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In re Adam Aircraft Indus., Inc.

United States District Court, D. Colorado

July 6, 2015

JEFFREY A. WEINMAN, as Chapter 7 Trustee and ALLEN & VELLONE, P.C., Appellees

For George F. Adams, Jr., Appellant: Amanda Catherine Jokerst, David Christopher Fawley, LEAD ATTORNEYS, Montgomery Amatuzio Dusbabek Chase, LLP-Denver, Denver, CO.

For Jeffrey A. Weinman, as Chapter 7 Trustee, Allen & Vellone, P.C., Appellees: Shelly C. Thompson, LEAD ATTORNEY, Allen & Vellone, P.C., Denver, CO; Theodore James Hartl, LEAD ATTORNEY, Lindquist & Vennum, PLLP-Denver, Denver, CO.

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R. Brooke Jackson, United States District Judge.

George F. Adam, Jr. appeals from a bankruptcy court award of a partial contingent fee to the Trustee's special counsel notwithstanding that, in Mr. Adam's view, there was no " recovery" to the bankruptcy estate on which a contingent fee could be calculated. For the reasons set forth in this order, the judgment of the bankruptcy court is affirmed.


Mr. Adam was the founder and the largest common shareholder of Adam Aircraft Industries, Inc., a manufacturer of small aircraft. On February 15, 2008 Adams Aircraft filed a petition for bankruptcy under Chapter 7 of the Bankruptcy Code. Morgan Stanley Senior Funding, Inc. and Morgan Stanley & Co., LLC, on behalf of themselves and a consortium of other lenders (collectively " Morgan Stanley" ), were the largest secured creditors of the estate. Morgan Stanley also had substantial unsecured claims.

Asset Sale

A few months after the bankruptcy filing the Trustee, Jeffrey A. Weinman, sold the debtor's assets for $10 million cash in a single transaction. Initially the Trustee agreed that Morgan Stanley and the bankruptcy estate would divide the portion of the sales proceeds that was subject to Morgan Stanley's security interest, 91% to Morgan Stanley and 9% to the estate. R. 279-80.[1] The Trustee, apparently pursuant to that agreement and with the approval of the bankruptcy court, distributed $5,826,837.30 of the sale proceeds to Morgan Stanley. R. 70.

Investigation of Potential Claims against Morgan Stanley

Later the Trustee decided that he should investigate the validity of that he calls the " forced transfer" of those funds to Morgan Stanley as well as Morgan Stanley's conduct in the months leading up to the bankruptcy petition. He described the circumstances of this bankruptcy as unique in his experience (which includes serving as a trustee in more than 25,000 bankruptcy cases) because it involved the " sudden failure of a company that had been operating full bore just a month or so before and had obtained financing somewhat shortly before, in excess of $100 million, and then the secured lender's actions . . . effectively put it out of business." R. 276.

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In March 2010 the Trustee applied for the court's approval, pursuant to 11 U.S.C. § 327, to retain the Denver law firm of Allen & Vellone as Special Counsel to the Trustee for the purpose of investigating Morgan Stanley's conduct. R. 7-8.[2] Allen & Vellone is a firm with which Mr. Weinman has had a long association.[3] The fee was to be determined by the firm's hourly rates of $375 for Patrick D. Vellone, $285 for Mathew M. Wolf, $110 for law clerks and $100 for paralegals, subject to the court's ultimate review and approval. Id. The court approved the application on March 11, 2010. R. 16.

Over the next seven to eight months the law firm investigated potential claims against Morgan Stanley and billed for its services using the hourly rate schedule. The law firm determined that the estate did have viable causes of action, and the estate authorized the firm to file a complaint based on those claims. R. 17-18.

Modified Contingency Fee Agreement

According to both Mr. Vellone and the Trustee, the Trustee wanted the law firm to pursue the litigation solely on a contingency fee. R. 243, 260; 282. The Trustee's concern was that the litigation could be " hard and long and costly." R. 283. He claims that he did not anticipate an easy, quick settlement. Id. In any event, Mr. Vellone declined to take the case solely on a contingent basis, indicating that it was more risk than his law firm was willing to take. R. 243.

Nevertheless, according to Mr. Vellone, he did believe that the case offered sufficient potential to justify a blended hourly and contingent fee arrangement. R. 245. Ultimately, Mr. Vellone and the Trustee negotiated a Modified Contingency Fee Agreement. R.21. Under that Agreement the fee would be determined by a combination of 75% of the firm's normal hourly rates plus 15% of the " gross amount recovered" by the firm on behalf of the estate through settlement or trial. Id. The term " gross amount recovered" was defined to mean " the total amount recovered before any subtraction of expenses and disbursements, including any amount collected by virtue of trial or any settlement of the Matter prior to trial or any reduction in the Client's liability to the Defendants under the Bankruptcy Code." R. 21-22 (emphasis added).

Mr. Adam objected that the proposed modification was not in the best interest of the estate or its creditors. R. 34. He argued that the only change in circumstances was that the firm's investigation had revealed that the estate had meritorious claims. There was no suggestion that the estate could not continue to pay on an hourly rate basis. Although neither the Trustee nor the law firm had provided an estimate of the recovery, Mr. Adam suggested that it potentially could be in the tens of millions of dollars. He argued that there was no justification for permitting the firm to continue to bill hourly rates while also being allowed to participate in the recovery. R. 35-38.

Before the modified contingency agreement was considered by the bankruptcy court, and apparently because counsel was concerned about a possible statute of limitations problem, the law firm filed a lawsuit against Morgan Stanley in district court seeking damages for breach

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of contract. Jeffrey Weinman, as Chapter 7 Trustee for the Bankruptcy Estate of Adam Aircraft v. Morgan Stanley Senior Funding, Inc., Morgan Stanley & Co., Inc., No. 10-cv-2933-REB-KMT. The parties then began, for the first time, to explore possible settlement. Mr. Vellone focused primarily on Morgan Stanley's secured interest in the remaining money in the estate's bank account. However, a secondary concern voiced by the Trustee was that even if the estate could obtain a release of the secured claim, Morgan Stanley was still in a position potentially to get back through its unsecured claims everything they might give up by releasing the secured claim. R. 285-86. In any event, the initial settlement negotiations were unsuccessful. R. 285.

Meanwhile, Mr. Vellone decided that, because of certain liability releases in the contracts with Morgan Stanley, a better strategy would be to pursue claim subordination in the bankruptcy court. R. 247. On March 9, 2011 the law firm filed a voluntary notice of dismissal of the district court case and, on the same day, it filed an Adversary Complaint on behalf of the Trustee against Morgan Stanley in the bankruptcy court. R. 42.

In the Adversary Complaint the Trustee alleged that in early 2007 Morgan Stanley agreed to underwrite $120 million in financing for Adams Aircraft; then, after the company ceased negotiations with other prospective lenders, Morgan Stanley cut its commitment to $80 million, still taking a $4 million transaction fee; then, after taking substantial losses in the credit crisis that emerged in mid-2007, Morgan Stanley without cause served the company with a notice of default and froze approximately $40 million in the company's accounts, basically a ruse to get out of its commitment to Adams Aircraft. The Trustee alleged that Morgan Stanley's actions made it impossible for the company to continue to operate and forced it into bankruptcy. R. 46-55. The Trustee sought equitable subordination or disallowance of Morgan Stanley's secured and unsecured claims and remission to the estate of approximately $36 million that Morgan Stanley had been paid on the loan. R. 56-57.

On March 11, 2011, two days after the filing of the Adversary Complaint, the bankruptcy court heard argument on Mr. Adam's objection to the modified contingency fee agreement. Instead of ruling definitively one way or the other, the court decided to approve the fee agreement " at least for now . . . for purposes of allowing this case to go forward," adding that " if there is success" the court would deal with the fee issue then. R. 137.


No formal discovery was obtained in the adversary proceeding. Morgan Stanley filed a motion to dismiss under Rule 12(b), which was denied. In re Adam Aircraft Industries, Inc., 2012 WL 646273, at *5 (Bankr. D. Colo. Feb. 28, 2012). The Trustee and Morgan Stanley then negotiated a settlement. R.69-75.

In the Settlement Agreement the parties recited, as relevant here, (1) that Morgan Stanley had asserted secured claims totaling approximately $56.6 million on behalf itself and other lenders who participated in the Morgan Stanley loan; (2) that the Trustee had sold substantially all of the company's assets to a third party for a gross purchase price of $10 million; (3) that the Trustee had paid $5,826,837.30 to Morgan Stanley from those proceeds; (4) that, after deducting the Trustee's Carve-out Proceeds ($581,255.45) and certain other amounts ($910,824.25), the " Remaining Sales Proceeds" from the $10 million asset

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sale were $2,681,083.00; [4] (5) that Morgan Stanley had a secured interest in the Remaining Sales Proceeds; (6) that Morgan Stanley asserted an unsecured claim in whatever is not covered by its secured interest in the Remaining Sales Proceeds, including the " Trustee's Carve-Out Proceeds" and the " Trustee's Recovery Proceeds" (monies that the Trustee has recovered " by virtue of avoidance and similar actions" ); (7) that the bankruptcy court had determined that the City of Pueblo is entitled to a payment from the Remaining Sales Proceeds of $709,065.72 on a lien claim; [5] and (8) that the Trustee had commenced an Adversary Proceeding seeking, among other things, equitable subordination of Morgan Stanley's claims. R. 69-70. The settlement provided that Morgan Stanley would assign its secured claim to the Trustee and subordinate its unsecured claim to all other claims, and the Trustee would seek dismissal of the Adversary Proceeding and release Morgan Stanley from all other claims. R. 71-72.

In a motion to approve the settlement the Trustee stated that he believed that the value of the settlement to the bankruptcy estate was " at least $3,097,952.99." R. 63, P4.d. This was represented to be 91% of Morgan Stanley's secured claim in the Remaining Sales Proceeds plus 45.72% of Morgan Stanley's unsecured claim. R. 64.

Specifically, the value to the estate of the release of Morgan Stanley's secured claim was said to be $1,794,535.72, derived by deducting the Pueblo lien ($709,065.72) from the Remaining Sales Proceeds ($2,681,083.00) and multiplying by .91 (91%). The Trustee estimated that all unsecured claims totaled $111,000,000; that Morgan Stanley's unsecured claims totaled $50.7 million, or 45.72% of the total; and, therefore, that Morgan Stanley had a 45.72% interest in the sum of (1) $241,297.47, being the nine percent of the Remaining Sales Proceeds not covered by Morgan Stanley's security interest; (2) $581,255.45, being the " Trustee Carve-out Proceeds; " and (3) $2,028,316.00, being the " Trustee Recovery Proceeds." Thus, Morgan Stanley's unsecured claim totaled $1,303,417.27. The total savings was the sum of $1,303,417.27 and $1,794,535.72, i.e., $3,097,953.99.

According to Mr. Vellone, there were no objections to the settlement. R. 252. The bankruptcy court issued a brief order, in the form tendered by the Trustee, approving the settlement on July 3, 2012. R. 77.

Fee Application

On July 30, 2012 the law firm filed an application for approval of $538,085.95 in attorney's fees and $10,145.82 in costs. R. 78. The law firm represented that the hourly component of the requested fee award was $73,086.37. R. 84. It represented

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that the reduction it had achieved in the estate's liability to Morgan Stanley was $3,099,977.22, R. 82.[6] Fifteen percent of that number is $464,996.58. The sum of those two numbers is $538,082.95, a number $3.00 less than the fee requested.[7] The fee amounts to more than five times what the fee would have been at 100% of the law firm's normal hourly rates.

As for the Adversary Proceeding, Mr. Vellone insisted that he still believed that the Trustee's claims were meritorious. However, he characterized the litigation as uncertain, risky and expensive -- so much so that he gave it no monetary value. R. 65-66. Rather, " by causing Morgan Stanley to forego its secured and unsecured claims, any rights in all current and future estate assets, and assign its lien in the Reserve Fund to the Estate, the Estate will have achieved through this ...

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