Landsing Development Group LLC

MEMORANDUM OF DECISION - 1
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF IDAHO
______________________________________________________
In Re:
Bankruptcy Case
LANDSING DEVELOPMENT 	No. 04-03424
GROUP LLC,
Debtor.
______________________________________________________
MEMORANDUM OF DECISION
______________________________________________________
Appearances:
Jeffrey A. Strother, Boise, Idaho, Attorney for Debtor.
David B. Young, BELNAP & CURTIS, Boise, Idaho, Attorney for
Dennis O”Keefe
Mr. Dennis O’Keefe, a real estate broker employed by Chapter 11
debtor in possession Landsing Development Group, LLC (“Landsing”), applied
for Court approval of professional compensation as an administrative expense in
this case. Docket No. 215; see 11 U.S.C. § 503(b)(2). 	Landsing objected,
arguing that O’Keefe is not entitled to any compensation. Docket No. 235. The
Court conducted an evidentiary hearing concerning O’Keefe’s application and
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1 In finding the facts, the Court has relied in part upon its opportunity to observe
the witnesses testify and to assess their demeanor and credibility. The Court has assigned
appropriate weight to that testimony in this Decision.
MEMORANDUM OF DECISION - 2
Landsing’s objection on July 6 and 7, 2005. The Court concludes O’Keefe’s
request for compensation must be denied. This Memorandum of Decision
constitutes the Court’s findings of fact and conclusions of law. Fed. R. Bankr. P.
7052; 9014.
FACTS1
Bruce Hessing is Landsing’s sole owner and its managing member.
Landsing’s primary asset was approximately forty acres of bare ground that it
intended to develop into residential housing. This development project was
known as “Southfork.” Southfork was composed of several parcels in varying
stages of development into individual residential lots.
Primarily due to financial problems with its secured lenders,
Landsing sought the advice of a bankruptcy attorney, Randy French (“Counsel”).
Landsing filed a petition under Chapter 11 of the Bankruptcy Code on September
22, 2004. Docket No. 1. In attempting to restructure, it was Landsing’s goal to
either obtain new financing secured by the real property to satisfy existing secured
debt, sell individual lots to pay the secured debt, or sell the partially completed
project as a whole to raise the money it needed and protect the owner’s equity.
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MEMORANDUM OF DECISION - 3
Dennis O’Keefe is a professional Boise real estate broker with
considerable experience. Counsel approached O’Keefe about retaining him to
represent Landsing in selling Southfork. Counsel, O’Keefe and Hessing all met in
December 2004 to discuss hiring O’Keefe. 	Based on these discussions, and after
conducting his own inquiry, O’Keefe decided that he was willing to work for
Landsing, but not Hessing personally, on a sales commission basis. Specifically,
O’Keefe offered to accept six percent of the gross sale price from the sale of
Southfork. He agreed he would not receive a commission on any individual lot
sales arranged by Hessing personally. O’Keefe communicated these terms to
Counsel, but not to Hessing. Indeed, O’Keefe had little direct communication
with Hessing, preferring to deal with Counsel as Landsing’s legal representative.
Hessing, however, was not convinced about the need to hire
O’Keefe at all. Ex. X. Over the course of multiple exchanges with Counsel, who
felt retaining a realtor was critical to the prospects of confirming a Chapter 11
plan, Counsel convinced Hessing that O’Keefe should be retained. Exs. G, H, I, J.
However, Hessing consented to O’Keefe’s employment with the understanding
that O’Keefe would not receive any sales commission if Hessing were successful
in arranging a refinance of the existing secured debt with a new lender, or if
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Hessing arranged a sale of the entire Southfork project to a Bruce Clibborn, a
party with whom Hessing had been communicating. Ex. K.
Aware of Hessing’s and O’Keefe’s different views regarding
O’Keefe’s employment, Counsel asked O’Keefe to come to his office on January
28, 2005, to review an application by Landsing for Court approval of O’Keefe’s
employment that Counsel prepared (the “First Application”), and to sign an
accompanying affidavit, both of which would then be filed with this Court.
Docket Nos. 118, 119. O’Keefe reviewed the application, which in relevant part
stated: “The terms of employment of Dennis O’Keefe, subject to the approval of
the Court, are that he will undertake this representation for a commission of six
percent (6%) of the gross sales price for any sale consummated.” Docket No. 118.
O’Keefe’s affidavit contained similar language regarding his proposed
commission. This application was also somewhat remarkable because it stated
that Counsel (not Landsing) had determined that hiring O’Keefe was in the
bankruptcy estate’s best interest, and that Counsel selected O’Keefe. O’Keefe
signed the affidavit, and Counsel signed the application. Counsel then filed both
the application and O’Keefe’s affidavit with the Court that same day, January 28.
Later that same day, Hessing went to Counsel’s office where he
signed yet another application (the “Second Application) for approval of
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O’Keefe’s employment on behalf of Landsing. Docket No. 122. This Second
Application was markedly different in content than the First Application that
O’Keefe had reviewed. In addressing O’Keefe’s compensation, it stated:
The terms of employment of Dennis O’Keefe, subject
to approval of the Court, are that he will undertake this
representation for a commission of six percent (6%) of
the gross sales price for any sale consummated, except
that Mr. O’Keefe will not be paid any commission for
a sale which the principals of the Debtor-in-Possession
negotiate. In the event that the Debtor-in-Possession
succeeds in refinancing the current secured debt, the
Debtor-in-Possession may decline any offer to sell the
property.
Docket No. 122. The Second Application also represents that Landsing (not
Counsel) had determined hiring O’Keefe was in the best interests of the
bankruptcy estate, and that Landsing had selected O’Keefe. Counsel did not sign
the Second Application. Counsel then filed it with the Court on February 3, 2005.
On February 23, 2005, the Court entered an Order Approving
Employment of Real Estate Broker (the “Order”). Docket No. 133. The Order
provides that based “upon the Application of counsel” and the affidavit of
O’Keefe, the realtor’s employment was approved pursuant to 11 U.S.C. § 327.
An intractable factual dispute developed at the hearing. O’Keefe
testified that he had never seen the Second Application, and that he understood he
would be compensated according to the terms contained in the First Application.
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MEMORANDUM OF DECISION - 6
Hessing, on the other hand, was unaware of the existence of the First Application,
and only agreed to employ O’Keefe on behalf of Landsing under the terms stated
in the Second Application. Ex. K. Counsel then testified that O’Keefe was aware
at the time he signed his affidavit that Hessing would only agree to employ him
under the terms set forth in the Second Application.
Around the same time that the two applications were signed and
filed, O’Keefe delivered two blank form contracts to Counsel: an “Exclusive
Seller Representation Agreement” and an “Intermountain Multiple Listing
Service, Inc. Land Data Form.” Exs. X, Y. O’Keefe testified that Counsel was
asked to complete the forms and have Hessing sign them. While Counsel never
offered any meaningful explanation why, Counsel did neither.
Throughout the early months of 2005, Hessing personally arranged
several individual lot sales in the Southfork development. The proceeds from
these sales facilitated Landsing’s reorganization efforts, and all were approved by
the Court after appropriate notice to interested parties and a hearing. See, e.g.,
Order Approving Sale of Real Property, Docket No. 96 (entered Jan. 3, 2005).
Neither Hessing nor O’Keefe dispute that they both contemplated Hessing might
negotiate and finalize the sale of individual lots in Southfork, and that O’Keefe
would not be paid any commission on such sales.
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At some time in approximately March, 2005, O’Keefe secured an
offer from a Mr. Gibson to purchase what remained of the Southfork development.
In addition, as Landsing moved toward confirmation of its proposed
reorganization plan, Hessing secured an offer from Bruce Clibborn to purchase
Southfork. The Clibborn offer was an integral part of Landsing’s plan to
reorganize, but efforts to conclude the sale were complicated by the existence of a
competing reorganization plan filed by certain of Landsing’s creditors.
Ultimately, the Court confirmed Landsing’s proposed plan, which contemplated
the sale to Clibborn. Order, Docket No. 221, entered June 10, 2005.
ARGUMENTS OF THE PARTIES
Landsing argues O’Keefe is not entitled to commission or
compensation because Southfork was sold to Clibborn, a sale Hessing personally
arranged without O’Keefe’s help. Hessing insists such a sale was expressly
excluded from those the parties agreed would justify a commission for O’Keefe.
Conversely, O’Keefe contends there was no such “Clibborn
exception” incorporated in his compensation agreement. More specifically,
O’Keefe argues that he should be compensated, and that his compensation should
be treated and paid as an administrative expense based on two theories. First,
O’Keefe points to the language in the First Application and Counsel’s express
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MEMORANDUM OF DECISION - 8
assurances to him that he would be paid a commission on any sale of the
development. Second, O’Keefe asks for payment for his services based upon an
equitable theory – quantum meruit.
DISCUSSION
A. 	The requirements for allowance and payment of an
administrative expense claim under § 503(b)(2) of the
Bankruptcy Code.
“An entity may timely file a request for payment of an
administrative expense, or may tardily file such request if permitted by the court
for cause.” 11 U.S.C. § 503(a). After notice and a hearing, the bankruptcy court
may allow an administrative expense claim for, inter alia, “compensation or
reimbursement awarded under section 330(a) of [the Bankruptcy Code.]” 11
U.S.C. § 503(b)(2). Section 503(b)(2) is the “only part of Section 503(b) under
which . . . professionals can receive compensation.” McCutchen, Doyle, Brown &
Enersen v. Official Comm. of Unsecured Creditors (In re Weibel, Inc.), 176 B.R.
209, 212–13 (B.A.P. 9 th Cir. 1994) (noting that approval of an administrative
expense claim under § 503(b)(2) requires that the professional fees be
compensable under § 330). The claimant bears the burden of proving the
legitimacy of an administrative expense claim. In re Cent. Idaho Forest Prods.,
317 B.R. 150, 155 (Bankr. D. Idaho 2004).
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2 In Chapter 11 cases such as this one, references to the term “trustee” includes a
debtor in possession. See 11 U.S.C. § 1107(a) (“a debtor in possession shall have all the
rights . . . and powers . . . of a trustee serving in a case under this chapter.”).
MEMORANDUM OF DECISION - 9
Section 330, in general terms, governs the allowance and amount of
compensation a bankruptcy court may award to a professional employed by a
trustee or Chapter 11 debtor in possession. Amounts awarded must be limited to
“reasonable compensation for actual, necessary services rendered . . . .” 11 U.S.C.
§ 330(a). Section 330 incorporates both 11 U.S.C. § 327, which governs
employment of professional persons, and by necessary implication, Fed. R. Bankr.
P. 2014. See, e.g., In re Fretter, Inc., 219 B.R. 769, 781 (Bankr. N.D. Ohio 1998)
(holding that to qualify for compensation under § 330, employment under § 327
must have been properly secured).
Rule 2014 mandates that “[a]n order approving the employment
of . . . professionals pursuant to § 327 . . . of the Code shall be made only on
application of the trustee or committee.”2 Fed. R. Bankr. P. 2014 (emphasis
added). This Rule also requires the application for approval of employment of any
professional to state “any proposed arrangement for compensation.” Id. So, too,
this District’s L.B.R. 2014.1 requires the trustee, debtor in possession, or
committee to sign the application, and requires that application to detail the
proposed arrangement for compensation of the professional.
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MEMORANDUM OF DECISION - 10
This rather complex set of related statutes and rules for the
employment and compensation of professionals retained to represent bankruptcy
estates, while perhaps somewhat Byzantine to some, serves a critical function.
Compliance with this scheme allows bankruptcy courts, and the many parties
interested in particular bankruptcy cases, to know the details of deals between the
bankruptcy estates and trusted professionals, and to ensure that the limited assets
of bankruptcy estates are expended prudently and properly. Compliance with the
Code and Rules discourages bankruptcy estates from employing professionals who
may have divided loyalties, from paying excessive compensation to professionals,
or from employing professionals whose services are not needed, all to the
disadvantage of creditors and equity security holders. One leading bankruptcy
commentator explains:
Generally, however, the stated purpose of the rule
requiring prior court authorization of employment is to
provide the court with a means of control over
administrative expenses. One court has stated:
“Control . . . is necessary to enable the court to contain
the estate’s expenses and avoid intervention by
unnecessary participants. The purpose of the rule
requiring prior court authorization of a professional’s
appointment is to eliminate volunteerism and thus aid
the court in controlling estate administrative
expenses.” Prior approval also gives the court an
opportunity to review any conflicts, the professional’s
competency and the necessity for the services to be
performed.
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3 The Court expresses no opinion regarding whether Counsel inappropriately
encouraged O’Keefe to act to his prejudice, as is perhaps evidenced by Counsel’s
representations in the First Application, or whether O’Keefe should have relied upon
Counsel’s representations. Such is a matter between Counsel and O’Keefe.
MEMORANDUM OF DECISION - 11
3 Collier on Bankruptcy ¶ 327.03 (Alan N. Resnick & Henry J. Sommer eds., 15 th
ed. rev. 2005) (quoting In re Haley, 950 F.2d 588, 590 (9 th Cir. 1991)).
B. 	The First Application and Counsel’s oral assurances to O’Keefe
do not support allowance of an administrative expense claim.
O’Keefe’s primary argument in support of his request for a
commission rests primarily on the language contained in the First Application for
approval of his employment. But that application is obviously defective under
Rule 2014 and L.B.R. 2014.1, both of which require that it be executed in this case
by the debtor in possession. Instead, the First Application to employ O’Keefe was
signed only by Counsel, not Hessing, Landsing’s manager. Moreover, the First
Application does not purport to represent that Counsel was acting for Landsing,
something the Court suspects was Counsel’s considered purpose in phrasing the
statements in the First Application in the manner he did.3 To the contrary, there
is nothing in the record to establish that Hessing or Landsing had agreed to the
compensation terms detailed for O’Keefe in the First Application.
Because it was technically and substantively defective under the
applicable provisions of the Code and Rules, the First Application could not be
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4 Admittedly, the Court’s order approving O’Keefe’s employment does reference
“the Application of counsel . . . .” 	But upon review, the Court concludes this language is
at best ambiguous as to whether it refers to the First or Second Application. 	As noted
above, since the First Application was flawed, as the signator, the Court declines to
conclude it approved a defective application.
MEMORANDUM OF DECISION - 12
approved. As a result, while the Order does not indicate such expressly, the
Court’s approval of O’Keefe’s employment was, by legal necessity, based on the
presence in the record of the Second Application. 4 The Second Application, the
one signed by Hessing, excludes any commission for O’Keefe based on the sale of
Southfork to Clibborn.
O’Keefe’s affidavit, filed with the First Application, may contain
some contradictory language regarding the terms of his compensation when
compared to the Second Application. But the function of the affidavit was to alert
the Court as to the professional’s “connections with the debtor, creditors, any
other party in interest, their respective attorneys and accountants, the United States
trustee, or any person employed in the office of the United States Trustee.” Fed.
R. Bankr. P. 2014. In other words, the Court does not review the affidavit of a
proposed professional to gain information regarding the proposed compensation.
Instead, the employment application (and, ideally, an attached written fee
agreement), should provide this information.
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MEMORANDUM OF DECISION - 13
When entering the order approving O’Keefe’s employment by
Landsing, the Court could rely only on the recitations concerning O’Keefe’s
compensation contained in the Second Application. Doing so was the only
manner in which the Court could fulfill its obligation to oversee Landsing’s
administrative expenses. See 3 Collier on Bankruptcy ¶ 327.03. And having done
so, enforcing the terms of the Second Application is the only appropriate path.
Because, O’Keefe says, he was completely unfamiliar with the
nuances and details of professional compensation in federal bankruptcy cases, he
asks the Court to require Landsing to compensate him, notwithstanding the lack of
a valid, Court-approved fee agreement. O’Keefe calls these “exceptional
circumstances.” But this “exceptional circumstances” argument is premised on an
exception in the Idaho case law to the statutory requirement that a broker,
employed by a seller of real estate to find a buyer, have a written agreement for
compensation. See Idaho Code § 9-508; Century 21 Quality Props., Inc. v.
Chandler, 646 P.2d 436, 438–39 (Idaho Ct. App. 1982) (describing the
exceptional circumstances exception to Idaho Code § 9-508).
Without regard to whether O’Keefe’s argument would be persuasive
in a nonbankruptcy context, this Court looks to federal bankruptcy law, and the
contents of its own file, to determine whether O’Keefe should be paid. After all,
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5 Under these facts, the Court need not, and does not, express an opinion
regarding (1) whether the terms contained in a proper application to employ a
professional are sufficient, in the absence of a separate written fee agreement, to support
an award of compensation; or (2) whether an application to employ a realtor in a
bankruptcy case may satisfy the state law statute requiring a written fee agreement
executed by the seller and a realtor.
Additionally, while mentioned in O’Keefe’s arguments, the Court also declines to
invoke judicial estoppel against Landsing to sustain O’Keefe’s claim. The Court is not
persuaded that Landsing, the objecting party in this case, is attempting to gain an unfair
advantage by arguing the Second Application is controlling after Counsel filed the First
MEMORANDUM OF DECISION - 14
O’Keefe was retained to provide services as a professional in a bankruptcy case;
he should expect to comply with the long-established statutes, rules and decisional
pronouncements governing the status of bankruptcy professionals in such cases.
Under these circumstances, the Court declines to rely on Chandler as a basis to
approve O’Keefe’s claimed fees. Reliance on state law ignores the reality that, in
a bankruptcy context, the Court’s decision to approve payment to estate
professionals may have a profound impact on the numerous other parties who
have financial and other interests in a bankruptcy case.
Here, neither the Second Application (the one the Court actually
approved), or any other written fee agreement, supports the notion that Landsing
agreed to pay O’Keefe a commission if Hessing negotiated a sale to Clibborn. 	In
short, O’Keefe has not met his burden of proving there is a proper legal or factual
basis for the Court to approve his request for compensation as an administrative
expense. 5
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Application without Landsing’s consent. Moreover, as discussed in this Decision, the
Court did not rely on the representations of the First Application in entering its Order,
another requirement for the operation of an estoppel. See In re Pich, 00.4 I.B.C.R. 183,
187 (Bankr. D. Idaho 2000) (discussing elements of judicial estoppel).
MEMORANDUM OF DECISION - 15
C. Quantum meruit.
“The [Bankruptcy] Code does not provide for fee awards based on
state law theories such as quantum meruit.” In re Weibel, Inc., 176 B.R. at 212.
“Compensation to professionals acting on behalf of the estate must be based on
provisions of the Code.” Id.
The Court is persuaded that the Bankruptcy Appellate Panel’s
straightforward holding in Weibel should apply here. A proper application to
employ O’Keefe disclosing the terms of his compensation (the Second
Application) was filed in this case, and the Court entered an order approving that
application. Docket Nos. 122, 133. Through his quantum meruit argument,
O’Keefe asks the Court to invoke an equitable remedy to alter the terms of this
approved employment application, thereby allowing him compensation when he
would otherwise not be entitled to it. Even were the Court inclined to exercise its
equitable powers, which it is not, those powers are not so broad as to ignore the
requirements of the Code and Rules. See Pac. Shores Dev., LLC v. At Home Corp.
(In re At Home Corp.), 392 F.3d 1064, 1070 (9 th Cir. 2004) (noting that a
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MEMORANDUM OF DECISION - 16
bankruptcy court’s equitable powers do not amount to a roving commission to do
equity, but are limited to effectuating the provisions of Title 11).
The Court concludes that the decisions relied upon by O’Keefe to
support his equitable claim in his well-researched brief, Docket No. 245, are
distinguishable. See, e.g., Atkins v. Wain, Samuel & Co. (In re Atkins), 69 F.3d
970 (9 th Cir. 1995) (addressing retroactive approval of a professional’s
employment when the debtor had signed an engagement letter); Law Offices of
Ivan W. Halperin v. Occidental Fin. Group, Inc. (In re Occidental Fin. Group,
Inc.), 40 F.3d 1059 (9 th Cir. 1994) (upholding order disgorging attorney’s fees for
failure to disclose conflicts and disapproving of quantum meruit generally); Land
West, Inc. v. Coldwell Banker Commercial Group (In re Haley), 950 F.2d 588 (9 th
Cir. 1991) (denying compensation to a real estate broker whose employment was
never approved by the court and who was never hired by the debtor); Mehdipour
v. Marcus & Millichap (In re Mehdipour), 202 B.R. 474 (B.A.P. 9 th Cir. 1996)
(addressing retroactive approval of a professional’s employment when the debtor
had hired the professional); First Interstate Bank of Nevada, N.A., v. CIC Inv.
Corp. (In re CIC Inv. Corp.), 192 B.R. 549 (B.A.P. 9 th Cir. 1996) (holding that
compensation can be paid to a professional who is not disinterested for services
performed while employed by a debtor even though the order approving
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employment is later reversed on appeal); In re Michener, 99.1 I.B.C.R. 33 (Bankr.
D. Idaho 1999) (denying compensation to a real estate agent whose employment
was never approved by the court and who was never hired by the debtor). In this
case, O’Keefe’s claim is simply contrary to the terms of his employment approved
by the Court.
Even if there is room under the Code for such an approach, equity
can not save his claim under these circumstances.
CONCLUSION
O’Keefe bears the burden of showing he is entitled to compensation
under the Bankruptcy Code and Rules. He has failed to do so. 	Consequently,
O’Keefe’s Application for Payment of Administrative Expense, Docket No. 215,
will be denied. A separate order will be entered.
Dated: August 16, 2005
Honorable Jim D. Pappas
United States Bankruptcy Judge
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