In re Stewart
| Decision Date | 20 August 2021 |
| Docket Number | 15-12215-JDL |
| Parties | In re: David A. Stewart, Terry P. Stewart, Debtors. |
| Court | United States Bankruptcy Courts. Tenth Circuit. U.S. Bankruptcy Court — Western District of Oklahoma |
ORDER DENYING MOTION FOR PARTIAL SUMMARY JUDGMENT
In 2017 the major creditor in this bankruptcy, SE Property Holdings LLC ("SEPH"), moved the Court to order the Debtors' former attorney, Ruston C. Welch and the Welch Law Firm, PLLC (individually or collectively referred to as "Welch") to disgorge approximately $350, 000.00 in attorney fees which he had been paid for his bankruptcy services. The source of the payment of the attorney fees was the settlement of claims by affiliated limited liability companies of the Debtors, including, for purposes pertinent here, received by Neverve, LLC ("Neverve") for damages arising out of the 2010 BP Deepwater Horizon oil spill in the Gulf of Mexico (the "BP Claim Proceeds"). Disgorgement was sought by virtue of Welch not having made proper disclosure of his fees required by 11 U.S.C. §§ 329 and 330 and Fed.R.Bankr.P. 2016 and 2017.[1] In April 2018, this Court ordered Welch to disgorge $25, 000.00 of his fee for his non-disclosure. SEPH appealed the Court's decision. The Bankruptcy Appellate Panel affirmed the Bankruptcy Court, but the Tenth Circuit Court of Appeals reversed and remanded the case back to this Court for further evidentiary hearing.[2]
On remand, Welch has moved for partial summary judgment on one issue which they assert is material to, though not dispositive of, the disgorgement proceeding. The specific issue raised by Welch's Motion for Partial Summary Judgment is whether SEPH held a security interest in the approximate $350, 000.00 in Neverve BP Claim Proceeds received by Welch which were used to pay his attorney's fees.[3] In his Motion Welch asserts that SEPH did not hold such a security interest. In response, SEPH asserts (1) it did hold such a security interest or, at the very least there are disputed issues of fact as to whether a security interest existed, precluding summary judgment and (2) that the issue of whether it held a security interest in the assets of Neverve is not dispositive of any issue in this case given the Tenth Circuit's Order and therefore not appropriate for summary judgment. Before the Court for consideration are the Welch Law Firm, P.C. and Ruston C Welch's Motion for Partial Summary Judgment in the Disgorgement Action [Doc. 805], SE Property Holdings, LLC's Response to Motion for Partial Summary Judgment [Doc. 824]; Welch Parties' Reply to SEPH's Response to Welch Parties' Motion for Summary Judgment [Doc. 837] and SE Property Holdings, LLC's Sur-Reply Brief Responding to New Arguments and Evidence in Reply Brief [Doc. 858].[4] To understand the issues presented by Welch's Motion for Partial Summary Judgment a little background and context is necessary.
For more than two years after being retained by the Debtors in the spring of 2015 to represent them in this bankruptcy case, numerous adversary proceedings associated with it, as well as representing numerous affiliates owned or operated by Debtors, Welch failed to disclose the amount, source or agreement for the payment of any attorney fees to him. It was not until August 30, 2017, when the Court directed him to do so that Welch revealed that he had been paid fees and expenses for the bankruptcy case and related adversary proceedings in the total amount of $348, 044.41. The source of all of these payments was BP Claim Proceeds.
In reversing this Court's decision ordering Welch to disgorge $25, 000.00, the Tenth Circuit held that the presumptive or "default" position for failure of an attorney to make proper disclosure under § 329 and Rule 2016 was disgorgement of the entire fees paid to the attorney unless there were "sound reasons supported by solid evidence" in mitigation of total disgorgement. In re Stewart, 970 F.3d 1255, 1268 (10th Cir. 2020). The Court of Appeals found that the Bankruptcy Court had not heard such "solid evidence." "Most importantly, however, the bankruptcy court failed to examine the source of the payments to Mr. Welch.**** (and) [w]e would therefore expect the court to examine those payments before deciding not to require complete disgorgement." Id. The Tenth Circuit instructed that upon remand this Court should, upon an evidentiary basis, closely examine all payments to Welch, including the amount, source and value of the same to determine the appropriate amount of disgorgement this Court should order.
Important for the issue now before this Court, the Tenth Circuit Opinion also noted that in the Bankruptcy Court that SEPH, in addition to the non-disclosure of the fees, had argued that Welch's use of the Neverve BP settlement proceeds was improper because (1) SEPH held a security interest in any BP proceeds that might be awarded to Neverve and/or (2) such proceeds were dividends to the Debtors and therefor property of the bankruptcy estate. While the Court's Opinion made "no judgment on the validity of the (SEPH's) challenges (i.e., that SEPH held a security interest in the BP proceeds and/or the proceeds represented disbursements to the Debtors) to these payments to Mr. Welch," it found that "even if they (the challenges) failed they may have caused sufficient concern to induce him to avoid the challenges by keeping the payments secret." In other words, whether or not SEPH actually held a security interest in proceeds was not as important, at least as to this disgorgement action, as to whether Welch believed there was such a security interest. The Opinion notes that while the Bankruptcy Court "seems to have inferred that Mr. Welch's ... failure to disclose must have been inadvertent ... an alternative hypothesis is that he surely knew of his duty and must have had a very strong reason to keep the payments secret," and that SEPH's challenges to his payments, including their alleged security interest, might have provided Welch "a motive not to disclose." 970 F.3d at 1268 (emphasis added). Under the Tenth Circuit's mandate, this Court is obligated to consider the issue of SEPH's security interest in the Neverve BP Claim Proceeds only in the context of whether it was one possible motive for Welch not to have disclosed his fees. The Opinion made clear, as does this Court, that whether SEPH actually held a security interest is not dispositive of the ultimate question as to whether disgorgement should be ordered. The existence of a security interest, and the perfection thereof, is left for another day in possible litigation as to who should receive the disgorged fees if such are ordered.
A. Whether Partial Summary Judgment Is Appropriate to Resolve A Single Issue Not Determinative of a Party's Claim.
Welch has moved for partial summary judgment citing Fed.R.Civ.P. 56(a) which provides that summary judgment is appropriate when there is no genuine issue as to any material fact, and the party is entitled to judgment as a matter law. Rule 56(a) also includes express authority for judgment on less than the entire case - judgment for all "or part of each claim or defense," the Rule denominating such judgments and its title as a "Partial Summary Judgment." While Welch has denominated his pleading as a motion for "Partial Summary Judgment," the relief he seeks is not a "judgment," but for the Court to "enter an order specifically finding that SEPH does not now, nor has it ever had a security interest in the Neverve BP Claims or BP Claim Proceeds." Such relief merely seeks this Court to determine a fact (though really a question of law masquerading as a fact) which may be one, though certainly not the determinative one, bearing upon Welch's motive for non-disclosure of fees. Given the Tenth Circuit's instruction to this Court that it should consider Welch's motive(s) for non-disclosure, including, but not limited to, Welch's knowledge of SEPH's possible security interest, this Court believes it inappropriate to consider whether the "fact" of SEPH's security interest can be determined prior to trial based upon the record before it.
More appropriate to the present case, is subdivision (g), added by amendments to Rule 56 in 2010, which contains authority for a court that fails to grant all requested relief to "enter an order stating any material fact ... that is not genuinely in dispute and treating the fact as established in the case."[5] As noted in the Committee Note, this provision applies only after the court has applied the general summary judgment standard in subdivision (a) to each claim or defense on which a party moved. If the court determines that summary judgment is not warranted, then Rule 56(g) makes it appropriate to consider, short of summary "judgment," establishing undisputed material facts. In this sense, Rule 56 and its "newly revised rules permit a party to move for partial summary judgment" as an "issue-narrowing adjudication." Servicios Especiales Al Comercio Exterior v. Johnson Controls, Inc., 791 F.Supp.2d 626, 632 (E.D. Wis. 2011); In re SemCrude, L.P., 2012 WL 694505 (Bankr. D. Del. 2012) (granting partial summary judgment on issue of lien perfection but denying it as to other claims).[6] "Inasmuch as it narrows the scope of the trial, a Rule 56(g) order may be compared to a pretrial order under Rule 16." 10B Wright, Miller & Kane, Federal Practice & Procedure, § 2737(4th ed. 2021 update). The question whether to exercise that Rule 56(g) authority is within the court's discretion. Although the validity of SEPH's security interest will probably be an issue which has to be ultimately determined, at this stage of the disgorgement proceeding the Court finds that it need not establish the validity as a "legal fact."
B. ...
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