In re Stein

• Decision Date: 25 November 2013
• Docket Number: No. 11–10283–MDC.,11–10283–MDC.
• Citation: 502 B.R. 81
• Parties: In re Marc F. STEIN and Jill S. Stein, Debtors.
• Court: U.S. Bankruptcy Court — Eastern District of Pennsylvania

502 B.R. 81

In re Marc F. STEIN and Jill S. Stein, Debtors.

No. 11–10283–MDC.

United States Bankruptcy Court, E.D. Pennsylvania.

Nov. 25, 2013.

Corinne Samler Brennan, Klehr Harrison Harvey Branzburg LLP, Philadelphia, PA, Matthew A. Hamermesh, Hangley Aronchick Segal & Pudlin, Philadelphia, PA, Paul J. Winterhalter, Law Offices of Paul J. Winterhalter, P.C., Philadelphia, PA, for Debtors.

William C. Miller, Chapter 13 Trustee, Philadelphia, PA, Trustee.

ORDER

MAGDELINE D. COLEMAN, Bankruptcy Judge.

AND NOW, the Law Offices of Paul J. Winterhalter, P.C. (the “Applicant”), former counsel for Marc F. Stein and Jill S. Stein (collectively, the “Debtors”), caused to be filed with this Court a Second Interim and Final Application for Compensation and Reimbursement of Expenses for Counsel to the Debtors [Docket No. 115] (the “Final Application”) in which the Applicant requests the allowance of compensation in the amount of $40,868.75 and the reimbursement of expenses in the amount $426.78.

AND, the Applicant filed an Application for Compensation and Reimbursement of Expenses dated February 21, 2012 [Docket No. 88] (the “First Application,” collectively with the Final Application, the “Applications”), in which the Applicant requested the allowance of compensation in the amount of $28,391.25 and the reimbursement of expenses in the amount $75.67.

AND, William C. Miller, the Chapter 13 standing trustee (the “Trustee”) filed an Objection dated February 8, 2013 [Docket No. 123] (the “Trustee's Objection”), objecting to the Applications on the ground that the Applicant received certain post-petition payments from the Debtors without prior court approval.

AND, upon consideration of the Applicant's Memorandum dated January 14, 2013 [Docket No. 120] (the “Memorandum”), wherein the Applicant addressed the propriety of its receipt of certain postpetition payments.

AND, this Court held a hearing on February 28, 2013, to address the Applications (the “February 28 Hearing”).

AND, at the February 28 Hearing, Paul J. Winterhalter, Esquire (“Winterhalter”), then counsel for the Debtors, addressed the Applicant's receipt of certain post-petition payments and the Applicant's involvement in the settlement of a claim against the Debtors held by Milestone Construction Management, Inc. (“Milestone”).

AND, at the February 28 Hearing, this Court put Winterhalter on notice that the Applicant was not to receive any post-petition payments without prior approval from this Court. Transcript of February 28, 2013 Hearing (“Transcript January 28, 2013”), 1:27:45–1:28:20.

AND, this Court has previously expressed its concerns regarding Winterhalter's handling of the claim against Michael Samschick held by Marc F. Stein. See, e.g., In re Stein, Bky. No. 11–10283, 2012 WL 4757805, *3 n. 3 (Bankr.E.D.Pa.2012).

The Post–Petition Payments

AND, Winterhalter filed a 2016(b) statement dated January 28, 2011, on behalf of the Applicant [Docket No. 16] wherein he disclosed that the Applicant received $5,000.00 prior to the filing of the petition (the “Pre–Paid Retainer”).

AND, despite being required to, Winterhalter failed to disclose the source of the Pre–Paid Retainer. Fed. R. Bankr.P.2016(a) (requiring disclosure of “the source of the compensation so paid or promised”).

AND, Winterhalter filed a supplemental 2016(b) statement dated June 21, 2011, on behalf of the Applicant [Docket No. 56], wherein he disclosed that on June 10, 2011, Applicant received “an additional retainer payment” in the amount of $1,500.00 from the Debtors.

AND, Winterhalter filed a second supplemental 2016(b) statement dated October 31, 2011, on behalf of the Applicant [Docket No. 80], wherein he disclosed that on October 31, 2011, Applicant received “an additional retainer payment” in the amount of $3,078.72 from the Debtors.

AND, Winterhalter filed a third supplemental 2016(b) statement dated June 19, 2012, on behalf of the Applicant [Docket No. 99], wherein he disclosed that on June 4, 2012, Applicant received “an additional retainer payment” in the amount of $2,000.00 from Stein Steel Construction, Inc.

AND, Winterhalter admits that Applicant received a total of $6,578.72 in post-petition retainer payments (the “Post–Petition Payments,” collectively with the Pre–Paid Retainer, the “Retainers”).

AND, Winterhalter never disclosed the source of the Pre–Paid Retainer.

AND, Matthew A. Hamermesh, present counsel for the Debtors, delivered to this Court a letter dated September 25, 2013 [Docket No. 161] (the “Hamermesh Letter”), that disclosed that the Applicant received $5,000.00 (the “Patagonia Payment”) from Patagonia, Inc., an entity in which the Debtors are alleged to own “an indirect 20% interest.”

AND, the Debtors' interest in Patagonia, Inc. was not previously disclosed.

AND, the Hamermesh Letter did not state when the Applicant received the Patagonia Payment or how this payment related to the other compensation, including the Pre–Paid Retainer, received by the Applicant.

AND, despite this Court's warnings at the February 28 Hearing and the requirements of Fed. R. Bankr.P.2016(a), Winterhalter did not disclose that Patagonia, Inc. was the source of any of the Retainers received by the Applicant. See, e.g., In re Harris Agency, LLC, 451 B.R. 378, 395–96 (Bankr.E.D.Pa.2011) (sanctioning the Applicant for his failure to disclose the source of payments received).

AND, Winterhalter admits that Applicant received the Post–Petition Payments without obtaining the prior approval of this Court.

AND, the Court of Appeals having held that the bankruptcy court “has a duty to review fee applications, notwithstanding the absence of objections by the United States trustee ..., creditors, or any other interested party, a duty which ... derives from the court's inherent obligation to monitor the debtor's estate and to serve the public interest,” In re Busy Beaver Bldg. Centers, Inc., 19 F.3d 833, 841 (3d Cir.1994) (emphasis in original).

AND, the Third Circuit generally prohibits a debtor's attorney from receiving compensation, inclusive of post-petition retainers, without prior court approval. F/S Airlease II, Inc. v. Simon, 844 F.2d 99, 103 (3d Cir.1988); In re Arkansas Co., Inc., 798 F.2d 645 (3d Cir.1986); In re Jensen, Bky. No., 2008 WL 2550556 (Bankr.E.D.Pa. Jun. 18, 2008) (ordering disgorgement of mortgage received postpetition by debtor's attorney); In re Berg, 356 B.R. 378, 380 (Bankr.E.D.Pa.2006) (“an attorney may not receive post-petition payments from property of the estate without application to and approval of the court.”); In re Pannebaker Custom Cabinet Corp., 198 B.R. 453, 462–63 (Bankr.M.D.Pa.1996) (“courts have permitted postpetition disbursements to professionals prior to notice and a hearing under rare circumstances.”); In re Walnut Associates, Bky. No. 91–15150, 1992 WL 361714, at *1 (Bankr.E.D.Pa. Dec. 1, 1992) (stating that an attorney should never receive a retainer between the time of filing of its application to employ and the court's approval of application for compensation).

AND, the Applicant's receipt of the Post–Petition Payments was improper because it did not seek approval for any procedure governing the interim payment of its fees.¹In re Jensen, Bky. No., 2008 WL 2550556 (“during the postpetition/preconfirmation phase of a chapter 13 case, a debtor's counsel may not take money or property from the bankruptcy estate without bankruptcy court authorization.”); Berg, 356 B.R. at 380;Pannebaker Custom Cabinet Corp., 198 B.R. at 464;In re DeRuskin Enterprises, Inc., Bky. No. 93–10820, 1993 WL 594354 (Bankr.E.D.Pa. Feb. 16, 1994) (“Post-petition payment of retainers prior to allowances of compensation in fee applications, unless specifically allowed by the court, are never appropriate.”).

AND, even though Winterhalter did disclose the Applicant's receipt of the Post–Petition Payments, he removed from this Court and other parties in interest their ability to review and approve the Applicant's retention of the Post–Petition Payments. Winterhalter created for the Applicant an unsupervised fee payment arrangement in contravention of the requirements of the Code. Pannebaker Custom Cabinet Corp., 198 B.R. at 463 (“The core problem in this case is that, by failing to apply for permission to accept postpetition disbursements, C & C has inappropriately removed the Bankruptcy Court from the prior review process.”).

The Milestone Settlement

AND, Milestone previously filed a Proof of Claim dated February 2, 2011, asserting an unsecured claim in the amount of $228,975.00 (the “Milestone Claim”).

AND, Milestone previously filed a Complaint dated June 15, 2011 [Adv. No. 11–469, Docket No. 1], seeking to have the Milestone Claim declared nondischargeable pursuant to 11 U.S.C. § 523(a)(2).

AND, this Court entered an Order dated October 5, 2012 [Adv. No. 11–469, Docket No. 30], exempting the Milestone Claim from discharge.

AND, Milestone filed a Motion for Relief from the Automatic Stay dated October 15, 2012 [Docket No. 105] (the “Lift–Stay Motion”), seeking authority to enforce the Milestone Claim.

AND, this Court was scheduled to hear the Lift–Stay Motion at a hearing scheduled for November 8, 2012; however, prior to this hearing, Milestone withdrew the Lift–Stay Motion.

AND, as reported to this Court in the Debtors' Motion to Voluntarily Dismiss Chapter 13 Case Pursuant to 11 U.S.C. § 1307(b) dated November 12, 2012 [Docket No. 109] (the “Dismissal Motion”), the Debtors “reached an out of court settlementwith Milestone resolving any and all claims Milestone had at any time against the Debtors.” Dismissal Motion, ¶ 4.

AND, at the February 28 Hearing, the terms of the “out-of-court” settlement between the Debtors and Milestone were disclosed to this Court.

AND, at the February 28 Hearing, Winterhalter advised this Court that the Debtors had borrowed $150,000.00 to fund the settlement with Milestone.

AND, the Hamermesh Letter later disclosed that in addition to the...