In re: Adam Aircraft Industries, Inc.

Filing 18

ORDER Reversing Bankruptcy Court's Order, and remanding this matter, by Judge Christine M. Arguello on 3/21/14. (dkals, )

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLORADO
Judge Christine M. Arguello
Civil Action No. 13-cv-01235-CMA
IN RE: ADAM AIRCRAFT INDUSTRIES, INC.,

GEORGE F. ADAM, JR.,
Appellant,
v.
JEFFREY A. WEINMAN, as Chapter 7 Trustee, and
ALLEN & VELLONE, P.C.,
Appellees.

ORDER REVERSING BANKRUPTCY COURT’S ORDER

This matter is before the Court on Appellant George F. Adam Jr.’s (“Adam”)
appeal of the United States Bankruptcy Court for the District of Colorado’s final Order
Granting Allen & Vellone, P.C.’s (“A&V”) Supplemental Application under 11 U.S.C.
§ 330 for Approval of Attorney Fees and “all previous related orders and proceedings
regarding the First and Final Application Under 11 U.S.C. § 331 For Approval of
Attorney[] Fees and Expenses.” (Doc. # 2.) The Court has jurisdiction over this appeal
from the final orders of the Bankruptcy Court. See 28 U.S.C. § 158(a)(1). For the
following reasons, the order of the Bankruptcy Court is reversed.

I. BACKGROUND 1
On March 11, 2010, the Bankruptcy Court granted Trustee’s Motion for
Employment of A&V as Special Counsel pursuant to 11 U.S.C. § 327. On March 29,
2011, the Bankruptcy Court approved, over Adam’s objection, a Modified Contingency
Fee Agreement between the Estate and A&V.
The Trustee engaged A&V to investigate, evaluate, and prosecute claims against
Morgan Stanley Senior Funding, Inc. and Morgan Stanley & Co. Inc. (collectively,
“Morgan Stanley”). On December 3, 2010, A&V filed claims against Morgan Stanley in
the United States District Court for the District of Colorado in Case No. 10-CV-02933,
which case was voluntarily dismissed without prejudice on March 9, 2011. A&V then
filed Adversary Proceeding No. 11-1156 MER on March 9, 2011 (the “Adversary
Proceeding”), seeking equitable subordination of Morgan Stanley’s secured and
unsecured claims against the estate. The Trustee and Morgan Stanley entered into a
Settlement Agreement and Release (the “Settlement Agreement”) which was approved
by the Court on July 3, 2012 and the Adversary Proceeding was dismissed pursuant to
that agreement on July 30, 2012.
According to the Settlement Agreement, Morgan Stanley, after distributions,
had remaining secured claims against the Estate in the amount of $50,749,668.54.
However, under the Settlement Agreement, Morgan Stanley assigned to the Trustee,
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The following facts are taken from the Bankruptcy Court’s February 1, 2013 Order (Rec. at
165-174) and the First and Final Application Under 11 U.S.C. § 331 For Approval of Attorney[]
Fees and Expenses (Rec. at 77-92).

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all its liens and other rights to all assets of the Debtor and the Estate, including its lien
on the “Remaining Sale Proceeds” (that is, the $2,681,083.00 retained by the Trustee
from the sale of the Debtor’s assets on June 10, 2009). 2
Under the Modified Contingency Fee Agreement, A&V agreed to provide
services for a reduced hourly rate of 75% of A&V’s standard rates. The Fee Agreement
further provided A&V would receive a contingency fee of 15% of any “gross amount
recovered” 3 by the estate in the Adversary Proceeding or settlement thereof. On
February 1, 2013, the Bankruptcy Court issued an order awarding $464,999.53 under
the contingency fee portion of the agreement based on A&V’s argument that the “gross
amount recovered” by the Estate under the Settlement Agreement is at minimum
$3,099,997.22. A&V arrived at this amount by estimating it reduced the Estate’s liability
to Morgan Stanley by negotiating that it would release its secured interest totaling at
least $1,796,579.95 in the Estate’s assets and its unsecured interest totaling at least
$1,303,417.27. In addition to the contingency fee award, the Bankruptcy Court also
awarded $73,086.37 in hourly fees and $10,145.82 in costs. Adam appeals the
Bankruptcy Court’s determination to award attorney fees based on the contingency
fee agreement but does not contest the hourly fees or costs award.

2

Prior to engaging A&V, the Trustee distributed $5,826,837.30 to Morgan Stanly as a secured
creditor.
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“Gross amount recovered” is defined as “the total amount recovered before any subtraction of
expenses and disbursements, including any amount collected by virtue of trial or any settlement
of the Matter prior to trial or any reduction in the Client’s liability to the Defendants under the
Bankruptcy Code.”
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II. STANDARD OF REVIEW
The Court reviews the factual determinations of the bankruptcy court under the
clearly erroneous standard, and reviews the its legal conclusions de novo. In re Market
Center East Retail Prop., Inc., 730 F.3d 1239, 1244-45 (10th Cir. 2013). However, a
Bankruptcy Court’s decision regarding attorney’s fees will not be upset absent an abuse
of discretion. Under this standard, the reviewing Court will not reverse the Bankruptcy
Court’s decision unless it has “a definite and firm conviction that the lower court
committed a clear error of judgment or exceeded the bounds of permissible choice in
the circumstances.” In re Cook, 223 B.R. 782, 788-89 (10th Cir. BAP 1998) (internal
citation omitted).
III. DISCUSSION
11 U.S.C. § 330(a)(1) allows for the award of reasonable professional fees
in bankruptcy cases, if the professional is employed under § 327 or § 1103 of the
Bankruptcy Code:
After notice to the parties in interest and the United States Trustee and a hearing,
and subject to sections 326, 328, and 329, the court may award to a trustee, a
consumer privacy ombudsman appointed under section 332, an examiner, an
ombudsman appointed under section 333, or a professional person employed
under section 327 or 1103–
(A) reasonable compensation for actual, necessary services rendered by
the trustee, examiner, ombudsman, professional person, or attorney and
by any paraprofessional person employed by any such person; and
(B) reimbursement for actual, necessary expenses.
11 U.S.C. § 330(a)(1). Section 330 provides the court with the ability to declare a fee
unreasonable and to independently determine reasonable fees. In re Commercial Fin.
Servs., 427 F.3d 804, 810. (10th Cir. 2005.) “[B]ankruptcy courts have wide discretion
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in awarding compensation to attorneys, trustees, and professionals so long as it is
reasonable.” Id. (citing In re Miniscribe Corp., 309 F.3d 1234, 1244 (10th Cir.2002)).
The burden is on the party requesting fees to establish that its request is reasonable.
Id. at 811. Section 330(a)(3) contains a list of factors for the court to consider in
determining the amount of reasonable compensation:
In determining the amount of reasonable compensation to be awarded to an
examiner, trustee under chapter 11, or professional person, the court shall
consider the nature, the extent, and the value of such services, taking into
account all relevant factors, including—
(A) the time spent on such services;
(B) the rates charged for such services;
(C) whether the services were necessary to the administration of, 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).
In the Tenth Circuit, the adjusted lodestar approach is used to calculate
reasonable attorney’s fees under 11 U.S.C. § 330(a). In re Commercial Fin. Servs., 427
F.3d at 811. “The lodestar analysis takes into account each of the factors specifically
mentioned in § 330(a)(3) plus additional relevant factors.” Id. This Circuit also applies
the Johnson factors for the award of attorney’s fees in bankruptcy cases. See id.
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(“As to the attorneys’ fees the cause must be remanded with directions to conduct
a hearing applying the standards that are set forth in Johnson v. Georgia Highway
Express, Inc.[, 488 F.2d 714 (5th Cir. 1974).]”). The twelve Johnson factors are:
(1) The time and labor required.
(2) The novelty and difficulty of the questions.
(3) The skill requisite to perform the legal service properly.
(4) The preclusion of other employment by the attorney due to acceptance of the
case.
(5) The customary fee.
(6) Whether the fee is fixed or contingent.
(7) Time limitations imposed by the client or the circumstances.
(8) The amount involved and the results obtained.
(9) The experience, reputation, and ability of the attorneys.
(10) The “undesirability” of the case.
(11) The nature and length of the professional relationship with the client.
(12) Awards in similar cases.
Johnson, 488 F.2d at 717-19.
The Modified Contingency Fee Agreement at issue here is best described as
a hybrid, reverse contingency fee agreement. It is a hybrid agreement because it
includes provisions for a combination of hourly and contingency fees. It is a reverse
contingency fee agreement because, if A&V’s arguments are accepted, it awards fees
based on a reduction in the Estate’s liability or the money saved. See Formal Opinion
93-373, ABA committee on Professional Ethics and Professional Responsibility (1993)

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(approving the use of reverse contingency fee agreements, but describing the problems
that arise in using such an agreement).
Adam makes various arguments that the Bankruptcy Court erred in awarding
fees pursuant to the Modified Contingency Fee Agreement. Relying in part on In re
Market Center East Retail Property, Inc., the Bankruptcy Court approved the agreement
and determined that agreement reasonable. 448 B.R. 43 (Bankr. D. N.M. 2011),
affirmed, 469 B.R. 44 (10th Cir. BAP 2012) (agreement for hourly fees plus 15% of
amount saved in real estate sale).
However, the Tenth Circuit has since overturned that decision. In re Market
Center East Retail Prop., Inc., 730 F.3d 1239, 1244-45 (10th Cir. 2013). The Tenth
Circuit explained, “[A] bankruptcy court has ‘wide discretion’ to authorize many types
of fee arrangements—provided the total fee is reasonable when considered against the
relevant factors.” Id. at 1249. Therefore, the Circuit determined that “the bankruptcy
court erred as a matter of law in holding that it was not obligated to consider the
§ 330(a)(3) and relevant Johnson factors—and only those factors—when evaluating
the reasonableness of attorney’s fees under § 330.” Id.
Similarly, in the instant case, the Bankruptcy Court failed to weigh the factors
pursuant to Johnson and Section 330(a)(3). Instead, the Bankruptcy Court merely listed
those factors but did not discuss or assign weight to them, stating that pursuant to the
now-overturned Bankruptcy Appeals Panel’s decision in In re Market Center East Retail
Property, Inc., “It is the approval of a contingent fee under § 328 that limits the inquiry
of the bankruptcy court, not the mandate in § 330(a) that a bankruptcy court consider

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‘all relevant factors.’” 469 B.R. 44 (10th Cir. BAP 2012). Because the Tenth Circuit has
clarified that the Johnson and Section 330(a)(3) factors are mandatory and applying
those factors may affect the Bankruptcy Court’s determination of the reasonableness
of the Modified Contingency Fee Agreement, this case must be remanded for
reconsideration of the agreement in light of the those factors. See In re Market
Center East Retail Prop., Inc., 730 F.3d at 1252.
IV. CONCLUSION
For the foregoing reasons, the Bankruptcy Court’s award of attorney fees to A&V
is REVERSED and the matter is REMANDED for further proceedings consistent with
this opinion.
DATED: March 21, 2014
BY THE COURT:

_______________________________
CHRISTINE M. ARGUELLO
United States District Judge

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