David Stewart v. United States Bankruptcy Court for the Western District of Oklahoma

FILED
U.S. Bankruptcy Appellate Panel
of the Tenth Circuit
June 4, 2019
PUBLISH
UNITED STATES BANKRUPTCY APPELLATE PANEL Blaine F. Bates
OF THE TENTH CIRCUIT Clerk
_________________________________
In re DAVID A. STEWART & TERRY P. BAP Nos. WO-18-068
STEWART, WO-18-079
Debtors.
_________________________________
SE PROPERTY HOLDINGS, LLC, Bankr. No. 15-12215
Chapter 7
Appellant,
v.
OPINION
DAVID A. STEWART, TERRY P.
STEWART, DOUGLAS GOULD, Chapter
7 Trustee, RUSTON C. WELCH, WELCH
LAW FIRM, P.C., & KIRKPATRICK
BANK,
Appellees.
_________________________________
Appeal from the United States Bankruptcy Court
for the Western District of Oklahoma
_________________________________
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.
_________________________________
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
1
Joel T. Marker, U.S. Bankruptcy Judge, United States Bankruptcy Court for the
District of Utah, sitting by designation.
2
All future references to “Code,” “Section,” and “§” are to the Bankruptcy Code,
Title 11 of the United States Code, unless otherwise indicated. All future references to
“Bankruptcy Rule” are to the Federal Rules of Bankruptcy Procedure.
2
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
3
SEPH asserts claims in excess of $30,000,000 by way of several promissory notes,
personal guaranties, and a judgment lien. Several of the promissory notes were from
limited liability companies managed by either David Stewart or Terry Stewart.
3
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
accounting 8 and filed a disclosure of compensation on September 14, 2017, indicating
4
Tr. Aug. 30, 2017 Hearing at 23-24, in Appellant’s App. at 7621-22.
5
Id. at 20, in Appellant’s App. at 7618.
6
11 U.S.C. § 329(a).
7
Motion for Accounting of Compensation Paid to Debtors’ Counsel Pursuant to 11
U.S.C. § 329(a) and Fed. R. Bankr. P. 2016(b), in Appellant’s App. at 2020.
8
Response to SE Property Holdings, LLC’s Motion for Accounting of
Compensation Paid to Debtors’ Counsel, in Appellant’s App. at 2043.
4
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
9
Disclosure of Compensation of Attorney for Debtor, in Appellant’s App. at 2030.
10
Amended Disclosure of Compensation of Attorney for Debtor, in Appellant’s App.
at 2036.
11
Id. at 2, in Appellant’s App. at 2037.
12
SE Property Holdings, LLC’s Motion for Disgorgement of Compensation Paid to
Welch Law Firm, P.C., Denial of Unpaid Compensation, and Reimbursement of Property
of the Estate Transferred to Third Parties, in Appellant’s App. at 3332. The Motion for
Disgorgement was filed under seal based on a confidentiality order entered in the BP oil
case. However, the bankruptcy court determined that Mr. Welch waived any
confidentiality by filing the Amended Disclosure of Compensation of Attorney for Debtor
5
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.
and entered an order unsealing the Motion for Disgorgement and other pleadings. Order
Unsealing Pleadings and Directing Clerk to File Pleadings, in Appellant’s App. at 5449.
13
Response of Ruston C. Welch and Welch Law Firm P.C., (“Welch”) to SE
Property Holdings, LLC’s (“SEPH”) Motion for Disgorgement, in Appellant’s App. at
3424.
14
Supplemental Statement to Amended Disclosure of Compensation of Attorney for
Debtors, in Appellant’s App. at 3528.
15
Appellant’s App. at 3920.
6
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
16
Second Supplemental Statement to Amended Disclosure of Compensation of
Attorney for Debtors, in Appellant’s App. at 3892; Third Supplemental Statement to
Amended Disclosure of Compensation of Attorney for Debtors, in Appellant’s App. at
4491; Fourth Supplemental Statement to Amended Disclosure of Compensation of
Attorney for Debtors, in Appellant’s App. at 5461; Fifth Supplemental Statement to
Amended Disclosure of Compensation of Attorney for Debtors, in Appellant’s App. at
5501.
17
In re Stewart, 583 B.R. 775 (Bankr. W.D. Okla. 2018).
18
Id. at 782-83.
19
SE Property Holdings, LLC’s Motion to Alter or Amend Order on Disgorgement,
Pursuant to Bankruptcy Rule 9023, in Appellant’s App. at 5513.
7
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
20
This Court ordered the separate appeals combined for purposes of briefing and
oral argument. Order Joining Cases for Briefing and Oral Argument, WO-18-068 BAP
ECF No. 18.
21
Straight v. Wyo. Dep’t of Trans. (In re Straight), 248 B.R. 403, 409 (10th Cir.
BAP 2000) (first quoting 28 U.S.C. § 158(a)(1), and then citing 28 U.S.C. § 158(b)(1),
(c)(1) and Fed. R. Bankr. P. 8002).
22
Behles-Giddens, P.A. v. Raft (In re K.D. Co.), 254 B.R. 480, 486 (10th Cir. BAP
2000) (quoting Van Cauwenberghe v. Biard, 486 U.S. 517, 521-22 (1988)) (reviewing
order disgorging fees for abuse of discretion).
23
Jensen v. U.S. Tr. (In re Smitty’s Truck Stop, Inc.), 210 B.R. 844, 846 (10th Cir.
BAP 1997) (citing Interwest Bus. Equip., Inc. v. U.S. Tr. (In re Interwest Bus. Equip.,
Inc.), 23 F.3d 311, 315 (10th Cir. 1994)); Fairshter v. Stinky Love, Inc. (In re Lacy), 306
F. App’x 413, 418 (10th Cir. 2008) (citing Udall v. FDIC (In re Nursery Land Dev., Inc.),
91 F.3d 1414, 1415 (10th Cir. 1996)) (reviewing order imposing sanctions for abuse of
discretion).
8
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
24
Rafter Seven Ranches LP v. C.H. Brown Co. (In re Rafter Seven Ranches LP), 362
B.R. 25, 28 (10th Cir. BAP 2007) (citing Comm. for the First Amendment v. Campbell,
962 F.2d 1517, 1523 (10th Cir. 1992)).
25
Arenas v. U.S. Tr. (In re Arenas), 535 B.R. 845, 849 (10th Cir. BAP 2015)
(quoting Moothart v. Bell, 21 F.3d 1499, 1504 (10th Cir. 1994)).
26
Id. (quoting Moothart v. Bell, 21 F.3d at 1504-05).
27
Jackson v. Los Lunas Cmty. Program, 880 F.3d 1176, 1191 (10th Cir. 2018)
(quoting Ohlander v. Larson, 114 F.3d 1531, 1537 (10th Cir. 1997)); Highmark Inc. v.
Allcare Health Mgmt. Sys., Inc., 572 U.S. 559, 563 n.2 (2014) (“The abuse-of-discretion
standard does not preclude an appellate court’s correction of a [lower] court’s legal or
factual error . . . .” (citing Cooter & Gell v. Hartmarx Corp., 496 U.S. 384, 405 (1990))).
28
DSC Nat’l Props., LLC v. Johnson (In re Johnson), 477 B.R. 156, 168 (10th Cir.
BAP 2012) (quoting Sender v. Johnson (In re Hedged-Invs. Assocs., Inc.), 84 F.3d 1267,
1268 (10th Cir. 1996)) (concluding bankruptcy court’s determination of legal standard is
reviewed de novo).
29
Id.
9
While § 329 requires both attorney disclosure of compensation and an evaluation
of the reasonableness of that compensation, the two requirements are contained in
separate paragraphs and involve legally distinct considerations. Section 329(a) imposes a
duty on the attorney to disclose compensation received in connection with a bankruptcy
case but does not define a penalty if the disclosure requirement is not followed. Section
329(b) states that if the compensation exceeds the reasonable value of the services, the
bankruptcy court may order the return of the excessive payment. The factors used to
evaluate the reasonableness of the compensation are given in § 330(a)(3), and the
bankruptcy court’s authority to order the return of excess payments is stated in § 329(b).
As the parties have not raised any questions regarding the reasonableness of the
compensation under § 329(b), this Court will consider only the duty to disclose under
§ 329(a) and the penalties developed in the case law for violating that duty.
In the event of a violation of § 329(a), a bankruptcy court may order disgorgement
of all fees paid to the attorney. 30 A bankruptcy court may also “sanction failure to
disclose.” 31 Even if compensation is not determined to be excessive under § 329(b), a
bankruptcy court may order disgorgement or a sanction based on a failure to disclose
under § 329(a). 32
30
Fairshter v. Stinky Love, Inc. (In re Lacy), 306 F. App’x 413, 419 (10th Cir.
2008); Turner v. Davis (In re Inv. Bankers, Inc.), 4 F.3d 1556, 1566 (10th Cir. 1993).
31
Jensen v. U.S. Tr. (In re Smitty’s Truck Stop, Inc.), 210 B.R. 844, 849 (10th Cir.
BAP 1997)) (citing In re Maui 14K, Ltd., 133 B.R. 657, 660 (Bankr. D. Haw. 1991)).
32
See, e.g., Henderson v. Kisseberth (In re Kisseberth), 273 F.3d 714, 720 (6th Cir.
2001) (The lower court found the attorney’s fees to be excessive under § 329(b), but
instead of ordering a return of only the excessive amounts of the fees, reduced the fees
10
Mr. Welch’s failure to disclose compensation as required by § 329(a) and Rule 2016(b) is
not in dispute. The issue for consideration is whether the bankruptcy court abused its
discretion when it ordered Mr. Welch to pay a financial sanction of $25,000 into the
bankruptcy estate.
Disgorgement, in this context, is the act of returning fees that were paid to the
attorney. A sanction is a legal order issued by a court in order to address disobedience.
Disgorgement may be required as a type of sanction. The bankruptcy court discussed the
option of ordering a full disgorgement of all fees received in the case, 33 but then elected
to consider several factors to determine “the degree of sanctions for non-disclosure.” 34
Accordingly, this Court will characterize the bankruptcy court’s Disgorgement Order as a
sanction.
substantially, allowing only $2,287 out of $15,100 billed, because the attorney had
violated § 329(a) as well.); Schroeder v. Rouse (In re Redding), 263 B.R. 874, 880 (8th
Cir. BAP 2001) (“It is well settled that disgorgement of fees is an appropriate sanction for
failure to comply with the disclosure requirements . . . .”); In re Indep. Eng’g Co., 232
B.R. 529, 532 (1st Cir. BAP 1999) (“Courts have long recognized that failure to disclose
is a sufficient basis for disqualification or disgorgement.”); Hale v. U.S. Tr. (In re
Basham), 208 B.R. 926, 931 (9th Cir. BAP 1997) (“The disclosure requirements imposed
by § 329 are mandatory, not permissive, and an attorney who fails to comply with the
disclosure requirements forfeits any right to receive compensation.”); Arens v. Boughton
(In re Prudhomme), 43 F.3d 1000, 1003 (5th Cir. 1995) (explaining that a bankruptcy
court is empowered “to order disgorgement as a sanction to debtors’ counsel for
nondisclosure”).
33
See In re Stewart, 583 B.R. 775, 783 (Bankr. W.D. Okla. 2018) (“The law is clear
that the failure to comply with § 329 and Rule 2016(b) constitute sufficient grounds,
under appropriate circumstances, for the Court to exercise its inherent power and
discretion to deny all fees and costs paid to Welch and to direct disgorgement of up to all
fees and costs already received.”).
34
Id.
11
2. Imposition of Sanctions
“We review the bankruptcy court’s decision imposing sanctions for an abuse of
discretion.” 35 SEPH asserts that this Court should apply the de novo standard of review to
the bankruptcy court’s determination of the legal standard. SEPH correctly observes that
a bankruptcy court abuses its discretion when it “commits an error of law, such as
applying an incorrect legal standard or misapplying the correct legal standard.” 36 We
acknowledge that the bankruptcy court’s conclusions as to the correct legal standard
applied are reviewed de novo. 37
a. Relevant Factors
When reviewing for abuse of discretion, we must consider whether the sanctions
imposed by the bankruptcy court were appropriate under the applicable legal standard
recognized by the Tenth Circuit. As SEPH points out in its briefing, the Tenth Circuit
recognizes that “[a]n attorney who fails to comply with the requirement of § 329 forfeits
any right to receive compensation for services rendered on behalf of the debtor . . . and a
court may order an attorney sua sponte to disgorge funds already paid to the attorney.” 38
35
Fairshter v. Stinky Love, Inc. (In re Lacy), 306 F. App’x 413, 418 (10th Cir. 2008)
(citing Udall v. FDIC (In re Nursery Land Dev., Inc.), 91 F.3d 1414, 1415 (10th Cir.
1996)).
36
Farmer v. Banco Popular of N. Am., 791 F.3d 1246, 1256 (10th Cir. 2015) (citing
Chamber of Commerce v. Edmondson, 594 F.3d 742, 764 (10th Cir. 2010)).
37
DSC Nat’l Props., LLC v. Johnson (In re Johnson), 477 B.R. 156, 168 (10th Cir.
BAP 2012) (“Whether the bankruptcy court applied the correct legal standard . . . is
subject to de novo review.” (quoting Chevy Chase Bank FSB v. Kukuk (In re Kukuk), 225
B.R. 778, 783 (10th Cir. BAP 1998))).
38
In re Lacy, 306 F. App’x at 419 (quoting Turner v. Davis, Gillenwater & Lynch
(In re Inv. Bankers, Inc.), 4 F.3d 1556, 1565 (10th Cir. 1993)).
12
As this Court has previously held, an attorney’s failure to adequately disclose
compensation pursuant to § 329(a) and Rule 2016(b) “is sufficient, in itself, to deny all
fees.” 39 In order to mitigate the harshness of total disgorgement, some courts temper the
amount of the sanction upon considering the circumstances of the case. 40
SEPH argues that the bankruptcy court erred in imposing a sanction less than the
total amount of the compensation paid to Mr. Welch. 41 While acknowledging that the
Tenth Circuit has not adopted a multi-factor legal test to determine the appropriate
sanction for failing to make § 329(a) disclosures, 42 SEPH argues courts should consider
the egregiousness of an attorney’s conduct. Although the bankruptcy court and SEPH cite
the same precedent, In re Brown from the Northern District of Oklahoma, SEPH argues
39
Jensen v. U.S. Tr. (In re Smitty’s Truck Stop, Inc.), 210 B.R. 844, 849 (10th Cir.
BAP 1997) (citing In re Park-Helena Corp., 63 F.3d 877, 881 (9th Cir. 1995)); see also
In re Lacy, 306 F. App’x at 419; In re Brown, 371 B.R. 486, 499 (Bankr. N.D. Okla.
2007); In re Woodward, 229 B.R. 468, 473-75 (Bankr. N.D. Okla. 1999).
40
Baker v. Cage (In re Whitley), 737 F.3d 980, 987 (5th Cir. 2013) (“[W]hen a
bankruptcy court imposes a disciplinary sanction it ‘must use the least restrictive sanction
necessary to deter the inappropriate behavior.’” (quoting Krim v. First City of
Bancorporation of Tex., Inc. (In re First City Bancorporation of Tex., Inc.), 282 F.3d
864, 867 (5th Cir. 2002))); Mapother & Mapother, P.S.C. v. Cooper (In re Downs), 103
F.3d 472, 478 (6th Cir. 1996) (“When a court metes out a sanction, it must exercise such
power with restraint and discretion.” (quoting Chambers v. NASCO, Inc., 501 U.S. 32, 44
(1991))); In re Sandpoint Cattle Co., 556 B.R. 408, 427 (Bankr. D. Neb. 2016)
(“Bankruptcy courts generally have substantial discretion in fashioning sanctions;
however, they must exercise that power with restraint and the sanction imposed must be
commensurate with the egregiousness of the conduct.” (quoting In re Downs, 103 F.3d at
478))).
41
In its brief, SEPH argued that the bankruptcy court erred as “full disgorgement” is
the standard. Appellant’s Br. 32. At oral argument, SEPH conceded that bankruptcy
courts have discretion to order either partial or full disgorgement.
42
Appellant’s Br. 32 (“The Tenth Circuit never adopted a multi-factor test for
determining the amount to be disgorged.”).
13
that the bankruptcy court committed error by considering factors beyond Brown’s test,
which states that “[t]he imposition of a disgorgement order should be ‘“commensurate
with the egregiousness of the conduct” and will depend on the particular facts of each
case.’” 43
However, no precedent in this jurisdiction solely employs this single-factor
approach or otherwise limits a bankruptcy court’s discretion in imposing sanctions. A
number of cases from within the Tenth Circuit authorize full disgorgement of
compensation as a sanction. 44 To find cases authorizing partial disgorgement, the Court
must look to jurisdictions outside of the Tenth Circuit, which hold that “the severity of
the sanction to be imposed remains within the sound discretion of the bankruptcy
court.” 45
We recognize that legal standards serve to guide a bankruptcy court’s application
of its discretion. 46 The Tenth Circuit generally provides that a trial court’s obligation in
43
In re Brown, 371 B.R. at 499 (quoting In re Hackney, 347 B.R. 432, 443 (Bankr.
M.D. Fla. 2006).
44
In re Lacy, 306 F. App’x at 419; Turner v. Davis Gillenwater & Lynch (In re Inv.
Bankers, Inc.), 4 F.3d 1556, 1565 (10th Cir. 1993); Jensen v. U.S. Tr. (In re Smitty’s
Truck Stop, Inc.), 201 B.R. 844, 849 (10th Cir. BAP 1997); In re Wood, 408 B.R. 841,
848 (Bankr. D. Kan. 2009).
45
Vergos v. Mendes & Gonzales, PLLC (In re McCrary & Dunlap Constr. Co.), 79
F. App’x 770, 785 (6th Cir. 2003); see also Schroeder v. Rouse (In re Redding), 263 B.R.
874, 878 (8th Cir. BAP 2001) (explaining court has “broad discretion in imposing
sanctions” for failure to disclose compensation); Walton v. Whitcomb (In re Whitcomb),
479 B.R. 133, 144 (Bankr. M.D. Fla. 2012) (“The sanctions can include . . . partial or
total disgorgement of fees paid.” (quoting In re Downs, 103 F.3d at 477-78)).
46
Mart. v. Franklin Capital Corp., 546 U.S. 132, 139 (2005) (“Discretion is not
whim, and limiting discretion according to legal standards helps promote the basic
14
applying its discretion is to weigh all relevant factors. 47 No Tenth Circuit authority
expressly provides the relevant factors a bankruptcy court should consider when
imposing a sanction against an attorney for failure to meet § 329(a) and Rule 2016(b)’s
disclosure requirements. As such, it was within the bankruptcy court’s discretion to look
outside this circuit in determining the relevant factors to consider. In the absence of
precedent expressly adopting relevant factors, we see no error in weighing factors
established by other bankruptcy courts under similar circumstances. 48 While it is within
the bankruptcy court’s discretion whether to consider the egregiousness of an attorney’s
nondisclosure, we are not convinced egregiousness is the only factor a bankruptcy court
should consider when imposing sanctions.
The bankruptcy court applied the factors set forth in In re Howard Ave. Station,
L.L.C., which included among others, an attorney’s experience level; willfulness or
recklessness of noncompliance; the reason for noncompliance; cooperation to rectify
noncompliance; promptness in curing noncompliance; whether the noncompliance was a
mere technical violation; and the harm and mitigation of the harm. 49 While the
bankruptcy court may have chosen from a number of cases to borrow factors from, we
principle of justice that like cases should be decided alike.” (citing Henry J. Friendly,
Indiscretion About Discretion, 31 Emory L.J. 747, 758 (1982))).
47
Thorpe v. Ret. Plan of Pillsbury Co., 80 F.3d 439, 445 (10th Cir. 1996) (citing
Gordon v. U.S. Steel Corp., 724 F.2d 106, 108 (10th Cir. 1983)).
48
See Mendez-Castro v. Mukasey, 552 F.3d 975, 980 (9th Cir. 2009) (explaining
lower court uses correct legal standard where it expressly cites and applies case law
relevant to its decision).
49
In re Stewart, 583 B.R. 775, 783 (citing In re Howard Ave. Station, L.L.C., 568
B.R. 146, 153-54 (Bankr. M.D. Fla. 2017)).
15
see no error in applying relevant factors articulated by the bankruptcy court in In re
Howard Ave. Station, L.L.C..
Our decision should not be read to curtail a bankruptcy court’s discretion or favor
one particular set of factors over another. However, even if SEPH were correct in arguing
the bankruptcy court must consider an attorney’s egregiousness, application of the
Howard Ave. Station, L.L.C. factors in effect weighs whether an attorney’s conduct is
egregious or not. 50 In weighing these factors, the bankruptcy court observed that Mr.
Welch’s non-disclosures were not “an isolated event” and added to the “atmosphere of
distrust between the parties.” 51 Although the bankruptcy court failed to make express
findings as to Mr. Welch’s egregiousness, the court considered his conduct and the effect
it had on the bankruptcy case as a whole—which this Court believes to be the intent
behind the holding in Brown. 52 Accordingly, we find no abuse of discretion.
b. Rule 9011 Factors
Although the motion before it was not a Rule 9011 motion, the bankruptcy court
also considered the sanctions pursuant to Rule 9011. SEPH argues that the bankruptcy
court erred in applying factors considered for violations of Rule 9011 when determining a
sanction amount in this case. However, the bankruptcy court did not rely on Rule 9011 or
50
See Egregious, Black’s Law Dictionary (10th ed. 2014) (defining egregious as
“extremely or remarkably bad; flagrant”).
51
In re Stewart, 583 B.R. at 784.
52
371 B.R. 486, 499 (Bankr. N.D. Okla. 2007).
16
applicable precedent to support its authority to impose sanctions. 53 Again because of the
lack of authority directly on point, the bankruptcy court considered factors relevant to
sanctioning an attorney. 54
These factors are generally applicable to circumstances where attorneys are
sanctioned, such as sanctions for filing a bad-faith petition or for improperly representing
debtors in a bankruptcy proceeding. 55 The factors were relevant to the issue before the
bankruptcy court and align with the Supreme Court’s mandate that a court’s inherent
power to sanction “must be exercised with restraint and discretion.” 56 Finally, the
bankruptcy court considered the Rule 9011 factors in addition to other relevant factors
related to the nondisclosure, and the sanction imposed did not rest solely on Rule 9011.
53
See In re Lacy, 306 F. App’x 413, 418 (10th Cir. 2008) (explaining that the
bankruptcy court has the “power to sanction conduct abusive of the judicial process”
pursuant to § 105(a)).
54
See Priddy v. First Nat’l Bank of Arvada (In re Rossmiller), 148 B.R. 326, 329 (D.
Colo. 1992) (applying Rule 9011 standards to auctioneer who filed application for
compensation without first seeking employment pursuant to § 327).
55
See Udall v. Fed. Deposit Ins. Corp. (In re Nursery Land Dev., Inc.), 91 F.3d
1414, 1416 (10th Cir. 1996) (citing White v. Gen. Motors Corp., 908 F.2d 675, 684 (10th
Cir. 1990) when explaining sanctions for filing bad-faith petition should be the least
severe to deter or punish); Wieland v. Assaf (In re Briones-Coroy), 481 B.R. 685, 717
(Bankr. D. Colo. 2012) (applying factors from White., 908 F.2d at 684 when sanctioning
bankruptcy petition preparer for failing to disclose fees, giving legal advice, and
continued misconduct before the court).
56
Chambers v. NASCO, Inc., 501 U.S. 32, 44 (1991) (citing Roadway Express, Inc.
v. Piper, 447 U.S. 752, 764 (1980)); see also In re Sandpoint Cattle Co., 556 B.R. 408,
426-27 (Bankr. D. Neb. 2016) (holding that bankruptcy courts have discretion in
fashioning sanctions for failure to make § 329(a) and Rule 2016(b) disclosures but must
do so with appropriate restraint).
17
As such, we see no error in the bankruptcy court’s review of these factors, in addition to
others, in determining the amount of sanction imposed against Mr. Welch.
c. The Rule 9023 Motion to Alter or Amend
SEPH also argues the bankruptcy court erred in denying its Motion to Alter or
Amend. However, because we hold the bankruptcy court did not abuse its discretion in
ordering a sanction of $25,000, we also determine the bankruptcy court was within its
discretion to deny the Motion to Alter or Amend under Rule 9023. 57
V. Conclusion
The bankruptcy court did not abuse its discretion when it considered relevant
factors from other cases and courts in deciding to impose a sanction of less than the full
amount of fees received by an attorney who violated the disclosure requirements of
§ 329(a) and Rule 2016(b). Nor did the bankruptcy court abuse its discretion under Rule
9023 when it denied SEPH’s Motion to Alter or Amend. Accordingly, both the
Disgorgement Order and the order denying the Motion to Alter or Amend must be
affirmed.
57
Applying Fed. R. Civ. P. 59 to bankruptcy proceedings. See LTF Real Estate Co.
v. Expert S. Tulsa, LLC (In re Expert S. Tulsa, LLC), 522 B.R. 634 , 643 (10th Cir. BAP
2014) (citing Loughridge v. Chiles Power Supply Co., 431 F.3d 1268, 1275 (10th Cir.
2005)) (reviewing motion pursuant to Fed. R. Civ. P. 59(e) for abuse of discretion).
18