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CAREY v. ERNST

November 8, 2005.

MICHAEL Q. CAREY D/B/A CAREY & ASSOCIATES, Appellant,
v.
RUDOLF J.O. ERNST and ANGELIKA L. ERNST, Debtors.



The opinion of the court was delivered by: ROBERT PATTERSON JR., Senior District Judge

OPINION AND ORDER

Appellant Michael Q. Carey d/b/a Carey & Associates ("Carey" or "Appellant") appeals from two separate rulings of Judge Cornelius Blackshear, United States Bankruptcy Judge, Southern District of New York ("Bankruptcy Court"). On March 3, and March 7, 2005, Carey filed a notice of appeal and an amended notice of appeal from the February 22, 2005 ruling of Judge Blackshear, "Opinion on the Fee Application of Michael Q. Carey and Carey & Associates and the Related Debtors' Objection to Claim No. 9 Filed by Michael Q. Carey and Carey & Associates" ("Fee Opinion") and his March 7, 2005 Order entered thereon. For the reasons set forth below, the Bankruptcy Court's Fee Opinion denying Carey's application for fees is remanded, and the denial of Carey's post-petition interest, and reduction of Carey pre-petition pre-judgment interest from 12% to 9% is upheld. On March 23, 2005, Carey filed an appeal from a March 17, 2005 ruling of Judge Blackshear, "Sua Sponte Order Denying Motion for Leave to Commence an Adversary Proceeding" ("Adversary Order"). That Order is affirmed. BACKGROUND

  This case arises out of an attorney's fee litigation initiated in New York Supreme Court, New York County, in August 1998, which resulted in an opinion dated March 26, 2004, by Justice DeGrasse awarding Carey his outstanding fees on his claim of breach of contract and account stated and severing Carey's claim for fees incurred in attempting to collect his outstanding fees. (State Court Op.)*fn1

  Ten days later, on April 5, 2004, Debtors filed for bankruptcy in a voluntary petition under chapter 13 of Title 11 of the United States Code, 11 U.S.C. § 101 et seq. (the "Bankruptcy Code"). (Fee Op. at 4.) On July 27, 2004, Carey filed a Proof of Claim with the Bankruptcy Court in the amount of $335,319.20. This included: (1) the judgment of $72,274.14; (2) pre-judgment interest on the $72,274.14, at Retainer Agreement rate of 12% per annum, totaling $48,900.88 for the period of July 31, 1998 through March 19, 2004; (3) post-judgment interest on the $72,274.14, at the statutory rate of 9% per annum, totaling $2,298.91 for the period of March 20, 2004 through July 27, 2004 (4) attorneys' fees from the collection efforts totaling $195,893.50; and (5) disbursements during the collection action totaling $15,951.77;. (Id.)

  Pursuant to an order of the Bankruptcy Court, dated December 9, 2004, Carey filed a Fee Application, totaling $205,707.78, plus 12% interest, with the Bankruptcy Court on December 17, 2004, relating solely to his claim for fees and disbursements incurred in pursuing the Collection Case and defending against the Debtors' counterclaims of fraud, malpractice, and breach of fiduciary duty. (Carey Fee App., Appellant's App. Ex. F). Debtors filed their Objections to Carey's Fee Application on January 7, 2005. (Fee Op. at 4.)

  On January 20, 2005, the Bankruptcy Court scheduled an evidentiary hearing for February 22, 2005. (Jan. 20, 2005 Tr.) It also directed each party mark its exhibits, confer on whether or not there would be any objections to the exhibits, and prepare an exhibit list and provide the exhibits, pre-marked, to the Bankruptcy Court and each other before the hearing. (Id.)*fn2 At the January 20, 2005 conference, Debtor's counsel objected to the format of Carey's fee application, suggesting that it did not conform to the Guidelines for Fees and Disbursements for Professionals in Southern District of New York Bankruptcy Cases ("Guidelines"). (Id.) The Bankruptcy Court agreed that Carey's fee application did not conform, but stated that the issue would be heard at the evidentiary hearing scheduled for February 22, 2005. (Id.)

  DISCUSSION

  A. Standard of Review

  Pursuant to Rule 8013 of the Federal Rules of Bankruptcy Procedure ("FRBP" or "Bankruptcy Rules") and the case law thereunder, a bankruptcy court's conclusions of law are subject to de novo review. See In re Miner, 229 B.R. 561, 564-565 (B.A.P. 2d Cir. 1999); In re Macrose Industries, Corp., 186 B.R. 789, 797 (E.D.N.Y. 1995). "A de novo review allows [the court] to decide the issue as if no decision had previously been rendered." In re Miner, 229 B.R. at 565.

  In contrast, a bankruptcy court's findings of fact are subject to a clearly erroneous standard. See Fed.R.Civ.P. 52(a); Bankruptcy Rule 8013. A finding of fact is clearly erroneous within the meaning of Bankruptcy Rule 8013 when although there is evidence to support it, the reviewing court on the entire record is left with the definite and firm conviction that a mistake has been committed. While the trial court's findings of fact are not conclusive on appeal, the party that seeks to overturn them bears a heavy burden. If two views of evidence are possible, the trial judge's choice between them cannot be clearly erroneous. To be clearly erroneous, a decision must strike us as more than just maybe or probably wrong; it must strike us as wrong with the force of a five-week-old unrefrigerated dead fish.

 
In re Miner, 229 B.R. at 565 (internal quotation marks and citations omitted).
B. Fee Application

  On February 22, 2005, the date scheduled for the evidentiary hearing, the Bankruptcy Court did not hold an evidentiary hearing. Instead the Court issued an opinion which: (1) gave full faith and credit to the State Court judgment on Carey's breach of contract and account stated claims for $72,274.14, the unpaid balance when Carey terminated his representation of Ernst in the extradition proceeding; (2) allowed the pre-petition interest on the $72,274.14 balance for the period of July 31, 1998 to April 4, 2004, but reduced it from 12% to the statutory rate of 9%; (3) denied Carey post-petition interest on the Supreme Court judgment; (4) allowed Carey "costs and disbursements related to the $72,274.14 Supreme Court judgment . . . for the period beginning May 1, 1998 through and including July 31, 1998"; and (5) disallowed in its entirety Carey's application for attorney's fees and collection costs incurred after July 31, 1998. (Fee Op. at 6-11.)*fn3

  At the outset of its opinion, the Bankruptcy Court stated, "the creditors fee application is governed by the Guidelines for Fees and Disbursements for Professionals in Southern District of New York Bankruptcy Cases. The Debtors' objection to claims is governed by 11 U.S.C. § 502(b)(1) and § 502(b)(4)." (Id. at 4.) The Bankruptcy Court denied Carey attorney's fees and purported costs incurred in the collection action ($205,707.78) on two grounds: 1) Such a claim must meet the "reasonable" test under § 502(b)(4) (See In re United Merchants & Mfrs., Inc., 674 F.2d 134, 139 (2d Cir. 1982)); and 2) the claim must be "substantiated" by "proper documentation." (Fee Op. at 9-10.) The Court found that based on Carey's inconsistent time records, unverified disbursement requests, and a three year gap in activity on the state docket, Carey's collection efforts were overstated. (Id. at 9.) The court held that "Carey has not met his burden of showing that the collection costs are valid and fall within the ambit of legal costs necessarily incurred in a collection action of this nature." (Id. at 10.) Without citing authority, the court found that the "creditor's entitlement to such fees is subject to forfeiture if the creditor fails to support his claim with proper documentation," and found Carey's collection efforts unsubstantiated and not reasonable under the Bankruptcy Code. (Id.)

  Sections 502(b)(1) and 502(b)(4) of Title 11 of the United States Code read as follows:
(b) Except as provided in subsections (e)(2), (f), (g), (h) and (i) of this section, if such objection to a claim is made, the court, after notice and a hearing, shall determine the amount of such claim in lawful currency of the United States as of the date of the filing of the petition, and shall allow such claim in such amount, except to the extent that —
(1) such claim is unenforceable against the debtor and property of the debtor, under any agreement or applicable law for a reason other than because such claim is contingent or unmatured;
. . . .
(4) if such claim is for services of an insider or attorney of the debtor, such claim exceeds the reasonable value of such services;
Technically, the fees involved here are not related to the services of an insider or attorney of the debtor, but the Bankruptcy Court apparently elected to utilize this section pursuant to its equitable power.*fn4 Bankruptcy Rule 3007 provides that once an objection is filed, a "copy of the objection with notice of the hearing thereon shall be mailed or otherwise delivered to the claimant, the debtor or debtor in possession and the trustee at least 30 days prior to the hearing." Although these sections suggest that a hearing is required when an objection has been asserted, reading 11 U.S.C. § ...

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