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Summarizing by Lars Fuller

Edwards Family Partnership, et al v. Johnson, et a

Case Type:
Case Status:
Reversed and Remanded
20-60728 (5th Circuit, Mar 05,2021) Published
The U.S. Court of Appeals for the Fifth Circuit (Circuit) reversed an order of the district court (DC), which had vacated fees awarded by the bankruptcy court (BC) to the counsel of the debtor (DR) for work performed prior to appointment of a trustee (TR), faulting the DC for improperly assessing the benefit of these legal services to the estate from hindsight, rather than assessing the reasonableness and likely benefit from the time they were rendered, and joined other circuits in awarding standing to a trustee based on their duties to administer the estate, not any pecuniary interest.
Procedural context:
The BC awarded fees to the bankruptcy debtor’s counsel for work performed prior to the TR's appointment. The DR's two largest creditors--Edwards Family Partnership, Inc. and Beher Holdings Trust, who at one point tried to depict themselves as a single entity known as the "Edward Entities" (E&B)--appealed. After a two-and-a-half-year delay, the DC vacated the fee award. It did so two days after the Circuit had ordered, in response to a petition for writ of mandamus, that the DC rule on consolidated appeals of the BC's rulings on the merits of a series of adversary proceedings. After E&B settled their dispute with DR's counsel, the parties jointly moved to dismiss them from this appeal; after the Circuit granted that request, the TR became the lone appellant, Thereafter, Appellees sought to dismiss the TR for lack of standing and the appeal as a whole on mootness grounds, and the TR filed his motion to vacate the judgment of the district court. Ultimately, due to a confusing panoply of motions, the Circuit remanded to the DC to reinstate the BC's original award, denied the appellees' standing motion on the merits, and denied the appellees' motion to dismiss the appeal and the TR's motion to vacate the judgment of the DC as moot.
The appeal arose from the filing of a petition for relief pursuant to Chapter 11 of the Code by Community Home Financial Services, Inc. (CHFS), in May of 2012, at the time heavily indebted to the E&B and others. Throughout CHFS’ case, E&B remained CHFS’ two largest creditors, and CHFS remained the debtor-in-possession, with its president as the designated representative. With the BC’s consent, CHFS hired two attorneys: Derek A. Henderson (Henderson) and Wells, Marble & Hurst PLLC (Wells) (collectively, DR’s Counsel). After being hired, DR’s counsel initiated adversary proceedings against E&B challenging the priority of certain claims between August 2012 and November 2013 and proposed a reorganization plan on January 29, 2013. This plan launched a multitude of controversies. First, E&B objected to its various provisions and moved to appoint a TR and to convert CHFS’ Chapter 11 case to a Chapter 7 liquidation. Next, the BC suspended any confirmation hearing. DR’s Counsel Thus responded to E&B’s motions as they continued to pursue their ongoing adversary proceedings. On November 13, 2013, Wells withdrew as counsel. Meanwhile, CHFS’ president transferred all but $7,500, amounting to over $9 million in cash, from CHFS’ account to his personal Panamanian one. He then fled the U.S., purportedly setting up a rogue operation of CHFS’ business out of new branch offices in Panama and Costa Rica. On December 20, 2013, Henderson filed a disclosure informing the BC that CHFS’s president had transferred those funds and moved CHFS’s principal place of business from Jackson, Mississippi to Panama. Three days after the disclosure, the BC appointed an emergency trustee; it then appointed Kristina Johnson as the TR on January 21, 2014. Henderson withdrew as counsel on March 6, 2014. Then came fee litigation. Both Henderson and Wells sought fees for the services they performed in connection with the adversary proceedings before Johnson was appointed as the TR. The BC eventually awarded fees to both DR’s Counsel in December 2015 and January 2016, awards that E&B timely appealed. In September of 2017, the DC affirmed in part but remanded for further findings of fact regarding the fees awarded for “commencing and then litigating certain Adversary Proceedings in the bankruptcy matter.” On February 27, 2018, the BC once again awarded fees to Henderson and Wells in connection with the adversary proceedings. Once more, E&B appealed. On August 5, 2020, the DC vacated the fee award, declaring that the decision of DR’s counsel to pursue adversary proceedings “was not a good gamble.” The TR and DR’s Counsel appealed, arguing that the DC had improperly evaluated the benefit of the adversary proceedings retrospectively.
Jennifer W. Elrod; Don R. Willett; and Kurt D. Engelhardt

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