In re: WITCHEY ENTERPRISES, INC.
- Summarized by David Treacy , U.S. Bankruptcy Court, Eastern District of Kentucky
- 7 months 6 days ago
- Case Type:
- Business
- Case Status:
- Affirmed
- Citation:
- No. 23-1883 (3rd Circuit, Jun 04,2024) Not Published
- Tag(s):
-
- Ruling:
- The U.S. Court of Appeals for the Third Circuit affirmed a district court's determination that a bankruptcy court did not abuse its discretion in denying fees to a chapter 11 debtor's counsel based on an undisclosed conflict of interest. Counsel's representation of the debtor's owner/president and co-obligor in other matters prepetition and during the pendency of the bankruptcy case "created two classic conflicts of interest: the representation of the Debtor and its principal and the representation of the Debtor and its creditor." Denying all fees to counsel was an appropriate remedy.
- Procedural context:
- The Third Circuit reviewed the district court's factual and legal determinations: “[T]o determine whether the District Court erred, we review the bankruptcy court’s findings by the standards the District Court should have employed.” In so doing, the circuit court considered whether the bankruptcy court abused its discretion with respect to its decisions on fees. It explained, "we must affirm if the Bankruptcy Court’s findings regarding the conflicts of interest here are supported by the record." And, it concluded the bankruptcy court did not need to hold an evidentiary hearing on the conflict of interest issues because there were no material disputes of fact.
- Facts:
- Witchey Enterprises, Inc. filed a chapter 11 petition in the U.S. Bankruptcy Court for the Middle District of Pennsylvania through attorney/appellant Andrew J. Katsock, III. Louis Witchey was Debtor's sole shareholder and president and a co-obligor on some portion of its debts. With the petition, Katsock filed a disclosure of compensation pursuant to 11 U.S.C. § 329(a) and F.R.B.P. 2016(b), but he did not apply to be employed as counsel for the debtor-in-possession under 11 U.S.C. § 327(a). At some point, the bankruptcy court ordered all administrative expense requests under 11 U,S,C, § 503 be filed. Katsock then sought authorization to be employed under § 327, requesting approval nunc pro tunc to the petition date. He also asked the court to approve compensation of $37,221.35 for services rendered post-petition. Katsock's application stated he “do[es] not have any connection with the Debtor or currently represent[] any of [its] creditors [or] other parties-in-interest . . . with respect to the matters upon which he is to be engaged” and “does not, by reason of any direct or indirect relationship to, connection with, or interest in the Debtor, hold or represent any interest adverse to the Debtor, its estate, or any class of creditors or equity interest holders.” The court approved Katsock's representation as of the date of the court's order, not nunc pro tunc to the petition date. Some time later, Katsock filed a fee application for services rendered totaling $13.637.70, again representing he held and represented no interest adverse to the estate, was a disinterested person, and was not employed by or representing a creditor in the case. Before ruling on this application, and due to a lack of progress in getting a plan confirmed, the court ordered the appointment of a Chapter 11 Trustee. The Chapter 11 Trustee asked Katsock to turn over all estate funds in his escrow account. In response, Katsock filed a "holdback motion," offering to return all funds but $13.637.70 for his requested fee until the bankruptcy court ruled on his fee application. The court entered an order consistent with Katsock's holdback request. The Chapter 11 Trustee and the U.S. Trustee then objected to Katsock's fee application because (a) they learned Katsock had represented Debtor's principal and his daughter personally before and during the bankruptcy case, (b) Katsock had not disclosed this representation, and (c) Katsock "had made unauthorized loans to, and received unauthorized loan repayment from, the Debtor during the bankruptcy case." The court denied the fee application owing to the undisclosed representation of Debtor's principal, which created conflicts of interest. Because the court denied the fee application, it concluded the holdback motion was moot and denied it as well. Katsock appealed the orders on the fee application and the holdback motion to the U.S. District Court for the Middle District of Pennsylvania, which affirmed. Katsock then appealed to the Third Circuit.
- Judge(s):
- KRAUSE, CHUNG, RENDELL
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