In re Little River Healthcare Holdings, LLC

Case Type:
Case Status:
Affirmed in part and Reversed in part
21-50616 (5th Circuit, May 18,2022) Not Published
Applying the plain meaning to the court-approved contingency fee agreement, the Court REVERSED, in part, concluding that certain categories of "damages" awarded by an Arbitrator should have been included in the contingency fee award. Because the fee agreement awarded 10% of "consequential and/or punitive damages," which term was defined to be "all damages other than direct damages," the Court REVERSED, in part, and AFFIRMED, in part. The Court also held counsel was not estopped from re-litigating issues raised in the arbitration, despite his participation therein. No "privity" existed.
Procedural context:
After entry of an arbitration award, counsel for the trustee sought Bankruptcy Court approval of his contingency fees pursuant to the previously approved contingency fee agreement. The Bankruptcy Court denied fees for certain categories of the arbitration award, but awarded fees based on interest. The District Court affirmed. Both parties (counsel and the trustee) cross-appealed.
In Law Office of Ryan Downton v. Little River Healthcare Holdings, LLC (In re Little River Healthcare Holdings, LLC), the Fifth Circuit was asked to interpret a contingent fee agreement previously approved by the bankruptcy court to assess the fees awarded thereunder. In the bankruptcy case below, Ryan Downton represented the chapter 7 trustee for health care provider that was pursuing claims against its insurer (BCBSTX). The bankruptcy court approved Downton’s contingency fee agreement, which provided for a fee calculated at 10% of any “consequential and/or punitive damages” awarded in the arbitration against BCBSTX. The agreement provided that “consequential and/or punitive damages in the Arbitration are all damages other than direct damages (money that the Arbitrator finds BCBSTX should have paid Little River for healthcare services provided to BCBSTX insureds).” Thus, Downton’s contingency fee would be calculated as 10% of “all damages other than direct damages” which were defined within the parenthetical. In the arbitration, the Arbitrator awarded several categories of damages in favor of the debtor. The ones relevant to this decision were: (1) patient-responsibility payments, meaning damages caused to the debtor when it was unable to collect money from private payer patients as a result of BCBSTX untimely finalization of claims; (2) prompt-payment law violations, which were penalties imposed by statute; and (3) pre-judgment interest, which the Arbitrator labeled as “interest as interest” rather than “interest as damages.” After finalizing the arbitration award, Downton applied for compensation from the bankruptcy court, asking for 10% of various amounts, including the three categories listed above. As relevant to this appeal, the bankruptcy court denied compensation for categories (1) and (2) above, concluding that the patient-responsibility award was did not fall within the definition of “consequential and/or punitive damages” and that the prompt-pay violations were “not damages” but rather “just a statutory penalty.” The bankruptcy court explained that the pre-judgment interest was really “interest as damages,” not “interest as interest” as labeled by the Arbitrator. Thus, the bankruptcy court awarded Downtown 10% of the interest. The district court affirmed, and both parties—i.e., Downton and the chapter 7 trustee—cross appealed. The Fifth Circuit first explained that the contingency fee agreement was not ambiguous and could be interpreted according to its plain meaning. The Court of Appeals specifically rejected the trustee’s argument that the parenthetical definition of “direct damages” was just an example of direct damages, explaining that the parties would have used different language if they had intended it so. Having resolved this question, the Court of Appeals focused on whether each category of the arbitration award fell into the definition of “consequential and/or punitive damages” as that term was strictly defined in the agreement. For the first category of damages (patient-responsibility payments), the Court of Appeals explained that such damages did not satisfy the definition of “money that BCBSTX should have paid” to the debtor (i.e., direct damages). Rather, the damages awarded under this category were based on amounts the debtor would have collected from private payers but for BCBSTX’s failure to timely process and finalize claims so that the debtor could collect balances from its patients. Because this category fell outside of the plain meaning of “direct damages,” the Court of Appeals reversed the bankruptcy court’s ruling and held that Downtown’s was entitled to 10% of these damages as part of his contingency fee award. The next issue was whether Downtown should have been awarded fees based on the statutory penalty awarded for BCBSTX’s violations of prompt-pay laws. On this point, because the statute itself referred only to a “civil remedy” rather than “damages” and imposed the penalty regardless of the amount of actual losses, if any, the Court of Appeals agreed with the lower courts that this category was not “damages” as defined in the contingency fee agreement. Thus, the Court affirmed the lower courts’ denial of Downton’s contingency fee for this category. The final category was interest. On this point, the Court of Appeals first considered (and rejected) the trustee’s argument that Downton was precluded or estopped from challenging the Arbitrator’s award. Specifically, the Court of Appeals held that there was no privity between the litigants and Downton. Downtown was not a successor to the debtor; he was never in a position to control the litigation—he was merely the trustee’s counsel in the arbitration; and his personal interests in maximizing his own attorneys’ fees were not represented in the arbitration. Thus, the Court of Appeals considered the merits of whether the “interest” award constituted direct damages or consequential damages. On the merits, the Court of Appeals agreed with the bankruptcy and district courts that the pre-judgment interest was properly relabeled as damages. But that did not resolve the question of whether such damages were “direct” or “consequential.” Turning to the plain language of the fee agreement, the Court of Appeals concluded that the pre-judgment interest was not money that BCBSTX should have paid to its insureds. Thus, the interest award fell into the other bucket of “consequential and/or punitive damages” against which the lower courts properly included in Downtown’s contingency fee award. The Court of Appeals affirmed on this ground, and remanded to the lower courts to recalculate the final fee award based on this ruling.
King, Jones, and Duncan

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