Prince, In re

• Decision Date: 20 December 1994
• Docket Number: No. 93-7073,ELECTRO-WIRE,93-7073
• Citation: 40 F.3d 356
• Court: U.S. Court of Appeals — Eleventh Circuit
• Parties: , 32 Collier Bankr.Cas.2d 998, 26 Bankr.Ct.Dec. 497 In re William L. PRINCE, Debtor.PRODUCTS, INC., Plaintiff-Appellant, v. SIROTE & PERMUTT, P.C., Defendant-Appellee.

Page 356

40 F.3d 356

63 USLW 2459, 32 Collier Bankr.Cas.2d 998,

26 Bankr.Ct.Dec. 497

In re William L. PRINCE, Debtor.

ELECTRO-WIRE PRODUCTS, INC., Plaintiff-Appellant, v. SIROTE & PERMUTT, P.C., Defendant-Appellee.

No. 93-7073.

United States Court of Appeals, Eleventh Circuit.

Dec. 20, 1994.

Lee R. Benton, Jerry W. Schoel, Melinda Murphy-Dionne, Schoel, Ogle, Benton & Centeno, Birmingham, AL, for appellant.

Barry A. Ragsdale, Birmingham, AL, for appellee.

Appeal from the United States District Court for the Northern District of Alabama.

Before COX, Circuit Judge, and FAY, Senior Circuit Judge, and CARNES ^*, District Judge.

FAY, Senior Circuit Judge:

This appeal addresses whether a law firm's prior representations and continuing connections to a bankruptcy debtor and to other parties in interest causes a conflict of interest which prejudices or harms the debtor's estate to the extent that the firm should be denied fees for its bankruptcy representation of the debtor. We hold that under the peculiar facts of this case it does.

I. BACKGROUND

In August of 1986, the law firm of Sirote & Permutt, P.C. ("Sirote") began representing William L. Prince ("Prince") and Clara Inez Prince ("Mrs. Prince") in an estate planning context. John H. Cooper ("Cooper"), the Sirote attorney designated as the client contact for the Princes, assigned the Princes' estate planning work to another Sirote attorney, Judith F. Todd ("Todd"). Sirote was paid a total of $7,381.77 for Todd's estate planning work, $5,056.40 of which was paid to Sirote in October of 1989, within the 90-day period immediately preceding Prince's filing of a Chapter 11 bankruptcy case.

During the time relevant to this action, Sirote also represented Prince's company, PBR Electronics, Inc. ("PBR"), and Prince, individually. In September of 1986, Sirote began working on a divorce case for Prince, which was dismissed in April of 1989 after the Princes reconciled. In 1988, Sirote began performing corporate work for PBR, a corporation operated and controlled by Prince. Both of the Princes owned stock in PBR, however Mr. Prince owned the vast majority (85%).

On June 6, 1989, five months before Prince filed his Chapter 11 suit, Todd's estate planning work for the Princes resumed and approximately $600,000 in property was conveyed from Mr. Prince to Mrs. Prince for no valuable consideration. The property deeds executed by Prince in this property transfer remained in Sirote's files and were not recorded until October 17, 1989, approximately one month prior to Prince's Chapter 11 filing. Sirote mailed a $212.86 bill to Prince for deed recording costs on November 27, 1989.

On November 28, 1989, Prince, represented by Jack Caddell, an attorney not associated with the Sirote firm, filed a voluntary Chapter 11 petition in the United States Bankruptcy Court for the Northern District of Alabama. In December of 1989, Prince paid Sirote the $212.86 bill owed for the deed recordings work.

In March of 1990, Prince called Cooper at Sirote and asked if Sirote had a "good bankruptcy lawyer." Cooper referred Prince to Robert B. Rubin, the head of Sirote's bankruptcy department at the time. Cooper then asked Todd to prepare a memorandum outlining the estate planning work she had done for the Princes and the effect it might have on Prince's bankruptcy proceedings. In her memorandum to Cooper, Todd wrote:

You should also be aware that we did accomplish a transfer of real estate to his wife giving her assets equal to approximately $600,000 in her sole name. Whether these could be set aside as a fraud on creditors, I am not in a position to answer.

On March 6, Prince met with Cooper and Rubin. After this meeting, Caddell filed a Motion to Withdraw as Prince's attorney. On April 20, 1990, Prince filed an Application for Approval of Employment of the Sirote firm in his Chapter 11 case. Accompanying the application in a sworn Bankruptcy Rule 2014 affidavit, Rubin, on behalf of Sirote, stated:

The undersigned, members and associates of the Firm of Sirote & Permutt, P.C. have no connection with the Debtor, any creditor of the Debtor or any other party in interest, their respective attorneys and accountants, other than the undersigned who has been recently introduced to the Debtor for the purposes of representation of the Debtor in a case under Title 11 of the United States Code. The Undersigned, nor the Firm of Sirote & Permutt, P.C. have not formerly represented the Debtor and do not presently represent any party in interest in the case and to best of the undersigned's knowledge is otherwise qualified to serve in the capacity as attorney for the Debtor pursuant to 11 U.S.C. Sec. 327.

Neither the application for employment nor Rubin's affidavit reflected Sirote's representation of the Debtor, his spouse, or his corporation; Sirote's participation in the transfer of $600,000 of the Debtor's assets to his wife; Sirote's receipt of $5,056.40 in payment of an antecedent debt during the 90-day period preceding the Debtor's bankruptcy filing; or Sirote's receipt of payment of the $212.86 prepetition debt after the filing of the Debtor's Chapter 11 case. The bankruptcy court approved the employment of Sirote on April 23, 1990.

Sirote further represented Mrs. Prince during the pendency of Mr. Prince's Chapter 11 case when Electro-Wire Products, Inc. ("EWP") brought suit against Mrs. Prince on a guaranty executed in favor of EWP in the United States District Court for the Northern District of Alabama. Sirote filed an answer on behalf of Mrs. Prince and obtained a stay of that proceeding because of the pendency of Mr. Prince's bankruptcy case.

Sirote filed two amendments to its application for employment. The first amendment stated that Sirote inadvertently had failed to disclose its performance of estate planning services for Mr. Prince, that those services had concluded in 1988, and that the services had no material effect or impact upon the bankruptcy proceedings. In its second amendment, Sirote attested that it inadvertently had failed to disclose its previous representation of Mr. Prince in other matters unrelated to his bankruptcy proceedings. In its second amendment Sirote also disclosed that it had represented both Mr. Prince and Mrs. Prince in the estate planning work performed by Todd.

On October 22, 1991, the bankruptcy court granted Sirote's Motion to Withdraw as Prince's counsel. Sirote filed its Application for Final Compensation on March 6, 1992.

After conducting hearings on Sirote's application for compensation and EWP's objections thereto, the bankruptcy court approved fees for Sirote in the amount of $98,589.42. The district court affirmed the bankruptcy court's fee award and increased the award amount to $199,293.52. EWP then filed this appeal.

II. STANDARD OF REVIEW

We review the district court's factual findings for clear error. Fed.R.Civ.P. 52(a); Anderson v. Bessemer City, 470 U.S. 564, 573, 105 S.Ct. 1504, 1511, 84 L.Ed.2d 518 (1985); Newell v. Prudential Ins. Co., 904 F.2d 644, 649 (11th Cir.1990). We subject the district court's legal conclusions to de novo review. Newell, 904 F.2d at 649. This Court reviews the district court's award of attorneys' fees for an abuse of discretion. Holywell Corp. v. Smith (In re Holywell Corp.) 967 F.2d 568, 571 (11th Cir.1992). "An abuse of discretion occurs if the judge fails to apply the proper legal standard or to follow proper procedures in making the determination, or bases an award upon findings of fact that are clearly erroneous." Hatcher v. Miller (In re Red Carpet Corp. of Panama City Beach) 902 F.2d 883, 890 (11th Cir.1990), citing In re Beverly Mfg. Corp., 841 F.2d 365, 369 (11th Cir.1988).

III. DISCUSSION

We agree with the district court that a bankruptcy judge's discretion in awarding compensation for services performed during bankruptcy proceedings deserves great deference. See In re Holywell Corp., 967 F.2d at 571; In re Red Carpet Corp. of Panama City Beach, 902 F.2d at 890. We also agree with both the district court and bankruptcy court that the language of 11 U.S.C. Sec. 328(c) permits a court to deny compensation to professionals found not to be disinterested persons, but does not require a denial of fees in those instances. The relevant language of Sec. 328(c) reads:

Except as provided in section 327(c), 327(e), or 1107(b) of this title, the court may deny allowance of compensation for services and reimbursement of expenses of a professional person employed under section 327 or 1103 of this title if, at any time during such professional person's employment under section 327 or 1103 of this title, such professional person is not a disinterested person, or represents or holds an interest adverse to the interest of the estate with respect to the matter on which such professional person is employed.

11 U.S.C. Sec. 328(c) (emphasis added).

The permissive nature of the language in Sec. 328(c) is clear. See Gray v. English, 30 F.3d 1319, 1324 (10th Cir.1994) citing Sen.Rep. No. 95-989, 1978 U.S.Code Cong. & Admin.News 5787, 5825. And, "[i]n the absence of actual injury or prejudice to the debtor's estate, this sanction [denial of fees] should not be rigidly applied." 2 Collier on Bankruptcy 328.04 at 328-34 (15th ed. 1994) (footnote omitted). When injury to the debtor's estate occurs, however, denial of fees is proper. The Tenth Circuit Court of Appeals recently stated in another bankruptcy fee compensation case that "[i]n exercising the discretion granted by the statute we think the [bankruptcy] court should lean strongly toward denial of fees, and if the past benefit to the wrongdoer fiduciary can be quantified, to require disgorgement of compensation previously paid that fiduciary even before the conflict arose." Gray, 30 F.3d at 1324. We agree.

The egregious facts of this case demonstrate that the conflicts of interest which Sirote labored under clearly prejudiced the Debtor's estate. By representing...