MICROBILT CORPORATION v. MASELLI
OPINION. Signed by Judge Joel A. Pisano on 6/16/2014. (gxh)
NOT FOR PUBLICATION
UNITED STATES DISTRICT COURT
DISTRICT OF NEW JERSEY
MICROBILT CORPORATION, et al.,
MASELLI WARREN, P.C.,
MASELLI WARREN, P.C.,
Case No. 11-18143 (MBK)
On appeal from July 25, 2013
Order of Bankruptcy Court for the
District of New Jersey
Civil Action No. 13-6323 (JAP)
On appeal from November 12, 2013
Order of the Bankruptcy Court for
the District of New Jersey
Civil Action No. 14-609 (JAP)
PISANO, District Judge
This matter comes before the Court on the appeal of MicroBilt Corporation (“MicroBilt”)
from the Order of the United States Bankruptcy Court, filed on July 23, 2013 and entered on July
25, 2013, granting in part the final fee application of Maselli Warren, P.C. (“MWPC”), special
counsel, for Debtor.1 MicroBilt also appeals from the Order of the United States Bankruptcy
MicroBilt’s Motion for Reconsideration of the Court’s July 25, 2013 Order was denied in an Order filed
on September 23, 2013.
Court, entered on November 12, 2013, granting MWPC’s motion to compel payment of its
allowed claim. For the reasons set forth below, the Bankruptcy Court’s Orders are affirmed.
Background and Procedural History
Background and Procedural History
The background of this dispute has been set forth in detail before the Bankruptcy Court.
Accordingly, the Court sets forth only those facts that are relevant to this appeal.2
MicroBilt is in the business of providing consumer identity data, information, and
services to end users. It buys credit information from Chex Systems, Inc. (“Chex”), and then
resells it to a number of end user industries within the alternative credit world. Chex and
MicroBilt initially entered into a Resale Agreement in 2003. This agreement was terminated in
2009, and the parties thereafter eventually entered into a subsequent Information Resale
Agreement (“Resale Agreement”), dated August 26, 2009.
In mid-2010, MicroBilt acquired the assets and liabilities of CL Verify, LLC and CL
Verify Credit Solutions, LLC (the “CL Companies”). The CL Companies are also resellers who
purchase information from Chex. There was a dispute between Chex and MicroBilt over
whether Chex had notice of the merger and/or if the merger violated the Resale Agreement.
For almost a decade, MWPC represented MicroBilt in various litigation matters.
MicroBilt hired MWPC in an attempt to obtain an injunction to prevent Chex from terminating
the contract with MicroBilt. MWPC filed an order to show cause in state court, which was
removed to federal court by Chex. Chex then brought suit against the CL Companies in a federal
court in Florida over unpaid bills. MWPC was hired and admitted pro hac vice to file an answer
All facts in this background statement can be found in the Brief of Appellant, Brief of Appellee, and
Reply Brief of Appellant, as well as the accompanying Record on Appeal (“R.”).
On March 18, 2011, MicroBilt filed for Chapter 11 bankruptcy. Chex then filed a Motion
to Compel MicroBilt to Assume or Reject its Resale Agreement on April 5, 2011. MicroBilt
sought authorization to retain MWPC as special counsel to handle the contract
assumption/rejection litigation. The Bankruptcy Court authorized the appointment of MWPC
pursuant to 11 U.S.C. § 327(e) on April 28, 2011. A conflict between MWPC and MicroBilt
arose, which resulted in MWPC’s withdrawal as counsel. MicroBilt’s bankruptcy counsel filed a
motion to substitute counsel and, because the case was in the midst of discovery, a motion to
extend discovery. The Bankruptcy Court granted these motions on August 15, 2011. The
Bankruptcy Court, however, stated that it did “not think that the estate should have to bear the
cost” for new counsel “coming up to speed,” and that MWPC should rather bear that cost. It was
agreed that when MWPC presented its fee application, this would be taken into account. R.
On February 26, 2013, MWPC filed its final fee application, requesting compensation in
the amount of $28,803.00 for services rendered and reimbursement of expenses totaling $183.64.
The fee compensatory amount included a 10% discount. MicroBilt filed an objection to the
application, arguing that the application should be denied in its entirety because
“MWPC…withdrew from serving as special litigation counsel to MicroBilt…and provided no
benefit to the Debtors’ Estates.” R. 128. Essentially, MicroBilt argued that the timing of
MWPC’s withdrawal cost MicroBilt substantial additional fees in educating new counsel on all
aspects of the history of the parties and the case, including providing new counsel with
documents and information that had already been provided to MWPC. MicroBilt asserted,
therefore, that the post-petition fees associated with MWPC’s work did not therefore benefit the
estate in any way.
On July 25, 2013, the Bankruptcy Court entered an order granting MWPC’s application
in part, reducing their fees to $19,303.00 (the “Post-Petition Order”). On August 29, 2013,
MicroBilt moved for reconsideration, on the basis that MWPC failed to serve MicroBilt with a
Pre-Action Notice pursuant to New Jersey Court Rule (“N.J. Ct. R.”) 1:20A-6. On September
23, 2013, the Bankruptcy Court filed an order denying the motion for reconsideration (the
At the time of the bankruptcy filing, MWPC held a pre-petition claim for unpaid legal
fees in the amount of $54,516.29, for which MWPC filed a proof of claim (“POC”) on June 2,
2011. See R. 159. When MicroBilt filed its statement of financial affairs on May 4, 2011, it
listed the MWPC claim as undisputed. On June 22, 2012, MicroBilt amended its statement of
financial affairs to dispute the amount of MWPC’s POC in its entirety. On November 30, 2012,
the Bankruptcy Court entered an order confirming MicroBilt’s Fourth Amended Chapter 11 Plan
of Reorganization (the “Plan”). The Plan provides that the allowed claims of all creditors are to
be paid in full; however, MicroBilt omitted the MWPC’s POC in the escrowed payments under
the Plan. The Plan also stipulates that MicroBilt does not release any claims it may have against
MWPC, and preserves MicroBilt’s right to pursue a cause of action against MWPC and
preserves its defenses to the MWPC claim.
Under D.N.J. LBR. 2007-1(a), and as stated in the Order, MicroBilt had sixty (60) days
to file an objection to the allowance of any claims. It is undisputed that MicroBilt failed to file a
timely objection to MWPC’s claim. On January 25, 2013, MicroBilt filed a certification stating
that it had made all payments to pre-petition secured and unsecured creditors. On July 16, 2013,
MWPC moved to compel payment of its pre-petition claim, asserting that MicroBilt had not paid
MWPC’s POC, despite certifying in January that it had made all payments to pre-petition claims.
MicroBilt objected to this motion, arguing that MWPC failed to serve MicroBilt with a PreAction Notice pursuant to N.J. Ct. R. 1:20A-6 and therefore the “Fee Action must be dismissed
and the underlying proof of claim stricken as an unperfected nullity.” R. 169-70. MicroBilt
alternatively argued that it should not be liable for the claim because of MWPC’s
“abandonment” of MicroBilt. Id. at 174-75.
On October 31, 2013, the Court issued an opinion granting MWPC’s motion to compel
payment of its allowed claim for pre-petition attorney’s fees in its entirety (the “Pre-Petition
Opinion”). The Court entered its order directing MicroBilt to pay the claim for pre-petition
attorney’s fees on November 11, 2013 (the “Pre-Petition Order”).
Rulings of the Bankruptcy Court
The Post-Petition Attorney Fee Application Order
The Bankruptcy Court held oral argument on the contested final fee application that was
submitted by MWPC on July 22, 2013. While MWPC had acknowledged a $724.00 voluntary
reduction for one of the expenses, it had argued that the time and effort expanded by MicroBilt’s
new counsel amounted to about $3,700.00. Accordingly, MWPC asserted that its fee application
should be reduced by approximately that amount. MicroBilt argued that MWPC’s estimate of
how much time its new counsel had expended “coming up to speed” did not reflect the realities
of the actual time spent. MicroBilt’s counsel asserted that it took more than the ten hours that
MWPC had argued for to learn the case, and that its bankruptcy counsel also had to take time to
learn the litigation side of the case in order to assist them. MicroBilt’s counsel argued that its
time records do not properly represent the extent of how much work it had to do to learn the
The Bankruptcy Court stated that, even though MWPC did withdrawal, MWPC’s work
did provide a value to the estate, and the estate would have had to pay an attorney for such work
regardless. See R. 308. Therefore, the Bankruptcy Court, after considering both the oral
argument and the written submissions, including the individual time entries, found “that the bulk
of the entries are for work that would have been undertaken in order to represent the interests of
the debtor no matter whether it was [MWPC] doing the work or [new counsel for MicroBilt].
There has been a true benefit in having the work done.” R. 313. The Bankruptcy Court
emphasized that there had been no objection that the work was somehow negligently or
improperly done, or that the work was unnecessary. Noting that “[i]t’s not so easy to make that
decision [of if work is unnecessary] at the time the work is undertaken, and this court affords the
latitude to counsel in that regard. Certainly the client, which is here, the debtor estate, benefited
from having those tasks completed.” Id. The Bankruptcy Court, however, found that there were
some reductions that could appropriately be taken from the fee application, because the debtor
estate “should not have to bear the brunt of new counsel having to come up to speed.” Id. The
Bankruptcy Court disagreed with MWPC’s conclusion that only approximately $3,700.00 should
be deducted from the fee application; rather, the Bankruptcy Court “looked at the various time
entries and found that [it] could ascribe greater time to certain entries than was credited by
[MWPC], and [it] also agree[d] with [MicroBilt’s counsel] that there’s obviously time and effort
that’s not always reflected in the time sheet.” Id. The Bankruptcy Court concluded the fee
application for MWPC would be granted, but less the sum of $9,500.00. The Bankruptcy Court
found that a reduction of $9,500.00 was necessary based upon an exclusion of time billed by
MWPC that occurred before April 28 or after August 8, as well as the $742.00 that MWPC
withdrew on its own, a reduction of $4,155.00, and the time that the Bankruptcy Court had
ascribed going through the time sheets as necessary for new counsel for MicroBilt to “come up
to speed.” Id. This was in addition to the 10% reduction that MWPC had already given to
On August 29, 2013, MicroBilt moved for reconsideration, on the basis that MWPC
failed to serve MicroBilt with a Pre-Action Notice pursuant to N.J. Ct. R. 1:20A-6. MWPC
opposed, arguing that the fact it did not serve such a notice to MicroBilt could not be considered
“new evidence.” The Bankruptcy Court agreed with MWPC, and denied the motion for
reconsideration on September 23, 2013.
The Pre-Petition Opinion and Order
As discussed, the Bankruptcy Court issued an opinion on October 31, 2013, granting
MWPC’s motion to compel payment of its claim for pre-petition attorney’s fee. First, the Court
determined that, while it recognized that MicroBilt had failed to file an objection to the MWPC
POC and was “cognizant of MWPC’s contention that MicroBilt’s untimely objection precludes
any opposition to the within Motion,” it would “address this matter on the merits, rather than
ruling on procedural niceties . . . .” R. 239 (citing In re Alcon Demolition, 204 B.R. 440, 445
(Bankr. D.N.J. 1997)).
Next, the Court turned to the issue of whether the claims allowance scheme incorporated
within the Bankruptcy Code preempts N.J. Ct. R. 1:20A-6, a New Jersey Court rule of procedure
that requires attorneys to provide clients with pre-action notice and to alert them of their right to
pursue arbitration before initiating an action to recover fees. The Court held that the Bankruptcy
Code (the “Code”) and the Federal Rules of Bankruptcy Procedure (the “Rules”) preempted the
New Jersey Court rule. The Court relied on a recent Third Circuit decision, Simon v. FIA Card
Servs., 732 F.3d 259 (3d Cir. 2013), in which the Third Circuit found that, where there is a direct
conflict between the Fair Debt Collection Practices Act (“FDCPA”) and the Bankruptcy Code or
Rules, the FDCPA claim would be preempted. The Bankruptcy Court compared that situation to
the one in front of them, explaining that there was a direct conflict between the New Jersey Court
rule and the Code and the Rules because, “had MWPC issued a pre-action notice, it would have
violated the automatic stay.” R. 241-42. Therefore, the Court concluded that MWPC’s failure to
serve the Pre-Action Notice did not preclude the allowance of the MWPC POC under 11 U.S.C.
§ 502, and granted MWPC’s motion. On November 12, 2013, the Order was entered.
On October 24, 2013, MicroBilt filed an appeal from the Post-Petition Order. On
February 21, 2014, this Court entered an Order consolidating the appeal from the Post-Petition
Order with MicroBilt’s appeal from the Bankruptcy Court’s Pre-Petition Order (together, the
Jurisdiction and Standard of Review
The Court has jurisdiction over this matter pursuant to 28 U.S.C. § 158(a)(1). Under Rule
8013 of the Federal Rules of Bankruptcy Procedure, a district court may “affirm, modify, or
reverse a bankruptcy judge’s judgment, order, or decree or remand with instructions for further
proceedings.” In bankruptcy cases, the district court serves an appellate function. Thus, the
Court reviews findings of fact under a clearly erroneous standard and reviews legal conclusions
under a de novo standard. Fed. R. Bankr. P. 8013; see also In re Sharon Steel Corp., 871 F.2d
1217, 1223 (3d Cir. 1989). A factual finding is clearly erroneous when “the reviewing court on
the entire evidence is left with the definite and firm conviction that a mistake has been
committed.” In re Cellnet Data Systems, Inc., 327 F.3d 242, 244 (3d Cir. 2003) (citing U.S. v.
U.S. Gypsum Co., 333 U.S. 364, 395 (1948)). “Findings of fact, whether based on oral or
documentary evidence, shall not be set aside unless clearly erroneous, and due regard shall be
given to the opportunity of the bankruptcy court to judge the credibility of the witness.” Fed. R.
Bankr. P. 8013.
For determinations that involve mixed questions of law and fact, a district court must
apply a mixed standard of review. Mellon Bank, N.A. v. Metro Commc’n, Inc., 945 F.2d 635, 642
(3d Cir. 1991). The Court must accept the Bankruptcy Court’s findings of historical or narrative
facts unless clearly erroneous, but exercise “plenary review of the trial court’s choice and
interpretation of legal precepts and its application of those precepts to the historical facts.”
Universal Minerals, Inc. v. C.A. Hughes & Co., 669 F.2d 98, 103 (3d Cir. 1981). Additionally,
the Bankruptcy Court’s exercises of discretion are reviewed for abuse thereof. Kool, Mann,
Coffee & Co. v. Coffey, 300 F.3d 340, 353 (3d Cir. 2002).
MicroBilt has appealed both the Pre- and Post-Petition Orders. First, MicroBilt argues
that both Fee Orders should be vacated, because the Bankruptcy Court erred in holding that N.J.
Ct. R. 1:20A-6 was preempted by the Code and the Rules. Next, MicroBilt appeals from the
Bankruptcy Court’s fee determination, arguing that it is clearly erroneous.
The Preemption Issue
In its appeal, MicroBilt argues that the Bankruptcy Court erred in its finding that the
Code and the Rules preempt the application of N.J. Ct. R. 1:20A-6. Instead, MicroBilt asserts
that the service of a Pre-Action Notice under N.J. Ct. R. 1:20A-6 was mandatory here, and
MWPC’s failure to serve such notice is fatal to both its claims for fees. MWPC argues,
however, that it could not have filed a pre-action arbitration notice pursuant to N.J. Ct. R. 1:20A6 without violating the automatic stay pursuant to 11 U.S.C. § 362(a).
Therefore, this Court must review, de novo, if the claims allowance scheme within the
Bankruptcy Code preempts the New Jersey Court rule that requires attorneys to provide notice to
a client before initializing an action to recover fees. Specifically, under N.J. Ct. R. 1:20A-6:
No lawsuit to recover a fee may be filed until the expiration of the 30 day period
herein giving Pre-Action Notice to a client; however, this shall not prevent a
lawyer from instituting any ancillary legal action. . . . The notice shall specifically
advise the client of the right to request fee arbitration and that the client should
immediately call the secretary to request appropriate forms; the notice shall also
state that if the client does not promptly communicate with the Fee Committee
secretary and file the approved form of request for fee arbitration within 30 days
after receiving pre-action notice by the lawyer, the client shall lose the right to
initiate fee arbitration. The attorney's complaint shall allege the giving of the
notice required by this rule or it shall be dismissed.
N.J. Ct. R. 1:20A-6.
Recently, the Third Circuit discussed the proper inquiry for determining if Code or the
Rules preclude a claim under the Fair Debt Collection Practices Act (the “FDCPA”). In Simon,
which the Bankruptcy Court relied on in making its decision, the debtor sought to bring various
claims for violations of the FDCPA, including the failure to include the “mini-Miranda” warning
required under 15 U.S.C.§ 1692e. See 732 F.3d at 263-64. Section 1692e mandates that a debt
collector must disclose in the initial communication with the debtor “that the debt collector is
attempting to collect a debt and that any information obtained will be used for that purpose.” 15
U.S.C. § 1692e(11). The District Court dismissed the action in its entirety, holding that the
FDCPA claims were precluded by the Bankruptcy Code. See Simon v. FIA Card Servs., N.A.,
Civil Action No. 12-0518, 2012 U.S. Dist. LEXIS 98225, at * 8 (D.N.J. July 16, 2012). The
Third Circuit reversed in part, finding that there should not be a blanket preclusion of all FDCPA
claims. Rather, they held:
When, as here, FDCPA claims arise from communications a debt collector sends
a bankruptcy debtor in a pending bankruptcy proceeding, and the communications
are alleged to violate the Bankruptcy Code or Rules, there is no categorical
preclusion of the FDCPA claims. When, as is also the case here, the FDCPA
claim arises from communications sent in a pending bankruptcy proceeding and
there is no allegation that the communications violate the Code or Rules, there is
even less reason for categorical preclusion. The proper inquiry for both
circumstances is whether the FDCPA claim raises a direct conflict between
the Code or Rules and the FDCPA, or whether both can be enforced.
Simon, 732 F.3d at 274 (emphasis added). Therefore, the Third Circuit found that preclusion of
FDCPA claims was necessary where there was a direct conflict between the Bankruptcy Code.
Consequently, the Third Circuit found that the plaintiffs’ FDCPA claim premised on a violation
of § 1692e(11) must be dismissed, emphasizing that there was an actual conflict involved if both
statutes were enforced: “If…a § 1692e(11) claim could arise from the fact that the [firm’s]
letters and subpoenas did not include the ‘mini-Miranda’ notice, the firm would violate the
automatic stay provision of the Bankruptcy Code by including the notice or violate the FDCPA
by not including the notice.” Id. at 280.
The Court finds that Simon is persuasive authority for finding that N.J. Ct. R. 1:20A-6 is
preempted by the Code and Rules. While Simon discusses the relationship between the Code and
the FDCPA, the rationale of the case is directly applicable here. In Smith, the existence of a
direct conflict between the automatic stay provision of the Code, 11 U.S.C. § 362(a), and a
violation of the FDCPA requirement of sending a “mini-Miranda” notice, see 15 U.S.C. §
1692(e)11, precluded the FDCPA claim from proceeding. Likewise, here, the statutory
requirements under N.J. Ct. R. 1:20A-6 directly conflict with the automatic stay provision of the
Code: if MWPC had issued a Pre-Action Notice, it would have violated the automatic stay
provision of the Code.3 Complying with both the Code and the New Jersey Court rule is
This conflict has been noted by other courts in this District. See In re Rapid Freight Sys., Inc., Civil
Action No. 09-34047, 2011 WL 1300441, at * 6 (Bankr. D.N.J. Mar. 31, 2011) (“If [the attorney] were to
have taken the steps necessary to perfect its statutory lien during the pendency of the Debtor's bankruptcy,
(i.e. filing a petition or complaint in pending state court forum) then [the attorney] would have done so in
violation of the automatic stay currently in effect.”).
impossible; in such cases where there is a direct conflict between the Code or Rules and a New
Jersey Court rule, both cannot be enforced. See, e.g., Simon, 732 F.3d at 274.4 Consequently,
this conflict preempts enforcing N.J. Ct. R. 1:20A-6 against MWPC for failing to send a preaction notice.
Further, as recognized in Smith, the Code is a complex, detailed, comprehensive, and
lengthy system “designed to bring together and adjust all of the rights and duties of creditors and
embarrassed debtors alike.” Id. at 272 (quoting Walls v. Wells Fargo Bank, N.A., 276 F.3d 502,
510 (9th Cir. 2002)). The claims allowance process is part of the core proceedings of the
Bankruptcy Court. See 28 U.S.C. § 157(b)(2)(B). The Code contains an extensive, detailed
scheme for claim allowance, which is part of the core proceedings of the bankruptcy court. See
28 U.S.C. § 157; see also In re McCarther-Morgan, Civil No. 08-1093, 2009 WL 7810817, at *4
(B.A.P. 9th Cir. Jan. 27, 2009) (“The Bankruptcy Code and the rules promulgated thereunder
specify comprehensive and detailed procedures for filing and consideration of creditors’ claims
and resolution of disputes over claims, which are core functions of the bankruptcy system.”).
For example, a proof of claim filed in a bankruptcy proceeding constitutes prima facie evidence
of its validity and is deemed allowed unless and until a party in interest objects to it. § 502(a);
Rule 3001(f). Thereafter, if an objection is filed, the bankruptcy court resolves that objection
after notice and a hearing. See Rule 3007. The Code has established how a party in interest can
object to a claim – specifically, the objecting party must “produce evidence sufficient to negate
the prima facie validity of the filed claim,” a standard which, in practice, means the objector
must produce evidence which “would refute at least one of the allegations that is essential to the
It should also be noted that Simon involved the preclusion of the FDCPA, a federal statute. As the Third
Circuit explained, “In contrast to its consistently strict application of the presumption against finding an
implied repeal of one federal statute by another, the Supreme Court has shown a greater willingness to
find that federal statutes and regulations preempt state-law causes of action.” Simon, 732 F.3d at 274.
claim’s legal sufficiency.” In re Allegheny Int'l, Inc., 954 F.2d 167, 173-74 (3d Cir. 1992).
Here, to find more generally that a party in interest could object to a claim based on a failure to
serve a pre-action notice on the Debtor is irreconcilable with the claims objection process
contemplated under the Code.
MicroBilt has emphasized that cases in this District have mandated that adherence to N.J.
Ct. R 1:20A-6 is necessary. These decisions are largely inapplicable in this context because they
deal with perfecting an attorney’s lien. For example, MicroBilt cites to In re Rapid Freight Sys.,
Inc., Civil Action No. 09-34047, 2011 WL 1300441 (Bankr. D.N.J. Mar. 31, 2011), a case in
which the bankruptcy court was asked to determine if an attorney held a valid attorney’s lien
securing pre-petition fees, including fees in connection with matters that were active and pending
at the time of the bankruptcy filing. The Bankruptcy Court determined that perfection
prerequisites under the relevant state law are necessary to uphold the validity of an attorney’s
lien, even if there is no fee dispute. The Bankruptcy Court concluded that, because the attorney
sought “payment from the assets of the Debtor’s estate, it was bound by the requirements of R.
1:20A-6 and pre-action notice” in order to uphold the validity of the attorney lien. See id. at * 8.
Implicated in the Rapid Freight decision is the well-settled premise that property interests
are created and defined by state law. See Butner v. United States, 440 U.S. 48, 55 (1979). A lien
is a property right, see In re Pennsylvania Central Brewing Co., 135 F.2d 60, 63 (3d Cir.1943);
accordingly, state law dictates whether or not an attorney properly perfected a lien against the
property of the debtor’s estate. Here, it is undisputed that MWPC did not perfect its attorney’s
lien; however, MWPC has asserted that it is not seeking an attorney’s lien, but is rather only
seeking to be treated as a general unsecured creditor. See R. 323; Appellee Br. at 5 n.2. In the
bankruptcy setting, the issue of whether or not a lien has been perfected still leaves an attorney
with a general unsecured claim that could be prosecuted in the bankruptcy case. In fact, in Rapid
Freight, the Bankruptcy Court noted the validity of such an unsecured claim: “The result may
seem harsh to [the attorneys], however, they are not left wholly without remedy or redress. They
will still have a general unsecured claim for alleged amounts owed based upon pre-petition
services provided to Debtor in connection with the state court collection matters.” Rapid
Freight, 2011 WL 1300441, at *7; see also Hoffman & Schreiber v. Medina, 224 B.R. 556, 564
(D.N.J. 1998) (affirming the bankruptcy court’s conclusion that, because the attorney failed to
perfect its lien under New Jersey state law, the attorney’s “entire claim against debtor is in the
nature of an unsecured claim”). The failure to perfect a lien does not result in the dismissal of
the claim outright, leaving the attorney with no redress. Therefore, assuming that the New Jersey
Court rule was not preempted by the Code and Rules, MWPC would remain in the same position
it is currently in: as a creditor with an unsecured claim.
Finally, MicroBilt argues that Kelley Drye & Warren v. Murray Indust., Inc., 623 F.
Supp. 522 (D.N.J. 1985) is the “correct and dispositive authority.” Br. at 15. The Court
disagrees. In Kelley Drye & Warren, the Court was faced with a similar issue. The defendant
had moved to dismiss the complaint or, alternatively, stay all proceedings because they had never
received a fee arbitration notice. The Court agreed, entering an order requiring the attorneys to
proceed with arbitration of its claim pursuant to N.J. Ct. R. 1:20A-1, et seq., and administratively
terminating the action. While superficially relevant, this decision is not persuasive. The Kelley
Drye & Warren case was in federal court because of diversity jurisdiction; as such the Court had
to apply the substantive law of New Jersey to the matter at hand. Because the substantive law of
New Jersey “conditions the right to practice in New Jersey upon an undertaking to resolve
attorneys’ fee disputes through arbitration as provided in the Rules of Court,” the Court was
obligated to require the attorneys to proceed with arbitration of its claim. Kelley Drye & Warren,
523 F. Supp. at 526. On the other hand, this case arrives in this Court because of the Bankruptcy
Code, which creates substantive federal jurisdiction. The involvement of the Bankruptcy Code,
with its protections for the Debtor under the automatic stay and its detailed scheme for claims
allowance, makes the Kelley Drye & Warren decision almost inapposite.
Overall, attempting to reconcile the procedure under N.J. Ct. R. 1:20A-6 with the claims
objection process or automatic stay protections under the Code results in the sort of confusion
and conflict that persuades the Court that N.J. Ct. R 1:20A-6 should be preempted in the context
of bankruptcy cases. The Fee Orders will not, therefore, be vacated on this ground.5
Accordingly, the Court will affirm the Bankruptcy Court’s holding that the Code and Rules
preempt application of N.J. Ct. R. 1:20A-6.
MicroBilt also argues, in passing, that the Pre-Petition Order granting MWPC’s allowed claim in its
entirety should be vacated and remanded because the Bankruptcy Court failed to make any factual
findings as to any reductions. It asserts that the Bankruptcy Court commented that it was addressing the
“matter” on the merits but only addressed the procedural issue of complying with N.J. Ct. R. 1:20A-6,
rather than its argument regarding the substantive claim. The Bankruptcy Court’s Memorandum Opinion
is clear on its intent to address a single issue in regards to the motion to compel; specifically, it was
making a determination on whether the claim is completely barred because MWPC failed to serve
MicroBilt with a pre-action notice as required under the New Jersey Court rule. See R. 239, 241. If
MWPC was under no such requirement to serve the notice, then the allowed claim was to be entered in its
entirety. See R. 243. Therefore, the Bankruptcy Court, finding that the Code and Rules preempt N.J. Ct.
R. 1:20A-6, granted MWPC’s motion to compel in its entirety. The Court disagrees that the Bankruptcy
Court must make a ruling on the substantive allowed claim once it determined that N.J. Ct. R. 1:20A-6
did not present a procedural barrier to entering the allowed claim.
The Court is also unconvinced as to how MWPC’s withdrawal as special counsel for MicroBilt in
the post-petition period affects MWPC’s pre-petition claim for unpaid legal fees, particularly when
considering that any effect of the alleged “abandonment” of MicroBilt by MWPC was accounted for by
the Bankruptcy Court when MWPC filed its post-petition fee application. Considering there was no
factual evidence provided to the Bankruptcy Court regarding how the withdrawal of MWPC as counsel
affected the pre-petition claim, there is no way that this Court can find that the Bankruptcy Court’s
decision to enter the allowed claim in its entirety was erroneous. Therefore, the Court finds that, even if it
disagreed with the Bankruptcy Court, vacating and remanding the Pre-Petition Order on this basis would
be both futile and a waste of judicial resources.
The Post-Petition Fee Application
MicroBilt has also appealed the Bankruptcy Court’s Post-Petition Fee, arguing that the
post-petition fee application order should be vacated for two reasons. First, it argues that the
Bankruptcy Court’s factual findings were clearly erroneous because it failed to consider or
appropriately weigh the attorneys’ fees and lost executive time that MWPC’s “untimely
abandonment” caused MicroBilt. Second, it argues that MWPC failed to follow the procedural
requirements of the Bankruptcy Court’s Order on Professional Services entered on July 6, 2011.
The Court finds these arguments meritless.
“Fee awards are reviewed for an abuse of discretion, which can occur ‘if the judge fails to
apply the proper legal standard or to follow proper procedures in making the determination, or
bases an award on findings of fact that are clearly erroneous.’” Ryker v. Current, 338 B.R. 642,
651 (D.N.J. 2006) (quoting Zolfo, Cooper & Co. v. Sunbeam–Oster Co., 50 F.3d 253, 258 (3d
Cir.1995) (quoting Electro–Wire Prods., Inc. v. Sirote & Permutt, P.C. (In re Prince), 40 F.3d
356, 359 (11th Cir.1994))). The fact that this Court may have reached a different conclusion
does not mean that the Bankruptcy Court abused its discretion. See United Telegraph Workers,
AFL-CIO v. Western Union Corp., 771 F.2d 699, 703 (3d Cir.1985) (citing Citizens to Preserve
Overton Park, Inc. v. Volpe, 401 U.S. 402, 416 (1971)).
The Court disagrees with MicroBilt’s assertion that the Bankruptcy Court’s fee award
was based on clearly erroneous findings of fact. A review of the Bankruptcy Court’s hearing on
the post-petition application shows that the decision was well-reasoned and thoughtful. The
Bankruptcy Court considered all the issues raised by MicroBilt, including the cost that MWPC’s
withdrawal cost MicroBilt in terms of attorneys’ fees and lost executive time, as well as
MicroBilt’s argument that MWPC’s work provided no benefit to the estate. See supra Part
II.B.1. The Bankruptcy Court clearly states that it carefully reviewed the time sheets and found
that it could credit greater time to certain entries by MicroBilt than MWPC argued for, and that it
considered in its determination the time that would not be reflected in time sheets, such as time
expended by various executives. See R. 313. The Bankruptcy Court also found that the “bulk of
the entries are for work that would have been undertaken in order to represent the interest of the
debtor” whether it was MWPC doing the work or MicroBilt’s new counsel. R. 313; see also R.
307. The Bankruptcy Court found that there was “a true benefit in having the work done” and
that “the client, which is here, the debtor estate, benefited from having those tasks completed.”
Id. The Bankruptcy Court also noted that there was no objection that the work that was done
was unreasonable, unnecessary, or negligently or improperly done. See id. at 313. The
Bankruptcy Court acknowledged and considered the same factual arguments that MicroBilt
raises here on appeal, and made its conclusions with a solid background of the ongoing litigation.
Accordingly, the Court does not find that the Bankruptcy Court’s award of fees to MWPC was
based on findings of fact that were clearly erroneous.
Second, MicroBilt argues that the Bankruptcy Court abused its discretion in the postpetition fee award by failing to recognize that MWPC did not follow the procedural requirements
of the Bankruptcy Court’s Order on Professional Services entered on July 6, 2011. The Court
disagrees. The Professional Services Order provides a permissive method by which
professionals could proceed to have their fees approved in order to be paid on a monthly interim
basis. See R. 2 (“[A]ll professionals retained in this case may seek monthly compensation in
accordance with the following procedures . . . .”) (emphasis added). MWPC’s decision to not
seek monthly compensation, but to rather file a first and final application for approval of its postpetition fees, was completely within its rights. Further, and more practically, the Court can
detect no prejudice that was done to any of the interested parties by the filing of a final fee
application rather than a monthly fee statement; the interested parties could object to the final
application, and indeed one did. To find otherwise would be exalting form over substance.
Therefore, the Court finds that the Bankruptcy Court did not abuse its discretion when it entered
a post-petition fee award for MWPC, even though MWPC chose not to follow the Professional
For the foregoing reasons, the Bankruptcy Court’s Order granting MWPC’s motion to
compel payment of its allowed claim in its entirety is AFFIRMED. The Bankruptcy Court’s
Order granting in part the final fee application of MWPC is likewise AFFIRMED. An
appropriate Order accompanies this Opinion.
/s/ Joel A. Pisano
JOEL A. PISANO
United States District Judge
Date: June 16, 2014
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