In Re Keller Financial Services of Florida, Inc.
- Reporters:
- , , ,
- Before:
- Glenn
ORDER ON FIRST AND FINAL APPLICATION FOR ALLOWANCE OF COMPENSATION FOR SERVICES RENDERED BY WILLIAMS REED WEINSTEIN SCHIFINO & MANGIONE, P.A., AND JOINT OBJECTION BY TRUSTEE AND NOTEHOLDERS’ COMMITTEE
THIS CASE came before the Court for hearing to consider the First and Final Application for Allowance of Compensation for Services Rendered and for Reimbursement of Expenses Incurred by Williams Reed Weinstein Schifino & Mangione, P.A., as Attorneys for the Debtors, and the Joint Objection to the Application filed by Kevin O’Halloran, as Trustee for the Debtors’ estates, and the Official Committee of Noteholders.
Background
The Debtors filed their voluntary petitions under chapter 11 of the Bankruptcy Code on April 1 and April 2, 1998. The Debtors initially were represented by Dominic L. Massari, III, although no Order authorizing Massari’s employment has been entered.
On May 6, 1998, the United States Trustee filed a Motion to Appoint a Chapter 11 Trustee in the cases, and the Official Committee of Noteholders (the Notehold-
On July 1, 1998, Williams Reed Wein-stein Schifino & Mangione, P.A. (Williams Reed) filed an Application for Employment as Co-Counsel for the Debtors. The Application was accompanied by an Affidavit of David S. Jennis, an attorney with Williams Reed, stating that no attorney in Williams Reed represented a person with an interest adverse or potentially adverse to the Debtors. The Affidavit was supplemented on July 2,1998.
The Court verbally approved Williams Reed’s Application for Employment at a hearing conducted on July 2, 1998. The immediate focus of Williams Reed’s services centered on defending the Motions to Appoint a Chapter 11 Trustee filed by the United States Trustee and the Notehold-ers’ Committee. The evidentiary hearing on the Motions was conducted on July 15, 16, and 17,1998.
On July 27, 1998, the Court entered an Order Authorizing the Employment of Williams Reed as Counsel for the Debtors. The Order authorized the Debtors to employ Williams Reed as counsel “nunc pro tunc as of and including June 26, 1998,” and further directed the disbursement of the sum of $75,000 to Williams Reed “to be held by Williams Reed as a general retainer for the fees and costs incurred in connection with Williams Reed’s representation of the Debtors.”
The Motions to Appoint a Chapter 11 Trustee were granted following the eviden-tiary hearing, and on July 28, 1998, an Order was entered approving the appointment of Kevin O’Halloran as the chapter 11 trustee in the cases.
On November 17, 1998, Williams Reed filed its First and Final Application for Allowance of Compensation for Services Rendered and for Reimbursement of Expenses Incurred as Attorneys for the Debtors. In the Application, Williams Reed requested approval of compensation for legal services provided to the Debtors in the amount of $91,968.50 for the period commencing on June 19, 1998, and extending through November 16, 1998, and also requested reimbursement for expenses incurred in the amount of $5,109.41, for a total award of $97,077.91. The Application acknowledges that Williams Reed received the retainer in the amount of $75,000 at the commencement of its postpetition representation of the Debtors. An itemization of the services rendered is attached to the Application, which includes a description of each service provided, the date of the service, the attorney performing the service, the amount of time devoted to each service, and the amount charged for the service.
On December 23, 1998, the Court entered an Order Allowing Interim Compensation to Williams Reed. In the Order, Williams Reed was awarded interim compensation in the amount of $60,000 to be credited to the amount requested in its Application, and Williams Reed was authorized to disburse the sum of $60,000 from the postpetition retainer previously received. The Order further provided that the interim award was without prejudice to the rights of the Trustee, the United States Trustee, and the Noteholders’ Committee to object to the Application, and that the amount awarded as interim compensation was subject to disgorgement in the event that a lesser amount was ultimately awarded.
On March 11, 1999, Williams Reed filed a Declaration and Supplemental Disclosure pursuant to Bankruptcy Rules 2014 and 2016. . The Supplemental Disclosure was signed by David S. Jennis and contains the following disclosures:
1. William J. Schifino, Jr., (Schifino) an attorney with Williams Reed, initially met with Henry and Dorothy Wilson (the Wilsons) on July 16,1998, to discuss claims asserted by the Wilsons against Southern Capital Securities and StevenHutek, and also to discuss Williams Reed’s representation of the Wilsons in connection with those claims.
2. The claims included claims arising out of the Wilsons’ purchase of notes from three Debtor entities.
3. Schifino spoke with Steven Hutek on July 16 or July 17, 1998, regarding the claims.
4. On July 28, 1998, Schifino provided an engagement letter to the Wilsons.
5. The Wilsons executed the engagement letter on July 29, 1998, and the executed letter was received by Schifino on or about July 30,1998.
6. On August 28, 1998, Williams Reed filed a Statement of Claim on behalf of the Wilsons against Steven Hutek and Southern Capital Securities with the Arbitration Tribunals of the National Association of Securities Dealers.
In the Declaration and Supplement, Williams Reed amended its Application for Compensation to reduce the amount of compensation requested by the sum of $5,000, “which amount represents the compensation requested by Williams Reed for all services rendered after July 31, 1998; other than compensation requested for the services rendered in response to the Trustee’s requests that Williams Reed furnish information to the Trustee or his counsel or in connection with the preparation of the Application.”
On March 31, 1999, Kevin O’Halloran, as Trustee of the Debtors’ estates, and the Noteholders’ Committee filed a Joint Objection to the Fee Application of Williams Reed. In the Joint Objection, the Trustee and the Noteholders’ Committee object to the Application on two separate grounds.
First, the Trustee and the Committee assert that Williams Reed was not disinterested as of July 16, 1998, as a result of its representation of the Wilsons, and that Williams Reed should therefore be denied compensation pursuant to § 328(c) of the Bankruptcy Code. According to the Trustee and the Committee, Williams Reed was not disinterested as a result of the representation because the Debtors were obligated to indemnify Steven Hutek and Southern Capital Securities, Inc. for certain claims that might be asserted against them ás a result of the sale of the Debtors’ notes. Southern Capital Securities, Inc. and Steven Hutek were the securities dealer and registered representative who sold the Debtors’ notes to the Wilsons, and had entered into a Selling Agency Agreement with the Debtors which provided:
9.a. The Corporation will indemnify and hold the Selling Agent harmless against any losses, claims, damages or liabilities, joint or several, to which the Selling Agent may become subject under the Act, the various state securities laws, or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement or arise out of or are based upon the omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading; ...
Based on this obligation to indemnify, the Trustee and the Noteholders’ Committee contend that the actions of Williams Reed on behalf of the Wilsons triggered a contingent claim against the Debtors and that, as a result, Williams Reed was no longer disinterested within the meaning of § 328(c) of the Bankruptcy Code. The Trustee and the Committee also contend that Williams Reed did not adequately disclose its lack of disinterestedness until the Declaration and Supplemental Disclosure on March 11, 1999, and that this violation of the disclosure rules is independent of the violation of the disinterestedness requirement.
Second, the Trustee and the Notehold-ers’ Committee assert that Williams Reed is not entitled to compensation for services after July 28, 1998, because services provided by a debtor’s attorney after the ap
Discussion
I. Conflicts, disinterestedness, and disclosure.
A. The Statutes and Rules.
The Bankruptcy Code and Federal Rules of Bankruptcy Procedure contain various provisions to ensure the impartiality of professionals in their representation of clients in bankruptcy cases. Section 327(a) of the Bankruptcy Code provides:
11 U.S.C. § 327 . Employment of professional persons
(a) Except as otherwise provided in this section, the trustee, with the court’s approval, may employ one or more attorneys, accountants, appraisers, auctioneers, or other professional persons, that do not hold or represent an interest adverse to the estate, and that are disinterested persons, to represent or assist the trustee in carrying out the trustee’s duties under this title.
(Emphasis supplied). Pursuant to
11 U.S.C. § 101 . Definitions
‡ !j! ^ ‡ Í
(14) “disinterested person” means person that—
sf: if: sj: ;¡í
(E) does not have an interest materially adverse to the interest of the estate or of any class of creditors or equity security holders, by reason of any direct or indirect relationship to, connection with, or interest in, the debtor or an investment banker specified in subparagraph (B) or (C) of this paragraph, or for any other reason.
To qualify for employment under
Rule 2014. Employment of professional Persons
(a) APPLICATION FOR AN ORDER OF EMPLOYMENT. An order approving the employment of attorneys, accountants, appraisers, auctioneers, agents, or other professionals pursuant to§ 327 , § 1103, or § 1114 of the Code shall be made only on application of the trustee or committee... .The application shall state the specific facts showing ... to the best of the applicant’s knowledge, all of the person’s connections with the debtor, creditors, any other party in interest, their respective attorneys and accountants, the United States trustee, or any person employed in the office of the United States trustee.
(Emphasis supplied).
An attorney representing a debtor in a bankruptcy case must also file a statement disclosing all compensation paid or agreed to be paid for services rendered in connection with the case.
In the event that a professional person represents an interest adverse to the interest of the estate, or is not a disinterested person, the Court may deny compensation and reimbursement pursuant to § 328(c). Section 328(c) provides:
11 U.S.C. § 328 . Limitation on compensation of professional persons
Hi i¡: }}: if; ^
(c) Except as provided insection 327(c) , 327(e), or 1107(b) of this title, the court may deny allowance of compensationfor services and reimbursement of expenses of a professional person employed under section 327 or 1103 of this title if, at any time during such professional person’s employment undersection 327 or 1103 of this title, such professional person is not a disinterested person, or represents or holds an interest adverse to the interest of the estate with respect to the matter on which such professional person is employed.
(Emphasis supplied). Thus,
B. Interpretation.
Several principles are established pursuant to these statutory provisions and rules.
First, a professional person employed by the trustee must be disinterested and must not hold or represent an interest adverse to the estate.
Second, having an “interest materially adverse to the interest of the estate,” as that phrase is used in the definition of “disinterested person” contained in
possessing, or serving as an attorney for a person possessing, either an “economic interest that would tend to lessen the value of the bankruptcy estate or that would create either an actual or potential dispute in-which the estate is a rival claimant ... or ... a predisposition under the circumstances that render such a bias against the estate.”
In re Prince,
Third, a professional person is required to disclose “all of the person’s connections with” the debtor, creditors, and parties in interest pursuant to Rule 2014. “The scope of disclosure is much broader than the question of disqualification .... The applicant and the professional must disclose all connections and not merely those that rise to the level of conflicts.”
In re Granite Partners, L.P.,
These disclosure requirements are not discretionary. The duty of professionals is to disclose all connections with the debtor, debtor-in-possession, insiders,creditors, and parties in interest as well as fee arrangements. They cannot pick and choose which connections are irrelevant or trivial.
# ‡
Violation of the disclosure rules alone is enough to disqualify a professional and deny compensation, regardless of whether the undisclosed connections or fee arrangements were materially adverse to the interests of the estate or were de minimis.
In re EWC, Inc.,
Fourth, the duty to disclose “all connections” is a continuing duty that does not terminate when the professional’s employment is approved.
In re Diamond Mortgage Corp.,
“Rule 2014(a) does not expressly require supplemental or continuing disclosure.... Nevertheless,section 327(a) implies a duty of continuing disclosure, and requires professionals to reveal connections that arise after their retention .... Continuing disclosure is necessary to preserve the integrity of the bankruptcy system by ensuring that the trustee’s professionals remain conflict free.”
In re Granite Partners, L.P.,
Finally, the remedy for a professional person’s violation of the continuing duty to disclose may be denial of the professional’s compensation. “Failure to disclose connections that have the potential for creating a conflict warrants a denial of all compensation to debtor’s counsel.”
In re Smitty’s Truck Stop, Inc.,
C. Application.
In this case, the Trustee and the Note-holders’ Committee do not contend that Williams Reed was not disinterested when it filed its Application for Employment on July 1, 1998, or when the Application was verbally approved on July 2, 1998. Instead, they contend that circumstances subsequently changed on or about July 16, 1998, when an attorney with Williams Reed met with Harry and Dorothy Wilson regarding possible claims arising from the Wilsons’ purchase of Notes issued by the Debtors. The ultimate issue is whether any such change of circumstance constituted the representation of an adverse interest or affected the disinterestedness of Williams Reed, or should have been disclosed in accordance with Rule 2014 of the Bankruptcy Rules.
Williams Reed acknowledges that Schifino met with the Wilsons on July 16, 1998,' and that the meeting involved the possible representation of the Wilsons by Williams Reed in connection with the Wilsons’ purchase of the Notes. Schifino spoke with Steven Hutek by telephone on July 16 or July 17, 1998. At that time, other attorneys at Williams Reed were preparing for and handling the evidentiary hearing on the motions of the U.S. Trustee and the Noteholders’ Committee for the appointment of a chapter 11 trustee, which
Williams Reed did undertake the representation of the Wilsons subsequently. On July 24, 1998, the Court entered its order granting the motions to appoint a chapter 11 trustee, and on July 28, 1998, Kevin O’Halloran qualified to serve as trustee and the Court entered an order approving his appointment and beginning his service as trustee. Also on July 28, 1998, Williams Reed provided an engagement letter to the Wilsons. The Wilsons executed the engagement letter on July 29, 1998, and the fully executed engagement letter was received by Williams Reed on or about July 30, 1998.
Williams Reed indicates that it decided to accept the representation of the Wilsons after the Court granted the motions to appoint a chapter 11 trustee. Once the trustee qualified and was appointed, Williams Reed provided the engagement letter to the Wilsons, the Wilsons signed the letter, and the letter was returned to Williams Reed on or about July 30, 1998.
The continuing duty to disclose matters which may impact on conflicts or disinterestedness arises from the disclosure requirements of
Certainly, there may be circumstances where conferences or other “connections” with a person should be disclosed, even though representation of such person is not undertaken or even though representation is undertaken at a time when the attorney is not the attorney for the “trustee.” More time may elapse than elapsed in this instance, preparatory work may be involved, conferences may take place, relationships may be developed, or other events may transpire, and such connec- • tions may require disclosure. However, in this case, the circumstances do not require the Court to conclude that the “connections” with the Wilsons should have been disclosed prior to the time that the representation of the Wilsons was undertaken. Accordingly, under the circumstances, and in view of the Court’s conclusions in Section II below, the Court concludes that the compensation of Williams Reed should not be reduced or disapproved because Williams Reed did not disclose the connections with Wilsons after the initial meeting or when it undertook the representation.
If, while Williams Reed was the attorney for the debtor in possession, the representation of the Wilsons had been undertaken' or the connections with the Wilsons were such as to require disclosure, Williams Reed would have had the duty to disclose the representation or the connections, and the qualification of Williams Reed to continue as the attorneys for the debtor in possession could have been considered. Additionally, if required disclosures had not been made, or if the representation of the Wilsons had been undertaken while Williams Reed was the attorney for the debtor' in possession and the representation had not been disclosed, the Court would consider disallowing or reducing the compensation of Williams Reed for its services for the debtor in possession. Further, there may be circumstances where the representation of or connections with a person prior or subsequent to the representation of a debtor in possession would cause a court to disallow or reduce compensation to the attorney for its representation of the debtor in possession. However, in this case, the representation was not undertaken while Williams Reed was the attorney for the debtor in possession, disclosure was not required under the circumstances, and the circumstances do not require the court to reduce or deny compensation to Williams Reed as attorney for the debt- or in possession.
II. Compensation for representation of trustee or debtor.
Since Williams Reed was not the attorney for the trustee or the debtor in possession after July 28, 1998, the issue arises as to whether it can be compensated from the estate for services rendered after that date as attorney for the debtor.
A. Statutes.
Section 503 provides for the allowance of administrative expenses in bankruptcy cases. The section provides that administrative expenses include the compensation and reimbursement of attorneys under § 330(a):
11 USC § 503 . Allowance of administrative expenses
(b) After notice and a hearing, there shall be allowed administrative expenses, other than claims allowed under section 502(f) of this title, including —
(2) compensation and reimbursement awarded under section SS0(a) of this title;
(Emphasis supplied). Section 330(a) provides that the court may award compensation “to a professional person employed under
11 USC § 330 . Compensation of officers
(a)(1) After notice to the parties in interest and the United States Trustee and a hearing, and subject to sections 326, 328, and 329, the court may award to a trustee, an examiner, a professional person employed under section 827 or 1103—
(A) reasonable compensation for actual, necessary services rendered by the trustee, examiner, professional person, or attorney and by any paraprofessional person employed by any such person; and
(B) reimbursement for actual, necessary expenses.
11 USC § 327 . Employment of professional persons
(a) Except as otherwise provided in this section, the trustee, with' the court’s approval, may employ one or more attorneys, accountants, appraisers, auctioneers, or other professional persons, that do not hold or represent an interest adverse to the estate, and that are disinterested persons, to represent or assist the trustee in carrying out the trustee’s duties under this title.
(Emphasis supplied).
In a case under chapter 11, a debtor in possession has the rights and powers of a trustee:
11 USC § 1107 . Rights, powers, and duties of debtor in possession
(a) Subject to any limitations on a trustee serving in a case under this chapter, and to such limitations or conditions as the court prescribes, a debtor in possession shall have all the rights, other than the right to compensation undersection 330 of this title, and powers, and shall perform all the functions and duties, except the duties specified in sections 1106(a)(2), (3), and (4) of this title, of a trustee serving in a case under this chapter.
(Emphasis supplied). A debtor is no longer a debtor in possession when a person that has qualified under section 322 is serving as trustee:
11 USC § 1101 . Definitions for this chapter
In this chapter' — •
(1) “debtor in possession” means debtor except when a person that has qualified under section 322 of this title is serving as trustee in the ease;
(Emphasis supplied).
B. Interpretation.
A debtor in a case under chapter 11 is a debtor in possession and has the rights and powers of a trustee, except when a person that has qualified under section 322 is serving as trustee. Accordingly, once a chapter 11 trustee has qualified and is serving, the debtor is no longer a debtor in possession, and the attorney for the debtor is no longer an attorney for a debtor in possession.
The fact that a chapter 11 trustee is appointed and the debtor is no longer a debtor in possession does not mean that the debtor no longer exists or no longer needs representation. The trustee may operate the business of the debtor (§ 1108). Additionally, the trustee has several duties, including the duty to investigate the acts of the debtor and the financial condition of the debtor (§ 1106), the duty to file a plan (§ 1106), and the duties to be accountable for property received and to account for the administration of the estate (§§ 1106 & 704). However, if the debtor is a corporation, the trustee does not replace the shareholders, nor is the corporate entity necessarily dissolved. The corporate entity remains a debtor (
Prior to the 1994 amendments to the Bankruptcy Code,
The 1994 amendments to the Bankruptcy Code deleted the provision in
Some courts have viewed the deletion of the provision for compensation “to the debtor’s attorney” as inadvertent, and continue to award compensation to the debt- or’s attorney even though the attorney is not employed by the trustee under
The Fifth Circuit Court of Appeals recently considered the issue in a more extensive opinion, and concluded that regardless of whether the deletion of the phrase “to the debtor’s attorney” was intentional or inadvertent, the statute is not ambiguous and must be followed.
Andrews & Kurth L.L.P. v. Family Snacks, Inc. (In re Pro-Snax Distributors, Inc.),
Although the legislative history and, indeed, a brief syntactical evaluation of the clause at issue suggest that Congress inadvertently neglected to include attorneys, our canons of construction do not require — nay, do not permit — us to consider these exogenous sources when the statute is clear textually on its face.
Id. at 425. The Fifth Circuit considered congressional intent, and concluded that “a clear determination cannot be made as to whether Congress ‘intended’ to disallow all fees to a debtor’s counsel after the appointment of a Chapter 11 trustee.” Id. at 423. The court also considered public policy, as well as a number of other arguments raised by the attorneys for the debtor. The court concluded:
We decide the issue before us bound by our conventions of statutory construction, even though common sense might lead the lay observer to conclude that a different result is perhaps more appropriate. The law, and the rules to which we adhere in order to interpret it, does not always conform to the dictates of common sense. In this case, we are faced with a statute which is clear on its face. It excludes attorneys from its catalog of professional officers of a bankruptcy estate who may be compensated for their work after the appointment of a Chapter 11 trustee.
Id. at 425.
The opinion of the Fifth Circuit is extensive and thorough, and addresses many more considerations than have been raised in this case. Accordingly, the Court concludes that
C. Application.
In this case, O’Halloran qualified and began serving as trustee on July 28, 1998. After July 28, 1998, the Debtor was no longer a debtor in possession, and no longer had the rights and powers of a trustee. Accordingly, after July 28, 1998, Williams Reed was no longer the attorney for the “trustee.”
Since
Conclusion
In this case, Williams Reed performed substantial legal services under difficult circumstances. The Debtors’ cases involved complex, sophisticated issues, significant debt, numerous creditors, and considerable publicity. Williams Reed agreed to undertake the representation after the cases had been filed, and the Debtors’ original attorney was unable to continue due to health concerns. Extensive litigation, including the motions to appoint a chapter 11 trustee, was already scheduled or in progress when Williams Reed filed its Application for Employment. Williams Reed was required to prepare quickly for the extensive evidentiary hearing on the motions to appoint the trustee. The services provided by Williams Reed were proficient and reasonable. Finally, Williams Reed asserts that it was unaware of any basis by which the representation of the Wilsons would be adverse to the Debtors or the Debtors’ estates, and further that it did not undertake the representation until it was no longer the attorney for the debt- or in possession. Williams Reed should be compensated for its services to the debtor in possession.
The issue, however, is whether Williams Reed may be compensated from the assets of the estate for the services rendered when it was not employed by the trustee and was not representing or assisting the trustee in carrying out the trustee’s duties. The Court concludes that such compensation is not authorized by
Accordingly:
IT IS ORDERED that:
1. The First and Final Application for Allowance of Compensation for Services Rendered by Williams Reed Weinstein Schifino & Mangione, P.A., as Attorneys for the Debtors is approved in part and disapproved in part as set forth in this Order.
2. Williams Reed Weinstein Schifino & Mangione, P.A. is awarded the sum of $82,159.90 as compensation for professional services rendered in this case, together with the sum of $5,109.41 as reimbursement for expenses incurred, for a total award of $87,269.31. Williams Reed previously received an interim award in the amount of $60,000 on December 23, 1998, so that the balance of the award due to Williams Reed is $27,269.31.
3. The Joint Objection by Trustee and Noteholders’ Committee to Fee Application of Williams Reed Weinstein Schifino & Mangione, P.A. is sustained in part and overruled in part as set forth in this Order.