600 B.R. 425
10th Cir. BAP2019Background
- Debtors David and Terry Stewart retained attorney Ruston Welch after their Alabama bankruptcy cases were transferred to the Western District of Oklahoma; Welch did not timely disclose compensation as required by 11 U.S.C. § 329(a) and Fed. R. Bankr. P. 2016(b).
- Welch later disclosed he had received about $348,404 from BP-settlement proceeds (part contingency fees for non-debtor entities and part fees for representing the Debtors); disclosures were filed only after a creditor (SE Property Holdings, LLC, "SEPH") raised the issue in court.
- SEPH moved for disgorgement of all fees paid to Welch and denial of any unpaid fees; Welch argued portions were earned for non-debtor clients and that some funds were not estate property.
- The bankruptcy court found Welch violated § 329(a)/Rule 2016(b) but imposed a monetary sanction of $25,000 to the estate instead of ordering full disgorgement of the roughly $350,000 paid.
- SEPH moved to alter or amend the disgorgement order; the bankruptcy court denied the motion. SEPH appealed both orders to the Tenth Circuit Bankruptcy Appellate Panel.
- The BAP reviewed the sanction for abuse of discretion and affirmed, concluding the bankruptcy court permissibly considered multi-factor standards (including factors from In re Howard Ave. Station) and did not err by imposing a partial sanction.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether failure to disclose under § 329(a) requires full disgorgement | SEPH: full disgorgement is appropriate for nondisclosure; the Tenth Circuit permits disgorgement sua sponte | Welch: payments partly for non-debtors; some funds not estate property; court lacks jurisdiction over non-estate funds | Court: Disgorgement is available but sanction amount is discretionary; partial disgorgement/sanction permissible |
| Proper legal standard for determining sanction amount | SEPH: court should focus on egregiousness and apply Brown test | Welch: court may consider other relevant factors and equitable circumstances | Court: No single-factor rule in Tenth Circuit; bankruptcy court may weigh multiple factors (experience, willfulness, reason, cooperation, harm) |
| Use of other sanction factors (e.g., Rule 9011-style factors) | SEPH: applying Rule 9011 factors was error | Welch: factors are relevant to measure culpability and remedy | Court: Permissible to consider such factors alongside others; sanction must be exercised with restraint |
| Motion to alter or amend under Rule 9023 (Fed. R. Civ. P. 59(e)) | SEPH: bankruptcy court misapplied standards and should have ordered full disgorgement | Welch: court acted within discretion | Court: Denial affirmed because no abuse of discretion in original sanction decision |
Key Cases Cited
- Chambers v. NASCO, Inc., 501 U.S. 32 (1991) (courts must exercise inherent sanctioning power with restraint and discretion)
- In re Lacy, [citation="306 F. App'x 413"] (10th Cir. 2008) (failure to disclose under § 329 may justify denial of fees and sanctions)
- In re Brown, 371 B.R. 486 (Bankr. N.D. Okla. 2007) (disgorgement should be commensurate with egregiousness of nondisclosure)
- In re Downs, 103 F.3d 472 (6th Cir. 1996) (sanctioning courts must exercise power with restraint; severity should deter misconduct)