Bankruptcy - Hon. James D. Walker, Jr. and Amber Nickell

Publication year2010

Bankruptcyby Hon. James D. Walker, Jr.* and Amber Nickell**

I. Introduction

In 2009 the country entered into a significant recession, but bankruptcy law—perhaps surprisingly—remained relatively static, at least in the Eleventh Circuit. On a national level, things were a bit more interesting; the chrysler bankruptcy was much discussed in the media and there was a renewed interest in allowing individuals to modify primary residence mortgages in bankruptcy. Still, even the collapse of the housing market could not move Congress to amend the Bankruptcy Code. Despite the action on a national level, in the Eleventh Circuit it was business as usual with a year that can best be described as unremarkable.1

II. Administration & Procedure

A. Judicial Estoppel

Judicial estoppel is the application of an equitable principle designed to prevent litigants from making a mockery of the judicial system by taking inconsistent positions in different courts.2 In recent years, the

United States Court of Appeals for the Eleventh Circuit has provided a framework for evaluating judicial estoppel claims in the context of Chapter 7 and Chapter 13 cases.3

In Grelier v. Burgess (In re Grelier),4 the United States Bankruptcy Court for the Northern District of Alabama was faced with a scenario not previously addressed by the Eleventh Circuit: an individual Chapter 11 debtor had referenced a potential legal malpractice claim against her divorce attorney in her Chapter 11 plan but not in any other document filed with the bankruptcy court.5 The debtor filed her bankruptcy petition in July 2007. She became aware of her potential malpractice claim no later than November 2007, and she did not amend her schedules after learning of the claim. She filed her disclosure statement and Chapter 11 plan in January 2008.6 The disclosure statement did not mention the malpractice claim. The plan simply reserved the debtor's right to prosecute claims against the divorce attorney.7

After the plan was confirmed and the debtor's bankruptcy case was closed, the debtor sued her divorce attorney for malpractice. The attorney had the bankruptcy case reopened and the malpractice case removed to the bankruptcy court, where he raised a defense of judicial estoppel.8

The bankruptcy court looked to the totality of the circumstances to determine that the malpractice case could not go forward.9 The court noted that the debtor made no effort to amend her schedules to reflect the claim.10 Furthermore, omitting the claim from the disclosure statement resulted in the debtor's failure "to include 'adequate information' . . . sufficient to allow creditors to make an informed judgment about the debtor's plan of reorganization."11 Placing a reservation of the right to sue in the plan "was too little too late to fully inform creditors about the potential asset."12 In holding that the debtor was estopped from continuing the malpractice case, the court noted that the debtor's actions gave her "an unfair advantage at confirmation" over both the malpractice defendant and other creditors entitled to vote.13

B. Barton Doctrine

The case of Lawrence v. Goldberg14 also involved a debtor whose litigation was cut off by the court, but under very different circumstances. In this case, a Chapter 7 debtor who refused to turn over approximately $7 million worth of estate property that he had concealed in an offshore trust was first fined and then incarcerated by the bankruptcy court for contempt. In response, the debtor filed suit alleging conspiracy and various other violations of state and federal laws against the trustee, the trustee's counsel, the trustee's investigator, and certain creditors.15 The district court dismissed the case based on lack of jurisdiction, and the Eleventh Circuit affirmed.16

In the Eleventh Circuit, the Barton doctrine17 requires a debtor to seek approval from the bankruptcy court before suing "'the trustee or other bankruptcy-court-appointed officer, for acts done in the actor's official capacity.'"18 At issue in Lawrence was whether the Barton doctrine applied to all the defendants in the debtor's lawsuit.19 The Eleventh Circuit held that the doctrine applied.20 The trustee was covered by virtue of being appointed by the court.21 Furthermore, the trustee's employment of both counsel and an investigator were approved by the court, "function[ing] as the equivalent of court-appointed officers by helping the Trustee execute his official duties."22 Finally, the creditor defendants also acted as court-appointed officers "to the extent

[they] financed the Trustee's efforts to locate hidden assets" and such financing was approved by the bankruptcy court.23

Not only did the Barton doctrine apply to all the defendants, but it also applied to all eighteen counts of the debtor's complaint because at the core of the complaint were allegations that the defendants colluded to enforce turnover of the trust assets.24 As such, the outcome of the lawsuit "could have an effect on the handling and administration of[the debtor's] bankruptcy estate."25

C. Eligibility

Section 109 of the Bankruptcy Code26 sets forth various eligibility requirements for bankruptcy, including the debtor's obligation to obtain pre-petition credit counseling.27 In In re Wise,28 a creditor sought dismissal of the case because the debtor obtained credit counseling on the same day she filed her petition.29 Although the United States Bankruptcy Court for the Northern District of Alabama had previously held that a debtor must obtain the credit counseling at least a day before filing,30 the same bankruptcy court, here, denied the creditor's mo-tion.31 The court held that the motion was untimely because it was raised after confirmation of the debtor's Chapter 13 plan.32

In reaching its decision, the bankruptcy court rejected the creditor's argument that Sec. 109 implicates subject matter jurisdiction.33 The court looked to the statute and noted that (1) it "contains no 'jurisdictional language'"; (2) it only places limitations on the debtors, not on the courts; and (3) it does not require the court to make its own investigation into a debtor's eligibility.34 Overall the bankruptcy court held that the credit counseling requirement is nonjurisdictional; therefore, it can be waived.35 In this case, the creditor waived its right to object based on a credit counseling defect by its delay in raising the issue.36

III. Professionals

Attorneys should not assume that keeping detailed time records will result in a fee enhancement in a routine Chapter 7 case. In In re Gonzalez,37 the United States Bankruptcy Court for the Middle District of Florida reaffirmed its decision to set a reasonable fee in a standard Chapter 7 case at a figure of $1500.38 Consequently, the court directed the debtor's attorney to show cause why his fees—shown in a disclosure statement to be $2050—should not be disgorged.39 To show cause, the attorney provided a detailed billing statement that showed he worked 8.13 hours at a rate of $250 per hour.40 Nevertheless, the docket showed the case to be routine, requiring "no additional court activity, such as other hearings, contested matters or contentions that required the presence of the Debtor or his attorney at a hearing and/or mandated additional services to be provided by counsel for the Debtor."41 Therefore, even though the additional fees represented actual hours worked, the court ordered the attorney to disgorge his fees in excess of $1500.42 The same outcome might be expected in a Chapter 13 case with similar facts. Courts are much more likely to set a predetermined reasonable fee amount in Chapter 13 cases.

The United States Bankruptcy Court for the Middle District of Georgia also addressed attorney fees in In re Hall;43 however, the issue in Hall was about who earned the fees, not whether the fees were reasonable.44 In Hall the debtor retained an Alabama attorney to pursue a medical malpractice claim. The Alabama attorney in turn contacted a Georgia attorney to handle the case. The debtor understood that the attorneys would share a forty-five percent contingency fee of any recovery he received. The two attorneys agreed to a fee-splitting arrangement in which the Alabama attorney would receive forty percent of the contingency fee and the Georgia attorney would receive sixty percent. After hiring the attorneys, the debtor filed for bankruptcy. He listed the suit in his schedules and listed the Georgia attorney as his counsel in the malpractice action. The Chapter 7 trustee succeeded to the debtor's interest in the malpractice claim and entered into a separate agreement with the Georgia attorney to prosecute the claim. The malpractice case was ultimately settled with approximately $360,000 paid to the Georgia attorney for his services.45

Upon learning of the settlement, the Alabama attorney pursued an administrative claim in the bankruptcy case, alleging that he was entitled to a portion of the fee paid to the Georgia attorney.46 After first determining the Alabama attorney had standing to bring his claim, the court considered the validity of the original contingency fee agreement.47 The court held that the contingency agreement was deemed rejected because the trustee never sought approval to accept the agreement.48 Consequently, the Alabama attorney had a pre-petition claim for damages, which was to be determined by state law.49 Because there had not yet been any recovery on the malpractice claim at the time of rejection, the Alabama attorney was not entitled to a share of the contingency fee.50 In addition, the attorney was not entitled to fees under quantum meruit because he did not produce proof as to the value of his services.51 Finally, the court held that the Alabama attorney was not entitled to fees under 11 U.S.C. Sec. 32852 because his services did not benefit the trustee or the bankruptcy estate.53 At best, he occasionally offered words of reassurance to the debtor, but he did...

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