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Duke v. Walker & Patterson, P.C.

United States District Court, S.D. Texas, Houston Division

October 16, 2019

MARK L. DUKE, Appellant,
v.
WALKER & PATTERSON, P.C., Appellee.

          MEMORANDUM OPINION AND ORDER

          GEORGE C. HANKS JR. UNITED STATES DISTRICT JUDGE

         This is a bankruptcy appeal. The appellant, Mark Duke (“Duke”), is the owner and managing member of the bankruptcy debtor, Duke Investments, Ltd. (“DIL”).[1] Duke seeks to vacate an order of the bankruptcy court that, he argues, impermissibly ordered him to pay the attorney's fees of the appellee, Walker & Patterson (“WP”), which served as special litigation counsel during DIL's bankruptcy. The Court AFFIRMS the bankruptcy court's judgment.[2]

         I. BACKGROUND

         Duke formed DIL to acquire and develop oil and gas properties. About 15 years after founding DIL, Duke began looking for a new banker for DIL and was referred to Amegy Bank, N.A. (“Amegy”). Amegy entered into a loan agreement with Duke, who signed for DIL as the borrower and for himself individually as guarantor. Simultaneously with the loan agreement, Duke signed a derivative trading agreement with Amegy.

         The relationship soured, and Amegy eventually sued DIL and Duke in Texas state court and posted some of DIL's properties for foreclosure. DIL and Duke filed a separate lawsuit, also in Texas state court, to enjoin the foreclosure; and DIL filed a Chapter 11 bankruptcy petition. See Southern District of Texas bankruptcy case number 10-36556. Duke and DIL then sued Amegy in an adversary proceeding related to DIL's bankruptcy, alleging, among other things, that Amegy had breached both the loan agreement and the derivative trading agreement, causing damages to Duke and DIL and excusing Duke and DIL from performing under the contracts. See Southern District of Texas bankruptcy case number 10-03577 at Dkt. 1. Amegy countersued both Duke and DIL, alleging that Amegy had not breached either agreement and was therefore owed balances on both. See Southern District of Texas bankruptcy case number 10-03577 at Dkt. 21. The balances claimed by Amegy were substantial: Amegy filed a proof of claim in DIL's bankruptcy asserting a secured claim in the amount of $5, 259, 958.43. See Southern District of Texas bankruptcy case number 10-03577 at Dkt. 55-1.

         DIL filed an application with the bankruptcy court to retain WP as special counsel under a contingent-fee arrangement to prosecute the adversary proceeding brought by Duke and DIL against Amegy (Dkt. 2 at p. 26). The proposed contingent-fee agreement was submitted to the bankruptcy court for approval and was signed by Duke individually; by Duke as managing member of DIL; and by WP (Dkt. 2 at pp. 40-41). The proposed agreement included the following paragraph:

To the extent necessary, this Agreement will be submitted to the Bankruptcy Court having jurisdiction over the Client's bankruptcy proceedings for approval. If the Bankruptcy Court does not approve this Agreement then Attorney shall have the right to terminate this Agreement. Any dispute arising under or relating to this Agreement, or the performance of any party hereto, shall be submitted to the Bankruptcy Court for resolution.[3]

Dkt. 2 at pp. 40-41.

         The bankruptcy court modified the proposed contingent-fee agreement to include the condition that, if the only recovery by Duke and DIL in their battle against Amegy was a reduction in the amount they owed to Amegy, Duke alone-and explicitly not DIL-would pay WP's contingent fee and expenses:

In the event the final result of asserting all claims, counterclaims and defenses by [DIL] against Amegy in the [adversary proceeding], whether by settlement or a final judgment, is a reduction in the amount of [the secured claim asserted in Amegy's proof of claim] (whether by defense or setoff of affirmative claims or counterclaims), and not in any amount to be paid by Amegy to [DIL], then the contingency fee calculated on such reduction under the Contingency Fee Agreement shall be payable to WP solely by [Duke] and there shall be no claim against [DIL] for such contingency fee. Further, in such event, any expenses advanced by WP under the Contingency Fee Agreement for which it is entitled to recovery shall be payable solely by [Duke] and there shall be no claim against [DIL] for such amount. Dkt. 2 at p. 50.

         In other words, in the event that WP could claim a victory (and thus entitlement to a contingent fee) without actually bringing cash into the bankruptcy estate, the bankruptcy estate's assets and its other creditors would nevertheless be protected because the bankruptcy court had mandated a guarantee of WP's contingent fee from Duke, who as the owner and managing member of DIL had guaranteed DIL's debt to Amegy and was a party aligned with DIL in the adversary proceeding. There was no objection to the bankruptcy court's modification of the contingent-fee agreement, and the bankruptcy court approved the agreement as modified (Dkt. 2 at pp. 49-52). The modified agreement became a formal retention order of the bankruptcy court and was entered on the bankruptcy court's dockets in both DIL's bankruptcy and the adversary proceeding, again without objection (Dkt. 2 at pp. 49-52). See Southern District of Texas bankruptcy case number 10-36556 at Dkt. 178 and Southern District of Texas bankruptcy case number 10-03577 at Dkt. 90.

         The adversary proceeding in which WP represented Duke and DIL settled. See Southern District of Texas bankruptcy case number 10-36556 at Dkt. 206. The settlement required Amegy to amend its proof of claim to assert a secured claim in the amount of $4, 000, 000.00-a reduction in the secured claim of $1, 259, 958.43. See Southern District of Texas bankruptcy case number 10-36556 at Dkt. 199, pp. 3-4. Since the recovery to Duke and DIL took the form of a reduction in Amegy's secured claim, Duke-and Duke alone-owed WP a contingent fee of $503, 983.37; and WP filed an application for allowance of compensation in that amount (Dkt. 2 at pp. 53-63). To make sure that it was absolutely clear who had to pay the fee, Amegy filed a “limited objection” to WP's application in which Amegy expressed no reservations about the amount of fees claimed by WP but “d[id] object to [WP's] fees and expenses being paid from the [bankruptcy] estate” because, “pursuant to the terms of the [bankruptcy court's retention order] only Mark Duke is liable for payment of the fee award and the estate is not be [sic] liable for payment.” See Southern District of Texas bankruptcy case number 10-36556 at Dkt. 230, p. 2. There was no response to Amegy's objection, which was a correct reading of the retention order. The bankruptcy court signed a fee award order awarding a $503, 983.37 “contingency fee per order” and $3, 405.50 in expenses to WP; to address Amegy's concerns, the bankruptcy judge included a statement in the fee order that “[t]he Debtor-in-possession shall not be liable for the awarded compensation” (Dkt. 2 at p. 75). There was no objection to the fee order, and Duke did not appeal it.

         DIL's bankruptcy continued for five more years. See Southern District of Texas bankruptcy case number 10-36556 at Dkt. 438. During that time, WP unsuccessfully attempted to get Duke to pay the contingent fee by filing a motion for a writ of garnishment and an adversary complaint alleging fraudulent transfer of assets. See Southern District of Texas bankruptcy case number 10-36556 at Dkt. 387 and Dkt. 403. After DIL's bankruptcy closed, WP filed a motion under Federal Rule of Civil Procedure 60(a) asking the bankruptcy court to reopen the bankruptcy and correct its order awarding the contingent fee and expenses to WP (Dkt. 2 at pp. 76-79). Specifically, WP asked the bankruptcy court to “correct the Fee Order . . . to include the direct liability of Mr. Duke for the fees and expenses awarded” (Dkt. 2 at p. 78). Duke opposed the motion, arguing that the requested correction would constitute an impermissible substantive change to the bankruptcy court's original fee order (Dkt. 2 at p. 87). In Duke's view, the bankruptcy court's original fee order only provided “that DIL was not liable for [WP's] fees[.] The [bankruptcy court] was never requested to enter . . . an order against Duke, individually” (Dkt. 2 at p. 87).

         The bankruptcy judge understandably was quite unhappy with Duke's refusal to pay WP's fee. In light of the earlier proceedings, the judge was in utter disbelief that Duke could in good faith argue that the original fee order did not order him to pay WP. In response to a question from Duke's counsel ...


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