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In re Innkeepers of New Castle Inc.

decided: February 10, 1982.


Appeal from the United States District Court for the Southern District of Indiana, Indianapolis Division. No. 76-B-22 -- James E. Noland, Judge.

Before Cummings, Chief Judge, Fairchild, Senior Circuit Judge, and East, Senior District Judge.*fn*

Author: East

Claimant-appellant Robert J. Maley (Maley) appeals an order of the District Court entered in the above bankruptcy matter on December 11, 1980, which awarded attorney fees to Maley and another attorney in the undivided amount of $325,000, plus expenses, for services rendered in the defense of an action by the State of Indiana (State) seeking to condemn land and highway access owned by Innkeepers of New Castle, Inc. (Innkeepers).

Maley had entered into a contingent fee contract for his legal services with Innkeepers, but shortly before the condemnation action came to trial in state court, Innkeepers filed a petition in the District Court seeking rearrangement of its financial affairs pursuant to Chapter 11 of the Bankruptcy Act of 1898, 11 U.S.C. ยงยง 1 et seq. (1976) (Bankruptcy Act).*fn1 Thereafter Maley and the other attorney, Jim Cordes, successfully pursued the state court defense and recovered a substantial award for Innkeepers. Both Maley and Cordes perfected liens on the judgment in accordance with Indiana law.

The District Court refused either to give effect to the contingent fee contract or to enforce the liens, and instead set the attorney fees awards on a "reasonable fee" basis in accordance with bankruptcy law. We reverse in part, affirm in part, and remand.


The pertinent facts are undisputed and are best narrated in the following chronological order:

In July of 1966, Andrew and Lucille Tabor, husband and wife, were the owners of record of a 33.96 acre tract of land in Indiana which was bordered on the west for approximately 400 feet by State Road # 3 and on the south by a public road which intersected with State Road # 3. At that time, Andrew Tabor was the owner of the franchise for a Holiday Inn Motel which he contemplated constructing on a part of the 33.96 acre tract.

On July 8, 1966, Andrew Tabor, acting in the name of the Holiday Inn, applied to the Indiana State Highway Commission for a permit to construct a driveway entrance and exit onto State Road # 3 for the use of the then proposed motel. The Commission's Permit Engineer responded with a letter to Andrew Tabor dated November 29, 1966 which purported to deny the driveway application because of a proposed widening and limitation of access to State Road # 3 at that location. However, at that time no final plans had been formulated for any modification of State Road # 3.

On February 24, 1967, Innkeepers of New Castle, Inc. was incorporated under the laws of Indiana for the purpose of owning and operating a Holiday Inn Motel. The principal stockholders were the Tabors who owned seventy-eight percent of the outstanding stock. Andrew Tabor was the president-treasurer, and Lucille Tabor was the vice president.

The Highway Commission eventually formulated its plans to modify State Road # 3. On April 7, 1969, following fruitless negotiations, the State notified the Tabors by letter that it intended to condemn a narrow strip of land and all rights of access along the entire length of the western edge of the Tabors' tract bordering State Road # 3. The letter included an offer of $7,731 in compensation for the proposed condemnation. No separate offer of compensation was ever made to Innkeepers.

On May 31, 1969, the Tabors deeded to Innkeepers 4.82 acres out of their larger tract. Innkeepers' new tract had a frontage along the east side of State Road # 3 of approximately 350 feet. The part of the original tract retained by the Tabors assumed the form of a lazy-U, fronting State Road # 3 on the north and south legs of the U. The deed to Innkeepers was recorded on June 2, 1969. Financing for the Holiday Inn was obtained by Innkeepers, and construction was substantially completed by October of 1969.

On December 19, 1969, the State filed its condemnation action in the Circuit Court of Henry County. Although the State sought to condemn the entire 400 feet of frontage on State Road # 3, including the frontage within the tract previously deeded to Innkeepers, and although the condemnation action was intended to have the effect of depriving Innkeepers' Holiday Inn Motel of access to the road, Innkeepers was not named as a party to the action.

The Tabors retained Maley to represent them and orally agreed to a contingent fee contract at a rate of fifty percent of any net gain received above the State's original offer. This contract, however, was not reduced to writing until May 5, 1971.

Maley filed an appearance on behalf of the Tabors in January of 1970. In August of 1970, Innkeepers opened the Holiday Inn Motel for business under the management of the Tabors. The condemnation action proceeded to the appointment of appraisers by the court. Maley filed exceptions to the appraisers' report, requested a jury trial, and began extensive preparations for trial.

In April of 1971, Andrew Tabor, acting as president of Innkeepers, agreed that Maley would also represent Innkeepers in the condemnation action. This contingent fee contract between Innkeepers and Maley (Maley's fee contract) contained the same terms and conditions as the Tabor-Maley contract, except that no base amount would be deducted from any recovery since the State had made no prior offer to Innkeepers as an entity separate from the Tabors. Maley's fee contract, however, was not reduced to writing until January 5, 1976, and then by an addendum to the earlier dated Tabor-Maley contract.

On September 13, 1971, the court entered an ex parte order granting the State's motion to amend its complaint to join Innkeepers as a party defendant. Maley filed objections to the order on the grounds that it bypassed the statutory requirement that the State give the property owner ten days' written notice of the proposed condemnation along with an offer of compensation. After briefing and a hearing, Maley's objections were overruled.

Maley then obtained a change of venue to the Circuit Court in another county, and the cause was set for jury trial beginning January 5, 1976. However, before trial Maley successfully secured separate trials for the condemnation action against Innkeepers' tract and the action against the tract retained by the Tabors individually.

On January 16, 1976, the condemnation cause against the Tabors individually resulted in a judgment of just compensation and interest since the date of taking in the amount of $31,217.36. Maley was compensated for his services on behalf of the Tabors in accordance with the Tabor-Maley contingent fee contract.

During the pretrial proceedings in the action against Innkeepers, the State expounded its theory that Innkeepers was not damaged by the loss of access to State Road # 3 because access could be obtained by easement across the Tabors' land to the public road lying to the south. The legal issues involved included whether Innkeepers was entitled to an easement by necessity because its parcel was landlocked, whether Innkeepers was equitably estopped from asserting that its tract was landlocked since it knew of the proposed condemnation of access when it obtained the property and built the motel, and whether the State could pierce the corporate veil to show that Innkeepers was the alter ego of the Tabors.

Maley prevailed on these issues by obtaining, through a motion in limine, a bar to the State making any reference to the relationship between the Tabors and Innkeepers during the trial. The condemnation action against Innkeepers was set for jury trial on December 6, 1976. Just twenty-six days before trial, however, the cross-appellant here, Alexander Hamilton Life Insurance Company of America (Hamilton), filed a suit against Innkeepers to foreclose the construction financing mortgage on the Holiday Inn tract.

On November 17, 1976, Innkeepers responded by filing a petition in the District Court seeking rearrangement of its financial affairs pursuant to Chapter 11 of the Bankruptcy Act. The Bankruptcy Court permitted Innkeepers to retain possession of its assets and to operate the motel under court supervision. On that same date, the Bankruptcy Court authorized Innkeepers, as debtor in possession, to employ both Maley and a separate law firm on general retainer to provide representation in the bankruptcy proceedings.

On the day of trial, Innkeepers as debtor applied for and received authority to proceed with its litigation in the condemnation action.*fn2

On December 9, 1976, the two-day trial of the condemnation cause resulted in a jury award of $800,000 for the taking of Innkeepers' property and access to the highway. The state court entered a just compensation judgment for that amount, together with the amount of $335,254.79 accrued interest since the date of taking, for a total of $1,135,254.79.

Jim C. Cordes, an attorney at law, aided Maley as local counsel in the trial of the condemnation cause against the Tabors individually and has been compensated for his services in that trial. Cordes again performed local counsel services in the trial of the condemnation cause against Innkeepers at the request of Andrew Tabor, as president of Innkeepers. Maley and Cordes each entered their respective attorney's lien charges on the face of the judgment when it was entered.

On March 28, 1977, pursuant to an agreed entry, the Bankruptcy Court sequestered the proceeds of the just compensation judgment in favor of Innkeepers, ordering the proceeds of that judgment to be paid into the Bankruptcy Court and the priorities of the two mortgages be preserved. The order, however, ignored the perfected attorneys' lien charges.

Then followed some two and one-half years on appeal. The State appealed to the Indiana Court of Appeals resulting in a reversal of the just compensation judgment. Innkeepers appealed to the Indiana Supreme Court resulting on July 29, 1979 in the vacation of the decision of the Court of Appeals and the reinstatement of the state court's judgment of just compensation.

The clerk of the state court issued a check in the amount of $1,193,819.17 as partial payment of the just compensation judgment, payable to Maley, Cordes, and Innkeepers. On November 7, 1979, the Bankruptcy Court ordered that the check be endorsed by Maley and Cordes and delivered to Innkeepers, debtor in possession, to be deposited in a special account and then reinvested in certificates of deposit. That order specifically provided:

6. The asserted attorney liens of Robert J. Maley, Esq. and Jim C. Cordes, Esq., as aforesaid, attach to said proceeds to the same extent as if those said funds remained in the possession of the Clerk of the Circuit Court of Fayette County, Indiana.

(Emphasis supplied).

Thereafter Maley and Cordes each applied to the District Court for allowance of their respective attorney's liens.

Maley claimed a fee in an amount equal to fifty percent of the condemnation judgment plus the post-judgment accrued interest to date less the sum of $2,131, the mutually agreed upon amount of the State's offer to the Tabors allocable to the Innkeepers' tract, and arrived at a total claim of $668,734.83. Maley also claimed $5,505.62 for expenses and $8,875 for expert witness fees.

Cordes, who had no explicit fee agreement with Innkeepers, applied for a fee of $100,000 based upon the amount of time spent on the case, the services performed, the customary compensation for local counsel, and the amount of the recovery.

The District Court referred the determination of the fee claims to the Bankruptcy Court which held a full evidentiary hearing after notice to all parties. On July 29, 1980, the Bankruptcy Court returned its formal recommendations (Recommendations) to the District Court, recommending a repudiation of Maley's fee contract and an undivided award of attorney fees to Maley and Cordes of $325,000, less than one-half of the amount called for under Maley's fee contract. The Recommendations characterized the suggested fee award as a bankruptcy administrative expense, and directed that Maley ...

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