Hong v. Liu (In re Liu)

In re: Long Dei Liu, Debtor.

William Hong and Harry Hong through Their Guardian Ad Litem, Yuanda Hong, Appellants, v. Long-Dei Liu; Smiley Wang-Ekvall, LLP; David A. Kay, Esq.;and Rosenberg, Shpall & Zeigen, APLC, Appellees.

Case No. 8:19-CV-00131-JLS

Adv. Case No. 8:16-AP-01233-TA

BK Case No. 8:16-BK-11588-TA

UNITED STATES DISTRICT COURT CENTRAL DISTRICT OF CALIFORNIA

September 14, 2020

ORDER AFFIRMING IN PART, REVERSING IN PART, AND REMANDING IN PART BANKRUPTCY COURT JUDGMENT AND ORDER RE ATTORNEY FEES

This is an appeal of the Bankruptcy Court's award of fees to counsel. For the reasons and in the manner set forth below, the Court affirms in part, reverses in part, and remands the matter to the Bankruptcy Court for further proceedings consistent with this Order.

I. Background

On March 14, 2014, Ling-Nie Hong died of blood loss a few days after delivering her second child (Harry) by cesarean section. Debtor/Appellee Long-Dei Liu ("Debtor" or "Dr. Liu") was her obstetrician. Dr. Liu was sued for malpractice by Ling-Nie's surviving spouse and her two young sons, Appellants/Judgment Creditors Yuanda Hong, William Hong, and Harry Hong (collectively, "Appellants" or "Judgment Creditors"). Appellants prevailed, and a California state court entered a multimillion dollar judgment against Dr. Liu and the hospital where Harry was born.

Specifically, a jury awarded Appellants $9,700,000, consisting of $9,100,000 in economic damages and $600,000 in non-economic damages; the jury apportioned liability as 75% to the hospital and 25% to Dr. Liu. (See Doc. 15-9, EOR at 557-72, Ct. App. Op. at 3.) As to the $9,100,000 in economic damages, after taking into account the hospital's pretrial settlement of $3,250,000, and allocating all the remaining economic damages to Dr. Liu by virtue of joint and several liability, Dr. Liu's liability to Appellants for economic damages was calculated at approximately $5,900,000. (See id. at 13.) After application of the $250,000 statutory cap on non-economic damages set forth in California Civil Code § 3333.2, and apportioning those non-economic damages, Dr. Liu's liability for non-economic damages was calculated at $62,500. (Id.) The court also awarded $35,000 in costs and post-judgment interest beginning November 3, 2015. (Id.)

This judgment was asserted as a claim against Dr. Liu's Chapter 11 bankruptcy estate. (See Amended Claim No. 2 ($6,214,170.05).) Only two other claims were made, and those were for miniscule amounts in comparison to the malpracticejudgment. (See Claim No. 1 (American Express Bank, FSB ($110.64); Claim No. 3, American Honda Finance Corp. ($43,662.63).)¹

The Chapter 11 petition was pending before the Bankruptcy Court for approximately two-and-a-half years. Three separate sets of counsel were awarded fees and costs, and different issues arise on appeal as to each of the three. Counsel David A. Kay ("Attorney Kay") represented Dr. Liu in his unsuccessful appeal of the malpractice judgment. Counsel David Rosenberg (and the firm Rosenberg, Shpall and Zeigen ("RSZ")) represented Dr. Liu in his successful quest to maintain his medical license in the face of the malpractice judgment. Finally, the law firm of Smiley, Wang-Ekvall, LLP ("SWE"), represented Dr. Liu as his general bankruptcy counsel.

On October 16, 2019, and after rejecting five plans of confirmation proposed by the Dr. Liu, the Bankruptcy Court confirmed a plan proposed by the Judgment Creditors. (See BK Doc. 616 ("Order Confirming Plan").) A month later, the Bankruptcy Court awarded attorney fees totaling $914,325.75, to be paid from the estate.² (BK Doc. 644.)³

Appellants seek reversal of the Order awarding fees and costs or, alternatively, they seek remand with instructions for the Bankruptcy Court to make specific findings regarding which services were reasonably likely to benefit the estate and/or were necessary to the administration of the estate. (Opening Br. at 3.)

II. Legal Standards

A. Standards of Review

The district court reviews the bankruptcy court's legal conclusions de novo andits factual determinations for clear error. In re First T.D. & Inv., Inc., 253 F.3d 520, 526 (9th Cir. 2001). "De novo means review is independent, with no deference given to the trial court's conclusion." In re Curtis, 571 B.R. 441, 444 (B.A.P. 9th Cir. 2017).

Otherwise, the bankruptcy court's allowance of attorney's fees will not be disturbed on appeal absent an abuse of discretion. In re Park-Helena Corp., 63 F.3d 877, 880 (9th Cir. 1995). In other words, an appellate court should "not disturb a bankruptcy court's award of attorneys' fees unless the bankruptcy court abused its discretion or erroneously applied the law." In re Strand, 375 F.3d 854, 857 (9th Cir. 2004) (internal quotation marks omitted). A bankruptcy court abuses its discretion in awarding fees where the reviewing court has "a definite and firm conviction that the bankruptcy court committed clear error in the conclusion it reached after weighing all of the relevant factors." In re Eliapo, 468 F.3d 592, 596 (9th Cir. 2006).

B. Duty of Debtor in Possession and His Counsel

In Chapter 11 cases like this one, a bankruptcy court may appoint a trustee, with powers and duties prescribed by statute. 11 U.S.C. § 1104(a). A bankruptcy court may also permit the debtor in possession to assume those powers and undertake those duties. 11 U.S.C. § 1107(a). Where it does so, the debtor in possession steps into the shoes of the trustee, and like the trustee, has a fiduciary responsibility to all the creditors of the bankruptcy estate. See In re McConville, 110 F.3d 47, 50 (9th Cir. 1997); In re Woodson, 839 F.2d 610, 614 & n.5 (9th Cir. 1988).

That fiduciary responsibility also rests with bankruptcy counsel for the debtor in possession. In re Perez, 30 F.3d 1209, 1219 (9th Cir. 1994) ("Counsel for the estate must keep firmly in mind that his client is the estate and not the debtor individually."). "Under no circumstances, . . . may the lawyer for a bankruptcy estate pursue a course of action, unless he [or she] has determined in good faith and as an exercise of his professional judgment that the course complies with the Bankruptcy Code and serves the best interests of the estate." Id.; see also In re Wilde Horse Enterprises, Inc., 136B.R. 830, 840 (Bankr. C.D. Cal. 1991) ("In a Chapter 11 proceeding, the attorney for debtor in possession, as an officer of the court charged to perform duties in the administration of the case, has a high fiduciary duty to the estate represented."). In that vein, the duties of a trustee or debtor in possession include the duty "to maximize the assets of the bankruptcy estate to allow maximum recovery for the debtor's creditors." In re Feiler, 218 F.3d 948, 952 (9th Cir. 2000); see also In re Consol. Nevada Corp., No. 3:13-BK-51236-GWZ, 2017 WL 6553394, at *7 (B.A.P. 9th Cir. Dec. 21, 2017) (The duty of "a chapter 11 debtor-in-possession (or trustee) is . . . to maximize the economic value of the estate."), aff'd, 778 F. App'x 432 (9th Cir. 2019).

C. Legal and Other Professional Fees (and Costs)

Legal and accounting professionals may be employed to represent or assist the debtor in possession or trustee in carrying out his or her duties under the Bankruptcy Code. See 11 U.S.C. § 327 ("[T]he trustee, with the court's approval, may employ one or more attorneys, accountants, . . . or other professional persons, that do not hold or represent an interest adverse to the estate, and that are disinterested persons, to represent or assist the trustee in carrying out the trustee's duties under this title."). All compensation to the professionals appointed under § 327 must be approved by the bankruptcy court. See 11 U.S.C. § 330. "The burden is upon the applicant to demonstrate that the fees are reasonable." In re Nakhuda, 544 B.R. 886, 902 (9th Cir. BAP 2016).

Subsection (a)(1) of §330 authorizes "reasonable compensation for actual, necessary services rendered" by a professional, together with "actual, necessary expenses." Subsection (a)(2) authorizes a court to "award compensation that is less than the amount of compensation requested." Subsection (a)(3) outlines factors a court must consider when determining what is reasonable compensation for services rendered. Specifically, the bankruptcy court must consider:

(A) the time spent on such services; (B) the rates charged for such services; (C) whether the services were necessary to the administrationof, or beneficial at the time at which the service was rendered toward the completion of, a case under this title; (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) with respect to a professional person, whether the person is board certified or otherwise has demonstrated skill and experience in the bankruptcy field; and (F) whether the compensation is reasonable based on the customary compensation charged by comparably skilled practitioners in cases other than cases under this title.

11 U.S.C. § 330(a)(3) (emphasis added, paragraph structure altered). Finally, subsection (a)(4) provides that compensation should not be allowed where the "services . . . were not . . . reasonably likely to benefit the debtor's estate[] or . . . necessary to the administration of the case." 11 U.S.C. § 330(a)(4).

The Ninth Circuit Bankruptcy Appellate Panel describes the duty of the bankruptcy court in considering a fee application:

Such examination, in general, should include the following questions: First, were the services authorized? Second, were the services necessary or beneficial to the administration of the estate at the time they were rendered? Third, are the services adequately documented? Fourth, are the fees requested reasonable, taking into consideration the factors set forth in § 330(a)(3)? . . . Finally, in making this determination, the court must take into consideration whether the

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