In re Am. Ctr. for Civil Justice

In re: AMERICAN CENTER FOR CIVIL JUSTICE, INC., Debtor LAW OFFICES OF WILLIAM S. KATCHEN, LLC. Appellant

No. 22-1016

United States Court of Appeals, Third Circuit

December 23, 2022

NOT PRECEDENTIAL

Submitted Pursuant to Third Circuit L.A.R. 34.1(a) On December 8, 2022

On Appeal from the United States District Court for the District of New Jersey (District Court No. 3-20-cv-06333) U.S District Judge: Honorable Freda L. Wolfson

Before: SHWARTZ, MATEY, and FUENTES, Circuit Judges

OPINION ^[*]

FUENTES, CIRCUIT JUDGE

Creditors who participate in a bankruptcy proceeding must ordinarily bear their own expenses and attorney fees.^[1] The Bankruptcy Code provides a limited exception to this rule: a creditor who makes a "substantial contribution" to a debtor's bankruptcy case may recover reasonable fees from the estate as an administrative expense.^[2] Appellant The Law Offices of William S. Katchen LLC ("Appellant") seeks attorney fees for its representation of a creditor in connection with the chapter 11 bankruptcy of American Center for Civil Justice, Inc. ("ACCJ"). The Bankruptcy Court found that Appellant did not substantially contribute to ACCJ's case and rejected its fee application without an evidentiary hearing. Appellant claims this was error. For the reasons set forth below, we disagree.

I. Factual Background

ACCJ and its creditor, American Center for Civil Justice, Religious Liberty & Tolerance ("RLT"), are affiliated not-for-profit entities with similar missions. In March 2018, ACCJ filed a voluntary petition for chapter 11 bankruptcy that listed an undisputed $14.8 million claim by RLT (the "RLT Claim"). The RLT Claim arose from a 2007 agreement between ACCJ and RLT. The Bankruptcy Court found that ACCJ and RLT had a shared interest in defending the continued validity of that agreement. However, several other creditors of ACCJ objected to the RLT Claim and moved to disallow it.

RLT hired Appellant to represent it in connection with ACCJ's bankruptcy. The resulting engagement letter stated that Appellant would represent RLT as a "non-priority, Unsecured Creditor" in ACCJ's bankruptcy and mentioned no other services.^[3] Appellant and ACCJ's bankruptcy counsel, Timothy P. Neumann, thereafter engaged in a joint defense strategy to defend the RLT Claim and the 2007 agreement against allegations of fraud, breach of fiduciary duty, and alter ego. Ultimately, Appellant provided $97,734.00 in legal services to RLT in this capacity.

RLT itself later filed for bankruptcy and applied, pursuant to 11 U.S.C. § 327(a), to hire Appellant to represent it in connection with its own bankruptcy case. The United States Trustee opposed RLT's § 327(a) application because Appellant was a pre-petition creditor of RLT and therefore not a disinterested person. To resolve this dispute, Appellant agreed to "waive any and all pre-petition claims against [RLT]" and return $97,734.00 held in Appellant's trust account to RLT.^[4] The Bankruptcy Court ordered that Appellant, "[n]otwithstanding any such waiver," would "retain the right to file an 11 U.S.C. § 503(b)(4) claim against [ACCJ]."^[5]

Appellant then filed the present motion to receive fees paid out of ACCJ's bankruptcy estate pursuant to 11 U.S.C. § 503(b), arguing that through its representation of RLT, it substantially contributed to ACCJ's bankruptcy case.^[6] The United States Trustee, ACCJ, and RLT all opposed Appellant's fee application. After oral argument on May 12, 2020, the Bankruptcy Court held that Appellant did not substantially contribute to ACCJ's case and denied its motion. Specifically, the Bankruptcy Court made a factual determination that Appellant provided only an "incidental" benefit to ACCJ through its defense of the 2007 agreement, which is insufficient to justify a fee award.^[7]

The District Court affirmed the Bankruptcy Court's denial of Appellant's fee application and rejected Appellant's alternative argument that remand was required for a "full evidentiary hearing" on the substantial contribution issue.^[8] The District Court also denied Appellant's subsequent motion for reconsideration. Appellant now appeals to this Court.

II. Jurisdiction and Standard of Review

The Bankruptcy Court had jurisdiction over this core bankruptcy proceeding under 28 U.S.C. §§ 157(a)-(b), 1334. The District Court had jurisdiction under 28 U.S.C. § 158(a)(1). We have jurisdiction under 28 U.S.C. § 158(d)(1).

Our review of a bankruptcy court's decision "duplicates that of the district court and we view the bankruptcy court decision unfettered by the district court's determinations."^[9] "[W]e review the bankruptcy court's legal determinations de novo, its factual findings for clear error, and its discretionary decisions for abuse of discretion."^[10]

III. Analysis

Appellant does not directly challenge the Bankruptcy Court's factual determination that it made no "substantial contribution" to ACCJ's bankruptcy but instead argues that the Bankruptcy Court was obligated to conduct an evidentiary hearing before making that decision.^[11] We disagree.

Under limited circumstances, the Bankruptcy Code allows a creditor's attorney fees to be paid out of the debtor's estate as an administrative expense.^[12] In relevant part, 11 U.S.C. § 503(b)(3)(D) permits a creditor to recover the "actual, necessary expenses" that it incurred "in making a substantial contribution in a case under chapter . . . 11 of this title." Section 503(b)(4) then permits the recovery of "reasonable compensation for professional services rendered by an attorney . . . of an entity whose expense is allowable under [11 U.S.C. § 503(b)(3)(D)]". Appellant argues that it substantially contributed to ACCJ's bankruptcy through its representation of RLT and is therefore entitled to compensation from the estate.^[13]

Creditors are presumed to act in their own self-interest until they demonstrate otherwise.^[14] To rebut this presumption and establish a "substantial contribution," the applicant must show that his efforts (1) "resulted in an actual and demonstrable benefit to the debtor's estate and the creditors;" and (2) the benefit to the estate was not simply "incidental" to self-interested pursuits.^[15] Put differently, the applicant must show that his "actions were designed to benefit others who would foreseeably be interested in the estate."^[16] The existence of a "substantial contribution" is ultimately a question of fact, and "the bankruptcy court . . . is in the best position to perform the necessary fact finding task."^[17] We review the Bankruptcy Court's findings in this regard for clear error, "in other words, with a serious thumb on the scale for the bankruptcy court."^[18] Here, Appellant's application to the Bankruptcy Court primarily relied on ACCJ's and RLT's shared interest in the continued validity of their 2007 agreement. Appellant's principal averred that he engaged in a joint defense strategy with ACCJ's counsel to defend ACCJ and RLT against allegations of "fraud, breach of fiduciary duties, [and] alter ego as a basis to disallow the RLT Claim."^[19] As the District Court observed, however, nothing in the record suggests that Appellant consulted with other creditors of ACCJ or otherwise acted for the benefit of creditors as a whole.

The Bankruptcy Court found instead that Appellant worked for the benefit of RLT, which had a significant self-interest in the validity of its $14.8 million proof of claim. It further determined that any concomitant benefit to ACCJ-which had its own attorney to defend the validity of the 2007 agreement-was "incidental."^[20] Indeed, RLT's director averred that Appellant performed work solely "in defense of the RLT Claim" and provided "no benefit to ACCJ."^[21]

Appellant does not directly challenge any of the Bankruptcy Court's findings but merely argues that it should have been granted an evidentiary hearing and the opportunity to submit further evidence. Specifically, it argues that our opinion in In re Busy Beaver Building Centers, Inc.^[22] required the Bankruptcy Court to conduct an evidentiary hearing, even though it never actually requested one.^[23] Appellant misreads Busy Beaver.

Busy Beaver held only that before a bankruptcy court can sua sponte reject a fee application, it must first give the "applicant an opportunity, should it be requested, to present evidence or argument."^[24] We stressed that this was necessary in sua sponte proceedings to simulate the role of an adversary and expressly noted that even then, a bankruptcy court may resolve an application solely based on documentary evidence and oral argument.^[25] As in any legal proceeding, the applicant must simply be afforded "a meaningful opportunity to be heard."^[26]

Appellant never requested an evidentiary hearing here, and several litigants-ACCJ, RLT, and the United States Trustee-stepped in to oppose Appellant's application and fulfill the role of "adversary." The Bankruptcy Court then held oral argument and decided the motion based on the arguments of counsel and record evidence; in other words, exactly what Busy Beaver would have permitted even in a sua sponte proceeding. It is also notable that the sole piece of additional evidence Appellant asserts that it would have introduced at an evidentiary hearing is an email that Appellant's principal himself drafted nearly two years before the Bankruptcy Court's decision. Appellant therefore had ample opportunity to present this evidence and failed to do so. In short, nothing in Busy Beaver requires remand for further proceedings.

Appellant's argument that a hearing is necessary to resolve an alleged "ambiguity" in the Bankruptcy Court's factual findings also misses the mark. Appellant complains that the Court acknowledged that RLT...