In re Dooley

• Citation: 399 B.R. 340
• Decision Date: 13 January 2009
• Docket Number: Adversary No. 07-04031.,Bankruptcy No. 06-40948.
• Parties: In re Earl F. DOOLEY, Debtor. David M. Nickless, Chapter 7 Trustee, Plaintiff, v. McGrail & McGrail, A.I.M. Mutual Insurance Co., Inc., E.H. Merrifield Bus Co., Inc., Defendants.
• Court: United States Bankruptcy Courts. First Circuit. U.S. Bankruptcy Court — District of Massachusetts

399 B.R. 340

In re Earl F. DOOLEY, Debtor.

David M. Nickless, Chapter 7 Trustee, Plaintiff, v. McGrail & McGrail, A.I.M. Mutual Insurance Co., Inc., E.H. Merrifield Bus Co., Inc., Defendants.

Bankruptcy No. 06-40948.

Adversary No. 07-04031.

United States Bankruptcy Court, D. Massachusetts. Western Division.

January 13, 2009.

COPYRIGHT MATERIAL OMITTED

David M. Nickless, James L. O'Connor, Jr., Nickless & Philips, PC, Fitchburg, MA, for Plaintiff.

Daniel I. Cotton, Wolfson, Keenan, Cotton & Meagher, Worcester, MA, John F. McGrail, McGrail & McGrail, Worcester, MA, Scott L. Machanic, Cunningham, Machanic, Celtin, Johnson & Harney LLP, Natick, MA, Christopher S. Williams, Williams & Associates, Boston, MA, for Defendants.

MEMORANDUM OF DECISION

HENRY J. BOROFF, Bankruptcy Judge.

Before this Court is the "Motion of David M. Nickless, Trustee, for Partial Summary Judgment" (the "Summary Judgment Motion") filed by the plaintiff David M. Nickless as the Chapter 7 trustee of Earl F. Dooley (respectively, "Trustee Nickless"; the "Debtor"). The three primary issues before this Court for summary judgment determination are: (1) whether, on the date of case commencement, the Debtor's third-party workers' compensation claim was property of the estate under 11 U.S.C. § 541(a); (2) whether the postpetition unauthorized settlement of the third-party claim was a violation of the automatic stay under 11 U.S.C. § 362(a) and therefore void under First Circuit precedent; and (3) whether monies retained by co-defendant McGrail and McGrail ("McGrail") for professional fees associated with a third-party settlement of that claim are subject to turnover under 11 U.S.C. § 542(a) and/or constituted a violation of Massachusetts General Laws ("M.G.L."), ch. 221, § 51 or M.G.L., ch. 93A §§ 2 and 11.

I. FACTS AND TRAVEL OF THE CASE

On February 3, 2005, the Debtor was injured in a motor vehicle accident while in the course of his employment (the "Accident"). The other vehicle was owned and/or operated by E.H. Merrifield Bus Company ("Merrifield"). As a result of the Accident, the Debtor had common law third-party claims against Merrifield and rights under the Massachusetts workers' compensation statute, M.G.L., ch. 152. On June 30, 2005, the Debtor and McGrail entered into a contingent fee agreement whereby McGrail agreed to represent the Debtor in all claims arising from the Accident (the "Fee Agreement"). In return, the Fee Agreement provided for attorney compensation in the amount of one-third of any recovery, plus expenses.

On or about November 9, 2005, McGrail obtained approval from the Massachusetts Division of Industrial Accidents (the "DIA") for an award to the Debtor paid by the Debtor's employer's workers' compensation carrier, AIM Mutual Insurance ("AIM"). AIM, through weekly payments and an $11,000 lump sum, paid a total of $25,162.64 to the Debtor and thereby asserted a lien (in the full amount of the payments) by operation of Massachusetts state law against any third-party claim/recovery by the Debtor. Also in 2005, McGrail began negotiations with Merrifield's insurer, National Interstate Insurance Company ("National Interstate"), regarding the Debtor's third-party claim and on January 9, 2006, filed an extensive demand package with National Interstate. Negotiations regarding the third-party claim continued throughout the spring of 2006 and resulted in a $40,000 offer from National Interstate.

The Debtor filed for relief under Chapter 7 of the Bankruptcy Code on June 7, 2006 (the "Petition Date"). Stephan Rodolakis was appointed Chapter 7 trustee ("Trustee Rodolakis") one day thereafter. On July 11, 2006, Debtor's bankruptcy counsel, Robert F. Casey, Jr. ("Attorney Casey"), requested information from McGrail regarding the third-party claim on behalf of Trustee Rodolakis—alerting McGrail for the first time to the existence of the Debtor's bankruptcy case.¹ In response, McGrail informed Attorney Casey that the third-party claim was still pending and National Interstate's $40,000 offer had not increased. No motion for leave to employ McGrail was filed with this Court. Instead, McGrail, at the Debtor's request, contacted AIM seeking to negotiate down the $25,162.54 lien against the third-party claim. As a result, in September 2006, McGrail reached an agreement with AIM and National Interstate whereby National Interstate would pay $40,000-split in equal amounts of $20,000 between AIM and the Debtor.

National Interstate, on its own accord, without signed settlement documents or settlement approval from the DIA, sent McGrail a check in the amount of $40,000 on or about September 28, 2006. One day earlier, McGrail received a letter from Attorney Casey acknowledging notice of the settlement proceeds to be disbursed to the Debtor in the amount of $13,333.33 and stating that, in his opinion, the amount was exempted.²

Subsequently, McGrail prepared a petition for third-party settlement approval for submission to the DIA (the "DIA Petition"). Within the DIA Petition, McGrail set forth the following planned disbursements of the settlement proceeds:

                  Payment from settlement directly to the
                    Debtor:                                     $13,333.33
                  Payment from settlement directly to AIM:      $13,333.33
                  Attorney fees to McGrail from AIM:            $ 6,666.67
                  Attorney fees to McGrail from the Debtor:     $ 6,666.67.3
                

On October 11, 2006, McGrail sent the DIA Petition and a third-party settlement letter to Attorney Casey and, on the following day, McGrail sent the DIA Petition to the Debtor for signature. Six (6) days later, on October 18, 2006, McGrail received two letters-one each from Attorney Casey and Trustee Rodolakis. Attorney Casey's letter acknowledged receipt of the proposed settlement documents and inquired as to McGrail's opinion regarding what portion of the settlement proceeds was attributable to future earnings. Trustee Rodolakis's letter instructed McGrail not to disburse any settlement proceeds to the Debtor. On December 13, 2006, McGrail received a copy of a letter from Attorney Casey to Trustee Rodolakis requesting that McGrail be allowed to pay $13,333.33 to AIM and $13,333.33 to McGrail for his fees, once the settlement was approved by the DIA.

McGrail received suggested changes to the DIA Petition from AIM's counsel on January 5, 2007 and a revised petition was filed with the DIA on February 2, 2007. McGrail informed Attorney Casey of DIA approval of the revised petition on February 6, 2007, sent the sum of $13,333.33 to AIM and inquired as to whether the settlement funds could now be released to the Debtor. On February 9, 2007, Attorney Casey requested information from McGrail to assist Attorney Casey in responding to Trustee Rodolakis's objection to the Debtor's exemption in the settlement proceeds. The objection was later sustained at a February 12, 2007 hearing. Also on February 12, 2007, presumably after the hearing, Trustee Rodolakis advised McGrail that he would need Bankruptcy Court approval of the settlement and demanded full turnover of the $40,000 settlement proceeds. McGrail responded to Trustee Rodolakis by explaining the history of the settlement and disbursement of the funds ($13,333.33 already paid to AIM; $6,666.67 paid to McGrail from AIM's portion of the settlement; $20,000 still held by McGrail in escrow for the Debtor). On February 14, 2007, Trustee Rodolakis revised his turnover demand to $26,666.67 (the $20,000 held in escrow plus the $6,666.67 paid to McGrail from AIM's settlement funds). McGrail responded the following day by stating he only had $20,000. Raising the stakes, on March 1, 2007, Trustee Rodolakis filed this adversary proceeding seeking turnover of the third-party claim settlement funds from McGrail ($26,666.67) and AIM ($13,333.33) (Counts I and II, respectively), and/or declaratory relief against all defendants in the form of a judgment declaring the third-party settlement void as a violation of the automatic stay under 11 U.S.C. § 362 (Count III).

On June 29, 2007, after the Pre-Trial Hearing, Trustee Rodolakis resigned as Chapter 7 trustee in the case. On or about July 3, 2007, Trustee Nickless was appointed as successor trustee.⁴ Trustee Nickless made further demands for turnover in letters to McGrail dated July 30, 2007 and February 5, 2008. On February 14, 2008, Trustee Nickless sought to amend the Complaint by adding two additional counts under M.G.L., ch. 211, § 51 (Count IV) and M.G.L., ch. 93A, §§ 2 and 11 (Count V) (the "Amended Complaint"). This motion to amend was allowed without objection on March 4, 2008. Ten (10) days later, Trustee Nickless filed the Summary Judgment Motion on Counts I and III of the Amended Complaint.⁵ Then, on March 26, 2008, Trustee Nickless filed a Motion to Compromise with defendant AIM in the Debtor's main case in order to dispose of Count II (the "AIM Compromise"). That motion was allowed by the Court on April 23, 2008 without objection.⁶ AIM was then dismissed as a defendant in this proceeding.

Neither McGrail, nor the Debtor, nor Trustee Rodolakis, ever requested or received authorization from the Bankruptcy Court to employ McGrail as special counsel to Trustee Rodolakis with respect to the claims arising from the Accident.⁷ Nor was any request for authority made to or received from the this Court to settle claims arising from the Accident.⁸ At Trustee Nickless's request, McGrail has turned over $20,000 of the settlement proceeds, but continues to hold $6,666.67.

At the hearing on the instant motion for partial summary judgment, the parties agreed to address Counts I, III and IV in the context of the Summary Judgment Motion.⁹ The matter was then taken under advisement with a joint statement of facts and issues and additional briefing to be submitted by the parties.

II. POSITIONS OF THE PARTIES

Trustee Nickless maintains that the Debtor's third-party claim against Merrifield is property of the bankruptcy estate...