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In re East Coast Foods, Inc.

United States District Court, C.D. California, Los Angeles Division

December 18, 2019




         Before the Court is an appeal from the United States Bankruptcy Court (the Honorable Sheri L. Bluebond, United States Bankruptcy Judge). Appellant Clifton Capital Group, LLC (“Clifton Capital”) appeals from the Bankruptcy Court's Order granting the Trustee's Fourth and Final Application for Compensation and Reimbursement of Fees and Expenses (the “Final Fee Application”) in the amount of $1, 155, 944.71. The Order was issued on November 19, 2018.

         Clifton Capital submitted its Opening Brief (“OB”) on March 6, 2019. (Docket No. 11). On May 22, 2019, Appellee Bradley D. Sharp, Chapter 11 Trustee, submitted his Brief (“AB”). (Docket No. 16). On July 1, 2019, Appellant submitted its Reply Brief (“RB”). (Docket No. 23). The Court has read and considered the papers filed in this appeal, and held a hearing on November 6, 2019.

         The Order is AFFIRMED in part, REVERSED in part, and REMANDED for further proceedings. The Bankruptcy Court did not make the required findings to determine that the Trustee is entitled to a fee award that exceeds the lodestar figure. However, the Bankruptcy Court did not abuse its discretion in awarding compensation for services performed by Development Specialists, Inc. (“DSI”).

         I. BACKGROUND

         On March 25, 2016, East Coast Foods, Inc. (the “Debtor”) filed for bankruptcy under Chapter 11. (Appellant's Excerpts of Record (“ER”) 60 (Docket No. 11)). On April 29, 2016, the Office of United States Trustee (the “U.S. Trustee”) appointed the Official Committee of Unsecured Creditors (the “Committee”). (ER 84). Clifton Capital is a member of the Committee. (Id.).

         On September 28, 2016, the Bankruptcy Court appointed Bradley D. Sharp as the Chapter 11 Trustee (the “Trustee”). (ER 90). The Trustee handled numerous issues during his appointment, including state court actions, tax disputes, landlord disputes, accounting practices, and return of intellectual property assets. (ER 967-70; AB 10-14). The Trustee employed his company, DSI, to help him perform some of his duties as the Trustee. (ER 102, 258, 331, 879).

         On July 3, 2018, the Bankruptcy Court entered an order confirming a joint Plan of Reorganization (the “Plan”). (ER 715-26). On September 10, 2018, the court granted non-material modifications to the Plan, and on September 14, 2018, the Plan became effective. (ER 715-34).

         The Trustee filed four fee applications during the bankruptcy case. In the first three applications, the Trustee sought approval of fees and costs on an interim basis. (ER 102 et seq., ER 258 et seq., ER 331 et seq.). In the fourth and final application, the Trustee sought final approval of his fees and costs. (ER 879 et seq.).

         In each Fee Application, the Trustee sought fees incurred by himself as well as by DSI personnel. Specifically, each Application contained the disclosure: “This Application includes the time records for employees of [DSI] . . . who assisted the trustee in the performance of his duties of this case.” (ER 102, 258, 331, 879).

         The Committee filed an objection to the First Fee Application, arguing that the court never authorized DSI's employment, and therefore, fees to DSI totaling $202, 767.59 should be disallowed. (ER 189). The Bankruptcy Court overruled the Committee's objection and approved the First Fee Application in full. (SER 41). The Committee did not object to DSI's fees in the second and third applications, and the Bankruptcy Court approved both Fee Applications in full. (SER 43-44; ER 52-53; AB 20).

         The Trustee filed the Final Fee Application in October 2018. The Final Fee Application disclosed that the Trustee and his staff at DSI had worked 1, 692.2 hours during the case, which would equate to $758, 955.50 if billed at normal hourly rates. (ER 885). However, the Trustee requested a fee of $1, 155, 844.71, which is the maximum fee permitted under 11 U.S.C. § 326(a) (“§ 326(a)”). (Id.).

         Clifton Capital filed an objection to the Final Fee Application. (ER 936 et seq.). It did not object to the Trustee's request for fees associated with work performed by his staff at DSI. However, Clifton Capital argued that the Trustee should not be paid the maximum amount under § 326(a), which is a limit and not a presumption of reasonableness. (ER 942-44). Clifton Capital argued that the Trustee had the burden of establishing his requested compensation was reasonable under 11 U.S.C. § 330(a) (“§ 330(a)”), and that the proper way to establish reasonable compensation is by applying the lodestar method. (Id.).

         The Bankruptcy Court granted the Trustee's Final Fee Application and entered an order granting the Final Fee Application (the “Final Fee Order”). (ER 58). The court provided two alternative grounds for granting the Fee Application. First, the court determined that the requested fee was reasonable because it equaled the amount set forth under § 326(a). The court explained: “Congress has really tried to be pretty clear that trustee compensation, it's really more in the nature of a commission” and “it ...

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