Resolving in Part, ECF No. 1
I. INTRODUCTION
“If citizens cannot trust that laws will be enforced in an evenhanded and honest fashion, they cannot be said to live under the rule of law.”
Turning to the merits of the case sub judice, three local attorneys, James P. Grissom (“Grissom”), William A. Csabi (“Csabi”) and Francisco J. Rodriguez (“Rodriguez”) (collectively “Defendants”) chose to test this Court’s resolve. Vicki G. Wright “(Debtor or Plaintiff’) filed the instant complaint seeking disgorgement of an unauthorized fee, turnover of property of the estate, and violation of the automatic stay against the three Defendants. Specifically, Plaintiff has alleged that Defendants violated 11 U.S.C. §§ 105, 329, 330, 362, 504, 542 and Rules 2016, and 2017 as well as Texas Rules of Professional Conduct 1.04(d) and 1.04(f). On August 30, 2017,
At trial, Plaintiff was represented by counsel, Abelardo Limon Jr. (“Limon”). Both Grissom and Rodriguez appeared pro se, while Csabi was represented by counsel, Richard O. Habermann. At the conclusion of trial, the matter was taken under advisement and is now ripe for consideration. The Court has considered the pleadings; the arguments presented by the parties; the evidence; and relevant case law and now issues the instant ruling.
II. JURISDICTION, VENUE, AND THIS COURT’S CONSTITUTIONAL AUTHORITY TO ENTER A FINAL ORDER
This Court holds jurisdiction pursuant to 28 U.S.C. § 1334, which provides “the district courts shall have original and exclusive jurisdiction of all cases under title 11.” Specifically, 28 U.S.C. § 1334(e), states that the district court in 'which a case under title 11 is pending has exclusive jurisdiction “(1) of all the property, wherever located, of the debtor as of the commencement of such case, and of property of the estate; and (2) over all claims or causes of action that involve construction of section 327 of title 11, United States Code, or rules relating to disclosure requirements under section 327.” Section 157 allows a district court to “refer” all bankruptcy and related cases to the bankruptcy court, wherein the latter court will appropriately preside over the matter. 28 U.S.C. § 157(a); see also In re: Order of Reference to Bankruptcy Judges, Gen. Order 2012-6 (S.D. Tex. May 24, 2012). This is a core matter as it “concern[s] the administration of the estate.” § 157(b)(2); see also
This Court may only hear a case in which venue is proper. Venue with respect to proceedings arising under title 11 is governed by 28 U.S.C. § 1409, and “may be commenced in the district court in which such case is pending.” Plaintiff resides in Harlingen, Texas, and has a Chapter 13 case under title 11 pending before this Court. Therefore, venue is proper within this jurisdiction.
Finally, this Court has an independent duty to evaluate whether it has the constitutional authority to sign a final order. Stern v. Marshall,
III. FINDINGS OF FACT
This Court makes the following findings of fact and conclusions of law pursuant to Fed. R. Bankr. P. 7052, which incorporates Fed. R. Civ. P. 52, and 9014, Any finding of fact more properly considered a conclusion of law, or any conclusion of law more properly considered a finding of fact, should be so considered. The case at bar is an adversary proceeding brought by Plaintiff against her former counsel arising from actions taken in connection with Plaintiffs Chapter 13 bankruptcy.
On October 31, 2013, Plaintiff filed a petition under Chapter 13 of the Code. Bankr. ECF No. 1. On March 26, 2014, Plaintiff and Grissom executed an “Amended Attorney Consultation and Fee Contract for Contingency Cases,” which reflects a “fee-sharing agreement” with Rodriguez that states, in part, as follows:
2.03 Attorney proposes to associate on this matter with another lawyer or law firm. Client’s execution of this Agreement represents Client’s written consentto the following terms of the association and fee-sharing agreement:
a. [Rodriguez] will participate in the fee-sharing agreement.
b. Fees will be divided based on an agreement by the above-referenced lawyers, law firms and Attorney to assume joint responsibility for the representation.
c. [Rodriguez] and [Grissom] will share equally in all attorneys [sic] fees recovered.
Pl.’s Ex. 1, ¶ 2.08. On April 22, 2014, Grissom and Csabi signed and entered into an agreement that was self-described as a “fee-sharing arrangement,” which states, in part, as follows:
a. [Grissom] and [Csabi] will participate equally in the fee-sharing arrangement for the division of attorneys [sic] fees according to the contract between [Plaintiff] and [Grissom],
b. Fees will be divided based on an agreement by the above-referenced lawyers, law firms and Attorney to assume joint responsibility for the representation.
Pl.’s Ex. 2.
On December 8, 2014, an Application to Employ Grissom, and Grissom alone, as Special Counsel to Plaintiff was filed on the Court’s CM/ECF docket, which is to say that Grissom’s fee sharing agreements with Csabi and Rodriguez were not filed of record or in any other manner disclosed to the Court. Bankr. ECF No. 71. The Court thereafter approved the employment of Grissom, and Grissom alone, as Special Counsel to Plaintiff on December 31, 2014. Bankr. ECF No. 72.
On April 8, 2016, this Court issued an order awarding $90,000.00 in attorney’s fees to Grissom, which were subtracted from Plaintiffs portion of the previously approved settlement proceeds,
On July 26, 2016, an Agreed Order between Plaintiff and Grissom was executed by the parties and signed by this Court, which directed Grissom to, inter alia, turnover Plaintiffs portion of the settlement funds in the amount $133,085.10 by August 1, 2016. “The check shall be made payable
On September 6, 2016, Plaintiff initiated the instant adversary proceeding. ECF No. 1. On January 23, 2017, Grissom filed a “Motion for Leave to Amend Motion to Approve Employment of Counsel,” two years after the Court approved Grissom’s employment. Bankr. ECF No. 238. As a result of that motion, on February, 28, 2017, this Court issued the following order, to wit:
Grissom filed his Application to Employ on December 8, 2014, and it was approved by the court on December 31, 2014. See [ECF Nos. 71, 72]. In the affidavit filed with the Application to Employ, Grissom specifically swore that he has “no connection with ... any ... parties in interest .., [and] that the foregoing statement made pursuant to Bankruptcy Rule 2014(a) ... is true and correct to the best of my knowledge.” [ECF No. 71 at 3], Since that time, Grissom has operated under his court-approved employment without any concern regarding the terms of his employment, both disclosed and undisclosed, until May 2016, when the Debtor initiated the dispute at bar. See generally [ECF No. 119], However, now, over 2 years after the court granted his employment and more than 7 months since the Debtor initiated this dispute, Gris-som seeks to change the circumstances of his employment. Compare [ECF No. 71] and [ECF No. 72] and [ECF No. 119] with [ECF No. 238] and [ECF No. 238-2] and [ECF No. 238-1]. For this, Grissom argues that the Debtor had knowledge of these arrangements. [ECF No. 238-2 at ¶¶ 12-13]. Yet, it was Gris-som who signed the Application to Employ on behalf of the Debtor and, as the Debtor’s proposed attorney in the Application to Employ, Grissom had access to all of the documentation he only now seeks to be weaponized, but did not feel it necessary to disclose then. Compare [ECF No. 238-2 at ¶¶ 12-13] with [ECF No. 71]. ... However, Grissom was in the best position to ensure that his Application to Employ was in full compliance with the relevant legal standards and statutory obligations. Grissom did not disclose the involvement of Mr. William Csabi nor Mr. Francisco Rodriguez at any point in his Application to Employ.
Bankr. ECF No. 256.
At the start of trial on August 30, 2017, this Court ordered the trial bifurcated
IV. CONCLUSIONS OF LAW
A. The Finality of Rule 8002
Appeals from this Court’s “final judgments, orders, and decrees,” 28 U.S.C. § 158 (a)(1), must be made “in the time provided by Rule 8002 of the Bankruptcy Rules.” § 158 (c)(2). Additionally, an appeal must be filed within fourteen days after entry of this Court’s judgment, order, or decree. Fed. R. Bankr. P. 8002. The Fifth Circuit has found that “§ 158, expressly requires that the notice of appeal be filed under the time limit provided in Rule 8002 ....” In re Berman-Smith,
Here, in both the Adversary Proceeding and the Bankruptcy Case, this Court has issued multiple Memorandum Opinions and orders. Other than one order appealed by Grissom that was later dismissed,
B. Employment of Special Counsel
Special counsel acting on behalf of a debtor or the estate must seek lawful employment from this Court while simultaneously
state[s] the specific facts showing the necessity for the employment, the name of the person to be employed, the reasons for the selection, the professional services to be rendered, any proposed arrangement for compensation, and, 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. The application shall be accompanied by a verified statement of the person to be employed setting forth 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.
Fed. R. Bankr. P. 2014(a). The Fifth Circuit has noted that “[although this provision does not explicitly require ongoing disclosure, case law has uniformly held that under Rule 2014(a), ... full disclosure is a continuing responsibility ...,” and “failure to disclose is sufficient grounds to revoke an employment order and deny compensation.” In re W. Delta Oil Co., Inc.,
Despite not being specifically pled, it is clear to this Court that Defendants violated § 327, Rule 2014, and BLR 2014-1, and therefore, this Court will exercise its inherent powers and. attend to these violations in order to “prevent an abuse of process.” § 105(a);
Simply because Grissom sought Court approval does not mean that his actions were proper. To be clear, this Court finds that Grissom, in addition to Csabi and Rodriguez, violated Rule 2014. Grissom failed to comply with Rule 2014 because he failed to disclose “any proposed arrangement for compensation.” Fed. R. Bankr. P. 2014(a). Specifically, Grissom failed to include the fee arrangements with Csabi and Rodriguez, which had been signed and in place months before Grissom filed his initial application to employ with this Court. Compare Pl.’s Ex. 1, ¶ 2.03 and Pl.’s Ex. 2 with Bankr. ECF No. 71 (showing evidence of Grissom’s agreements with Rodriguez and Csabi from March 2014 and April 2014 and Grissom filing an application to employ in December 2014 not disclosing said agreements to the Court). Furthermore, the Fifth Circuit has noted that case law has uniformly held that full disclosure is a continuing responsibility; In re W. Delta Oil Co., Inc.,
Turning to BLR 2014-1, similarly to § 327 and Rule 2014, this Court finds Defendants violated BLR 2014-1 due to their failures to accomplish the necessary filings. Starting with Grissom, in this District, an application of an attorney for a debtor must have attached the statement required by § 329 and Rule 2016. BLR 2014-1(a). As discussed further in the latter portions of this opinion, Grissom did not file an application that met the standards of § 329 and Rule 2016, and therefore, this Court finds that Grissom violated BLR 2014-1(a). In regards to Csabi and Rodriguez, in this District, special counsel seeking employment “in an individual chapter ... 13 case for the purpose of prosecuting a tort claim must ....” file an application to be employed or file a motion
C. Employment of Any Counsel
Any attorney representing a debtor in connection with a bankruptcy case must file a disclosure statement with this Court detailing
the compensation paid or agreed to be paid, if such payment or agreement was made after 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.
11 U.S.C. § 329 (a). An attorney’s services are considered in connection with a bankruptcy case when services rendered or to be rendered by an attorney have or will have an impact on the debtor’s bankruptcy case. In re Healey, No. 15-60471,
Defendants represented Plaintiff in connection with the instant Bankruptcy Case because the services rendered by Defendants in the lawsuit against API Pipe & Supply, LLC had an impact on Plaintiffs bankruptcy case when the Defendants achieved the settlement funds of $223,085.10 on behalf of Plaintiff which became property of the bankruptcy estate. See Bankr. ECF No. 107, Ex. 1; Pl. Ex. 17; In re Healey,
Rule 2016 instructs attorneys how to comply with § 329 disclosure requirements. According to Rule 2016, Grissom was required to disclose “whether [he] ha[d] shared or agreed to share the compensation with any other entity,” and to “include the particulars of any such sharing or agreement to share.” Fed. R. Bankr. P. 2016(b). When Grissom made his filings before the Court, Grissom did not disclose that he had shared or agreed to share the compensation with Csabi and Rodriguez, and Grissom did not include the particulars of the sharing or agreement to share. See Bankr. EOF Nos. 71, 107. Additionally, because Csabi and Rodriguez failed to make any filings in the Bankruptcy Case disclosing their fee sharing agreements with Grissom they also violated Rule 2016—and consequently § 329—because Rule 2016 and § 329 leave no room for silence. As stated above, the requirements of § 329 and Rule 2016 applied to Defendants because their representation was in connection with Plaintiffs bankruptcy, and the requirements of § 329 and Rule 2016 applied even though Csabi and Rodriguez failed to seek formal employment from the Court. See In re Fair,
D. Prohibition on Fee Sharing
There is no doubt that “§ 504 of the Code ... flatly prohibits the splitting of fees without prior court approval.” In re Anderson,
(a) Except as provided in subsection (b) of this section, a person receiving compensation or reimbursement under section 503(b)(2) or 503(b)(4) of this title may not share or agree to share—
(1) any such compensation or reimbursement with another person; or
(2) any compensation or reimbursement received by another person under such sections.
11 U.S.C. § 504(a). Courts widely acknowledge that the exceptions to the prohibition on sharing compensation found in § 504(b) and § 504(c) are limited only to fee sharing between “(1) partners or associates in the same professional association, partnership, or corporation; (2) attorneys for petitioning creditors that join in a petition commencing an involuntary case; and (3) an attorney and a bona fide public service attorney referral program.” In re Smith,
In the instant matter, Defendants flagrantly violated § 504 when they created the multiple fee sharing agreements between themselves and failed to receive this Court’s approval of-said fee sharing agreements. The Code and the Fifth Circuit are incredibly clear that splitting fees without this Court’s approval is strictly prohibited. See In re Anderson,
Generally there are three widely acknowledged exceptions to the prohibition on fee splitting found in § 504 and none apply to the Defendants. Closer analysis reveals that allowing fee sharing for partners or associates in the same professional, association, partnership, or corporation could potentially be the only exception to the Rule that may apply to the Defendants because the remaining two exceptions most certainly do not apply.
E. Property of the Estate
When a debtor commences a bankruptcy proceeding, an estate is automatically created, which includes both the legal and equitable interests of the debtor. § 541(a). Additionally, a Chapter 13 debt- or’s estate includes any additional property that “the debtor acquires after the commencement of the case but before the case is closed, dismissed, or converted .... ” § 1306(a)(1). Settlement proceeds, such as the Plaintiffs, are property of the estate. Id.; In re Bratcher, No. 08-36225,
Furthermore, Paragraph 14 of the Plaintiffs confirmed Chapter 13 plan states that “property of the estate shall vest in the debtor(s) upon entry of the discharge order.” Bankr. ECF No. 54, “This [Paragraph 14] provision makes it clear that property of the estate does not vest in the debtor until entry of a discharge. All property
Finally, in the Agreed Order entered on July 26, 2016, which is now final, “[this] Court reiterate[d] it’s finding that such funds [,$133,085.10,] [were] property of the [Plaintiff]’s chapter 13 estate.” Bankr. EOF No. 175. Thus, for the aforementioned reasons, the Court reiterates that the remainder of the settlement proceeds in the amount of $133,085.10 is property of this Plaintiffs bankruptcy estate. See id.; § 1306(a)(1); In re Bratcher, No. 08-36225,
F. Violations of the Automatic Stay
After a bankruptcy petition is filed, an automatic stay arises to safeguard the newly created estate. § 362(a). “The stay prohibits ‘all entities’ from making collection efforts against the debtor or the property of the debtor’s estate.” Campbell v. Countrywide Home Loans, Inc.,
provides for damages upon a finding that the defendant knew of the automatic stay and that the defendant’s actions which violated the stay were intentional. Whether'the party believes in good faith that it had a right to the property is not relevant to whether the act was “willful” or whether compensation must be awarded.
In re Chesnut,
Determining liability for a violation of the automatic stay requires “finding that the [Defendants] knew of the automatic stay and that the [Defendants’] actions which violated the stay were intentional.” See In re Chesnut,
Similarly, maintaining possession of estate property falls within the “continuum of conduct [that] exists which the Court must evaluate in determining whether [a party] has assumed control of property of the estate.” In re Allentown Ambassadors, Inc.,
In addition to exercising control over estate property, Csabi and Rodriguez also disregarded the prohibition “from making collection efforts against the debtor or the property of the debtor’s estate.” Campbell,
Turning now to Defendants knowledge of the Plaintiffs Chapter 13 bankruptcy and the automatic stay, it is undisputed that Grissom was aware that the Plaintiff was in bankruptcy as evidenced by his application for employment; ergo, Grissom was aware of the bankruptcy’s automatic stay. See Bankr. ECF No. 71. Based on Csabi’s and Rodriguez’s testimony, it is unlikely that Csabi and Rodriguez did not
Finally, there is no weight to the arguments that Csabi and Rodriguez made that they believed the $73,333.00 to be their property. Min. Entry (8/31/2017). Following the law of the Circuit, “[w]hether the party believes in good faith that it had a right to the property is not relevant to whether the act was ‘willful’ ” in determining if an. action was a violation of the automatic stay. In re Chesnut,
V. CONCLUSION
The case at bar involves flagrant Code, Bankruptcy Rules, and Local Rules violar tions by three local attorneys and their troublesome practices before this Court. Defendants willfully failed to meet the disclosure requirements set forth in the Code, the Rules, and the Local Rules. Defendants improperly split fees pursuant to agreements that each individual made with one another, which were secreted from the Court. Moreover, when Defendants collected their improper fees, they demonstrated nothing less than a flagrant disregard of this Court’s previous orders and underestimated the power and weight of the automatic stay, the United States Bankruptcy Code, Bankruptcy Rules, and the Southern District of Texas Bankruptcy Local Rules.
After considering the pleadings, arguments presented by the parties, the evidence, and relevant case law, this Court finds the following:
1. Grissom violated § 327(e) (employment of special counsel), § 329(a) (employment of attorneys), § 504(a) (prohibition on fee splitting, § 362(a) (violation of the automatic stay), Rule 2014(a) (employment of professional persons requirements), Rule 2016(b) (disclosure of compensation requirements), and BLR 2014-1(a) (employment of special counsel);
2. Csabi violated § 327(e), § 329(a), § 604(a), § 362(a), Rule 2014(a), Rule 2016(b), and BLR 2014-1(d); and
3. Rodriguez violated § 327(e), § 329(a), § 504(a), § 362(a), Rule 2014(a), Rule 2016(b), and BLR 2014-1(d).
Therefore, this court holds Defendants Grissom, Csabi, and Rodriguez liable for violations of the above cited Bankruptcy
This Memorandum Opinion should serve as a warning to all that appear before this Court that flagrant and willful violations of the Bankruptcy Code, Bankruptcy Rules and Bankruptcy Local Rules will not be endured by this Court.
This Court will issue further orders establishing a separate trial as to the issue of damages. An Order consistent with this Memorandum Opinion will be entered on the docket simultaneously herewith.
Notes
. Dale Carpenter, Flagrant Conduct: The Story of Lawrence v. Texas 108 (2012).
. Any reference to "Code” or “Bankruptcy Code” is a reference tp the United States Bankruptcy Code, 11 U.S.C., or any section (i.e. §) thereof refers to the corresponding section in 11 U.S.C.
. Citations to trial minutes shall take the form Min. Entry (date).
. Based on evidence presented at trial, there are State Bar of Texas complaints pending against all three Defendants, See Pl’s. Exs. 32, 33, 34; see also Min. Entry (8/31/2017).
. “[A] proceeding is core under section 157 if it invokes a substantive right provided by title 11 or if it is a proceeding that, by its nature, could arise only in the context of a bankruptcy case."
. Citations to the docket in this adversary proceeding styled Wright v. Csabi et. al., 16-1004 (the "Adversary Proceeding”), shall take the form "ECF No. —,” while citations to the bankruptcy case, 13-10472 (the “Bankruptcy Case”), shall take the form “Bankr. ECF No. —.”
. As discussed ad nauseam in previous opinions and orders, there was an initial $650,000 settlement. Of that, $326,914.90 was non-debtors portion which was paid to the Internal Revenue Service on his behalf. The remaining monies were the Plaintiff’s portion. And of the Plaintiff's portion, there was an immediate $100,000 carveout to the Chapter 7 trustee, which was approved by this Court. Bankr. ECF No. 91, 92. The total amount remaining was $223,085.10. After the subtraction of Grissom’s $90,000 in attorney’s fees, the total remaining amount is $133,025.10.
. The body of the letter states it was also delivered by certified mail, but no evidence was presented to establish this fact.
. The trial was ordered bifurcated to appease the parties regarding an evidentiary dispute that was easier resolved in this manner so as not to delay trial.
. Ample credible evidence was presented and is on the record as showing numerous potential ethical violations that troubled this Court; however, as stated, this Court will leave those matters to the appropriate tribunal, including, but not limited to, the State Bar of Texas,
. Bankr. ECF No. 280, dismissed on May 15, 2017.
. “No provision of this title providing for the raising of an issue by a party in interest shall be construed to preclude the court from, sua sponte, taking any action or making any determination necessary or appropriate to enforce or implement court orders or rules, or to prevent an abuse of process.”
. Per § 503(b)(2), “compensation and reimbursement awarded under section 330(a) of this title” is an allowed administrative expense. § 503(b)(2). In turn, § 330(a)(1) awards compensation to a professional person employed under § 327 and, furthermore, § 330(a)(4)(B) states that;
In a ... chapter 13 case ..., the court may allow reasonable compensation to the debt- or’s attorney for representing the interests of the debtor in connection with the bankruptcy case based on a consideration of the benefit and necessity of such services to the debtor and the other factors set forth in this section.
11 U.S.C. § 330(a)(1),(a)(4)(B).
. Section 503(b)(4) allows as an administrative expense “reasonable compensation for professional services rendered by an attorney or an accountant of an entity whose expense is allowable under subparagraph (A), (B), (C), (D), or (E) of paragraph (3) of this subsection,” § 503(b)(4). And those relevant sections of § 503(b)(3) allow as administrative expenses for the actual, necessary expenses incurred by:
(A) a creditor that files a petition under section 303 of this title;
(B) a creditor that recovers, after the court’s approval, for the benefit of the estate any property transferred or concealed by the debtor;
(C) a creditor in connection with the prosecution of a criminal offense relating to the case or to the business or property of the debtor;
(D) a creditor, an indenture trustee, an equity security holder, or a committee representing creditors or equity security holders other than a committee appointed under section 1102 of this title, in making a substantial contribution in a case under chapter 9 or 11 of this title; [and]
(E) a custodian superseded under section 543 of this title, and compensation for the services of such custodian[.]
11 U.S.C. § 503(b)(3).
. Defendants were not "attorneys for petitioning creditors that join in a petition commencing an involuntary case” nor were they "attorney[s] and a bona fide public service attorney referral program,” In re Smith,