In Re: Long Dei Liu

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8 UNITED STATES DISTRICT COURT

9 CENTRAL DISTRICT OF CALIFORNIA

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In re: Long Dei Liu, Case No. 8:19-CV-00131-JLS

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Adv. Case No. 8:16-AP-01233-TA

12 Debtor.

_________________________________ BK Case No. 8:16-BK-11588-TA

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William Hong and Harry Hong through ORDER AFFIRMING IN PART,

14 Their Guardian Ad Litem, Yuanda REVERSING IN PART, AND

REMANDING IN PART

Hong,

15 BANKRUPTCY COURT

JUDGMENT AND ORDER RE

16 Appellants, ATTORNEY FEES

17 v.

18 Long-Dei Liu; Smiley Wang-Ekvall,

LLP; David A. Kay, Esq.; and

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Rosenberg, Shpall & Zeigen, APLC,

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Appellees.

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1 This is an appeal of the Bankruptcy Court’s award of fees to counsel. For the

2 reasons and in the manner set forth below, the Court affirms in part, reverses in part,

3 and remands the matter to the Bankruptcy Court for further proceedings consistent

4 with this Order.

5 I. Background

6 On March 14, 2014, Ling-Nie Hong died of blood loss a few days after

7 delivering her second child (Harry) by cesarean section. Debtor/Appellee Long-Dei

8 Liu (“Debtor” or “Dr. Liu”) was her obstetrician. Dr. Liu was sued for malpractice by

9 Ling-Nie’s surviving spouse and her two young sons, Appellants/Judgment Creditors

10 Yuanda Hong, William Hong, and Harry Hong (collectively, “Appellants” or

11 “Judgment Creditors”). Appellants prevailed, and a California state court entered a

12 multimillion dollar judgment against Dr. Liu and the hospital where Harry was born.

13 Specifically, a jury awarded Appellants $9,700,000, consisting of $9,100,000 in

14 economic damages and $600,000 in non-economic damages; the jury apportioned

15 liability as 75% to the hospital and 25% to Dr. Liu. (See Doc. 15-9, EOR at 557-72,

16 Ct. App. Op. at 3.) As to the $9,100,000 in economic damages, after taking into

17 account the hospital’s pretrial settlement of $3,250,000, and allocating all the

18 remaining economic damages to Dr. Liu by virtue of joint and several liability,

19 Dr. Liu’s liability to Appellants for economic damages was calculated at

20 approximately $5,900,000. (See id. at 13.) After application of the $250,000 statutory

21 cap on non-economic damages set forth in California Civil Code § 3333.2, and

22 apportioning those non-economic damages, Dr. Liu’s liability for non-economic

23 damages was calculated at $62,500. (Id.) The court also awarded $35,000 in costs and

24 post-judgment interest beginning November 3, 2015. (Id.)

25 This judgment was asserted as a claim against Dr. Liu’s Chapter 11 bankruptcy

26 estate. (See Amended Claim No. 2 ($6,214,170.05).) Only two other claims were

27 made, and those were for miniscule amounts in comparison to the malpractice

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1 judgment. (See Claim No. 1 (American Express Bank, FSB ($110.64); Claim No. 3,

2 American Honda Finance Corp. ($43,662.63).)1

3 The Chapter 11 petition was pending before the Bankruptcy Court for

4 approximately two-and-a-half years. Three separate sets of counsel were awarded

5 fees and costs, and different issues arise on appeal as to each of the three. Counsel

6 David A. Kay (“Attorney Kay”) represented Dr. Liu in his unsuccessful appeal of the

7 malpractice judgment. Counsel David Rosenberg (and the firm Rosenberg, Shpall and

8 Zeigen (“RSZ”)) represented Dr. Liu in his successful quest to maintain his medical

9 license in the face of the malpractice judgment. Finally, the law firm of Smiley,

10 Wang-Ekvall, LLP (“SWE”), represented Dr. Liu as his general bankruptcy counsel.

11 On October 16, 2019, and after rejecting five plans of confirmation proposed by

12 the Dr. Liu, the Bankruptcy Court confirmed a plan proposed by the Judgment

13 Creditors. (See BK Doc. 616 (“Order Confirming Plan”).) A month later, the

14 Bankruptcy Court awarded attorney fees totaling $914,325.75, to be paid from the

15 estate.2 (BK Doc. 644.)3

16 Appellants seek reversal of the Order awarding fees and costs or, alternatively,

17 they seek remand with instructions for the Bankruptcy Court to make specific findings

18 regarding which services were reasonably likely to benefit the estate and/or were

19 necessary to the administration of the estate. (Opening Br. at 3.)

20 II. Legal Standards

21 A. Standards of Review

22 The district court reviews the bankruptcy court’s legal conclusions de novo and

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24 1 Dr. Liu and his spouse purchased a new 2016 Honda Odyssey minivan, financing $43,547.63 on

April 12, 2016, the day before Dr. Liu filed his Chapter 11 petition in this action. (Compare Claim

25 3-1 at 5 (vehicle purchased on Apr. 12, 2016) with BK Doc. 1 (petition filed Apr. 13, 2016).)

2 The Bankruptcy Court described the amount of fees expended in this case as “eye-watering.”

26 (Tentative re Fees, EOR 592.) The Court concurs in this description.

3 A number of documents reveal the bases for the Bankruptcy Court’s award of fees. For purposes

27 of the present appeal, the November 21, 2018 Order Approving Final Payment of Fees and Expenses

(BK Doc. 644 (“Fees Order”) must be considered in conjunction with three tentative rulings and the

28 transcript of the hearing on the matter. (See Doc. 15-11, EOR 591-604 (“Tentative re Fees”); BK

1 its factual determinations for clear error. In re First T.D. & Inv., Inc., 253 F.3d 520,

2 526 (9th Cir. 2001). “De novo means review is independent, with no deference given

3 to the trial court’s conclusion.” In re Curtis, 571 B.R. 441, 444 (B.A.P. 9th Cir.

4 2017).

5 Otherwise, the bankruptcy court’s allowance of attorney’s fees will not be

6 disturbed on appeal absent an abuse of discretion. In re Park-Helena Corp., 63 F.3d

7 877, 880 (9th Cir. 1995). In other words, an appellate court should “not disturb a

8 bankruptcy court’s award of attorneys’ fees unless the bankruptcy court abused its

9 discretion or erroneously applied the law.” In re Strand, 375 F.3d 854, 857 (9th Cir.

10 2004) (internal quotation marks omitted). A bankruptcy court abuses its discretion in

11 awarding fees where the reviewing court has “a definite and firm conviction that the

12 bankruptcy court committed clear error in the conclusion it reached after weighing all

13 of the relevant factors.” In re Eliapo, 468 F.3d 592, 596 (9th Cir. 2006).

14 B. Duty of Debtor in Possession and His Counsel

15 In Chapter 11 cases like this one, a bankruptcy court may appoint a trustee, with

16 powers and duties prescribed by statute. 11 U.S.C. § 1104(a). A bankruptcy court

17 may also permit the debtor in possession to assume those powers and undertake those

18 duties. 11 U.S.C. § 1107(a). Where it does so, the debtor in possession steps into the

19 shoes of the trustee, and like the trustee, has a fiduciary responsibility to all the

20 creditors of the bankruptcy estate. See In re McConville, 110 F.3d 47, 50 (9th Cir.

21 1997); In re Woodson, 839 F.2d 610, 614 & n.5 (9th Cir. 1988).

22 That fiduciary responsibility also rests with bankruptcy counsel for the debtor in

23 possession. In re Perez, 30 F.3d 1209, 1219 (9th Cir. 1994) (“Counsel for the estate

24 must keep firmly in mind that his client is the estate and not the debtor individually.”).

25 “Under no circumstances, . . . may the lawyer for a bankruptcy estate pursue a course

26 of action, unless he [or she] has determined in good faith and as an exercise of his

27 professional judgment that the course complies with the Bankruptcy Code and serves

28 the best interests of the estate.” Id.; see also In re Wilde Horse Enterprises, Inc., 136

1 B.R. 830, 840 (Bankr. C.D. Cal. 1991) (“In a Chapter 11 proceeding, the attorney for

2 debtor in possession, as an officer of the court charged to perform duties in the

3 administration of the case, has a high fiduciary duty to the estate represented.”). In

4 that vein, the duties of a trustee or debtor in possession include the duty “to maximize

5 the assets of the bankruptcy estate to allow maximum recovery for the debtor’s

6 creditors.” In re Feiler, 218 F.3d 948, 952 (9th Cir. 2000); see also In re Consol.

7 Nevada Corp., No. 3:13-BK-51236-GWZ, 2017 WL 6553394, at *7 (B.A.P. 9th Cir.

8 Dec. 21, 2017) (The duty of “a chapter 11 debtor-in-possession (or trustee) is . . . to

9 maximize the economic value of the estate.”), aff’d, 778 F. App’x 432 (9th Cir. 2019).

10 C. Legal and Other Professional Fees (and Costs)

11 Legal and accounting professionals may be employed to represent or assist the

12 debtor in possession or trustee in carrying out his or her duties under the Bankruptcy

13 Code. See 11 U.S.C. § 327 (“[T]he trustee, with the court’s approval, may employ

14 one or more attorneys, accountants, . . . or other professional persons, that do not hold

15 or represent an interest adverse to the estate, and that are disinterested persons, to

16 represent or assist the trustee in carrying out the trustee’s duties under this title.”). All

17 compensation to the professionals appointed under § 327 must be approved by the

18 bankruptcy court. See 11 U.S.C. § 330. “The burden is upon the applicant to

19 demonstrate that the fees are reasonable.” In re Nakhuda, 544 B.R. 886, 902 (9th Cir.

20 BAP 2016).

21 Subsection (a)(1) of §330 authorizes “reasonable compensation for actual,

22 necessary services rendered” by a professional, together with “actual, necessary

23 expenses.” Subsection (a)(2) authorizes a court to “award compensation that is less

24 than the amount of compensation requested.” Subsection (a)(3) outlines factors a

25 court must consider when determining what is reasonable compensation for services

26 rendered. Specifically, the bankruptcy court must consider:

27 (A) the time spent on such services; (B) the rates charged for such

28 services; (C) whether the services were necessary to the administration

1 of, or beneficial at the time at which the service was rendered toward

2 the completion of, a case under this title; (D) whether the services were

3 performed within a reasonable amount of time commensurate with the

4 complexity, importance, and nature of the problem, issue, or task

5 addressed; (E) with respect to a professional person, whether the person

6 is board certified or otherwise has demonstrated skill and experience in

7 the bankruptcy field; and (F) whether the compensation is reasonable

8 based on the customary compensation charged by comparably skilled

9 practitioners in cases other than cases under this title.

10 11 U.S.C. § 330(a)(3) (emphasis added, paragraph structure altered). Finally,

11 subsection (a)(4) provides that compensation should not be allowed where the

12 “services . . . were not . . . reasonably likely to benefit the debtor’s estate[] or . . .

13 necessary to the administration of the case.” 11 U.S.C. § 330(a)(4).

14 The Ninth Circuit Bankruptcy Appellate Panel describes the duty of the

15 bankruptcy court in considering a fee application:

16 Such examination, in general, should include the following questions:

17 First, were the services authorized? Second, were the services necessary

18 or beneficial to the administration of the estate at the time they were

19 rendered? Third, are the services adequately documented? Fourth, are the

20 fees requested reasonable, taking into consideration the factors set forth

21 in § 330(a)(3)? . . . Finally, in making this determination, the court must

22 take into consideration whether the professional exercised reasonable

23 billing judgment.

24 In re Mednet, 251 B.R. 103, 108 (B.A.P. 9th Cir. 2000) (internal citations omitted). In

25 making the latter determination regarding billing judgment, the bankruptcy court

26 looks to whether counsel properly considered these questions:

27 (a) Is the burden of the probable cost of legal services

28 disproportionately large in relation to the size of the estate and

1 maximum probable recovery? (b) To what extent will the estate suffer if

2 the services are not rendered? (c) To what extent may the estate benefit

3 if the services are rendered and what is the likelihood of the disputed

4 issues being resolved successfully?

5 Unsecured Creditors’ Comm. v. Puget Sound Plywood, Inc., 924 F.2d 955, 959 (9th

6 Cir. 1991) (emphasis added). These considerations are required because counsel has

7 “an obligation to consider the potential for recovery and balance the effort required

8 against the results that might be achieved.” Id. at 961. Counsel have the duty to

9 “scale back” their services such that those services are geared toward the reasonably

10 expected recovery rather than the best possible recovery. See In re Auto Parts Club,

11 Inc., 211 B.R. 29, 34 (B.A.P. 9th Cir. 1997) (“[A]n attorney must scale back its

12 services based on the reasonable expected recovery for the estate, not the potential

13 optimum recovery.”).

14 Moreover, the relevant benefit to be considered is the benefit to the estate rather

15 than to the debtor. Id. Indeed, “[s]ome bankruptcy courts have denied compensation

16 to attorneys for chapter 11 debtors based on a finding that the attorneys’ services

17 primarily benefitted debtors personally or their principals rather than the estate.” In re

18 Horizon Ridge Med. & Corp. Ctr., LLC, No. BAP NV-14-1532-DJUKI, 2016 WL

19 742716, at *7 (B.A.P. 9th Cir. Feb. 23, 2016); see also In re Love, 163 B.R. 164, 177

20 (Bankr. D. Mont. 1993) (disallowing fees where “a substantial portion of [counsel’s]

21 services were rendered for the benefit of the [debtor in possession] personally or [his]

22 family and associates rather than for the benefit of the estate”).

23 D. Defensive Appellate Rights as Property of the Estate

24 The filing of a voluntary Chapter 11 petition, like the filing of a voluntary

25 petition under any Chapter of the Bankruptcy Code, creates a bankruptcy estate that

26 includes “all legal and equitable interests of the debtor in property.” 11 U.S.C.

27 § 541(a)(1). “Property” is defined by state law. Bunter v. United States, 440 U.S. 48,

28 55 (1979). Under California law, the right to appeal an adverse judgment is a right

1 created by statute and is therefore “property” of the estate. See Cal. Civ. Code § 655;

2 Cobb v. Univ. of So. Cal., 32 Cal.App.4th 798, 803 (1995); In re Fridman, No. BAP

3 CC-15-1151-FKIKU, 2016 WL 3961303, at *7 (B.A.P. 9th Cir. July 15, 2016) (“The

4 right to appeal a state court judgment is property that is part of a debtor’s estate.”); see

5 also In re Bouzaglou, No. 2:14-AP-01645-DS, 2018 WL 4062299, at *4, 7 (B.A.P.

6 9th Cir. Aug. 13, 2018) (holding that defensive appellate rights were property of a

7 Chapter 7 bankruptcy case), aff’d, 803 F. App’x 147 (9th Cir. 2020).

8 E. Remand with Instructions

9 An appellate court may remand issues regarding fees to the bankruptcy court

10 with instructions regarding how to proceed. See, e.g., Renfrow v. Draper, 232 F.3d

11 688, 696 (9th Cir. 2000); In re Bertola, 317 B.R. 95, 104 (B.A.P. 9th Cir. 2004)

12 (remanded with instructions as to fees related to a particular legal theory).

13 III. Award of Fees and Costs to David A. Kay, Special Counsel to Debtor In

14 Possession

15 Attorney Kay represented Dr. Liu in his unsuccessful appeal of the malpractice

16 judgment. He submitted a total of five interim and final fee applications, seeking a

17 total award of $104,227.50 in fees and $8,404.42 in costs.4 (See BK Docs. 166, 223,

18 378, 470 & 557.) The Bankruptcy Court ultimately approved an award of $95,227.50

19 in fees and $8,404.42 in costs. (BK Doc. 644.)

20 A. Fees and Costs Associated with Pursuit of the Appeal

21 Appellants challenge the fee award as compensating services not reasonably

22 likely to benefit the debtor’s estate. (Opening Br. at 11-13.) By awarding fees in

23 pursuit of the appeal of the malpractice judgment, the Bankruptcy Court impliedly

24 found that the appeal was likely to benefit the estate and that Attorney Kay exercised

25 reasonable billing judgment. In the Tentative re Fees, the Bankruptcy Court correctly

26 noted that a successful appeal would have benefitted the creditors other than

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4 In its tentative order, the Bankruptcy Court mistakenly noted that Attorney Kay sought approval of

28 $153,854.13 in fees. (Tentative re Fees, EOR 603; cf. Fees Order at 2 (summarizing fees sought and

1 Appellants in that, in light of the assets of the estate, those creditors’ recovery rate

2 would have been 100%. (See Tentative re Fees, EOR 604.) Yet at the hearing,

3 discussing not only Attorney Kay’s fees applications but also SWE’s, the Bankruptcy

4 Court also alluded to counsel’s responsibility to exercise billing judgment, clearly

5 expressing concern that reasonable billing judgment was not exercised in this case:

6 You are urging me to say it’s all a question of it was not

7 reasonably calculated to lead to any benefit to Creditors. Well, it sort of

8 was. The problem was, and what you’re really saying is, is too expensive

9 for that goal. Way too expensive by a factor of 20 times. And that’s

10 undeniably true.

11 (Oct. 31, 2018 Tr. at 21 (emphasis added).)

12 The question currently before this Court is whether the Bankruptcy Court

13 abused its discretion in its implicit finding that the appeal was likely to benefit the

14 estate and that Attorney Kay exercised reasonable billing judgment. On the one hand,

15 viewed objectively, the chance of a successful appeal was very low.

16 Three of four of Dr. Liu’s issues on appeal challenged the sufficiency of the

17 evidence. (See Ct. App. Op. at 4.) A party “raising a claim of insufficiency of the

18 evidence assumes a daunting burden.” Whiteley v. Philip Morris Inc., 117 Cal. App.

19 4th 635, 678 (2004) (internal quotation marks omitted); see also In re Michael G., 203

20 Cal. App. 4th 580, 589 (2012) (“The substantial evidence standard of review is

21 generally considered the most difficult standard of review to meet, as it should be,

22 because it is not the function of the reviewing court to determine the facts.”).

23 Dr. Liu’s final issue involved liability apportionment, wherein Dr. Liu argued that

24 certain corrections and clarifications made by the trial court to the amount of the

25 judgment obviated the imposition of joint tort liability for economic damages. (See

26 Ct. App. Op. at 12-16.) Joint tort liability has ancient roots and, although California

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1 tort reform has adjusted the doctrine as to non-economic damages, this ancient

2 doctrine remains unchanged as to economic damages. See Grundel v. Union Iron

3 Works, 127 Cal. 438, 440 (1900) (citing case law from as early as 1806); Aluma Sys.

4 Concrete Constr. of California v. Nibbi Bros. Inc., 2 Cal. App. 5th 620, 625 (Ct. App.

5 2016) (“[T]ort law provides for the joint liability of all tortfeasors, regardless of their

6 respective shares of fault, with respect to all objectively provable expenses and

7 monetary losses”) (internal quotation marks omitted).

8 The Court of Appeals easily resolved the sufficiency of the evidence arguments

9 and the joint and several liability question. The trial court’s corrections to the amount

10 of judgment were characterized as corrections meant to remedy clerical errors, which

11 are permissible, even where an appeal is pending. Indeed, there was no alteration to

12 the jury’s verdict, only clarifications by the trial court as to the amount of judgment

13 enforceable against Dr. Liu, as calculated by operation of California law. Thus, the

14 appeal was ultimately unsuccessful.

15 On the other hand, a successful appeal would yield a big payoff, adding more

16 than $6,000,000 to the value of the estate. All other things being equal, the bigger the

17 potential payoff, the more reasonable it is to expend fees in pursuit of that payoff.

18 Thus, viewed in this context, the Court finds no abuse of discretion in the award

19 of fees for services incurred in Attorney Kay’s pursuit of the appeal, at least up to a

20 certain point. The Court identifies that point as the decision to pursue a petition for

21 rehearing, which had a near-zero chance of success.

22 Specifically, the Court of Appeals issued its opinion on May 15, 2018, and

23 Attorney Kay shortly thereafter filed a petition for rehearing. (See Doc. 24 at 127-

24 170, RJN (Liu Pet’n for Rehr’g).) Rehearing is generally granted only when there is

25 an error in the decision “where correction would likely produce either a different

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5 Although non-economic damages are not imposed jointly after Proposition 51 was passed in 1986,

27 imposition of joint and several tort liability for economic damages remains unchanged. “Thus, in an

action subject to Proposition 51, each tortfeasor remains jointly and severally liable to the plaintiff

28 for economic damages, but is liable to the plaintiff for only its proportionate share of noneconomic

1 result or a different meaning.” Alameda County Mgmt. Employees Ass’n v. Sup. Ct.,

2 195 Cal.App.4th 325, 338 n.10 (2011). A leading treatise warns: “As a practical

3 matter, rehearings are rarely granted” and that “cost concerns may militate against

4 pursuing a rehearing on tenuous grounds.” Rutter Group, Cal. Prac. Guide Civ. App.

5 & Writs, §§ 12:31 & 12:36.

6 The petition for rehearing filed after Dr. Liu lost his appeal does not come close

7 to meeting the relevant standard. It again discusses at length the sufficiency of the

8 medical evidence regarding Dr. Liu’s negligence, but the Court of Appeal thoroughly

9 addressed the evidence supporting the jury’s verdict as to Dr. Liu’s negligence.

10 (Compare Pet. for Rehr’g at 11-27 with Ct. App. Op. at 4-8.) Thus, given the high

11 standard for rehearing that is “rarely” met, and layering upon that high standard the

12 “daunting burden” of prevailing on a sufficiency-of-the-evidence argument, given the

13 record already considered by the Court of Appeal, continuing to pursue sufficiency-of-

14 the-evidence arguments on the medical issues in the petition for rehearing was an

15 unreasonable expenditure of the funds of the estate. The same is true for the

16 sufficiency-of-the-evidence argument regarding the decedent’s likely future earnings.

17 (Compare Pet. for Rehr’g at 33-36 with Ct. App. Op. at 10-12.)

18 Similarly, the jury instruction argument was clearly unlikely to benefit the

19 estate. Attorney Kay argued that the trial court should have instructed the jury based

20 on the more general future damages provision of California Civil Code § 3283 (which

21 requires that future damages be “certain to result”) rather than instructing the jury

22 using the wrongful death damages pattern instruction, which imposes a lesser

23 requirement. See Judicial Council of California Civil Jury Instructions (“CACI”)

24 § 3921 Wrongful Death (Death of an Adult). This argument was rejected by the Court

25 of Appeal on the theory that the more specific wrongful death measure of damages

26 was applicable. (Ct. App. Op. at 8-10.) This conclusion was not error, and therefore

27 continuing to pursue this argument on a petition for rehearing lacked reasonable

28 billing judgment.

1 Finally, the arguments seeking rehearing on the issue of the amount of the

2 judgment also lack billing judgment. The trial court clarified the amount of judgment,

3 properly characterizing any earlier ambiguities as “clerical errors.” A trial court is

4 permitted to correct clerical errors even after an appeal is filed. See Hennefer v.

5 Butcher, 182 Cal. App. 3d 492, 506 (Ct. App. 1986). The amount of the judgment

6 ultimately calculated by the trial court was simply that required by operation of well-

7 established California law.

8 In short, the petition for rehearing does not identify any deficiency in the Court

9 of Appeal opinion that might justify amendment or rehearing. Instead, the petition

10 amounted to a mere rehashing of the issues already decided. Viewed from the

11 perspective of the potential benefit to the estate, continued pursuit of the appeal after

12 the Court of Appeal issued its opinion on May 15, 2018 was of little to no benefit to

13 the estate and—because that would have been obvious to a reasonable attorney at the

14 time the services were rendered—showed unreasonable billing judgment. It was an

15 abuse of discretion for the Bankruptcy Court to decide otherwise.

16 B. Unlawful Fee-Sharing Arrangement

17 Appellants also contend no fees should be awarded because Attorney Kay

18 entered into an unlawful fee-sharing agreement with another attorney who was

19 awarded fees in this case. (Opening Br. at 30-31.) This fee was disclosed to the

20 Bankruptcy Court in the Debtor in Possession’s Application to Employ David A. Kay

21 as Special Counsel. (BK. Doc. 20 at 4.) Specifically, the Application to Employ,

22 filed by Lei Lei Ekvall and Robert S. Marticello of SWE, disclosed Attorney Kay’s

23 terms of employment as including a referral fee to David Rosenberg: “4. Referral Fee.

24 The terms of Mr. Kay’s employment include a referral fee to David Rosenberg of 15%

25 of all sums paid for attorneys’ fees.” (Id.)

26 The unlawful nature of this fee-sharing agreement could not be any clearer:

27 Fees by attorneys that are subject to approval by the Bankruptcy Court may not be

28 subject to a fee-sharing agreement. Subject to exceptions not implicated here, the

1 Bankruptcy Code prohibits “a person receiving compensation or reimbursement under

2 section 503(b)(2)” (which incorporates by reference § 330) from “shar[ing] or

3 agree[ing] to share” the “compensation or reimbursement with another person.” 11

4 U.S.C. § 504(a). Both the payment of and receipt of shared fees are prohibited, as are

5 any agreements to pay them or receive them. Id.

6 Therefore, it was unlawful for Attorney Kay to agree to share fees with

7 Attorney Rosenberg, and it was unlawful for Attorney Rosenberg to agree to receive

8 them. This arrangement was not excused or otherwise made lawful or acceptable

9 because it was disclosed in the Application to Employ filed with the Bankruptcy

10 Court, or by the Bankruptcy Court’s approval of Attorney Kay’s employment.

11 The Bankruptcy Court stated at the hearing that its reduction to the fees

12 awarded to Attorney Kay in the “arbitrary” amount of $9,000 was to “make a point

13 regarding” the unlawful fee-sharing arrangement. (Tr. at 3-4.) Given the clearly

14 unlawful nature of this fee-sharing arrangement, a failure to disallow at least 15% of

15 the entire fee award—the amount subject to the unlawful fee-sharing agreement—was

16 an abuse of discretion.

17 Therefore, the Court AFFIRMS IN PART and VACATES IN PART the fee

18 award as to Attorney Kay. Specifically, the Court holds that the award of fees in

19 excess of $73,060.69 was an abuse of discretion, calculated as follows:

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Total Fees Requested (See BK Doc. 644) $104,227.50

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Less: Fees Incurred After Court of Appeals Opinion (See BK

22 Doc. 557) ($18,273.75)

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Subtotal: $85,953.75

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Less: 15% of Fees Subject to Unlawful Fee-Sharing Agreement ($12,893.06)

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Total: $73,060.69

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27 The Court also VACATES the award of costs associated with the court filing

28 fees in June 2018. (See Doc. 557 at 7 ($738.80).)

1 IV. Abuse of Discretion Based on Application of the Wrong Legal Standard

2 As explained further below, the Court reverses (or reverses in part) the fees

3 award as to RSZ and SWE because the Bankruptcy Court applied the wrong legal

4 standard. Specifically, the Bankruptcy Court’s ruling was based (at least in part) on

5 the erroneous belief that for fees to be disallowed as benefitting the debtor rather than

6 the estate, the services provided must benefit only the debtor. (See EOR 594,

7 Tentative re Fees (“The court is aware of the case law cited above that says efforts

8 solely benefitting a debtor as opposed to his creditors is not compensable.”) (emphasis

9 in the original); id. at 591 (citing Horizon Ridge); Oct. 31, 2018 Tr. at 10 (“A million

10 dollars in fees to advance the interests of $30,000 makes zero sense. So, you are then

11 left, I suggest, inalterably to the conclusion that a lot of this was really for the benefit

12 of Doctor Liu. That’s the problem. Unfortunately, I don’t think the law gives me a

13 very good road map as to what to do in such a situation. I think the standard is that

14 if it was only to benefit Doctor Liu, he’s got to pay for it and not his estate.”)

15 (emphasis added).)

16 The Bankruptcy Court’s conclusion is not without support, at least in dicta, but

17 such a standard is incompatible with a debtor in possession’s role as a fiduciary for the

18 estate. The Bankruptcy Court relied on Horizon Ridge, in which the BAP stated that

19 “[s]ome bankruptcy courts have denied compensation to attorneys for chapter 11

20 debtors based on a finding that the attorneys’ services primarily benefitted debtors

21 personally or their principals rather than the estate.” 2016 WL 742716 at *7

22 (emphasis added). After a string cite of examples, the Horizon Ridge court continued

23 by stating: “We agree that debtors’ attorneys may not be compensated by the estate

24 for services rendered entirely for the benefit of principals or other non-debtor parties,

25 because such services are not reasonably likely to benefit the debtor’s estate, because

26 such services are not reasonably likely to benefit the debtor’s estate.” Id. (emphasis

27 added) (internal quotation marks omitted). This passage tends to support the

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1 Bankruptcy’s Court’s conclusion regarding the “primarily” versus “entirely” (or

2 “solely”) distinction.

3 However, immediately following this discussion, the Horizon Ridge court

4 refocused on counsel’s duty to exercise reasonable billing judgment, viewed from the

5 perspective of the estate:

6 In exercising “reasonable billing judgment,” the first question an attorney

7 must consider is whether “the burden of the probable cost of legal

8 services [is] disproportionately large in relation to the size of the estate

9 and maximum probable recovery.” . . . Because the attorney is employed

10 by the estate, it necessarily follows that the attorney must consider the

11 “burden” and the “maximum probable recovery” to the estate.

12 Id. (emphasis in the original) (citation omitted). Thus, the relevant consideration in

13 the exercise of billing judgment of counsel representing a debtor in possession (or a

14 trustee) is always a comparison of the burden and the relevant benefit to the estate.

15 This consideration is incompatible with a standard that merely considers the benefit of

16 the estate in relation to the benefit to the debtor.

17 Any conclusion that fees could be paid so long as there is some small or

18 potential benefit to the estate—that is, that the fees may be awarded so long as the

19 services do not solely benefit the debtor—ignores important legal standards. Indeed,

20 such a conclusion would alter two important principles governing the predominant

21 issues before the Bankruptcy Court: (1) upholding the debtor in possession’s fiduciary

22 duty to the estate and (2) requiring the exercise of billing judgment.

23 First and foremost, such a conclusion is fundamentally incompatible with the

24 debtor in possession’s (and his counsel’s) fiduciary duty to the estate. As fiduciaries,

25 the debtor in possession and his counsel are never free to pursue the interests of the

26 debtor at the expense of the estate simply because there may still be some marginal or

27 ancillary benefit to the estate. See In re Perez, 30 F.3d at 1219 (“Under no

28 circumstances, . . . may the lawyer for a Bankruptcy estate pursue a course of action,

1 unless he [or she] has determined in good faith and as an exercise of his professional

2 judgment that the course complies with the Bankruptcy Code and serves the best

3 interests of the estate.”). Under this standard, the question for counsel is never

4 whether a particular course of action benefits only the debtor and not the estate, the

5 relevant question always includes an assessment of the relative burden to the estate in

6 light of the potential or likely benefit to the estate. Although an incidental benefit to

7 the debtor is not prohibited, pursuit of that incidental benefit cannot be permitted to

8 alter counsel’s duty to the estate.

9 Second, and relatedly, such a conclusion would ignore counsel’s duty to scale

10 back fees and use billing judgment based on the likely value to the estate rather than

11 to the debtor. There is no room in the standard applied by the Bankruptcy Court for

12 the three questions posed by the Ninth Circuit in Puget Sound. These three questions

13 require analysis of the relative burden to the estate measured against the probable

14 recovery, the extent and likelihood of benefit to the estate, and the cost or

15 consequences to the estate if the course of action is not pursued. See Puget Sound,

16 924 F.2d at 959.

17 Because the Bankruptcy Court applied the wrong legal standard, the Court

18 reverses and remands as set forth below.

19 V. Award of Fees to Rosenberg, Shpall & Zeigen, Special Counsel to the

20 Debtor in Possession

21 The law firm of Rosenberg, Shpall & Zeigen (“RSZ”), and more specifically,

22 Attorneys Rosenberg and Zeigen, represented Dr. Liu in his successful attempt to

23 retain his medical license. RSZ submitted two fee applications that were awarded by

24 the Bankruptcy Court in the Order subject to appeal here. (See BK Docs. 472 & 561.)

25 The fees awarded by the Bankruptcy Court were incurred for services from January 1,

26 2018 through July 30, 2018. (Compare BK Doc. 644 at 3 (ordering fees based on the

27 First and Second Interim Applications) with BK Doc. 472 at 5-10 (First Interim

28 Application covering January through March 2018) and BK Doc. 561 at 6-13 (Second

1 Interim Application covering April through July 2018).) Of the $106,001.25 in fees

2 sought, the Bankruptcy Court awarded $95,000, effectively disallowing $11,001.25.6

3 (See BK Doc. 644.)

4 In light of the application of the wrong legal standard, the Court VACATES the

5 portion of the Fees Order awarding fees to RSZ. The Court REMANDS the issue of

6 the appropriate amount of fees (if any) to the Bankruptcy Court. In determining the

7 appropriate amount of fees, consistent with § 330(a)(3)(C), the Court directs the

8 Bankruptcy Court to make specific findings and conclusions as to whether (and/or the

9 extent to which) the defense of Dr. Liu’s medical license benefitted the estate rather

10 than Dr. Liu at the time the services were rendered. Additionally, the Bankruptcy

11 Court is directed to make specific findings and conclusions as to whether counsel

12 exercised reasonable billing judgment in conformity with In re Mednet, Puget Sound,

13 and Auto Parts, including whether (and/or to what extent) counsel should have “scaled

14 back” their services based on the reasonably expected recovery to the estate. See Auto

15 Parts Club, Inc., 211 B.R. at 34.

16 In doing so, the Court directs the Bankruptcy Court to factor in the following:

17 1. January 1, 2018 through July 30, 2018 is the relevant time period for

18 determining whether the services were “beneficial at the time at which the service was

19 rendered” and whether RSZ complied with the duty to “scale back” their services.

20 (See BK Docs. 472 at 5-10 & 561 at 6-13.)

21 2. Dr. Liu was in his 70s at the time the defense of his medical license was

22 undertaken. (See Oct. 31, 2018 Tr. at 37.) Thus, it would not be reasonable to assume

23 Dr. Liu would continue to practice medicine for many years into the future.

24

25

26 6 The Bankruptcy Court’s tentative ruling outlined a “combin[ation of] issues” that justified the

disallowance of a total of $11,001.25. (See Tentative re Fees, EOR 602.) These included RSZ’s

27 wholesale failure to disclose the fee-sharing agreement with Attorney Kay, the fact that defense of

Dr. Liu’s medical license issue was of more benefit to Dr. Liu than to the estate, and the fact that Dr.

28 Liu earned relatively little from his medical practice during the pendency of the bankruptcy. (See id.

1 3. All of Dr. Liu’s Proposed Chapter 11 Plans, including the original Plan

2 filed on April 25, 2017 (well before the relevant time period referred to above),

3 contemplated liquidation of the estate. (See BK Docs. 264, 277, 305, 385 & 417; cf.

4 Oct. 31, 2018 Tr. 36 (“I don’t accept that your proposition that this case was

5 obviously always a liquidation case. It’s true that that was the plan ended up getting

6 filed.”); Tentative re Fees, EOR 601 (“[W]hen the case started . . . , the possibility of

7 an earn-out approach did not seem entirely unlikely.”).)

8 4. All of Dr. Liu’s Proposed Plans claimed the medical practice as an

9 exempt asset. (See BK Doc. 277 Ex. 1; BK Doc. 305 Ex. 1.)7

10 5. The record lacks any reliable valuation of the medical practice as a going

11 concern or a saleable asset. The Stake Report (Doc. 22-2 at 187-217) expressly

12 disclaims its use as a business valuation. Indeed, in providing the $96,000 figure,

13 Stake sets forth in red type, highlighted in yellow, that it is “NOT A BUSINESS

14 VALUATION.”8 (Doc. 22-2 at 215.) Similarly, the Biggs report sets forth no

15 analysis or explanation supporting the conclusion that the medical practice should be

16 valued somewhere between the $5,000 to $10,000 range. (BK Doc. 425

17 (characterizing the value of the medical practice as “nominal”).)

18 6. The record lacks evidence to support the assumption that the practice

19 would have been unsaleable without a licensed doctor—presumably Dr. Liu—at the

20 helm. (Cf. Oct. 31, 2018 Tr. at 42 (“THE COURT: And the practice would have been

21 unsaleable without a licensed M.D.? MS. WANG-EKVALL: Correct. I would think

22 so.”).)

23 7. Dr. Liu’s gross revenues dropped by more than half shortly after he filed

24 bankruptcy. Specifically, in 2014 and 2015, before he filed bankruptcy, Dr. Liu’s

25

7 Exhibit 1 is not attached to the Second through Fourth Amended Plans, but the changes to those

26 Proposed Plans do not suggest an intention to remove the medical practice from the list of exempt

assets.

27 8 In the text, Stake also expressly acknowledges he was not engaged to provide a proper business

evaluation. He states: “If requested, I will prepare a formal business valuation which may or may

28 not arrive at a conclusion of value similar to the estimate presented in this declaration.” (Stake

1 practice reportedly grossed $263,708 and $268,649, respectively. (See BK Doc. 50 at

2 32-33, Debtor’s Form 107 (Stmt. Fin. Affairs) (filed on May 18, 2016).) For January

3 1, 2016 through April 13, 2016 Dr. Liu reported his gross revenue as only $39,203.00.

4 (Id.) This is approximately $11,200 per month, or $134,410 annually—approximately

5 half the gross revenue generated in the two previous years. This downward trend not

6 only continued, it worsened. Just a few days into the relevant time period regarding

7 RSZ’s fees, on January 5, 2018, the November 30, 2017 Operating Report was filed.

8 (BK Doc. 422.) It reported only $153,910.64 in cumulative post-petition gross

9 revenue for the nineteen-and-a-half-month period from the time of the filing of the

10 petition in mid-April of 2016 to November 30, 2017. (Id. at 14.) By the end of the

11 November 2017, the average gross revenue for the medical practice had dropped more

12 than another $3,000, to approximately $7,900 per month.

13 VI. Award of Fees and Costs to Smiley Wang-Ekvall, LLP, General Counsel

14 to Debtor in Possession

15 The Bankruptcy Court awarded $724,098.25 of the $774,098.25 sought by

16 SWE. (BK Doc. 644). Of the disallowed $50,000, three categories of reductions are

17 detailed in the tentative, totaling $23,551. (EOR 591-97, Tentative re Fees ($5,000 for

18 administrative tasks, $3,551 for pleadings never filed, and $15,000 related to filing

19 applications for employment for other counsel).)9

20 In making the award, the Bankruptcy Court acknowledged Appellants’

21 argument that the services benefitted only Dr. Liu individually or his spouse, and not

22 the estate and creditors. (Id. at EOR 592.) And it noted that “the total of over $1

23 million is eye-watering,” and that it was “particularly [so] when one considers that the

24 total [of the claims] of all . . . unsecured creditors [other than Appellant is] only about

25 $30,000.” (Id.)

26

27

9 As set forth below, the Court vacates and remands the issue regarding fees for the administrative

28 tasks. The Bankruptcy Court’s deductions to the fees sought for pleadings never filed and related to

1 As set forth below, the Court AFFIRMS in part, VACATES in part, and

2 REMANDS in part.

3 A. Administrative Tasks Billed at Attorney Rates

4 Apparently agreeing with Appellant’s arguments that SWE billed attorney

5 hourly rates (ranging from approximately $370 to over $600 per hour) for paralegal

6 work, the Bankruptcy Court made an “arbitrary adjustment” of only $5,000 to SWE’s

7 fee request of approximately $159,967.50 for such administrative tasks. (Tentative re

8 Fees, EOR at 592-93.) Services rendered on behalf of the estate must be charged at an

9 appropriate rate. See 11 U.S.C. § 330(a)(3)(B) (requiring courts to consider “(B) the

10 rates charged for such services”). Appropriate rates are determined by practices and

11 rates in the community, including rates for paralegal services, which are different than

12 attorney rates. See Trustees of Const. Indus. & Laborers Health & Welfare Tr. v.

13 Redland Ins. Co., 460 F.3d 1253, 1257 (9th Cir. 2006) (“[F]ees for work performed by

14 non-attorneys such as paralegals may be billed separately, at market rates, if this is the

15 prevailing practice in a given community.”) (internal quotation marks omitted); In re

16 Music Merchants, Inc., 208 B.R. 944, 948 (B.A.P. 9th Cir. 1997) (affirming

17 bankruptcy court’s reduction in hourly rate where senior attorney performed work

18 more appropriately performed by a lower-paid professional, such as a paralegal or

19 junior associate). Separate billing for paralegal work is the prevailing practice in the

20 Central District of California. See, e.g., Gonzalez v. City of Maywood, 729 F.3d 1196,

21 1206-07 (9th Cir. 2013); Andrew Potter v. Big Text Trailer Mfg., Inc., No.

22 EDCV181678PSGKKX, 2020 WL 1942619, at *9 (C.D. Cal. Mar. 2, 2020); Vogel v.

23 Dolanotto, LLC, No. 216CV02488ODWKSX, 2018 WL 1684303, at *4 (C.D. Cal.

24 Apr. 5, 2018); Marcus v. Countrywide Home Loans, Inc., No. CV 17-950 PA

25 (FFMX), 2017 WL 11286023, at *7 (C.D. Cal. Oct. 13, 2017).

26 Here, the Court concludes that the Bankruptcy Court abused its discretion by

27 awarding fees for paralegal tasks at attorney rates, reducing the fee award only by an

28 arbitrary 3.125%. Therefore, the Court VACATES this part of the Fees Order, and

1 REMANDS the issue to the Bankruptcy Court with the instruction that it determine an

2 appropriate paralegal rate and to award fees for the 387.6 hours in this category

3 accordingly.

4 B. Adversary Proceeding and Motion for Derivative Standing

5 Appellants sued Dr. Liu’s wife in an adversary proceeding in light of her claim

6 that certain property was her separate property, and therefore excluded from Dr. Liu’s

7 individual bankruptcy estate. (See AP Doc. 1 (Complaint).) The trial on the matter

8 resulted in significant assets becoming part of the estate. (See AP Doc. 224

9 (Judgment).) SWE expended 93 hours ($52,381) in filing two motions to dismiss, an

10 answer, and a counterclaim. (Opening Br. at 28.) The Bankruptcy Court saw no basis

11 for adjustment and instead awarded all the fees sought by SWE in the adversary

12 proceeding. (See Tentative re Fees, EOR 593-94.) In doing so, the Bankruptcy Court

13 applied the erroneous legal standard discussed above, noting that only fees expended

14 “solely benefitting a debtor . . . [are] not compensable.” (Id. EOR 594 (emphasis in

15 the original).)

16 Given that the adversary action sought to marshal assets for the estate, and

17 given Mrs. Liu’s position that certain assets were her separate property (and thus, not

18 property of the estate), the defense of the adversary action was neither “necessary to

19 the administration of the case” nor “reasonably likely to benefit the debtor’s estate.”

20 11 U.S.C. § 330(a)(4). Although Dr. Liu may well have had a personal interest in

21 defending against the adversary action, the estate had no such interest.10 Thus,

22 awarding payment of counsel’s fees out of the estate was an abuse of discretion.

23 The same is true for the fees awarded in connection with opposing Appellants’

24 motion to be granted derivative standing, 14.90 hours for a total of $8,921.00.

25 (Opening Br. at 23.) By filing the motion, Appellants sought declaratory relief and

26 asserted a voidable transaction claim; essentially, Appellants sought derivative

27

28 10 Because these services benefitted only Dr. Liu, this award of fees would be an abuse of discretion

1 standing (on behalf of the estate) to assert a claim to void a preferential transfer of

2 property. (See generally BK Doc. 224 (Motion for Derivative Standing).) This

3 motion was filed in the main bankruptcy case, but it is clearly related to the adversary

4 action, seeking essentially the same relief as that sought in the adversary action

5 regarding Mrs. Liu’s claimed separate property. (See id.) By opposing derivative

6 standing, counsel were essentially defending Mrs. Liu’s position, which was contrary

7 to the interests of the estate. Therefore, awarding these fees out of the estate was an

8 abuse of discretion.

9 The Court therefore VACATES the award of fees as to defending against the

10 adversary action ($52,381) and opposing the derivative standing motion ($8,921.00).

11 C. Rule 2004 Examinations and Opposing Related Contempt Motion

12 Appellants object to 103.10 hours ($45,876) SWE spent opposing and attending

13 the Rule 2004 examination of Dr. and Mrs. Liu and on the related production of

14 documents. (See Opening Br. at 22.) Appellants also object to another 3.8 hours

15 ($2,123) that was spent opposing a motion for an order to show cause (“OSC”)

16 regarding contempt as to Mrs. Liu, who failed to appear for her examination. (Id. at

17 23.)

18 More specifically, Appellants contend the Rule 2004 documents should have

19 been produced voluntarily by the debtor in possession in keeping with his fiduciary

20 role. (Opening Br. at 22.) SWE counters that Appellants failed to confer before the

21 Rule 2004 examinations, leading to litigation regarding the examinations. (SWE

22 Resp. Br. at 17-18 & 49-51.) Relatedly, Appellants sought an OSC as to Mrs. Liu

23 based on her failure to appear for a Rule 2004 examination and failure to produce

24 documents. (BK Doc. 123.) The Bankruptcy Court denied the Motion, but it did so

25 on the basis of the failure to meet and confer regarding the Motion, along with a

26 general desire for counsel to get along and to work out routine matters. (See BK Doc.

27 151.)

28

1 These issues relate to the routine administration of the estate. As recognized by

2 the Bankruptcy Court, the parties took a more adversarial stance than was necessary,

3 leading to increased fees. Pointedly, the stance taken by Dr. Liu may have been more

4 adversary than that befitting a debtor in possession with a fiduciary obligation to the

5 estate; nevertheless, that adversarial stance on these two particular points arose at least

6 in part because Appellants’ counsel failed to follow Local Rules regarding meeting

7 and conferring.

8 Because there is a basis for the Bankruptcy Court to conclude that these fees

9 were incurred in performing services “necessary to the administration of the case,” 11

10 U.S.C. § 330(a)(4), the Court finds no abuse of discretion in awarding these fees, and

11 therefore AFFIRMS the Fees Order as to these categories of fees.

12 D. Automatic Stay Violation and Relief from the Automatic Stay

13 Appellants also challenge 18.30 hours ($10,222.50) that are related to

14 objections based on an automatic stay violation and opposing a motion for relief from

15 the automatic stay. (Opening Br. at 23.) These fees were incurred when Dr. Liu

16 sought relief from the automatic stay to enable him to file his appeal of the state court

17 malpractice judgment. (See SWE Resp. Br. at 52-54; BK Doc. 82.) There is no abuse

18 of discretion and the Court AFFIRMS this portion of the Fees Order.

19 E. Debtor’s Proposed Plans

20 Appellants oppose approximately $351,000 in fees incurred in connection with

21 Dr. Liu’s five Proposed Plans, including numerous extensions of time sought by

22 Dr. Liu. (See Opening Br. at 23-24; cf. EOR at 594-95.) Ultimately, the Bankruptcy

23 Court affirmed a plan submitted by the Judgment Creditors. Nevertheless, the

24 Bankruptcy Court noted that the Debtor’s plan came close to being approved, and the

25 Judgment Creditors’ Plan was confirmed after they proposed a term that Debtor could

26 not propose. (See SWE Resp. Br. at 41 (referring to Appellants’ agreement to

27 subordinate their claim to other unsecured creditors’ claims).) For that reason, except

28

1 for the separate issue discussed in the next section, the Court AFFIRMS the Fees

2 Order as to this category of fees.

3 F. Absolute Priority Rule and Defensive Appellate Rights as Property

4 of the Estate

5 The Bankruptcy Court required the parties to brief whether Dr. Liu’s Fourth

6 Amended Proposed Plan ran afoul of the absolute priority rule of 11 U.S.C.

7 § 1129(b)(2). (See Opening Br. at 15-16, 24 & 26-27; Doc. 23-6 at 143-51 (SWE Ex.

8 56 (Mar. 28, 2018 Hr’g Tr.).) Because this proposal included Dr. Liu’s retention of

9 the right to control his appeal of the malpractice judgment, for the Bankruptcy Court

10 to confirm the Fourth Amended Proposed Plan, Dr. Liu had to convince it that

11 defensive appellate rights do not become property of the estate. (See Opening Br. at

12 15-16, 24 & 26-27.) The parties submitted additional briefing. (BK Docs. 494, 506 &

13 508.) SWE billed a total of 194.7 hours ($93,291) advancing this argument to defend

14 its Fourth Amended Proposed Plan.

15 At the time of the filing of Dr. Liu’s briefs on the subject, courts within the

16 Ninth Circuit had made clear that defensive appellate rights are property of the estate.

17 See In re Fridman, No. BAP CC-15-1151-FKIKU, 2016 WL 3961303 (B.A.P. 9th

18 Cir. July 15, 2016). In Fridman, in 2016, the BAP concluded that the sale of the right

19 to appeal a judgment against the debtors was an asset of the estate. 2016 WL 3961303

20 at *7. The BAP noted that “[t]he right to appeal a state court judgment is property that

21 is part of a debtor’s estate.” Id. In making its conclusion, the BAP relied on In re

22 McCarthy, In re Marciano, and In re Mozer. Id.

23 In In re McCarthy, BAP No. CC–07–1083–MoPaD, 2008 WL 8448338, at *16

24 (9th Cir. BAP Feb. 19, 2008), the BAP affirmed the bankruptcy court’s holding that

25 defensive appellate rights were property of the estate. In re Marciano held similarly,

26 analyzing California law and concluding that the right to appeal an adverse judgment

27 is a property right, and that the right becomes part of the bankruptcy estate. No. 1:11–

28 BK–10426–VK, 2012 WL 4369743, at *3 (C.D.Cal. Sept. 25, 2012). The court in In

1 re Mozer, 302 B.R. 892, 896 (C.D.Cal.2003) noted that “[t]he right to appeal is

2 valuable in nature and is the property of the bankruptcy estate under California's broad

3 concept of property rights.” The court therefore concluded that “all of the Debtors’

4 appellate rights, including the Defensive Appellate Rights, are saleable by the

5 Trustee.” Id. At the relevant time, at least two other Circuits had held similarly.11 In

6 re Croft, 737 F.3d 372, 377 (5th Cir. 2013) (“Croft’s defensive appellate rights are

7 property under Texas law, and became part of the estate when he filed for

8 bankruptcy.”); Martin v. Monumental Life Ins. Co., 240 F.3d 223, 232 (3d Cir. 2001)

9 (“The right to appeal is part of the debtors’ estates.”).

10 Although the Bankruptcy Court requested briefing on the subject, (see SWE

11 Resp. Br. at 13; Doc. 23-6 at 143-51, Mar. 28, 2018 Tr. at 28-31)), it was still up to

12 SWE to demonstrate reasonable billing judgment. In light of the clear and well-settled

13 case law on this topic, the expenditure of 194.70 hours of counsel’s time, for a total

14 bill of $93,291, to be charged to the estate, was a colossal waste of time and money.

15 Indeed, at the hearing on the fee award, the bankruptcy judge specifically asked the

16 United States Trustee to weigh in on the fees spent in pursuit of this case. (See Oct.

17 31, 2018 Tr. at 28.) When the dialogue turned to the issue of defensive appellate

18 rights, and the Trustee expressed disapproval of awarding fees nearing $100,000 for

19 briefing on this issue. (See id. at 32 (“I would say though on the issue of just the

20 Defensive Appellate Rights, I mean that’s an issue our office is very familiar with. I

21 don’t know how he gets $100,000.”) & 33 (“There’s no way you could get to

22 $100,000 on that.”).) The Trustee expressly referred to the Fridman and the Marciano

23 cases as establishing that defensive appellate rights become property of the estate. (Id.

24 at 32.)

25

26

11 Since then, the Ninth Circuit has joined these two Circuits, albeit in an unpublished case. See In

27 re Bouzaglou, No. 2:14-AP-01645-DS, 2018 WL 4062299, at *3 & n.4 (B.A.P. 9th Cir. Aug. 13,

2018) (noting that “Bouzaglou’s defensive appeal rights were property of his bankruptcy estate”),

28 aff'd, 803 F. App’x 147, 148 (9th Cir., May 1, 2020) (noting that the appellant had “chose[n] to file

1 The amount of time expended on this issue was grossly disproportionate to any

2 possible benefit to the estate, and counsel failed to demonstrate reasonable billing

3 ||judgment in spending nearly 200 hours advancing the argument. Therefore, the Court

4 ||concludes that it was an abuse of discretion to award the entire amount of fees sought

5 connection with this issue. The Court VACATES the Fees Order on this issue and

6 ||REMANDS for to the Bankruptcy Court to determine an amount of fees that would be

7 ||reasonable for briefing a single, straightforward legal issue.

8 || VIE Conclusion

9 As set forth above, the Court AFFIRMS IN PART, REVERSES IN PART, and

10 REMANDS IN PART.

11 IT IS SO ORDERED.

12 DATED: September 14, 2020 Sagl Al

13 _

14 The Hon. Josephine L. Staton

United States District Judge

BANKRUPTCY COURT; BAP

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