583 B.R. 775
Bankr. W.D. Okla.2018Background
- SE Property Holdings filed an involuntary Chapter 7 petition against the Stewarts; the case was transferred from Alabama to the Western District of Oklahoma.
- In June 2015 Ruston C. Welch (Debtors' counsel) began representing the Debtors and affiliated non-debtor entities; he did not file Rule 2016(b)/§ 329 disclosures for more than two years.
- Between June 2015 and July 2017 Welch paid himself $348,404.41 for bankruptcy and adversary work; those payments came from BP Deepwater Horizon settlement proceeds obtained for non-debtor affiliates under contingent-fee agreements.
- The source, amount, and agreements for those payments were first fully disclosed only after the court ordered in-camera production (August–September 2017) and by amended/supplemental disclosures in September–December 2017.
- SEPH moved to disgorge compensation and deny unpaid fees under 11 U.S.C. § 329(a) and Fed. R. Bankr. P. 2016/2017; the Court found Welch violated § 329 and Rule 2016(b) by failing to disclose and considered appropriate sanctions.
- The Court declined full disgorgement, citing practical limits and mitigation factors, and ordered Welch to pay $25,000 to the Chapter 7 trustee within 30 days.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether counsel violated § 329/Rule 2016(b) by failing to disclose fees and sources | Welch failed to disclose amount/source of compensation for >2 years; nondisclosure violates § 329 and Rule 2016(b) | Argued some fees (contingent BP fees) were not "in connection with" the bankruptcy so not subject to § 329 disclosure | Court held § 329/Rule 2016(b) required disclosure; applying BP proceeds to pay bankruptcy fees made them subject to disclosure, so Welch violated the rules |
| Whether third‑party source (BP settlement proceeds for non‑debtors) excuses disclosure | SEPH: source must be disclosed even if a third party | Welch: payments from contingent-fee work for non-debtors were not "in connection with" the bankruptcy; thus no disclosure required | Court rejected Welch's argument; source disclosure is mandatory even if funds originated with non-debtors when applied to pay bankruptcy fees |
| Whether nondisclosure alone warrants disgorgement of fees received | SEPH sought full disgorgement and denial of unpaid compensation under § 329 | Welch argued services benefited the estate and disgorgement would be inequitable; also asserted lack of subjective bad intent | Court recognized nondisclosure alone can justify disgorgement but exercised discretion; rather than full disgorgement imposed a monetary sanction ($25,000) considering circumstances |
| Scope of relief as to funds paid to third parties (Kirkpatrick Bank) | SEPH sought disgorgement of $173,939.41 paid to Kirkpatrick from Shimmering Sands BP proceeds | Welch argued those funds were passed through and not used for his benefit | Court declined to disgorge payments to Kirkpatrick through this motion, finding Welch did not retain those funds and equitable/authority limits counsel against ordering return here |
Key Cases Cited
- Mapother & Mapother P.S.C. v. Cooper (In re Downs), 103 F.3d 472 (6th Cir. 1996) (attorney retained after filing must still disclose under § 329)
- Turner v. Davis, Gillenwater & Lynch (In re Investment Bankers, Inc.), 4 F.3d 1556 (10th Cir. 1993) (failure to disclose under § 329 can forfeit right to compensation and support disgorgement)
- Neben & Starrett, Inc. v. Chartwell Financial Corp. (In re Park-Helena Corp.), 63 F.3d 877 (9th Cir. 1995) (strict disclosure obligations; nondisclosure sanctionable even absent other Code violations)
- Henderson v. Kisseberth (In re Kisseberth), 273 F.3d 714 (6th Cir. 2001) (bankruptcy courts have broad authority to deny compensation for nondisclosure)
- White v. General Motors Corp., 908 F.2d 675 (10th Cir. 1990) (sanctions should be the least severe adequate to deter misconduct; factors for imposition)