In re Grabanski
| Decision Date | 24 October 2017 |
| Docket Number | Bankruptcy No. 10–30902 |
| Citation | 578 B.R. 458 |
| Parties | IN RE: Thomas M. GRABANSKI and Mari K. Grabanski, Debtors. |
| Court | U.S. Bankruptcy Court — District of North Dakota |
578 B.R. 458
IN RE: Thomas M. GRABANSKI and Mari K. Grabanski, Debtors.
Bankruptcy No. 10–30902
United States Bankruptcy Court, D. North Dakota.
Signed October 24, 2017
Vickie L. Driver, Husch Blackwell LLP, Dallas, TX, DeWayne Johnston, Johnston Law Office, Grand Forks, ND, for Debtors.
RULING ON DISGORGEMENT AND SANCTIONS
THAD J. COLLINS, U.S. BANKRUPTCY JUDGE, SITTING BY DESIGNATION
These matters came before the Court for hearing in Fargo, North Dakota on a number of filings related to the compensation of Debtors' counsel Attorney DeWayne Johnston and Johnston Law Office P.C.1 Sean Foss appeared for Interested Parties John and Dawn Keeley ("the Keeleys"). David Thompson appeared for DeWayne Johnson and Johnston Law Office P.C. ("Johnston"). After hearing arguments, the Court took these matters under advisement. The parties did not offer evidence or testimony at the hearing. The parties relied entirely on the lengthy record already developed on these issues. The parties filed post-hearing briefs. This is a core proceeding under 11 U.S.C. § 157(b)(2).
STATEMENT OF THE CASE
Johnston received compensation for his work in connection with this bankruptcy beyond what the Court approved as reasonable. The Keeleys argue that Johnston received $262,301.50 (or possibly $567,801.50 depending on treatment of a $300,000 payment) even though the Court approved only $37,013.76. The Keeleys ask the Court to order Johnston to disgorge the difference between what he received and what was approved—$262,301.50 or possibly $526,787.74.
Johnston argues that the Court cannot order him to disgorge fees related to this case. He argues: that the Court does not have jurisdiction over his fees because the Court dismissed the bankruptcy; that the Keeleys do not have standing to request disgorgement; that res judicata and the Rooker–Feldman doctrine preclude disgorgement; and that fees paid to him beyond the Court-approved amount were not for work done "in connection with" this case. He argues that, even if the Court could order disgorgement, he has already returned much of the money at issue through settlements and other litigation. The Court rejects Johnston's legal arguments, finds that his disputed fees were paid in connection with this case, that his fees exceeded the reasonable amount previously approved, and that he failed to properly disclose and explain the fees. The Court orders him to disgorge $44,887.74 in fees.
BACKGROUND AND FACTS
This case has a long and complicated history. The Court has previously outlined
the history of this bankruptcy in its April 12, 2013, Memorandum and Order dismissing the bankruptcy. See Doc. 572 at 2–24. This history contained many examples of Debtors' delays and misrepresentations to the Court and creditors. See id. The Court noted that it had "bent over backwards to give Debtors every possible benefit of the doubt" during the bankruptcy. Id. at 31. The Court concluded that Debtors had "made no realistic effort to confirm a plan of reorganization," "failed to provide accurate bankruptcy schedules upon which parties could rely," and "willfully failed to abide by orders of the Court and to appear before the Court in proper prosecution of their case." Id. at 30–31. The Court dismissed the bankruptcy with prejudice.2 Id. at 32.
Since that time, the disputes in the case have been almost entirely about Johnston's compensation for his work representing Debtors during the bankruptcy. Specifically, the parties have disputed whether Johnston properly disclosed all the compensation he received and whether he was entitled to that compensation. What follows is a detailed review of the dispute over Johnston's compensation.
In general, throughout these proceedings, the Keeleys, and other creditors, sought disclosures from Johnston about his compensation. They eventually sought disgorgement of compensation based on evidence that he received compensation related to the bankruptcy that the Court had not approved.
For his part, Johnston maintained that he received compensation in connection with this case only if the Court approved it. He has argued that fees paid to him from Debtors' wholly owned entities for work for those entities was not "in connection with" this bankruptcy and concludes that those fall outside his disclosure duties in this Court. The Court has repeatedly rejected that argument. He asserted that any mistakes were innocent and that he acted in good faith.
The Court has already issued three opinions related to Johnston's fees. The Court issued the first two of those opinions on the same day. In re Grabanski, Bankr. No. 10-30902, 2013 WL 1702416 (Bankr. D.N.D. Apr. 19, 2013) (Order on Final Application for Compensation); In re Grabanski, Bankr. No. 10-30902, 2013 WL 1702415 (Bankr. D.N.D. Apr. 19, 2013) (Order on Motion to Show Cause).
In its Order on Final Application for Compensation, the Court addressed Johnston's final fee application, which requested $43,845.41 in fees and expenses. In re Grabanski, 2013 WL 1702416, at *3. The Court noted that it had previously awarded Johnston $34,013.67 in fees, but had completely denied two later interim applications for $23,853.62 and $41,651.41 because there had been no progress in the case during the time covered by those interim applications. Id. at *2–3.
In ruling on Johnston's final fee application, the Court outlined the troubled history of the bankruptcy and said, "[I]t is hard to find much or any of the services or expenses contained in Attorney Johnston's Application for Final Compensation aimed at reorganization." Id. at *9. The Court concluded that Johnston was entitled to only $3,000 in addition to his initial interim award—for a final and total fee award of $37,013.76. Id.
In its Order on Motion to Show Cause, the Court addressed the Keeleys' Motion
for Order to Show Cause and For Contempt. In re Grabanski, 2013 WL 1702415. That Motion was based on evidence that Johnston failed to disclose all the compensation he received for work in connection with the bankruptcy. Id. at *1–3. The evidence at that time showed that, despite having previously disclosed only $15,000,3 "Johnston ... received at least $205,400 from Debtors or partnerships that are entirely owned by Debtors and/or under Debtors' control." Id. at *3. The Court said:
Debtors' and Johnston's responses to all these requests for disclosure has basically been that the compensation approved to date is all the compensation he has gotten on this case. He suggests that the other money coming to him—from entities related to or owned by the Grabanskis—[is] not relevant because those entities are not in bankruptcy. This response has left great confusion about where a significant sum of money has gone. The disclosure requirement is not limited to amounts the Court has approved. The law requires disclosure of sums paid to an attorney representing a debtor "in connection with" a bankruptcy case. 11 U.S.C. § 329(a). As noted above, this section is broadly interpreted in favor of disclosure.
The disclosures Attorney Johnston has made and his explanations for why he has not disclosed other payments are inadequate and do not meet the requirements of the Bankruptcy Code. He has received payments "in connection" with Debtors' case and/or closely related entities and failed to disclose them. The disclosures Debtors have made—after being directed to do so by the Court—have left open more questions than they have answered.
Id. at *4 (paragraph omitted). The Court then specifically ordered Johnston:
to disclose all compensation, including monetary funds, property or other compensation, received from Debtors or related entities, including but not limited to G & K Farms, Texas Family Farms, MTM Farms, Grabanski Grain, LLC, the Keeley and Grabanski Land Partnership and any other entity in which Debtors have an interest, if such receipt was made after one year before the date of filing. The disclosure must include the date and amount of the payments and the payor of the compensation. It must also specifically address whether the compensation has been earned. If it has been earned, the disclosure must include the nature of the services provided and a description of the proceeding in which they were incurred, particularly in proceedings not held before this Court. If the compensation is unearned, the remaining balance of the compensation and the location where the compensation is currently being held must be disclosed.
Id. The Court denied the Keeleys' request for attorney's fees and sanctions at that time, but noted that the Keeleys' could renew those arguments and requests after Johnston made his full disclosure. Id. at *5.
On June 5, 2013, Johnston's filed his Disclosure of Compensation. Doc. 578. The Keeleys, joined by Choice Financial Group and PHI Financial Services ("Choice" and "PHI," respectively), creditors in the case, objected to Johnston's disclosure and Johnston responded to those objections.
Docs. 590, 591, 593, 598 and 599. The Keeleys argued that Johnston's Disclosure of Compensation failed entirely to comply with the Court's order....
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