United States Court of Appeals
For the First Circuit
No. 99-1865
IN RE MAILMAN STEAM CARPET CLEANING CORP.,
Debtor.
_____________________
GARY R. LEBLANC,
Appellant,
v.
RICHARD P. SALEM, TRUSTEE, ETC.,
Appellee.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Edward F. Harrington, U.S. District Judge]
Before
Selya, Circuit Judge,
Bownes, Senior Circuit Judge,
and Boudin, Circuit Judge.
Gary R. LeBlanc, pro se ipso, for appellant.
Richard P. Salem, pro se ipso, for appellee.
May 16, 2000
SELYA, Circuit Judge. This appeal requires us to
revisit the final resting place of Mailman Steam Carpet Cleaning
Corp. (the debtor). An earlier opinion of this court adumbrates
the relevant background, see LeBlanc v. Salem (In re Mailman
Steam Carpet Cleaning Corp.), 196 F.3d 1, 2-4 (1st Cir. 1999)
(Mailman I), and an abbreviated version, borrowing heavily from
the original, suffices here.1
In October 1990, the debtor, represented by Attorney
Gary R. LeBlanc, won a verdict in excess of $450,000 against
Alfred C. Lizotte in an environmental suit. An appeal ensued.
Betimes, the debtor attached a parcel of commercial real estate
(upon which Al's Service Station, a corporation controlled by
Lizotte, operated a Gulf station) in an effort to secure the
judgment.
Before collecting any sums from Lizotte, the debtor
slid into bankruptcy. See 11 U.S.C. §§ 701-766 (1994 & Supp.
1999). The Lizotte judgment thus became a principal asset of
the bankruptcy estate and LeBlanc, who had been engaged under a
1We previously warned that the record in this case "lacks
crucial documents" and requires us to use approximate numbers
throughout. Mailman I, 196 F.3d at 2. That warning still
applies.
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contingent fee arrangement, became a creditor. On September 18,
1995, the trustee in bankruptcy, Richard P. Salem, notified the
court and creditors of his intention to compromise the judgment
for $100,000. LeBlanc, qua creditor, objected.
The bankruptcy court held a hearing during which Salem
introduced an appraisal that estimated the fair market value of
the property, including the fixtures and equipment associated
with Al's Service Station (the Corporation), at $390,000, and
then assigned $175,000 of this total to the "[l]and, buildings
and installations" owned personally by Lizotte (and, thus,
subject to the attachment). The appraiser also pointed out that
the real estate was encumbered by a prior first mortgage that
secured nearly $100,000 in debt. LeBlanc asserted that the real
estate was worth much more than the estimate but offered no
concrete evidentiary support for a different valuation. No
other creditor objected to the anticipated settlement.
In the end, the bankruptcy court approved the proposal,
subject to the following condition:
If the gas station is sold within two years
from [October 19, 1995], the trustee may
move for revocation of this approval.
Depending on the facts of the sale, the
court will then either confirm or revoke its
approval.
The court denied LeBlanc's subsequent motion to alter or amend
and ordered Salem to deliver an executed discharge of the lien,
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to be held in escrow pending payment of $100,000 to the
bankruptcy estate.
Approximately seven months later, Lizotte and the
Corporation sold the real property and the business assets of
the Corporation for an aggregate price of $560,000. Lizotte
maintained that the business assets represented most of the
value; thus, he proposed to satisfy the first mortgage, remit
$100,000 to Salem to complete the settlement, and pay the
remaining net proceeds to the Corporation's creditors (the
largest of which apparently was Gulf Oil or its distributor, New
England Petroleum). Contending that this allocation was a sham
and would fraudulently divert $360,000 from Lizotte's creditors
(including the debtor), LeBlanc moved to compel Salem to seek
revocation of the order conditionally approving the settlement.
The bankruptcy court granted LeBlanc permission under Fed. R.
Bankr. P. 2004 to examine Lizotte, Gulf, and the Corporation,
limited, however, to information concerning the terms of the
sale and to whom the proceeds had gone.2
The permitted discovery moved at a snail's pace.
Finally, the depositions concluded and Salem sought leave to
2
The court subsequently denied LeBlanc permission to examine
the buyer, Peterborough Oil Co. LeBlanc gripes about this
ruling in passing, but has neither assigned error to it nor made
any suitably developed argumentation in regard to it.
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abandon the reserved right to seek revocation of the settlement.
LeBlanc — and LeBlanc alone — opposed abandonment. At a hearing
held on April 15, 1998, LeBlanc recounted his version of the
pertinent facts and the conclusions that he had drawn from his
investigation. See Mailman I, 196 F.3d at 3-4 (describing
LeBlanc's contentions). Apparently unimpressed, the bankruptcy
court overruled his objection and authorized Salem to surrender
the right to seek revocation.
LeBlanc appealed both this order and a collateral order
dealing with the allowance of his claim.3 After some skirmishing
— including a remand for further findings — the district court
upheld both determinations. See In re Mailman Steam Carpet
Cleaning, Civ. No. 99-40083-EFH (D. Mass. June 25, 1999)
(Mailman II). LeBlanc then prosecuted this appeal. In it, he
presses two assignments of error.
The Abandonment Order
The appellant first solicits our intervention in
respect to the order approving abandonment of the right to seek
revocation of the settlement. As the appellant acknowledges,
3
Striking on a different front, LeBlanc simultaneously filed
an adversary proceeding against Salem, in which he alleged
negligence and breach of fiduciary duty stemming from Salem's
failure to seek revocation of the settlement. The bankruptcy
court rejected this initiative, granting summary judgment in
Salem's favor. The district court affirmed, and so did we. See
Mailman I, 196 F.3d at 4-9.
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the standard of review is abuse of discretion. See Prebor v.
Collins (In re I Don't Trust), 143 F.3d 1, 3 (1st Cir. 1998).
The abuse of discretion rubric is not hard and fast. See 1
Steven Alan Childress & Martha S. Davis, Federal Standards of
Review § 4.21, at 4-131 to -139 (3d ed. 1999). Here, we apply
it against the background understanding that "[c]ompromises are
favored in bankruptcy." Hicks, Muse & Co. v. Brandt (In re
Healthco Int'l, Inc.), 136 F.3d 45, 50 n.5 (1st Cir. 1998)
(quoting 9 Collier on Bankruptcy ¶ 9019.01, at 9019-2 (15th ed.
1995)).
A chapter 7 trustee is entrusted to marshal an estate's
assets and liabilities, and proceed in settling its accounts on
whatever grounds he, in his informed discretion, believes will
net the maximum return for the creditors (on whose behalf he
toils). When augmentation of an asset involves protracted
investigation or potentially costly litigation, with no
guarantee as to the outcome, the trustee must tread cautiously
— and an inquiring court must accord him wide latitude should he
conclude that the game is not worth the candle. See, e.g., id.
at 50-52. After all, "a chapter 7 trustee is required to reach
an informed judgment, after diligent investigation, as to
whether it would be prudent to eliminate the inherent risks,
delays and expense of prolonged litigation in an uncertain
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cause." Kowal v. Malkemus (In re Thompson), 965 F.2d 1136, 1145
(1st Cir. 1992).
These principles are dispositive here. LeBlanc mounts
a claim of fraud — a claim that, after earnest investigation, he
cannot substantiate. In order to probe the claim more
thoroughly, the trustee would have to deplete the estate's
(already slim) assets in exploring what might well prove to be
a dry hole. Given the known facts, a decision to go no further
seems easily defensible.
Lizotte is now in bankruptcy, with no visible assets
apart from the real estate which is at issue in this proceeding.
The sale to Peterborough Oil reportedly was contingent on the
payment of roughly $200,000 to Gulf Oil/New England Petroleum,
and a further payment of $60,000 for a covenant not to compete.
The mortgage — a priority lien — had a balance of nearly
$100,000. Backing these sums out of the sales price left only
$200,000 on the table — some of which obviously would have to be
devoted to closing costs, taxes, attorneys' fees, and the like.
Under those circumstances, accepting a $100,000 settlement
rather than either frustrating the sale (by attempting to block
the $200,000 payment) or prolonging the squabble about how to
allocate the sales price between real property and business
assets does not appear unreasonable. Trustees must take care
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not to throw good money after bad, and, on this somewhat opaque
record, Salem's inclination to embrace the settlement is a
choice which appears deserving of some deference.
Nor was Salem's position rubber-stamped. The
bankruptcy court conducted no fewer than four hearings to
scrutinize the appellant's claims. Upon considering all the
available evidence, the court elected, as its discretion fully
allowed, to accept the trustee's recommendation. The situation
thus is reminiscent of In re Thompson, in which we wrote:
[T]he baseline for appellants' opposition to
the proposed settlement rests in their
readiness to second-guess the informed
judgment of the chapter 7 trustee, as well
as the discretionary determination of the
bankruptcy court, that continued litigation
would not result in a net benefit to the
chapter 7 estate. . . . The important
policy favoring efficient bankruptcy
administration normally will warrant
judicial recognition that the chapter 7
trustee, . . . rather than . . . an
individual creditor, is the more appropriate
arbiter of the "best interests" of the
chapter 7 estate.
965 F.2d at 1145 (citations omitted).
The district court also reviewed the facts. In an
abundance of caution, it remanded for further findings and
ultimately affirmed the decision of the bankruptcy court. See
Mailman II, slip op. at 3. The court stated that "the record
simply does not reflect that the land owned by Lizotte and
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secured by the real estate attachment was valued at more than
the $200,000 [originally] estimated by the independent real
estate appraiser." Id. It then noted that the appellant had
neither introduced any contrary expert testimony nor proffered
any hard evidence "that Lizotte [had] manipulated the valuation
of his real estate." Id. Consequently, the district court
concluded that the bankruptcy court had not abused its
discretion. See id.
We appreciate that, notwithstanding the district
court's imprimatur, we must independently review the bankruptcy
court's determination. See Palmacci v. Umpierrez, 121 F.3d 781,
785 (1st Cir. 1997). But that review should not occur in a
vacuum. In this instance, the decision whether to seek
revocation of the settlement has been poked, prodded, and probed
at some length. For present purposes, the acid test of the
bankruptcy court's decision is not whether pressing onward might
have produced more funds for the estate but, rather, whether
accepting the settlement (and thereby forgoing the risks
inherent in intransigence) fell within the universe of
reasonable alternatives. The ascertained facts, as revealed by
the record, convince us that the bankruptcy court did not exceed
the wide boundaries of its discretion in determining that a bird
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in the hand was worth more than continued shaking of a
potentially barren bush.
The Claim Allowance
We turn next to LeBlanc's second assignment of error.
The facts are these. The debtor originally retained LeBlanc to
handle the environmental suit pursuant to a written retainer
agreement, dated June 20, 1988, that specified a one-third
contingent fee based on the "verdict, jury award or settlement."
LeBlanc succeeded in obtaining a verdict against Lizotte in mid-
1990. With an appeal in prospect, he prepared a neoteric fee
agreement that provided, in substance, that he would handle the
appeal and receive an aggregate fee equal to the greater of 43%
of any recovery or his overall time charges (based on specified
billing rates). The debtor signed this agreement in November
1990.
When the debtor later filed for bankruptcy and LeBlanc
served a proof of claim based on the November 1990 fee
agreement, the agreement proved as much necrotic as neoteric;
the bankruptcy court struck it down as violative of Rule
3:05(5)(e) of the Rules of the Supreme Judicial Court of
Massachusetts (which at the time provided, in pertinent part,
that a contingent fee shall not "exceed stated maximum
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percentages of the amount collected"). 4 The court did not
disallow LeBlanc's claim entirely, however, but allowed it to
the extent of one-third of the amount of the litigation proceeds
ultimately collected. The district court affirmed these twin
determinations, holding (1) that the bankruptcy court did not
err in finding the November 1990 fee agreement unenforceable,
and (2) that the bankruptcy court's allowance of the claim in an
amount equal to one-third of the actual recovery was "reasonable
and do[es] not constitute an abuse of discretion." Mailman II,
slip op. at 4.
Like the district court, we review de novo the
bankruptcy court's rulings of law and test its findings of fact
for clear error. See BayBank-Middlesex v. Raylar Distributors,
Inc., 69 F.3d 1200, 1202 (1st Cir. 1995). We think it is
significant here that the claim under review is essentially a
claim for an attorney's fee. The bankruptcy court's role is
preeminent in determining the reasonableness of fees claimed in
bankruptcy proceedings, and the court's determinations in that
wise are reviewed with great deference. See In re I Don't
4In the District of Massachusetts, both the federal district
court and the bankruptcy court have incorporated the Supreme
Judicial Court's ethical standards into their own rules. See D.
Mass. R. 83.6(4)(B); Bankr. Mass. R. 9020-3. At the times
relevant hereto, that incorporation embraced former S.J.C. R.
3:05 (since stricken).
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Trust, 143 F.3d at 3; In re Martin, 817 F.2d 175, 182 (1st Cir.
1987); Rome v. Braunstein (In re Chestnut Hill Mortgage Corp.),
158 B.R. 547, 549 (D. Mass. 1993), aff'd, 19 F.3d 54 (1st Cir.
1994). With these tenets in mind, we consider the particulars
of the appellant's claim.
We most assuredly cannot fault the bankruptcy court for
refusing to honor the November 1990 fee agreement. By leaving
open the possibility of fees in excess of the stated percentage,
that agreement plainly ran afoul of the then-applicable ethical
canon, S.J.C. R. 3:05(5)(e). The court therefore had the right
— and, arguably, the duty — to refuse to enforce it. See Berman
v. Linnane, 424 Mass. 867, 871-72 & n.7 (1997).
This brings us to the reasonableness of the allowance.
Since the November 1990 fee agreement had purported to supplant,
not merely supplement, the original fee agreement, the
bankruptcy court determined that it would consider not only the
original agreement, but also equitable doctrines. In the end,
it approved LeBlanc's claim to the extent of one-third of the
amounts actually realized on the judgment against Lizotte. We
glean from the record that the court thought this sum reasonable
in relation to the services rendered and to the result achieved
and believed that such an award would prevent unjust enrichment
of the bankruptcy estate. Indeed, the court expressly found
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that "one-third of the recovery, plus expenses" constituted a
"typical compensation arrangement for matters such as this" and
was "[f]air" in the circumstances of this case.
In our view, the allowance of the claim passes the test
of reasonableness with flying colors. Because we do not wish to
belabor the obvious, we add only a brief comment.
Having found that the November 1990 fee agreement
violated ethical precepts, the bankruptcy court likely could
have denied LeBlanc compensation altogether. See, e.g., Rome,
19 F.3d at 58; cf. Culebras Enters. Corp. v. Rivera-Rios, 846
F.2d 94, 97 (1st Cir. 1988) (stating, in a non-bankruptcy
context, that "[d]enial of attorneys' fees may be a proper
sanction for violation of an ethical canon"). The fact that the
court elected to take less draconian measures does not mean that
it could attach no significance to the violation — and this is
so even though it seems to have regarded the ethical shortfall
as resulting from a good-faith blunder. In all events,
assessing the reasonableness of claims for counsel fees is a
matter "in which the court of first instance enjoys particularly
great leeway," In re I Don't Trust, 143 F.3d at 3, and there is
no sign that the bankruptcy court's allowance of LeBlanc's claim
in a sum less than he had hoped outstripped that leeway.
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The proof of the pudding is in the tasting. The essence
of LeBlanc's engagement by the debtor centered around the notion
that his compensation would be commensurate to the monies
realized by the client. The bankruptcy court's resolution of
LeBlanc's claim was faithful to this central concept; it found
that LeBlanc's work had produced a recovery and that he was
entitled to compensation proportionate to the size of that
recovery. So viewed, LeBlanc's complaint reduces to a quarrel
over the percentage that the court deemed appropriate. That
ends the matter. Whether or not a higher percentage might have
been sustainable, it cannot seriously be argued that the court's
decision to approve the claim based on a conventional percentage
(33a%) constituted an abuse of discretion.
We need go no further. At long last, the lower courts
appear to have laid this tangled and contentious matter to rest.
We discern no error in their administration of these last rites.
Affirmed.
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