In re WT Mayfield Sons Trucking Co., Inc.

• Decision Date: 30 September 1998
• Docket Number: Bankruptcy No. 96-63194.
• Parties: In re W.T. MAYFIELD SONS TRUCKING CO., INC., Debtor.
• Court: U.S. Bankruptcy Court — Northern District of Georgia

225 B.R. 818 (1998)

In re W.T. MAYFIELD SONS TRUCKING CO., INC., Debtor.

Bankruptcy No. 96-63194.

United States Bankruptcy Court, N.D. Georgia, Atlanta Division.

September 30, 1998.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

Guy G. Gebhardt, James H. Morawetz, Office of United States Trustee, Atlanta, Georgia, for U.S. Trustee.

Albert N. Remler, Remler Law Group, P.C., Atlanta, Georgia, for Debtor.

ORDER GRANTING MOTION OF UNITED STATES TRUSTEE FOR DISGORGEMENT OF FEES

JAMES E. MASSEY, Bankruptcy Judge.

Eric B. Reuss was the attorney in this case for W.T. Mayfield Sons Trucking Co., Inc. in its capacity as a Chapter 11 debtor in possession, though the Debtor never asked the court to approve the professional relationship, as required by § 327 of the Bankruptcy Code. Nor did Mr. Reuss ever apply for compensation from the estate, which would have also involved judicial review, under § 330. Mr. Reuss did receive compensation, however, but not from officers of the Debtor, the source he identified in an amended statement filed pursuant to Bankruptcy Rule 2016(b).

Without revealing the arrangement to the court or creditors, Mr. Reuss through two professional corporations billed and accepted payments totaling more than $90,000 from Mayfield Rigging Co., Inc., a wholly owned, solvent subsidiary of the Debtor.

The U.S. Trustee moves for an order requiring disgorgement of the payments made by Mayfield Rigging to Mr. Reuss and his professional corporations. He grounds the motion on the absence of court approval either of Mr. Reuss' employment as Debtor's counsel or of the compensation paid, the unreasonableness of the compensation paid and the filing of false Rule 2016(b) disclosure statements. In response, Mr. Reuss contends that the Debtor had no interest in the funds used to pay his fees. He concedes that the court may review fee arrangements between a debtor's attorney and a third party but asserts that the only issue presented is whether the compensation paid was excessive. Among the issues raised here is a novel one: whether secret payments by a wholly owned and solvent subsidiary of a Chapter 11 debtor to the debtor's counsel for professional services rendered to the debtor in its capacity as debtor in possession constitute property of the estate under § 541(a) of the Bankruptcy Code. The court held an evidentiary hearing on the motion, and the parties briefed their positions.

As its name states, W.T. Mayfield Sons Trucking Co., Inc. was in the trucking business. It was a specialty hauler, transporting very large cargo over irregular routes. At the time of its bankruptcy on February 29, 1996, the company valued its assets at $5,000,000 and acknowledged liabilities of about $6,000,000. Its tax liability led to bankruptcy. The Internal Revenue Service threatened to shut down the company in an effort to collect unpaid withholding taxes totaling more than $600,000. It also asserted claims against several of the Debtor's officers. To deal with its problems with the I.R.S., Mayfield Trucking turned to Eric Reuss on the recommendation of its outside accountant. Mr. Reuss negotiated with an I.R.S. agent but was unable to reach an agreement. The company then sought to retain Mr. Reuss to file a bankruptcy petition.

In a letter dated February 26, 1996, addressed to Mr. Jim Mayfield, W.T. Mayfield Sons Trucking Co., Inc., Reuss stated in part:

This will follow up our conversations today. I wanted you to know exactly what your legal cost parameters would be to file a Chapter 11. The following is what you would have to come up with prior to the work commencing:

                  Chapter 11 Filing Fee            $   800.00
                  Non-refundable retainer           15,000.00
                  Current balance (see statement)      666.75
                                                  ___________
                  Total                            $16,466.75
                                                  -----------
                

The funds would of course have to be in the form of a cashier\'s check, certified check, or cash, due to the procedure of shutting down your accounts upon filing.

This letter set the stage for what followed. Mr. Reuss revealed that he was unwilling to risk nonpayment, so much so that he demanded preferential payment of a debt for $666.75, in addition to a cash retainer of $15,000. He advised Mr. Mayfield that once the petition was filed, the rules about paying lawyers and prepetition debt would change, thereby sending the subtle message that paying lawyers postpetition was a problem, which might impede relief from the effort of the I.R.S. to collect. There is no evidence that he informed the Debtor that it could pay professionals postpetition from unencumbered assets if the court approved the employment and the compensation.

The Debtor apparently did not have the cash to pay the retainer demanded by Mr. Reuss. So two days later, the principals of Mayfield Trucking, James J. Mayfield, Sr., and James J. Mayfield, Jr., executed a note dated February 28, 1996, to Eric B. Reuss, P.C. in the amount of $14,000 for "value received" as an initial retainer. That fee arrangement was short-lived when Mr. Reuss realized that this was a major piece of legal work. He testified, "just before, at the time of the bankruptcy filing when the level of work — when it became apparent that this was going to be much more involved than was originally anticipated, Jim and I worked out an arrangement where there would be a fee basically paid of sixty thousand dollars. That was — there was an additional promissory note signed by Jim Mayfield to bring the total amount that I had in the form of promissory notes up to sixty thousand dollars at or before the time of the bankruptcy filing." Hearing Tr. 7-8.

That fee arrangement also had a short life. The Mayfields quickly changed their minds and told Mr. Reuss that they did not want to be personally responsible for paying his legal fees. According to Reuss, Jim Mayfield, Jr. asked whether he would agree to bill the Debtor's subsidiary, Mayfield Rigging, instead of relying on the Mayfields personally. The general manager and later president of Mayfield Rigging, James T. Pirkle, had a different recollection. On examination by Reuss' lawyer, he testified credibly that Mayfield, Sr., now deceased, told him that it was Reuss, not the Mayfields, who had suggested billing the subsidiary. Reuss' counsel made no motion to strike this hearsay testimony. Neither the U.S. Trustee nor Mr. Reuss called Jim Mayfield, Jr. as a witness.

Regardless of the origin of the idea, Mr. Reuss approved the fee arrangement with Mayfield Rigging, which cut a check dated February 29, 1996 for $2,500 payable to Eric B. Reuss, P.C. The check cleared the following day. He acknowledges that the $14,000 note "as well as remaining individual offers to pay were withdrawn prior to the filing for relief under Chapter 11 of the Bankruptcy Code on February 29, 1996." Reuss Reply Brief, 2.

On February 29, 1996, Mr. Reuss filed a Chapter 11 bankruptcy petition for Mayfield Trucking, showing Eric B. Reuss, P.C. as the Debtor's attorney. Until a trustee was appointed in the Chapter 11 case in December 1997, Mr. Reuss acted as counsel for the Debtor. He appeared regularly in court and prepared and filed numerous pleadings for the Debtor, which he signed as its counsel.

Among the first of those pleadings, filed on March 15, 1996, was the Debtor's Statement of Financial Affairs. Item 9 directs a debtor to

list all payments made or property transferred by or on behalf of the debtor to any persons, including attorneys, for consultation concerning debt consolidation, relief under the bankruptcy law or preparation of a petition in bankruptcy within one year immediately preceding the commencement of this case.

In response, a box labeled "none" adjacent to item 9 was checked.

In the same filing package, Mr. Reuss included his disclosure statement concerning his fee arrangement, which is required by § 329(a) and Bankruptcy Rule 2016(b). An attorney representing a debtor in a bankruptcy case or in connection with a bankruptcy case must file with the court a statement disclosing the amount and source of compensation paid or promised from and after one year prior to the petition date, whether or not the attorney applies for compensation in the bankruptcy case. 11 U.S.C. § 329(a). The initial disclosure statement is due within 15 days of the entry of the order for relief and must be supplemented within 15 days after any payment or agreement not previously disclosed. Fed.R.Bankr.P. 2016(b).

In that statement, Mr. Reuss identified his firm as Reuss Legal Services, P.C., rather than Eric B. Reuss, P.C., the firm name stated on the petition. He stated that he had received no funds from the Debtor, other than $800 for the filing fee, and that his fee arrangement was "To be det." which he testified meant "to be determined." He also stated that he had received "no transfer, assignment or pledge of property . . . for the value stated."

On October 6, 1997, Mr. Reuss filed a pleading entitled "Amendment of Statement of Financial Affairs and Statement pursuant to Rule 2016(b)." Although that pleading purports to be filed by the Debtor, Mr. Reuss signed it. It states:

Comes now the Debtor, WTMT, Inc., f/k/a W.T. Mayfield Sons Trucking Co., Inc., and amends its Statement of Financial Affairs and Statement Pursuant to Rule 2016(b) by stating the following: Within the one year immediately preceding the commencement of this case, two of the Debtor\'s officers employed Reuss Legal Services, P.C. ("RLS") to represent the Debtor and the Debtor\'s officers and directors with respect to the Debtor\'s and the Debtor\'s officers and directors\' liabilities to the Internal Revenue Service. Said officers paid RLS a fee of $60,000 therefor. In accepting the employment arrangement, RLS agreed to represent the Debtor in any bankruptcy proceeding that might be required and to not submit an application for payment of additional

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