In re Stewart
| Decision Date | 25 March 2021 |
| Docket Number | Case No. 15-12215-JDL |
| Parties | In re: David A. Stewart, Terry P. Stewart Debtors. |
| Court | U.S. Bankruptcy Court — Western District of Oklahoma |
The following is ORDERED:
Jointly Administered
MEMORANDUM OPINION AND ORDER ON MOTIONS TO COMPEL DISCOVERYOn March 24, 2021, this discovery dispute came before the Court for hearing on (1) SE Property Holdings, LLC's ("SEPH") Motion to Compel Welch Parties (collectively and individually hereinafter referred to as "Welch") To More Fully Respond to Interrogatories, and Produce Documents [Doc. 795], the Response and Objection of Welch Law Firm, P.C. and Ruston C. Welch to SE Property Holdings, LLC's Motion to Compel [Doc. 807] and SE Holdings, LLC's Reply Brief to Response of Welch Parties on Motion to Compel [Doc. 818]; (2) SE Property Holdings, LLC's Motion to Compel Neverve, LLC ("Neverve") to Produce Documents [Doc. 796] and the Corrected Response and Objection of Neverve, LLC to SE Property Holdings, LLC's Motion to Compel [Doc. 815]; and (3) SE Property Holdings LLC's Motion to Compel Shimmering Sands Development Company, LLC to Produce Documents ("Shimmering Sands") [Doc. 797].
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 the payment of any attorney fees to him. It was not until August 30, 2017, when the Court ordered him to do so that the Welch revealed that he had been paid fees and expenses for the bankruptcy case and adversaries in the amount of $348,044.41. The source of all of these payments was proceeds of tort claims against British Petroleum arising out of the April 2010 Deepwater Horizon oil spill in the Gulf of Mexico received by Debtors' affiliates, principally for the matter presently before the Court, Neverve and Shimmering Sands. The Neverve and Shimmering Sands proceeds (but not in their entirety) were applied to the then outstanding hourly rate fees and expenses incurred by Welch in his representation of the Debtors, affiliates, insiders or related defendants in various adversary proceedings.
As a result of Welch's failure to have made proper disclosure of his attorneys' fees as required by 11 U.S.C. Code § 329 and Fed.R.Bankr.P. 2016 and 2017,1 SEPH moved the Court to order disgorgement of all of the approximately $350,000 in fees received by Welch for his bankruptcy services. On April 27, 2018, this Court held that the appropriate sanction for Welch's failure to timely disclose his compensation was the disgorgement of $25,000. In re Stewart, 583 B.R. 775 (Bankr. W.D. Okla. 2018). SEPH appealed, and the BAP affirmed the $25,000 sanction. SE Property Holdings, LLC v. Stewart (In re Stewart), 600 B.R. 425 (10th Cir.BAP 2019). On SEPH's appeal, the Tenth Circuit reversed and remanded this Court's decision. In re Stewart, 970 F.3d 1255 (10th Cir. 2020). The Circuit Court 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. Id., 970 F.3d at 1268. The Court of Appeals found that the Bankruptcy Court had not heard such "solid evidence" to support any mitigation of anything less than the entire fee. "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.
In accordance with the instructions from the Court of Appeals, this Court entered a Scheduling Order in conjunction with an evidentiary hearing solely on the issue of disgorgement of fees from Welch to be held on June 1, 2021. [Doc. 772]. Pursuant to that Scheduling Order, SEPH served Welch Interrogatories and Requests for Production of Documents relative to the disgorgement issue. SEPH also served upon Shimmering Sands and Neverve Subpoenas to Produce Documents. While Welch answered many of the Interrogatories and produced many documents responsive to the Requests, he did object to certain Interrogatories and Requests for Production, primarily on the basis of the attorney-client privilege and the prohibition of the Confidentiality Order entered by the United States District Court in Louisiana in the BP oil spill litigation. Shimmering Sands and Neverve objected to the Subpoenas for documents on the basis of attorney-client privilege and included a Privilege Log in their objections.
Not satisfied with the discovery responses from Welch, Shimmering Sands and Neverve, SEPH filed its Motions to Compel. Welch has filed his Response to the Motion to Compel. Neverve, although originally objecting to the Subpoena to Produce Documents on the sole, general basis of "privileged attorney/client communication" [Doc. 796-1], in its Response to theMotion to Compel adopted the more expansive Response of Welch, particularly relevant being the protection of the Confidentiality Order. Shimmering Sands has not filed a response to SEPH's Motion to Compel.
Included in Welch's and Neverve's Response, and asserted for years throughout much of this litigation, is the argument that certain documents should not be produced by virtue of the Confidentiality Order issued by the United States Magistrate in the U.S. District Court for the Eastern District of Louisiana in the BP oil spill multi-district litigation. [In re: Oil Spill by the Oil Rig "Deepwater Horizon" in the Gulf of Mexico, on April 20, 2010, MDL No. 2179, Section J (E.D. La. 1/13/16)]. That Order reads as follows:
Both the Neverve [780-3, Exhibit A] and Shimmering Sands' Subpoenas [780-4, Exhibit A] seek the following:
As to Welch, there are 48 Requests for Production, 21 of which assert the Confidentiality Order as a basis for refusing to produce documents: 12, 14, 15, 16, 17, 18, 19, 20, 26, 27, 28, 29, 31, 32, 34, 36, 38, 40, 41, 42 and 43. Each of those Requests seek documents "between Neverve (and Shimmering Sands) and all communications related to said representation agreements", "all fee sharing agreements entered into or consented by Neverve regarding its BP claim and settlement thereof," and/or "all time sheets, billing statements, and invoices related to or arising out of the Welch Parties representation of Neverve, and all communicationsrelated thereto from April 1, 2015 through the present," and "documents in the possession (of Welch) for the legal services regarding Neverve's BP claim and settlement thereof."
The Confidentiality Order does not specifically mention non-disclosure of attorneys' fees. While one could broadly read "all communications regarding resolution of the claims or lawsuits" to encompass attorney fee agreements and payments, in this case there is a litany of reasons why the Court does not believe that such an interpretation is appropriate in the present circumstances. First, we begin with the premise that "federal courts have held that the scope of discovery should be broadly and liberally construed to achieve full disclosure of all potentially relevant information." Sanchez v. Matta, 229 F.R.D. 649, 654 (D. N.M. 2004); Gomez v. Martin Marietta Corp., 50 F.3d 1511, 1520 (10th Cir. 1995). Fed.R.Civ.P. Rule 26 "contemplates discovery of any matter that bears on or that reasonably could lead to other matter[s] that...
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