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Tri-State Financial, LLC v. Lovald: BANKRUPTCY - recusal motion untimely; no abuse approving settlement without hearing or in fees award

United States Court of Appeals
FOR THE EIGHTH CIRCUIT
___________
No. 07-2430
___________
Tri-State Financial, LLC, *
*
Appellant, **
v. *
*
John S. Lovald; Murphy Brothers, **
Appellees. *
___________
Appeals from the United States
No. 07-2433 District Court for the District
___________ of South Dakota.
Tri-State Financial, LLC, *
*
Appellant, *
*
v. *
*
Robert E. Hayes; Davenport, *
Evans, Hurwitz & Smith, *
*
Appellees. *
___________
Submitted: March 12, 2008
Filed: May 13, 2008
___________
1The Honorable Irvin N. Hoyt, Bankruptcy Judge for the United States
Bankruptcy Court for the District of South Dakota.
2TSF also complains the bankruptcy court erred under Bankruptcy Rule 9019(a)
when the court permitted the settlement creditor to participate as a party in the
settlement approval proceeding, offering evidence and presenting argument. The
bankruptcy court did not exceed its considerable equitable discretion, and finding no
error, we conclude this complaint by TSF lacks merit.
3The Honorable Charles B. Kornmann, United States District Judge for the
District of South Dakota.
-2-
Before RILEY, GRUENDER, and SHEPHERD, Circuit Judges.
___________
RILEY, Circuit Judge.
These consolidated cases arise out of the 2003 bankruptcy filing by Tri-State
Ethanol Company, LLC (TSE), the owner of an ethanol plant near Rosholt, South
Dakota. Tri-State Financial, LLC (TSF) purchased the ethanol plant from the
bankruptcy estate and appeals, asserting the bankruptcy court1 (1) abused its discretion
in denying TSFs motion seeking the recusal of the bankruptcy judge; (2) erred in (a)
approving a settlement negotiated by the bankruptcy trustee with an oversecured
creditor contrary to TSFs objection, and (b) in denying TSF a hearing regarding the
settlement approval; and (3) exceeded its authority and abused its discretion in
allowing Robert E. Hayes (Hayes), an attorney retained by the bankruptcy trustee, to
collect his fees in full despite a conflict of interest arising from Hayess representation
of both the trustee and an unsecured creditor.2 The district court3 affirmed the
decisions of the bankruptcy court. We affirm.
I. BACKGROUND
The William F. Murphy Self-Declaration of Trust and Mike D. Murphy
(collectively, Murphy) loaned money to TSE to finance the construction of a pipeline
to TSFs South Dakota ethanol plant. On May 23, 2003, TSE filed a Chapter 11
bankruptcy which was later converted to a Chapter 7 proceeding on July 29, 2004.
4The Trustee discovered several accounting errors and other discrepancies in
Murphys claim. The settlement agreement estimated the benefits to the debtors estate
were approximately 0,000.
-3-
On January 28, 2005, bankruptcy trustee John S. Lovald (Trustee) filed a motion in
the bankruptcy court seeking authority to pay certain secured claims, including a
partial payment to Murphy of ,986,000 on Murphys secured claim. On February
15, 2005, the bankruptcy court granted the Trustee authority to make the requested
partial payment to Murphy on Murphys secured claim. No unresolved objection to
this payment was ever filed in the bankruptcy court.
On August 8, 2005, Murphy filed an amended proof of claim as an oversecured
creditor in the amount of ,526,324.75, plus post-petition interest and attorney fees.
In August 2005, the Trustee negotiated a settlement with Murphy on Murphys
outstanding claims for 5,886.80 and filed a motion to have the settlement approved
on August 25, 2005.4 The bankruptcy court held a telephonic status conference on
October 12, 2005, involving representatives of TSF, the Trustee, and Murphy where
the parties agreed that, in lieu of an evidentiary hearing scheduled for the next day, the
parties would submit written arguments and agreed exhibits by November 14, 2005.
The parties then had until November 29, 2005, to submit any responsive arguments.
The parties accordingly submitted written briefs and responsive arguments. On
January 22, 2007, this settlement was approved by the bankruptcy court over TSFs
objections. The bankruptcy court found the settlement was a compromise which fell
within the range of reasonableness and [was] in the best interests of the estate.
TSF not only took exception to the Murphy settlement, but also took exception
to many of the other actions of the bankruptcy court and also of the Trustee,
eventually filing a motion on June 29, 2006, asking the bankruptcy judge to recuse
himself. On September 1, 2006, the bankruptcy judge denied the motion in a thorough
117 page decision.
-4-
In August 2003, the Trustee retained Hayes to represent the Trustee in the TSE
bankruptcy proceedings. Hayes also represented Clapper Corporation (Clapper), an
unsecured creditor. Hayes disclosed this potential conflict, and both the Trustee and
Clapper waived any conflict. The August 2003 attorney retention application
disclosed to the court and creditors Hayes is counsel for unsecured creditor Clapper
Corporation. This appointment was approved without objection. Later, when Hayes
sought payment for his services, TSF objected on the basis of a conflict in Hayess
representation of both the Trustee and Clapper. The bankruptcy court approved
Hayess fee request over TSFs objection.
TSF appealed to the district court the recusal motion denial; the Murphy
settlement; and Hayess fee approval. The district court affirmed the bankruptcy
courts decisions. These appeals followed.
II. DISCUSSION
As the second reviewing court, we apply the same standards of review that the
district court applied . . . review[ing] the bankruptcy courts factual findings for clear
error and its conclusions of law de novo. In re Clark, 223 F.3d 859, 862 (8th Cir.
2000).
A. Recusal
Motions for recusal under 28 U.S.C. 455 will not be considered unless timely
made. Fletcher v. Conoco Pipe Line Co., 323 F.3d 661, 664 (8th Cir. 2003) (citation
omitted). The timeliness doctrine under 455 requires a party to raise a claim at the
earliest possible moment after obtaining knowledge of facts demonstrating the basis
for such a claim. Id. (internal quotation marks and citation omitted). A party is
required to bring its recusal motion promptly to avoid the risk that the party might
hold its application as an option in the event the trial court rules against it. See In re
Apex Oil Co., 981 F.2d 302, 304-05 (8th Cir. 1992).
-5-
TSFs motion was not timely. The issues TSF discusses as the bases for its
motion were: (1) the December 12, 2003, denial of TSEs motion for multifaceted
relief; (2) the courts July 28, 2004, comments and ruling related to the conversion of
the case to Chapter 7; (3) the courts actions at the October 26, 2004, auction of the
ethanol plant and private comments the court made following the auction; and (4) a
November 18, 2005, hearing where TSFs counsel intimated the court was being
unfair. While these events occurred as early as December 2003 and then in 2004 and
2005, TSF did not make its recusal motion until June 29, 2006. The actions and
comments TSF asserts for its recusal motion first occurred thirty months before the
motion and last occurred seven months before the motion. Even measuring from the
most recent event, a relatively lengthy seven months elapsed. TSFs motion is
untimely and, on this basis alone, the district courts decision to affirm the bankruptcy
courts denial of the recusal motion is affirmed. See In re Kansas Pub. Employees
Retirement Sys., 85 F.3d 1353, 1360-61(8th Cir. 1996) (finding a ten-month delay
from the initial awareness of a potential conflict rendered the motion untimely).
B. Murphy Settlement Approval
A bankruptcy courts approval of a settlement will not be set aside unless there
is plain error or abuse of discretion. In re Martin, 212 B.R. 316, 319 (B.A.P. 8th Cir.
1997) (citing In re New Concept Housing, Inc., 951 F.2d 932, 939 (8th Cir. 1991)).
An abuse of discretion occurs if the court bases its ruling on an erroneous view of the
law or on a clearly erroneous assessment of the evidence. In re Racing Servs., 332
B.R. 581, 584 (B.A.P. 8th Cir. 2005) (citing Cooter & Gell v. Hartmarx Corp., 496
U.S. 384, 405 (1990)). The standard for evaluation of a settlement is whether the
settlement is fair and equitable and in the best interests of the estate. Martin, 212
B.R. at 319 (internal quotation marks and citation omitted) (relying, in part, on
Protective Comm. for Indep. Stockholders of TMT Trailer Ferry, Inc. v. Anderson,
390 U.S. 414, 424 (1968)). A settlement is not required to constitute the best result
obtainable. Id.
-6-
Rather, the court need only . . . determine that the settlement does not fall
below the lowest point in the range of reasonableness.
. . .
In assessing the reasonableness of a settlement, the factors to be
considered can be summarized as follows:
(A) the probability of success in the litigation;
(B) the difficulties, if any to be encountered in the matter of
collection;
(C) the complexity of the litigation involved, a[n]d the expense,
inconvenience and delay necessarily attending it; and
(D) the paramount interest of the creditors and a proper deference
to their reasonable views in the premises.
Id. (internal quotation marks and citations omitted). Both the bankruptcy court and
the district court considered this four factor test and found the first three factors
weighed in favor of the settlement because (1) Murphy had a good chance of success
in litigation considering Murphy was entitled to be paid both principal and interest
under the contractual terms of the notes; (2) Murphy is an oversecured creditor and
therefore would not have any difficulty in collecting the monies owed; (3) the
litigation necessary to dispute Murphys claim would be complex and protracted, and
Murphy would be entitled to recover attorney fees and expenses from the petition date
of May 23, 2003, through the appellate process; and (4) even though 52 entities were
given notice of the proposed settlement, TSF was the only entity filing an objection.
The lower courts also found Murphy made significant concessions in (1) waiving preand
post-petition attorney fees available under 506; and (2) settling its claim for
5,886.80 which is almost 5,000 less than the amount of principal, interest and
late charges accrued as shown in Trustees Revised Exhibit 4 of 0,000. Based on
a review of the four factor test and the totality of the circumstances, neither the
bankruptcy court, nor the district court, abused its discretion in approving the Murphy
settlement.
-7-
The bankruptcy court also did not abuse its discretion in denying TSF a hearing
regarding the Murphy settlement. Rule 9019 states, [o]n motion by the trustee and
after notice and a hearing, the court may approve a compromise or settlement. The
term after notice and a hearing,
(A) means after such notice as is appropriate in the particular
circumstances, and such opportunity for a hearing as is appropriate in the
particular circumstances; but (B) authorizes an act without an actual
hearing if such notice is given properly and if(i) such a hearing is not
requested timely by a party in interest . . . .
11 U.S.C. 102(1). Here, a hearing was scheduled and notice of the hearing was
properly given to TSF. TSF then agreed with the other parties and the court, or did
not object to the proposed procedure, to cancel the scheduled hearing and to instead
present the issue to the bankruptcy judge on written arguments. TSF submitted its
written argument opposing the settlement and also submitted a written response to the
opposing argument. As such, TSF was properly notified of the proposed settlement
and had an opportunity to participate in a hearing which was scheduled specifically
to address the Murphy settlement. TSF was heard when TSF submitted its written
arguments and evidence and the bankruptcy court considered the submitted evidence
and arguments. Where TSF agreed to the cancellation of the formal hearing and was
given the opportunity to submit its arguments in writing, the court did not abuse its
discretion when it did not hold a formal hearing regarding the Murphy settlement.
C. Hayess Attorney Fees
[A] decision regarding [the award of] attorney fees [is reviewed] for an abuse of
discretion. In re Clark, 223 F.3d 859, 862 (8th Cir. 2000) (citation omitted). The
bankruptcy court has the broad power and discretion to award or deny attorney fees,
and, indeed, a duty to examine them for reasonableness. Id. at 863 (citations
omitted). An assessment of the reasonableness of the compensation sought is always
a question of fact for the court. Id. (citation omitted). TSF does not challenge the
reasonableness of Hayess hourly rate or that Hayes did the work claimed. Instead,
5The Trustee and Clapper both formally waived any conflict. We acknowledge
nonbinding authority exists indicating the limitations in 327 cannot be waived. See
In re American Energy Trading, Inc., 291 B.R. 154, 158 (Bankr. W.D. Mo. 2003)
(The adverse interest and disinterested person limitations set forth in 327 governing
the employment of professionals cannot be excused by waiver. (citing In re
Envirodyne Indus., Inc., 150 B.R. 1008 (Bankr. N.D. Ill. 1993)). Section 327(a)
permits the trustee, with court approval, to employ attorneys that do not hold or
represent an interest adverse to the estate. Section 327(c) mandates, upon objection
by another creditor or by the trustee, the court shall disapprove such employment if
there is an actual conflict of interest. The court in American Energy Trading found
an actual conflict of interest. Id. at 156-57 ([T]he actual conflict that has been
represented to the Court at the hearing, provides ample support for this Court to revisit
its previous ruling.). Here, no actual conflict of interest existed. Because no actual
conflict of interest exists, it is unnecessary for us to determine the effectiveness of the
waiver by the Trustee and Clapper.
-8-
TSF argues the fees should have been reduced (or not paid at all) because of the
conflict arising from Hayess representation of both the Trustee and Clapper, an
unsecured creditor.
Under 11 U.S.C. 327(c), an attorney is not disqualified from representing the
Trustee solely because the attorney represents a creditor unless a creditor objects to
the employment and an actual conflict of interest exists. On August 3, 2004, when the
Trustee filed an application with the court seeking to employ Hayes, the application
disclosed Hayes is counsel for unsecured creditor Clapper. At this time there was
no actual conflict.5 Hayess appointment was approved without objection. Only later,
in 2006, when Hayes sought payment for his services, did TSF object on the ground
of a conflict in Hayess representation of both the Trustee and Clapper.
At no time did Hayes represent the bankruptcy estate in connection with any claims
by Clapper. The Trustee employed a different attorney to represent the estate in
challenging any claim by Clapper. No financial harm was suffered by the bankruptcy
estate or any other party from this alleged conflict. Where TSF only challenges the
fee award on the basis of a conflict, effectively not contesting whether the work was
-9-
done or whether the hourly rate charged was reasonable, the court did not abuse its
discretion in awarding Hayes the fees sought.
III. CONCLUSION
For the foregoing reasons, we affirm the district court and the subject challenged
decisions of the bankruptcy court.
______________________________
 

 
 
 

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