In Re Gulf Coast Orthopedic Center
ORDER ON MOTIONS SEEKING DISGORGEMENT OF FEES (DOC. NOS.: 963, 986, 1060, 1068)
Gulf Coast Orthopedic Center (GCOC) has been operating from a common location with three of its affiliates: Medical Development Corporation (MDC), GCOC Physical Therapy (GCOC — PT), and American Medical Care Inc. (AMC) providing elective outpatient surgery and ancillary services to patients with spine disc and joint problems. The Debtor and its affiliates are known as the “The Bonati Institute for Advanced Arthroscopic Surgery” (Bonati Group) share not only the premises owned by MDC, but also administrative, marketing, billing, and collection for all the operating units of the Bonati Group. The Debtor and its Affiliates have common shareholders officers and directors. Dr. Bonati and his wife Patricia Bonati are the sole shareholders of all the entities making up the Bonati Group. Cecelia O’Ryan, Dr. Bonati’s sister managed the day to day operation of the business end of the operation.
Prior tо October 1996, more than 40 former patients sued Dr. Bonati and GCOC and sought damages in the millions based on alleged malpractice by Dr. Bonati and GCOC. One of the suits filed by what is referred to as the Ammirati Group (Malpractice Creditors) actually obtained a money judgment in the amount of $2 million compensatory and $1.5 million punitive damages against Dr. Bonati and GCOC, albeit the judgment was reversed and was remanded for a new trial. This suit was still pending at the time GCOC sought protеction in this Court when it filed its voluntary petition under Chapter 11 on October 29, 1996. Dr. Bonati also filed his own individual Chapter 11 petition on the very same day.
The law firm of Johnson Blakely, Pope, Bokor, Ruppel
&
Burns, P.A. (Johnson Blakely) represented the Bonati entities prior to the commencement of the Chapter 11 cases of GCOC and Dr. Bonati. On November 15, 1996, Charles M. Tatelbaum of the law firm of Johnson Blakely filed an Application on behalf of GCOC and sought authorization to be employed as counsel for the Dеbtor-in-Possession. (DIP) Johnson Blakely did not disclose its representation of the non-debtor affiliates of GCOC when it filed its Application, in clear violation of F.R.B.P.2014(a). Specifically, the Application to employ the law firm of Johnson Blakely signed by Dr. Bonati and Mr. Tatelbaum stated in paragraph 3 that Johnson Blakely has not represented any of the creditors in this matter or any other party in interest. Accompanying the Application, the Affidavit signed by Mr. Ta-telbaum stated that all facts and matters contained in the application are true and correct and that neither he nor his law firm represents any interest adverse to the estate or the proposed representation.
When Mr. Tatelbaum joined the law firm of Cummings & Lockwood, in the Application to be retained Mr. Tatelbaum stated that he became a partner of Cummings & Lockwood on June 1, 1998, that GCOC will continue to utilize the services of Julius J. Zschau of Johnson Blakely as lead general counsel and also utilize the support staff of Johnson Blakely and the law firm of Cummings & Lockwood. An Affidavit of Lawrence Farese, managing partner of Cummings & Lockwood which accompanied the Application, it is stated that there is no adverse interest represented by Cummings & Lockwood and in paragraph 3 stated that Cummings & Lockwood does not represent any interest adverse to the estate, has not previously represented the Debtor and to the best of the knowledge of the Affiant, never represented a creditor or insider of the Debtor. As noted earlier, the Application was approved on July 15, 1998 and authorized Cummings & Lockwood to continue as co-counsel for GCOC. Cummings & Lockwood filed three interim applications for compensation. This Court approved two of the applications for a total of $77,700. The Debtor has paid this sum in full. On November 22, 1996, this Court entered an Order and approved the employment of Mr. Tatelbaum of the law firm Johnson Blakely. Dr. Bonati also filed his Application for authority to employ Mr. Tatelb-aum and the Application was approved by an Order entered on November 27, 1996. After Mr. Tatelbaum left the firm of Johnson Blakely in June 1998 he continued to provide legal services to GCOC and Dr. Bonati and the Bonati entities as partner in the law firm of Cummings & Lockwood. Other attorneys in the same firm also provided legal services for the non-debtor affiliates. Pursuant to an Order dated July 15, 1998, this Court authorized partial substitution of attorneys for GCOC аnd authorized GCOC to also employ the law firm of Cummings & Lockwood as co-counsel.
On November 27, 1996, Mr. Tatelbaum of the law firm of Johnson Blakely filed an Application for authority to employ Cherry, Bekaert & Holland (CBH) to act as accountant both for the corporate case and for the individual case of Dr. Bonati. The Application was accompanied by an affidavit of Robert White, a principal in the account firm of CBH. Mr. White in his affidavit disclosed that prior tо the commencement of the bankruptcy case his firm represented the Debtor but he did not believe that such prior representation created an adverse interest. Mr. White also disclosed that the Debtor is indebted to the firm in the amount of $43,600. The Affidavit of Mr. White is totally silent concerning the firm’s representation of the non-debtor affiliates. This Application was also approved by this Court by an Order entered on December 10,1996.
After numerous attempts by Dr. Bonati to achieve reorganization, his individual ease was dismissed on April 22, 1998.
GCOC filed several Disclosure Statements and Plans of Reorganization but none of the seven Plans submitted reached confirmation. On July 11, 2000, this Court directed the appointment of an Examiner. In due course, the Examiner filed his Report. The Examiner found that the law firm of Johnson Blakely simultaneously represented GCOC, Dr. and Mrs. Bonati, Cecilia O’Ryan and her husband Felix O’Ryan and non-Debtor аffiliates both pri-
The matters under immediate consideration are the following:
(1) Motion for an Order for Disgorgement of Fees of Johnson Blakely filed by Susan K. Woodard, the Chаpter 7 Trustee (Trustee).
(2) Motion for an Order of Disgorgement of Cummings & Lockwood filed by the United States Trustee (U.S. Trustee)
(8) Motion for Summary Judgment by Cummings & Lockwood re: disgorgement.
(4) Motion for Summary Judgement by Johnson Blakely re: Disgorgement.
The Trustee in her Motion alleges that both law firms throughout this Chapter 11 case continued to render legal services to non-debtor Bonati entities at the same time they represented the Debtor, GCOC. She further alleges (1) that Bonati filed a proof of claim in the case of GCOC (Claim No. 147) in the amount of $160,250 plus interest and costs; and (2) that MDC, another non-debtor affiliate of GCOC, аlso filed a proof of claim (No. 148) in the amount of $2,800,407.05, as did GCOC-PT, a claim (No. 149) in the amount of $391,594.18.
Since the commencement of the Chapter 11 case, neither Johnson Blakely, Cummings & Lockwood nor CBH filed any subsequent disclosure statement regarding the disclosure of connections required by FRBP 2014(a) concerning their representation of insiders, affiliates or any other parties in interest. The first time this disclosure was made was when responses were filed tо the Examiner’s Report by Cummings & Lockwood, and a Motion for Summary Judgment, filed by Cummings & Lockwood concerning U.S. Trustee’s Motion to Disgorge Compensation, which Motion was accompanied by an affidavit of Mr. Tatelbaum. In his response, Mr. Ta-telbaum admitted that Cummings & Lockwood simultaneously represented GCOC, Dr. and Mrs. Bonati, and MDC who were involved in the medical malpractice suits and also in a malpractice action filed by the Debtor against a formеr attorney for GCOC. Mr. Tatelbaum also disclosed for the first time that Cummings & Lockwood received a postpetition retainer of $20,000 from MDC although this retainer was not disclosed when Cummings & Lockwood applied to be retained as co-counsel. Johnson Blakely admitted and conceded that the disclosure statement filed by Mr. Tatelbaum while he was a partner of Johnson Blakely did not comply with the requirements of FRBP 2014. No response has been filеd to the disgorgement motion by CBH.
Based on the facts recited by the Examiner in his Report on November 1, 2000, the U.S. Trustee filed its Motion to join in the Motions filed by the Trustee. The Malpractice Creditors also filed their support for the Motions for Disgorgement and contend that the requirement of F.R.B.P. 2014(a) is mandatory, and under applicable law, a total forfeiture of all fees of all
On February 13, 2001, this Court entered an Order scheduling a hearing for February 20, 2001 at 1:30 p.m. The Order provided that the Court would hear oral argument limited to the issue of whether the professional’s acknowledged failure to make disclosure of all of the debtor’s professionals’ connections with the Debtor, creditors, and any other party in interest as required by FRBP 2014 operates as a per se bar on the payment of compensation to such professionals, thereby requiring disgorgement of fees heretofore allowed and paid pursuant to orders of this Court. Both Johnson Blakely and Cummings & Lockwood filed their respective Motions for Summary Judgment directed only at the applicability, vel non, of the per se Rule. They contend that there are no genuine issues of material fact relevant to this limited issue and, based on these, they are entitled to a summary judgment in their respective favors as a matter of law.
Employment of professionals by the Debtor is governed by 11 U.S.C. § 327 and FRBP 2014 and allowance of compensation is governed by § 330. No professional can be employed who holds or represents an interest adverse to the estate and that is not a disinterested person. The term “disinterested” is defined by § 101(14)(A) of the Code as: “is not a creditor or an insider of a debtor.” Bankruptcy Rule 2014 which governs employment of professional persons requires a disclosure by the professional to be employed to disclоse the professional’s connection with the debtor, creditors, any party of interest, their respective attorneys and accountants, the United States trustee, or any person employed in the office of the United States Trustee. The application must be accompanied by a verified statement setting forth the person’s connections with the debtor, creditors, any party of interest, their respective attorneys аnd accountants, the United States trustee, or any person employed in the office of the United States Trustee.
The requirement of full disclosure and the consequences of failure to disclose have been frequently litigated, even prior to the adoption of the Code. The seminal case dealing with this subject was
Woods v. City Nat’l Bank & Trust Co.,
Courts are generally in agreement that the Bankruptcy Code requires disapproval of all employment of professionals who are not disinterested and once the employment was authorized the Court must set aside the employment of the disqualified professional.
In re EWC, Inc.,
When considering allowance tо a professional, one must initially consider whether the employment was authorized by the court. Clearly if the professional was not authorized to be employed it is not entitled to any compensation. From that it might logically follow that if the failure to disclose the relevant information rendered the authorization invalid, the professional would not be entitled to any compensation at all. The duty to disclose the professional’s connection under FRBP 2014 is a mandatory requirement, and the scope of the disclosure is far broader than what is required for disqualification.
Under the Rule the applicant and the professional must disclose all connections, not merely those which rise to the level of conflict.
Halbert v. Yousif,
Several courts have held that the failure to disclose the relationships is sufficient in and of itself to require denial and disgorgement of all compensations separate and apart from any question that there was any actual conflict of interest.
In re Sky Valley, Inc.,
Whether or not the failure to disclose is excused because it is claimed that it caused no harm to the estate was rejected by this Court in the case of
In re Florida Peach Corp. of America,
Johnson Blakely admits, as it must, that Mr. Tatelbaum was a head of the bankruptcy department of Johnson Blakely until June 1988. The firm of Johnson Blakely was counsel of record for GCOC. Mr. Tatelbaum, a highly experienced bankruptcy attorney who signеd the Petition, did not disclose in his 2014 Statement and in the Affidavit when he applied for authorization to employ his law firm’ Johnson Blakely as counsel for GCOC as Debtor in Possession. As noted earlier, it is also without dispute that Johnson Blakely represented at the same time Dr. Bonati, his wife Patricia, his sister Ms. O’Ryan, DMC, the landlord of GCOC and GCOC-PT, and affiliates of GCOC. Dr. Bonati filed a Proof of Claim against GCOC, Claim No. 147 in the amount of $160,250. MDC filed a Proof of Claim No. 148 in the amount of $2,300.407.05, and GCOC-PT filed Claim No. 149 in thе amount of $391,564.18. Thus, it is evident that Johnson Blakely
Johnson Blakely, realizing that Mr. Ta-telbaum’s failure to make a full disclosure of the firm’s connection with GCOC’s affiliates, who were not only insiders of GCOC but also its creditors, contend first that everybody knew, or at least all the major players knew, particularly counsel for the Malpractice Claimants. Thus, they were fully aware of the nondisclosed connection of Johnson Blakely, and this is really much ado about nothing because this is a “no harm no foul” situation. Therefore, it would be improper to apply the
per se
Rule, and a total forfeiture and disgorgement of fees would not be warranted, citing
In re Prince,
To further bolster the position of Johnson Blakely counsel for Johnson Blakely also contends first that the Examiner appointed by this Court during the pendency of the Chapter 11 case recommended the creation of a trust to be funded by the assets contributed by Dr. Bonati and its affiliates. He also recommended that the trust should be denied the opportunity to seek disgorgement from GCOC’s attorneys and accountants, that Johnson Blakely relied on Mr. Tatelbaum and it was his responsibility to comply with the disclosure requirements of the Code and the Rules. After Mr. Tatelbaum left the Johnson Blakely firm and joined Cummings & Lockwood, that relying on Mr. Tatelb-aum’s competence was sufficient and there was no need to submit supplemental disclosures of the firm’s connection with Dr. Bonati and GCOC affiliates. Lastly, while conceding there is no excuse for Mr. Ta-telbaum’s violation of the disclosure requirements, considering the benefits of the services rendered by Johnson Blakely during its representation would clearly make the application of the per se rule inappropriate.
In support of this proposition, counsel for Johnson Blakely contend there is no per se rule. It is not supported by the express language of the Code or by eases interpreting the consequences of violation of the disclosure requirement. Section 328(c) leaves no doubt that this section provides that the court “may deny” allowance of compensation for services and reimbursement of expenses of a professional if it develops during the representation that the professional is not disinterested or represents an adverse interest. According to Johnson Blakely this Sectiоn does not mandate a forfeiture or disgorgement, but merely permits this drastic sanction, and Rule 2014, which was also violated by Johnson Blakely, is silent concerning any sanctions for violation of the Rule.
The Ninth Circuit held that even a “literal” application of the disclosure requirements a failure to disclose “may” result in a denial of all fees requested when there is a failure to disclose.
In re Park-Helena Carp.,
Thus it is evident from the authorities considered that by no means can one discern a consensus, which places this Court in a nonenviable position to make a choice between these diametrically opposing approaches.
This Court is constrained to pragmatically accept the per se rule and is satisfied that notwithstanding the admitted and undisputed violation of Section 328(c) and especially FRBP 2014 in light of the history of this Chapter 11 case, it is more appropriate to consider all the relevant circumstances, including the bankruptcy experience of the professionals rather than to apply the per se rule. These comments shоuld not be construed that the failure to comply with the disclosure requirement will be accepted on the claimed ground of “no harm no foul,” a proposition which is totally unacceptable and rejected.
Based on the foregoing, this Court shall schedule forthwith a final evidentiary hearing for the purpose of receiving competent evidence on the remaining issue which is what type and what amount of sanctions would be appropriate based on the record established at the final evidentiary hearing.
Accordingly, it is
ORDERED, ADJUDGED AND DECREED that ruling be, and the same is hereby, deferred on all Motions, including Motions for Summary Judgment, relating to disgorgement pending the resolution of the remaining issues. It is further
ORDERED, ADJUDGED AND DECREED that a final evidentiary hearing be, and the same is hereby, scheduled before the undersigned to determine what sanctions would be appropriate under the facts of this case for the violation of Rule 2014(a) by Johnson Blakely Pope Bokor Ruppel & Burns, P A. and Cummings & Lockwood in Courtroom 9A, Sam M. Gibbons U.S. Courthouse, 801 N. Florida Avenue, Tampa, Florida 33602 on June 27, 2001 at 1:30 p.m.