalez & Gonzalez Law, P.C., was authorized to be employed 9 to represent the debtor in its capacity as DIP performing the 10 duties of the trustee. 11 The official committee of unsecured creditors was appointed 12 by the United States trustee on March 17. 13 On July 8, the committee filed a motion to order that a 14 chapter 11 trustee be appointed. 15 The debtor countered on July 19 with a motion to approve a 16 DIP loan facility for $3 million, to which motion the committee 17 objected as containing unacceptable terms such as a security 18 interest in avoiding actions, restrictions on filings within the 19 case, and not disclosing conditions precedent to drawing funds. 20 At a hearing on July 28, this court ordered the United 21 States trustee to appoint a chapter 11 trustee pursuant to 11 22 U.S.C. § 1104(a)(2). 23 The debtor appealed the order to appoint a chapter 11 24 trustee and unsuccessfully sought a stay pending appeal. 25 The court approved the United States trustee’s appointment 26 of the chapter 11 trustee on August 11. 27 The chapter 11 trustee did not pursue debtor’s proposed DIP 28 loan, and the loan motion was denied on September 9. 1 On November 11, the debtor voluntarily dismissed its appeal 2 of the chapter 11 trustee appointment. 3 The joint plan of liquidation confirmed July 28, 2022, 4 provides for a liquidating trustee. 5 Debtor’s counsel has filed an application for final award of 6 fees of $132,539.50 and costs of $7,046.42. 7 The United States trustee objects to $25,506.00 as 8 attributable to services rendered after appointment of the 9 chapter 11 trustee. 10 The liquidating trustee joins the objection of the United 11 States trustee and further objects to the remainder of the fee 12 application, urging that further investigation is needed.1 13 14 Jurisdiction 15 Jurisdiction is founded on 28 U.S.C. § 1334(a). Fee awards 16 concerning estate administration are core proceedings that a 17 bankruptcy judge may hear and determine. 28 U.S.C. 18 § 158(b)(2)(A). 19 20 Analysis 21 We start with procedure before turning to the merits of the 22 question regarding debtor’s counsel’s eligibility for fees 23 24 1In the objection to fees for the period before the chapter 11 trustee was appointed, the liquidating trustee questions 25 benefit to the estate, truthfulness of Schedules and Statement of Financial Affairs, accuracy of monthly operating reports (all of 26 which were later corrected by the chapter 11 trustee), post- 27 petition accounts payable that actually were for prepetition obligations, and the relationship with special counsel RKF Global 28 PLLC, which has a pending application for fees and expenses of $447,668.60 to which objection has also been lodged. incurred after appointment of a chapter 11 trustee. 2 3 4 Procedure 5 A fee application made pursuant to Rule 2016 becomes a Rule 6] 9014 “contested matter” if a party in interest opposes. Fed. R. 7 Bankr. P. 2016 & 9014, adv. comm. note.’ 8 Civil Rule 42 permitting bifurcation applies in contested 9|}/matters. Fed. R. Civ. P. 42, incorporated by Fed. R. Bankr. P. 10} 7042 & 9014 (c). 11 Bifurcation is permitted, as a matter of judicial 12 || discretion, for convenience, to avoid prejudice, or to expedite 13} and economize. Fed. R. Civ. P. 42(b). 14 A favored purpose of bifurcation is, as in this instance, to 15 |} deal with a straightforward dispositive issue before tackling a 16 || more difficult question not yet ripe for decision. DANJAQ LLC v. 17 |} Sony Corp., 263 F.3d 942, 961-62 (9th Cir. 2001). 18 The limiting principle is that bifurcation must not impair a 19] right to trial by jury or risk unduly confusing a jury. Beacon 20 | Theaters, Inc. v. Westover, 359 U.S. 500, 507-11 (1959); DANJAQ LLC, 263 F.3d at 961-62. 22 Here, the question of fees for services by debtor’s counsel 23 | after appointment of a chapter 11 trustee warrants bifurcation as 24a matter of convenience, expedition, and economy. There is no 25 26 |} — 27 “The Rules Advisory Committee explained: “If a party in interest opposes the amount of compensation sought by a 28 || professional, there is a dispute which is a contested matter.” Fed. R. Bankr. P. 9014, adv. comm. note.

1] pertinent jury trial right. The question is not complex and of 2\| some importance but with only sparse direct precedent. 3 In contrast, the compensation dispute for services rendered before the debtor lost DIP status is fact-intensive and overlaps 5 parallel special counsel fee application. Further factual 6 || development exploring the nitty gritty of who-did-what-when-and- why and to what benefit will be necessary. Ultimate resolution neither imminent nor likely to be of interest to nonparties. 9 Hence, bifurcation is appropriate. 10 11 II 12 Finality 13 Debtor’s counsel defends the $25,506.00 fee request for the 14 || appeal from the chapter 11 trustee appointing order on the 15 erroneous theory that the order was not “final” until the appeal order was dismissed. That theory is wrong. 17 The cited support is a California state law doctrine 18 | regarding finality of California state court judgments. People v. 19 |} Mount, 66 Cal. App. 5th 599, 606 (2021). That minority rule does 20 not apply to judgments rendered by federal courts. Sosa v. DIRECTTIV, Inc., 437 F.3d 923, 927-28 (9th Cir. 2006) (contrasting 22 federal and California finality doctrines). 23 Federal law determines the effect of judgments rendered by federal courts. Restatement (Second) of Judgments § 87; Hawkins v. 25 | Risley, 984 F.2d 321, 324-25 (9th Cir. 1993); Robi v. Five Platters, Inc., 838 F.2d 318, 322-23 (9th Cir. 1988). 27 The federal rule on finality of federal judgments follows 28 || the Restatement (Second) of Judgments. Taylor v. Sturgell, 553

1] U.S. 880, 891-95 (2008); Christopher Klein, et al., Principles of Preclusion and Estoppel in Bankruptcy Cases, 79 AM. BANKR. L.J. 3] 839, 844-47 (2005). 4 The effective date of a federal judgment for purposes of the 5 rules of res judicata is the date of its rendition. 6 || Restatement (Second) of Judgments §$ 14; United States ex rel. Barajas v. Northrop Corp., 147 F.3d 905, 909 (9th Cir. 1998); 8 || George v. City of Morro Bay (In re George), 318 B.R. 729, 733-37 (9th Cir. BAP 2004), aff’d, 144 F. App’x 636, cert. denied, 546 10] U.S. 1094 (2006). 11 The federal procedural mechanism to delay enforcement of an 12 || order of a federal court is the stay pending appeal. The Federal 13 Rules of Bankruptcy Procedure provide the procedure for stays pending appeal in bankruptcy cases. Fed. R. Bankr. P. 8007. 15 Unless stayed, a federal judgment retains all of its 16 preclusion effects and may be enforced during the pendency of an 17 |] appeal. Tripati v. Henman, 857 F.2d 1366, 1367 (9th Cir. 1988). 18 || Here, a stay pending appeal was denied. 19 The argument that the debtor remained as DIP until it 20 dismissed its appeal contradicts § 1101(1). The term debtor in possession means “debtor except when a person that has qualified 22 under [§] 322 of this title is serving as trustee in the case.” 2311 U.S.C. § 1101(1) (emphasis supplied). A trustee appointed 24} under § 1104 qualifies and enters into duty upon the timely 25] filing of the required bond. 11 U.S.C. § 322(a). It follows that 26 the debtor ceased to be the representative of the estate the 27 moment the trustee qualified. 11 U.S.C. § 323(a). 28 Counsel’s finality argument lacks merit.

1 III 2 Fee Application 3 A peculiarity of chapter 11 is that DIP counsel may serve 4 dual roles: counsel for debtor and counsel for DIP performing the 5 duties of the trustee. 6 In effect, DIP counsel walk a tightrope at constant risk of 7 falling into the abyss of conflict. Sophisticated chapter 11 8 counsel are vigilant to remind clients that they represent the 9 bankruptcy estate and that advancing narrow parochial concerns of 10 the debtor may necessitate separate counsel. 11 The distinction comes into play when awarding compensation 12 for chapter 11 services. Services that benefit the debtor but not 13 the estate are not likely to be paid by the estate. 14 The $25,506.00 portion of the fee application by debtor’s 15 counsel for the period after appointment of the chapter 11 16 trustee suffers from two independently fatal errors: the Lamie 17 problem regarding unauthorized employment and the lack of benefit 18 to the estate. 19 20 A 21 The Supreme Court in Lamie ruled that the Bankruptcy Code 22 does not authorize compensation for debtor’s counsel once DIP 23 status terminates upon conversion from chapter 11 to chapter 7 24 unless counsel is separately employed pursuant to § 327. Lamie v. 25 United States Trustee, 540 U.S. 526 (2004). 26 The debtor’s counsel tries to distinguish this case from 27 Lamie by arguing that this case involves merely the appointment 28 of a chapter 11 trustee, rather than conversion to chapter 7. While it is conceivable that the chapter 11 trustee could have 2 | ratified the employment of DIP counsel, it is otherwise a 3 || distinction without a difference. 4 The objection by the United States trustee based on Lamie 5 reasons that the key disqualifier is loss of DIP status, regardless of whether it results from conversion to chapter 7 or 7 || appointment of a chapter 11 trustee. 8 This court agrees and has so held. In re Johnson, 397 B.R. 9] 486 (Bankr. E.D. Cal. 2008). There, counsel for an ousted DIP 10 || performed transition services at the request of the chapter 11 11 |} trustee.’ The United States trustee invoked Lamie to object that 12 || some of the fees were unauthorized because counsel’s § 327(a) appointment expired when the debtors lost DIP status. This court 14 || agreed that Lamie applied but ruled that § 327(e) permitted 15 || former DIP counsel to be employed and paid at the request of the 16 || trustee: “The trustee is the main gatekeeper, and the key to the 17 || gate’s lock is § 327(e).”% Johnson, 397 B.R. at 488. 18 The new trustee, according to the Lamie analysis, has three 19] alternatives: (1) re-employ former DIP counsel under § 327 (a); 20 |; ———_ 21 facts of Johnson were: 22 A chapter 11 trustee was appointed when this contentious cross-border real estate development case became dead in the 23 water. Debtors’ counsel made a final fee request under § 330(a) for work done before and after the trustee took 24 over. The United States trustee objected that some of the fees were unauthorized under § 330(a) because counsel’s § employment expired when the debtors lost debtor-in- 26 possession status. The case trustee, who had requested the services, then applied to employ debtors’ counsel under 27 § 327 (e) for the specified special purpose of performing the transition services that he had requested. 28 Johnson, 397 B.R. at 488.

1 (2) employ former DIP counsel for a specified special purpose 2 under § 327(e); or (3) not employ former DIP counsel. Here, the 3 trustee chose option three. 4 The trustee’s leverage as gatekeeper functions as an 5 incentive for the former DIP counsel to cooperate with the 6 trustee in transition to new management. In principle, this need 7 not be a conflict as the DIP counsel’s main client is the estate, 8 rather than the persons who formerly controlled the estate. 9 In short, under Lamie the key event is termination of DIP 10 status. The distinction between appointment of a chapter 11 11 trustee or conversion to chapter 7 makes no difference. The 12 putative services after appointment of the chapter 11 trustee 13 were rendered without the benefit of an employment authorization 14 under § 327. The Lamie objection will be sustained. 15 16 B 17 Regardless of Lamie and the need for employment under § 327, 18 § 330 itself provides an adequate independent reason to sustain 19 the objections to the fee application for services rendered after 20 appointment of the chapter 11 trustee. 21 The court must consider whether the services for which 22 compensation is requested were either beneficial or necessary to 23 the administration of the case as of the time the services were 24 rendered. 11 U.S.C. § 330(a)(3)(C); Roberts, Sheridan & Kotel, 25 P.C. v. Bergen Brunswick Drug Co. (In re Mednet), 251 B.R. 103, 26 106-07 (9th Cir. BAP 2000). 27 Further, the court is forbidden by § 330(a)(4)(A) to award 28 compensation for services that are not reasonably likely to benefit the estate or necessary to the administration of the case. 11 U.S.C. § 330(a) (4) (A); Smith v. Edwards & Hale, Ltd. (in re Smith), 317 F.3d 918, 924-27 (9th Cir. 2002). 4 The burdens of proof and of persuasion are on the fee applicant. Shalaby v. Mansdorf (In re Nakhuda), 544 B.R. 886, 6 |} 902 (9th Cir. BAP 2016). 7 It is apparent that the appeal of the order to appoint a 8 |} chapter 11 trustee was an exercise in obstruction. The appeal no reasonable likelihood of benefitting the estate.* Nor was 10 the appeal necessary to the administration of the estate. 11 Hence, even in the absence of Lamie, the application for 12 1 payment of compensation for services rendered after the chapter 13 trustee became the representative of the estate must be denied on account of § (4) (A). 15 16 KEK 17 For the foregoing reasons, the objections to compensation in 18] the amount of $25,506.00 for services rendered after appointment 19] of the chapter 11 trustee are SUSTAINED. 20 To that extent, counsel’s Motion RG-20 is DENIED. 21 An appropriate separate order shall issue. 22 Dated: November 18, 2022 Ny 24 United s wes ae Judge 25 26 “In the bifurcated portion of the fee application that 27 || remains for future resolution, the debtor’s counsel should plan on addressing the identical critique of the DIP financing motion 28 as having been primarily an obstruction tactic with no reasonable likelihood of approval at the time of its filing. 10