In re Breland

1

In re: CHARLES K. BRELAND JR., Debtor.

No. 16-2272-JCO

United States Bankruptcy Court, S.D. Alabama, Southern Division

November 18, 2022

MEMORANDUM ORDER AND OPINION

JERRY U.S. BANKRUPTCY JUDGE

This matter came before the Court on the Motions of Attorney Irvin Grodsky (doc. 2362), David Hudgens (docs. 2373, 2430), and Attorney Julie Hudgens-Haney (doc. 2403), as counsel for the Hudgens Creditors, for allowance of administrative claims for attorney's fees and costs (collectively, "§523 Motions") and the Debtor's Objections thereto (doc 2426, 2427, 2444). Proper notice of hearings on the above matters was given and appearances were noted on the record. At the conclusion of counsels' arguments, the Court requested more documentation for in camera review and indicated it would take the matters under advisement upon receipt. The Court having received all materials, determines that based on the nature of the matters, the legal issues involved, and the relationship of the movants, it is appropriate to address the aforementioned Motions jointly in one order. Further, based on the pleadings, briefs, exhibits record, and statements of counsel, the Court finds that the §523 Motions are due to be DENIED for the following reasons:

JURISDICTION

This Court has jurisdiction under 28 U.S.C. §§ 1334 and 157, and the District Court's Standing Order of Reference dated August 25, 2015. This is a core proceeding under 28 U.S.C. §157(b)(2)(B).

PROCEDURAL HISTORY AND FACTS

The Debtor, Charles K. Breland, Jr. ("Breland") filed this Chapter 11 bankruptcy on July 8, 2016. Breland's initial schedules reflected total assets of $51,727,881 and debts of $5,445,170. (Doc. 42). On July 25, 2016, Creditor Levada EF Five, LLC ("Levada") filed a Motion to Dismiss or in the Alternative Appoint a Chapter 11 Trustee which was amended and supplemented ("Levada's Motion") (Docs. 22, 65,173,184). Levada's Motion set forth that Breland's fraudulent transfers, gross mismanagement, and other non-statutory grounds warranted dismissal or the appointment of a Trustee. Levada's Motion stated in part,

Breland has created a network of entities which he has attempted to use to shield his assets from collection. He has emptied his bank accounts and transferred real property of significant and substantial value out of his name. Those transfers were to insiders including his wife and his affiliate entities and occurred immediately upon the announcement of Levada's verdict. He has caused a mortgage to be placed on at least some of that property and used for the benefit of Breland and his affiliates. His testimony indicates he did not tell the bank about Levada's verdict when he personally guaranteed the loan. He is also storing money in a debtor-in-possession account to shield it from his creditors and is using it for himself and his businesses. Breland's dishonest and fraudulent conduct is grounds for appointing a trustee . . .

(Doc. 22 at 14.)

Levada's Motion also alleged that Breland's misuse of the Chapter 11 process as an instrument to delay payment of its debts and serve the interests of its insiders, the deep-seated conflict and animosity between Breland and his creditors, and the failure to file 2015.3 reports further justified appointment of a Chapter 11 Trustee. (Docs. 22, 62, 65, 184).

The Hudgens Creditors thereafter filed a Motion for Authority to Bring Fraudulent Transfer Action on September 16, 2016 and a Motion to Appoint a Chapter 11 Trustee on September 22, 2016 ("Hudgens' Motions"). (Docs. 98, 109). The Hudgens' Motions set forth similar facts and arguments as the Levada Motion^[1], including Breland's various transfers of property, inability to provide consistent financial and accounting information, fraud, dishonesty, gross mismanagement, and other statutory grounds warranting the appointment of a Trustee. (Id.) The Bankruptcy Administrator and the United States also urged the court for the appointment of a Chapter 11 Trustee. (Docs 293, 375). Breland filed an Omnibus Brief in Opposition (doc. 122) and a Motion to Dismiss (doc. 312) which the Bankruptcy Administrator, the Hudgens Creditors, the United States, and Levada all opposed. (Docs. 332, 371, 375, 376). After a full hearing including three days of testimony, this Court entered an order requiring the appointment of a Chapter 11 Trustee ("Trustee Order"), (doc. 378). The Trustee Order stated in part:

. . . Mr. Breland's systematic siphoning of assets to other companies in common control on the eve of multiple unfavorable jury verdicts, and on the eve of bankruptcy raises grave concerns about his ability to act in the interest of his creditors .

Mr. Breland's failures to disclose and his inaccurate and inconsistent disclosures are so extensive that they can only be the result of fraud, dishonesty, or gross mismanagement.

The inaccuracies, omissions, and obfuscations alone justify the appointment of a trustee.

Mr. Breland's failure to obey orders of this Court is cause by itself to appoint a trustee.

Mr. Breland's bold transfer of so many properties out of the reach of potential judgment creditors on the eve of multiple trials is likewise material in this Court's consideration of his misconduct. The evidence is clear and convincing that nearly every action Mr. Breland has taken since those trials started has been to frustrate his creditors.

The numerous transfers between Mr. Breland and the affiliated entities and among the affiliated entities are the result of a lack of evenhandedness and self-dealing.

Doc. 378 at 29-31.

After years of contentious administration, including: various negotiations, IRS litigation, related adversary proceedings, and failed compromises, court ordered mediation ultimately facilitated resolution of various outstanding matters as well as the proposal of a consensual plan which was recently confirmed. (Doc. 2325). Notwithstanding confirmation, an adversary proceeding involving the Hudgens Creditors remains pending.

After plan confirmation, the Hudgens Creditors' Counsel filed Motions for Allowance of Administrative Claims asserting that their efforts were compensable under Section 503(b)(4). The Hudgens Creditors contend that they made a substantial contribution to the success of the Chapter 11 under §503(b)(3)(D) by obtaining the Trustee Order and challenging certain proposed actions of the Debtor in Possession before the appointment of a Trustee. Attorney Irvin Grodsky seeks an administrative claim of $84,710.00 for 240.6 hours at $350 per hour (doc. 2362), David Hudgens seeks $29,850.00^[2] for 99.50 hours at $300 per hour (doc. 2430), and Attorney Julie Hudgens Haney seeks $38,132.50 for 212.50 hours of work at a rate of $175-$190 per hour (doc. 2403).

Because of the surplus nature of the case, Breland has a vested interest in the administration of the Chapter 11 and the allowance of claims. Breland contends that the Hudgens Creditors' Administrative Expense requests are due to be denied because: (1) the Hudgens Creditors did not provide a substantial contribution to the success of the Chapter 11; (2) the compensation requested is for services unrelated to appointment of a Trustee; (3) creditors would have received the same distribution even without the appointment of a Trustee; (4) the Hudgens Creditors took actions adverse to the estate; and (5) there was duplication of efforts. (Doc. 2426).

ANALYSIS

A party seeking an administrative expense claim under §_ 503(b)(3)(D) bears the burden of proving that its efforts directly resulted in a significant and tangible benefit to the case.

Section 503 of the Bankruptcy Code provides for the allowance of administrative expenses in limited circumstances. 11 U.S.C §503. It provides in part:

(b) After notice and a hearing, there shall be allowed administrative expenses, other than claims allowed under section 502(f) of this title, including-

(3) the actual, necessary expenses, other than compensation and reimbursement specified in paragraph (4) of this subsection, incurred by . . .

(D) a creditor, an indenture trustee, an equity security holder, or a committee representing creditors or equity security holders other than a committee appointed under section 1102 of this title, in making a substantial contribution in a case under chapter 9 or 11 of this title; . . .

(4) reasonable compensation for professional services rendered by an attorney or an accountant of an entity whose expense is allowable under subparagraph (A), (B), (C), (D), or (E) of paragraph (3) of this subsection, based on the time, the nature, the extent, and the value of such services, and the cost of comparable services other than in a case under this title, and reimbursement for actual, necessary expenses incurred by such attorney or accountant;

11 U.S.C. §503(b)(3)(D), (b)(4).

The plain language of Section 503(b)(3)(D) requires that to be compensable, the alleged contribution must be substantial. As a general premise, courts narrowly construe administrative expense provisions and grant substantial contribution applications only in unusual or rare cases. In re Am. Plumbing & Mech., Inc., 327 B.R. 273 (Bankr.W.D.Tex. 2005); In re Randall's Island Family Golf Centers, Inc., 300 B.R. 590 (Bankr.S.D.N.Y. 2003); In re 9085 E. Mineral Office Bldg., Ltd., 119 B.R. 246 (Bankr.D.Colo. 1990). Such narrow construction is also consistent with the general doctrine that priority statutes, such as §503(b), should be strictly construed. In re Miller, 610 B.R. 678 (Bankr. S.D. Ala. 2019); In re United Container LLC, 305 B.R. 120 (Bankr. M.D. Fla. 2003); In re Federated Dep't Stores, Inc., 270 F.3d 994 (6th Cir.2001); In re Commercial Fin. Servs., Inc., 246 F.3d 1291 (10th Cir.2001); In re S & Y Enterprises, LLC, 480 B.R. 452 (Bankr. E.D.N.Y. 2012).

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