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Objection to Pronske Substantial Contribution

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IN THE UNITED STATES BANKRUPTCY COURT
FOR THE NORTHERN DISTRICT OF TEXAS
DALLAS DIVISION
In re: §
§
ONDOVA LIMITED COMPANY §
§
§ CASE NO. 09-34784-SGJ-11
§ Chapter 11
Debtor. §
JEFFREY BARON’S OBJECTION TO AMENDED APPLICATION OF PRONSKE &
PATEL, P.C., FOR PAYMENT OF FEES AS AN ADMINISTRATIVE
EXPENSE FOR A SUBSTANTIAL CONTRIBUTION TO THE ESTATE
TO: THE HONORABLE STACY JERNIGAN
UNITED STATES BANKRUPTCY JUDGE:
Jeffrey Baron, by and through counsel, submits this objection (the “Objection”) to the
Amended Application of Pronske & Patel, P.C. (“Pronske”) for Payment of fees as an
Administrative Expense for a Substantial Contribution to the Estate. Pronske seeks
reimbursement of fees and expenses incurred in the amounts of $177,352.70 and $52,121.17. In
support of the Objection, Baron represents as follows:
I. Summary Statement
Pronske made the same claim before the district court before Judge Furgeson. A Final
Order was issued in favor of Pronske in the amount of $177,352.70 by the District Court [Dist.
575], primarily for assisting in negotiating the Global Settlement Agreement. Pronske seeks an
additional $52,121,17 for additional fees and expenses allegedly incurred during the Amended
Application period.
Jeff Baron objects on the following grounds:
The Bankruptcy Court should not entertain a fee application based on
a proceeding and order entered by the District Court.
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To the extent that Pronske seeks an order for fees under the
Bankruptcy Code, he has not met his burden of proof under 11 U.S.C.
§§ 503(b)(3)(D) to show that Baron made a substantial contribution to
the Debtor’s estate as is required by the Bankruptcy Code and
applicable case law.
Even assuming that the Court were to determine that a substantial
contribution was made by Jeffrey Baron in the Bankruptcy Case, the
fees and expenses are unreasonable as they are duplicative of the
efforts spent by the Trustee to negotiate and consummate the Global
Settlement Agreement.
Pronske violated his fiduciary duty to Jeffrey Baron and is therefore,
not entitled to fees as a matter of law. Burrows v. Arce, 997 S.W. 2d
229 (Tex. 1999).
II. The District Court Already Granted Fees to Pronske.
Pronske seeks an order granting the same relief that has already been granted by District
Court on different legal grounds in the Receivership action. He now seeks an award of fees
under a theory of substantial contribution under the Bankruptcy Code. As set out below, an
award of fees in the receivership action does not satisfy Pronske’s burden of proof under the
Bankruptcy Code, which imposes a much higher standard than the standard apparently utilized
by the District Court. Thus, Pronske’s apparent reliance on the award of fees from the District
Court is irrelevant to a determination of whether Pronske made a “substantial contribution”
under Section 503(b) of the Code. Moreover, as Pronske has already been awarded fees, his
current motion seeks a duplicate award.
III. The Standard for Proving Substantial Contribution Under the Code.
The court may award the actual, necessary expenses incurred by a creditor, including his
attorney’s fees, if the creditor has made a “substantial contribution” in a case under Chapter 11
of the Bankruptcy Code. 11 U.S.C. § § 503(b)(3)(D, 503(b)(4). Consolidated Bancshares, Inc.
v. Creel & Atwood, 785 F.2d 1249 (5
th
Cir. 1986). The goal is to “promote meaningful creditor
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participation in the reorganization process.” Id. at 1253. Services that substantially contribute to
a case are “those which foster and enhance, rather than retard or interrupt the progress of
reorganization, In re White Motor Credit Corp., 50 B.R.885, 892 (Bankr. N.D. Ohio 1985).
Compensation must be denied where the services rendered by the creditor were only remotely
related to the reorganization” on the theory that “a creditor’s attorney must ordinarily look to its
own client for payment, unless the creditor’s attorney rendered services on behalf of the
reorganization, not merely on behalf of his client’s interest, and conferred a significant and
demonstrable benefit to the debtor’s estate and the creditors.” In re General Oil Distributors, 51
B.r. 794, 806 (E.D.N.Y. 1985) (emphasis supplied).
The burden of proof is on the applicant to establishing their entitlement to an award under
11 U.S.C. § 503(b), and the applicant must demonstrate by a preponderance of the evidence that
a substantial contribution was made. In re American 3001 Telecommunications, Inc., 79 B.R.
271, 273 (Bankr.N.D.Tex. 1987); see In the Matter of Baldwin-United Corp., 79 B.R. 321, 336
(Bankr.S.D.Ohio 1987); In re 1 Potato 2, Inc., 71 B.R. 615, 618 (Bankr.D.Minn.1987).
A. Substantial Contribution Claims are Narrowly Construed.
Claims for substantial contribution are narrowly construed and are subject to strict
scrutiny. In re Luisa, L.L.C. , 354 B.R. 345, 348 (Bankr. S.D.N.Y. 2006) See In re Asarco LLC,
2010 WL 3812642, *8 (Bankr. S.D. Tex. Sept. 28, 2010) (“Substantial contribution claims may
only be granted in ‘unusual and rare circumstances…Narrowly construing the allowance of
substantial contribution claims to rare and unusual circumstances is ‘consistent with the general
doctrine that priority statues , such as section 503(b) should be strictly construed to preserve the
estate for the benefit of creditors””) (citations omitted). In re U.S. Lines, Inc. 103 B.R. 430
(Bankr. S.D.N.Y. 1989).
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The factors considered by courts to determine whether an applicant has made a
substantial contribution include: (i) "whether the services were provided to benefit the estate
itself or all of the parties in the bankruptcy case"; (ii) "whether the services conferred a direct,
significant and demonstrably positive benefit upon the estate"; and (iii) "whether the services
were duplicative of services performed by others." In re Best Prods. Co., 173 B.R. 862, 865
(Bankr. S.D.N.Y. 1994), In re Jensen-Farley Picures Inc., 47 B.R. 557, 569) (Bnkr. D. Utah
1985).
The burden of proof is extremely high because a litigant is presumed to act in its own
interest. In re Villa Luisa, L.L.C., 354 B.R. at 348. To satisfy the substantial contribution test,
Pronske must demonstrate that Jeffrey Baron contributed to "the proper administration of the
case as a whole." See In re Bayou Group, LLC, 431 B.R. 549, 561 (Bankr. S.D.N.Y. 2010). To
this end, "[t]hird parties, who generally represent only their clients' interests and only indirectly
contribute to the case's administration, therefore normally would not be compensated by the
estate on an administrative priority basis." Id. Rather, courts typically allow substantial
contribution claims only when a creditor has "played a leadership role that normally would be
expected of an estate-compensated professional but was not so performed." (emphasis supplied)
Id. at 562.
B. Substantial Contribution Cannot be Granted If the Applicant’s Efforts Are
Duplicative of the Trustee’s Efforts.
It is well established that an applicant is not entitled to an award of attorneys' fees based on
"substantial contribution" where, as in this case, the applicant's efforts were duplicative of those of a
statutory fiduciary. In re Mirant, 354 B.R. 354 B.R. 113, 132-35 (Bankr.N.D.Tex.2006) (J.Lynn)
citing In re Consol. Bancshares, Inc., 785 F.2d at 1249. Mere participation in negotiation of
Chapter 11 plans, negotiating contracts or settlements is insufficient to establish substantial
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contribution as the activities are presumed to have been undertaken to represent the creditor and
not the Estate. See In re Granite Partners, 213 B.R. 440, 449 (Bankr. S.D.NY. 1997) (“Mere
participation in the negotiation, drafting and confirmation of the plan is no sufficient…Here, the
applicants objections to the disclosure statement did not alert the character of the document, and
did not, therefore, rise to the level of substantial contribution.” Asarco, 2010 WL 381262, at *8.
(“Activities of a creditor or their counsel that are ordinary, expected, routine, or duplicative do
not constitute a substantial contribution to a debtor’s estate.”) Accord In re Sentinel Mgmt., 404
B.R. 488, 496 (Bankr. N.D. Ill. 2009) (noting that expected and routine activity that does not
give rise to a substantial contribution to the estate). Mere conclusory statements regarding the
provision of services that substantially contribute to the Estate are insufficient to establish that a
substantial contribution has been made. In re American Plumbing & Mechanical, Inc. 327 B.R.
273, 279 (W.D. Tex. 2005); In re U.S. Lines, Inc, 103 B.R. at 430.
C. Substantial Contribution Claims Cannot be Granted Unless Pronske Demonstrates an
Actual, Tangible Benefit to the Estate.
The substantial contribution test is results-oriented because it requires the creditor to
establish that he provided an actual, tangible benefit to a debtor's estate. See In re Bayou Group,
431 B.R. at 561 (observing that substantial contribution applicants must provide "a substantial
net benefit" to a debtor's estate); In re Best Prods., 173 B.R. at 866 ("The integrity of [section]
503(b) can only be maintained by strictly limiting compensation to extraordinary creditor actions
which lead directly to tangible benefits to the creditors, debtor or estate.") (emphasis supplied);
As a result, substantial contribution claims are awarded at the end of a case so that courts have
the ability to assess, with the benefit of hindsight, whether a creditor has provided an actual
benefit to the debtor's estate and facilitated the administration of the bankruptcy cases. See In re
Bayou Group, 431 B.R. at 566 n.18 (observing that the substantial contribution test is applied
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with the benefit of hindsight); In re Granite Partners, 213 B.R. at 447 ("The substantial
contribution test is applied in hindsight, and scrutinizes the actual benefit to the case.").
D. Pronske Cannot Establish that But For his Contribution, the Parties Would Not have
Reached a Global Settlement Agreement.
Demonstration of a direct causal connection between the actions of the claimant and the
benefit received by the bankruptcy estate is required in order to prove a substantial contribution.
DP Partners, 106 F.3d at 673;
In re Asarco, 2010 WL 3812642 at *8 citing U.S. Lines, Inc. 103
B.R. at 430. As noted in American Plumbing,
The substantial-contribution applicant must show that his services have some
causal relationship to the alleged substantial contribution. See DP Partners, 106
F.3d at 673. Some courts have used a but-for test to determine whether that causal
relationship exists. See In re D.W.G.K. Restaurants, Inc., 84 B.R. 684, 690
(Bankr.S.D.Cal.1988) (using the phrase "but for"); Alert Holdings, 157 B.R. at
759 (denying the substantial-contribution application when "even without the
benefit of the LPOC's objection, most of the changes to the disclosure statement
would have been made anyway"); In re New Power Co., 311 B.R. 118, 124
(Bankr.N.D.Ga.2004) (denying the substantial-contribution application because
"the Court must conclude that the Examiner would have been appointed ... absent
[the applicant's alleged contribution]"). However, satisfying the but-for
requirement by itself is not enough to establish the causal relationship.
American Plumbing at 680.
Simply stated, Pronske cannot demonstrate that Jeffrey Baron made a “net” substantial
contribution to the Estate. Merely attending and participating in settlement negotiations on
behalf of a client does not constitute the kind of evidence that satisfies Pronske’s burden of proof
under Section 503(b). In the Matter DP Partners Ltd. Partnership, 106 F.3d (5
th
Cir. 1997), the
Court held that bankruptcy courts should weigh the costs of the claimed fees and expenses
against the benefits conferred upon the estate which directly from those actions. To aid the
district and appellate courts in the review process, bankruptcy judges are to make specific and
detailed findings on the substantial contribution issue.
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At best, it appears that Pronske merely duplicated the services provided by the Trustee,
who was responsible for, and did negotiate the Global Settlement Agreement on behalf of the
bankruptcy estate. Under Section 503(b), and the controlling case law, Pronske must look to his
client for payment for his services. The Estate should not have to pay Pronske for the same
services performed by the Trustee, and for which the Trustee’s counsel was paid.
IV. Pronske Violated Fiduciary Duties to Jeff Baron and is Not Entitled to Fees.
A lawyer who violates his fiduciary duty to a client must disgorge fees, irrespective of
whether the breach caused the client damages. Burrow v. Arce, 997 SW 2d 229 (Tex. 1999)
Lawyers seeking compensation from the Court based on “substantial contribution” cannot
maintain such a claim where, as here, the lawyer disseminated false, inaccurate or misleading
information to about his client. In the instant case, Pronske accused Mr. Baron of transferring
assets off shore to evade process and used this argument as a basis for seeking withdrawal from
representation of Jeff Baron. There is nothing more damaging in a bankruptcy than an allegation
that a party, in this case, one’s client, is transferring assets to remove them from the jurisdiction
of the Court. Indeed, acts to transfer assets outside the Court’s jurisdiction potentially constitute
a bankruptcy crime.
In fact, Jeff Baron did not transfer assets off-shore, as alleged by Pronske. Before an
attorney makes such an allegation against a client, he must conduct great care and exercise due
diligence to check his facts before seeking withdrawal to minimize any potential harm to the
client. The facts and circumstances surrounding counsel’s motion to withdraw do not indicate
any effort to verify his allegations before filing his motion. Under the circumstances, Mr.
Pronske violated his fiduciary duty to Jeff Baron and should be denied all compensation by this
Court.
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V. Conclusion
WHEREFORE, Jeffrey Baron respectfully submits that the Court should deny the
Application or grant such relief as is just.
Very respectfully,
/s/ Stephen R. Cochell
Stephen R. Cochell
The Cochell Law Firm, P.C.
Texas Bar No. 24044255
7026 Old Katy Rd., Ste 259
Houston, Texas 77096
(713)980-8796 (phone)
(713)980-1179 (facsimile)
srcochell@cochellfirm.com
CERTIFICATE OF SERVICE
This is to certify that, October 8, 2012, a copy of this Motion was served counsel for the
Trustee, the Receiver, John Macpete and Pronske & Patel, P.C. by email. Because counsel for
Jeffrey Baron is not yet registered to efile on the Bankruptcy Court’s ECF system, all other
counsel will be served on October 9, 2012 through the Court’s ECF system.
/s/ Stephen R. Cochell
Stephen R. Cochell
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