In re Miszko

• Decision Date: 22 April 2021
• Docket Number: Case No. 18-36702 (CGM)
• Citation: 627 B.R. 809
• Parties: IN RE: Michael MISZKO, Jr., Debtor.
• Court: U.S. Bankruptcy Court — Southern District of New York

627 B.R. 809

IN RE: Michael MISZKO, Jr., Debtor.

Case No. 18-36702 (CGM)

United States Bankruptcy Court, S.D. New York.

Signed April 22, 2021

THOMAS C. FROST, 399 Knollwood Road, Suite 102, White Plains, NY 10603, Attorney for Krista M. Preuss, Chapter 13 Trustee

ANDREA B. MALIN, Genova & Malin LLP, 1136 Route 9, Suite 1, Wappingers Falls, NY 12590, Former Attorney for the Debtor

MICHAEL MISZKO, JR., Pro Se Debtor

MEMORANDUM OF DECISION ON CHAPTER 13 TRUSTEE's MOTION FOR OBJECTION TO CLAIM 4-1 AND COURT's SUA SPONTE CONSIDERATION OF DISGORGEMENT

CECELIA G. MORRIS, CHIEF UNITED STATES BANKRUPTCY JUDGE

In this matter, the Court has been asked to examine a proof of claim and an underlying fee application to determine the appropriate remedy for the actions of the debtor's former counsel. For the reasons expressed in this memorandum of decision, the Court will order that counsel disgorge $15,145.72 and pay those funds directly to the debtor.

Jurisdiction

This Court has subject matter jurisdiction pursuant to 28 U.S.C. §§ 157(a) and 1334(a), the District Court's Standing Order of Reference dated July 10, 1984, and the Amended Standing Order of Reference dated January 31, 2012. This is a core proceeding under 28 U.S.C. § 157(b)(2)(A) ("matters concerning the administration of the estate") and (E) ("orders to turn over property of the estate").

Background

The Debtor, Michael Miszko, Jr. ("Debtor"), initially represented by other counsel, filed this Chapter 13 case on October 9, 2018. Attorney Andrea B. Malin ("Debtor's Counsel"), of the law firm Genova & Malin LLP,¹ made her first filing in this case on April 1, 2019 (ECF No. 32). A notice of substitution of counsel for Debtor's Counsel was then made on April 24, 2019 (ECF No. 44). Debtor's Counsel did not file her disclosure of compensation required by Rule 2016(b) of the Federal Rules of Bankruptcy Procedure until October 1, 2019 (ECF No. 81). That same day, Debtor's Counsel filed her first fee application, seeking payment of $15,075.00 in fees and $70.72 in expenses and asking to be paid through the Debtor's Chapter 13 Plan (ECF No. 82). The Trustee did not object to the fees and expenses requested and this Court approved them at a hearing held on October 29, 2019. On November 4, 2019, the Court entered the order granting the fee application (ECF No. 88). The order submitted by Debtor's Counsel and signed by this Court was different from the proposed order in the fee application. That proposed order indicated that the fees and expenses would be paid as an administrative expense through the Debtor's Chapter 13 plan. Instead, the order submitted by Debtor's Counsel and signed by this Court stated that Debtor's Counsel could take the approved fees and expenses from amounts being held in escrow.² At no time did she make a request to this Court to change the source of payment or its timing.

Despite taking moneys from the escrowed funds, Debtor's Counsel filed Claim 4-1 on November 6, 2019 in the amount of the fees and expenses approved. On November 5, 2020, the Debtor himself contacted the office of Krista M. Preuss, the Chapter 13 Trustee ("Trustee"), inquiring as to why Debtor's Counsel was seeking payment in Claim 4-1 when she had already taken those amounts from the escrow account. See ECF No. 143 at ¶ 10.

The Trustee filed the instant motion objecting to Claim 4-1 (ECF No. 143) on December 10, 2020, requesting that the Court order under 11 U.S.C. § 105 that Debtor's Counsel submit a corrected order regarding the fee application and refund the $15,145.72 paid out of escrow. Alternatively, the Trustee requested that Claim 4-1 be reduced to $0.

Debtor's Counsel filed opposition to the motion (ECF No. 155), arguing that she had already amended Claim 4-1 to remove the $15,145.72, that the Trustee's motion was defective, and that it was too late to correct the order approving the fee application and to file an appeal.³

The Debtor, now pro se , filed an affidavit in response to the motion (ECF No. 157), indicating that he was unaware that Debtor's Counsel was going to deduct funds from money being held in escrow. In his opposition, the Debtor attached a billing statement from Debtor's Counsel's firm, which stated that the firm would file a proof of claim to recover the outstanding balance.

The Court held a hearing on the matter on February 9, 2021. At the hearing, the Court indicated, in line with the Trustee's prayer for relief requesting "such other and further relief as the Court deems appropriate[,]" that the Court was considering requiring disgorgement of the $15,145.72 awarded. To afford Debtor's Counsel adequate due process to consider this sanction, the Court adjourned the matter to March 23, 2021.

Debtor's Counsel then filed supplemental opposition papers (ECF No. 169) on March 12, 2021, arguing that she did not commit fraud, did not violate the automatic stay, and did not violate applicable statutes by requesting that she be permitted to apply the escrow funds to the fee award.

At the March 23, 2021 hearing, the Court questioned Debtor's Counsel as to whether she discussed taking her fees and expenses out of the escrowed funds with the Trustee. She stated that she "believe[d] that [she] had[.]" Tr. at 8.⁴ Asked whether Debtor's Counsel had discussed taking her fees and expenses out of the escrowed funds, the Trustee's attorney stated: "I don't recall that, and I certainly would've noted our system if we had a conversation like that." Tr. at 8. Debtor's Counsel acknowledged that she did not ask the Court to take her fees and expenses out of the escrowed funds, and averred that she told the Debtor and perhaps the Debtor's ex-spouse's attorney. Tr. at 8. The Court also asked Debtor's Counsel whether she reviews the filings she makes with this Court. She stated: "Absolutely, Judge; I always have." Tr. at 9. Specific to her filing of Claim 4-1, Debtor's Counsel stated that "during that period of time, ... I was in an out of the office. Maybe I wasn't as careful as I should have been, but I probably—I signed it with other documents, and I just didn't catch the error." Tr. at 9.

Discussion

Under § 330(a)(1) of the Bankruptcy Code, a Court may award reasonable and necessary fees and expenses in this Chapter 13 case. There is no dispute regarding the reasonableness and necessity of the fees and expenses applied for by Debtor's Counsel. The issue is in the method that Debtor's Counsel received those approved fees and expenses. Debtor's Counsel's first proposed order, which was attached as an exhibit to her fee application, showed that she intended to be paid through the Chapter 13 plan (ECF No. 82).⁵ This is consistent with the Chapter 13 plans filed by Debtor's Counsel in this case, including the last plan she filed prior to her termination (ECF No. 112 at § 4.3),⁶ which was filed after the fees and expenses in question were approved. The record of the October 29, 2019 hearing on the fee application indicates no request by Debtor's Counsel to change the source of payment for her fees and expenses.⁷ By all indications, Debtor's Counsel had only asked to be paid through the plan. Despite this, Debtor's Counsel later uploaded an order that allowed her to be paid by deducting the amount from funds held by her in escrow (ECF No. 88).⁸ This order was entered by the Court under the assumption that it was identical to the proposed order attached as an exhibit to Debtor's Counsel's fee application.

I. Whether Debtor's Counsel's Actions Were an Abuse of Process under § 105(a)

According to the Second Circuit:

11 U.S.C. § 105 is an omnibus provision phrased in such general terms as to be the basis for a broad exercise of power in the administration of a bankruptcy case. The basic purpose of [§] 105 is to assure the bankruptcy courts power to take whatever action is appropriate or necessary in aid of the exercise of their jurisdiction. Bankruptcy courts, both through their inherent powers as courts, and through the general grant of power in [§] 105, are able to police their dockets and afford appropriate relief.

In re Casse , 198 F.3d 327, 336 (2d Cir. 1999) (cleaned up). Section 105(a) "confer[s] authority to fill the gaps left by the statutory language and to exercise equity in carrying out the provisions of the Bankruptcy Code." In re Greenwich Sentry, L.P. , 534 F. App'x 77, 80 (2d Cir. 2013) (cleaned up).

Section 105(a) of the Bankruptcy Code empowers a Court to correct an abuse of process and to do so sua sponte . "Courts have used these provisions of section 105 to resolve issues regarding the ability to detect and punish contempt, to regulate the practice of lawyers, to administer the assets under its control and the claims related to them and to monitor and supervise all bankruptcy estates." 2 Collier on Bankruptcy ¶ 105.02 (16th ed. 2021). "While ‘abuse of process’ under § 105(a) is not defined in the Bankruptcy Code, a few courts essentially define it as ‘maneuvers or schemes which would have the effect of undermining the integrity of the bankruptcy system.’ " In re Trevino , 615 B.R. 108, 128 (Bankr. S.D. Tex. 2020) (footnote omitted). "The abuse of process provision of Section 105(a) has ... been employed to impose sanctions upon those who willfully mislead the bankruptcy court, who file clearly frivolous petitions in order to interpose delays upon creditors, or who fail to comply with court orders concerning scheduling or other matters." In re Globo Comunicacoes e Participacoes S.A. , 317 B.R. 235, 247 (S.D.N.Y. 2004) (cleaned up). Section 105(a)'s enforcement mechanisms come with the power of civil contempt, which "should not be resorted to where there is a fair ground of doubt as to the wrongfulness of the [party's] conduct." Taggart v. Lorenzen , 587 U.S. ––––, ––––, 139 S. Ct. 1795, 1801, 204 L.Ed.2d 129 (2019) (cleaned up).

"Payments to a debtor's attorney provide serious potential for evasion of creditor protection provisions of the bankruptcy laws, and serious potential...