In re Smith
| Decision Date | 05 November 2007 |
| Docket Number | Docket No. 06-5323-bk.,Docket No. 06-4450-bk. |
| Citation | 507 F.3d 64 |
| Parties | In re Sueann M. SMITH. Jeffrey H. Schwartz, Appellant, v. Robert L. Geltzer, Chapter 7 Trustee, Appellee. Sueann M. Smith, Appellant, v. Robert L. Geltzer, Appellee. |
| Court | U.S. Court of Appeals — Second Circuit |
David J. Mark, Feder, Kaszovitz, Isaacson, Weber, Skala, Bass & Rhine LLP, New York, NY, for Appellant Sueann M. Smith.
Robert M. Ginsberg, Ginsberg & Broome, P.C., New York, NY, for Appellant Jeffrey H. Schwartz.
Robert A. Wolf, Bryan Cave LLP (Christopher R. Strianese, on the brief), New York, NY, for Appellee.
Before: STRAUB, KATZMANN, and B.D. PARKER, Circuit Judges.
Judge B.D. PARKER concurs in the judgment of the Court and files a separate concurring opinion.
These appeals require us to consider the extent to which a debtor who files for Chapter 7 bankruptcy protection has the ability to control the personal injury action that is the principal asset of her estate. In the proceedings below, the Bankruptcy Court — at the request of the trustee — ordered the removal of the debtor's preferred choice of special personal injury counsel and then denied the debtor's motion to dismiss her bankruptcy petition, even though she had arranged to pay all of her debts in full in an attempt to have her preferred counsel continue to prosecute the personal injury action. Under the circumstances present here, including several instances of apparent misconduct by the special personal injury counsel, we hold that the Bankruptcy Court did not err in approving the trustee's request to remove that counsel. However, we also hold on the present record that the Court exceeded the bounds of its allowable discretion in denying the debtor's motion to dismiss. Accordingly, the District Court's order at issue in appeal No. 06-4450-bk is affirmed, the order at issue in appeal No. 06-5323-bk is vacated, and the case is remanded for further proceedings.
In April 2004, appellant Sueann M. Smith filed a voluntary petition for bankruptcy pursuant to Chapter 7 of the U.S Bankruptcy Code. She had debts of approximately $14,000, and a single potential asset: a personal injury claim based on a prior sledding accident in which she was blinded in one eye. All parties agree that if the personal injury claim is successfully prosecuted, recovery would likely far exceed creditors' claims against Smith.
Appellee Robert L. Geltzer was chosen to be the permanent Chapter 7 trustee representing Smith's estate, and in October 2004, the United States Bankruptcy Court for the Eastern District of New York (Carla E. Craig, Chief Judge) approved Geltzer's request to retain appellant Jeffrey H. Schwartz as his special counsel to prosecute Smith's personal injury action. The Bankruptcy Court ordered that the personal injury action was to be pursued on behalf of "the Trustee, Robert L. Geltzer," as opposed to the debtor directly, as is customary in bankruptcy cases. However, in January 2005, Schwartz filed a complaint in New York state court that listed Smith, not Geltzer, as the plaintiff. This was the first of a litany of errors that, when viewed together, reflect at best a lack of understanding of the bankruptcy process and at worst an effort to circumvent its requirements.
It took nine months and five separate entreaties by Geltzer before Schwartz, in October 2005, amended the caption to list Geltzer as the plaintiff. In the meantime, Schwartz brought on another attorney, Robert M. Ginsberg, to prosecute the personal injury action — without getting the approval of either the trustee or the Bankruptcy Court. After Geltzer informed Schwartz that such approvals were required under the Bankruptcy Code before Ginsberg could begin serving as trial counsel, Schwartz and Ginsberg tried to get around this requirement informally. Ginsberg sent Schwartz a letter, with a copy to Geltzer, suggesting that A subsequent letter from Ginsberg revealed that he had already been working on the personal injury action, including retaining an expert and preparing a bill of particulars, without the trustee's or the Bankruptcy Court's knowledge or authorization.
Geltzer then moved the Bankruptcy Court for an order removing Schwartz as special personal injury counsel and requiring Schwartz to turn over the personal injury file to a new special counsel. Smith (the debtor) filed an affidavit in opposition to the trustee's motion. She stated that she "ha[s] a substantial interest in the outcome of this case" and that she wanted Ginsberg, "one of the most highly regarded trial attorneys in the plaintiff's personal injury field," to represent the estate. While Geltzer's motion was pending, Ginsberg continued, still without authority, to prosecute the personal injury action and went so far as to file court papers representing that he was counsel to Geltzer.
On December 7, 2006, Chief Bankruptcy Judge Carla Craig held a hearing on the motion to remove Schwartz. At one point Chief Judge Craig asked the attorneys to meet in the hallway to try to "work it out." When they returned, an associate of Geltzer's told the Court that Ginsberg "came up to [him] and goes, `Is there anything I can do to sweeten the pot?'"; Ginsberg denied making such an offer. Three weeks later, Chief Judge Craig issued a written decision granting the trustee's motion to remove Schwartz as personal injury counsel and directing Schwartz to turn over to Geltzer "all files relating to the personal injury action." The Bankruptcy Court entered a formal order to this effect on January 17, 2006.
In her opinion, Chief Judge Craig explained that the trustee's motion was "overwhelmingly supported by th[e] record," including that (a) Schwartz "delayed at least six months . . . before acting on the trustee's request that he amend the caption in state court"; (b) Schwartz transferred the case to Ginsberg without approval of the trustee or the Bankruptcy Court; and (c) Ginsberg worked on the case and attempted to remain as trial counsel despite the lack of trustee or court approval, thus "creat[ing] a legitimate and substantial concern in the mind of a reasonable person that this personal injury action, which was being handled by an attorney who had no authority to do so, might be settled in a similarly unauthorized fashion, possibly even without payment of the proceeds to the trustee." Chief Judge Craig was especially concerned with the letter sent by Ginsberg suggesting that Schwartz remain as "attorney of record" while Ginsberg would act as trial counsel because such fee-splitting arrangements are prohibited under section 504(a) of the Bankruptcy Code and, without proper authorization, can constitute a violation of the New York Lawyer's Code of Professional Responsibility. "It is appalling, and incomprehensible," wrote Chief Judge Craig, "that Mr. Ginsberg could think it was permissible, in the absence of consent by the trustee and court approval, for him to act as counsel on [this] case and receive a fee for doing so, funneled through Mr. Schwartz as `attorney of record.'" Chief Judge Craig also credited Geltzer's associate's account of the exchange in the hallway and noted that Ginsberg's attempt to "sweeten the pot" "is an additional reason why the trustee is amply justified in refusing to retain him, particularly in light of Mr. Ginsberg's persistent and flagrant disregard of his obligations as an attorney." Finally, Chief Judge Craig found that whatever weight should be accorded the debtor's preference to retain Ginsberg was outweighed by the "clear evidence that Messrs. Schwartz and Ginsberg should not be retained to represent the estate."
Schwartz appealed to the District Court, which affirmed the Bankruptcy Court's decision in an opinion and order issued on August 24, 2006. Schwartz filed a timely appeal to this Court, docketed as No. 06-4450-bk, which is the first appeal we address, infra.
Almost immediately after the Bankruptcy Court issued its removal decision, Smith, on February 8, 2006, moved to dismiss her bankruptcy case. In support of her motion, Smith said that she still had "confidence" in Schwartz and Ginsberg and wanted to "obtain control of the prosecution of the Personal Injury Claim." "To that end," Smith "obtained a commitment from Setareh Holding Corp." whereby Setareh would provide Smith with "up to $17,500" to pay the claims of the estate in return for a lien against any recovery in the personal injury action in the amount of $17,500 plus 8.3% interest per month. Ginsberg's law firm agreed to "advance all payments for the Trustee's commission UNTIL NOW, court fees; or expenses which have been incurred," with this advance to be treated as a disbursement to be deducted from the total settlement or judgment of the personal injury litigation without interest. Smith argued that with these arrangements, dismissal of her Chapter 7 petition would be in her best interest, would satisfy her creditors, and "no one will suffer any prejudice."
While Smith's motion was pending, Schwartz and Ginsberg refused to turn over the personal injury file to Geltzer — in defiance of the Bankruptcy Court's January 17, 2006 order — and Ginsberg continued to prosecute the personal injury action, including filing responses to discovery requests.1
Geltzer, as trustee, opposed Smith's dismissal motion on multiple grounds, including that (1) the creditors were provided with "no certainty, at all, that they will be paid by the Debtor"; (2) dismissal would be against Smith's best interests due to Ginsberg's record of "incompeten[ce]" and "dishonest[y]" and because Setareh's interest...
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