In re Salazar

In re: WILBERT W. SALAZAR and STEPHANIE RAE SALAZAR, Debtors.

Case No. 15-13194 ts13

UNITED STATES BANKRUPTCY COURT DISTRICT OF NEW MEXICO

December 19, 2016

OPINION

Debtors' former counsel asked the Court to enter a money judgment against debtors for the attorney fees and costs allowed in this dismissed case. The Court holds that its final order allowing fees is a judgment establishing debtors' debt to counsel. If counsel wishes to collect the debt in state court, no further judgment is needed from this Court. The Court also rules that, to the extent it has ancillary jurisdiction over the fee collection process, it will abstain so collection can be pursued in state court. Counsel's request therefore will be denied.

I. FACTS¹

The Court finds:

Debtors filed this chapter 13 case on December 8, 2015. Their counsel was William F. Davis & Assoc., P.C. Debtors filed their bankruptcy schedules, statement of financial affairs, and proposed chapter 13 plan on the petition date.

Debtors are relatively sophisticated. When they filed their case, Mr. Salazar was a manager at a car dealership, while Ms. Salazar was a registered nurse working at a hospital in Espanola.

Debtors did not confirm a chapter 13 plan. During the pendency of the case, however, they negotiated with their home mortgage lender about a possible loan modification agreement.² Debtors ultimately struck a deal with their lender, and on June 4, 2016, moved to dismiss the bankruptcy case.

The Court granted the dismissal motion on June 8, 2016. The dismissal order stated in part:

1. If any allowed fees charged by Debtor's counsel remain unpaid, the Chapter 13 trustee is hereby ordered to pay any funds she had on hand as of the date of dismissal to the Debtor's counsel rather than the Debtor until such fees have been paid (as also to pay herself any trustee fees in connection therewith, if a plan has been confirmed). The Court finds that there is cause to modify the provisions of 11 U.S.C. § 349(b)(3) to such an extent.

2. If any portion of Debtor's counsel fees have not yet been approved by the Court, the Chapter 13 Trustee shall hold sufficient funds on hand as of the date of dismissal until Debtor's counsel has submitted a final fee application and the Court has ruled on the same. Debtor's counsel may file a final fee application within seven days. The deadline to object is hereby shortened to 10 days, to which three days is added pursuant to Fed.R.Bankr.P. 9006(f). When the fee application has been ruled on, the Trustee shall comply with the provisions of paragraph 1 of this Order. If a fee application is not timely filed, the Trustee is directed to return all funds to the Debtor.

Shortly after dismissal, counsel filed a first and final fee application, seeking approval of $17,504.37 in fees, $1,218.13 in taxes, and $912.96 in expenses. The fee application was served on the debtors, the chapter 13 trustee, and the U.S. Trustee's office. A notice of deadline to object was served on the same parties and also all other parties on the mailing matrix.

No one objected to the fee application. On July 18, 2016, the Court entered an order approving the application. The fee order authorized counsel to retain pre-petition payments of$5,000, and authorized the chapter 13 trustee to pay counsel the balance of the approved fees ($14,675.46).

Between July 18, 2016 and September 12, 2016, the chapter 13 trustee paid counsel all of the money she had received from the debtors in plan payments ($6,800). The trustee filed a final report and account on September 12, 2016. The case was closed on September 22, 2016.

Six days later, on September 28, 2016, counsel filed the motion, asking that the case be reopened and that the Court enter a money judgment against the debtors in the amount of the allowed fees and costs.

The Court reopened the case on November 28, 2016. On December 12, 2016, the Court held a hearing on counsel's request for a money judgment, and took the matter under advisement.

II. DISCUSSION

A. The Fee Order is a Judgment.

The fee order is a final order. See In re Hall, 2010 WL 2079530, at *1 (D. Kan.) (order approving final fee application is a final order because it ended litigation on the merits and left nothing for the court to do but execute the judgment). More importantly, the fee order is a judgment. Fed. R. Bankr. P. 9001(7), for example, defines "Judgment" as "any appealable order," while Fed. R. Bankr. P. 9002(5) defines the term to include "any order appealable in an appellate court."). Further, in In re Sweports, 777 F.3d 364 (7^th Cir. 2015), Judge Posner of the Seventh Circuit characterized a final bankruptcy court order approving professional fees as a judgment. 777 F.3d at 367.

There is substantial case law that final attorney fee orders are res judicata on issues that could have been raised in the fee allowance process. See, e.g., Grausz v. Englander, 321 F.3d 467 (4^th Cir. 2003) (fee approval is res judicata on subsequent malpractice action); Iannochino v.Rodolakis (In re Iannochino), 242 F.3d 36, 49 (1^st Cir. 2001) (same); In re Intelogic Trace, Inc., 200 F.3d 382, 387 (5^th Cir. 2000) (same); Potter v. Pierce, 342 P.3d 54, 59 (N.M. 2015) (same). The res judicata effect of final fee orders is discussed in 3 Collier on Bankruptcy, ¶330.07 (16^th ed.).

In contrast, interim fee awards are not judgments. See In re Fairway Missionary Baptist Church, 131 B.R. 407, 408 (Bankr. W.D. Tenn. 1991) (interim fee award did not "rise to the dignity or level of a money judgment"); In re Gibson, 2010 WL 744573, at *10 (Bankr. C.D. Ill.) (agreeing with Fairway Missionary that interim fee orders are not money judgments).

It is less clear whether the fee order is a "money judgment." The order only "allows" the fees and "authorizes" the chapter 13 trustee to pay them. As noted by Sweports, "There is . . . a critical difference . . . between determining an entitlement to fees and ordering payment of fees." 777 F.3d at 367. On the other hand, Judge Specter in In re Dow Corning Corp., 237 B.R. 380, 386-87 (Bankr. E.D. Mich. 1999), held that a money judgment is a judgment entitling the plaintiff to a specified sum of money, entered against an identifiable party. Under this definition, and taking into account the debtors' direct liability for the debt because of case dismissal, the fee order might be considered a money judgment.

B. The Fee Order Establishes a Debt Owed by Debtors.

The fee order established that debtors owed counsel $14,675.46.³ In Sweports, construing similar facts, Judge Posner held:

Almost every damages suit that is resolved in favor of the plaintiff ends not with a disbursement of money but with a judgment that establishes a debt. If the defendant fails to pay, the plaintiff must initiate a further proceeding to collect the judgment debt. The judgment to which [debtor's counsel] was and is entitled would merelyestablish a debt; to collect it he will undoubtedly have to initiate a collection suit in state court.

777 F.3d at 367. Further, even though the fee order authorized the bankruptcy estate to pay the allowed fees, it is clear that, after dismissal, the order obligates the debtors to pay the fees. In Morgan & Bley, Ltd. v. Victoria Group, Inc., 2015 WL 2258416 (N.D. Ill.), for example, the district court, citing Sweports, said:

The Seventh Circuit concluded that the bankruptcy court could even award fees under § 330 after the bankruptcy case has been dismissed and the estate has been extinguished. Id. at 367-68. The bankruptcy court's statement . . . that the . . . fee award was only against the "estate," then, was incorrect.

2015 WL 2258416, at *4.

The fee order, a final judgment entitled to res judicata effect, established debtors' debt to counsel.

C. The Court's Post-Dismissal Jurisdiction.

The proper way to handle allowance and collection of professional fees after bankruptcy case dismissal turns in part on the Court's jurisdiction to hear and determine the matters.

1. Ancillary jurisdiction to rule on fee applications filed after case dismissal. As a starting point, the law is clear that, even though the case had been dismissed, the Court had "clean-up" or ancillary jurisdiction to rule on counsel's fee application. See In re Sweports, 777 F.3d at 367; In re 5900 Associates, Inc., 468 F.3d 326, 330 (6^th Cir. 2006) (bankruptcy courts retain jurisdiction to approve attorney fees under § 330 after dismissal of the underlying case); In re Hirsch, 550 B.R. 126, 131 (Bankr. W.D. Mich. 2016) (citing 5900 Assocs.); In re Doherty, 229 B.R. 461, 464 (Bankr. E.D. Wash. 1999) (court has jurisdiction, after dismissal, to hear and determine administrative expense issues).

The Tenth Circuit has held that bankruptcy courts retain jurisdiction after case dismissal over pending "core proceedings." See Johnson v. Smith (In re Johnson), 575 F.3d 1079, 1083 (10^th Cir. 2009) (bankruptcy court retained jurisdiction to hear "core" adversary proceeding after dismissal of the main case); Smith v. Commercial Banking Corp. (In re Smith), 866 F.2d 576, 578 (3d Cir. 1989) (to the same effect); Fidelity & Deposit Co. of Maryland v. Morris (In re Morris), 950 F.2d 1531, 1534 (11^th Cir. 1992) (same). Allowance of professional fees is a "core" proceeding. 28 U.S.C. § 157(b)(2)(A) and (B).

It is appropriate for bankruptcy courts to rule on fee applications in dismissed cases, as the courts are familiar with the cases and with the fee allowance process. Bankruptcy courts know generally what is charged for counsel services in chapter 13 cases. It would be an unnecessary burden on state courts to make them rule on what fees and costs should be paid by debtors to their bankruptcy counsel. See Sweports, 777 F.3d at 366 (Seventh Circuit reversed the bankruptcy court's ruling that it lacked jurisdiction to hear a fee application in a dismissed chapter 11 case).

Rulings on fee applications can be of particular importance in dismissed chapter 13 cases where, as here, the trustee is holding plan...