In re Mercury
| Decision Date | 30 May 2002 |
| Docket Number | No. 99 B 20783(ASH).,99 B 20783(ASH). |
| Citation | 280 B.R. 35 |
| Parties | In re Gary MERCURY and Mary Mercury, Debtors. |
| Court | U.S. Bankruptcy Court — Southern District of New York |
Mark S. Swartz, Bardonia, NY, for Debtors.
Alan G. Merkin, P.C., Fellows & Hymowitz, P.C., New City, NY, for Applicant Fellows & Hymowitz, P.C.
William F. MacReery, Katonah, NY, for Chapter 7 Trustee.
AMENDED DECISION DENYING PROFESSIONAL COMPENSATION
Before me is an application by the law firm of Fellows & Hymowitz, P.C. ("F & H") for professional compensation (a one-third contingency fee) and reimbursement of expenses in connection with the settlement, on behalf of the debtors' then Chapter 7 Trustee, of a state court personal injury action in which they were counsel of record for debtors Mary and Gary Mercury. The settlement was approved in November 2000 by this Court (Connelly, B.J.) over the bitter objection of both debtors, who then were not represented by counsel. As amplified below, because F & H repudiated its legal and ethical obligation to represent their clients, the debtors, and undertook the conflicting representation of the Chapter 7 Trustee in violation of the New York Code of Professional Responsibility and 11 U.S.C. § 327(a) and (e), the application is denied.
A trial hearing on the F & H application was held on January 29, 2002. The evidence was supplemented by later submissions requested by the Court. The following constitute this Court's findings of fact and conclusions of law in accordance with Bankruptcy Rule 7052.
This Court has jurisdiction over the subject matter of this contested matter under 28 U.S.C. §§ 1334(a) and 157(a) and the standing order of reference signed by Acting Chief Judge Ward dated July 10, 1984. This is a core proceeding under 28 U.S.C. § 157(b).
Mary Mercury was grievously injured1 in a "slip and fall" accident on an icy sidewalk owned or controlled by a church elementary school in December 1992. Mrs. Mercury's injuries were crippling, precluding her from working and requiring a number of surgeries not all of which have been performed as of this date. She has suffered and continues to experience constant, severe pain.
After another firm commenced the personal injury action in 1996 in which both Mercurys were named plaintiffs, the Mercurys retained attorney Robert Fellows of the F & H law firm to represent them in the action against the owner of the property on which Mary was injured. They signed a retainer agreement with the F & H firm dated June 4, 1998, which provided for a one-third contingency fee.
While Mary Mercury was suffering the personal and economic consequences of her accident, Gary Mercury was experiencing business reverses. Mr. Mercury was and is a 22% minority investor in, and had been president of, real estate developer South Liberty Realty Corporation ("South Liberty"). A dispute between Mr. Mercury and his co-venturers in South Liberty resulted in a state court lawsuit by South Liberty against both Mercurys in 1995. On March 2, 1999 South Liberty obtained a judgment against Mr. Mercury. Although a February 11, 1999 ruling of the state court concluded that "the action against the defendant, Mary Mercury, is dismissed," shortly after the judgment against Mr. Mercury South Liberty somehow obtained a judgment against Mrs. Mercury. Despite Mrs. Mercury's contention that there was no basis for the judgment against her on account of her husband's business activities, South Liberty was threatening to levy execution upon the Mercury home, title to which was held in her name, as well as Mr. Mercury's 22% stock interest in South Liberty.
Faced with this crisis the Mercurys turned to Mrs. Mercury's counsel in the personal injury action, and Mr. Fellows referred them to his partner, Steven Hymowitz, Esq., for bankruptcy advice. The Mercurys reported no substantial source of income at the time. Their assets, other than their home which was subject to first and second mortgages aggregating slightly more than the value of the home, consisted of Mr. Mercury's claims related to his investment in South Liberty (which he valued substantially in excess of the South Liberty judgment against him) and Mrs. Mercury's personal injury action (which might be successful in an amount far exceeding all their debts, but also might fail either as to liability or damages). Upon these facts Mr. Hymowitz concluded that the Mercurys could not expect to confirm a plan under Chapter 11, and he advised the Mercurys to file for bankruptcy under Chapter 7.
The Mercurys paid Mr. Hymowitz $1,200 but were not asked to sign a retainer agreement with respect to bankruptcy representation. Mr. Hymowitz prepared and filed the petition as if the Mercurys were proceeding pro se, without the assistance of counsel.
The petition was filed March 29, 1999. Barbara Balaber-Strauss was appointed interim Trustee and became permanent Trustee on May 11, 1999.
In accordance with the retainer agreement, Mr. Fellows and his firm prosecuted the personal injury action on behalf of the Mercurys. In June 1999 F & H were successful in defeating a motion for summary judgment by the defendant. The case was fully prepared and ready for trial in January 2000, and the state court set January 31, 2000 as the date for picking a jury.
Shortly before January 31, 2000 counsel for the defendant's insurance carrier contacted Mr. Fellows and requested that the parties participate in mediation to settle the case. When so advised by Mr. Fellows, the Mercurys responded that they did not wish to participate in a mediation and wished to proceed promptly to trial. Mr. Fellows assured them that there could be no prejudice to their interests if he and they attended the mediation because, if the outcome of the mediation were not satisfactory to them, they could then proceed to trial.2 A mediation was held on February 4 or 18, 2000 (the discrepancy in the evidence as to the date is not material) at which Mr. Fellows and the defendant's insurance carrier reached a settlement figure of $190,000, which Mr. Fellows told the Mercurys was the best figure that could be obtained. The Mercurys rejected the proposed settlement and made clear to Mr. Fellows their desire to proceed to trial in the personal injury action.3
But the action did not proceed to trial. After the mediation Mr. Fellows had no further communication with Gary or Mary Mercury concerning the proposed settlement. (January 29, 2002 Tr. at 107-108)
Beginning in January Mr. Fellows had conversations with the Chapter 7 Trustee and her counsel concerning retention of F & H as special counsel to the Trustee. Mr. Fellows wrote letters to the Trustee and her counsel dated January 26 and 28, 2000, respectively, and his affidavit in support of his retention as special counsel to the Trustee is dated January 28, 2000. By application dated April 6, 2000, counsel for the Chapter 7 Trustee sought an order retaining F & H as special counsel to the Trustee (the "special counsel retention motion"). The special counsel retention motion was delivered to the Office of the United States Trustee for review and approval, but was never served on Mr. and Mrs. Mercury or any other party. The motion did not disclose any actual or potential conflict between the Mercurys and the Chapter 7 Trustee with respect to the potential settlement. Unbeknownst to the Mercurys, unopposed by any other party, and approved by the office of the United States Trustee, the special counsel retention motion was granted by this Court's order dated May 2, 2000. Shortly following the order approving retention of his firm as counsel to the Chapter 7 Trustee, Mr. Fellows wrote a letter dated May 17, 2000 to Mr. and Mrs. Mercury (quoted in full under point II, below) advising them for the first time that their interests were adverse to those of the Trustee and that they should retain counsel to represent them.4
At no time did Mr. Fellows or F & H ever apply either to the state court or to this Court to be relieved of their contractual and professional obligation to represent the Mercurys in the personal injury action pending in the state court, nor were they ever relieved of that obligation.
But F & H did make a motion, ex parte, to withdraw as counsel in the bankruptcy case. Although F & H had been unwilling to make a formal appearance as counsel for the Mercurys in their Chapter 7 case, in fact the firm accepted a retainer of $1,200 and acted as the Mercurys' bankruptcy counsel in rendering pre-petition counseling and advice, preparation of the petition and schedules and continuing actual representation of the Mercurys in the usual and customary proceedings in a Chapter 7 case, including the Section 341(a) meeting, disclosure and the like. Prior to the filing of the special counsel retention motion by the Chapter 7 Trustee, F & H filed its own motion by notice dated January 25, 2000 in the Bankruptcy Court seeking to withdraw as counsel for the debtors in the Chapter 7 case (the "Chapter 7 withdrawal motion"). Like the special counsel retention motion, the Chapter 7 withdrawal motion was never served on Mr. and Mrs. Mercury. Unbeknownst to the Mercurys5 and unopposed by any party, the Chapter 7 withdrawal motion was granted by this Court's order dated March 3, 2000.
Thus it was that by May 2000 the Mercurys were effectively deprived of any counsel to represent them either in the Bankruptcy Court or in the personal injury action, by reason of two motions in the Bankruptcy Court, neither of which was served upon them, combined with Mr. Fellows' letter dated May 17, 2000 notifying the Mercurys of their conflict with the Chapter 7 Trustee and the necessity for them to retain new counsel — notwithstanding the fact that F & H were never relieved...
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