538 B.R. 867
Bankr. M.D. Ala.2015Background
- Debtor Billy Jack Smith filed Chapter 13 after a pending Georgia workers’ compensation claim; his confirmed plan required any WC recovery (less fees/costs and allowed exemptions) to be turned over to the Chapter 13 Trustee.
- Debtor’s bankruptcy counsel (Ingram and Layson) did not list or notify pre-petition WC attorneys (Oates, Martin) of the bankruptcy; Trustee repeatedly tried to contact Martin with little response.
- Oates retired and referred the WC claim to Burns, who assigned associate Shannon Rolen; Rolen did not discover the bankruptcy until 2014 and never properly filed or served employment/fee/settlement motions.
- In January 2015 the WC Board approved a $30,000 settlement; Rolen received and disbursed funds (retaining fees, paying co-counsel, and paying the debtor) without court approval or paying proceeds to the Trustee—converting estate property in violation of the confirmed plan.
- Trustee moved to examine attorneys and to dismiss; the court dismissed the bankruptcy with prejudice and held a sanctions hearing.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether court may sanction attorneys for violating confirmed plan and converting estate property | Trustee: attorneys violated plan/order and Bankruptcy Rules; sanctions appropriate under §105 | Attorneys: some relied on client representations or made imperfect efforts; differences between Chapter 7 and 13 duties | Court invoked §105(a) and imposed monetary sanctions against attorneys for failures to communicate and compliance breaches |
| Duties of debtor’s bankruptcy counsel to identify/notify civil counsel | Trustee: bankruptcy counsel must list/notify civil counsel and provide case specifics to prevent conversion | Bankruptcy counsel: claimed they informed debtor and relied on debtor to notify civil counsel | Court held bankruptcy counsel negligent for failing to identify/notify WC counsel; disgorged their $2,750 fee |
| Duties of civil counsel (WC attorneys) when client is in bankruptcy | Trustee: civil counsel must check for bankruptcy, contact trustee, seek court approval of employment/settlement/fees | Rolen/Burns: attempted (but did not timely file) employment application; relied on client statements that plan obligations were completed | Court held Rolen/Burns liable for conversion; sanctioned $7,500 (accepted from Rolen pre-hearing) and held Burns vicariously liable for supervision failure |
| Liability of referring/retained counsel who received fees during bankruptcy | Trustee: counsel accepting fees without court approval must disgorge | Martin: claimed some fee-splitting and reliance on other counsel; did not timely respond to Trustee | Court ordered Martin to disgorge $1,237.50 (his share) for benefit of unsecured creditors |
Key Cases Cited
- Green Point Credit, LLC v. McLean, 794 F.3d 1313 (11th Cir. 2015) (bankruptcy court’s authority under §105 to fashion sanctions and remedies)
- In re Evergreen Sec., Ltd., 570 F.3d 1257 (11th Cir. 2009) (bankruptcy court may impose sanctions for violation of court orders or rules)