970 F.3d 1255
10th Cir.2020Background
- SE Property Holdings (SEPH) initiated an involuntary Chapter 7 against David and Terry Stewart; the cases were transferred to Oklahoma.
- Attorney Ruston Welch entered appearance, later obtained $348,404.41 in fees tied to BP/Deepwater Horizon settlement proceeds and Neverve, LLC.
- Welch failed to timely disclose his fee agreement and payments as required by 11 U.S.C. § 329(a) and Fed. R. Bankr. P. 2016(b); disclosures were filed only after the court ordered them in Sept. 2017.
- SEPH moved for disgorgement and denial of fees; the bankruptcy court found violations but ordered only $25,000 disgorgement (about 7%) citing mitigating factors.
- The Bankruptcy Appellate Panel affirmed; the Tenth Circuit reversed and remanded, holding full disgorgement is the presumptive sanction and the bankruptcy court abused its discretion by imposing a small penalty without evidentiary support or adequate inquiry into the payments' source and motives for nondisclosure.
Issues
| Issue | SEPH's Argument | Welch's Argument | Held |
|---|---|---|---|
| Appropriate sanction for failure to disclose under § 329 and Rule 2016(b) | Full disgorgement/forfeiture of all fees paid | Partial disgorgement justified given benefit to estate, inadvertence, hardship | Default sanction is full disgorgement; bankruptcy court abused discretion in imposing only $25,000 absent sound, supported reasons |
| Whether the contingency fees/payments were "in connection with" the bankruptcy and thus subject to disclosure | Yes — contingency payments were applied to bankruptcy fees or derived from debtor-affiliated assets and must be disclosed | Contingency fees were earned for non-bankruptcy services and not subject to § 329 | Bankruptcy court correctly treated the payments as connected enough to be subject to scrutiny; their source must be examined on remand |
| Whether the court may rely on sua sponte mitigating factors without evidentiary support | Court erred in considering undocumented mitigating factors | Court may rely on judge’s experience and equitable discretion | Court abused discretion by adopting speculative mitigating factors (e.g., ignorance, inability to pay) with no evidentiary basis |
| Need to investigate source and motive for nondisclosure before denying full disgorgement | Court must examine whether payments were estate property, subject to liens, or devices to divert assets from creditors | No further inquiry necessary if fees benefited estate and misconduct was inadvertent | Court must examine the payments’ source/motive (e.g., timing of contingency agreement, security interests, dividends) before imposing less-than-full disgorgement; remand required |
Key Cases Cited
- Lamie v. U.S. Tr., 540 U.S. 526 (2004) (trustee/employment and court-approval rules in bankruptcy)
- Bethea v. Robert J. Adams & Assocs., 352 F.3d 1125 (7th Cir. 2003) (attorney disclosure deadlines and continuing duty)
- Futuronics Corp. v. Arutt, Nachamie & Benjamin (In re Futuronics Corp.), 655 F.2d 463 (2d Cir. 1981) (failure to disclose fee-sharing warranted denial/disgorgement)
- Eastman v. Union Pacific R.R. Co., 493 F.3d 1151 (10th Cir. 2007) (judicial estoppel and deterrence for bankruptcy nondisclosure)
- Turner v. Davis, Gillenwater & Lynch (In re Investment Bankers), 4 F.3d 1556 (10th Cir. 1993) (attorney who fails to comply with § 329 forfeits compensation)
- Gray v. English, 30 F.3d 1319 (10th Cir. 1994) (court should lean toward denial/disgorgement though exceptions may apply)
- Law Offices of Nicholas A. Franke v. Tiffany (In re Lewis), 113 F.3d 1040 (9th Cir. 1997) (even negligent failure to disclose can support denial of fees)