Avon Townhomes Venture

OCR transcription for search; preserved printed pages are authoritative

UNITED STATES BANKRUPTCY COURT

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AUTHENTICAT|
US. GOVERNMENT,
INFORMATION

GPO

In re

Entered on Docket
October 15, 2010

GLORIA L. FRANKLIN, CLERK
U.S BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA

IT S SO ORDERED. “4
Signed — f£O- ib 22 OY «>

UNITED STATES BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA

Case No. 05-53243-RLE

AVON TOWNHOMES VENTURE, Chapter 7

Debtor.

MEMORANDUM DECISION RE ORDER TO DISGORGE COMMISSION RECEIVED

BY JAMES MCCLENAHAN AND EAGLE HOME LOANS
On July 30, 2010, the Court issued its Memorandum Decision Regarding Court’s Order

to Show Cause (“Memorandum Decision”) and Order Pursuant to Memorandum Decision

(“Order”). The Order directed James McClenahan (“McClenahan”) and/or Eagle Home Loans,

Inc. (“Eagle Home Loans”) to file a written response to the Court’s tentative decision to order

McClenahan and Eagle Home Loans to disgorge $18,300 in commission received as a result of

the sale of a parcel of partially developed real property in Lathrop, California (the “Property’”).

McClenahan timely filed his Response To Tentative Decision on August 30, 2010, which also

included a Motion To Amend/Clarify Findings (the “Response’”’).

MEMORANDUM DECISION

:11-41750 Doc# 334 Filed: 10/13/10 Entered: 10/15/10 11:01:14 Page 1 of

The following constitutes the Court’s Findings of Fact and Conclusions of Law, pursuant

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UNITED STATES BANKRUPTCY COURT

For The Northern District Of California

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to Rule 7052 of the Federal Rules of Bankruptcy Procedure. In addition, the Findings of Fact and

Conclusions of Law in the Court’s Memorandum Decision is incorporated by reference herein.

I. FACTUAL BACKGROUND
A detailed discussion of the factual and procedural background can be found in the

Court’s Memorandum Decision. Nevertheless, the Court shall provide a summary of the relevant
facts as it pertains to McClenahan and Eagle Home Loans.

On May 15, 2008, the Court issued an Order to Show Cause directing various parties,
including McClenahan, to appear in Court and show cause why sanctions should not be imposed,
individually and/or jointly, for their conduct regarding the sale of the Property. On October 7,
2008, after four days of evidentiary hearings, the Court issued an Amended Order to Show Cause
directed at Stanley A. Zlotoff, as Debtor’s counsel, and Joe Guerra, as Debtor’s Responsible
Individual. Thereafter, the Court conducted additional evidentiary hearings.

After the conclusion of the evidentiary hearings, the Court determined that McClenahan!
acted as the broker on behalf of the Debtor in the sale of the Property and received commission in
the amount of $18,300 ( the ““Commission’”) as a result of the sale. See Memorandum Decision,
pp. 60:18 - 62:14. However, neither Eagle Home Loans nor McClenahan was employed by the
Debtor with the Court’s approval.

As a result, although the Court did not sanction McClenahan under its inherent powers,
the Court tentatively held that because McClenahan’s employment was not authorized by the
Court, the receipt of the Commission was improper and must be disgorged. Because the Order to
Show Cause only warned McClenahan of the possibility of sanctions generally pursuant to 11
U.S.C. § 105 and not disgorgement under 11 U.S.C. § 327, the Court gave McClenahan an
opportunity to respond in writing.

McClenahan filed his Response on August 30, 2010, which included a Motion to

! McClenehan testified that he is the president, CEO and 100% shareholder of Eagle Home Loans, Inc. See 7/25/08
Transcript, Docket #269, at 24:18-25:1; 10/6/08 Transcript, Docket #289, at 77:3-24. Thus, for purposes of this
Memorandum, the terms “McClenehan” and “Eagle Home Loans” are used interchangeably.

MEMORANDUM DECISION

Ca

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UNITED STATES BANKRUPTCY COURT

For The Northern District Of California

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Amend/Clarify Findings in the same pleading.

II. DISCUSSION
As stated in the Memorandum Decision, section 327 of the Bankruptcy Code permits the

trustee, with the approval of the court, to employ attorneys, accountants and other such
“professional persons,” provided such professionals “do not hold or represent an interest adverse
to the estate” and are “disinterested persons.” 11 U.S.C. § 327(a). Section 327 applies to debtors
in possession by virtue of § 1107(a).

A real estate broker is a “professional person” as contemplated by § 327. In re Silver Oak
Homes, Ltd., 167 B.R. 389, 398 (Bankr. D.Md. 1994); In re McConnell, 82 B.R. 43, 44 (Bankr.
S.D. Tex. 1987); In re Eastern Inns of New Hampshire, Inc., 72 B.R. 418, 420 (Bankr. D. Me.
1987); In re Roberts, 58 B.R. 65, 67 (Bankr. D.N.J. 1986). A real estate broker is not entitled to
a commission on the sale of estate property where his employment was not approved by the
bankruptcy court. In re Haley, 950 F.2d 588, 590 (9th Cir. 1991); Enea v. Coldwell Banker/Del
Monte Realty, 225 B.R. 715, 719 (N.D. Cal. 1998). “The purpose of section 327 requiring prior
court authorization of a professional’s appointment is to eliminate volunteerism and aid the court
in controlling estate administrative expenses.” Haley, 950 F.2d at 590 [citations omitted].

The law is well-settled that “[flailure to receive court approval for the employment of a
professional in accordance with § 327 and Rule 2014 precludes the payment of fees.” DeRonde
v. Shirley (In re Shirley), 134 B.R. 940, 944 (9 Cir. 1992); Atkins v. Wain, Samuel & Co. (In re
Atkins), 69 F.3d 970, 973 (9" Cir. 1995)(“In bankruptcy proceedings, professionals who perform
services for a debtor in possession cannot recover fees for services rendered to the estate unless
those services have been previously authorized by a court order.” [citations omitted]).

McClenahan’s Response does not dispute that neither he nor Eagle Home Loans obtained
the Court’s authorization to be employed as broker for the Debtor. The Response also does not
dispute the Court’s finding that McClenahan and/or Eagle Home Loans acted as the broker on

behalf of the Debtor. Instead, McClenahan appears to argue, without any supporting legal

MEMORANDUM DECISION

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UNITED STATES BANKRUPTCY COURT

For The Northern District Of California

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authorities, that disgorgement would be improper because the Commission was earned and the
estate received the benefit of the sale. However, “[a]s a general rule the equitable remedy of
quantum meruit cannot be available where the fees are barred by law under the bankruptcy
rules.” Halperin vy. Occidental Financial Group, Inc. (In re Occidental Financial Group, Inc.), 40
F.3d 1059, 1063 (9" Cir. 1994). Otherwise, any unapproved professional could assert an
equitable claim to compensation.

The fact that McClenahan or Eagle Home Loans paid $18,000 of the Commission to
Debtor’s counsel out of his own volition does not change the basis of the disgorgement. To
accept McClenahan’s suggestion that the Court direct the disgorgement order to Debtor’s counsel
would mean that any professional who is ordered to disgorge fees could simply assert that he
spent the fees in question and the Court must track down the recipients of the funds. The Court
is under no such obligation.

Likewise, it is irrelevant whether it was McClenahan or Eagle Home Loans who actually
received the Commission. Neither of them was employed with the approval of the Court. Since
McClenahan is the President, CEO, and 100% shareholder of Eagle Home Loans, the
disgorgement is properly directed to him.

McClenahan placed much emphasis on the fact that the Order on Motion to Sell Property
Free and Clear allowed for the payment of a realtor’s commission. Contrary to McClenahan’s
assertion, an order allowing payment of a commission from sale proceeds, along with payments
of other fees and liens, is not synonymous with the approval of a professional’s employment or a
professional’s compensation, which is governed by 11 U.S.C. §§ 327-330. Indeed, unless
ordered otherwise, a professional employed by a debtor must submit a fee application seeking
court approval of its fees, and a bankruptcy court has a duty to review said fee application
notwithstanding the absence of objections by the trustee, debtor or creditors. See Lobel & Opera
y. United States Trustee (In re Auto Parts Club, Inc.), 211 B.R. 29, 33 (9" Cir. BAP 1997).

Lastly, McClenahan’s arguments and legal authorities pertaining to the due process

requirement of sanctions are inapplicable in this instance. As stated in the Memorandum

MEMORANDUM DECISION

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Decision, the Court held that sanctions under the Court’s inherent powers against McClenahan
were inappropriate. See Memorandum Decision p. 60:3-4. The statutory predicate for the
disgorgement of the Commission is 11 U.S.C. § 327 and its related case law.

Mindful of due process concerns, the Court gave McClenahan thirty (30) days to respond
to the proposed disgorgement. McClenahan contends that had he known of the possibility of
disgorgement, he would have examined the witnesses differently at the evidentiary hearings.
However, any additional testimony from Carlos Hernandez or Debtor’s counsel would not alter
the fact that neither McClenahan nor Eagle Home Loans were or was employed pursuant to court
authorization, which McClenahan did not dispute. Furthermore, as the Court clearly stated in its
Memorandum Decision that the basis of the disgorgement was the failure to obtain court
approval for employment, McClenahan was free to provide declarations and legal authorities to
show why the Commission should not be disgorged despite his failure to obtain court approval of
employment. He did not do so.

In sum, McClenahan has not provided the Court with any reasons or cited any legal
authorities to support his position that he is entitled to the Commission despite his failure to
obtain employment authorization. Based on the foregoing, the Court finds that McClenahan and
Eagle Home Loans failed to obtain court approval for their employment as broker for the Debtor
in accordance with 11 U.S.C. § 327 and thus they are not entitled to the Commission in the
amount of $18,300 for the sale of the Property. The Commission shall be disgorged to the
Chapter 7 Trustee.

With regard to the Motion to Amend/Clarify Findings (“Motion”), McClenahan did not
provide appropriate notice and opportunity for hearing of the Motion to the other interested
parties, as required by Federal Rule of Bankruptcy Procedure 9014 and Local Bankruptcy Rule
9014-1. Therefore, the Motion will be denied without prejudice.

An appropriate Order shall issue.

ay

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Court Service List [by mail and ECF]

Joe Guerra

Guerra & Associates
P.O. Box 609

San Jose, CA 95106

Metricz Corporation
3033 Moorepark
Suite 7

San Jose, CA 95118

Samuel E. Goldstein

Samuel E. Goldstein and Assoc.
1777 Botelho Dr. #345

Walnut Creek, CA 94596

Robert Jaramillo

c/o Law Offices of Thomas Salciccia
870 North First Street

San Jose, CA 95112

Raymundo Lujano
265 North 26" Street
San Jose, CA 95116

James McClenehan
Eagle Home Loans
1190 Park Avenue
San Jose, CA 95126

James Roberts

ROBERTS & ELLIOTT, LLP
Ten Almaden Boulevard
Suite 500

San Jose, CA 95113

Perry J. Woodward

Terra Law, LLP

177 Park Avenue, 3" Floor
San Jose, CA 95113

Luis Aguilar
P.O. Box 21889
San Jose, CA 95151

Patrick E. Marshall

Law Offices of Patrick E. Marshall
345 Sth St. #4

Hollister, CA 95023

Clifford W. Stevens
Law Offices of Neumiller and Beardslee
P.O. Box 20

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Stockton, CA 95201-3020

Avon Townhomes Venture
P.O. Box 609
San Jose, CA 95106

Stanley A. Zlotoff

Law Offices of Stanley A. Zlotoff
300 S Ist St. #215

San Jose, CA 95113

Mohamed Poonja
P.O. Box 1510
Los Altos, CA 94023-1510

Kevin W. Coleman

Schnader Harrison Segal and Lewis LLP
One Montgomery St. #2200

San Francisco, CA 94104

Suzanne Decker
1271 Washington Ave. #318
San Leandro, CA 94577

Reidun Stromsheim
Stromsheim & Associates

201 California Street, Suite 350
San Francisco, CA 94111

Nanette Dumas

Office of the U.S. Trustee
280 S Ist St. #268

San Jose, CA 95113

MEMORANDUM DECISION

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