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In re Black Diamond Mining Company, LLC

United States District Court, E.D. Kentucky, Southern Division, Pikeville

August 6, 2014

IRA J. GENSER, et al., Defendants. TAFT A. MCKINSTRY, Trustee of the BD Unsecured Creditors Trust, Plaintiff,


AMUL R. THAPAR, District Judge.

Using one word instead of another in a contract can make the difference between success and failure in litigation. So too can defining the word in a particular way. But equally weighty is the choice not to include or define a contractual term. As the present dispute over attorneys' fees makes clear, such an omission can upset a party's expectations when default state law gives meaning to undefined terms in a private agreement.


On the eve of filing a bankruptcy plan for the struggling Black Diamond Mining Company, LLC, the Trustee of the BD Unsecured Creditors Trust ("Trustee") signed a short but important contract. In this "Settlement Agreement, " the Trustee agreed to reimburse former restructuring specialists Ira Genser and Larry Tate, along with their employer Alvarez & Marsal North America, LLC ("A&M Parties"), for a portion of their attorneys' fees. R. 11-2 at 2. The reimbursement would occur over the course of a multi-step process: The parties would submit motions disputing fee calculations and then the bankruptcy judge would award a "reasonable" fee. Id. ¶ 3. There was just one hitch: The agreement did not define "reasonable."

This oversight proved problematic. Bankruptcy Judge Fulton issued an order interpreting the term "reasonably incurred attorneys' fees" as used in the Settlement Agreement to mean fees calculated using the "lodestar" approach common in federal law.[1] R. 1-2. Under this approach, Judge Fulton factored the customary billing rates of the A&M Parties' attorneys into one of the prongs of the lodestar test. Because the A&M Parties retained a Philadelphia-based law firm, Judge Fulton concluded that a fee based in part on these attorneys' customary Philadelphia-based billing rates was a "reasonable" fee. Id. at 7. The Trustee objected to that conclusion and came running to this Court, unhappy with the result of the deal she cut. The Trustee asked this Court to reinterpret the term "reasonable" in a manner that would limit the attorneys' fees that the A&M Parties could collect to amounts calculated using Kentucky-based billing rates. See R. 1.

Had the Trustee negotiated a more specific contract, she would not be in this unpleasant bind. But hindsight is 20/20. To resolve this fee litigation, the Court ordered supplemental briefing about how Kentucky courts calculate reasonable attorneys' fees. R. 38; R. 156. The Court also construed Judge Fulton's order as a proposed finding of fact and conclusion of law to review de novo. R. 218. Because Judge Fulton used federal law when interpreting the Settlement Agreement, his decision contains a legal error. But this error is slight: Under Kentucky law, trial courts have wide discretion to calculate a "reasonable" attorneys' fee award under a fee-shifting contract.


A federal district court reviews a bankruptcy court's proposed findings of fact and conclusions of law under a de novo standard. 28 U.S.C. § 157(c)(1); Waldman v. Stone, 698 F.3d 910, 917 (6th Cir. 2012). The Supreme Court recently applied this rule to a district court's review of bankruptcy court decisions on matters involving state law claims designated as "core" by the Bankruptcy Code. Exec. Benefits Ins. Agency v. Arkison, 134 S.Ct. 2165, 2173 (2014). These so-called Stern claims, the Arkison Court first acknowledged, implicate such fundamental state law "private rights" that they must be resolved by an Article III judge-not by a final judgment from a bankruptcy court. Id. at 2168 (citing Stern v. Marshall, 564 U.S. -, 131 S.Ct. 2594 (2011)). However, the Court decided that bankruptcy judges could issue proposed findings of fact and conclusions of law to resolve these Stern claims, just as they do for non-core claims involving state law. Id. at 2173. District courts must then review these proposed findings of fact and conclusions of law de novo before adopting them as final judgments. Id. at 2170. This process, the High Court held, cured any Constitutional defect associated with a bankruptcy court's ability to hear claims grounded in state law.

This Court previously held that the Trustee's claims against the A&M Parties involved "core" claims. Sergent v. McKinstry, 472 B.R. 387, 395 (Bankr. E.D. Ky. 2012). At that time, however, the Court did not determine whether these claims also implicated such "quintessential private rights" under state law such that an Article III judge must resolve them. Subsequently, the Court grew concerned that the claims originating from the Settlement Agreement were, in fact, matters of state law, which bankruptcy courts may not resolve. R. 20 at 10. Accordingly, this Court ultimately withdrew reference from the bankruptcy court over the attorneys' fees dispute. R. 22.

The Court's intuitions were proper: The Trustee's claims against A&M arising from the Settlement Agreement are matters of state contract law. Why? Because the Settlement Agreement is a contract between private parties, and contract interpretation is a matter of state law-even in a bankruptcy proceeding. In re Martin, 761 F.2d 1163, 1167-68 (6th Cir. 1985). The dispute over the meaning of terms in the Settlement Agreement is just that kind of "common law cause of action" that a bankruptcy court cannot unilaterally decide as part of a core proceeding. Stern, 131 S.Ct. at 2615.

But the A&M Parties protest any review of the bankruptcy court's decision, arguing that the Trustee waived any objection to paying the A&M Parties' counsel at their ordinary billing rate. R. 156 at 4-6. However, this argument lacks merit. The Trustee reserved her right to object to the A&M Parties' attorneys' customary billing rates at the start of the fee disputes with A&M. See Objection to Alvarez & Marsal, N.A., LLC, Ira Genser, and Larry Tate's Statement of Fees and Expenses Related to the Motion to Establish Amount of Adequate Security at 2 & n.1, In re Black Diamond Mining Co., LLC, No. 08-70066, (Bankr. E.D. Ky. 2009), ECF No. 1914. She exercised this right at the time that Judge Fulton made his decision on the fee calculation issue. See Transcript of Hearing Before the Honorable Thomas H. Fulton at 26-33, 49-50, In re Black Diamond Mining Co., LLC, No. 08-70066, (Bankr. E.D. Ky. 2009), ECF No. 2208 (objecting to Judge Fulton's decision to allow payment at Philadelphia rates and confirming that it will be a final and appealable order). And she restated that objection in her motion in this Court out of an abundance of caution. R. 1-3 at 2 n.1.

Accordingly, in the face of these multiple objections, and following Arkison, this Court reviews de novo Judge Fulton's conclusion: That the A&M Parties may collect fees based on their customary Philadelphia billing rates. See 28 U.S.C. § 157(c)(1); R. 30; R. 218.

I. The Bankruptcy Judge Erred by Interpreting the Settlement Agreement Using Federal Law.

Bankruptcy Judge Fulton concluded that the "reasonableness" of attorneys' fees awarded under the Settlement Agreement should be analyzed under the "lodestar" method typically used to "determine attorney fee awards in the Sixth Circuit." R. 1-2 at 2. Judge Fulton relied exclusively on federal ...

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