Downs, In re
| Decision Date | 19 December 1996 |
| Docket Number | Nos. 94-5867,94-5909 and 94-5910,s. 94-5867 |
| Citation | 103 F.3d 472 |
| Parties | 37 Collier Bankr.Cas.2d 207, 36 Fed.R.Serv.3d 874, Bankr. L. Rep. P 77,219 In re Joseph Patrick DOWNS; Helen B. Downs, Debtors. MAPOTHER & MAPOTHER, P.S.C.; Charles M. Friedman, Plaintiffs-Appellants/Cross-Appellees (94-5867/5909)/Plaintiffs-Appellees (94-5910), v. Kyle COOPER, Defendant-Appellee/Cross-Appellant (94-5867/5909)/Defendant (94-5910), Southern American Insurance Company in Liquidation, Defendant (94-5867/5909)/ Defendant-Appellant (94-5910). |
| Court | U.S. Court of Appeals — Sixth Circuit |
Joseph Patrick Downs, Bardstown, KY, pro se.
Helen B. Downs, Bardstown, KY, pro se.
Charles M. Friedman (argued and briefed), Mapother & Mapother, Louisville, KY, for Plaintiffs-Appellants, Cross-Appellees.
Kathryn H. Hogan (argued and briefed), Greene and Cooper, Louisville, KY, for Kyle Cooper.
Cathy S. Pike (argued and briefed), Goldberg & Simpson, Louisville, KY, for Southern American Ins. Co. in Liquidation.
Before: NATHANIEL B. JONES, Senior Circuit Judge, and ALAN E. NORRIS and MOORE, Circuit Judges.
This is a bankruptcy case. During the course of Chapter 11 proceedings, the bankruptcy court imposed sanctions against the debtors' attorney, Charles Friedman, and his firm, Mapother and Mapother ("Mapother"), for failure to disclose Friedman's fee arrangement in accordance with the Bankruptcy Code and Rules of Bankruptcy Procedure. The bankruptcy court further denied the motion of the trustee and Southern American Insurance Company ("SAIC") to sanction Friedman under Federal Rule of Bankruptcy Procedure 9011 for filing a motion to convert the debtors' petition to a Chapter 11 petition. The district court affirmed the bankruptcy court in all respects. We affirm in part and reverse in part the decision of the district court.
This case has a long and intricate history, so we will recite only the facts pertinent to the immediate appeals. Hardscrabble Farms, Inc., a dairy farm owned by debtor Joseph P. Downs, filed a Chapter 11 reorganization petition in 1986, listing approximately $3.3 million of indebtedness. In an attempt to reorganize, Hardscrabble entered into a loan with SAIC. Mr. Downs eventually defaulted on the loan payments, causing the fiduciary relationship between Hardscrabble and SAIC to fall apart.
After the attempt to reorganize Hardscrabble failed, Downs and his wife, Helen P. Downs, filed a Chapter 7 bankruptcy liquidation petition on July 17, 1990. The Downses' petition listed 100% stock ownership in Hardscrabble, valued at zero, as an asset. The petition also listed as an asset the Downses' pending lender liability suit against SAIC in Nelson County Circuit Court. Hardscrabble Farms, Inc., et al. v. Southern American Ins. Co., Case No. 89-0608l(A) (Nelson County Kentucky Circuit Court filed July 25, 1989). Attorney August Klapheke represented the Downses in the Chapter 11 proceedings. The Downses pledged full ownership of the Hardscrabble stock to Klapheke as consideration for his services. Despite the fact that he held a security interest in the stock, Klapheke proceeded to solicit bids for purchase of the stock. Eventually, an entity known as P & Y submitted a bid. After learning of Klapheke's interest, however, the bid was withdrawn. Thereafter, SAIC offered to purchase the stock in settlement of the Downses' state court claim. The Trustee filed motions in the bankruptcy court to determine the status of Klapheke's security interest in the stock, to sell the stock, and to settle Downses' claims against SAIC.
In April 1991, Klapheke became incapacitated by what was later discovered to be a brain tumor. As a result, the president of Heaven Hill, Inc., a creditor of the Downses and Hardscrabble Farms, contacted Friedman and asked him to replace Klapheke as the Downses' counsel. Friedman agreed, and Mr. Downs paid Friedman a $40,000 retainer. Mr. Downs had received this money from Bourbon-Aid Feed, a company owned by his children. Bourbon-Aid, however, had acquired the money from Heaven Hill.
On June 17, 1991, Friedman entered an appearance on behalf of the Downses at the hearing on the Trustee's settlement motions. At the hearing, Friedman moved to convert the Chapter 7 case to a Chapter 11 reorganization case pursuant to 11 U.S.C. § 706, and posted a $16,500 appeal bond with the bankruptcy court. In August 1991, Friedman received an additional $6,000 from Bourbon-Aid Feed.
On August 20, 1991, the bankruptcy court granted the Trustee's settlement motion. Furthermore, the bankruptcy court denied the Downses' motion to convert, reasoning that reorganization was impossible. In so doing, the bankruptcy court concluded that the Downses' motion was filed in bad faith, in light of the fact that the debtors' bankruptcy had been pending for over one year and the motion to convert was filed on the "very eve, on the very day, almost a moment before the trustee was going to consummate a sale that the Court had been contemplating and working with for over six months." J.A. at 175 (Transcript of Hearing of 8/20/91). The court also noted that the motion was filed "solely for the purpose of delaying the sale." Id. The Downses appealed, and the district court reversed and remanded the case to the bankruptcy court to determine "[w]hether the Downs[es] can propose a viable reorganization plan and have the ability to proceed under Chapter 11...." J.A. at 351. In addition, the district court ordered that the Downses and/or Friedman be sanctioned if it appeared that their motion was in bad faith and there was no viable Chapter 11 plan.
On remand, the bankruptcy court held a four-day evidentiary hearing. In a June 3, 1992, Memorandum Opinion, the bankruptcy court found that "from the evidence concerning the financial condition of the Downs [sic] and [Hardscrabble] and Mr. Downs' admission that no plan had been reviewed, evaluated, or formulated until well after the initial conversion motion was filed, that the motion to convert this case to Chapter 11 was filed in objective bad faith and that on this ground the motion to convert should be denied." J.A. at 217. Furthermore, the bankruptcy court directed the Downses and Friedman to disclose all information relating to the retainer. Id. at 218. Accordingly, Friedman filed a statement with the bankruptcy court on June 11, 1992, wherein he disclosed his fee arrangement with Heaven Hill and Bourbon-Aid Feed. J.A. at 856-59.
On August 28, 1992, SAIC filed a Motion for Sanctions, pursuant to Rule 9011 of the Rules of Bankruptcy Procedure, against the Downses and Friedman on grounds that the § 706 Motion was filed in bad faith. The Trustee subsequently joined SAIC's Motion, alleging that 1) Friedman had failed to disclose his fee arrangement with Heaven Hill under Bankruptcy Rule § 2016, and 2) Friedman had failed to disclose a potential conflict of interest arising out of his Chapter 7 representation of the Downses in violation of 11 U.S.C. § 101(14). Friedman responded with 1) a Motion for Sanctions against the Trustee for failure to notify the Downses of offers of settlement in relation to the stock, and 2) a Motion for Sanctions against SAIC's attorneys for improperly filing the original Motion for Sanctions.
On March 23, 1993, the bankruptcy court denied in part and granted in part SAIC and the Trustee's Motion against Friedman and denied Friedman's Motion outright. The court reasoned that Rule 9011 sanctions would not be appropriate with regard to the filing of the § 706 Motion because 1) given the time constraints, Friedman adequately reviewed the case before he made the filing, and 2) the Motion was not filed in subjective bad faith. J.A. at 1656. On the other hand, the court granted the Motion with regard to Friedman's failure to disclose the fee arrangement. Accordingly, the court ordered Friedman and his firm to disgorge the entire retainer, minus the appeal bond and reimbursable expenses. As a further "sanction," it held that "no allowance for professional fees shall be granted by this Court to Friedman or his firm under 11 U.S.C. § 330." Id. at 1661. Both parties moved for reconsideration; consequently, the bankruptcy court issued a revised opinion wherein it affirmed its earlier decision on the Rule 9011 sanctions, but amended the earlier order by reducing the amount of the § 329 sanction to $20,000 and rescinding its bar on § 330 fees. Friedman appealed to the district court on the § 329 ruling, while SAIC and Cooper cross-appealed on the Rule 9011 issue. In a 7-page Memorandum Opinion, the district court affirmed. These appeals followed.
The issues to be addressed on appeal are: 1) whether the bankruptcy court properly imposed sanctions on Friedman and Mapother for Friedman's failure to comply with § 329 and Rule 2016; 2) whether the bankruptcy court properly reduced the amount of those sanctions so as to allow Friedman and Mapother to retain a portion of the retainer; and 3) whether the bankruptcy court properly denied SAIC and the Trustee's motion for sanctions under Rule 11. We will address each issue in turn. 1
The applicable standard of review for a decision of a district court concerning a bankruptcy is dependent on whether such decision involves a question of law or fact. In this case, a de novo independent review is appropriate to review the district court's interpretation and application of 11 U.S.C. § 329(a) and Bankruptcy Rules 2016(b), See In re Caldwell, 851 F.2d 852, 857 (6th Cir.1988), and the factual findings regarding the parties' actions are reviewed under the clearly erroneous standard. See Archer v. Macomb County Bank, 853 F.2d 497, 499 (6th Cir.1988).
We will consider Friedman's appeal first. He argues that the district court erred in upholding the bankruptcy court's Amended Order requiring him to remit $20,000 of the funds received by him. We disagree.
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