Gordon v. McConnell (In re McConnell)

641 B.R. 261

IN RE: James Edward MCCONNELL, Debtor.

Neil C. Gordon, Chapter 7 Trustee for the Estate of James Edward McConnell, Appellant,

v.James Edward McConnell; Nancy J. Gargula, Appellees.

CIVIL ACTION NO. 1:21-cv-304-AT

BANKR. CASE NO. 19-67128-PWB

United States District Court, N.D. Georgia, Atlanta Division.

Signed March 11, 2022

ATTORNEYS FOR APPELLANT: Neil C. Gordon, William Dale Matthews, Arnall Golden Gregory LLP, Atlanta, GA.

ATTORNEYS FOR APPELLEE JAMES EDWARD MCCONNELL: Karen Ann King, King & King, P.C., Atlanta, GA.

ATTORNEYS FOR APPELLEE NANCY J. GARGULA : Lindsay Payne Swift Kolba, United States District Court-Trustee, Atlanta, GA.

ORDER

AMY TOTENBERG, UNITED STATES DISTRICT JUDGE

This matter is currently before the Court on Appellant Neil C. Gordon's appeal of the bankruptcy court's January 4, 2021 order (Appeal Doc. 1-2)¹ ("the Bankruptcy Order"). In that order, the bankruptcy court rejected significant portions of Appellant and his law firm's requested compensation for legal services to a Chapter 7 bankruptcy estate in which Appellant was the trustee. For the reasons that follow, the Bankruptcy Order is AFFIRMED IN PART and REVERSED IN PART .

I. Background

A. The Debtor's Chapter 7 Bankruptcy Case

James Edward McConnell ("the Debtor") filed a Chapter 7 bankruptcy petition on October 28, 2019. (Bankr. Doc. 1 at 61.) In his Chapter 7 schedules, he listed a property located at 1369 High Point Ave. SW, Atlanta, GA 30315 with a stated value of $117,692. (Id. at 15.) The property was subject to three secured claims: a $31,657 claim from Discover Home Equity Loans, a $73,634 claim from Wells Fargo Home Mortgage, and a $275 claim from HMS Association Management. (Id. at 23–24.) In total, the Debtor had $108,733 in secured debt and $20,807 in unsecured debt for a total of $129,540 in liabilities. (Id. at 40.) The Debtor listed a total monthly income of $2,988 and total monthly expenditures of $2,988, meaning that he had no net income. (Id. at 35, 37). However, he selected a box marked "Retain the Property and enter into a Reaffirmation Agreement ," indicating that he intended to retain his home. (Id. at 38.)

The commencement of the case led to the creation of a bankruptcy estate under 11 U.S.C. § 541(a), and Appellant Neil C. Gordon of the law firm Arnall, Golden & Gregory, LLP ("the firm") was appointed as the Trustee for the Chapter 7 bankruptcy estate. (Bankr. Doc. 6 at 1.) According to time entries from the firm, Appellant presided at a meeting of creditors on December 2, 2019. (Bankr. Doc. 56 at 8.) A week later, Appellant filed an application seeking the bankruptcy court's permission to hire his own law firm to perform legal services for the bankruptcy estate. (Bankr. Doc. 20.)

In the application, Appellant stated that his firm had already begun performing "certain professional services" for the estate "[i]n order to expedite the marshalling of the Estate's assets." (Id. at 4.) The firm's time records indicate that at that point Appellant had billed time for tasks such as reviewing documents and drafting a "legal work action memo," and other members of the firm had billed time for tasks such as requesting a title examination, preparing a notice of interest in real estate for purposes of 11 U.S.C. § 549(c), and researching tax records and deed indexes for liens and undisclosed properties. (Bankr. Doc. 56 at 11.)

In the application, Appellant stated,

Professional services for which counsel for the Trustee are necessary in this Case relate to the accounting for and investigation and recovery of assets to be administered for the benefit of the bankruptcy estate of the Debtor (the "Estate "), including but not limited to that certain real property known generally as 1369 High Point Avenue, SW, Atlanta, Fulton County, Georgia 30315.

(Bankr. Doc. 20 at 2.) Specifically, he represented,

Counsel will be needed for any (a) objection to any (i) motion to convert Case or (ii) motion to dismiss Case; (b) preparation of demand letters; (c) settlement negotiations; (d) legal research; (e) preparing, filing and prosecution of any (i) adversary proceeding (ii) motion to compel, (iii) motion for turnover, (iv) motion to settle, (v) motion to sell, (vi) claim objection, (vii) objection to exemptions, and (viii) other objections; and (f) other necessary services.

(Id. ) He added,

The professional services, which may be rendered for which it is necessary that an attorney act may also include:

(a) Preparation of pleadings and motions and conducting of examinations incidental to the administration of the Estate;

(b) Services incidental to preservation and disposition of assets;

(c) Investigation, analysis, and appropriate action, if required, relative to any preference, fraudulent transfer, unperfected security interest, improper disposal of assets, prosecution of the Estate's claims, or pending litigation;

(d) Any and all other necessary action incident to the proper preservation and administration of the Estate.

(Id. at 3.) Appellant also represented that it "will be in the best interest of the Estate" for Appellant himself to act as the attorney performing these legal services because he was already familiar with the case and, as a consequence, "the trouble, expense, and delay inherent in acquainting and counseling other attorneys regarding operative facts may thus be avoided." (Id. )

The bankruptcy court granted Appellant's application on the same day that it was filed, subject to any objection by the United States Trustee.² (Bankr. Doc. 21.) In its order, the bankruptcy court stated that in connection with the legal services performed for the estate, "compensation shall be paid to AGG upon notice, hearing, and approval of the Court pursuant to 11 U.S.C. §§ 330, 331 and Bankruptcy Rule 2016 of an appropriately detailed application." (Id. at 2.)

On January 8, 2020, Appellant filed an application to employ a real estate agent to assist with selling the property. (Bankr. Doc. 26.) In that application, Appellant stated,

Based on Trustee's independent investigation of value and a real estate Broker's inspection, evaluation and comparative marketing analysis value of the Property, Trustee has determined that the value of the Property would support a listing price of $215,000.00. Thus, there is significant equity in the Property of approximately $84,000.00 to benefit the Estate if the Property were sold by Trustee.

(Id. at 3.) The proposed listing agreement included a list of "Special Stipulations" that had been drafted by the Appellant, including that Appellant was acting as the ‘Seller" of the property, that the Appellant was selling the property as is and made no warranties as to the condition of the property, and that the terms of the sale were subject to court approval. (Id. at 12.) Appellant requested authority from the bankruptcy court to employ a real estate agent to sell the property with a listing price of $215,000 consistent with the terms contained in the proposed listing agreement. (Id. at 3.) The record does not indicate that the Appellant's request was ever granted.

B. The Debtor's Conversion Motion

On January 22, 2020, the Debtor filed a motion to convert his Chapter 7 case to a Chapter 13 case.³ (Bankr. Doc. 30.) The Debtor also scheduled a hearing on his motion for February 25, 2020 pursuant to the bankruptcy court's self-calendaring procedures. (Id. at 2.) Appellant responded by filing an opposition to the Debtor's conversion motion on February 11, 2020. (Bankr. Doc. 38.)

In his opposition, Appellant argued that the Debtor's motion should be denied on the grounds that the Debtor had no disposable income that could be used to establish a repayment plan for a Chapter 13 case and that the motion was a bad faith effort to thwart Appellant's sale of his home. (Id. at 4–5.) Appellant contended that the timing of the motion clearly established the bad faith motive. (Id. at 8–9.) He explained that on January 15, 2020 he had offered to "settle" with the Debtor by requiring the Debtor to pay the equivalent of the nonexempt equity in the home to avoid a sale of the home, and that instead of responding to that settlement offer the Debtor moved to convert the case to a Chapter 13 case so that he could keep his home. (Id. at 4.) Based on this sequence of events, Appellant argued, "Debtor is not seeking a conversion of his Bankruptcy Case in a good faith effort to pay his creditors, but in an effort to not pay them in direct response to Trustee's interest shown in the Property." (Id. at 5.)

After Appellant filed his opposition Appellant engaged in settlement negotiations with the Debtor's attorney for several months, as evidenced by his firm's billing records. (Bankr. Doc. 56 at 12–14.) Then, on May 14, 2020, while his conversion motion was still pending, the Debtor filed an amendment to his Chapter 7 schedules. (Bankr. Doc. 46.) In the amended schedules, the Debtor added $500 of monthly income from rent that he had started receiving from a roommate, which brought his total monthly income to $3,488. (Id. at 11.) The Debtor also reduced his monthly expenses to $2,588, bringing his net monthly income to $900. (Id. at 13.)

Around the same time, the Debtor proffered a proposed Chapter 13 repayment plan under which he would make $900 in monthly payments to the Appellant for a period of 60 months. (Bankr. Doc. 47. at 2.) Under the terms of the plan, unsecured creditors would receive 100% of the total amount of their claims. (Id. at 6–7.) The Debtor's attorney served Appellant with the proposed plan on May 21, 2021. (Id. at 9.)

Less than a week later, Appellant withdrew his objection to the conversion motion and filed a consent order requesting that the bankruptcy grant the Debtor's motion, which the bankruptcy court granted. (Bankr. Doc. 48.) Under the terms of the consent order, the Chapter 7 case would be converted to a Chapter 13 case on the condition that it would be reconverted to a Chapter 7 case — with Appellant as the Trustee — if...