In re Bressman, 02-1725.

Citation327 F.3d 229
Decision Date25 April 2003
Docket NumberNo. 02-1725.,02-1725.
PartiesIn re: Andrew E. BRESSMAN, Debtor Robert B. Wasserman, Chapter 7 Trustee of the Bankruptcy Estate of Andrew E. Bressman, Appellant v. Andrew E. Bressman; Stefanie Bressman; Arthur Bressman, individually and as Trustee for the Bressman Family Trust; Phyllis Bressman; Perri Bressman, a minor; Hadley Bressman; Hyla Bressman, a/k/a Hyla Jacobs; Bannon & Whitney, Inc., a corporation; Pershing & Co., a corporation; Kopstein, Van Alen, Nash & Co., a corporation; Mid Ocean Trust Limited, a Cook Islands corporation, as Trustee for the Bressman Family Trust; Bressman Family Trust; *Newman & Greenberg, a partnership; *the Law Offices of Robert Hill Schwartz; Cole, Schotz, Meisel, Forman & Leonard, P.C., a professional corporation; Shapiro & Croland, a partnership including professional corporations. * Amended pursuant to Clerk's Order dated 6/11/02
CourtUnited States Courts of Appeals. United States Court of Appeals (3rd Circuit)

Harry M. Gutfleish (Argued), Wasserman, Jurista & Stolz, Millburn, NJ, for Appellant.

Michael D. Sirota (Argued), Cole, Schotz, Meisel, Forman & Leonard, Hackensack, NJ, for Appellees.

Before FUENTES and STAPLETON, Circuit Judges, and O'KELLEY,* District Judge.


STAPLETON, Circuit Judge.


The Trustee in the Chapter 7 bankruptcy proceedings of Andrew Bressman ("Debtor") appeals the District Court's affirmance of the Bankruptcy Court's grant of summary judgment to Appellees, attorneys Newman & Greenberg, The Law Offices of Robert Hill Schwartz (together, "Newman & Schwartz"), and Cole, Schotz, Meisel, Forman & Leonard, P.A. ("Cole Schotz"). The Trustee seeks to recover certain funds received by appellees as counsel fees. We will affirm the judgment of the District Court.


In July, 1996, the Debtor filed voluntarily for bankruptcy protection under Chapter 11 of the Bankruptcy Code. The Bankruptcy Court approved Cole Schotz to represent the Debtor as debtor-in-possession. On June 9, 1997, the Chapter 11 proceedings were converted to Chapter 7 proceedings. Cole Schotz continued to represent the Debtor in the bankruptcy proceedings, but as counsel for the debtor out-of-possession. Upon his appointment, the Trustee engaged the same litigation counsel that had represented the Creditors Committee since the beginning of the Chapter 11 proceeding.

Upon the conversion to Chapter 7, Cole Schotz advised the Debtor that all payments for future services would have to be paid from non-estate sources. It thereafter received four fee payments: a check from the savings account of Stefanie Bressman, the Debtor's wife, on August 18, 1997; a check from Stefanie's PNC checking account on October 30, 1997; a check from the same account on December 8, 1997; and a check from PAS Realty, a firm owned by the Debtor's father, on January 2, 1998. It is only the December 8, 1997, check for $12,218.57 that is at issue here. On November 7, 1997, and January 7, 1998, Cole Schotz filed certifications with the Bankruptcy Court in accordance with § 329 of the Code reporting these fees for representing the debtor out of-possession and their source.1

In the summer of 1996, the Securities and Exchange Commission ("S.E.C.") commenced disciplinary proceedings against the Debtor as a result of his activities as president and C.E.O. of A.R. Baron & Co., Inc., a securities firm, which had also declared bankruptcy. In August, 1996, Stefanie Bressman hired Newman & Schwartz to provide representation for the Debtor in the S.E.C.'s proceedings as well as in any criminal proceedings that might ensue. The retention agreement required Mrs. Bressman to pay Newman & Schwartz a retainer of $50,000 and to make that payment and all ensuing payments of their fees with non-estate assets. At that time, Stefanie and the Debtor assured the attorneys responsible for the firm's representation that Stefanie came from a family of substantial financial means and had adequate assets, separate from the Debtor, with which to pay for the representation. Three days after she entered the retention agreement, Stefanie caused $50,000 to be wire transferred from her personal account at Chase Bank to Newman & Schwartz. The S.E.C.'s investigation led to a state court indictment of the Debtor for a variety of crimes. Upon Newman & Schwartz's advice, the Debtor exercised his Fifth Amendment right against self incrimination in both the criminal case and the bankruptcy proceedings. Eventually, the Debtor pled guilty to fraud and grand larceny.

Between August 8, 1996, and August 18, 1997, Newman & Schwartz was paid an additional $125,000 for services rendered to the Debtor. With the exception of one $50,000 payment received from his mother, each payment came from Stefanie. These payments are not at issue here. Rather, the Trustee seeks to recover six payments received by the firm from Stefanie's personal account at PNC Bank between November 20, 1997, and December 3, 1997.

More than a year before his bankruptcy, the Debtor established a trust in the Cook Islands. The Debtor's contingent interest in this trust was disclosed in the schedules filed with the Bankruptcy Court on July 18, 1996, and the Debtor testified concerning the terms of this trust at a hearing twenty days later that was attended by counsel for the Creditors Committee.

Between November 19 and December 5, 1997, six wire transfers totaling $430,000 passed from the Cook Islands trust to Mrs. Bressman's personal account. On the business day following each of the six transfers, Stefanie paid a substantial portion of the amount transferred to Cole Schotz and Newman & Schwartz in satisfaction of bills for their respective representations of the Debtor. The six payments made to Newman & Schwartz totaled $380,000.

The Trustee, after his appointment on June 23, 1997, continued the efforts of the Creditors' Committee to identify and recover assets of the estate. On December 23, 1997, he instituted this suit against Stefanie, other family members and numerous firms to recover the assets of the Cook Islands trust for the estate. The complaint was amended to seek recovery of the fees paid to Newman & Schwartz and to Cole Schotz on May 26, 1998. The claims against all other defendants were settled without a determination of whether the trust was part of the Debtor's estate.

The Trustee and the law firms filed cross-motions for summary judgment. In support of their motions and in opposition to the Trustee's, the law firms filed affidavits of the responsible attorneys, which set forth the facts recounted above and averred that they had no knowledge that the Cook Islands trust was the source of the funds used by Stefanie to pay the fees at issue. Neither questioned Stefanie about the source of the funds because they believed they had no reason to do so.

In response to these affidavits, the Trustee filed an affidavit of his counsel.

With respect to Cole Schotz, he described correspondence between that firm and himself in which he had inquired concerning the source of the fees being paid to Cole Schotz. This correspondence culminated in a letter to Cole Schotz on November 10, 1997, which stated in part as follows:

I am in receipt of your supplemental Certification, dated November 7, 1997, acknowledging that, since the conversion of the within bankruptcy proceedings to Chapter 7, your firm has received approximately $18,000.00 from Stefanie Bressman in payment of fees incurred by your firm in connection with the within bankruptcy proceedings.

I know that you are fully aware of the pending adversary proceeding against Stefanie Bressman, seeking recovery of funds transferred to Mrs. Bressman as fraudulent conveyances. The purpose of this letter is to advise you that Mr. Wasserman, as Bankruptcy Trustee, will likely be forced to seek disgorgement of the fees paid to your firm by Stephanie [sic] Bressman if it is ultimately determined that such fees are the "fruit" of fraudulent conveyances by Mr. Bressman. Please be guided accordingly.

App. IV at Tab 24, pp. 5-6.

With respect to Newman & Schwartz, Trustee's counsel stressed the following telephone conversation with one of the firm's attorneys who represented the Debtor in the on-going criminal proceedings:

16. On October 15, 1997, I received a telephone call from Richard A. Greenberg, Esq. of Newman & Schwartz, concerning the Trustee's Rule 2004 Subpoena. Mr. Greenberg wanted to know (a) why the Trustee was interested in the source of Newman & Schwartz's fees; and (b) whether Mr. Newman was required to appear for a deposition of October 31, 1997.

17. In response, I advised Mr. Greenberg that the Trustee was investigating whether his firm had received payment from funds or assets that constituted property of Andrew Bressman's bankruptcy estate and that the Trustee would seek disgorgement of any fees paid from estate property. Mr. Greenberg stated this his firm had not received payment from Andrew Bressman. I responded that the mere fact that the payments were not received from Andrew Bressman did not mean that Newman & Schwartz was not paid with estate assets.

App. IV at Tab 24, p. 7.

Before the Bankruptcy Court, the Trustee contended that the challenged fee payments were unauthorized post-petition transfers recoverable under §§ 549 and 550. He further asserted that Newman & Schwartz had violated § 329 by failing to report the challenged fee payments to the Bankruptcy Court and that both firms had violated §§ 327 and 330 by receiving funds of the Debtor's estate without court approval. According to the Trustee, these violations of §§ 327, 329 and 330 required that the challenged fees be "disgorged."

The Bankruptcy Court assumed without deciding that the trust was an asset of the bankrupt's estate. It held that, even making this assumption, §§ 327, 329 and 330 were not applicable to the situation before it and that the only remedies...

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