In Re Gluth Bros. Const., Inc.
459 B.R. 351
Bankr. N.D. Ill.2011Background
- Debtor Gluth Bros. Construction, Inc., a Chapter 11 case, filed June 5, 2007; Creditor Trust seeks to challenge Debtor’s counsel Querrey & Harrow’s fees.
- Q&H was retained April 10, 2007, with Frank Gluth guaranteeing the firm’s fees and with prior representation of Gluth by a firm attorney before representation of the Debtor.
- Disclosures of compensation and connections were late and incomplete, including failure to file Form B-203 and late Rule 2016 disclosures.
- Issues arose over ownership of the Shop Parcel and Rolling Hills Lots, with ownership initially unclear and mischaracterized in schedules.
- Ms. Miller, formerly at Q&H, later represented Frank Gluth individually, raising potential conflicts of interest despite assertions otherwise.
- Court ultimately approves a reduced cumulative fee award of $202,420.53 and disgorges $128,737.60 in fees already paid or held in escrow.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Did Q&H fail to disclose compensation and sharing as required? | U.S. Trustee argues Rule 2016(b) violations and improper disclosures. | Q&H contends disclosures were adequate or cured later; some items deemed immaterial. | Yes, disclosures were deficient and late; sanctions warranted. |
| Did Q&H disclose connections with the Debtor or adverse interests? | Gluth’s ownership and prior representation created connections needing disclosure. | Q&H asserts no current representation or disqualifying conflict at filing. | Not clearly disqualified, but disclosure failures tainted employment. |
| Is there an actual conflict of interest due to prior representation of a party adverse to the estate? | Prior Gluth representation and guarantees create an adverse-interest concern. | No proven active representation of Gluth during the case; no actual conflict shown. | No proven active representation or actual conflict; sanctions for disclosure failures. |
| Are the fees reasonable given the circumstances and post-petition work? | Fees should be scrutinized for work on unconfirmed plan and failed claims bearing on estate. | Services were reasonably likely to benefit the estate at the time rendered. | Fees not reduced on reasonableness; sanctions grounded in disclosure failures, not value. |
| What is the appropriate sanction for Q&H’s disclosure failures? | Disgorgement of improperly received fees is appropriate. | Disgorgement may be excessive absent clear conflict or harm. | Cumulative fees reduced to $202,420.53; disgorgement of $128,737.60 ordered. |
Key Cases Cited
- In re Crivello, 134 F.3d 831 (7th Cir. 1998) (defines 'hold or represent an interest adverse to the estate' and actual conflicts)
- U.S. v. Gellene, 182 F.3d 578 (7th Cir. 1999) (disclosure requirements cannot be waived by sideshow arguments; beware appearance of conflict)
- In re Crivello, 134 F.3d 831 (7th Cir. 1998) (conflicts and disinterestedness in professional employment)
- In re Envirodyne Indus., 150 B.R. 1008 (Bankr.N.D. Ill. 1993) (broad interpretation of connections that must be disclosed)
- In re Mortakis, 405 B.R. 293 (Bankr.N.D. Ill. 2009) (sanctions for disclosure deficiencies; mandatory disclosures)
- Lambert v. Coan (In re AroChem Corp.), 176 F.3d 610 (2d Cir. 1999) (discussion of 'represent an interest adverse to the estate' broad vs present tense)