In re Johnson

• Decision Date: 10 August 2004
• Docket Number: No. 1:04CV353.,1:04CV353.
• Court: U.S. District Court — Eastern District of Virginia
• Parties: In re Delores B. JOHNSON, David W. Johnson, Debtors. Delores B. Johnson, David W. Johnson, Appellants, v. Richter, Miller & Finn, Appellee.

312 B.R. 810

In re Delores B. JOHNSON, David W. Johnson, Debtors.

Delores B. Johnson, David W. Johnson, Appellants, v. Richter, Miller & Finn, Appellee.

No. 1:04CV353.

United States District Court, E.D. Virginia, Alexandria Division.

August 10, 2004.

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Richard G. Hall, Annandale, VA, for Appellants.

Paul Stone Richter, Richter, Miller & Finn, Washington, DC, for Appellee.

MEMORANDUM OPINION

ELLIS, District Judge.

At issue in this bankruptcy appeal is whether a law firm that served as special counsel to the trustee of a bankrupt debtor's estate may be compensated for its services to the trustee from the debtor's estate when the law firm simultaneously represented one of the debtor's creditors. More specifically, the questions presented are:

(i) whether the bankruptcy court erred in awarding compensation to the appellee law firm for work the firm performed for the trustee even though the firm also simultaneously represented a creditor of the debtor on the ground that the firm's dual representation presented no actual conflict of interest; and

(ii) whether the bankruptcy court erred in ruling that the appellee law firm's amended application for compensation as counsel for the trustee included no request for compensation for work the firm performed for its creditor-client.

I.

In December 1998, Helen M. Cunningham engaged the services of a sole-practitioner attorney, Robert Barth, to collect a debt owed to her by Delores and David Johnson. The Johnsons' debt to Cunningham was evidenced by a Note and secured by a Deed of Trust on property owned by the Johnsons at 1211 U Street N.W. ("U Street property") in the District of Columbia. Cunningham agreed in writing to pay Barth a contingency fee of thirty percent (30%) of any amount Barth collected on the Note. Thereafter, Barth retained the law firm of Richter, Miller & Finn ("RMF") to assist him in collection of the debt. Barth and RMF agreed orally to share the contingent fee on a quantum meruit basis.

Cunningham, by counsel RMF, initiated an action on January 22, 1999 against Delores and David Johnson in the United States District Court for the Eastern District of Virginia to collect the amount due on the Note ("Cunningham action"). After Delores Johnson filed a voluntary petition for bankruptcy pursuant to Chapter 7 of the Bankruptcy Code in the bankruptcy court in this district on February 10, 1999, proceedings against Delores Johnson in the Cunningham action were automatically stayed pending disposition of Mrs. Johnson's bankruptcy case. See 11 U.S.C. § 362(a). Cunningham, by counsel RMF, filed a motion in the bankruptcy court on October 5, 1999, to obtain relief from the automatic stay of the proceedings in this district so that Cunningham could foreclose on the U Street property. The bankruptcy court granted Cunningham's motion. See In re Johnson, Case No. 99-10629 (Bankr.E.D.Va. Nov.18, 1999) (Order). Thereafter, Cunningham, by counsel RMF, initiated foreclosure proceedings on the U Street property and purchased the property at the foreclosure sale on January 12, 2000. Cunningham's efforts since then to sell the property have been unsuccessful.

On May 11, 1999, a default judgment entered against David Johnson in the Cunningham action in the amount of $757,173.12. See Cunningham et al. v. Johnson et al., Case No. 1:99cv72 (E.D.Va. May 11, 1999) (Default Judgment). Thereafter, Cunningham, by counsel RMF, pursued proceedings to collect the default judgment from David Johnson until those proceedings were also automatically stayed on January 17, 2001 when Mr. Johnson filed a voluntary petition for bankruptcy pursuant to Chapter 11. See 11 U.S.C. § 362(a).

On May 17, 1999, Cunningham, by counsel RMF, initiated an adversary proceeding in the bankruptcy court seeking to deny Delores Johnson's discharge pursuant to 11 U.S.C. § 727. This action succeeded and, on September 19, 2000, the bankruptcy court entered an order denying Delores Johnson's discharge. See In re Johnson, Case No. 99-10629 (Bankr.E.D.Va. Sept.19, 2000) (Order).

On April 16, 2001, the bankruptcy court converted David Johnson's Chapter 11 case to a Chapter 7 case and consolidated it with Delores Johnson's pending Chapter 7 case. See In re Johnson, Case No. 99-10629 (Bankr.E.D.Va. Apr.16, 2001) (Order). The bankruptcy court also concluded at that time that, even after the foreclosure sale of the U Street property, the Johnsons still owed Cunningham approximately $396,000, the difference between the $757,173.12 default judgment and the sale price of the U Street property at foreclosure.

In late 2000, shortly after the bankruptcy court denied Delores Johnson's discharge, Robert O. Tyler, the Trustee in Mrs. Johnson's bankruptcy case, sought to retain RMF to serve as special counsel to the Trustee in connection with the Trustee's efforts to recover property and assets of the estate. In the course of discussions with RMF regarding RMF's retention in this regard, RMF disclosed to the Trustee the nature and extent of the firm's representation of Cunningham. RMF also told the Trustee that the firm, in connection with its representation of Cunningham, had acquired substantial, non-confidential information relating to Delores Johnson's business affairs, including her assets and liabilities. Indeed, the Trustee sought to retain RMF not only because of RMF's expertise in bankruptcy law, but also because RMF had specific knowledge of the facts of the case. Prior to agreeing to serve as special counsel, RMF also informed Cunningham and her personal elder care attorney, Richard Snowdon, of the Trustee's request to retain the firm. Cunningham consented to the dual representation after obtaining the advice of Snowdon.

Thereafter, on February 16, 2001, the Trustee filed an application pursuant to Rule 2014, Fed. R. Bankr.P., to obtain the bankruptcy court's approval for the employment of RMF as special counsel.¹ The Trustee's Rule 2014 application appropriately disclosed that RMF also represented Cunningham in connection with the latter's efforts to collect a debt owed by the Johnsons. Four days later, on February 20, 2001, the bankruptcy court entered an order approving the Trustee's application and authorizing RMF's employment as special counsel retroactive to January 1, 2001. See In re Johnson, Case No. 99-10629 (Bankr.E.D.Va. Feb.20, 2001) (Order). Between January 2001 and September 2002, RMF worked approximately 600 hours as special counsel to the Trustee collecting, as a result, over $1.8 million in assets on behalf of the bankrupt estate.²

On September 17, 2002, Edward Laios filed a proof of claim as an unsecured creditor to recover a debt owed to him by the Johnsons. The debt was evidenced by a Note and secured by a Deed of Trust on property owned by the Johnsons on Georgia Avenue in the District of Columbia ("Georgia Avenue property"). Laios was unable to enforce his security interest in the Georgia Avenue property because the District of Columbia had foreclosed on the property for failure of the debtors to pay real estate taxes. Before Laios filed his proof of claim, but after the property had been sold at the tax sale, the Trustee initiated an adversary proceeding in the bankruptcy court to attempt to recover the Georgia Avenue property for the benefit of the estate. The Trustee subsequently sought leave of court to abandon that proceeding for reasons not fully disclosed in the record and which, in any event, are immaterial to the resolution of this matter. On October 31, 2002, Cunningham, by counsel RMF, objected to Laios' proof of claim and sought to reduce Laios' unsecured claim by between $300,000 and $400,000, the estimated value of the property, on the ground that Laios unreasonably failed to take action to enforce his security interest in the property and thus should not be permitted to recover that amount as an unsecured creditor of the Johnsons. Although the Trustee had objected to the proof of claim on other grounds, he neither joined nor opposed Cunningham's objection. On April 2, 2003, the bankruptcy court entered an order disallowing the Laios claim in its entirety.³ See In re Johnson, Case No. 99-10629 (Bankr.E.D.Va. April 2, 2003) (Order).

On September 25, 2003, RMF filed an Application for Compensation and Reimbursement pursuant to Rule 2016, Fed. R. Bankr.P., requesting total compensation of $209,834.47 for work performed as special counsel to the Trustee.⁴ This amount included $190,046 for legal services provided, and $19,788.47 in expenses incurred, on behalf of both the Trustee and Cunningham. The bankruptcy court rejected the application on the ground that RMF was not entitled to recover from the estate for legal services provided to, and expenses incurred on behalf of, Cunningham. See In re Johnson, Case No. 99-10629 (Bankr.E.D.Va. Nov.5, 2003) (Order). Thereafter, on December 1, 2003, RMF filed an Amended Application for Compensation pursuant to Rule 2016, Fed. R. Bankr.P., which requested total compensation of $127,472.03. According to the Amended Application, this amount included no claim for fees or expenses incurred in connection with the firm's representation of Cunningham, but covered instead only $125,316 for legal services rendered to the Trustee and $2,156.03 in expenses incurred in connection with performing those legal services. On February 2, 2004, the bankruptcy court conducted a full evidentiary hearing on RMF's Amended Application. Delores Johnson and Laios objected to the Amended Application on the grounds (i) that RMF's representation of Cunningham and the Trustee presented a conflict of interest and (ii) that RMF's Amended Application requested compensation for duplicative services performed for Cunningham and the Trustee. The Trustee did not object to the Amended Application. On February 11, 2004, the bankruptcy court issued an order overruling all objections and...