Crivello, In re
| Citation | 134 F.3d 831 |
| Decision Date | 09 January 1998 |
| Docket Number | No. 97-1646,97-1646 |
| Parties | 39 Collier Bankr.Cas.2d 213, 31 Bankr.Ct.Dec. 1258, Bankr. L. Rep. P 77,603 In re Frank Pio CRIVELLO, Debtor. KRAVIT, GASS & WEBER, S.C., Appellant, v. M. Scott MICHEL, United States Trustee, Appellee. Seventh Circuit |
| Court | United States Courts of Appeals. United States Court of Appeals (7th Circuit) |
Thomas L. Shriner, Jr. (argued), Foley & Lardner, Milwaukee, WI, for Appellant.
John L. Daugherty, Executive Office for the United States Trustees, Washington, DC, John R. Byrnes (argued), United States Department of Justice, avid Walter Asbach, United States Trustee/DOJ, Milwaukee, WI, for Appellee.
Before POSNER, Chief Judge, MANION and KANNE, Circuit Judges. *
In its application for employment as bankruptcy counsel for Frank Crivello, the debtor-in-possession, Kravit, Gass & Weber, S.C. ("KGW"), did not disclose prior interactions it had with the debtor as well as its prepetition claims against him. After approving its petition, the bankruptcy court learned of these connections, revoked KGW's employment order, and denied its petitions for compensation. KGW appealed to the district court, which affirmed the denial of all fees. KGW then appealed to us. We agree with the lower courts' conclusion that bankruptcy courts have discretion to deny fees under 11 U.S.C. § 328(c) for professionals employed under 11 U.S.C. § 327(a), but we reverse the district court's affirmance and remand this matter to the bankruptcy court because erroneous findings of fact may have tainted the bankruptcy court's exercise of discretion.
This case revolves around the actions of two cousins, Frank and Joseph Crivello, and the law firm that represented them, KGW. Frank Crivello filed a voluntary chapter 11 petition on November 20, 1992. At this time, Frank Crivello scheduled Joseph Crivello, 1 National Management, Inc. ("NMI"), and Fifth Corporation as creditors. Joseph Crivello was the sole shareholder in NMI. Joseph also owned stock, directly or indirectly, in Fifth Corporation. NMI, Fifth Corporation, Berkshire Factoring, Inc. ("Berkshire"), and ICT II Corporation filed claims against Frank Crivello in the proceeding. Joseph Crivello owned stock in Berkshire and ICT II Corporation. He did not, however, personally file a claim against the estate.
On December 8, 1992, Frank Crivello, as debtor-in-possession, filed an employment application in the bankruptcy court to retain KGW as his counsel in the chapter 11 proceeding. As required by Fed.R.Bankr.P. 2016(b), accompanying this application were an attorney's statement ("a 2016(b) statement") and an affidavit from Leonard G. Leverson, a shareholder of KGW with bankruptcy experience. He attested that neither he nor any member of his firm held or represented any interest adverse to the debtor or the estate and identified seven creditors of the debtor that KGW had represented in other matters. The firm's 2016(b) statement disclosed a $10,000 bankruptcy retainer paid by NMI on Frank Crivello's behalf. KGW had applied $600 of the retainer to Crivello's chapter 11 filing fee and $5,670.94 to pre-petition financial advisory services.
On January 11, 1993, Assistant United States Trustee John R. Byrnes wrote Leverson to reiterate that the application for employment should state all of the funds KGW had obtained from Frank Crivello and should disclose the source of the funds. Byrnes also requested that Leverson clarify the scope of KGW's services, including its representation of Frank Crivello in any criminal investigation. Leverson responded that he did not believe the matters into which Byrnes inquired were appropriate for disclosure in a 2016(b) statement under his reading of § 329(a) of the Bankruptcy Code, 11 U.S.C. § 329(a). He offered to reconsider his view if Byrnes would direct him to authority contrary to his interpretation. Byrnes never responded. On February 8, 1993, the bankruptcy court authorized the debtor to retain KGW as his chapter 11 counsel with retroactive effect to November 20, 1992.
In its 2016(b) statement and affidavit, KGW did not disclose numerous interactions the firm had with Frank Crivello as of the petition date. It had previously represented Frank Crivello and Joseph Crivello in matters in which they were sued jointly. KGW also was and had been representing Frank Crivello in defense of criminal matters, including several pending federal criminal investigations. Finally, it had agreed to represent 122 companies owned in whole or in part by the debtor in defense of any criminal investigation of Frank Crivello. All of these companies were insiders of Frank Crivello.
KGW also did not disclose its prepetition claims against Crivello and a series of triangle payment schemes between Frank Crivello, Joseph Crivello, and Joseph's companies. Immediately prior to the filing of bankruptcy, Frank Crivello owed KGW $18,103.58 for criminal matters and $18,823.40 for civil matters. The firm did not disclose these prepetition claims for fees until March 13, 1995, when it filed a supplement to its affidavit of disinterestedness. That disclosure stated that KGW had waived the $18,103.58 claim for prepetition criminal representation. KGW did not file a claim against the estate.
It is questionable whether KGW waived this claim. On December 31, 1992, KGW received a $50,000 retainer from Sierra Holding Corp., a company owned by Joseph Crivello. This payment was intended to be in anticipation of work KGW would complete for Sierra Finance Co., which is also owned by Joseph. On or about April 30, 1993, KGW applied this retainer to Frank Crivello's outstanding balance for services rendered in KGW's criminal representation of Crivello. KGW then applied the remainder of the sum to Crivello's bill for postpetition legal services. KGW claims that this application of the Sierra payment was inadvertent. Once Leverson discovered the error, he disclosed it to the United States Trustee, M. Scott Michel, and supplemented his affidavit of disinterestedness.
The outside payments did not stop there. Between November 20, 1991 and June 1, 1992, NMI 2 paid KGW for joint representation of Frank and Joseph Crivello. On September 2, 1993, Berkshire paid KGW $45,542 for representing Frank Crivello. NMI also paid KGW at least $281,368.10 from August 3, 1992 to March 20, 1995 for representing the debtor. Finally, Joseph Crivello retained KGW on February 22, 1994 to provide advice about a potential gaming industry venture.
On October 25, 1993, KGW applied to the bankruptcy court for interim compensation of $169,825.68 as required by 11 U.S.C. § 330 and Fed.R.Bankr.P. 2016(a). Over the objections of some creditors and the United States Trustee, the bankruptcy court awarded KGW $80,000. On June 2, 1994, the firm filed an application for final compensation of $334,484.94. This application was amended on September 19, 1994. On November 28, 1994, KGW filed a second application for interim compensation pending a determination on its application for final compensation. The United States Trustee objected to all of these applications. It claimed that KGW was not disinterested, that KGW failed to disclose its connections to insiders adequately, and that the amount of the request was unreasonable.
In connection with its fee applications and in response to the United States Trustee's objections, KGW filed supplemental 2016(b) statements on October 27, 1994, December 6, 1994, January 17, 1995, and April 19, 1995. These statements revealed some details of NMI's payments to KGW for services on behalf of the debtor.
KGW also filed an amended affidavit of disinterestedness in connection with a hearing on the second interim fee application on December 27, 1994. It explained that KGW's original affidavit of disinterestedness did not mention the firm's prepetition representation of Joseph Crivello because his name did not appear in the creditor mailing matrix when the attorneys at KGW cross-checked the lists of current and former KGW clients with the mailing matrix of Frank Crivello's creditors.
On March 25, 1995, the bankruptcy court revoked KGW's employment order and denied its application for compensation in its entirety. See In re Crivello, 194 B.R. 463 (Bankr.E.D.Wis.1996). The court specifically found that KGW was not a disinterested person and that KGW had "willfully failed to disclose critical facts and connections with Frank" Crivello. Id. at 469. KGW appealed this decision.
On February 18, 1997, the district court affirmed the bankruptcy court. See In re Crivello, 205 B.R. 399, 405 (E.D.Wis.1997). The court, however, found no support in the record for the bankruptcy court's findings that KGW had willfully failed to disclose its connections with the debtor and that KGW had attempted to thwart the Bankruptcy Code's disclosure requirements. See id. at 403-04. Nevertheless, the district court determined that these evidentiary deficiencies did not warrant a reversal because the bankruptcy court's decision to deny KGW's requests for compensation under 11 U.S.C. § 328(c) was based on the independent and adequate finding that KGW was not a disinterested party. See id. at 404. KGW appealed to this court.
In an appeal of a district court's affirmance of a bankruptcy court's decision, we utilize the same standard of review employed by the district court below: we uphold a bankruptcy court's findings of fact unless clearly erroneous and we review its legal conclusions de novo. See In re A-1 Paving & Contracting, Inc., 116 F.3d 242, 243 (7th Cir.1997); In re Marrs-Winn Co., 103 F.3d 584, 589 (7th Cir.1996); see also Fed.R.Bankr.P. 8013. KGW challenges the district court's denial of its compensation request. Because the compensation of professionals in bankruptcy proceedings is a complicated area, we pause to survey the legal landscape before continuing.
A chapter 11 debtor-in-possession like Frank Crivello stands in the shoes of a trustee and acquires the same rights,...
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