IN RE TRI-STATE ETHANOL COMPANY LLC

IRVIN HOYT, Bankruptcy Judge

The matter before the Court is the Second Interim Application for Allowance of Compensation and Reimbursement of Expenses filed by Woods, Fuller, Schultz Smith P.C. and the objection thereto filed by Tri-State Financial, L.L.C. This is a core proceeding under 28 U.S.C. § 157(b)(2). This Decision and accompanying order shall constitute the Court's findings and conclusions under Fed.Rs.Bankr. P. 7052 and 9014(c). As set forth below, the fees requested under the Second Interim Application will be awarded. The Amended Memorandum Re: Several Pending Matters entered May 2, 2007, and the order entered with the original memorandum on April 18, 2007; the letter decision and order entered May 2, 2007, on Tri-State Financial, L.L.C.'s motions for reconsideration; the Second Interim Decision Re: Woods Fuller's Second Interim Application for Fees and order entered July 10, 2007; and the letter decision and order entered July 10, 2007, on Tri-State Financial, L.L.C.'s Motion to Disqualify Woods, Fuller, Schultz Smith as Attorneys for Trustee are incorporated herein by reference.

I.

Tri-State Ethanol Company LLC ("Tri-State Ethanol" or "Debtor") filed a Chapter 11 petition in bankruptcy on May 23, 2003. Debtor was authorized to employ Woods, Fuller, Schultz Smith P.C. ("Woods Fuller") as special counsel to represent Debtor in "various litigation, both as Plaintiff and Defendant involved with the construction of Debtor's [ethanol plant] . . .," as set forth in the employment application.

A plan was never confirmed. The case was converted to Chapter 7 on July 29, 2004. John S. Lovald was selected by the United States Trustee to serve as the case trustee.

On January 24, 2005, Woods Fuller filed a fee application for post-petition, pre-conversion services rendered for Debtor from May 27, 2003, through January 10, 2005. One objector lacked standing. The United States Trustee's objection was resolved by an agreed order. This fee order resolved proof of claim no. 395, which Woods Fuller had also filed on January 24, 2005.

On April 22, 2005, Trustee Lovald filed an application to employ Woods Fuller as Chapter 7 special counsel to deal with matters and claims associated with the ethanol plant construction and a subsequent explosion. In the application, Trustee Lovald acknowledged Woods Fuller's claim against the estate for pre-petition fees rendered Woods Fuller not disinterested but still employable under 11 U.S.C. § 327(e). No objections to this employment application were filed, and it was approved by Order entered May 5, 2005.

On January 6, 2006, Woods Fuller filed another fee application (captioned "First Interim . . ."). The firm sought total fees of $125,159.94 for services rendered and costs incurred, including sales tax, representing Trustee Lovald from July 30, 2004, through November 30, 2005. No objections were filed, and the application was approved by order entered February 1, 2006.

Woods Fuller filed its third fee application (captioned "Second Interim" and referenced as "second interim" herein) for services rendered for Trustee Lovald and related expenses incurred from December 5, 2005, through December 7, 2006. The total sought was $160,887.87, which included $147,534.00 for professional services, expenses of $4,619.86, and sales tax of $8,734.01.

The only objector to this fee application was Tri-State Financial, L.L.C. ("Tri-State Financial"). Tri-State Financial's objection contained an introductory paragraph, thirteen numbered paragraphs, and a prayer for relief. Numbered paragraphs 1, 2, 3, 4, 5, 6, 7, 8, 9, and 10 were factual recitations. In paragraph 11, Tri-State Financial argued,

[i]n the representation of [Trustee Lovald],[Woods Fuller] provided advice and services to the Trustee that are contrary to and in conflict with the advice and services that [Woods Fuller] had provided to [Tri-State Ethanol] as debtor and debtor-in-possession before and after the commencement of this case on 5/23/03.

In paragraph 12, Tri-State Financial argued,

To a large extent, the professional services of [Woods Fuller] were misdirected, often at [Tri-State Financial], and not focused on enhancing the estate for the benefit of creditors and holders of equity security interests. To a significant extent, but not exclusively, on account of this, the aggregate fees to date and the fees claimed in [Woods Fuller]'s Second Application for Fees and Expenses are unreasonable and excessive, the hours spent are unreasonable, unnecessary, and may sometimes be duplicative, and professional services for which the fees are claimed have often not benefit[t]ed the Chapter 7 estate. The efforts of [Woods Fuller] on major problems such as the claim of North Central Construction, Inc. ("NCC") and Gaylor Engineering ("Gaylor") have not enhanced the Chapter 7 estate, reduced unsupportable claims against the Chapter 7 estate, or, in other words, resulted in a sufficiently high degree of success so as to be commensurate with the amount of fees. Litigation was not brought at all or not timely brought by the Trustee against NCC or Gaylor. No objections to the claim of NCC identifying the Chapter 7 estate's defenses and/or counterclaims was ever filed by [Woods Fuller] on behalf of the Trustee and appropriate litigation was either never commenced (NCC and others) or not timely commenced (Gaylor Engineering). The litigation against Gaylor was belatedly filed by the Trustee and has appeared to encounter the defense by Gaylor that the litigation should be dismissed for failure to timely prosecute. Results commensurate with the fees have not been and are not identified in [Woods Fuller]'s Second Application for Fees and Expenses.

In paragraph 13, Tri-State Financial alternatively argued Woods Fuller's second interim fee application was "premature before the results of and by [Woods Fuller] are known."

Some bases for Tri-State Financial's objection to Woods Fuller's second interim fee application had been repeated in several of its other pending pleadings. Since Tri-State Financial had offered little or no case law in support for these legal arguments, the Court addressed them in an interim decision. In re Tri-State Ethanol Company LLC, Bankr. No. 03-10194, slip op. (Bankr. D.S.D. April 18, 2007, and amended May 2, 2007). Therein, the Court overruled Tri-State Financial's objection to Woods Fuller's second interim fee application (and other pending pleadings) to the extent Tri-State Financial had argued Woods Fuller was not eligible for employment under § 327(e) or may not be paid under §§ 328 or 330 because the firm was not disinterested, because the firm holds an interest adverse to the bankruptcy estate or Debtor, or because the firm counseled Trustee Lovald to settle the claim held by North Central Construction, Inc. ("North Central").

Two bases for the Tri-State Financial's objection to Woods Fuller's second interim fee application remain unresolved: (1) whether some post-conversion services failed to benefit the estate; and (2) whether some fees were unreasonable, excessive, or duplicative. The Court advised the parties an evidentiary hearing would be set on these issues after Trustee Lovald's proposed settlement with North Central was resolved. In the interim, the Court asked Tri-State Financial to file a supplement to its objection to "better identif[y] each entry to which it objects and [set] forth the specific reason for the objection to each entry."

Tri-State Financial filed a lengthy supplement to its objection on May 18, 2007. For the first time, it objected to the form of Woods Fuller's second interim fee application. Tri-State Financial then categorized Woods Fuller's services and set forth several objections to each category. Woods Fuller responded, arguing — in several ways — that Tri-State Financial's supplement had raised new objections and also repeated ones upon which the Court had already ruled, rather than fine-tuning the earlier, unresolved objections the Court had identified.

In a second interim decision entered July 10, 2007, the Court addressed each type of objection raised by Tri-State Financial in its supplemental objection and ruled several objections lacked legal support or were not supported by appropriate factual allegations. The Court concluded only one issue remained.

Tri-State Financial's second argument regarding duplicative services was that several entries related to discovery issues in general and privilege issues in particular were unnecessary or misguided. Though it was not abundantly clear, it appears Tri-State Financial believed Woods Fuller was, more than necessary, researching and writing memos regarding privileges Trustee Lovald could assert. An evidentiary hearing will be held on this objection, and this objection only.

In re Tri-State Financial LLC, Bankr. No. 03-10194, slip op. at 14 (Bankr. D.S.D. July 10, 2007).

On July 10, 2007, the Court also entered a decision and order regarding the unresolved issues under Tri-State Financial's motion to have Woods Fuller disqualified as counsel for the estate. In re Tri-State Ethanol Company LLC, Bankr. No. 03-10194, 2007 WL 2033344, slip op. (Bankr. D.S.D. July 10, 2007). This decision further addressed and resolved some of the conflict of interest issues Tri-State Financial had raised against Woods Fuller in several pleadings.

The evidentiary hearing on the remaining issue under Woods Fuller's second interim fee application was held August 23, 2007. The hearing was combined with the evidentiary hearing on Tri-State Financial's objection to Woods Fuller's proof of claim no. 261, which essentially encompassed pre-petition fees incurred by the firm.

Woods Fuller attorney William G. Taylor, Jr., testified about the work he and his team at the law firm had performed pre-petition for Tri-State Ethanol. He said he was brought in by his partner, Attorney Bradley C. Grossenburg, in August 2002 when construction problems at the ethanol plant arose with Gaylor Engineering and North Central and shortly after North Central had filed a mechanic's lien against the ethanol plant.

After the bankruptcy was filed, Attorney Taylor said he made himself available to the Chapter 11 debtor's counsel during the summer of 2003, primarily answering questions and giving opinions. Eventually, because the number of questions had increased, Attorney Taylor testified he asked to be formally employed by the Chapter 11 debtor so he would not be working for free. He said the employment application was approved and he continued doing work for the debtor-in-possession. Attorney Taylor said his firm's billing statements continued in the usual format, except they were edited when necessary to protect privileged information from appearing in the case file.

After the case converted to Chapter 7, Attorney Taylor said he was employed by Trustee Lovald to represent him and the bankruptcy estate regarding the construction-related matters. He said the firm's first interim fee application was approved without objection. Attorney Taylor identified the firm's second interim application as the present matter before the Court.

Attorney Taylor testified the format of the firm's billing materials showed, in narrative form, the work done by each attorney involved, the date of the work performed, the amount of time expended, the rate charged by that attorney, totals for time and charges, and an itemization for out-of-pocket expenses the firm had advanced during the term of the bill. On cross-examination, Attorney Taylor noted the format of the firm's billing statements had changed a bit when a new computer system was installed. He stated the format for identifying the client and the particular matter being addressed were altered. He did not give specifics except to say the firm now did not always assign a "matter" number.

As to Woods Fuller's legal work regarding issues related to privileges and discovery, Attorney Taylor reviewed when the issues were raised by Tri-State Financial. He relayed the importance his firm attributed to protecting privileged information related to Trustee Lovald's proposed settlement with North Central and the resolution of Gaylor Engineering's claim. He said they researched what the firm's responsibilities were to protect the privileged communications. Attorney Taylor testified the firm faced some time constraints in order to respond to document production requests by Tri-State Financial and scheduled depositions. He stated a team from the firm catalogued privileged documents and eventually, at the request of Jerrold L. Strasheim, counsel for Tri-State Financial, the firm prepared a privilege log. He said they then prepared a second privilege log after Attorney Strasheim indicated the first was not sufficiently detailed. Attorney Taylor testified this was all accomplished in about 35 days and involved principally two other attorneys, with some involvement by himself. Attorney Taylor stated each attorney kept time records for this work and submitted them to the firm's central billing; the billings then became a part of the computer printout included in the firm's second interim fee application. He said the hourly rates charged were as agreed under their employment application with Trustee Lovald.

Attorney Taylor said he was the team leader on the work performed for Trustee Lovald. He did not feel the team's discovery/privilege work was duplicative because the issues were vigorously disputed and resulted in three hearings. Attorney Taylor said efforts to resolve privilege matters with Tri-State Financial in a less onerous manner were unsuccessful. He said his preparation for the hearings on discovery/privilege issues was typical of what he would do for any such hearing; he said one attorney assisted him with preparation. He opined the time spent was appropriate to the circumstances.

On cross-examination of Attorney Taylor, Attorney Taylor and Attorney Strasheim sparred regarding their respective assessment of the federal rules and case law regarding privileges and their application to the circumstances presented. Colloquy followed on whether some entries in the fee application contained insufficiently itemized or "lumped" services and whether the second interim fee application on its own was sufficient to show no unnecessary duplicative services were knowingly included. In response, Attorney Taylor said he and one or two other members of the firm reviewed the entries in the fee application before it was submitted to insure the firm was not violating any attorney-client privilege issues and to assess the fairness and reasonableness of the services performed before the application was submitted. Attorney Taylor acknowledged that because they had worked as a team, there was invariably some duplication of effort, such as two people looking at a document, but he opined there was no duplication of services that was not fair and reasonable. When questioned why the fee application was not organized by topic, Attorney Taylor noted the firm had used the same format for its previous fee application and no one objected to it.

James G. Jandrain, an equity member and board of managers member of Tri-State Ethanol since 2001 and an equity member and board of managers member for Tri-State Financial since 2005, testified on behalf of Tri-State Financial. He said he never knew some legal bills from Woods Fuller were confidential. He also said he had not personally seen all the invoices while a board member for Tri-State Ethanol.

After Woods Fuller's case in chief regarding its second interim fee application, Tri-State Financial asked, and Woods Fuller agreed, that the evidence presented earlier in the day regarding Woods Fuller's proof of claim no. 261, in particular Attorney Grossenburg's testimony about the firm's hourly rates, also be considered a part of the record regarding Woods Fuller's second interim fee application. Tri-State Financial then requested a recess before presenting its case regarding Woods Fuller's second interim fee application. After the recess, however, it did not offer additional exhibits or testimony.

The Court was unable to discern the applicability of Attorney Grossenburg's testimony as to the unresolved issue regarding Woods Fuller's second interim fee application. The only remotely relevant exchange was when Attorney Grossenburg, in response to several questions from counsel for Tri-State Financial, stated his firm had discussed confidentiality matters with the clients.

Several joint exhibits were received. The majority were minutes from Tri-State Ethanol board of manager meetings held pre-petition. No testimony clearly addressed their relevance to the unresolved issues. From the minutes of May 5-6, 2003, the Court discerned some board of managers were not satisfied with Woods Fuller's performance. One set of minutes offered jointly was from a post-petition meeting held September 25, 2003, while Debtor was in Chapter 11. It referenced work Woods Fuller was doing regarding the construction litigation and the board's decision to present a refinancing/re-engineering agreement to the Bankruptcy Court for approval. A separate exhibit from Tri-State Financial was the Tri-State Ethanol board of manager minutes from May 18, 2002, where the board established a policy that payment for services "by anyone" would have to be approved by the board after a purchase order or itemized bill was submitted. None of the minutes offered in evidence were signed.

One joint exhibit was Woods Fuller's second interim fee application, which, of course, was already part of the record.

In its supplemental objection, paragraph 10, which in turn referenced portions of paragraph 6, Tri-State Financial listed numerous dates between August 31, 2006, and December 1, 2006, on which it believed unnecessary or duplicative services regarding privilege or other discovery services were rendered. Tri-State Financial, however, did not set forth, either in the supplemental objection or through evidence at the hearing, what in particular on those dates was objectionable. Tri-State Financial did present at the hearing an exhibit (Exhibit Q) it had prepared that listed certain dates between August 7, 2006 and December 4, 2006 and a set of initials [presumably of a professional or paraprofessional from Woods Fuller], a time, an hourly rate, and an "Amount" for each date. The exhibit also had a total at the bottom of $41,672.50. Foundation for the exhibit was limited. Though it apparently was a distillation of Tri-State Financial's objection to Woods Fuller's second interim fee application as it related to alleged duplicative or unnecessary services by the firm regarding privilege or other discovery issues, the dates did not consistently match those set forth in Tri-State Financial's supplemental objection. Also, in the exhibit, no allocation of time was made between the various services rendered on a date; the whole time was listed. From it, the Court could only presume Tri-State Financial was arguing Woods Fuller's second interim fee application should be reduced by $41,672.50 for unnecessary or duplicative services rendered by Woods Fuller regarding privileges or other discovery-related matters.

II.

Attorneys' fees paid from the bankruptcy estate. When an attorney is employed by a bankruptcy estate and renders services in connection with that employment, § 330(a)(1) of the Bankruptcy Code governs the awarding of fees to that attorney. Lamie v. United States Trustee, 540 U.S. 526, 529 (2004). To the extent fees are awarded under § 330, they are payable as an administrative expense under 11 U.S.C. § 503(b)(2).

The burden of proof rests on the fee applicant. Walton v. LaBarge (In re Clark), 223 F.3d 859, 863 (8th Cir. 2000). The applicant's standard of proof is a preponderance of the evidence. In re Birky, 296 B.R. 480, 484 (Bankr. C.D. Ill. 2003). An objector, however, may not merely allege general dissatisfaction with the results obtained, but must have evidence to support an argument that the applicant spent too much time. See In re Marlar, 315 B.R. 81, 86 (Bankr. W.D. Ark. 2004).

In this circuit, the lodestar approach is the appropriate method used in calculating reasonable compensation under § 330. Chamberlain v. Kula (In re Kula), 213 B.R. 729, 736 (B.A.P. 8th Cir. 1997) (cited in Stalnaker v. DLC, Ltd. (In re DLC, Ltd.), 295 B.R. 593, 608-09 (B.A.P. 8th Cir. 2003)).

The lodestar method is calculated as the number of hours reasonably expended multiplied by a reasonable hourly rate. [Kula, 213 B.R. at 736.] Determinations as to necessity, reasonableness, etc., involve questions of fact. The bankruptcy court's decision to award fees are reviewed for an abuse of discretion. Grunewaldt v. Mut. Life Ins. Co. (In re Coones Ranch, Inc.), 7 F.3d 740, 744 (8th Cir. 1993). Moreover, judges are justified in relying on their own knowledge of customary rates and experience concerning reasonable and proper fees, without the need for independent evidence. Bachman v. Pelofsky (In re Peterson), 251 B.R. 359, 365 (8th Cir. BAP 2000).

DLC, Ltd., 295 B.R. at 608-09. The lodestar figure presumably reflects many of the factors often referred to as the Johnson factors, including,

(1) the novelty and complexity of the issues, (2) the special skill and experience of counsel; (3) the quality of representation, and (4) the results obtained[.]

Kula, 213 B.R. at 738. Consequently, these factors cannot serve as independent bases for increasing a fee award above the lodestar amount. Pennsylvania v. Delaware Valley Citizens' Council for Clean Air, 478 U.S. 546, 564-65 (1986).

Fee awards to attorneys employed by a Chapter 7 trustee. As aptly stated in Henricksen v. Manty (In re Henricksen), 291 B.R. 833, 837 (B.A.P. 8th Cir. 2003), services by a Chapter 7 trustee's attorney are compensable when the services are measured, directed, and reasonable in all respects and if the time spent was necessary to the trustee's performance of statutory and fiduciary duties. The time spent by the attorney should be appropriate and commensurate with the complexity, importance, and nature of the problem, issue, or task at hand. Id. The rate charged should be reasonable, and the services should be directed toward completion of the case. Id.

As noted therein, that the "trustee's attorneys services must benefit the estate is an incorrect characterization of the standard. Section 330 contains no requirement that the attorneys' services benefit the estate." DLC, Ltd., 295 B.R. at 608. Instead, § 330(a)(3)(A) states:

In determining the amount of reasonable compensation to be awarded, the court shall consider the nature, the extent, and the value of such services, taking into account all relevant factors, including —

(A) the time spent on such services;

(B) the rates charged for such services;

(C) whether the services were necessary to the administration of, or beneficial at the time at which the service was rendered toward the completion of, a case under this title;

(D) whether the services were performed within a reasonable amount of time commensurate with the complexity, importance, and nature of the problem, issue, or task addressed; and

(E) whether the compensation is reasonable, based on the customary compensation charged by comparably skilled practitioners in cases other than cases under this title.

11 U.S.C. § 330(a)(3)(A).

The Appellate Panel has also noted difficult or unique cases can produce fee awards that are higher than normal. Id. Litigation expenses can "explode" when a trustee is "challenged . . . at every turn[.]" Id. In affirming the Bankruptcy Appellate Panel's decision in DLC, Ltd., the Court of Appeals noted:

The determination of reasonable compensation under section 330 includes accounting for factors such as hours reasonably expended, competitive hourly rates, and the necessity and benefit of the work to the completion of a case (not simply to the settlement of unsecured creditors' claims). 11 U.S.C. § 330(a)(3).

We do not find clear error in the bankruptcy court's determination that the trustee had a fiduciary obligation to pursue the fraudulent transfer claim, the trustee was met with opposition every step of the way, the trustee had valid claims to pursue for more than four years, his services were necessary, and the hourly rate and hours expended were reasonable.

Stalnaker v. DLC, Ltd., 376 F.3d 819, 825 (8th Cir. 2004).

Duplicative services. There is no per se rule in the Bankruptcy Code against compensation for multiple appearances by members of the applicant's firm or for intra-office conferences. See In re Marolf Dakota Farms Cheese, Inc., Bankr. No. 89-50045, slip op. at 8 (Bankr. D.S.D. Oct. 19, 1990). Instead, if compensation for more than one professional or paraprofessional is sought for the same service or for an inter-or intra-office conference, the applicant must show the multiple appearances were necessary and the fee charged for each professional or paraprofessional was reasonable. Id.

As noted in In re Robertson Companies, Inc., 123 B.R. 616 (Bankr. D.N.D. 1990),

[w]hile it is correct to say that where more than one attorney is involved in a project there exists a greater propensity to duplicate efforts, it also is correct that the mere employment of two or more professionals on the same project does not in and of itself necessarily make it duplicative. What may appear routine is not always so in the context and complexities of a particular case. In re Washington Mfg. Co., 101 B.R. 944, 954 (Bankr. M.D. Tenn. 1989).

Each of the attorneys involved apparently dealt with a particular aspect of the case and approached the particular project with an eye focused by his or her particular expertise; i.e., bankruptcy, tax, securities, employment law, corporate law, real estate. Many of the matters were handled on an expedited basis under short time constraints and although not resulting in protracted court time, did apparently necessitate considerable out of court negotiations.

Robertson Companies, 123 B.R. at 619.

Legal research. Time spent on legal research is not always necessary and compensable.

Counsel are presumed to be sufficiently experienced and to have an adequate background in the applicable law. In re Pettibone Corp., 74 B.R. [294, 303 (Bankr. N.D. Ill. 1987)]. This court does recognize that particular questions requiring research will arise and, where adequately documented, will be fully compensable.

In re Pothoven, 84 B.R. 579, 585 (Bankr. S.D. Iowa 1988).

Interim fees. During the administration of a bankruptcy estate, a professional employed under 11 U.S.C. § 327 may seek interim compensation. 11 U.S.C. § 331 and Fed.R.Bankr.P. 2016(a). The same standards set forth in § 330 and Rule 2016(a) apply. Id. The purpose of an interim compensation award is to alleviate the financial burden on certain estate professionals in long and complicated cases. Leichty v. Neary (In re Strand), 375 F.3d 854, 858 (9th Cir. 2004); Fokkena v. Byron (In re Hyman Freightways, Inc.), Bankr. No. 06-2607 (PAM), 2006 WL 3757972, slip op. at *2 (Bankr. D. Minn. Dec. 20, 2006) (citing In re Mansfield Tire Rubber Co., 19 B.R. 125, 127 (Bankr. N.D. Ohio 1981)).

III.

Based on the record presented, the Court concludes Woods Fuller did not render duplicative or otherwise unnecessary services for Trustee Lovald on privilege issues and other discovery-related matters. The itemization attached to the application and Attorney Taylor's testimony were the only evidence clearly directed to the issue. None of Attorney Taylor's testimony was disputed. Through its second interim application and Attorney Taylor's testimony, Woods Fuller showed, by a preponderance of the evidence, the necessity of more than one professional working on the discovery/privilege issues and why the firm's resulting fee was reasonable. See Marolf Dakota Farms Cheese, Bankr. No. 89-50045, slip op. at 8. Nothing in Tri-State Financial's supplemental objection, its Exhibit Q, or its cross-examination of Attorney Taylor provided any support for a different conclusion.

The case has been especially litigious; special counsel for Trustee Lovald (as well as counsel for Tri-State Financial) have had to deal with multiple pleadings and sometimes multiple courts at the same time. In light of these circumstances and the ensuing time constraints, it is clear the legal work performed by Woods Fuller for Trustee Lovald on the privilege and other discovery issues raised by Tri-State Financial was more than one attorney could handle. Moreover, the team approach utilized by Woods Fuller ensured a timely, high quality work product for Trustee Lovald. Accordingly, Tri-State Financial's objection that Woods Fuller billed the Chapter 7 estate for unnecessary or duplicative legal research and writing regarding privileges and other discovery issues will be overruled.

IV.

Several times during the August 23, 2007, evidentiary hearing, counsel for Tri-State Financial raised issues related to Woods Fuller's second interim fee application that had been addressed in earlier decisions. Though the Court, in response, advised counsel for Tri-State Financial that he could make an offer of proof as to the previously-addressed issues, Tri-State Financial did not do so.

The first time an offer of proof was discussed was mid-morning, at the close of an extended colloquy, which initially related to the admissibility of an unredacted billing statement by Woods Fuller and morphed into Tri-State Financial's raising some of the issues previously addressed by the Court. Attorney Strasheim, counsel for Tri-State Financial, advised the Court he wanted to offer the transcript of the hearing held December 18, 19, and 20, 2006, (Joint Exhibit 14, volumes I, II, and III) on Trustee Lovald's motion to approve his settlement with North Central. He said the transcript was being advanced to show Woods Fuller's services had no value because the firm had breached an alleged duty to Debtor and to show Woods Fuller should forfeit all fees because it had breached this alleged duty to Debtor. The Court advised Attorney Strasheim he could make an offer of proof regarding the previously resolved issues. Attorney Strasheim responded that he would do so during "his case."

Woods Fuller had made available for the hearing an unredacted version of its fee billing for services rendered and costs incurred between January 2000 through June 2003, the time-period covered within its proof of claim no. 261. In anticipation that Tri-State Financial would want the unredacted version of the statement admitted into evidence, Woods Fuller filed, shortly before the hearing, a motion to protect that exhibit from public view. Tri-State Financial did not consent to that.
Part of the extended colloquy regarding this exhibit was whether Woods Fuller had failed to timely provide it to Tri-State Financial under a discovery request. Woods Fuller advised the Court it had made the redacted version of the exhibit available to counsel for Tri-State Financial earlier in the year and, though Woods Fuller had anticipated Tri-State Financial would request the unredacted version, Tri-State Financial did not do so. In response, counsel for Tri-State Financial argued the Court had cut off its discovery attempts. The Court reminded counsel for Tri-State Financial that its earlier order regarding pending discovery matters (entered April 18, 2007) and the attendant decision (originally entered April 18, 2007, and amended on May 2, 2007) had invited renewed discovery motions if the parties were unable to resolve discovery disputes related to the unresolved issues under Woods Fuller's second interim fee application and its proof of claim no. 261 and that no such motions were ever filed.

Late morning, Attorney Strasheim again argued, during cross-examination of Attorney Taylor, that Woods Fuller should forfeit its fees because the firm had breached some continuing duty owed post-conversion to Tri-State Ethanol. When addressing an objection as to the relevancy of a question on that topic, counsel for Tri-State Financial argued Tri-State Ethanol was a viable entity, separate from Debtor, though it was in Chapter 7. The Court noted that issue had been resolved in a final order entered July 10, 2007, on Tri-State Financial's Motion to Disqualify Woods, Fuller, Schultz Smith as Attorneys for Trustee and that Tri-State Financial was "plowing old ground." It was also at this point that the Court advised counsel for Tri-State Financial a second time that he could make an offer of proof. In response, counsel for Tri-State Financial offered into evidence the transcript of the hearing held December 18, 19, and 20, 2006 (Joint Exhibit 14, volumes I, II, and III) on Trustee Lovald's motion to approve his settlement with North Central. A relevancy objection was sustained, and the transcripts were not admitted as evidence. Counsel for Tri-State Financial did not then make an offer of proof and explain the relevancy of the transcript in support of Tri-State Financial's argument that Woods Fuller should not be paid because the firm had violated some continuing duty owed to the post-conversion debtor.

Early in the afternoon, both parties rested as to evidence regarding Tri-State Financial's objection to Woods Fuller's proof of claim no. 261. The Court then recessed to allow Tri-State Financial to review the unredacted version of Woods Fuller's fee itemization. The hearing was reconvened, however, when the Court was advised the unredacted fee statement related only to the pre-petition fees under Woods Fuller's proof of claim no. 261. Attorney Strasheim, however, argued the unredacted version of Woods Fuller's fee statements was also relevant to Woods Fuller's second fee application under his theory that Woods Fuller had breached its duty (presumably to the post-conversion debtor). The Court again advised counsel he could make an offer of proof. Attorney Strasheim responded by offering the unredacted fee statements (Woods Fuller's Exhibit 2) into evidence. The Court refused because the unredacted version had not been shown to be relevant to the three unresolved issues under the two contested matters heard that day. Tri-State Financial again did not make an offer of proof.

Counsel stated he was offering the unredacted exhibit in support of Tri-State Financial's objection to Woods Fuller's proof of claim no. 261, not as to both contested matters heard that day, though he may have just misstated his intent. The Court directed Attorney Strasheim to destroy his copy; the Court kept a copy, at Tri-State Financial's request, for purposes of maintaining the record for any appeal. That action effectively resolved Woods Fuller's August 20, 2007, Motion for Entry of Protective Order.

The record reveals one other instance where Tri-State Financial verged on making a formal offer of proof. Early in the day, Attorney Strasheim asked Attorney Grossenburg if he had reviewed the contract between North Central and Tri-State Ethanol. Attorney Strasheim stated the purpose of the question was to review work the law firm had done and ascertain whether the law firm's contract had to be approved "by the board" [presumably Tri-State Ethanol's board of managers]. Attorney Strasheim then asked Attorney Grossenberg if this particular contract was a "defined-scope contract." The relevancy of this question was raised. In response, Attorney Strasheim stated he "would offer to prove, based on [Attorney Grossenburg's] last answer, that [Attorney Grossenburg] did not understand the meaning of defined scope. I'm about done, your honor." Attorney Strasheim then asked the witness a question on another subject. He did not explain how the "defined-scope" colloquy related to Tri-State Financial's objection to Woods Fuller's proof of claim no. 261 or its objection to Woods Fuller's second interim fee application.

An offer of proof can serve two purposes:

`(1) to inform the court and opposing counsel of the substance of the excluded evidence, enabling them to take appropriate action; and (2) to provide an appellate court with a record allowing it to determine whether the exclusion was erroneous and whether appellant was prejudiced by the exclusion.'

Christinson v. Big Stone County Co-op, 13 F.3d 1178, 1180-81 (8th Cir. 1994 (quoting Thomas v. Wyrick, 687 F.2d 235, 239 (8th Cir. 1982)). Since Tri-State Financial did not make a record expressing the substance of the evidence it would present, if permitted, on the previously resolved issues, nothing in the record indicated to the Court it should revisit its earlier rulings and allow Tri-State Financial to present evidence on those issues. Christinson, 13 F.3d at 1180-81; see Carton v. Missouri Pacific Railroad Co., 46 F.3d 1135 (table) (8th Cir. 1995). The Court is familiar with the three-day hearing held in December 2006 on Trustee Lovald's proposed settlement with North Central. Nothing during that hearing — then or now — leads the Court to alter its conclusions regarding the "continuing duty to Debtor" issue that Tri-State Financial has raised in several pleadings, including its original objection to Woods Fuller's second interim fee application.

Though invited to supply relevant law in support of its "continuing duty to debtor" theory, Tri-State Financial has never done so. Accordingly, the Court's earlier findings and conclusions, including the case law cited therein, regarding Woods Fuller's second interim fee application, Tri-State Financial's motion to have Woods Fuller disqualified, and Tri-State Financial's related motions to reconsider stand as entered, and are incorporated herein.

The offer was made in the April 18, 2007, interim decision when Tri-State Financial's motion to disqualify Woods Fuller was addressed:

What is left is Tri-State Financial's argument that Woods Fuller has violated some continuing fiduciary or professional duty to Debtor. An order will be entered setting a deadline for Tri-State Financial to provide case law support for this argument in a brief. The case law must be relevant to the present circumstances, i.e., a corporate Chapter 11 debtor converted to Chapter 7. In its brief, Tri-State Financial cannot ignore the fact that the Chapter 7 case renders Debtor defunct, Braden v. Tri-R Builders, Inc. (In re Tri-R Builders, Inc.), 86 B.R. 138, 141 (Bankr. N.D. Ind. 1986), and that Trustee Lovald is now in control since Debtor's board of managers has been "completely ousted." Commodity Futures Trading Commission v. Weintraub, 471 U.S. 343, 352-53 (1985). Tri-State Financial also cannot ignore the fact that Trustee Lovald controls any attorney-client privilege held by Debtor. Weintraub, 471 U.S. at 352-56. Finally, Tri-State Financial cannot ignore the fact that while Trustee Lovald holds a fiduciary duty to Debtor's equity holders as well as to the other creditors,

[o]ne of the painful facts of bankruptcy is that the interests of shareholders become subordinated to the interests of creditors. In cases in which it is clear that the estate is not large enough to cover any shareholder claims, the trustee's exercise of the corporation's attorney-client privilege will benefit only creditors, but there is nothing anomalous in this result; rather, it is in keeping with the hierarchy of interests created by the bankruptcy laws. See generally 11 U.S.C. § 726(a).

Id. at 355.

In re Tri-State Ethanol Company LLC, Bankr. No. 03-10194, slip op. at 25-26 (Bankr. D.S.D. April 18, 2007).

As directed by the Court, both parties filed briefs regarding Tri-State Financial's motion to have Woods Fuller disqualified because of an alleged breach of duty to Debtor. In its brief, however, Tri-State Financial failed to reflect the facts of the case or discuss the case law the Court had provided on April 18, 2007. Thus, even assuming the facts as alleged by Tri-State Financial, the Court was not provided with any legal basis to remove Woods Fuller as counsel for Trustee Lovald on the grounds the firm had violated some continuing duty to Debtor. An evidentiary hearing on the motion to disqualify was deemed unwarranted, and the motion was denied in all respects on July 10, 2007. No appeal was taken.

An appropriate order overruling Tri-State Financial's objection and awarding Woods Fuller the fees requested under its second interim application will be entered.