Edwards Family P'ship, LP v. Johnson

EDWARDS FAMILY PARTNERSHIP, LP;BEHER HOLDINGS TRUST; & CHARLES C. EDWARDS APPELLANTS v. KRISTINA M. JOHNSON, Trusteefor Community Home Financial Services Corporation APPELLEE

CAUSE NO. 3:18-CV-154-CWR-LRA

c/w 3:18-CV-155

c/w 3:18-CV-156

c/w 3:18-CV-157

UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF MISSISSIPPI NORTHERN DIVISION

October 2, 2020

MEMORANDUM OPINION AND ORDER

Edwards Family Partnership, LP, Beher Holdings Trust, and Charles C. Edwards appeal the Bankruptcy Court's memorandum opinion and judgment. For the reasons that follow, the judgment is affirmed in part, reversed in part, and rendered in part.

I. Factual and Procedural History

This case is complex and the proceedings have been lengthy. What follows will discuss only those facts and proceedings necessary to the decision. Readers can find more detail in the Bankruptcy Court's 214-page opinion. That opinion will be cited as "Op. at [page number]."

Charles C. Edwards is a doctor and investor in Baltimore, Maryland. He owns Edwards Family Partnership, LP and Beher Holdings Trust, among other companies. Between 2006 and 2012, Dr. Edwards' entities invested tens of millions of dollars in Community Home Financial Services (CHFS), a mortgage servicing company in Jackson, Mississippi run by Butch Dickson.

The relationship fell apart. State-court litigation commenced in 2012 and was removed here. In an attempt to recoup as much of his investment as possible, Dr. Edwards asked this Court to appoint a receiver to manage CHFS's affairs. The undersigned heard evidence at a multi-day hearing until CHFS filed for bankruptcy and brought the action to a halt. Thus began a six-year saga in the U.S. Bankruptcy Court for the Southern District of Mississippi that has come at enormous cost to all involved. The litigation has lasted longer than the underlying business relationship.

Dr. Edwards filed proofs of claim totaling nearly $30 million. The numbers were not inflated. In the receivership proceeding, Dr. Edwards had sought $30.8 million. See Docket No. 16 in No. 3:12-CV-252. In a later proceeding to enforce Dickson's personal guarantee, Dr. Edwards received a judgment against Dickson in excess of $28 million. See Amended Rule 54(b) Final Judgment in Edwards Family P'ship v. Dickson, No. 3:13-CV-587-CWR-LRA, Docket No. 83 (S.D. Miss. July 25, 2016).

The curious feature of this bankruptcy, given its worth, was in how few claims there were to resolve. Aside from the Edwards entities' claims for roughly $30 million, the Estate of CHFS owed a handful of creditors several thousand dollars each—about $200,000 in aggregate. Op. at 52. It would have been a rational, efficient decision to settle with all of the minor creditors and give Dr. Edwards whatever was left. See Edwards Family P'ship, LP v. Johnson, No. 3:18-CV-158-CWR-LRA, 2020 WL 4506788, at *1 (S.D. Miss. Aug. 5, 2020). After all, $200,000 represents less than 1% of the estate.¹

That did not happen. Instead, Dickson directed CHFS to commence adversary proceedings challenging whether Dr. Edwards' investments were secured or unsecured. Id. at *2 (finding this strategic decision "neither necessary nor 'reasonably likely' to benefit the CHFS estate"). It turns out Dickson was a crook. He fled to Central America with millions of dollars.²Upon his flight, the first Bankruptcy Judge to preside over this case appointed a Jackson attorney named Kristina Johnson as Trustee to manage CHFS's affairs. The Trustee hired the law firm at which she is a partner, Jones Walker, to be her counsel. She resumed the proceedings challenging the priority of Dr. Edwards' claims and then filed new claims, including RICO claims, against him. Every effort the first Bankruptcy Judge and the undersigned made to encourage settlement failed.³ Private mediation before Judge Houston, the retired Bankruptcy Judge from Northern Mississippi, was also unsuccessful.

When this Court wrote in earlier proceedings that it had a lot to say about this case, it was about the litigation this dispute has spawned, and how over the last five years that litigation has gotten out of hand.

Trustees and their attorneys are "not private persons" acting out of self-interest, but "officers of the court" with special duties to the judiciary and the creditors. Matter of Evangeline Ref. Co., 890 F.2d 1312, 1323 (5th Cir. 1989) (quotation marks and citations omitted). "The powers and duties of a bankruptcy trustee are extensive." Commodity Futures Trading Comm'n v. Weintraub, 471 U.S. 343, 352 (1985). "The trustee is accountable for all property received, and has the duty to maximize the value of the estate." Id. at 352 (quotation marks and citations omitted). A Trustee is, in fact, "duty bound to assert" a cause of action "if doing so would maximize the value of the estate." Louisiana World Exposition v. Fed. Ins. Co., 858 F.2d 233, 246 (5th Cir. 1988). If doing so would maximize the value of the estate.

The Trustee was appointed to bring stability to a bad situation—CHFS's failure and Dickson's fraud—so that remaining funds could be returned to CHFS's creditors. "Creditors"here essentially means Dr. Edwards. But something went wrong. The parties dispute who started it and when it happened. Those are complex questions that must be resolved later. At some point, though, the Trustee's priorities shifted from recovering money for the benefit of Dr. Edwards, to pursuing Dr. Edwards.

The structural incentives are obvious and common enough. When a Trustee sues anyone or challenges anything in court, she can bill the estate for services rendered. She is authorized to bill her own hourly fees, the hourly fees of those who represent her (which in this case includes the partners, associates, and paralegals of her law firm), and every other professional she hires. Those fees become the responsibility of the estate. In large cases, a Trustee and her counsel stand to make millions of dollars.

Because of the potential for abuse, and mindful that "every dollar received by the [Trustee] results in one dollar less for creditors." the judiciary requires Trustees and other professionals to justify their work on behalf of an estate. Evangeline, 890 F.2d at 1326.⁴ The Fifth Circuit instructs that "[t]he job of the bankruptcy courts is to oversee trustees' marshalling of a debtor's assets for appropriate distribution among the creditors." Kipp Flores Architects, L.L.C. v. Mid-Continent Cas. Co., 852 F.3d 405, 410 (5th Cir. 2017) (citation omitted). Professional fees are thus subject to the Bankruptcy Court's discretion and reviewed on appeal by this Court and the Court of Appeals. See In re Woerner, 783 F.3d 266, 272 (5th Cir. 2015) (en banc). The courts "should only award fees to the level that has been proven to be actual, necessary and reasonable." Evangeline, 890 F.2d at 1327.

This case was always at risk of a supercharged conflict. First, there's real money on the table. Relative to the Mississippi legal economy, there's an enormous estate to bill here. Second, the minority creditors have so little at stake, in real terms and relatively, that they have no incentive to step in. A fight between the Trustee and Dr. Edwards won't meaningfully impair their collective 0.1% recovery. The final, and maybe critical psychological realization here, is that when a Trustee lodges colorable accusations of impropriety against the super-majority creditor,⁵ she renders less persuasive that creditor's objection that the Trustee is wasting estate assets.

Adding dollar signs might help make the hypothetical less abstract. Say the Estate of CHFS is ultimately worth $20 million. (Dr. Edwards claims he's owed $30 million, but this is bankruptcy; he won't walk away with 100% of his claim.) Then the professionals need to be paid—someone had to step in and take care of CHFS when its owner fled to Central America and then went to federal prison—and maybe their bills reach $2 million. We are left with $18 million for creditors. Less than 0.1% goes to the minority creditors, while Dr. Edwards exits from Bankruptcy Court with about $17,982,000. (Keep in mind he also has to pay his team of attorneys, so he goes home with meaningfully less than that.)

To be clear, that is a hypothetical about how it should have worked. Protect the assets, subtract necessary professional fees, and distribute the corpus to the creditors.

In real life, however, the Trustee, her counsel, and the professionals they retained have defined "necessary" work so broadly that they have billed the Estate more than $5 million. Docket No. 41 at 8 & n.15. More than 30 attorneys at Jones Walker have billed the file. Id. at 5 & n.8. The firm even billed for law student intern work. Id.

Aspects of the firm's work verge on the untenable. The Trustee hired an expert in the commercial law of the British Virgin Islands and Bermuda to testify live at trial that the inclusion of the word "The"⁶ in some of the parties' documents invalidated millions of dollars of secured transactions over many years. This in turn forced Dr. Edwards to hire his own, competing expert about the meaning of the word "The" in those jurisdictions. The Bankruptcy Court's opinion dedicated 11 pages to the evidence and foreign law on this issue before concluding that it was immaterial because Dr. Edwards and CHFS knew who they were dealing with and weren't confused. Op. at 108-18. Charles Dickens would be impressed. See Bleak House (1852-1853).⁷

In law, the billable hours can keep going as long as there is a target to fight. There's a great target here: a stubborn and wealthy doctor-playing-businessman from out-of-state.⁸ And in this situation the Trustee has no financial incentive to stop billing hours, as she is essentially using Dr. Edwards' own money to sue him. Her fees and those of her law firm are being siphoned from the creditors' eventual recovery.⁹ One cannot overlook or lose sight of that fact. Unfortunately, the present Bankruptcy Judge has not placed any...