568 B.R. 146
Bankr. M.D. Fla.2017Background
- Debtor-in-possession (DIP) sought to employ special litigation counsel (Special Counsel) with a $3,500 post-petition retainer to be paid by the debtor’s principal; employment order said compensation would be allowed only upon court application, the firm would not be paid by the estate, and the firm waived administrative expense entitlement.
- Special Counsel had limited prior experience representing bankruptcy estate fiduciaries; he more often represented creditors.
- Without timely court applications or supplemental Rule 2016(b) disclosures, Special Counsel’s firm received multiple third-party payments post-petition totaling about $39,750 (later disclosed as $38,200 plus the retainer) and sought compensation totaling $47,852.21 after the U.S. Trustee filed a Motion for Disgorgement.
- The United States Trustee moved to disgorge fees for failure to disclose post-petition payments; Special Counsel then filed a belated fee application and cooperated with the Trustee.
- The core legal issues involved § 329 (disclosure of fees), Rule 2016(b) (timely disclosure), Rule 2017(b) (excessive payments review), and § 330 (reasonableness of fees).
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Special Counsel violated § 329 and Rule 2016(b) by failing to disclose post-petition third-party payments | U.S. Trustee: counsel failed to timely disclose post-petition payments, impeding oversight | Special Counsel: omissions were inadvertent and due to unfamiliarity with fiduciary representation; later cured and cooperative | Court: violation occurred; nondisclosure impedes review and is sanctionable, but can be excused in appropriate cases |
| Whether disgorgement/denial of all fees is required for the disclosure violation | U.S. Trustee: disgorgement or denial of fees is warranted despite lack of willfulness | Special Counsel: disgorgement is extreme given cooperation, lack of willfulness, and results obtained for estate | Court: disgorgement/total denial permissible but not warranted here; crafted limited sanction (refund of $1,250) based on mitigating factors |
| Whether the fees sought meet § 330 reasonableness standards | U.S. Trustee: undisclosed receipts preclude timely review of reasonableness; scrutiny required under § 330/Rule 2017(b) | Special Counsel: services and expenses are reasonable and would be approved absent disclosure lapse | Court: § 330 factors favor approval of services/expenses, but untimely disclosure triggered sanctional response |
| Standard for imposing sanctions for § 329/Rule 2016(b) violations | U.S. Trustee: strict approach supports substantial or total disgorgement to deter nondisclosure | Special Counsel: case-specific, discretionary factors should mitigate relief | Court: adopts case-by-case approach; lists mitigating/aggravating factors (experience, willfulness, cooperation, harm, prior violations, prompt cure, results) |
Key Cases Cited
- Grant v. George Schumann Tire & Battery Co., 908 F.2d 874 (11th Cir. 1990) (lodestar method required under § 330)
- Johnson v. Georgia Highway Express, Inc., 488 F.2d 714 (5th Cir. 1974) (factors for adjusting fee awards)
- Henderson v. Kisseberth (In re Kisseberth), 273 F.3d 714 (6th Cir. 2001) (bankruptcy courts may deny all compensation for failure to satisfy Code and Rules)
- Vergos v. Mendes & Gonzales (In re McCrary & Dunlap Constr. Co., LLC), 79 Fed.Appx. 770 (6th Cir. 2003) (discretionary relief for nondisclosure; discussion of mitigating factors)
- Prince v. Electro-Wire Products, Inc. (In re Prince), 40 F.3d 356 (11th Cir. 1994) (complete denial of fees can be extreme but serves deterrent purpose)