Henley v. Malouf (In re Roberts)
556 B.R. 266
Bankr. S.D. Miss.2016Background
- William S. Roberts (Debtor) sued in state court (Hinds County Action) pre-petition; Malouf (attorneys) represented him. Debtor filed Chapter 13 in 2003 but did not disclose the lawsuit in schedules/SoFA.
- Debtor’s Chapter 13 plan confirmed with zero distribution to unsecured creditors; confirmation order retained estate property until discharge.
- The state-court case was settled during the Chapter 13 plan; Malouf received and disbursed settlement proceeds (including attorney fees) without Bankruptcy Court approval.
- Debtor completed plan payments, received discharge, and case closed; later the Trustee learned of the undisclosed settlement and reopened the case.
- Trustee sued Malouf in 2015 seeking declaratory relief and turnover of settlement funds, alleging violations of §§ 521, 329, 330, 542 and Rule 9019; Malouf moved to dismiss under FRCP 12(b)(1), (6) and (7).
Issues
| Issue | Plaintiff's Argument (Trustee) | Defendant's Argument (Malouf) | Held |
|---|---|---|---|
| Standing to pursue undisclosed claim | Trustee can step into debtor’s shoes and recover settlement for creditors | Trustee lacks statutory authority in Chapter 13 to sue for turnover like a Chapter 7 trustee | Denied dismissal — under Flugence trustee has standing; court will issue OSC on possible conversion to Chapter 7 |
| Whether lack of § 327 court authorization voids settlement | Settlement unenforceable because Malouf wasn’t court‑approved special counsel under § 327 | § 327 applies to trustees, not debtors; debtor need not obtain § 327 approval | Granted dismissal as to § 327 claim — debtor need not hire counsel under § 327; claim implausible |
| Compliance with §§ 329/330 (fee disclosure/approval) | Malouf failed to disclose/obtain approval of fees; fees subject to court review | Malouf asserts charging lien and entitlement to fees | Court finds Malouf must comply with §§ 329/330; until compliance not entitled to fees (oversight preserved) |
| Turnover under § 542 | Trustee seeks turnover of settlement proceeds held by Malouf | Malouf contends trustee lacks statutory turnover power in Chapter 13 | Court defers ruling on § 542 turnover; will resolve after decision on conversion to Chapter 7 (Chapter 7 trustee would have clear § 542 authority) |
| Failure to disclose under § 521 and Rule 9019 approval requirement | Debtor’s nondisclosure kept estate/creditors from review; settlement required court approval | Malouf contends settlement and fees are proper (and claims liens) | Denied dismissal as to § 521 and Rule 9019 — Trustee stated plausible claims that asset remained estate property and settlement lacked court approval |
Key Cases Cited
- Warth v. Seldin, 422 U.S. 490 (U.S. 1975) (standing principles govern Rule 12(b)(1) facial attacks)
- Reed v. City of Arlington, 650 F.3d 571 (5th Cir. 2011) (trustee may pursue undisclosed assets for benefit of creditors)
- Flugence v. Axis Surplus Ins. Co., 738 F.3d 126 (5th Cir. 2013) (Chapter 13 trustee may pursue undisclosed post‑petition cause of action for creditors)
- In re Foster Mortgage Corp., 68 F.3d 914 (5th Cir. 1995) (bankruptcy court should approve settlements under Rule 9019)