445 B.R. 744
Bankr. N.D. Tex.2011Background
- Debtors Jason and Bobbie Ferguson filed a Chapter 13 case in the Northern District of Texas in 2005 after an April 2005 accident against State Court Defendants.
- The Debtors disclosed the related state court claims to the Trustee, but a scheduling error failed to reflect those claims on Schedule B-2; they later amended the schedules following disclosure at the 341 meeting.
- State Court Defendants sought judicial estoppel to bar the claims; trial court granted summary judgment despite the inadvertent non-disclosure.
- The Trustee engaged Newbern as special counsel on a contingency basis to intervene in the state court suit, proposing one-third of recovered funds for Newbern.
- Settlement discussions proposed a $1,000,000 recovery for the Debtors’ estate; Newbern sought either one-third of proceeds or a fee of $48,628.67 plus an enhancement.
- Debtors and their counsel objected to the Fee Request; the court held hearings and ultimately determined the fee arrangement with Clarke and the contingency fee were improper under §504.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Newbern is entitled to a one-third contingency fee | Newbern relies on §328 and Barron for full contingency entitlement. | Debtors contend the contingency is not appropriate given disclosure failures and the minimal unsecured debt. | Newbern is not entitled to a one-third contingency. |
| Whether notice and due process supported binding retention | Trustee sought expedited consideration and Newbern argues retention was approved. | Debtors did not receive proper 21-day or adequate service notice; due process was not satisfied. | Not bound by §328 retention due to deficient notice and due process concerns. |
| Whether Newbern's arrangement with Clarke violates §504(a) | Clarke's time-sharing constitutes an association under Rule 2014 and §504(b)(1) exception. | Clarke is not a regular associate; §504(a) prohibits fee sharing with a non-regular associate. | Section 504(a) applies and sharing with Clarke is impermissible. |
| Whether Clarke qualifies as a 'regular associate' under §504(b)(1) | Rule 9001(10) broad, Clarke could be treated as regular associate. | Clarke is not in the same professional association; cannot share under §504(b)(1). | Clarke is not a regular associate; cannot share compensation under §504(b)(1). |
| What remedy or allocation of fees should the court impose | Retain Clarke at $166/hr retroactively if disclosure is provided; Newbern to be compensated for non-Clarke time. | Disallow Clarke’s time and adjust Newbern’s fees to reflect disallowance. | Allow Newbern to be compensated for non-Clarke work; authorize retroactive Clarke engagement if properly disclosed and approved; disallow Clarke’s time and adjust totals accordingly. |
Key Cases Cited
- In re Coastal Plains, 179 F.3d 197 (5th Cir. 1999) (judicial estoppel and non-disclosure consequences in bankruptcy)
- In re Superior Crewboats, Inc., 374 F.3d 330 (5th Cir. 2004) (trustee's ability to pursue interests in estate claims; estoppel considerations)
- In re Barron, 325 F.3d 690 (5th Cir. 2003) (contingency fee deviations under §328(a))
- In re Kane, 535 F.3d 380 (5th Cir. 2008) (differences in treatment of trustee interests and judicial estoppel)
- In re Worldwide Direct, Inc., 316 B.R. 637 (Bankr. D. Del. 2004) (fee sharing with contract staff; market efficiency vs. §504 restrictions)
- In re Tarasiak, 280 B.R. 791 (Bankr. D. Mass. 2002) (need for disclosure when contract professionals are used)
- Lemonedes v. Balaber-Strauss (In re Coin Phones), 226 B.R. 131 (S.D.N.Y. 1998) (of-counsel arrangements and §504 considerations)