Northwest Bank v. Sovereign Holdings, Inc. et al
ORDER granting in part and denying in part 64 Motion for Attorney Fees. Signed by U.S. District Judge Karen E. Schreier on 3/29/2017. (JLS)
UNITED STATES DISTRICT COURT
DISTRICT OF SOUTH DAKOTA
f/k/a First National Bank,
ORDER GRANTING IN PART AND
DENYING IN PART PLAINTIFF’S
MOTION FOR ATTORNEY FEES
SOVEREIGN HOLDINGS, INC.,
Plaintiff, Northwest Bank, filed suit against defendants, Sovereign
Holdings, Inc., Hepar, L.L.C., and Mary Ellen Nylen, asserting claims for breach
of contract, conversion and fraudulent transfer, and breach of fiduciary duty.
Docket 1. Northwest also requested injunctive relief through the imposition of a
constructive trust. Id. Northwest and defendants stipulated to the dismissal of
all claims except the breach of contract claim against Sovereign. Docket 38. On
February 23, 2016, this court granted Northwest’s motion for partial summary
judgment on the breach of contract claim. Docket 59. Northwest now seeks to
recover attorneys’ fees of $158,738.90 from Sovereign based on the parties’
contract. Id. The court grants in part and denies in part Northwest’s motion.
Sovereign is a South Dakota corporation owned by Mary Ellen Kisting
(formerly Nylen) and Mark A. Nylen as trustee. Docket 80 at 2. Sovereign
executed three unlimited guaranties to Northwest securing a loan made by
Northwest to Hepar BioScience, LLC, a company that was principally owned by
Mark. Docket 32 at 2. Sovereign signed the guaranties in December 2011,
January 2012, and May 2013. Docket 34-1; Docket 28-2; Docket 28-3.
In 2014, one of Sovereign’s primary assets was a Cesna Citation Jet that
was owned by Sovereign’s wholly owned subsidiary, Hepar, LLC. Docket 45 at
16-17; Docket 44 at 3. In July 2014, Sovereign received an offer to sell the jet.
See Docket 45 at 16-17. Sovereign discussed the sale with Northwest. See id.
In an email dated July 30, 2014, the Executive Vice President for Northwest
wrote to Mark that “Northwest Bank consents to the sale of the airplane by
Hepar LLC and waives any interest it may have . . . in the airplane or the
proceeds from the sale of the airplane.” Docket 80-3. Sovereign sold the jet and
deposited the money into an attorney trust account and then into a joint
account owned by Mark and Mary. Docket 45 at 17. Mark and Mary later filed
for divorce, and in his divorce complaint, Mark requested that the proceeds
from the jet sale be returned to Sovereign. Docket 80 at 3. The South Dakota
Circuit Court granted Mark’s request. Id. at 5.
While Sovereign was finalizing the sale of the jet, Sovereign also was
selling its other primary asset, transportation equipment that was previously
owned by Hepar. Docket 80 at 2. After Sovereign notified Northwest about the
sale of the equipment, Northwest’s Executive Vice President sent Sovereign an
email stating that Northwest did “not have a security interest in Sovereign’s
transportation equipment” and that Northwest took “no position regarding the
auction of such equipment.” Docket 80-5. Northwest refused, however, to waive
any rights to the proceeds of the equipment. See id.
A few months after Sovereign sold the jet and the transportation
equipment, Hepar BioScience filed a petition under Chapter 11 of the United
States Bankruptcy Code. Docket 32 at 3; Docket 28-4 at 1. Northwest
participated in Hepar BioScience’s bankruptcy proceedings, and the
Chapter 11 bankruptcy resulted in a plan where Northwest would be a fully
secured creditor and Hepar BioScience would be “absolved of all default and
the original payment schedule affirmed” as to the loan from Northwest. Docket
80 at 5; Docket 80-16 at 3. Under the terms of the guaranties, however,
Northwest could demand immediate payment from Sovereign if Hepar
BioScience filed for bankruptcy, regardless of any actions taken during the
bankruptcy proceeding. Docket 34-1; Docket 28-2.
The issue before the court now is whether Northwest may collect attorney
fees and expenses from Sovereign. Docket 64. Under the guaranties, Sovereign
“agree[d] to pay all expenses of collection, enforcement or protection of
[Northwest’s] rights and remedies under this Guaranty . . . .” Docket 34-1 at
¶ 11; Docket 28-2 at ¶ 11. This includes “reasonable attorneys’ fees, court
costs and other legal expenses.” Docket 34-1 at ¶ 11; Docket 28-2 at ¶ 11.
STANDARD OF REVIEW
When interpreting an attorney fee provision of a contract, a federal
district court looks to the controlling state law of the contract. See S. Wine &
Spirits of Nev. v. Mountain Valley Spring Co., LLC, 712 F.3d 397, 399 (8th Cir.
2013) (applying Nevada law to attorney fee provision). This court has already
determined that Iowa law governs. Docket 59 at 4. Under Iowa law, “[w]hen
judgment is recovered upon a written contract containing an agreement to pay
an attorney fee, the court shall allow and tax as part of the costs a reasonable
attorney fee to be determined by the court.” Iowa Code § 625.22. The party
seeking to recover attorney fees must “prove both that the services were
reasonably necessary and that the charges were reasonable in amount.” Ales v.
Anderson, Gabelmann, Lower & Whitlow, P.C., 728 N.W.2d 832, 842 (Iowa
2007). The court, in determining a reasonable award, “look[s] at the whole
picture, and using independent judgment with the benefit of hindsight,
decide[s] on a total fee appropriate for handling the complete case.” Id. (citing
Lynch v. City of Des Moines, 464 N.W.2d 236, 238 (Iowa 1990)).
When determining whether attorney’s fees are reasonably necessary, the
Iowa courts look to the following factors:
the time necessarily spent, the nature and extent of the service,
the amount involved, the difficulty of handling and importance of
the issues, the responsibility assumed and results obtained, the
standing and experience of the attorney in the profession, and the
customary charges for similar service.”
Id. at 842 (quoting Lynch, 464 N.W.2d at 238). The parties do not dispute that
this litigation involved multimillion dollar liability and that Northwest obtained
a judgment for $18,130,003.44 plus interest. Docket 61. The parties also do
not dispute that the litigation surrounding the guaranties involved proceedings
in South Dakota state court, South Dakota federal court, and United States
Bankruptcy Court. Furthermore, the parties do not dispute that the rates
charged by Northwest’s attorneys are consistent with the rates charged by
other attorneys in the area with similar experience. All of these facts support
Northwest’s request for attorneys’ fees
Sovereign’s argument is that “the time necessarily spent” on this case by
Northwest’s attorneys and “the nature and extent of the service” provided is
excessive. Sovereign argues Northwest acted unreasonably by bringing the
current litigation, by participating in the Nylen’s divorce proceedings, and by
being involved in Hepar BioScience’s bankruptcy.
Sovereign first argues that Northwest’s instigation of this action was
unreasonable because Sovereign is “judgment proof.” According to Sovereign,
Northwest cannot collect on the proceeds from the sale of the jet or the
transportation equipment because Northwest consented to those sales and
expressly waived its rights to the proceeds from the jet. Sovereign argues that
because those proceeds are Sovereign’s only assets of substance, Northwest
knew it could never collect on a judgment from this court. Sovereign’s
argument, however, ignores the fact that Northwest has a valid claim.
Sovereign breached the guaranties it signed. Northwest is not unreasonable for
bringing valid litigation. Although Sovereign’s argument may prohibit
Northwest from collecting certain proceeds in the future, the argument does
not bar Northwest from receiving a judgment in its favor. Because Northwest
has brought a valid claim against Sovereign, Northwest’s actions in this case
Sovereign also argues that Northwest’s participation in the Nylen divorce
proceedings after June 3, 2015, was unreasonable. Sovereign argues that even
though Mark and Mary transferred money from the sale of the jet and the
transportation equipment into their personal account, Northwest did not need
to participate in the divorce proceedings because the South Dakota State
Circuit Court ordered Mark and Mary to transfer the proceeds back into a
Sovereign account. The state court also prohibited Mark and Mary from
accessing the account without the court’s permission. Because the state court
entered its order on June 3, 2015, Sovereign requests that this court not award
attorney fees for work on the divorce proceedings after that date. Docket 81 at
17-18. Sovereign’s argument, however, overlooks the fact that other relevant
information may have surfaced during the divorce proceedings. Furthermore,
Northwest’s actions appear reasonable when the amount of work completed in
the divorce proceedings after June 3, 2015, is compared to the amount of
money in dispute. Sovereign objects to about 25 hours of work performed by
Northwest’s attorneys. Docket 64-2; Docket 64-4. The proceeds in dispute
totaled $10,821,486.98. Docket 81 at 17. Thus, the court finds the amount of
time Northwest spent in connection with the divorce proceedings is reasonable.
Next, Sovereign argues Northwest’s participation in the Hepar BioScience
bankruptcy was unreasonable because Northwest was a secured creditor and
therefore did not need to participate in the bankruptcy proceedings. The court
disagrees. It was reasonable for Northwest, as a senior secured lender, to play
an active role in Hepar BioScience’s Chapter 11 commercial reorganization,
even if Northwest was working privately with Mark. Thus, Northwest’s
participation in all three hearings was reasonable.
Last, Sovereign argues that Northwest’s attorney fees are unreasonable
because Whitfield Eddy and Woods Fuller both billed to attend the same
hearings, one hearing on April 24, 2015, and the other on August 28, 2015.
Northwest’s attorneys did not respond to the objection, and the court finds that
one attorney could have represented Northwest’s interests. The court will
deduct the higher amount of attorney fees from each day. The total deduction
is $4,565. The total award of attorney’s fees is $154,173.90.
It is ORDERED that Northwest’s motion for attorney fees (Docket 64) is
granted in the amount of $154,173.90.
IT IS FURTHER ORDERED that this court will retain jurisdiction in this
matter as to attorney fee and cost applications made related to post-judgment
enforcement and collection efforts.
DATED this 29th day of March, 2017.
BY THE COURT:
/s/ Karen E. Schreier
KAREN E. SCHREIER
UNITED STATES DISTRICT JUDGE
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