Armstrong Bank v. Shraiberg, Landau & Page, P.A. (In re Tuscany Energy, LLC)

581 B.R. 681

IN RE: TUSCANY ENERGY, LLC, Debtor.

Armstrong Bank, Plaintiff,

v.Shraiberg, Landau & Page, P.A. and Tuscany Energy, LLC, Defendants.

CASE NO.: 16–10398–EPK

ADV. PROC. NO.: 17–01380–EPK

United States Bankruptcy Court, S.D. Florida, West Palm Beach Division.

Signed January 25, 2018

Megan W. Murray, Tampa, FL, for Plaintiff.

Patrick R. Dorsey, Boca Raton, FL, for Defendant.

ORDER DISMISSING ADVERSARY PROCEEDING

Erik P. Kimball, Judge, United States Bankruptcy Court

Prior to filing its chapter 11 petition, Tuscany Energy, LLC paid a retainer to its bankruptcy counsel, Shraiberg, Landau & Page, P.A. In the present complaint the plaintiff, Armstrong Bank, asks this Court to determine that it had a valid, enforceable, and perfected lien in the funds used to pay the retainer, that the debtor's counsel converted and assisted the debtor in converting the retainer funds, that the debtor's counsel tortiously interfered with the loan agreements between the debtor and Armstrong Bank in requesting and receiving the retainer, and that the debtor's counsel was unjustly enriched by payment of the retainer. Armstrong Bank does not seek a money judgment. Armstrong Bank seeks an order directing the debtor's counsel to return the retainer funds to the bankruptcy estate, ruling that the unearned portion of the retainer as of the bankruptcy petition date is cash collateral of Armstrong Bank, and determining that Armstrong Bank has a first priority lien in those funds or, in the alternative, that any claim of the debtor's counsel to those funds be equitably subordinated to the claim of Armstrong Bank. Armstrong Bank seeks related declaratory relief. Inevitably, Armstrong Bank will seek an order directing that the portion of the retainer that remained unearned on the petition date be paid to Armstrong Bank in partial satisfaction of its claim, although that relief is not requested in the complaint.

Because all of the relief requested in this adversary proceeding, although presented in various forms, is aimed at disposition of a retainer that was undisputedly property of the bankruptcy estate, this adversary proceeding is a core matter in its entirety, subject to entry of final orders and judgment by this Court. 28 U.S.C. §§ 1334(a), (b) and (e) ; 28 U.S.C. §§ 157(a) and (b) ; Bakst v. Smokemist, Inc. (In re Gladstone) , 513 B.R. 149, 153–156 (Bankr. S.D. Fla. 2014) (discussing bankruptcy jurisdiction and the power of the bankruptcy court to enter final orders); Fannie Mae v. CCH John Eagan II Homes, L.P. (In re CCH John Eagan II Homes, L.P.) , Adv. Proc. No. 16–01183–EPK, 2016 WL 6088134, at *3–*6, 2016 Bankr. LEXIS 3758, at *11–*20 (Bankr. S.D. Fla. Oct. 17, 2016) (addressing bankruptcy jurisdiction over property of the estate and related issues). Because the relief requested is limited to declaratory and injunctive relief with regard to property of the estate, and is thus entirely equitable in nature, none of the claims presented are subject to trial by jury. See Bakst v. Bank Leumi, USA (In re D.I.T., Inc.) , 575 B.R. 534 (Bankr. S.D. Fla. 2017). Although the main bankruptcy case was dismissed on October 2, 2017, the Court properly retained jurisdiction to address potential disputes regarding the retainer. ECF No. 285, Case No. 16–10398–EPK.

The Court has carefully reviewed the defendants' motion to dismiss [ECF No. 7] and the related response and reply [ECF Nos. 18 and 25]. Based on Armstrong Bank's own allegations in the complaint, for the reasons stated below, Armstrong Bank is not entitled to any of the relief it requests in this adversary proceeding. The motion to dismiss will be granted and the complaint will be dismissed. Because Armstrong Bank did not seek leave to amend its complaint consistent with precedent in this circuit, the dismissal will be with prejudice.

To proceed in a chapter 11 case, a corporate debtor must be represented by counsel. Without counsel, the case soon will be dismissed. See Potter v. Altman , 647 Fed. Appx. 974, 976 (11th Cir. 2016) ; Palazzo v. Gulf Oil Corp. , 764 F.2d 1381, 1385 (11th Cir. 1985). It is the norm that a corporate chapter 11 debtor pays a retainer to its bankruptcy counsel prior to filing the petition. Experienced bankruptcy lawyers rarely undertake representation of a debtor-in-possession without a retainer. Indeed, the Court might doubt the competence of a bankruptcy lawyer who accepts an engagement to represent a chapter 11 debtor without a retainer or similar assurance of payment. To do so would put counsel completely at risk for counsel's fee based on the success or failure of the case as a whole. So, a corporate chapter 11 debtor is required to have counsel and that counsel almost always must be paid a retainer.

More than 5,700 new chapter 11 cases were filed last year. There are more than 400 chapter 11 cases pending in this district alone. Why, then, is it so difficult to find a reported decision where a secured creditor claimed that funds used to pay a retainer to debtor's counsel remained subject to its pre-bankruptcy security interest? The answer is that, except in extremely unusual circumstances, the secured creditor retains no interest at all in funds paid to debtor's counsel as a pre-petition retainer. U.C.C. section 9–332, uniformly enacted in the states, provides that a transferee of money, or funds from a deposit account, takes free of any security interest "unless the transferee acts in collusion with the debtor in violating the rights of the secured party." E.g. , Fla. Stat. § 679.332. Even if counsel knows that the debtor is in default of its loan obligations and that the secured creditor claims a lien on the funds used to pay a retainer, which is invariably the case, requesting a pre-petition retainer for services to be rendered in a chapter 11 case does not by itself constitute collusion as contemplated in the statute. It is not surprising, then, that almost no secured creditor claims that its pre-bankruptcy security interest continues to attach to the retainer paid to debtor's counsel and that there are almost no reported decisions on the issue.

In the Court's experience, nearly every corporate chapter 11 debtor has a lender with a blanket lien on its assets, including deposit accounts, and has defaulted on the loan before the bankruptcy was filed. That default is often the reason for the filing. The retainer is almost universally paid from an account that is subject to the lender's blanket lien. In many cases, although not in this case, the retainer is paid from an account maintained at the lender itself. If Armstrong Bank's allegations here are sufficient to support a claim of collusion, then nearly every retainer paid to proposed counsel for a chapter 11 debtor remains subject to the secured lender's lien, is cash collateral, and likely cannot be used for its intended purpose. If Armstrong Bank's view is correct, then almost no corporate entity would be able to pursue relief under chapter 11.

According to the complaint, Armstrong Bank had a lending relationship with the debtor based on a loan that Armstrong Bank acquired from the debtor's original lender. Armstrong Bank alleges that, prior to the filing of this bankruptcy case, Armstrong Bank had a lien on essentially all assets of the debtor, including its deposit accounts. Armstrong Bank claims it perfected that lien by filing U.C.C. financing statements in the proper location. This is the only allegation in the complaint in connection with perfection of Armstrong Bank's security interest in the SunTrust Bank account used to pay the retainer.

Armstrong Bank alleges that the debtor was in default of its obligations under the parties' loan documents in October 2015. Armstrong Bank alleges that debtor's counsel knew of these defaults and knew of Armstrong Bank's lien prior to receiving the retainer the following month, in November 2015. These are the only relevant allegations with regard to the state of mind of the debtor and debtor's counsel at the time the retainer was requested and paid.

In November 2015, about two months prior to filing its bankruptcy petition, the debtor paid a retainer to the debtor's counsel in two installments aggregating $200,000.00. According to the complaint, $10,000.00 of that sum was used to pay debtor's counsel for services rendered prior to the filing of this case. Although not specifically stated in the complaint, this would leave $190,000.00 as a retainer for services to be rendered during the bankruptcy case. According to the complaint, the debtor also paid to debtor's counsel a costs retainer in the amount of $1,717.00, which apparently was used to pay the filing fee. This sum does not appear to be at issue in the complaint. According to the complaint, the debtor and debtor's counsel entered into an engagement agreement that treated the retainer as a traditional security retainer, to be held for payment of legal fees and expenses yet to accrue.

In January 2016, the debtor filed its voluntary chapter 11 petition and the following month the debtor obtained authority from this Court to retain debtor's counsel for purposes of its bankruptcy case. Debtor's counsel disclosed the retainer to the Court and all parties in interest.

About nine months later, in September 2016, debtor's counsel sought approval of compensation and reimbursement of expenses on an interim basis and permission to apply the retainer to approved fees and expenses. Armstrong Bank objected on the ground that, in its view, the retainer was cash collateral subject to Armstrong Bank's lien and the debtor could not provide adequate protection for use of the alleged cash collateral. The Court held a hearing on the matter, permitted the parties to brief their positions, and entered a comprehensive order overruling the objection of Armstrong Bank and authorizing application of the retainer to approved fees and expenses of debtor's counsel. In re Tuscany Energy, LLC , 561 B.R. 910 (Bankr. S.D. Fla. 2016). Among...