Se Prop. Holdings, LLC v. Stewart (In re Stewart), BAP Nos. WO-18-068

• Decision Date: 04 June 2019
• Docket Number: BAP Nos. WO-18-068,Bankr. No. 15-12215,WO-18-079
• Court: U.S. Bankruptcy Appellate Panel, Tenth Circuit
• Parties: IN RE David A. STEWART & Terry P. Stewart, Debtors. SE Property Holdings, LLC, Appellant, v. David A. Stewart, Terry P. Stewart, Douglas Gould, Chapter 7 Trustee, Ruston C. Welch, Welch Law Firm, P.C., & Kirkpatrick Bank, Appellees.

600 B.R. 425

IN RE David A. STEWART & Terry P. Stewart, Debtors.

SE Property Holdings, LLC, Appellant,

v.David A. Stewart, Terry P. Stewart, Douglas Gould, Chapter 7 Trustee, Ruston C. Welch, Welch Law Firm, P.C., & Kirkpatrick Bank, Appellees.

BAP Nos. WO-18-068

WO-18-079

Bankr. No. 15-12215

United States Bankruptcy Appellate Panel of the Tenth Circuit.

Filed June 4, 2019

Richard M. Gaal (Samuel F. Reid, III with him on the brief) of McDowell, Knight, Roedder & Sledge, L.L.C., Mobile, Alabama (Mark B. Toffoli of The Gooding Law Firm, Oklahoma City, Oklahoma, with him on the brief) Attorneys for Appellant.

David A. Cheek of Cheek & Falcone, PLLC, Oklahoma City, Oklahoma (Ruston C. Welch of Welch Law Firm, P.C., Oklahoma City, Oklahoma, with him on the brief) Attorneys for Appellees.

Before SOMERS, MOSIER, and MARKER,¹ Bankruptcy Judges.

OPINION

MARKER, Bankruptcy Judge.

I. Introduction

Attorney Ruston Welch failed to disclose the compensation he received from David and Terry Stewart (the "Debtors") and their related entities, as required by 11 U.S.C. § 329(a) and Federal Rule of Bankruptcy Procedure 2016(b).² Upon discovering the omission, one of the Debtors' creditors sought to have Mr. Welch's compensation disgorged. After a hearing, the bankruptcy court ordered Mr. Welch to pay a sanction of $ 25,000 to the Debtors' estate, rather than disgorging the almost $ 350,000 of total compensation. The creditor moved to alter or amend the sanction order pursuant to Rule 9023 and Federal Rule of Civil Procedure 59(e), arguing that full disgorgement of Mr. Welch's compensation was appropriate under the circumstances and that the bankruptcy court considered incorrect factors in its decision. The bankruptcy court denied the motion, and the creditor filed this appeal. Because we are unable to determine that the bankruptcy court abused its discretion, we AFFIRM the decision.

II. Facts

The Debtors are a married couple who live in Edmond, Oklahoma but own interests in multiple businesses in Alabama. One of the Debtors' creditors, SE Property Holdings, LLC ("SEPH"),³ commenced separate involuntary Chapter 7 petitions against each of the Debtors on September 30, 2014, in the Southern District of Alabama. The Debtors sought dismissal of the involuntary petitions, but the Alabama bankruptcy court denied the motions to dismiss and entered orders for relief on March 18, 2015. The Alabama bankruptcy court then ordered the joint administration of the cases on April 24, 2015. The Debtors sought a change of venue, and the Alabama bankruptcy court transferred the case to the Bankruptcy Court for the Western District of Oklahoma on June 12, 2015.

The Debtors retained Ruston Welch as counsel to represent them in the Western District of Oklahoma. Mr. Welch filed a notice of appearance on June 17, 2015. Part of Mr. Welch's representation included answering the adversary proceeding filed by Douglas Gould, the Chapter 7 trustee in the Debtors' case (the "Trustee"), seeking to avoid and recover alleged fraudulent transfers made by the Debtors to their children and multiple affiliated entities. The Trustee and the Debtors agreed to settle the adversary proceeding for $ 750,000 and sought bankruptcy court approval. SEPH objected to the settlement. At a hearing on the settlement agreement, SEPH informed the bankruptcy court that entities owned or controlled by the Debtors received a large settlement on claims against British Petroleum ("BP") stemming from the April 2010 Deepwater Horizon oil spill. The terms of the BP settlement were the subject of a confidentiality order, which caused the bankruptcy court to require additional inquiry into the Debtors' interest in the BP settlement proceeds to take place in camera .

At the in camera hearing, SEPH suggested that Debtors' counsel had neither disclosed his representation agreement with the Debtors nor any legal fees paid by the Debtors. Mr. Welch conceded that he did not file a disclosure of compensation or fee agreement pursuant to Rule 2016(b)upon appearing in the case.⁴ Furthermore, Mr. Welch explained that his legal fees were paid out of proceeds of the BP settlement agreement.⁵ Mr. Welch stated that he did not disclose the payments because he did not believe that the payments were made "in connection with" the Debtors' case.⁶

After the in camera hearing, SEPH filed a motion for an accounting of compensation on September 8, 2017.⁷ Mr. Welch responded to the motion for an accounting⁸ and filed a disclosure of compensation on September 14, 2017, indicating that out of the total $ 672,986.21 BP settlement funds, he was paid $ 348,404.41 for attorney's fees and expenses.⁹ Mr. Welch received $ 144,591.85 as part of a contingency fee for representing the entities in the BP lawsuit and an additional $ 203,812.56 for representing the Debtors in their bankruptcy case. The two largest payments came from Shimmering Sands Development Company, LLC and Neverve, LLC. David Stewart owned a fifty-percent membership interest in both Shimmering Sands Development Company, LLC and Neverve, LLC. Mr. Welch's initial disclosure indicated that the Debtors still owed him approximately $ 54,000 as of July 31, 2017. Mr. Welch filed an amended disclosure of compensation on September 20, 2017, including a supplement explaining that compensation was earned for "[r]epresentation of numerous other defendants in adversary proceedings"¹⁰ and further explaining the source of the payments.¹¹

SEPH filed a motion for disgorgement of attorney's fees paid to Mr. Welch and to deny any requests for unpaid compensation (the "Motion for Disgorgement") on October 20, 2017.¹² In the Motion for Disgorgement, SEPH requested that the bankruptcy court disgorge the $ 348,439.41 payment to Mr. Welch based on Welch's failure to disclose his fee agreement and compensation pursuant to § 329 and requested that any of the Debtors' funds held by Welch in trust for legal fees be turned over to the Trustee.

Mr. Welch responded to the Motion for Disgorgement on December 4, 2017, arguing that the BP settlement funds were not property of the bankruptcy estate and that the bankruptcy court lacked jurisdiction to order non-estate entities to turn over non-estate property.¹³ Further, Mr. Welch argued that $ 144,591.85 of the funds were earned for services to non-debtor limited liability companies with no connection to the bankruptcy case. Finally, Mr. Welch argued that the remaining $ 203,812.56 belonged to non-debtor entities and was not subject to disgorgement.

Mr. Welch supplemented the amended disclosure of compensation on December 4, 2017, in which he provided context to his representation of the Debtors.¹⁴ After Mr. Welch filed these disclosures, the bankruptcy court entered its Order on Motion for Accounting of Counsel's Compensation , which concluded that Mr. Welch adequately disclosed the source of his payments and denied the request for an accounting.¹⁵ Mr. Welch filed four more supplements amending the disclosure of compensation indicating additional funds received for representing affiliated entities.¹⁶

Without holding a separate hearing on the issues, the bankruptcy court entered its Memorandum Opinion and Order for Disgorgement of Fees (the "Disgorgement Order") on April 27, 2018.¹⁷ In the Disgorgement Order, the bankruptcy court determined that Mr. Welch's "failure to disclose the amount and source of his fees and expenses ... for over two years ... constitute[d] a clear violation of § 329 and Rule 2016(b)."¹⁸ However, the bankruptcy court determined that the violation did not warrant disgorgement of the full compensation. The bankruptcy court ordered Mr. Welch to disgorge $ 25,000 for the benefit of the bankruptcy estate.

SEPH filed a motion to alter or amend the Disgorgement Order pursuant to Rule 9023, challenging the bankruptcy court's findings of facts related to the consequences of ordering a full disgorgement of the attorney's fees (the "Motion to Alter or Amend").¹⁹ The bankruptcy court denied the Motion to Alter or Amend, concluding that there was no error in considering Mr. Welch's ability to pay the sanctions or failing to compel him to disclose his financial situation. SEPH appealed both the Disgorgement Order and the order denying the Motion to Alter or Amend.²⁰

III. Jurisdiction & Standard of Review

"With the consent of the parties, this Court has jurisdiction to hear timely-filed appeals from ‘final judgments, orders, and decrees’ of bankruptcy courts within the Tenth Circuit."²¹ An order on a motion for disgorgement is final for purposes of 28 U.S.C. § 158(a)(1).²² Neither party in this case elected for these appeals to be heard by the United States District Court pursuant to 28 U.S.C. § 158(c). Accordingly, this Court has jurisdiction over this appeal.

A bankruptcy court's order on disgorgement and/or sanctions is reviewed for abuse of discretion.²³ Similarly, an order denying a motion to alter or amend a prior order pursuant to Rule 9023 is also reviewed for abuse of discretion.²⁴ "Under the abuse of discretion standard: ‘a trial court's decision will not be disturbed unless the appellate court has a definite and firm conviction that the lower court made a clear error of judgment or exceeded the bounds of permissible choice in the circumstances.’ "²⁵ Abuse of discretion occurs when a trial court "makes an ‘arbitrary, capricious or whimsical,’ or ‘manifestly unreasonable judgment.’ "²⁶ "A clear example of an abuse of discretion exists where the trial court fails to consider the applicable legal standard or the facts upon which the exercise of its discretionary judgment is based."²⁷

To the extent the bankruptcy court erred in determining the correct legal standard, that conclusion is reviewed de novo .²⁸ To the extent the bankruptcy court erred in making factual findings, those findings are reviewed for clear error.²⁹

IV. Analysis

1. Order Disgorging Fees

While § 329 requires both attorney disclosure of compensation and an evaluation of the...