In re David and Terry Stewart

Case Type:
Case Status:
Reversed and Remanded
Nos. 19-6103 & 19-6104 (10th Circuit, Aug 14,2020) Published
1oth Cir. reversed and remanded ruling of bankruptcy court (WD. Ok.), affirmed by the BAP, on creditor's appeal of sanction order against debtor's counsel for failure to disclose fee payments received. Tenth Cir. ruled bankruptcy court's order for debtor's counsel to pay $25,000 to estate, rather than full disgorgement of $348k fee, was unsupported by bankruptcy court finding "good reason." Bankruptcy court abused discretion by assuming facts not in evidence and assuming good faith without examining motives for nondisclosure.
Procedural context:
Creditor moved for debtor's counsel to disgorge fee payment of approximately $348k based on nondisclosure by attorney. Bankruptcy court (WD Ok.) granted motion in part, ordering debtor's counsel to pay estate $25k. Creditor moved to alter or amend judgment, which bankruptcy court denied. Creditor appealed to BAP for 10th Cir., which affirmed. Creditor appealed to 10th Circuit.
Creditor (SEPH) commenced involuntary bankruptcy proceeding against Stewarts on September 30, 2014, in the Southern District of Alabama. On March 18, 2015, the court entered orders for relief and for joint administration of the cases. The case was moved on June 12, 2015, to the Western District of Oklahoma. Debtor's counsel (Mr. Welch), who had not entered an appearance in Alabama, entered his appearance as attorney for the Stewarts in the Oklahoma proceedings on June 17. On the same day, he executed a representation agreement with the Stewarts and certain named business affiliates. Also at that time, the named affiliates, including Neverve, guaranteed Mr. Welch’s legal fees in connection with the bankruptcy representation. Mr. Welch assisted in settling claims related to the BP oil spill in the Gulf of Mexico in spring 2016. Under a fee-sharing agreement executed on April 19, 2016, the total attorney fee was 40% of the proceeds; that amount was split three ways with 52% of it going to the chief attorney, 32% to Mr. Welch, and 16% to the person who referred the matter to the chief attorney. Mr. Welch’s fee would therefore be about 13% of the amount recovered on the claims. The settlement proceeds were disbursed in August 2016, and Mr. Welch received $348,404.41, including $144,591.85 under his contingency-fee contract. The remaining $203,812.56 came out of the $275,572.27 in net-settlement proceeds for Neverve. He then credited all that toward what he was owed for his bankruptcy work. In his own words, this was “a matter of fairness and efficiency in [his] mind.” Id. at 3198. Mr. Welch did not disclose the payments until September 2017, more than two years after entering into the bankruptcy-fee arrangement and more than a year after being paid. His disclosure was not voluntary. The failure to disclose was pointed out by SEPH during proceedings on August 30, 2017, to determine whether the bankruptcy court would approve an agreement between the Trustee and the Stewarts related to the estate's surrender of the affiliates to the Stewarts. The agreement stated that the Trustee would abandon to the Stewarts all nonexempt property, including the Stewarts’ membership interests in various limited liability companies, and the Stewarts would pay $750,000. After the court directed Mr. Welch to file disclosures of the compensation he received, he filed disclosures on September 14 and 20, 2017. In October 2017, SEPH filed a motion seeking disgorgement of Mr. Welch’s fees and the denial of future compensation for violation of his disclosure obligations under § 329(a) and Rule 2016(b).
Hartz, Baldock, Eid

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