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In re U.S. Bentonite, Inc., Ch. 11 Case No. 13 20211-MER (Bankr. D. Wyo. Sept. 3, 2015) (Violation of supplemental disclosure requirement of FED. R. BANKR. P. 2014(a)).
The issues before the Court were whether an attorney representing the debtor who accepts a position with a creditors' firm during the pendency of the bankruptcy case creates a connection that must be disclosed; whether total or partial denial of compensation is warranted for the non-disclosure; and whether the settlement agreement reached in this case during the time of the alleged conflict was fair and equitable and in the best interests of the estate. To resolve these issues, the bankruptcy court first examined the employment standards of 11 U.S.C. § 327(a). In furtherance of the disinterestedness prong of § 327(a) and the fiduciary duties counsel for the debtor owes the estate, FED. R. BANKR. P. 2014(a) requires counsel for debtors to disclose any connections that have the potential of creating a conflict of interest. These disclosure requirements under Rule 2014(a) continue after the initial application to employ is approved. The bankruptcy court agreed with the broad construction of Rule 2014(a), and the conclusion that Rule 2014(a) creates a continuing obligation for counsel to advise the court when such a connection arises during the representation of a debtor-in-possession. The required supplemental disclosure allows the court, not counsel, to determine whether a conflict exists and counsel remains disinterested under § 327(a). Failing to make a supplemental disclosure robs the court the power to make such a determination.
In this case, the court determined the attorney's acceptance of a position with creditors' counsel in the midst of settlement negotiations involving the same creditors should have been disclosed and counsel failed to do so. The Court held counsel for a debtor-in-possession has an ongoing fiduciary duty to supplement initial employment disclosures with any connections that arise that create potential conflicts. After determining there was a violation of Rule 2014(a), the court turned to the available remedies for such a non-disclosure. In the Tenth Circuit, the failure to supplement initial disclosures when a connection with the potential to create a conflict arises warrants total denial and/or disgorgement of compensation. However, the bankruptcy court has the discretion to determine whether total or partial denial of fees is appropriate based on the facts of a case. Here, the court determined only partial denial of fees from the date the connection (when the associate accepted a position with the creditor's firm) arose was proper. Finally, with respect to the settlement agreement, the bankruptcy court found the agreement was not tainted. Based largely on the evidence from the other creditors, the court determined the settlement agreement resulted in a fair and equitable allocation of the remaining assets, and debtors had no real stake in the outcome. Thus, the court concluded the settlement agreement was in the best interests of the estates under the Rule 9019 standard, with one amendment. The court reduced the administrative claim for debtors' counsel under the settlement agreement consistent with the denial of part of the firm's fees.
Posted: 10/7/2015 9:04:41 AM
In re Sun River Energy, Inc., Ch. 7 Case No. 15-15610 MER, Opinion issued August 13, 2015 (Chapter 7 Trustee May Employ Own Firm as Counsel Under 11 U.S.C. § 327).
The Chapter 7 trustee filed an application to employ his own firm as counsel, and after an independent review the Court approved the application. Thereafter, a creditor filed an objection. Noting that the application was not required to be sent out on notice by Fed. R. Bankr. P. 2014(a) and Local Bankruptcy Rule 2014-1, the Court treated the objection as a motion to alter or amend under Fed. R. Civ. P. 59(e) as incorporated by Fed. R. Bankr. P. 9023.
After addressing the general requirements for employment under 11 U.S.C. § 327(a), the Court held the Trustee's firm did not hold or represent an interest adverse to the estate, and was a disinterested person. However, when a trustee seeks to hire his or her own law firm, the trustee must also satisfy 11 U.S.C. § 327(d), which authorizes such employment "if such authorization is the in the best interest of the estate." The Court recognized determinations under § 327(d) turn on the particular circumstances of each case. Thus, the Court ultimately adopted the flexible approach articulated in In re SONICblue, Inc., 2007 WL 3342662, at *6 (N.D. Cal. Nov. 9, 2007) (Not Reported in F.Supp.2d) ("[A]bsent a showing of substantial savings and/or efficiencies, appointment of a trustee's own law firm as counsel is not in the estate's best interest."). Here, the trustee demonstrated that hiring his own firm was in the best interests of the estate based on the Trustee's immediate need for representation on multiple forums, the lack of a retainer, the contingent nature of payment to his firm and his firm's willingness to provide the representation despite the risk of nonpayment inherent in the type of litigation at issue. Lastly, the Court concluded the creditor failed to demonstrate how approving the trustee's own firm would result in any manifest injustice warranting reconsideration of its order approving the application. Therefore, the Court's order approving the application stood as originally entered.
Posted: 9/3/2015 7:11:37 AM
In re Smith (Walters v. Farmers Korner, Inc.), Adversary Proceeding No. 14-01065-SBB
This case identifies (a) the characteristics of a non-statutory insider subject to a trustee's avoidance of preferential transfers and (b) the perils of transferring titles among relatives and closely held corporations pre-petition in an effort to remove personal property from the debtor's estate. It also illustrates the problems inherent in choreographing pre-petition debt collection and repossessing collateral from family members and their closely held corporations.
The plaintiff/trustee sought to avoid as preferences various pre-petition transfers of purported loan collateral/personal property by the debtor to the creditor. Unfortunately, it was in the context of the debtor/son and creditor/father in a tangled transaction which involved their respective closely held companies and repossession of the intended collateral by the creditor which secured the obligation. The lender did take a judgment against the debtor after default on the loan and moved to enforce the judgment.
The court held that the lender, the father's closely held corporation, received avoidable preferential transfers from his son and his son's closely held corporation, when recovering the collateral that secured the son's obligation. The lender was deemed a non-statutory insider due to (a) the father's close and controlling relationship with the lender company and with his son, individually, (b) the staging of the "repossession" by the father and the father's attorney, and (c) the bogus transfer of debtor's assets to the lender, but debtor's continuing retention and possession of the collateral.
The court also found the personal use, and casual and indiscriminate transfers and titling of the loan collateral (motor vehicles), was evidence of the debtor's rights and interests in his businesses' property, thus relegating that business property to be property of his, the debtor's estate.
Posted: 8/19/2015 7:14:23 AM
In re Ottman, Bankr. Case No. 11-35219-SBB (recusal)
This opinion discusses when a bankruptcy judge accused of bias should be disqualified from hearing a case and explores the parameters of what is and is not objectionable conduct by the court.
Following the first day of a multi-day hearing on the debtors' second motion to modify their Chapter 13 plan, the debtors filed a motion to recuse Judge Sidney Brooks. The debtors argued that Judge Brooks should recuse himself because his criticism of debtors' counsel during the hearing was "unwarranted, prejudicial, and created an appearance of impropriety" such that recusal was warranted under 28 U.S.C. § 455. Counsel argued further that the judge's tone was "one of condescension, a profound lack of respect, and a manner that borders on scorn." The Chapter 13 trustee opposed recusal.
Based on its review of the transcript of the hearing, the court found that a reasonable person, knowing all the relevant facts, would not harbor doubts about Judge Brooks' impartiality. The court found that any confusion and frustration voiced by Judge Brooks during the hearing was a direct result of the inadequate courtroom presentation of debtors' counsel, and no evidence was presented that showed the court was unable to make a fair judgment in the case. The judge acknowledged that he has a duty to recuse himself where any of the statutory grounds set forth in [11 U.S.C.] § 455 exist; however 'there is a corresponding duty not to do so if cause for recusal has not been shown." Moreover, "[a] judge's impartiality is subject to an objective test which requires a judge to recuse himself when 'a reasonable person, knowing all the relevant facts, would harbor doubts about the judge's impartiality." In the context of a motion to recuse, "the reasonable person standard contemplates a well informed, thoughtful and objective observer, rather than a hypersensitive, cynical and suspicious person."
"In general, 'when a judge's words or actions are motivated by events originating within the context of judicial proceedings, they are insulated from charges of bias.' These include remarks which may be considered critical, or even hostile, to a party or its counsel." The court concluded that while the hearing transcript reflects confusion and frustration by the court as it attempted to follow a somewhat erratic and splintered presentation by debtors' counsel, the court's comments were based entirely on conduct observed at the hearing and "criticism of counsel is rarely grounds for recusal under the principles set forth by the Supreme Court."
Posted: 7/30/2015 9:39:45 AM
Summary for Publication: In re Edward J. Romero, Bankr. Case No. 15-11254-TBM (Chapter 7)(Applicability of Colorado's homestead exemption.)
The Court sustained the Chapter 7 Trustee's objection to Debtor's claim of exemption under Colo. Rev. Stat. § 38-41-201 or Â§ 38-41-201.5 in a Peterbilt truck. Though the Debtor has been living on the Peterbilt truck continuously since approximately 1998 and considers it to be his home, under applicable principles of statutory construction, the Court concludes that the term "homestead" requires some association with realty. Because the Peterbilt truck is not permanently or semipermanently installed on real property, it is not associated with the land and does not qualify as a homestead.
Posted: 6/26/2015 7:35:21 AM
Ogden v. PNC Bank, N.A., Adversary Proceeding No. 13-01054 EEB
Chapter 13 debtor filed a complaint against her mortgage lender, alleging the bank violated the automatic stay, her chapter 13 plan, the confirmation order and Fed. R. Bankr. P. 3002.1, by misapplying her postpetition mortgage payments and raising the amount of her postpetition payments to recover prepetition arrears. The Court found the bank had created confusion in its system of accounting, which essentially keeps two sets of books to reflect postpetition mortgage paymentsâ€”one for bankruptcy purposes and one for non-bankruptcy purposes. The non-bankruptcy accounting tracks all amounts contractually due under debtor's loan, including late fees, in the event that debtor fails to complete her chapter 13 plan. The bank failed to clearly communicate this fact to the Debtor. However, because the bank had not sought to collect contractually-due late fees in bankruptcy, the Court found no violation of the Code attributable to this accounting system. The Court noted that the Code only provides for limited court oversight of mortgage lenders during the term of a chapter 13 plan, and that debtor may have remedies under RESPA or, at the conclusion of her plan, under 11 U.S.C. § 524(i), if the bank fails to appropriately account for her payments.
Posted: 6/24/2015 8:26:35 AM
In re Gonzales; Case No. 09-27194 HRT; Order entered June 9, 2015 (11 U.S.C. § 1328(a); FED. R. BANKR. P. 3002.1).
The Court confirmed the Debtors' chapter 13 plan (the "Plan"), which included a provision to cure a prepetition mortgage default and to make current mortgage payments directly to the mortgage creditor. Over the course of the 60 month Plan, the Debtors made all of their payments to the chapter 13 trustee (the "Trustee"). Thereafter, the Debtors filed certifications that they had complied with all of their payments and obligations under their Plan. Upon the Trustee filing a request for discharge, the Court entered
the Debtors' discharge. Prior to certifying the case for discharge, the Trustee had served a notice on the mortgage creditor under Rule 3002.1(f) giving notice that the Debtors had paid the full amount required to cure the pre-petition mortgage default. The creditor filed a timely response under Rule 3002.1(g). It agreed that the pre-petition default had been cured. However, it alleged a post-petition default in direct payments of over $49,000.00 or about 37 missed payments. No interested party sought a Court determination under Rule 3002.1(h) or otherwise informed the Court of the alleged default prior to discharge. The allegation of Debtors' failure to make the required payments directly to the mortgage creditor came to the Court's
attention shortly after the discharge was entered. The Court entered an order for the Debtors and the Trustee to show cause why the Debtors' discharge should not be vacated as improvidently granted. The Debtors did not dispute the default. Following a hearing on the matter, the Court held that 11 U.S.C. § 1328(a) only authorizes the Court to grant a discharge in a chapter 13 case "after completion by the debtor of all payments under the plan" and direct payments to a creditor pursuant to a provision of a confirmed plan are "payments under the plan." The discharge in this case was improperly granted and the Court vacated the Debtors'
discharge because they did not make all payments required under the terms of their confirmed Plan.
Posted: 6/11/2015 7:13:35 AM
Wellness International Network, LTD., ET AL. v. SHARIF (United States Supreme Court)
Certiorari to The United States Court of Appeals for The Seventh Circuit.
Posted: 6/1/2015 8:29:46 AM
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