MEMORANDUM OPINION AND ORDER DENYING NUTOVIC & ASSOCIATES’ APPLICATION FOR FINAL ALLOWANCE OF FEES AND EXPENSES
The Debtors filed twelve separate chapter 11 petitions on May 11, 2009 (“Petition Date”). The cases were consolidated for joint administration. (Order Granting Joint Administration, ECF # 6.) On July 1, 2009, the Court entered a written order dismissing these chapter 11 cases following a hearing on the same day (“Dismissal Hearing”).
(See
Order Granting Motion to Dismiss Case, ECF # 39.) Debtors’ counsel, Isaac Nutovic, Esq. of the firm Nuto-vic & Associates (collectively, “Nutovic”), the retention of whom was approved by the Court on an interim basis only on June 5, 2009 (Order Authorizing Interim Retention of Nutovic & Associates as Attorneys for Debtors and Debtors-in-Possession (“Interim Retention Order”), ECF # 24), now moves this Court for fees in the amount of $84,008.50 and expenses in the amount of $200.43, including (a) $69,832.50 in fees for work completed from May 11, 2009 through July 1, 2009 (while the case was pending) and (b) $14,076 in fees incurred in preparing and arguing the Application after the case was dismissed. (App. For Final Professional Compensation for Nutovic (“Application”) at ¶28 (ECF # 42); Resp. to Opp. to Application at ¶ 23 (ECF # 44).) The Scher Law Firm, LLP (“Scher”), as nominee and attorneys for
BACKGROUND
A. Pre-Bankruptcy Events
Prior to filing their bankruptcy cases, the Debtors, controlled by individual debt- or Fred Deutsch (“Deutsch”), managed real estate primarily to reduce investors’ tax liability. (See Deutsch Corporate Ownership and Local Rule 1007-2 Decl., Case No. 09-12996 (“Local Rule 1007-2 Deck”), Addendum at ¶ 1 (ECF # 11).) Parklex LP managed real estate located at 114 East 32nd Street (the “East 32nd Street Property”) to generate tax deductions for the benefit of certain parties (“Limited Partners”) invested in the property. (Id.) In 1991, a Deutsch-controlled entity acquired the controlling interests in Parklex LP’s general partner. (Id. at ¶ 2.) On May 8, 2006, Deutsch, acting as principal of Parklex LP’s former general partner, Debtor Parklex Associates, Inc. (“PAI”), allegedly sold the East 32nd Street Property for approximately $55 million. The Scher Law Firm, LLP v. Nutovic, et al., No. 24026/2009, Verified Petition, New York State Supreme Court, Kings Cty (Sept. 22, 2009). (Ex. M to Graff. Aff. (hereinafter, “Ex. M”) at ¶ 9.) At the sale closing, Deutsch allegedly directed that $23,080,351.63 (“$23 Million Transfer”) from the sale proceeds be transferred to FAL Associates, LLP (“FAL”), another Debtor formed on May 1, 2006. (Id. at ¶ 10.)
Diedrich Holdkamp, one of the Limited Partners, commenced an action in Kings County State Supreme Court, captioned Parklex Associates, L.P., et al v. Parklex Associates, et al, No. 14514/2006, on May 11, 2006 (“State Court Action”). Hold-kamp sought an accounting on behalf of all of the Limited Partners. (Id. at ¶ 14.) On May 26, 2006, Justice Carolyn Demarest signed an order in the State Court Action (“2006 TRO”) prohibiting the “secreting or wasting of funds in any and all accounts used, maintained or in the name of Parklex Associates, L.P., or its general partner.” (Id. at ¶ 16.) On July 12, 2006, $20,035,823.80 was allegedly transferred from FAL to DB Partners I LLC (“20 Million Transfer”), a non-debtor entity controlled by Deutsch, formed on July 5, 2006, purportedly on the eve of the disclosure of the “closing binders” from the closing of the sale of the East 32nd Street Property. (Id. at ¶¶ 20, 25, 29.)
The parties settled the State Court Action on April 13, 2009, conditioned on the Debtors making certain scheduled payments (“Settlement Agreement”).
(Id.
at ¶ 7(a).)
2
In the event of a default under the Settlement Agreement, a Confession of Judgment in the amount of $15,574,597.19, which had been signed by Deutsch, would be entered against Deutsch, though “the [Settlement [AJgreement did not block the plaintiffs from taking further action against [certain] other defendants if the
B. The Bankruptcy Filing
The Debtors filed their chapter 11 petitions on May 11, 2009, ostensibly because of (i) their inability to make the payments due under the Settlement Agreement and (ii) their expectation that they could assemble funds from third parties (the Debtor’s wife and former real estate attorneys) who allegedly had an interest in the Debtors consummating the Settlement Agreement. (See Application at ¶¶ 20-22); Application Hr’g Tr. at 7:10-13 (“[T]he [Settlement [A]greement did not block the plaintiffs from taking further action against the other defendants if the settlement agreement was not consummated.”)
C. The Retention Hearing
Nutovic filed an application to be retained as counsel for all of the Debtors on May 27, 2009, indicating that his law firm “received the sum of $87,532 ($100,000 less $12,468 paid as filing fees) as a retainer [‘Retainer’] ... for services rendered and to be rendered to the Debtors” in connection with the proceedings. (Nutovic Affirmation in Supp. of Mot. to Authorize Debtors’ Retention of Nutovic and Assocs. at ¶ 6 (ECF # 10) (“Nutovic Retention Aff.” and “Retention Motion”, respectively).)
3
At the June 3, 2009 hearing on the Retention Motion (“Retention Hearing”), Nutovic again stated that “the source of the [$100,000] retainer is from DB Partners, LLC” a non-debtor “wholly owned by Mr. Deutsch.” (Retention Hr’g Tr. at 5:23-25.) He also represented that “all the real estate holding entities ... just obtained ... their assets post the closing of 2006, and the rest of the entities have no assets and have had no dealings and no operations or any activities since 2006.... And my understanding is that these are shell entities. No operations, at least since 2006.” (Retention Hr’g Tr. at 10:19— 23; 11:7-9.)
At the Retention Hearing, the U.S. Trustee’s office expressed concern about Nutovic’s retention, particularly with respect to Nutovic’s ability to represent all twelve Debtors without a conflict arising. (Retention Hr’g Tr. at 7:22-8:3, 8-11.) The U.S. Trustee’s suspicions were raised aft^r examining several Fed. R. BaNKR.P. 2004 requests filed by the Limited Partners seeking to investigate the Debtors (“2004 Requests”), indicating that “monies were transferred from one entity to another or perhaps from Mr. Deutsch,” or from a Debtor entity to non-debtor (Deutsch’s wife). (Id.) The Court was equally troubled by the potential for conflict, as well as the possibility that the Retainer was the product of fraudulent conveyances. (Retention Hr’g Tr. at 22:15-19 (“If ... there have been fraudulent conveyances, they’ll be plenty of chance to explore that in due course. If Mr. Nutovic’s fees are the result of improper transfers, it’s going to be his problem in keeping the fees from other sources.”).) Accordingly, the Court only approved the Retention Motion on an interim basis. (Retention Hr’g Tr. at 18:22-25; Interim Retention Order.) The Interim Retention Order specifically provided that “all compensation paid and reimbursement of expenses incurred by [Nutovic], shall be subject to approval by this Court pursuant to 11 U.S.C. Sections 330 and 331.” (Interim Retention Order at 2.)
D. The Dismissal Hearing
This Court held two additional hearings in the bankruptcy case following the Retention Hearing: a hearing on June 23, 2009 to address the 2004 Requests (“2004 Requests Hearing”) and the Dismissal Hearing on July 1, 2009, to address the Debtors’ motion to dismiss the case. Fol
E. Post-Dismissal Activities
On July 2, 2009, one day after the case was dismissed, Justice Demarest issued a TRO in the State Court Litigation against Nutovic, prohibiting him from spending the balance of the Retainer on deposit with him. (Order to Show Cause (July 2, 2009) (Graff Aff. Ex. H).)
On July 9, 2009, Nutovic admitted in open court at the State Court July 9 Hearing that the he had already spent the entirety of the Retainer. (State Court July 9 Hr’g Tr. at 31:23.) The transcript of the State Court July 9 Hearing also reveals that Nutovic argued that “once the [bankruptcy] case is dismissed ... there is no preclusion to taking the money that was paid before for services rendered.” (Id. at 13:17-19.) Nutovic’s statement to Justice Demarest is in direct conflict with what Nutovic argued before this Court at the hearing on the current Application. (Compare id. with Application Hr’g Tr. at 11:12.) At the State Court July 9 Hearing, Justice Demarest ruled on the record that Nutovic must hold the money transferred to him from the retainer in escrow. (State Court July 9 Hr’g Tr. at 31:19-20.) Nuto-vic responded that he spent the money and answered affirmatively when asked “[y]ou have spent all of this money without approval?” (Id. at 31:24-25; 32:1.) Justice Demarest then ordered Nutovic that “[y]our direction is that any sum that you have is to be held. And perhaps this has to be modified to indicate that whatever sums you perhaps hold out of the $100,000, that you are to place in escrow pending further order.” (Id. at 32:8-12.)
F. Turnover Proceeding Against Nu-tovic
On September 22, 2009, Scher filed the Nutovic Turnover Action, seeking relief “[d]irect[ing] [Nutovic] to turnover to [Scher as nominee and Claimants’ Representative for the Plaintiffs and LPs in the settlement of the State Court Action] $100,000, plus interest on the monies running at 9% per annum, pursuant to CPLR ¶ 5004, from May 11, 2009.” (Ex. M.) Among other things, Scher claimed that “$100,000.00 ‘general retainer deposit’ paid to [Nutovic] was wrongfully received and retained as a payment directly from one of
Nutovic did not disclose to this Court that the source of the Retainer was not non-debtor DB Partners I LLC, but instead was debtor Management Associates LLC, until he filed the current Application. (See Application Hr’g Tr. at ¶ 13:13-20.) At the hearing on the Application, Nutovic alleged that Management Associates LLC received the money for the Retainer from “DB Partners” (“Management Associates Transfer”) on the day before the petition was filed, though his statements in the Application and the bank statements attached to the Graff Aff. possibly indicate that that transfer took place on the Petition Date. (Compare id. with Application at ¶ 19 (“On May 11, 2009 before the Debtors’ cases were commenced, Deutsch arranged for $100,000 to be wire-transferred to Applicant as a retainer.”); Graff. Aff. Ex. D.)
G. The Current Application
On June 1, 2010, nearly a year after he admitted that he spent the Retainer paying himself, Nutovic filed the Application in this Court to recover fees and expenses incurred during the pendency of the bankruptcy case. Scher argues that Nutovic is not entitled to fees due to his material misrepresentations, including his “failure to identify the source of the money [instead only identifying that an ‘affiliate entity’ or an entity wholly owned by Deutsch paid his fee] belonging to Parklex,” which was “consistent with his failure to disclose to this Court that the money was subject to two (2) [TROs (one of which is presumably the 2006 TRO) ] issued by [Justice Demarest in state court] that [were] supposed to prevent Fred Deutsch, one of the Debtors, from ‘secreting or wasting’ Park-lex Associates’ money.” (Graff Aff. at ¶ 2.) Scher also submits, among other things, that Nutovic did not segregate funds paid to him by Management Associates LLC and spent all of the money without court approval. (Id.)
Nutovic acknowledges, and the record supports, that (i) he spent the Retainer prior to obtaining court approval, in violation of the Bankruptcy Code and the Federal Rules of Bankruptcy Procedure; (ii) he failed to disclose the debtor source (Management Associates LLC) of the Retainer at the Retention Hearing; and (iii) if he had a duty to investigate the source of funding of the Retainer, which the Court finds he did, and if the Retainer is a product of a fraudulent conveyance (including, but not limited to, the 23 Million Transfer, the 20 Million Transfer and/or the Management Associates Transfer), a
1. Nutovic Acknoivledges He Spent The Retainer Without Court Approval
Specifically, Nutovic now agrees that the balance of the retainer, after being applied to any prepetition amounts (such as the filing fee), “could not be taken or used by him absent the approval of the bankruptcy court even after the bankruptcy cases were dismissed.” (E.g., Application Hr’g Tr. at 10:25-11:4; 11:12.) He also admitted in open court on July 9, 2009 in the State Court Litigation that he spent the Retainer. (State Court July 9 Hr’g Tr. at 31:23.)
2. Nutovic Acknowledges He Failed to Disclose the Debtor Source of the Retainer at the Retention Hearing
Regardless whether debtor Management Associates LLC was the payor of the Retainer for bookkeeping purposes, shortly after the money was wired from DB Partners I, LLC (a different entity than the “DB Partners, LLC” which Nutovic represented to be the source of the Retainer at the Retention Hearing (Retention Hr’g Tr. at 5:23-25)), the money came from Management Associates LLC, a debtor, and Nutovic did not disclose this to the Court until more than a year after the Retainer was received. (See Application Hr’g Tr. at 13:3-21 (“The Court: You received your retainer from DB Partners I LLC, which was not a debtor in front of me? Mr. Nutovic: Correct, your Honor. The Court: Okay. Where did DB I LLC obtain the funds that were used to pay your retainer? Mr. Nutovic: I don’t have specific knowledge, Your Honor.... I believe it was funds related to Mr. Deutsch’s prior business activities, which may have been Parklex.... [T]o be clear ... DB Partners transferred the money to Management Associates which was a debtor on the day before the filing, and they in turn transferred it immediately over to me. And Mr. Deutseh had told me that he had done that simply as a bookkeeping matter because that entity Management Associates was where he disbursed all funds related to his business entities. But the source of the funds was DB Partners LLC.”).) Thus, the Court is not convinced by Nutovic’s argument that to “report to the court that it got the Retainer from one of the Debtors would have been misleading; the proper reporting was that the money came from DB.” (Resp. to Opp. to Application at ¶ 5.)
3.Nutovic Acknowledges That If He Had a Duty to Investigate the Source of Funding of the Retainer, Which the Court Finds He Did, and If The Retainer is a Product of a Fraudulent Conveyance, a Determination Which the Court Leaves to the State Court, Nutovic Would Have to Disgorge any Fees He Obtained In and Following the Bankruptcy Case
It also appears that Nutovic never inquired into the source of the funds that DB Partners I LLC paid to him as his retainer. Nutovic directly contradicted himself about the status of Deutsch’s various business entities since 2006 in an attempt to explain why such inquiry was not necessary.
(Compare
Application Hr’g Tr. at 16:6-17 (“The Court: And did you make any inquiry in light of the allegations that Mr. Deutseh had committed a fraud, among other things, by improperly transferring twenty-three million dollars to entities that he controlled? Did you make any inquiry about the source of the funds that DB Partners I
LLC
— what was the source of the funds that they paid as your retainer? Mr. Nutovic: Your Honor, I— my understanding was — and did I make a specific inquiry, I cannot recall my conver
Nutovie also admitted that he was aware that several fraudulent conveyance claims were being asserted against Deutsch. (Application Hr’g Tr. at 26:23-27:8) (Mr. Nutovie: “I made an inquiry about the source of the funds, Your Honor. They were his funds. I understood that he was under — he had been accused of making fraudulent transfers. I did not — I didn’t have the time nor did I or — honestly, Your Honor, with three years between the time of the fraudulent conveyance and the representation to me that there had been transactions and business conducted since that period of time, I don’t believe I had an obligation to tell the Court we’re dealing with a fraudulent conveyance over here and the source of the funds may be a fraudulent conveyance.”) Furthermore, Nutovie admitted that if an attorney’s funds derived from the product of a fraudulent transfer, they would be subject to disgorgement:
The Court: [C]an you tell me whether there is any applicable law that deals with disgorgement of retainers where the source of a — the source of the funds that the attorney receives as the retainer was proceeds of a fraudulent transfer, for example?
The Court: Subject to disgorgement?
Mr. Nutovie: If the attorney had — and the normal rules of subsequent transfers, Your Honor, if value is not given then it’s subject to disclosure.
(Application Hr’g Tr. at 22:11-21. See also id. at 26:4-11 (“The Court: Is that right. You can accept the fruits of a fraudulent conveyance as your retainer without disclosing those facts to the bankruptcy court at the time you’re seeking your approval of a retention? Mr. Nuto-vic: Your Honor, again, you’re supposing that these are the fruits of a fraudulent conveyance. And if they are perhaps — if you can meet the requirements of a constructive trust, then you are correct, Your Honor.”).)
Nutovie had detailed knowledge of the purported fraudulent 2006 23 Million and 20 Million Transfers and arguably the May 2009 Management Associates Transfer when he sought to be retained as Debtors’ counsel.
(See id.
at 50:6-12 (“The only fact that was not known to me at the time [of the Retention Hearing] ... as to the source of the funds, that as to whether or not there was other transactions, whether you can trace directly from 2006 to 2009 the funds that I got, because there is a gap in the account statements.”).) Furthermore, to the extent Nutovie did not know of any of the transfers, the Court made it clear at the Retention Hearing in June 2009, and it became even clearer when then Nutovie Turnover Action was filed in September 2009, that Nutovie should have been, if he was not before, keenly interest
The Court is similarly not convinced by Nutovic’s argument that the Settlement Agreement may have expunged any claims of fraudulent conveyance against Deutsch and thus the attorney fees could not be the product thereof. But, as described further below, the Court leaves it to the state court to (i) interpret the Settlement Agreement entered into in that court, and (ii) resolve the state law issues whether the 23 Million and 20 Million Transfers and Management Associates Transfer were fraudulent such that the Retainer was the product of those alleged fraudulent transfers. Nutovic was on notice of such potential fraud on the Petition Date, at the Retention Hearing, and then when the Nutovic Turnover Action was filed. These circumstances were sufficient to require Nutovic to investigate the source of the Retainer. 5
Accordingly, as explained further below, the Court denies Nutovic’s Application in its entirety due to (i) his failure to obtain Bankruptcy Court approval before spending the Retainer, particularly because he was never retained on a final basis, in violation of sections 327 and 330 of the Bankruptcy Code; (ii) his failure to reveal the source of the Retainer at the Retention Hearing in violation of his disclosure duties under sections 327 and 329 of the Bankruptcy Code, and (iii) his failure to investigate whether the funds derived from a fraudulent transfer, despite the facts that the 23 Million and 20 Million Transfers took place in 2006 and Nutovic did not receive the Retainer until 2009. The Court leaves to the state court to determine whether, and the extent to which, the source of the Retainer was actually a fraudulent conveyance. But, the Court will not award Nutovic any fees or expenses requested in the Application due to his failure to obtain approval prior to spending the fees, failure to disclose the correct payor of the Retainer, and failure to properly investigate the source of the Retainer.
A. Nutovic Should Have Sought Approval of his Retention on a Final Basis and Approval of Fees Prior to Spending The Retainer and Dismissing the Bankruptcy Case Under Sections 327 and 330 of the Bankruptcy Code, Though the Court Still Has Jurisdiction to Hear the Application Now
1. The Code Requires An Attorney’s Retention and Fee Application To Be Approved Prior to Awarding Any Fees
Section 327(a) of the Bankruptcy Code provides that “[e]xcept as otherwise provided in this section, the trustee [or debtor-in-possession;
see
11 U.S.C. § 1107], with the court’s approval, may employ one or more attorneys ... 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.” Retroactive approval of professional employment will only be granted in “extraordinary circumstances,” which may be established by examining “whether the applicant or some other person bore responsibility for applying for approval; whether the applicant was under time pressure to begin service had initial approval not been granted; the extent to which compensation to the applicant will prejudice innocent third parties; and other relevant factors.”
In re F/S Airlease II, Inc.,
The court may award fees to professional persons retained under section 327 pursuant to section 330 of the Bankruptcy Code. 11 U.S.C. § 330. Section 330 provides in relevant part:
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 ...
(A) reasonable compensation for actual, necessary services rendered by the trustee, examiner, ombudsman, professional person, or attorney and by any paraprofessional person employed by an such person; and
(B) reimbursement for actual, necessary expenses.
11 U.S.C. § 330(a)(1).
In determining reasonable compensation, section 330 directs the court to consider:
(A) the time spent on such services;
(B) the rates charged for such services;
(C) whether the services were necessary to the administration of, or beneficial at the time which the service was rendered toward the completion of, a case under this title;
(D) whether the services were performed within a reasonable amount of time commensurate with the complexity, importance and nature of the problem issue, or task addressed;
(E) with respect to a professional person, whether the person is board certified or otherwise has demonstrated skill and experience in the bankruptcy field; and
(F) whether the compensation is reasonable based on the customary compensation charged by comparably skilled practitioners in cases other than cases under this title.
11 U.S.C. § 330(a)(3). 6
“A bankruptcy court confronted with a professional’s violation of the Code and/or Rules [including sections 327, 329 and 330] is afforded a ‘great deal of latitude in fashioning an appropriate sanction.’ ”
Vergos v. Gonzales (In re McCrary and Dunlap Constr. Corp.),
[n]oncompliance with the provisions of the Code and Rules that govern the employment and compensation of professionals can range from inadvertent, technical violations, which may call for the imposition of no sanction whatsoever, to intentional violations, which may warrant complete disgorgement of fees. Caselaw establishes that the benchmark for determining the severity of the sanction to be imposed is willfulness.... [T]he bankruptcy court should deny all compensation to an attorney who exhibits a willful disregard of his fiduciary obligations to fully disclose the nature and circumstances of his fee arrangement under § 329 and Rule 2016.
Id.
(internal quotation marks omitted). The
Vergos
court acknowledged that “[precedent also makes clear that non-willful violations of the Code and Rules generally do not call for imposition of the harsh sanction of complete disgorgement of fees,” but “a finding of willfulness must [not] in all instances precede an order requiring complete disgorgement of fees.”
Id.
Instead, “[d]isgorgement may be proper even though the failure to [comply
2. The Bankruptcy Court Has Jurisdiction Over Postr-Dismissal Fee Applications
Furthermore, as the
Dery
court determined,
3. Nutovic Violated Sections S27 and 330 of the Bankruptcy Code by Spending the Entire Retainer After the Case Was Dismissed
Here, while Nutovic has filed an application pursuant to section 330 of the Bankruptcy Code, he was never finally retained by this Court under section 327, and collected the fees more than a year ago before applying to this Court for compensation. He has failed to demonstrate any “extraordinary circumstances” why
nunc pro tunc
approval of his retention on a final basis or his fees going back more than a year would be appropriate. The Interim Retention Order specifically required that “all compensation paid and reimbursement of expenses incurred by [Nutovic], shall be subject to approval by this Court pursuant to 11 U.S.C. Sections 330 and 331.” (Interim Retention Order at 2.) He was put on notice by Justice Demarest in July 2009, and again in September 2009, when the Nutovic Turnover Action was filed, that it was inappropriate to spend the Retainer until he obtained this Court’s approval. The delay and blatant misuse of the Bankruptcy Code and clear violation of
B. Failure to Disclose the Source of A Retainer Is Sufficient To Deny A Fee Application Before or After A Case is Dismissed
1. Section 329 of the Bankruptcy Code Requires Detailed Disclosure of the Source of Prepetition Retainers
The Court also finds that Nutovic’s failure to disclose the source of his retainer, debtor Management Associates LLC, until this Application was filed warrants a complete denial of the Application. Under 11 U.S.C. § 329(a), “[a]ny attorney representing a debtor in a case under this title, or in connection with such a case, whether or not such attorney applies for compensation under this title, shall file with the court a statement of the compensation paid or agreed to be paid, if such payment or agreement was made one year before the date of the filing of the petition, for services rendered or to be rendered in contemplation of or in connection with the case by such attorney, and the source of such compensation.” Fed. R. BankrP. 2016 requires disclosure of any payments previously made to the applicant and of the existence of any compensation agreement between the applicant, their client and any third party who will share the compensation, and specifically requires “[a] supplemental statement ... within 15 days after any payment or agreement not previously disclosed.” Id. Fed. R. BankR.P. 2017 permits the court on its own initiative, or on motion by a party in interest, to decide “whether payment[s] of money or ... transferís] of property by the debtor, made directly or indirectly and in contemplation of the filing of a petition under the Code by or against the debtor ... to an attorney for services rendered or to be rendered” as well any payments made after the entry of the order for relief to attorneys by the debtor for “services in any way related to the case” are “excessive.”
“Section 329 and Rule 2016 are fundamentally rooted in the fiduciary relationship between attorneys and courts.”
Downs,
“Compensation may be denied, particularly when an attorney intentionally misrepresents facts [required to be disclosed under section 329] and deceives the court. The bankruptcy court may order disgorgement of fees, award costs or impose other penalties when an attorney is found to have committed a fraud on the court.” 3 COLLIER ON BANKRUPTCY 329.04[l][b] (citing
In re Teknek,
2. The Reasonableness of Prepetition Retainers is Reviewable After a Case is Closed
Prepetition retainers and the required attendant disclosures are also reviewable after a case has been closed: “[generally the payment, or agreement to pay, should be examined prior to the closing of the estate. However, a closed estate may be reopened for the purpose of making a motion to recover excessive compensation paid by a debtor for services rendered in conjunction with the case if the payments were concealed and not revealed by the statement required to be filed. Such procedure would be especially warranted if the size of the payment is substantial.” 3 Collier on Bankruptcy ¶ 329.05[2].
3. Nutovie’s Failure to Disclose the Source of the Retainer, Combined With Deutsch’s Failure to Provide More Detailed Information about DB Partners I, LLC in the Local Rule 1007-2 Decl. Are Sufficient to Warrant a Denial of the Application
Here, like the attorney in
Vergos,
Nuto-vic misrepresented that the source of the retainer was DB Partners LLC
8
at the Retention Hearing. Regardless whether Management Associates LLC was merely a vehicle for paying Deutsch-entity expenses, no one disputes that it was the last source of the Retainer before it was wired to Nutovic. Nor did Nutovic properly disclose Deutsch’s interest in DB Partners I, LLC until the current Application, despite a cursory mention in the Local Rule 1007-2 Affidavit of an “investment entity with cash” (Local Rule 1007-2 Aff. at ¶4), which further misled the Court regarding the source of the Retainer in June 2009. Such failures are particularly unreasonable in light of the approximately twenty-four hours Nutovic spent preparing the Debt
C. Nutovic Had a Duty to Investigate the Source of the Retainer Where There Is a Reasonable Suspicion That the Funds Derived From a Fraudulent Transfer
1. Attorneys Must Investigate the Source of Funds Received Where A Reasonable Lawyer Would Question the Client’s Intent In Paying the Fees
The Court also finds that Nutovic had a duty to investigate the source of the retainer at least after the June 2009 Retention Hearing and again when the Nuto-vic Turnover Action was filed, if not prior to the Petition Date. Nutovic’s failure to investigate further warrants denying his Application. Outside of the bankruptcy context, courts in this district have determined that “lawyers who receive a conveyance under circumstances that should cause them to inquire into the reasons behind the conveyance must diligently do so, lest they be charged with knowledge of any intent on the part of transferor to hinder, delay, or defraud. A lawyer who blindly accepts fees from a client under circumstances that would cause a reasonable lawyer to question the client’s intent in paying the fees accepts the fees at his peril.”
S.E.C. v. Princeton Economic Int’l Ltd.,
Similarly, in
HBE Leasing Corp. v. Frank,
Conversely, in
Wasserman v. Bressman (In re Bressman),
[a] transferee has knowledge if he ‘knew facts that would lead a reasonable person to believe that the property transferred was recoverable.’ In this vein, some facts suggest the underlying presence of other facts. If a transferee possesses knowledge of facts that suggest a transfer may be fraudulent, and further inquiry by the transferee would reveal facts sufficient to alert him that the property is recoverable, he cannot sit on his heels, thereby preventing a finding that he has knowledge. In such a situation, the transferee is held to have knowledge of the voidability of the transfer.
Id.
at 236 (internal citations omitted). Still, the court qualified its holding to determine that “[s]ome facts strongly suggest the presence of others; a recipient that closes its eyes to the remaining facts may not deny knowledge. But this is not the same as a duty to investigate, to be a monitor for creditors’ benefit when nothing known so far suggests that there is a fraudulent conveyance in the chain. ‘Knowledge’ is a stronger term than ‘no
2. Taken Together With His Other Failures to Disclose, Nutovic Violated His Investigatory Obligations With Respect to the Source of the Retainer
Here, Nutovic was clearly on notice of the purported fraudulent transfers (including the 23 Million, the 20 Million, and the Management Associates Transfers) — he was very familiar with the details of the Settlement Agreement on the Petition Date, seemingly filing the bankruptcy petitions to permit Deutsch and the related entities additional time to comply with the Settlement Agreement obligations. See supra Part I.B. Nutovic admits that he would have to turn over the funds if they were the subject of a fraudulent conveyance. See supra Part I.G.3. This Court raised the issue of possible fraudulent conveyances at the June 2009 Retention Hearing, and it was front and center in the Nutovic Turnover Action filed in September 2009. See supra Part I.C and F. Nutovic merely argues he had no duty to investigate the source of the Retainers because the alleged fraudulent transfers took place in 2006, and he received the funds in 2009; however, in doing so, he relies on a representation that the Deutsch entities were conducting business from 2006 to 2009, a representation that directly contradicts his statements on the record regarding Deutsch at the Retention Hearing and in the Application. See supra Part I.G.3.
CONCLUSION
For the reasons explained above, the Court DENIES Nutovic’s Application in its entirety.
IT IS SO ORDERED.
Notes
. Scher also seeks disgorgement of the monies and a temporary restraining order (“TRO”) subject to a determination in a turnover proceeding filed by Scher against Nuto-vic in state court ("Nutovic Turnover Action”). (Graff Aff. at ¶ 80.) The Court also denies Scher's request for the TRO and leaves any remaining issues regarding disgorgement to the state court in the Nutovic Turnover Action.
. The record does not contain a copy of the Settlement Agreement, but neither party denies that it exists.
. There appears to be a factual issue about how much of the retainer was actually applied to prepetition amounts due. At the hearing on the current Application, Nutovic represented he was owed approximately $13,000 for services rendered prior to the Petition Date, plus approximately $12,000 in filing fees, and contended that the credit on the retainer was approximately $75,000. (Application Hr’g Tr. at 9:12-22.) In the Application and in the Response to Scher’s Opposition to the Application, Nutovic alleged the firm was owed $84,008.50 in fees; $69,832.50 for services rendered prior to dismissal of the case, plus $14,076 to defend his fee application after the case was dismissed. (Application at ¶ 27; Resp. to Opp. to Application at ¶ 23.) In the Retention Motion, Nutovic alleged that his “law firm received the sum of $87,532 ($100,000.00 less $12,468 paid as filing fees) as a retainer on account of fees for services rendered and to be rendered to the Debtors in connection with the conduct of these proceedings. The Firm rendered services to the Debtors in the days preceding the commencement of these cases and has applied $13,946.50 leaving an approximate credit balance of $73,586.50.” (Retention Mot. at ¶ 6.) However, at the July 9, 2009 hearing in the State Court Action (“State Court July 9 Hearing”), Scher argued that the proper amount that should be a credit was $83,000, not $73,000. (Hr'g Tr. (July 9,
. To the extent Scher argues that the Debtors' bad faith and Nutovic’s potentially conflicted representation warrant a denial of the Application under
In re Angelika Films 57th Inc.,
. Justice Demarest recently denied Scher’s motion for summary judgment and DB Partners I LLC’s motion to dismiss a turnover action filed by Scher against DB Partners I LLC, RBC Capital Markets Corporation ("RBCCM”) and Royal Bank of Canada ("RBC”) ("RBC Turnover Action”) regarding the proceeds of the 20 Million Transfer because,
inter alia,
there existed a "triable issue” of fact whether RBC had knowledge of the fraud at the time the loan in question was made. Justice Demarest set a trial date for July 6, 2010.
See Scher Law Firm v. DB Partners I LLC,
No. 24633/09,
. There are also several other criteria concerning, inter alia, expense limits and task descriptions embodied in the Bankruptcy Rules and the Guidelines for Fees and Disbursements for Professionals in Southern District of New York Bankruptcy Cases set forth in this district's bankruptcy General Order M-389 that the Court considers in evaluating fee and expense applications. Because the Court is denying Nutovic's Application in its entirety, and does not engage in a line-by-line analysis of the billing records attached to the Application, it will not elaborate further on these criteria in this Opinion and Order.
.
SRC Holding Corp.
has since been reversed by the Eighth Circuit on the grounds that the law firm's representation of the debtor in a state court lawsuit brought by a bankruptcy estate claimant who had agreed to fund certain loans to the debtor did not breach its fiduciary duties to the debtor, even where one of the attorneys was arguably a fact witness to the loan closing.
Leonard v. Dorsey & Whitney LLP (In re SRC Holding Corp.),
. As noted supra Part I.G.2, Nutovic later admitted that the name of the non-debtor entity to which he was referring as the alleged source of the Retainer was in fact "DB Partners I, LLC.”
. Collier states that "[a] state court has no jurisdiction to reexamine the transfer of property to an attorney in a bankruptcy case.” 3 Collier on Bankruptcy 329.05[3] (citing
In re Wood,
. While attorneys may be awarded fees for preparing fee applications "based on the level and skill reasonably required to prepare the application,” 11 U.S.C. § 330(a)(6), the court may reduce or disallow a request if the services provide no real benefit to the estate.
In re Keene,