Robbins v. Barbour (In re Futreal), No. CHAPTER 7, 2016 BL ... · CHAPTER 7 CASE NO. 15-70886 CHAPTER 7 CASE NO. 15-70885 CHAPTER 7 CASE NO. 16-60736 CHAPTER 7 ... She thereafter

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UNITED STATES BANKRUPTCY COURT FOR THE WESTERN DISTRICT OF VIRGINIA

IN RE: AIMEE DAWN FUTREAL, Debtor. IN RE: MICAH JERIMEY REPASS and HOLLY LEIGH REPASS, Debtors.IN RE: ANGELA WOODWARD SPEAS, Debtor. IN RE: CLIFFORD ALLEN COLLIER and SHIRLEY DARLENECOLLIER, Debtors. IN RE: SHEILA MAE CASH, Debtor. IN RE: CINDY D. TIPTON, Debtor. JUDY A. ROBBINS,UNITED STATES TRUSTEE FOR REGION FOUR, Movant, v. BRENT BARBOUR, PRINCE LAW, LLC, PRINCE

LAW FIRM, LLC, PRINCE LAW, LLP, and JASON SEARNS. Respondents.

CHAPTER 7 CASE NO. 15-70886 CHAPTER 7 CASE NO. 15-70885 CHAPTER 7 CASE NO. 16-60736 CHAPTER 7CASE NO. 16-61448 CHAPTER 7 CASE NO. 16-61249 Misc. Proceeding No. 16-00701

November 15, 2016, Decided

For Aimee Dawn Futreal, Debtor (15-70886): Barry L. Proctor, Abingdon, VA.

For Micah Jerimey Repass, Debtor (15-70885): Barry L. Proctor, Abingdon, VA.

For Holly Leigh Repass, Joint Debtor (15-70885): Barry L. Proctor, Abingdon, VA.

For Angela Woodward Speas, Debtor (16-60736): Tracy Allen Giles, Giles & Lambert PC, Roanoke, VA.

For Clifford Allen Collier, Debtor (16-61448): Malissa Lambert Giles, Tracy Allen Giles, Giles & Lambert PC,ROANOKE, VA.

For Shirley Darlene Collier, fka Shirley Darlene Stoneman, fka Shirley Stoneman Bowers, fdba True Vine Church ofWorship, fka Shirley Darlene Bowers, fka Shirley Stoneman Collier, Joint Debtor (16-61448): Malissa Lambert Giles,Tracy Allen Giles, Giles & Lambert PC, ROANOKE, VA.

For Sheila Mae Cash, Debtor (16-61249): Janice Hansen, David E. Wright, Cox Law Group, PLLC, Lynchburg, VA.

For USTrustee, Plaintiff (16-00701): Margaret K Garber, LEAD ATTORNEY, U S Trustee's Office, Roanoke, VA;Benjamin Webb King, LEAD ATTORNEY, Office of the U.S. Trustee, Roanoke, VA.

Paul M. Black, UNITED STATES BANKRUPTCY JUDGE.

Paul M. Black

MOTION FOR REVIEW OF ATTORNEY'S FEES AND CIVIL PENALTIES AGAINST DEBT RELIEF AGENCY

Robbins v. Barbour (In re Futreal), No. CHAPTER 7, 2016 BL 382367 (Bankr. W.D. Va. Nov. 15, 2016), Court Opinion

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MEMORANDUM OPINIONThese matters came before the Court on multiple motions of the United States Trustee ("UST") seeking review ofattorneys' fees that current or prospective debtors in the Western District of Virginia paid to the self-described"national law firm," Prince Law LLC ("Prince Law")1 and the imposition of civil penalties against the firm. In addition,the UST has filed a motion to show cause why Prince Law and two individual attorneys should not be held in contemptof this Court's Order of May 5, 2016. As will be explained below, the Court will grant the UST's motions.

PROCEDURAL BACKGROUNDThe Court first addressed these matters in the Repass and Futreal cases at an evidentiary hearing held on February17, 2016. The Court issued an Order to Show Cause for Sanctions against Prince Law LLC; Brent Barbour, Esq.;Jason Edward Searns, Esq.; and Barry Proctor, Esq. (the "Show Cause Order") following the February hearing. TheCourt then conducted a hearing on the Show Cause Order on April 22, 2016 (the "Show Cause Hearing"). Despiteservice on each of the parties by the United States Marshal's Service, proof of which was filed with the Court on March25, 2016,2 Mr. Proctor was the only respondent who appeared at the Show Cause Hearing. Following the ShowCause Hearing, the Court issued a Memorandum Opinion and Order on May 5, 2016, imposing the followingsanctions:

Mr. Barbour misled his clients, failed to respond to the show cause order, and failed to appear in Court toexplain [*2] his actions. Mr. Barbour's privileges to practice before this Court shall be revoked, and Mr.Barbour shall be fined $2,500.00, to be paid within sixty (60) days of the Court's order to do so. After three(3) years Mr. Barbour may apply for readmission to the bar of this Court, provided he timely pays the$2,500.00 fine set forth above. There is no evidence any of the funds paid to Prince Law actually madetheir way to Mr. Barbour, so no disgorgement of fees will be ordered from him.

Jason Edward Searns and Prince Law, LLC, a District of Columbia limited liability company, arecollectively fined $2,500.00 for the unauthorized practice before this Court. The Court finds that theirsolicitation of and control over the Futreal and Repass cases in this jurisdiction, and their use of non-licensed legal personnel to prepare documents filed in this case, amounts to the unauthorized practice oflaw before this Court. Further, the Class B Agreements are found to be insufficient to satisfy the disclosureexception to Bankruptcy Rule 2016(b) , particularly in light of Mr. Searns's and Prince Law's failure tomeet any of the Commonwealth of Virginia's statutory requirements to practice law in this jurisdiction. Mr.Searns and Prince Law are further ordered to disgorge all attorneys' fees paid by the Futreals and theRepasses in this matter, less any fees paid to Mr. Proctor. All fines and fees to be disgorged shall be paidwithin sixty (60) days of the Court's order to do so. Mr. Searns and Prince Law are further prohibited fromfiling or participating in, either directly or indirectly, any cases in the United States Bankruptcy Court forthe Western District of Virginia now or in the future.

Mr. Proctor is directed to disgorge the sum of $175.00 to Ms. Futreal and $175.00 to the Repasses forfailing to make a proper Bankruptcy Rule 2016(b) disclosure in their cases. Such payment shall be madewithin sixty (60) days of the date of the Court's order to do so. The Court finds Mr. Proctor to have beenforthright and credible in his appearances before the Court, including his testimony under oath. No furtherrestrictions or sanctions will be placed upon Mr. Proctor given his cooperation in these cases and that theservices he provided proved valuable to his clients.

In re Futreal, 2016 Bankr. LEXIS 1939 , 2016 WL 2609644 , at *13-14 (Bankr. W.D. Va. May 5, 2016). Mr. Proctorfiled a letter with the Court on July 8, 2016 confirming that he had complied with the Order. No other party respondedto the Court's Order. Accordingly, the UST filed motions for civil contempt against Brent Barbour, Jason Searns, andPrince Law LLC in the Repass and Futreal matters.

In addition, the UST filed motions to review attorneys' fees in three other pending cases, Speas, Collier, and Cash.The UST also filed a miscellaneous proceeding seeking review of attorneys' fees paid by a would-be debtor who wasunable to file a bankruptcy petition in Tipton. On August 18, 2016, Jason Searns ("Searns") submitted a letter offering



https://www.bloomberglaw.com//document/X3D9I918?jcsearch=Fed. R. Bankr. P.2016(b)&summary=yes#jcite


his explanation as to why he did not attend the Show Cause Hearing, as well as explanations of his involvement inPrince Law and specifically in the Futreal [*3] and Repass matters. On October 4, 2016, Mr. Searns filed a responseto the UST motions for contempt as well as his own motion for reconsideration of the sanctions imposed against him.

All of the above matters were heard at an evidentiary hearing on October 20, 2016. Counsel for the UST appeared atthe hearing, as did Searns.3 Searns appeared pro se in his individual capacity only, not as counsel for Prince Law orDavid Prince.4 However, he did appear as a representative of Prince Law. The Court heard sworn testimony fromdebtors Angela W. Speas ("Speas"), Clifford and Darlene Collier (collectively the "Colliers"), and Holly Repass("Repass"). In addition, the Court heard testimony from the Clerk of the Court John W.L. Craig II, Attorney Darren T.Delafield ("Delafield")—a former Prince Law Class B Partner who regularly practices before this Court—and Searns.The Court admitted the exhibits filed by the UST without objection and allowed counsel for the UST to proffer evidenceon behalf of debtor Sheila Cash and would-be debtor Cindy Tipton without objection.

FINDINGS OF FACT5I. The Active Debtors in this Courta. Angela W. SpeasIn 2014, Speas was travelling for her job and ended up hospitalized. As a result, she incurred substantial medical bills.She thereafter began conducting internet research into the possibility of filing for bankruptcy protection to protect whatassets she could. In the course of this research, Speas came across Prince Law. She filled out an on-line informationrequest form, and was called by a Prince Law representative within several minutes. Speas entered into a feeagreement with Prince Law on May 18, 2015. UST Ex. 48. Over the course of a six-month payment plan, Speas paidPrince Law $1,893.00. During those six months, Speas testified she promptly provided all documentation Prince Lawrequested. After she made the final payment on December 9, 2015, Speas called Prince Law to check on the status ofher filing. She testified that she was given "the run around," and after a particularly unpleasant conversation with aPrince Law representative in January, 2016, given no progress was apparently made, she decided to terminate PrinceLaw's services and request a refund. At that time, Prince Law indicated that no refund would be issued. Speas thenretained the law firm Giles & Lambert, a local consumer bankruptcy law firm, to prepare and file her bankruptcypetition at an additional cost of $1,500.00. Her case was subsequently filed and a discharge successfully obtained.

Speas heard nothing further from the firm until March 2016, when she received a letter from Prince Law LLC datedMarch 11, 2016 stating that "due to financial difficulties beyond our control, Prince Law LLC, must cease operationseffective immediately." UST Ex. 49.6 A check for $368.00, which Prince Law described as a refund of costs paid to thefirm, was enclosed, and Prince Law advised ". . . [we] deeply regret not being able to complete your matter." Id. Speasthen received a letter dated July 26, 2016 from Kevin P. Tynan, an attorney representing Prince Law and David Princein connection with [*4] ethics matters pending before the Florida State Bar, apparently initiated by Speas. UST Ex. 50.This letter explained the circumstances under which Prince Law made the decision to cease operations, including itsfinancial difficulties, and the decision not to issue Speas a refund of the attorneys' fees she paid. Speas responded tothe Florida State Bar and Mr. Tynan in a letter refuting the explanations offered by Mr. Tynan. UST Ex. 51. She did notreceive a response from either Mr. Tynan or the Florida State Bar.

Speas states that she never received any benefit from Prince Law. She does not recall ever speaking with anyone atPrince Law who identified themselves as an attorney during her numerous conversations with the firm — despiteasking to speak to one numerous times and also leaving a voicemail with David L. Prince, the managing partner.Through the UST, Speas requests the Court to void her contract with Prince Law, to order Prince Law to refund theattorneys' fees she paid, and to award further damages in the amount of $1,500.00, the amount of additionalattorneys' fees she paid Giles & Lambert to file her bankruptcy petition.

b. Clifford A. Collier and Shirley D. CollierThe Colliers also discovered Prince Law by virtue of their own online research about filing a bankruptcy petition. Afterfilling out a request for information, Mr. Collier spoke with a Mr. Gonzalez at Prince Law, who said he would handlethe first stages of the intake process and arrange for them to speak with an attorney. The Colliers decided to retain




Prince Law to file their bankruptcy petition. Mr. Collier testified that on the day they returned the representationagreement, they received a call from a Virginia attorney named Murphy Pepper. Mr. Pepper did not give the Colliersan address, but they testified that they understood his offices to be in Roanoke, Virginia, where this Court is located.7The Colliers were not contacted by any Virginia attorney associated with Prince Law again.8

The Colliers paid the firm a total of $865.00 in March 2015. The Colliers understood that once this fee was paid, thefirm would proceed to prepare and file their bankruptcy petition. Thereafter, the balance of the attorneys' fee would bepaid in monthly installments. However, by January 2016, the petition remained unprepared and unfiled, and the firmasked for new documents to replace those the Colliers had sent earlier as they were becoming stale. On March 11,2016, Prince Law LLC sent the Colliers a letter like the one Speas received advising that the firm would ceaseoperations. UST Ex. 56. A check for $388.00 was enclosed with the letter, which Prince Law described as a refund ofcosts paid to the firm. Upon receipt of the letter, the Colliers demanded a full refund and return of their documents.While they did receive their documents in the mail, they never received a response to their request for a refund. TheColliers also proceeded to retain the firm Giles & Lambert to prepare and file their bankruptcy petition, at a cost of anadditional $1,500.00. Their case was successfully prosecuted [*5] to discharge as well.

Through the UST, the Colliers ask the Court to void their contract with Prince Law, to order Prince Law to refund theattorneys' fees they paid, and to award further damages in the amount of $1,500.00, the amount of additionalattorneys' fees they paid Giles & Lambert to file their bankruptcy petition.

c. Sheila M. CashSheila Mae Cash retained Prince Law in or around November 2015. Between November 2015 and February 2016,Cash made regular monthly payments on her retainer with Prince Law totaling $1,050.00. Her case was never filedby Prince Law.9 Cash has not received a refund of any of the attorneys' fees paid to Prince Law, and subsequentlyretained the Cox Law Group to file her bankruptcy petition at a cost of $1,200.00. Her Chapter 7 case wassubsequently filed and a discharge obtained. Through the UST, Cash asks the Court to void her contract with PrinceLaw, to order Prince Law to refund the attorneys' fees she paid, and to award further damages in the amount of$1,200.00, the amount of additional attorneys' fees she paid Cox Law Group to file her bankruptcy petition.

d. Micah J. Repass and Holly L. RepassThe facts of the Repass's case were thoroughly discussed in the May 5, 2016 Opinion of this Court and need not berepeated here. Ms. Repass appeared and testified at the present hearing that she was aware she was entitled to arefund from Prince Law pursuant to the Court's Opinion and Order. However, the sums directed by the Court to bepaid by Mr. Barbour, Searns, and Prince Law were not paid.

II. Prospective Debtor with Unfiled CaseCindy D. TiptonCindy Tipton retained Prince Law around May 15, 2015. She paid Prince Law a total of $1,718.00 from May 1, 2015until September 21, 2015.10 Prince Law did not file a bankruptcy petition on her behalf, and counsel for the USThas proffered that she has not been able to afford to pay another attorney to do so.11 Tipton has not received anyrefund from Prince Law, and the UST does not believe she was notified that the firm closed. Tipton is asking the Courtto void her contract with Prince Law, to order Prince Law to refund the attorneys' fees she paid, and to award furtherdamages.

The Clerk of the United States Bankruptcy Court for the Western District of Virginia testified that as of the October 20,2016 hearing, the fines imposed by the May 5, 2016 Order had not been paid to the Court. While the Court did receivea letter from Mr. Proctor stating that he had complied with the terms of the Order and refunded the fees required to hisclients, the Court had no knowledge of Mr. Barbour or Prince Law issuing the required refunds of attorneys' fees.

III. Prince Law and Its Virginia Member




a. Darren Delafield Attorney Darren Delafield offered illustrative testimony as to how Prince Law operated in the Western District ofVirginia. When Delafield first became involved with Prince Law, he understood that he would serve as local trialcounsel to assist with filing bankruptcy petitions in Roanoke. David Prince first contacted Delafield when the firm had aclient in this District, and Prince proposed that Mr. Delafield [*6] would enter into a partnership agreement withPrince Law for that case as well as for possible future cases in the District. Delafield agreed to enter into thispartnership agreement to increase his case load and increase his attorneys' fees revenue. He executed a "Class BAgreement" with Prince Law LLP on October 24, 2014.12 UST Ex. 68.

Delafield's compensation arrangement for a Prince Law Chapter 7 case would be $125.00 for meeting with the client,reviewing the petition and schedules, and getting the client's endorsement on the documents. He would be paid anadditional $75.00 to represent the client at the required meeting of creditors. Delafield understood that this would bethe extent of his role as local trial counsel for a Chapter 7 case. Prince Law would collect documents and fees fromthe client, process the documents, and send him "a professionally prepared Best Case file" that he could then importand print at his office. In a Chapter 13 case, Delafield would be compensated $450.00 at the time the client signed thepetition, and then the remainder of the attorneys' fees would be paid by the client to the Chapter 13 Trustee and bepaid to Delafield through the plan.

Delafield explicitly agreed only to accept cases that would be heard in the Roanoke division of the Western District, asthat is where his office is physically located. If Delafield agreed to accept a case outside of Roanoke, he and PrinceLaw had an arrangement that he would also be compensated for travel expenses. Delafield was paid by check and didnot know whether he received an IRS Form 1099, W-2, or 1065 (Schedule K-1) tax form from Prince Law. Heestimates he is owed roughly $5,000.00 in unpaid fees from Prince Law. Delafield maintains his own separate lawpractice, as well as his own professional liability insurance coverage. He does not believe he was ever covered underany Prince Law professional liability policy.

The first contact Delafield would receive from Prince Law regarding a potential client would be a request for a conflictscheck. If the client cleared the conflicts check, Delafield would then choose whether to accept the case, and hegenerally did so for cases that were in the Roanoke area. Delafield maintains that he responded by either accepting orrejecting each conflicts check request his office received from Prince Law. Once he agreed to take on a case, PrinceLaw would proceed to collect the documents and fees from the client, conduct initial interviews, and have the client fillout a questionnaire. Then Prince Law would prepare a "Best Case" file and send it to Delafield once a paralegaldeemed it ready to send. While the transfer of the file was not contingent upon the client having paid the attorneys'fees in full, Delafield was not permitted to file the petition by Prince Law until the client had done so.

Once Delafield received the "Best Case" file from Prince Law, he would review it and make additional notes, thenreturn it to the paralegal staff at Prince Law for revisions. These additional notes included Delafield selecting theappropriate [*7] exemptions for the client. Delafield prepared the homestead deeds himself, and these were generallyhand delivered by the clients to the appropriate Virginia circuit court for filing. The clients would pay the filing fee forthe homestead deeds themselves. In all but one case,13 Delafield met face to face with the clients and got wet-inksignatures on all documents.

Delafield described the progression of his relationship with Prince Law in four stages. The first stage began when thepartnership agreement was executed and it lasted until he tendered his written resignation from the firm on September30, 2015. The second stage consisted of completing the cases that were active at the time of his resignation. The thirdstage began when Delafield became aware that Prince Law would be closing and he tentatively agreed to take on fiveAbingdon, Virginia area cases on the condition that he could interview the clients first to determine they wereappropriate candidates for bankruptcy. If appropriate, those cases would be filed at the same time so that he couldconsolidate travel time. As these conditions were never met, Delafield never took on the Abingdon cases. The finalstage of the relationship was when Prince Law's closing became imminent. At that time, David Prince asked Delafieldto close out approximately eight clients who had not yet paid Prince Law in full by taking them on directly as clients ofDelafield's firm, with a credit of the attorneys' fees paid to Prince Law towards Delafield's fees.




Delafield made the decision to resign from Prince Law because he was unhappy with the poor quality of the workproduct prepared by the Prince Law paralegal staff. He indicated that all of his cases with Prince Law had difficulties.His expectation upon entering into the limited partnership agreement was that Prince Law would provide him with aprofessionally prepared "Best Case" file and related documents such that he could audit the work product prepared byPrince Law. Delafield often sent the files back to Prince Law for review by a senior paralegal. Despite his efforts toeducate the paralegal staff as to the quality of work product expected in a case to be filed in the Western District, thequality remained poor. Thus, on September 30, 2015, Delafield submitted his resignation letter to Prince Law.

Following his resignation, Delafield continued to represent Prince Law clients, including both those he had alreadyagreed to represent as well as additional clients on a case-by-case basis. As Prince Law was winding down, DavidPrince approached Delafield with an offer to sell him the firm's Western District practice. Delafield declined the offer.14

b. Jason Searns Jason Searns has been a Colorado licensed attorney for 24 years. He was also licensed in New York for a time.Searns is not licensed to practice law in Virginia or Florida. Searns last represented individual debtors in bankruptcycases in 1999, but indicates that he has kept up with developments in bankruptcy law through continuing legaleducation [*8] classes over the years. Searns testified that David Prince, the managing partner of Prince Law, hasnever to his knowledge actually practiced bankruptcy law.

Searns became involved in Prince Law in January 2014. Searns testified that David Prince reached out and askedwhether he could use a model for a "national law firm" Searns had developed for other law firms across the countryand apply it to Prince Law. Searns joined the firm as general counsel and obtained an ownership interest in the firm.Prince Law was at all times a consumer bankruptcy firm. The firm had a few bankruptcy attorneys working out of thehome office in Florida, as well as "local partners" in other states. Searns named four bankruptcy attorneys who workedout of the Florida office, none of which were admitted to practice in Virginia.

Searns's role as co-managing partner was three-fold. He was general counsel of the firm, he maintained relationshipswith the "national" (local) partners of the firm, and he spoke to clients from time to time when the situation required. Asgeneral counsel, he would work with local counsel on cases in which UST offices were challenging the "national lawfirm" business model. David Prince handled all business aspects of the firm and was the sole signatory on all of thefirm's accounts. Searns estimates he worked roughly 60 hours per week. He was not salaried and would periodicallyreceive a draw, assuming there were funds available. Searns put all of his remaining assets into the firm to keep itrunning in the summer of 2015, a total of about $50,000.00. Searns testified that David Prince likewise contributed allof his remaining assets in late 2015, roughly $50,000.00, and that Mr. Prince took out a loan of $500,000.00 from hisparents. Both Searns and Mr. Prince worked in the Florida office until March 11, 2016.

While Searns evidently only had limited involvement with the business aspects of the firm, he believes that the firm didits banking at Wells Fargo and Chase Bank. He did not manage or supervise the firm's client trust accounts, butbelieved they were also maintained at Wells Fargo or Chase. Searns also did not know where the trust accountledgers were located, but he believed David Prince would know.

Searns testified that there were a number of Virginia partners involved with Prince Law over the course of its two-yearexistence. The first was Murphy Pepper, located in Midlothian, who only handled cases in the Eastern District. Searnstestified it was at Mr. Pepper's suggestion that Prince Law LLP was formed as a d/b/a for Prince Law LLC, registeredwith the Virginia State Bar. Other Virginia partners included Edrie Pfeiffer in the Norfolk Division, the Burger Law Firmin the Eastern District, and for a short time, Brent Barbour in the Western District. To find local partners, Searns andPrince Law worked with a national law firm that provided counsel to an employee benefit program to develop the localpartner criteria for Prince Law. The local partners had to have a minimum of five years of experience in consumerbankruptcy work, no disciplinary [*9] history, and their own professional liability insurance coverage. Searns usuallypersonally researched the local partners by looking at their websites, checking with the relevant state bar, andinterviewing the prospective partner to get information about the attorney's practice.




Searns testified that at Murphy Pepper's suggestion, in August 2014, Prince Law formed the sister law firm, PrinceLaw LLP, in Virginia. Searns states that the entity was registered with the Virginia State Bar and the StateCorporation Commission. However, Searns had no explanation as to why the filings in the Western District weremade by attorneys disclosed to be affiliated with Prince Law LLC. He indicated that this must have been a mistakeas Virginia cases were to be filed by Prince Law LLP. Searns testified that as new Virginia partners were brought in,the relationship between the two entities was explained to them.15

Searns testified Prince Law began to unwind in January 2016. The firm stopped taking on new clients in late 2015,and the firm was working with all current clients to complete as many cases as could be completed. Searns told theCourt that Petty and Associates, a national law firm with a contract with the "employee benefit program,"16 becameinvolved with the unwinding to assure that clients were properly taken care of. Searns does not know when PrinceLaw stopped accepting payments from clients. After consulting Florida ethics counsel Kevin Tynan, the firm decidedto notify clients of the impending closure. On advice of ethics counsel, the firm decided it had to refund costs toclients, and that refunds of attorneys' fees would be handled on a case-by-case basis based upon work performed.As the firm was running out of money, an effort was made to take care of every client they could. Searns was notinvolved in the accounting of the firm and did not know at which point a client's fee would be moved from the trustaccount to the operating account. Searns testified, however, that Prince Law viewed fees as earned on receipt, andthe firm would not begin work on a case until fees were paid in full.17

Searns's testimony was that Mr. Prince is currently employed at a call center in Florida earning a minimal salary.Searns advised Mr. Prince was aware of the Court's Order that a representative from Prince Law appear at thehearing, and Mr. Prince understood that Searns would serve as that representative. Searns advised that the FloridaState Bar has an active proceeding against Mr. Prince, which Searns believes is still pending.

IV. Prince Law Discipline in Other Bankruptcy CourtsUST Exhibits 87 through 93 are copies of various orders and stipulations entered across the country against PrinceLaw, David Prince and/or Searns requiring disgorgement or imposing sanctions, or both. Prince Law was ordered todisgorge the sum of $1,600.00 in two separate cases by the United States Bankruptcy Court for the District ofConnecticut on October 9, 2015. UST Ex. 87, 89. Exhibit 88 is an order of the same court requiring disgorgement of$1,349.25. UST Ex. [*10] 88. The United States Bankruptcy Court for the Northern District of Ohio required the TheLaw Offices of Prince and Associates, LLC, another Prince Law entity, to disgorge the sum of $250.00 byStipulation and Agreement with the UST on April 22, 2014. UST Ex. 90. The United States Bankruptcy Court for theMiddle District of Louisiana required Prince Law to disgorge the sums of $1,287.50 and $1,337.50 by ordersentered January 22, 2016. UST Ex. 91, 92. Most recently, the United States Bankruptcy Court for the EasternDistrict of Virginia sanctioned Prince Law LLC, Prince Law Firm LLC, David Prince, and Searns on September 8,2016, by requiring them to disgorge the sums of $345.00 and $1,925.00. That court's orders also provide that thefour named respondents are "permanently enjoined from filing bankruptcy cases in the Eastern District of Virginia,both individually and through any entity owned or operated by them." UST Ex. 93, 94. UST Exhibit 95 consists ofcopies of checks signed by Searns on an account drawn on Searns & Associates, LLC paying the Eastern Districtof Virginia disgorgement obligations.18

CONCLUSIONS OF LAWThis Court has jurisdiction of this matter by virtue of the provisions of 28 U.S.C. §§ 1334(a) and 157(a) and thedelegation made to this Court by Order from the District Court on December 6, 1994, and Rule 3 of the Local Rules ofthe United States District Court for the Western District of Virginia . This Court further concludes that this matter is a"core" bankruptcy proceeding within the meaning of 28 U.S.C. § 157(b)(2) .

I. Motion to ReconsiderMr. Searns included in his response to the UST motions for contempt a motion to reconsider the sanctions imposed bythe Court's Order of May 5, 2016. As the Federal Rules do not provide for a motion for reconsideration, the Court willtreat the motion as a motion for a new trial made under Bankruptcy Rule 9023 , which incorporates Fed. R. Civ. P. 59 .



https://www.bloomberglaw.com//document/XEIMUU003?jcsearch=28 U.S.C. 1334(a)&summary=yes#jcite

https://www.bloomberglaw.com//document/XEIMCA003?jcsearch=28 U.S.C. 157(a)&summary=yes#jcite

https://www.bloomberglaw.com//document/X3LJ2VH8?jcsearch=W.D. Va. Gen. R. 3&summary=yes#jcite

https://www.bloomberglaw.com//document/X3LJ2VH8?jcsearch=W.D. Va. Gen. R. 3&summary=yes#jcite

https://www.bloomberglaw.com//document/XEIMCA003?jcsearch=28 U.S.C. %C2%A7 157(b)(2)&summary=yes#jcite

https://www.bloomberglaw.com//document/X3D9KRH8?jcsearch=Bankruptcy Rule 9023&summary=yes#jcite

https://www.bloomberglaw.com//document/X3E9SMH8?jcsearch=Fed. R. Civ. P. 59&summary=yes#jcite


Searns has presented no new issue of law or fact or any other valid or relevant grounds to warrant altering oramending the judgment under Rule 59(e) . Further, such a motion must be made within 14 days of the entry ofjudgment. Searns filed his motion on October 4, 2016. "Timeliness is jurisdictional." Collier on Bankruptcy, ¶9023.02,citing Browder v. Director, Illinois Dep't of Corrections, 434 U.S. 257 , 272-73 , 98 S.Ct. 556 , 565 , 54 L.Ed.2d 521(1978); In re De Jesus Saez, 721 F.2d 848 (1st Cir. 1983). The motion is therefore denied.

The UST asks the Court to review the facts of these cases within the scope of several provisions of the BankruptcyCode, including 11 U.S.C. §§ 329 and 526 , as well as 11 U.S.C. § 105 .

II. New Motions for Review of Attorney's FeesA. 11 U.S.C. § 329(b)The UST seeks review and disgorgement of attorneys' fees paid to Prince Law in the Speas, Collier, Cash, and Tiptonmatters. As to the reasonableness of attorney fees, 11 U.S.C. § 329(b) provides, "[i]f such compensation exceeds thereasonable value of any such services, the court may cancel any such agreement, or order the return on any suchpayment, to the extent excessive . . ." Further, 11 U.S.C. § 526(c)(2) provides that:

Any debt relief agency shall be liable to an assisted person in the amount of any fees or charges inconnection with providing bankruptcy assistance to such person that such debt relief agency has received,for actual damages, [*11] and for reasonable attorneys' fees and costs if such agency is found, afternotice and a hearing, to have—

(A) intentionally or negligently failed to comply with any provision of this section, section 527 , or section528 with respect to a case or proceeding under this title for such assisted person;

(B) provided bankruptcy assistance to an assisted person in a case or proceeding under this title that isdismissed or converted to a case under another chapter of this title because of such agency's intentionalor negligent failure to file any required document including those specified in section 521 ; or

(C) intentionally or negligently disregarded the material requirements of this title or the Federal Rules ofBankruptcy Procedure applicable to such agency.

The Court finds based upon the record before it that Prince Law is a debt relief agency as defined in 11 U.S.C. §101(12A) . Likewise, upon review of the schedules and other information provided in connection with the Speas,Collier, Cash and Tipton cases the Court finds that each of these debtors are "assisted persons" as defined in 11U.S.C. § 101(3) .19 As such, Prince Law was bound to comply with the provisions of Sections 526 , 527 , and 528 ineach of these cases. Yet, in each of these cases Prince Law failed to perform services to these assisted persons thatit informed them it would provide. 11. U.S.C. § 526(a)(1) . Prince Law failed to file petitions in any of these cases.The bankruptcy counsel ultimately obtained in the Speas, Collier, Cash and Tipton matters did not receive any workproduct from Prince Law. No evidence was presented to suggest that Prince Law even began to prepare therequisite petition, schedules, and disclosures necessary to file these bankruptcy cases. Moreover, other thanreturning costs paid by two of these debtors, Prince Law returned no part of the fees paid for those services. WhileSearns testified that Prince Law viewed debtors' attorneys' fees as "earned on receipt," this position is incompatiblewith Virginia professional conduct standards.20 As no petitions were ever filed in the Speas, Collier, Cash or Tiptoncases, and there is no evidence the fees were earned, the services rendered by Prince Law in each of those matterscannot be said to have any reasonable value and the fees collected by Prince Law are excessive in their entirety. 11U.S.C. § 329(b) . The Court will direct that those fees be returned.

B. 11 U.S.C. § 526Section 526 of the Bankruptcy Code provides an alternate ground for disgorgement of attorneys' fees. If the debt reliefagency fails to perform any service that the agency informed an assisted person it would provide, the Court has theauthority to declare void the contract between that agency and the assisted person. 11 U.S.C. §§ 526(a)(1) , (c)(1) .



https://www.bloomberglaw.com//document/X3E9SMH8?jcsearch=Fed. R. Civ. P. 59(e)&summary=yes#jcite

https://www.bloomberglaw.com//document/X5C9EU?jcsearch=434 U.S. 257&summary=yes#jcite

https://www.bloomberglaw.com/ms//document/X5C9EU?jcsearch=272-73&summary=yes#jcite

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https://www.bloomberglaw.com//document/X5C9EU?jcsearch=54 L.Ed.2d 521&summary=yes#jcite

https://www.bloomberglaw.com//document/XAC65Q?jcsearch=721 F.2d 848&summary=yes#jcite

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For the reasons stated previously in Part II(A), the Court so finds in each of the Speas, Collier, Cash and Tiptonmatters. As such, he Court declares void Speas's contract with Prince Law and will direct Prince Law to disgorge$1,525.00 in attorneys' fees. In Collier, the Court declares void the debtors' contract with Prince Law and will directPrince Law to disgorge $567.00 in attorneys' fees. In Cash, [*12] the Court voids the debtor's contract with Prince Lawand orders Prince Law to disgorge $1,050.00 in attorneys' fees. Finally, in Tipton, the Court declares void the debtor'scontract with Prince Law and will direct Prince Law to disgorge $1,718.00 in attorneys' fees. Prince Law is directed todisgorge these attorneys' fees within sixty (60) days of the date of the Court's Order to do so. The funds shall beprovided directly to the debtors in each of those cases, with evidence of timely payment provided to the office of theUST in Roanoke, Virginia. Prince Law and Searns are also directed to immediately disgorge the fees paid to them byFutreal and Repass, less any funds paid to Barry Proctor, as directed by this Court's May 5, 2016 MemorandumOpinion and Order. This payment shall also be made to those debtors and certified to the UST as above.

The UST has also moved this Court to impose civil penalties pursuant to Section 526(c)(5) . 11 U.S.C. § 526(c)(5) .That section permits the Court, on its own motion or on motion of the UST, to enjoin the violation of such section orimpose civil penalties on debt relief agencies that have "engaged in a clear and consistent pattern or practice ofviolating this section." Id . Prince Law has clearly demonstrated a clear and consistent pattern or practice of violatingSection 526(a)(1) , as demonstrated by the numerous cases before the Court. Accordingly, the Court will impose thefollowing civil penalties: $1,500.00 in the Speas case as measured by the sum she paid to Giles & Lambert toultimately file her bankruptcy petition; $1,500.00 in the Collier case as measured by the sum they paid Giles &Lambert to file their bankruptcy petition; $1,200.00 in the Cash case as measured by the sum she paid Cox LawGroup to file her bankruptcy petition; and finally, $500.00 in the Tipton case. Prince Law is ordered to pay these civilpenalties to the office of the UST in Roanoke, Virginia within sixty (60) days of the Court's order to do so.

III. Motion for Civil ContemptThe UST has moved for civil contempt in the Futreal and Repass cases because of Prince Law, Searns, andBarbour's failure to comply with the Court's Order of May 5, 2016. The Court has authority to hold a party in civilcontempt under Section 105(a) of the Bankruptcy Code. 11 U.S.C. §105(a) . A movant must establish civil contemptby clear and convincing evidence. In re Rountree, 448 B.R. 389 , 417-18 (E.D. Va. 2011). In cases where a litigant'sactions are egregious, vindictive, or malevolent, punitive damages are appropriate. In re Cherry, 247 B.R. 176 ,186-87 , 189-90 (E.D. Va. 2000). As stated in the May 5th Opinion, the Court has inherent power "to control admissionto its bar and discipline attorneys who appear before it," and this "includes power to suspend or disbar attorneys formpracticing before the Court." In re Futreal, 2016 Bankr. LEXIS 1939 , 2016 WL 2609644 , at *9 (Bankr. W.D. Va. May5, 2016) (internal quotations omitted). The UST has asked the Court to treble the sanctions imposed by the previousOrder as a penalty for the parties' civil contempt. "Civil contempt sanctions 'may be imposed in an ordinary civilproceeding upon notice and an opportunity to be heard' without a jury trial or proof beyond a reasonable doubt." In reGregg, 428 B.R. 345 , 348 (Bank. [*13] D. S.C. 2009) (citing Int'l Union, United Mine Workers of Am. v. Bagwell, 512U.S. 821 , 827 , 114 S. Ct. 2552 , 129 L. Ed. 2d 642 (1994)). In addition, in closing, the UST asks the Court to enteran injunction against Prince Law LLC, Prince Law LLP, Searns, David Prince, and any other associated law firmbarring them permanently from practicing in both the Western and Eastern Districts of Virginia.21 However, the UST'sAmended Motion did not name David Prince as a party individually, and he has neither been served nor noticed toappear in this matter.

The Clerk of the Court testified that Prince Law, Searns, and Barbour have not paid the sanctions imposed by theCourt's prior Order. Searns testified that both he and David Prince had knowledge of the Court's Order. In addition, theCourt's Order was mailed to Barbour by first class mail. Accordingly, the Court holds Prince Law, Searns, and Barbourin civil contempt for their failure to comply with the Court's Order.

The Court's prior Order imposed a fine of $2,500.00 on Barbour. The Court now imposes an additional fine of$2,500.00 on Barbour because of his contempt. In addition, since Barbour did not timely pay the initial sanctionagainst him as that Order cautioned, he shall be permanently disbarred from practicing before this Court. The Court'sprior Order imposed a fine of $2,500.00 on Prince Law LLC and Searns collectively. The Court now imposes anadditional fine of $2,500.00 on Prince Law LLC and Searns collectively because of their contempt. Such fines shall be




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paid within sixty (60) days of the date of the Court's order to do so to the Clerk of the United States Bankruptcy Courtfor the Western District of Virginia.

Consistent with the rulings of the United States Bankruptcy Court for the Eastern District of Virginia, the Court willalso reaffirm the prohibition contained in its prior Order to unequivocally state that Prince Law LLC, Searns, and anyother related entities, now specifically including Prince Law, LLP, are permanently enjoined from practicing beforethe United States Bankruptcy Court for the Western District of Virginia directly or indirectly in any capacity, includingthrough any company owned or operated by them. The Court reserves the right to explore additional monetary andnon-monetary sanctions if the directives of this Court are not timely satisfied.22

The Bankruptcy Code provides this Court with several mechanisms to deal with issues raised here, and it may be thatthe United States Bankruptcy Courts must police such matters for the near future. If nothing else, these cases reflectthe Pandora's Box of ethical issues opened by multi-jurisdictional practice thought the "national law firm" businessmodel, where law firms in distant locations around the country advertise on the internet, and then seek to retain a localattorney to become a local "member"—albeit one with limited, if any, rights other than in the cases they actually take.These local counsel retentions are often nothing more than disguised independent contractor arrangements designedto increase revenue streams by attempting to evade the [*14] fee splitting prohibitions in the Bankruptcy Code andBankruptcy Rules. These cases raise several questions as to who, if anybody, has oversight authority over thesearrangements: Is it the state disciplinary authority where the law firm retains local counsel, or is it the authoritywhere the law firm is physically located? If the former, when the ultimate sanction is to take a license, what powerdoes that bar have to discipline attorneys who have no license to begin with? If the latter, does the bar have powerto sanction local attorneys for actions that may have occurred in cases conducted in another state? Who hasdisciplinary and ethical authority over the client's fees and the attorney's trust account when the fees are paid out ofstate and the local attorney doing the work has no oversight or direct access to them?23 Do disciplinary authorities inmultiple states have the ability to coordinate their efforts?

Unfortunately, this Court is not the only court that has had to deal with this practice model in recent months. See, e.g., In re Banner, 2016 Bankr. LEXIS 2214 , 2016 WL 3251886 , at *9 (Bankr. W.D.N.C. June 2, 2016) (sanctioning lawfirm and individual attorneys where "business plan [was designed] with the sole purpose of making money while takingno responsibility for the firm's clients and attempting to isolate the firm from any liability related to client representationby associating a local 'partner.'"). As Judge Beyer stated in Banner, "the actions (or lack thereof) . . . in this case areoffensive to the court and to the many attorneys who uphold the high standards demanded by the legal profession."Id. Heeding Banner's caution, attorneys appearing before this Court need look no further than the present cases toremind themselves they should be most cautious in associating with law firms looking for local partners or membersthat are not licensed to practice law or do business in this state.

A separate Order shall issue.

Decided this 15th day of November, 2016.

/s/ Paul M. Black

UNITED STATES BANKRUPTCY JUDGE

fn 1

Prince Law is a legal chameleon, controlled by Jason Edward Searns and David L. Prince, members of theColorado and Florida bars, respectively. In the present cases, Prince Law has surfaced as The Law Offices ofPrince and Associates, LLC; Prince Law Firm LLC; Prince Law LLC and Prince Law LLP. The latter two entities area District of Columbia limited liability company and a Virginia limited liability partnership. The office address of eachentity in these cases is 7800 Peters Road, Suite C-200, Plantation, Florida 33324. "Prince Law" has an ever-




changing legal structure which has confounded those trying to police its actions through the court system, andwhich has confused at least one Bar disciplinary authority as well.

fn 2

Mr. Searns testified that he did not recall being served, but he did not deny he was served. The Court finds serviceon Mr. Searns was proper and effective.

fn 3

Searns represented to the Court he did not have the financial wherewithal to travel from Colorado, where he nowlives, to Virginia for the contempt hearing. With the assistance of the United States Bankruptcy Court for the Districtof Colorado, gratefully acknowledged by this Court, Searns was able to testify live by video from its courtroom.

fn 4

Searns testified that he and David Prince agreed that Searns would appear as a representative of Prince Law tocomply with the Court's Order. See infra.

fn 5

Where appropriate, findings of fact shall be construed as conclusions of law and conclusions of law shall beconstrued as findings of fact. See Fed. R. Bankr. P. 7052 ; 9014(c) .

fn 6

The "Bankruptcy Fee Agreement" is with "Prince Law, LLP, a National Law Firm." However, the signature line forPrince Law, which bears no actual signature, is listed as "Prince Law, LLC." The March 11, 2016 letter refers toPrince Law LLC twice and makes no reference to Prince Law LLP at all. As indicated above, Prince Law LLC is aDistrict of Columbia limited liability company and Prince Law LLP is purportedly a Virginia limited liabilitypartnership.

fn 7

Murphy Pepper is not an attorney located in the Western District of Virginia. Rather, it appears that Mr. Pepper'soffice is located in the Eastern District of Virginia in Midlothian, a suburb of Richmond, Virginia.

fn 8

The client intake letter again references Prince Law LLP.

fn 9

This Prince Law appears to be "Prince Law, LLC, a National Law Firm," based on the firm's request for documents.UST Ex. 59. Cash made her payments to Prince Law LLC.

fn 10

The payment confirmations that Tipton sent were to Prince Law LLC. UST Ex. 64.

fn 11



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Delafield testified that in February 2016 he offered to represent Ms. Tipton for free as long as she would pay thefiling fee, and she declined to retain him. After that point, due to Ms. Tipton's lack of willingness to meet Delafield inperson and her failure to return a questionnaire to his office, Delafield decided that he would not take Ms. Tipton'scase. She returned to Delafield around March 2016 to ask him to represent her, but he had decided against doingso by that point.

fn 12

Delafield's limited partnership agreement was with Prince Law LLP. However, Delafield testified that he was underthe impression that he was working for Prince Law LLC, as his checks were issued by Prince Law LLC and he heldhimself out as a partner of Prince Law LLC.

fn 13

Delafield testified that on one occasion he was representing a husband and wife. While he met with the husband inperson, he could not meet with the wife. Instead, Delafield and the wife conducted a video meeting over Skype inwhich Delafield walked though her bankruptcy documents and he saw her sign the documents.

fn 14

Based up his testimony, the Court found Delafield to be both candid and truthful, mindful of both his professionalresponsibilities and his client's best interests.

fn 15

This strained explanation as to the relationship between Prince Law LLP and Prince Law LLC, one being the d/b/aof the other despite the fact they are two separate entities formed in different jurisdictions, appears to havemystified the Virginia State Bar disciplinary counsel. The Court directed that its May 5, 2016 Opinion and Order besent to the Virginia State Bar, among other disciplinary authorities. In that Opinion and Order, Prince Law LLC, aDistrict of Columbia limited liability company, was sanctioned. In fact, the Virginia State Bar Custodian ofMembership Records, Gale M. Cartwright, submitted an affidavit in Futreal that provided "[a]fter a diligent search ofthe Records no record or entry of such record was found to exist to show that Prince Law Firm, LLC nor PrinceLaw, LLC is or was ever registered with the Virginia State Bar as a professional entity." UST EX 32. Prince LawLLP, a Virginia limited liability company, was never involved in the Futreal and Repass cases, and was unheard ofby this Court until the most recent set of pleadings was filed and hearings were held on October 20, 2016.Nevertheless, on August 22, 2016, Virginia State Bar's Senior Assistant Bar Counsel wrote Searns, in part, asfollows:

. . . you explained that you believe a key premise of the Memorandum Opinion—that Prince Law wasnot registered with the SCC—is incorrect.

Instead, you stated that Prince Law LLP was registered with the SCC in August 2014 as an in-stateentity. You also provided a copy of a May 4, 2016 Registered Limited Liability Partnership AnnualContinuation Report and Fee sent to Prince Law, LLP at a Midlothian, Virginia address by the SCC. . . .I was able to confirm, through the SCC, that, consistent with your representation, Prince Law LLP wasregistered with the SCC as a limited liability partnership in August 2014 and remains on active status. .. .

The Virginia State Bar is required to prove ethical misconduct by clear and convincing evidence. Basedon the fact that Prince Law LLP is registered with the SCC; the fact that attorneys licensed to practicelaw in the Commonwealth of Virginia were involved in the Futreal and Repass matters, and the factthat, as a result of the services provided by Mr. Proctor and the sanctions imposed by the Bankruptcy




Court, the harm to Ms. Futreal and the Repass' appears to be have been remedied, I have dismissedthis matter.

See Response to Motion to Contempt filed by Jason Searns, Futreal Docket Entry No. 43 (emphasis added).Neither the pleadings nor the evidence, including testimony or exhibits, reflects that Prince Law LLP was involvedin any way in the Futreal and Repass matters, nor was there any evidence that Brent Barbour or Barry Proctorwere ever affiliated with Prince Law LLP.

fn 16

This was never adequately explained at trial.

fn 17

Searns did testify that Prince Law would take creditor phone calls and accumulate documents, but no work on thefiling documents would begin until the client paid in full.

fn 18

Searns testified Searns & Associates, LLC was an entity he formed to do "contract work," presumably legal innature. Despite Searns not being a member of the Florida bar, the address of Searns & Associates, LLC is thesame address as Prince Law in Plantation, Florida.

fn 19

The Bankruptcy Code defines an assisted person as "any person whose debts consist primarily of consumer debtsand the value of whose nonexempt property is less than $186,825." 11 U.S.C. § 101(3) . As Tipton did not filebankruptcy, she had no schedules to produce. However, UST Ex. 63 is a personal financial statement prepared forTipton in connection with her pre-filing credit counseling, and it listed nonexempt assets well below the threshold.The Court finds this sufficiently persuasive to demonstrate her status as an "assisted person."

fn 20

"Although ethics opinions are not binding on state or federal courts, they do provide guidance in resolving mattersof professional responsibility." In re Pinkins, 213 B.R. 818 , 822 n.2 (Bankr. E.D. Mich. 1997). In that light, theVirginia State Bar has addressed flat fees in Chapter 7 cases, and opined as follows:

[treating advance fees as "earned when paid"] is as ethically impermissible in connection with aChapter 7 bankruptcy case as it would be in any other legal matter. Such money handling by thelawyer violated Rule 1.15(a)(1) and the precepts of LEO 1606. No client funds should be applied to thelawyer's credit, when tendered, for legal services which have yet to be performed. In the event thelawyer becomes disabled, dies, is discharged by the client, terminates representation of the client, orhas his license to practice suspended or revoked, any unearned legal fees, which remain the propertyof the client, must be in a trust account, and thus on hand for return to the client.

Va. State Bar, Legal Ethics Op. 1883, at p.4 (2015). The Ethics Opinion goes on to conclude that "[a]n attorneymay ethically disburse from his trust account, to his own credit, the entirety of the advanced fixed fees tendered bythe client and remaining in his attorney trust account immediately before he files the client's Chapter 7 bankruptcypetition." Id. at pp. 6-7.

fn 21




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The UST cites as authority for this injunction two consent orders entered by Judge Phillips in the Eastern District inactions against Rachael Hammer, The Burger Law Firm LLC, Prince Law LLC, and Prince Law Firm LLC. Theseorders each state: "The Defendants are hereby PERMANENTLY ENJOINED from filing bankruptcy cases in theEastern District of Virginia, both individually and through any company owned or operated by them." The Ordersdefine "Defendants" as "David Prince, Jason Searns, Prince Law, LLC and Prince Law Firm, LLC." UST Ex. 93, 94.

fn 22

The Court does not wish to increase the sanctions in this case, and has sought less restrictive options to fairlycompensate those harmed by the egregious conduct in these cases and to deter future misdeeds by therespondents. However, the Court takes the misconduct in these cases seriously and expects its orders to becomplied with in a timely manner. The Court has other options available, which it hopes are unnecessary. Withoutlimitation, and mindful of the Eastern District of Virginia's Orders, this Court reserves the right to impose a moreexpansive injunction against the various respondents in these cases. In addition, a bankruptcy court may validlyexercise its civil contempt power to order coercive incarceration if certain conditions, including the ability to purgethe contempt by compliance, are satisfied. See In Re Tate, 521 B.R. 427 , 441 (Bank. S.D. Ga. 2014).

fn 23

This question is highlighted by Searns's position that the attorney's fees paid by clients in Virginia and to berepresented by an attorney in Virginia, but paid to the law firm's business office in Florida, were earned on receipt.



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BNA's Bankruptcy Law Reporter™

May 26, 2016

U.S. Trustees

Abusive Ch. 7 Trustee's One-Year Suspension UpheldBNA Snapshot

Pereira v. DOJ, 2016 BL 150925, S.D.N.Y., No. 1:16-cv-02599-NRB, 5/11/16

Holding: Trustee's abusive demeanor at meeting of creditors was adequate justification for his one year suspension from Chapter 7trustee panel.

More Details: The trustee was sanctioned for not providing access to a translator, for using demeaning and abusive language, andgenerally for not acting professionally and in accordance with the U.S. Trustee's guidelines for its panel trustees.

By Daniel Gill

May 23 — A veteran Chapter 7 panel trustee's one year suspension was upheld by the U.S.District Court for the Southern District of New York ( Pereira v. DOJ, 2016 BL 150925, S.D.N.Y.,No. 1:16-cv-02599-NRB, 5/11/16).

Judge Naomi Reice Buchwald affirmed the decision of the Director of the United States TrusteeProgram to suspend for one year John S. Pereira so that Pereira is ineligible to receive any newcases during the pendency of the suspension.

In her May 11 memorandum and order, the court found that Pereira's behavior and abusive comments during three meetingsof creditors supported the suspension.

Pereira was allowed to continue to serve as trustee on his pending case-load.

Abusive Behavior

Pereira is the senior standing Chapter 7 panel trustee in both the Southern and Eastern Districts of New York, the court said.

In Chapter 7, a debtor's nonexempt assets are liquidated by a trustee, and the property of the estate is distributed to creditors.Those trustees are selected from a panel of professionals, often but not always attorneys, and are supervised by the Office ofthe United States Trustee, a branch of the Dept. of Justice.

On May 12, 2014, and on July 16, 2014, the Office of United States Trustee for Region 2 received letters complaining aboutthe trustee's behavior at recently conducted 341(a) meetings.

A “341(a) meeting” refers to what is sometimes called a first meeting of creditors, prescribed by Section 341(a) of the U.S.Bankruptcy Code. Chapter 7 debtors appear at a public meeting room to be questioned by the trustee appointed to his or hercase and by creditors or other interested parties should any choose to appear. The 341(a) meeting is not a court hearing; thetrustee presides over it.

The letters complained of the trustee's behavior in three separate meetings. The U.S. Trustee's office for Region 2 consideredthe letters and the transcripts of the 341(a) meetings (all such meetings are recorded) and determined that Pereira should besuspended from receiving new case assignments for a one year period. The office said that Pereira's actions in the subjectmeetings of creditors “were overly aggressive and arguably biased” based on one of the debtor's proficiency in English, andthat his conduct was “violative of Program policy, and so egregious that they warrant suspension.”

The office also sanctioned what it called Pereira's “aggressive and unprofessional behavior.”

Abusive Ch. 7 Trustee's One-Year Suspension Upheld, Bankruptcy Law Reporter (BNA)


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mailto:[email protected]

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Suspension Affirmed by the Director

In accordance with applicable administrative procedures, Pereira appealed the Region 2 OUST decision to the nationaldirector of the of the U.S. Trustee Program, Clifford J. White. The director concluded that the record supported the regionaloffice's suspension and its determination that Pereira was “unprofessional, discourteous, overly aggressive and improper.”

The trustee challenged the director's decision by filing a complaint in the district court.

Record Supported Suspension

The district court found that the record supported the director's affirmance of the OUST Region 2's suspension of the trustee.

The court's legal analysis focused on 28 U.S.C. § 586(d)(2), which it said provided an adequate remedy in court for theplaintiff trustee, thereby eliminating the need to consider the trustee's argument that the suspension violated theAdministrative Procedure Act (5 U.S.C. Section 701).

The court said that to overturn the director's decision, it would have to determine whether his decision was “unreasonable andwithout cause.”

The court found that the trustee's behavior in the three 341(a) meetings supported the suspension. Among other things, thetrustee did not allow one debtor prompt access to a telephonic language interpreter service, despite the debtor's repeatedrequests for an interpreter and the ready availability of the service. Instead, the trustee made a number of abusive commentschallenging the debtor's lack of English proficiency despite becoming a naturalized citizen 10 years earlier.

The court disagreed with the trustee's assertion that the director did not properly consider the trustee's long tenure andservice, suggesting that the trustee's service and “good behavior” after the original suspension notice was handed down “nodoubt factored into the sanction imposed.” The court suggested that perhaps without those mitigating factors a more severepenalty would be indicated.

Wendy Helene Schwartz of Binder & Schwartz LLP, New York, represented trustee John S. Pereira. Dominika NataliaTarczynska of the U.S. Attorney's Office, New York, represented the government.

To contact the reporter on this story: Daniel Gill in Washington at [email protected]

To contact the editor responsible for this story: Jay Horowitz at [email protected]

For More Information

For full text: http://www.bloomberglaw.com/public/document/Pereira_v_DOJ_No_16_Civ_2599_NRB_2016_BL_150925_SDNY_May_11_2016_

Abusive Ch. 7 Trustee's One-Year Suspension Upheld, Bankruptcy Law Reporter (BNA)


https://www.bloomberglaw.com/ms/documentdocument/1?citation=28%20usc%20586&summary=yes#jcite

https://www.bloomberglaw.com/ms/documentdocument/1?citation=5%20usc%20701&summary=yes#jcite


mailto:%[email protected]

http://www.bloomberglaw.com/ms/public/document/Pereira_v_DOJ_No_16_Civ_2599_NRB_2016_BL_150925_SDNY_May_11_2016_

http://www.bloomberglaw.com/ms/public/document/Pereira_v_DOJ_No_16_Civ_2599_NRB_2016_BL_150925_SDNY_May_11_2016_


Majority Opinion >

Pagination* BL

UNITED STATES BANKRUPTCY COURT FOR THE MIDDLE DISTRICT OF PENNSYLVANIA

IN RE: JENNIFER AMI HOFFMAN, ESQ. ANDREW A. VARA, Acting United States Trustee, Movant v. JENNIFERAMI HOFFMAN, ESQ., Respondent

MISC. NO.: 1:16-mp-00001MDF

May 5, 2016, Decided

For United States Trustee, Plaintiff: Gregory Benjamin Schiller, LEAD ATTORNEY, US Department of Justice, Officeof the US Trustee, Harrisburg, PA.

Jennifer A Hoffman, Defendant, Pro se, Harrisburg, PA.

Mary D France, Chief Bankruptcy Judge.

Mary D France

Before me is the Complaint of Andrew A. Vara, Acting United States Trustee (the "UST"), requesting that an order beentered suspending Jennifer Ami Hoffman, Esq. ("Respondent") from the practice of law before this Court andimposing other relief.1

I. Procedural HistoryOn February 22, 2016, the UST filed the Complaint in this miscellaneous proceeding and, thereafter, the Court issuedan order setting a March 8, 2016 answer date and scheduling a hearing for March 22, 2016. The Complaint and Orderwere served on Respondent at her last known mailing address in Harrisburg, Pennsylvania. At the hearing on March22, Respondent did not appear. Dorothy Mott, Esq., appeared at the hearing to provide information regardingRespondent, but did not enter an appearance on her behalf. Ms. Mott requested that I continue the matter so that shecould consult with Respondent and perhaps enter her appearance on Respondent's behalf. I granted the request, anda continued hearing was scheduled for April 18, 2016.

Respondent neither filed an answer to the Complaint nor retained counsel to represent her interests. On April 18,2016, the UST requested an entry of default judgment against Respondent asserting that she had been properlyserved and had failed to file an answer or otherwise respond to the Complaint.

II. Factual Findings 2Respondent has been admitted to practice before the Bankruptcy Court for the Middle District of Pennsylvania since2003. In November 2015, bankruptcy debtors Sean R. Keefer and Karen L Keefer (the "Keefers") alleged that

Hoffman v. Hoffman, No. 1:16-mp-00001MDF, 2016 BL 158632 (Bankr. M.D. Pa. May 05, 2016), Court Opinion



Respondent failed to inform them of a continued creditors' meeting scheduled in their case. The Keefers originallyfiled a Chapter 13 case, but when they were unable to make the plan payments, they elected to convert their case toChapter 7. The creditors' meeting in the converted case was adjourned by the Chapter 7 trustee, but the Keeferswere unaware that the meeting had been rescheduled. Understandably, they failed to appear. The Chapter 7 trusteethereafter moved to dismiss their case.3 Unable to make contact with Respondent, the Keefers filed a letter opposingthe motion to dismiss and describing their efforts to contact their attorney. The Chapter 7 trustee concurred in themotion, and when the Keefers appeared at the continued creditors' meeting on December 18, 2015, the meeting wasconcluded.

After becoming aware of Respondent's failure to communicate with her clients, the UST sent a letter to Respondentdemanding that on or before November 30, 2015 she provide an explanation for why she had failed to communicatewith her clients. Respondent [*2] did not respond to the letter. Subsequently, the UST determined that Respondent'slicense to practice law was subject to administrative suspension. After this discovery, the UST again wroteRespondent requesting that she contact the UST to discuss the status of her open bankruptcy cases, her intentionsregarding the representation of her clients in the future, and any personal difficulties that were hindering her ability torepresent her clients in their pending cases. At the time the UST contacted Respondent she was counsel of record inthirty-one open cases in the district, most of which were Chapter 13 cases. Of the thirty-one cases, twelve were filed in2010, ten were filed in 2011, eight were filed in 2012 and one was filed in 2013.

In the meantime, other members of the bar agreed to assist Respondent's clients in completing their cases. Ms. Motthas entered her appearance in nineteen of the cases, Michael Csonka, Esq. has entered his appearance in threecases, John Frey, Esq. has entered his appearance in one case and Aaron Neuharth, Esq. has entered hisappearance in three cases. In four other cases, the debtors were able to complete the necessary requirements toobtain a discharge without representation. Only one case is now pending in which debtors have not obtained counseland have not yet received a discharge.4

At the hearing on March 8, Ms. Mott informed the Court that while she was not formally representing Respondent, shewas aware that Respondent had experienced a series of crises in her personal life and was simply unable to cope withmaintaining her practice. While this undoubtedly is a difficult time for Respondent, it does not excuse her from simplywalking away from her clients. She neither informed her clients that she no longer intended to practice law, nor did sherefer her clients to new counsel.

Independently of the UST's Complaint, on February 8, 2016, I issued an order directing Respondent to appear onMarch 8, 2016 and show cause why she should not be required to disgorge attorneys' fees she had received in thecase of Eric K. Keefer and Carrie I. Keefer ("Debtors").5 Debtors' case was closed after the Chapter 13 trustee filed afinal report. Debtors were not granted a discharge, however, because they had failed to file several requiredcertifications regarding financial management and domestic support obligations. Unable to contact Respondent forassistance, Debtors filed the certifications and moved to reopen their case pro se. After I granted the motion, Debtorswere granted a discharge.

When Respondent failed to appear at the show cause hearing on March 8, 2016, I entered an order requiring her todisgorge all compensation she had received from Debtors within thirty days. Under the terms of the order, Respondentwas to certify compliance with the Court. Failure to comply with the disgorgment order subjected Respondent to thepossibility of further sanctions being imposed. Respondent has not filed a certification of compliance thus I mustassume that she has failed to disgorge the funds. Therefore, [*3] in addition to the cases cited by the UST, I also willconsider Respondent's non-compliance with the disgorgement order when I determine whether the sanctionsrequested by the UST are justified.

III. DiscussionFederal courts possess the inherent power to manage their cases and court proceedings and to protect the integrity ofthe judicial system. Chambers v. NASCO, Inc., 501 U.S. 32 , 43-47 , 111 S. Ct. 2123 , 115 L. Ed. 2d 27 (1991)cited in In re Brooks-Hamilton, 400 B.R. 238 , 246 (9th Cir B.A.P. 2008). The Local Bankruptcy Rules ("L.B.R.") authorize



https://www.bloomberglaw.com//document/X5CC32?jcsearch=501 U.S. 32&summary=yes#jcite

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https://www.bloomberglaw.com//document/X5CC32?jcsearch=111 S. Ct. 2123&summary=yes#jcite

https://www.bloomberglaw.com//document/X5CC32?jcsearch=115 L. Ed. 2d 27&summary=yes#jcite

https://www.bloomberglaw.com//document/X3HMPP1?jcsearch=400 B.R. 238&summary=yes#jcite

https://www.bloomberglaw.com/ms//document/X3HMPP1?jcsearch=246&summary=yes#jcite


judges of this Court to discipline attorneys who appear before it. L.B.R. 2090-2(a) . Bankruptcy courts possess bothinherent authority to suspend or disbar attorneys who practice before them and specific statutory authority to disciplineattorneys under 11 U.S.C. § 105(a) . See In re Snyder, 472 U.S. 634 , 643 , 105 S. Ct. 2874 , 86 L. Ed. 2d 504 (1985);Fellheimer, Eichen & Braverman, P.C. v. Charter Technologies, Inc., 57 F.3d 1215 , 1224 (3d Cir. 1995); In reCrayton, 192 B.R. 970 , 976 (9th Cir. B.A.P. 1996). See also L.B.R. 2090-2 .

Before an attorney may be sanctioned, a court must provide the attorney with notice of the alleged misconduct and anopportunity to respond to the allegations. Fellheimer, 57 F.3d at 1225 . Respondent has been provided with noticedetailing the attempts made by one client to contact her. Further, Respondent was contacted by the UST regardingher failure to communicate with her clients, and she has failed to respond. Although Ms. Mott did not enter anappearance on Respondent's behalf, she did state at the hearing on the Complaint that she had communicated withRespondent through members of her family. Therefore, I find that Respondent has received adequate, particularizednotice of the allegations against her as set forth in the Complaint. Nevertheless, Respondent has failed to respondeither directly or through counsel to these allegations.

Rule of Professional Conduct 1.3 requires a lawyer to "act with reasonable diligence and promptness in representing aclient." 204 Pa. Code § 81.4.1.3 . The parameters of this duty are further refined in the comment to the rule, whichprovides that "a lawyer should pursue a matter on behalf of a client despite opposition, obstruction or personalinconvenience to the lawyer, and take whatever lawful and ethical measures are required to vindicate a client's causeor endeavor." Pa. Rule Prof. Conduct 1.3 , Comment, Id. Effective representation of a client requires that a lawyercommunicate regularly with her client.

Rule 1.4 describes a lawyer's responsibility to communicate as follows:

a) A lawyer shall:

(1) promptly inform the client of any decision or circumstance with respect to which the client's informedconsent, as defined in Rule 1.0(e) , is required by these Rules;

(2) reasonably consult with the client about the means by which the client's objectives are to beaccomplished;

(3) keep the client reasonably informed about the status of the matter;

(4) promptly comply with reasonable requests for information; . . .

204 Pa. Code § 81.4.1.4 . As the documentation submitted by the UST in support of his motion demonstrates,Respondent failed to communicate with at least thirty-one of her clients as required by Rule 1.4 . Several clients wererequired to reopen their cases to obtain a discharge, others needed assistance after [*4] their cases were convertedfrom Chapter 13 to Chapter 7, and still others required assistance in modifying their Chapter 13 plans.

Although not specifically adopted as the standard in this circuit, many courts, including the Ninth Circuit, have reliedon the disciplinary standards developed by the American Bar Association ("ABA").6 Under the ABA's Standards forImposing Lawyer Sanctions (the "Standards"), when imposing lawyer discipline, a court should consider: "(1) whetherthe duty violated was to a client, the public, the legal system or the profession; (2) whether the lawyer actedintentionally, knowingly or negligently; (3) whether the lawyer's misconduct caused a serious or potentially seriousinjury; and (4) whether aggravating factors or mitigating circumstances exist." Brooks-Hamilton, 400 B.R. at 252 .Aggravating factors include whether the attorney has been subject to prior disciplinary actions, has engaged in apattern of misconduct, or whether the attorney has refused to acknowledge the wrongful conduct. Crayton, 192 B.R. at981 . Mitigating factors include the absence of prior disciplinary proceedings, the presence of personal problems,inexperience, or good faith attempts to correct deficiencies or errors. Id .



https://www.bloomberglaw.com//document/1?citation=M.D. Pa. L.B.R. 2090-2&summary=yes#jcite

https://www.bloomberglaw.com//document/XEH7SM003?jcsearch=11 U.S.C. 105(a)&summary=yes#jcite

https://www.bloomberglaw.com//document/X5CB50?jcsearch=472 U.S. 634&summary=yes#jcite

https://www.bloomberglaw.com/ms//document/X5CB50?jcsearch=643&summary=yes#jcite

https://www.bloomberglaw.com//document/X5CB50?jcsearch=105 S. Ct. 2874&summary=yes#jcite

https://www.bloomberglaw.com//document/X5CB50?jcsearch=86 L. Ed. 2d 504&summary=yes#jcite

https://www.bloomberglaw.com//document/X39MBP?jcsearch=57 F.3d 1215&summary=yes#jcite

https://www.bloomberglaw.com/ms//document/X39MBP?jcsearch=1224&summary=yes#jcite

https://www.bloomberglaw.com//document/XANK46?jcsearch=192 B.R. 970&summary=yes#jcite

https://www.bloomberglaw.com/ms//document/XANK46?jcsearch=976&summary=yes#jcite


https://www.bloomberglaw.com//document/X39MBP?jcsearch=57 F.3d at 1225&summary=yes#jcite

https://www.bloomberglaw.com//document/X43Q3OH8?jcsearch=Pa. R.P.C. 1.3&summary=yes#jcite

https://www.bloomberglaw.com//document/X43Q3OH8?jcsearch=Pa. R.P.C. 1.3&summary=yes#jcite

https://www.bloomberglaw.com//document/X43Q3P18?jcsearch=Pa. R.P.C. 1.4&summary=yes#jcite

https://www.bloomberglaw.com//document/X43Q3N18?jcsearch=Pa. R.P.C. 1.0(e)&summary=yes#jcite



https://www.bloomberglaw.com//document/X3HMPP1?jcsearch=400 B.R. at 252&summary=yes#jcite

https://www.bloomberglaw.com//document/XANK46?jcsearch=192 B.R. at 981&summary=yes#jcite

https://www.bloomberglaw.com//document/XANK46?jcsearch=192 B.R. at 981&summary=yes#jcite

https://www.bloomberglaw.com//document/XANK46?jcsearch=192 B.R. 970&summary=yes#jcite


Respondent has failed to diligently represent her clients. She has ignored an order of this Court directing her todisgorge funds. Further, even after having been contacted by the UST about the importance of communicating withher clients, she failed to do so. Although there is no evidence to suggest that she intended to harm her clients, atsome point she determined that she was no longer interested in representing their interests. Unfortunately, she failedto communicate this intention to her clients or to seek permission to withdraw from representation. The consequenceof her actions were serious and, in each case, jeopardized the ability of the client to obtain a discharge.

As a mitigating factor, Ms. Mott represented to the Court that Respondent has faced a series of significant personalproblems. It is appropriate for a court to consider factors such as emotional and personal difficulties experienced by alawyer when deciding the type of discipline to impose. But in this case, Respondent did not take the opportunity eitherpersonally or through counsel to explain why she abandoned her clients. Sadly, other parties were required to stepinto the breach to protect their interests.

It is for these reasons that I find it appropriate to grant the UST's request that Respondent be suspended frompractice. As a preliminary matter, she must be suspended at this time because she is under administrative suspensionby the Pennsylvania Supreme Court. Under Local Rule 83.8.1.2 of the District Court for the Middle District ofPennsylvania , an attorney may be admitted to practice before the court if the attorney is a member of the bar of thePennsylvania Supreme Court and is in good standing in the jurisdiction. Under L.B.R. 2090-1(a) , an attorney may notbe admitted to practice before the bankruptcy court unless they have been [*5] admitted to practice before the DistrictCourt. Respondent has been administratively suspended by the Supreme Court and, thus, is not eligible to practice infederal court in Pennsylvania at this time. Therefore, at a minimum, Respondent must be barred from practicing beforethis Court until she is reinstated by the state court.

Information provided through the Disciplinary Board for the Supreme Court suggests that Respondent has beensuspended because she failed to obtain the required continuing legal education. This information supports theconclusion that Respondent has decided to abandon her practice. However, if she changes her mind, she could bereinstated in good standing immediately as her suspension is attributable to a technical non-compliance with practicerequirements. Fulfillment of a continuing education requirement, however, does not address her lack of diligence inhandling her clients' affairs. Respondent's failure to exercise professional responsibility as an attorney is a moreserious infraction. While appearing as an officer of this Court, Respondent failed to exercise diligence in therepresentation of her clients' interests and failed to communicate with them regarding matters critical to obtaining abankruptcy discharge. Although none of Respondent's clients have suffered significant harm, it has only been throughthe efforts of other lawyers that this harm has been avoided.

VI. ConclusionDisciplinary proceedings are not intended to punish the offender, "but rather seek to determine the fitness of an officerof the court to continue in that capacity and to protect the courts and the public from the official ministration of personsunfit to practice." Office of Disciplinary Counsel v. Duffield, 537 Pa. 485 , 500 , 644 A.2d 1186 , 1193 (1994) (citingOffice of Disciplinary Counsel v. Campbell, 463 Pa. 472 , 345 A.2d 616 (1975)). ABA Standard 2.3 advises thatsuspension should be for a minimum of six months, but no greater than three years. Because Respondent has notbeen the subject of any prior disciplinary proceedings before the Bankruptcy Court of the Middle District ofPennsylvania, she will be suspended from practicing before the Court for six months regardless of whether or not sheis reinstated by the Supreme Court in the interim. After this time period, she may move this Court for reinstatement. Asa condition of reinstatement, however, Respondent must demonstrate that she is a member in good standing of thePennsylvania bar and that she is prepared to competently and diligently represent her clients. Further she mustdocument that she has complied with the Order entered in the Eric K. Keefer and Carrie I. Keefer case filed at CaseNo. 1:10-bk-05127 directing her to disgorge all compensation received for services in this case. An appropriate ordersuspending Respondent and delineating the terms under which Respondent may seek reinstatement follows.

By the Court,

/s/ Mary D France



https://www.bloomberglaw.com//document/X3PSL718?jcsearch=M.D. Pa. LR 83.8.1.2&summary=yes#jcite

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https://www.bloomberglaw.com//document/X2TUS6?jcsearch=537 Pa. 485&summary=yes#jcite

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https://www.bloomberglaw.com/ms//document/X2TUS6?jcsearch=1193&summary=yes#jcite

https://www.bloomberglaw.com//document/X4TRAK?jcsearch=463 Pa. 472&summary=yes#jcite

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Chief Bankruptcy Judge

ORDERUpon consideration of the Complaint of Andrew A. Vara, Acting United States Trustee, requesting that an order [*6] beentered suspending Jennifer Ami Hoffman, Esq., ("Respondent") from the practice of law before this Court, and for thereasons set forth in the accompanying Opinion; it is hereby ORDERED that the Motion to suspend Respondent frompracticing before this Court is GRANTED.

It is further ORDERED that Respondent is barred from practice before this Court for a period of six (6) months fromthe date of this Order irrespective of whether or not her administrative suspension by the Supreme Court ofPennsylvania is lifted in the interim.

It is further ORDERED that at any time six (6) months after the date of this Order, Respondent may petition the Courtfor readmission to practice upon a showing of the following:

(1) that she is a member in good standing of the Bar of the Supreme Court of Pennsylvania;

(2) that she is prepared to competently and diligently represent her clients; and

(3) that she has disgorged all attorney compensation received from her former clients Eric K. Keefer and Carrie I.Keefer.

By the Court,

/s/ Mary D France

Chief Bankruptcy Judge

fn 1

The Court has jurisdiction over this matter pursuant to 28 U.S.C. § 1334(b) . This is a core, non-Stern proceedingunder 28 U.S.C. § 157(b)(2)(A) . This Opinion constitutes findings of fact and conclusions of law made pursuant toFederal Rule of Bankruptcy Procedure 7052 .

fn 2

"[A]llegations in a complaint, other than those relating to the amount of damages, are deemed admitted if thedefendant fails to deny them in a timely fashion." Davis v. Metro. Life Ins. Co., No. 1:13-CV-2741, [2015 BL 34759], 2015 U.S. Dist. LEXIS 16292 , [2015 BL 34759], 2015 WL 574616 , at *5 (M.D. Pa. Feb. 11, 2015) (citing Fed. R.Civ. 8(b)(6) ).

fn 3

The Keefers' bankruptcy case is docketed at Case No. 1:12-bk-04122.

fn 4

I am grateful for and appreciative of the efforts made by Mr. Csonka, Mr. Frey, Mr. Neuharth and, especially Ms.Mott, as well as the UST, to assist Ms. Hoffman's former clients in achieving the goals they expected to obtain



https://www.bloomberglaw.com//document/XEIMUU003?jcsearch=28 U.S.C. 1334(b)&summary=yes#jcite

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https://www.bloomberglaw.com//document/X3D9JU18?jcsearch=Federal Rule of Bankruptcy Procedure 7052&summary=yes#jcite

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when they filed for bankruptcy relief.

fn 5

Debtors' bankruptcy case is docketed at Case No. 1:10-bk-05127.

fn 6

ABA Standards for Imposing Lawyer Sanctions, approved 1986, amended 1992 available athttp://www.americanbar.org/content/dam/aba/administrative/professional_responsibility/corrected_standards_sanctions_may2012_wfootnotes.authcheckdam.pdf (last visited May 4, 2016).





November 24, 2016

Sanctions

Sanctioned Bankruptcy Attorney Can't Blame Paralegal for Case FlawsBNA Snapshot

• Debtor's attorney must disgorge $1,100 retainer fee

• Attorney must personally witness signing of documents and file affidavits identifying document filed and date signed

By Diane Davis

Nov. 22 — A bankruptcy attorney who allowed an untrained, unsupervised paralegal to prepareand file all of the documents in the debtors’ Chapter 13 case must be sanctioned ( In reRuebling , 2016 BL 385302, Bankr. C.D. Ill., No. 15-71627, 11/18/16).

Judge Mary P. Gorman of the U.S. Bankruptcy Court for the Central District of Illinios Nov. 18concluded that debtors’ attorney, Kevin Linder, violated the Bankruptcy Code, BankruptcyRules, Judicial Code, and the court's standing order.

As a sanction, Linder's fee application was denied in its entirety, and he must disgorge the $1,100 paid as a retainer. Inaddition, for a one-year period, Linder must be personally present and witness the signing of any document by a debtor thatwill be filed with the debtor's actual or electronic signature affixed, the court said. He will also be required to file an affidavitidentifying the document filed and the date the document was signed.

Linder's certification of compliance with Federal Rule of Bankruptcy 9011 will mean that “he made a reasonable inquiry intothe facts underlying the information contained in the document,” the court said.

The conditions placed on Linder allowing him to continue his electronic filing privileges are “burdensome” but necessarybecause he can “no longer blame his paralegal and clients for the inaccuracies in his documents,” the court said.

The electronic signatures of debtors Aaron and Linda Ruebling affixed to their bankruptcy petition represented under penaltyof perjury that they had signed the petition on Oct. 22, 2015, and the information provided was true and correct. AttorneyLinder's electronic signature was also affixed to the petition certifying under Rule 9011, that “to the best of his ‘knowledge,information, and belief, formed after an inquiry reasonable under the circumstances’ the factual allegations of the petitions hadevidentiary support.”

The Local Rules also require that the original signature of any non-filing party must be obtained before the document iselectronically filed. A standing order of the court provides that when an electronic signature is affixed to a filed document, thefiler must have and maintain the originally signed document.

Linder filed the bankruptcy petition without first obtaining the signatures of the debtors on it, the court said. Linder arguedthrough counsel, Bruce Kugler, that he shouldn't be sanctioned because he was authorized by the debtors. He also arguedthat Linder's actions weren't done knowingly or willfully. Linder was dealing with family health issues, he said, and talked to hisparalegal about filing the petition and authorized her to go ahead because he assumed that the debtors had signed thepetition.

Based on Linder's fee application, the court determined that Linder had an initial meeting with the debtors in May 2015, andthen had little to do with the preparation, execution, and filing of the bankruptcy documents. Linder's paralegal prepared all ofthe documents and met with the debtors without supervision by Linder, the court said. Linder also didn't review or analyze theinformation provided by the debtors, the court said.

Sanctioned Bankruptcy Attorney Can't Blame Paralegal for Case Flaws, Bankruptcy Law Reporter (BNA)



http://www.bloomberglaw.com/ms/public/document/In_re_Ruebling_No_1571627_2016_BL_385302_Bankr_CD_Ill_Nov_18_2016


https://www.bloomberglaw.com/ms/documentdocumentdocumentdocument/1?citation=2016%20bl%20385302&summary=yes#jcite

https://www.bloomberglaw.com/ms/documentdocumentdocumentdocument/1?citation=frbankpr%209011&summary=yes#jcite


The court found that this practice was not an isolated incident in Linder's bankruptcy practice. Linder must “be required tofocus on his bankruptcy practice and to review all documents filed in his cases both as to substance and form,” the court said.

Kevin Linder, Linder Law Office, Springfield, Ill., represented debtors Aaron E Ruebling, and Linda Ruebling.

Kenneth Takis Siomos, Springfield, Ill, represented Chapter 7 Trustee John H Germeraad.

U.S. Trustee Timothy E. Ruppel, Region 10 Peoria Office - U.S. Trustee, Peoria, Ill.

To contact the reporter on this story: Diane Davis in Washington, D.C. at [email protected]



Full text at: http://www.bloomberglaw.com/public/document/In_re_Ruebling_No_1571627_2016_BL_385302_Bankr_CD_Ill_Nov_18_2016

Sanctioned Bankruptcy Attorney Can't Blame Paralegal for Case Flaws, Bankruptcy Law Reporter (BNA)








November 24, 2016

Debtor's Transactions With Attorneys

Ch. 13 Trustee Improperly Seeks Sanctions Against Debtor's CounselBNA Snapshot

• Trustee seeks to punish debtor's attorney

• Fees charged by debtor's attorney weren't excessive

By Diane Davis

Nov. 21 — The compensation paid to a Chapter 13 debtor's attorney was reasonable, notexcessive, and doesn't need to be disgorged ( In re Petrovic , 2016 BL 382071, Bankr. N.D. Ill.,No. 16 B 18969, 11/16/16).

Judge A. Benjamin Goldgar of the U.S. Bankruptcy Court for the Northern District of Illinois Nov.16 ruled against the Chapter 13 trustee and denied his request to examine the compensationpaid to debtor's counsel.

The Chapter 13 trustee's motion is a “Rule 9011 motion dressed in section 329 clothing,” the court said. Federal Rule ofBankruptcy Procedure 9011 is used as a sanction to pay a penalty into court, the court said.

The trustee brought the motion under Bankruptcy Code Section 329, which isn't a “vehicle for sanctioning a debtor's attorney,”the court said. Section 329 requires every attorney representing a debtor in bankruptcy to file with the court a statement ofcompensation paid or agreed to be paid.

The court's ruling shows that the trustee didn't ask the court for what it really wanted — sanctions against the debtor'sattorney.

Debtor Rade Petrovic filed for Chapter 13 protection rather than comply with a show cause order in his divorce case. Thedebtor failed to comply with a divorce judgment and a state court found him in contempt.

Chapter 13 bankruptcy allows individuals receiving regular income to obtain debt relief while retaining their property, but to doso, the debtor must propose a plan that uses future income to repay all or a portion of his debts over a three to five yearperiod.

The debtor listed more than $700,000 in unsecured debt in his bankruptcy schedules, which is over the debt limit of $394,725for a Chapter 13 debtor under Section 109(c). The bankruptcy court gave the debtor a chance to convert the case to oneunder Chapter 11, but the debtor failed to do so and the case was dismissed.

Chapter 13 trustee Glenn Stearns asked the court for an examination of debtor's counsel's fees. According to the trustee, theattorney's fees of $4,000 paid to J. Kevin Benjamin should be disgorged because the debtor was clearly ineligible for Chapter13.

The court found that the debtor wasn't overcharged by his attorney, but “got everything he paid for.”

The trustee's Section 329 motion was designed not to protect the debtor from overreaching on Benjamin's part, but to punishBenjamin for filing the case and opposing the motion to dismiss, the court said.

The debtor's attorney could have been sanctioned under Rule 9011 for his conduct, but the trustee must ask the court for

Ch. 13 Trustee Improperly Seeks Sanctions Against Debtor's Counsel, Bankruptcy Law Reporter (BNA)



http://www.bloomberglaw.com/ms/public/document/In_re_Petrovic_No_16_B_18969_2016_BL_382071_Bankr_ND_Ill_Nov_16_2

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sanctions under Rule 9011, the court said.

J. Kevin Benjamin, Benjamin & Brand LLP, Chicago, represented debtor Rade Petrovic, aka Ray Petrovic aka Rade Petrouieaka Petrovic Rade aka Rade Petrovich aka Petrouie Rade.

Gerald Mylander, Lisle, Ill., represented Chapter 13 trustee Glenn B. Stearns.




Full text at: http://www.bloomberglaw.com/public/document/In_re_Petrovic_No_16_B_18969_2016_BL_382071_Bankr_ND_Ill_Nov_16_2

Ch. 13 Trustee Improperly Seeks Sanctions Against Debtor's Counsel, Bankruptcy Law Reporter (BNA)







Majority Opinion >

Pagination* B.R.** BL

UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK

In re: AMPAL-AMERICAN ISRAEL CORP., Debtor. YOSEF A. MAIMAN and MERHAV (M.N.F.) LIMITED, Appellants,v. ALEX SPIZZ, Appellee.

15 Civ. 6569 (KPF)

July 18, 2016, Filed July 18, 2016, DecidedBankr. No. 12-13689 (SMB).

For Yosef A. Maiman, Merhav (M.N.F.) Limited, Appellants: David M. Friedman, LEAD ATTORNEY, Kasowitz,Benson, Torres & Friedman L.L.P, New York, NY; Daniel Alexander Fliman, Kasowitz, Benson, Torres & Friedman,LLP (NYC), New York, NY.

For Alex Spizz, Appellee: Alex Spizz, LEAD ATTORNEY, Tarter Krinsky & Drogin LLP, New York, NY; ArthurGoldstein, LEAD ATTORNEY, Nachamie, Spizz Cohen & Serchuk, P.C., New York, NY.

KATHERINE POLK FAILLA, United States District Judge.

KATHERINE POLK FAILLA

[*607] OPINION AND ORDERKATHERINE POLK FAILLA, District Judge

Appellants Yosef A. Maiman and Merhav (M.N.F.) Limited appeal from an order issued by the United StatesBankruptcy Court for the Southern District of New York (Bernstein, J.), authorizing Appellee Alex Spizz, the Chapter 7Trustee of Ampal-American Israel Corporation, to retain the law firm of Tarter Krinsky & Drogin LLP as his generalcounsel, and denying Appellants' cross-motion to disqualify the Trustee. Appellants argued below, and reiterate here,that the law firm is conflicted from representing the Trustee under 11 U.S.C. § 327 , and that the Trustee should havebeen removed for cause for various reasons. As set forth in the remainder of this Opinion, this Court affirms theBankruptcy Court's order.

BACKGROUND 1On August 29, 2012, Ampal-American Israel Corporation ("Ampal" or the "Debtor"), [*608] a corporation engaged in"acquiring interests in various businesses" located in or related to Israel, filed a Chapter 11 petition in the UnitedStates Bankruptcy Court for the Southern District of New York. (Bankr. Dkt. #1, Ex. A). On April 5, 2013, theBankruptcy Court issued an Order directing appointment of a Chapter 11 Trustee, see In re Ampal-American Israel

Maiman v. Spizz (In re Ampal-Am. Israel Corp.), 554 B.R. 604 (S.D.N.Y. 2016), Court Opinion


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Corp., No. 12-13689 (SMB), [2013 BL 93036], 2013 Bankr. LEXIS 1419 , [2013 BL 93036], 2013 WL 1400346(Bankr. S.D.N.Y. Apr. 5, 2013) ("Ampal I"); and on May 2, 2013, the Court converted the matter to a Chapter 7bankruptcy (Bankr. Dkt. #258). The voting creditors then elected Alex Spizz as Chapter 7 Trustee. (Bankr. Dkt. #275).Spizz's law firm, Nachamie Spizz Cohen & Serchuk, P.C. ("Spizz Cohen"), was retained as counsel to the Trustee onJune 27, 2013. (Bankr. Dkt. #298). Thereafter, Spizz's law firm dissolved, and he joined the firm of Tarter Krinsky &Drogin LLP ("TKD"); as a result, on April 17, 2015, Spizz sought to employ TKD as counsel to the Chapter 7 Trustee.(Bankr. Dkt. #573).

TKD is not new to this case. Previously, TKD had represented three entities — Ofer Shapira and his law firm, Shapira& Co. (together, "Shapira"), and Mishmeret Trusts Company Ltd ("Mishmeret"), an Indenture Trustee of the estate thatShapira represents — in earlier proceedings in this bankruptcy. Citing this prior representation, Appellants havevigorously opposed the Trustee's application to retain TKD as general counsel. Indeed, Appellants have contendedthat the only proper course of action is to remove the Trustee entirely from this case. To place the instant appeal incontext in this lengthy and contentious bankruptcy, the Court will [**2] detail several earlier skirmishes between theparties that inform the current dispute.

A. The Prior Proceedings1. The Trustee's Application in June 2013 to Retain Shapira as Special CounselOn June 24, 2013, the Trustee moved for appointment of Shapira as special counsel to the Trustee to represent theestate's interests in Israel. (Bankr. Dkt. #291). Appellant Yosef Maiman, on behalf of Ampal's controlling shareholders(the "Controlling Shareholders"), objected to this application on the ground that Shapira concurrently representedMishmeret and another Indenture Trustee, Hermetic Trust, and that this representation gave Shapira an interestadverse to the estate. (Bankr. Dkt. #303). The Bankruptcy Court held a hearing on July 11, 2013, during which theTrustee withdrew the application and exercised Ampal's right to retain Shapira solely as counsel to certain non-debtorsubsidiaries. (Bankr. Dkt. #318; R. 22-35).

2. The Violation of the Automatic Stay by Shapira and Mishmeret in October 2013On October 4, 2013, Shapira, representing Mishmeret and Hermetic, wrote a letter to Maiman and certain other Ampalofficers and directors, alleging breaches of fiduciary duties, waste, and mismanagement, and seeking payment orsecurity for payment to his clients. (Bankr. Dkt. #352, Ex. B-2; R. 74-75). Counsel for certain recipients of the Shapiraletter contacted [*609] the Trustee, requesting that he (i) notify Shapira that the letter violated the automatic stay anddemand that Shapira withdraw it, and (ii) terminate Shapira's retention by the non-debtor Ampal subsidiaries. (Dkt.#352, Ex. C; R. 75). The Trustee responded that he understood Shapira to have written the letter "to preserve claimsunder the Debtor's D&O policies," and reasoned that because Shapira had not taken any action beyond writing theletter, he had not violated the automatic stay. ( Id.). In the same response, the Trustee confirmed that he "[had] nointention to allow the bondholders or others prosecute claims that belong[ed] to the debtor's estate." ( Id.).

The letter recipients then moved to enforce the automatic stay in the Bankruptcy Court (the "Enforcement Motion");they concurrently sought damages from Mishmeret and Shapira, and an order from the Bankruptcy Court directing theTrustee to terminate Shapira's representation of the non-debtor Ampal subsidiaries. (Bankr. Dkt. #352; R. 75-76). TheTrustee, as well as Mishmeret and Shapira, filed responses in opposition, contending that these directors and officerslacked standing to seek to enforce the automatic stay or to recover damages; the Trustee further maintained that theShapira letter did not violate the automatic stay. (Bankr. Dkt. #357, 362; R. 76-77). In addition, the Trustee,Mishmeret, and Shapira argued that the Court should not compel the Trustee to terminate Shapira, as Shapira wasretained only by the non-debtor subsidiaries, and disqualification was therefore unwarranted. (Bankr. Dkt. #357, 364;R. 76-77). TKD was retained to represent Mishmeret and Shapira in this proceeding. (Bankr. Dkt. #357).

At oral argument, TKD reiterated on its clients' behalf that they did not [**3] intend to assert claims belonging to theestate and that they agreed not to pursue any such claims. (R. 54-55). The Bankruptcy Court accordingly deemed thatrepresentation "a withdrawal of the October 4 Letter to the extent it demanded payment or security for [] claims thatbelong to the estate." In re Ampal-American Israel Corp., 502 B.R. 361 , 368 (Bankr. S.D.N.Y. 2013) ("Ampal II").



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Ultimately, the Bankruptcy Court found that Mishmeret and Shapira had willfully violated the automatic stay by"demanding payment on account of an estate claim," but that the letter recipients had failed to "identify any damagesproximately caused by the stay violation," other than attorneys' fees and legal expenses that the Court deemed"unnecessary litigation costs" resulting from an "overreaction" of a motion. Ampal II, 502 B.R. at 374 . Further, theBankruptcy Court declined to direct the Trustee to terminate Shapira as counsel to the non-debtor subsidiaries,explaining that "Shapira ha[d] not taken any steps to collect the D&O insurance proceeds on Mishmeret's behalf, andany conflict [was thus] potential and hypothetical." Id. at 375 .

3. The October 2013 Discovery DisputeOn October 7, 2013, the Trustee moved to compel Ampal, through Maiman, to produce certain electronic informationrelated to Ampal; the parties stipulated to procedures for segregating confidential information of former employees, butthen sought the Bankruptcy Court's assistance in implementing the terms of that stipulation. (R. 91-95). Ultimately, theBankruptcy Court issued a supplemental order (the "Discovery Order"), which, as relevant here, prohibited the Trusteefrom disclosing certain confidential information to Ofer Shapira individually, as well as Shapira & Co., its employees,representatives, or agents. (Bankr. Op. 7-8 ).

[*610] 4. The May 2014 Litigation Financing AgreementIn May 2014, the Trustee and the Indenture Trustees entered into a Litigation Financing Agreement (the "LFA"), inconnection with which TKD represented Mishmeret. (R. 366-401). Pursuant to the LFA, the Indenture Trustees wouldloan $1.5 million to fund litigation against the Controlling Shareholders, including Maiman, and its former officers anddirectors. ( Id. at 386-90). As the Bankruptcy Court explained:

The principal focus of [this] litigation was a $20 million note, executed in favor of Ampal by Merhav(M.N.F.) Limited ("MNF"), an entity controlled by Maiman and one of the Controlling Shareholders, andpersonally guaranteed by Maiman. Ampal subsequently assigned the note to Merhav Ampal Group("MAG"), a non-debtor subsidiary. The Trustee and MAG were required to use reasonable efforts tocommence the Maiman Litigation as soon as practicable.

(Bankr. Op. 6-7 ).

The Bankruptcy Court approved the LFA on June 24, 2014 (Bankr. Dkt. #429), and as permitted by its terms,Mishmeret promptly assigned its rights and obligations under the LFA to Klirmark Opportunity Fund L.P. and MeitavGemel & Pension Ltd., two underwriters not represented by TKD (Bankr. Dkt. #429, 587).

5. The MAG Litigation and the Assertion of the Interference and Gadot ClaimsFollowing execution of the LFA, MAG sued [**4] Appellants in New York State Supreme Court in September 2014;prior to answering, Maiman filed a proof of claim against the estate, asserting that Ampal, MAG, andrepresentatives of the Indenture Trustees had interfered with MNF's attempts to finance an ethanol productionproject in Colombia. (See Adv. Proc. 14-02385, Dkt. #1-A; R. 166-70).2 Appellants then removed this action to theBankruptcy Court in October 2014, following which MAG filed a complaint and Appellants filed an answer. (Adv.Proc. 14-02385, Dkt. #4, 7).3

In their answer, Appellants asserted an affirmative defense of tortious interference (the "Interference Claim") with theproject in Colombia, and then reasserted this claim in a third-party complaint filed against the Indenture Trustees,Shapira, and two Ampal bondholders. (Adv. Proc. 14-02385, Dkt. #8; R. 181-95). According to Appellants, as of 2011and 2012, "[MNF] and Ampal had made great progress securing the required land, permitting, and the additionalfinancing necessary" for the Colombian ethanol project. (R. 186-87). Simultaneously, however, Ampal "was faced withgreat difficulties" in its Middle Eastern investments, in part due to the Arab Spring, and it failed to receive "crucialdividend payments from its portfolio companies." ( Id. at 187-88). As Ampal began to negotiate restructuring proposalswith its Bondholders and their representatives, Appellants claimed, those Bondholders and representatives made



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"inflammatory and untrue comments" to the media as part of a "very public smear campaign" and attempted todissuade potential investors, who consequently pulled out of the project. [*611] ( Id. at 188-89, 190). The Colombianproject fell through, and Ampal filed for bankruptcy. ( Id. at 190).

Further, in the third-party complaint, Appellants alleged that the Indenture Trustees had harmed the estate by"improperly inform[ing] the press that the Bondholders intended to force a sale of Gadot (one of Ampal's portfoliocompanies)"; on the following day, "Israel Discount Bank nominated a receiver for Gadot's shares," resulting in tens ofmillions of dollars lost in Ampal's investment in Gadot (the "Gadot Claim"). (R. 191).

On September 2, 2015, the Bankruptcy Court granted summary judgment in favor of MAG and against Appellants,resulting in an entry of a money judgment for an amount in excess of $28 million. See Ampal II, [2015 BL 284654], 2015 Bankr. LEXIS 2934 , [2015 BL 284654], 2015 WL 5176395 , at *14. This decision was subsequently affirmedby the United States District Court for the Southern District of New York (Rakoff, J.) on February 29, 2016. See In reAmpal-American Israel Corp., No. 15 Civ. 7949 (JSR), [2016 BL 67351], 2016 U.S. Dist. LEXIS 27963 , [2016 BL67351], 2016 WL 859352 (S.D.N.Y. Feb. 28, 2016).

Also in February, the Bankruptcy Court dismissed Appellants' third-party complaint.4 With regard to their disallowanceclaim against the Indenture Trustees, the Bankruptcy Court determined that Appellants' "unclean hands" allegationswere insufficiently related to the Indenture Trustees' proofs of claims to disallow those proofs of claim. See In reAmpal-American Israel Corp., 545 B.R. 802 , 811 (Bankr. S.D.N.Y. 2016). Further, the Bankruptcy Court deemedAppellants' setoff claim unsustainable because the alleged debts lacked mutuality, as required [**5] under law. Id. at814 . Because the disallowance and setoff claims were the jurisdictional hooks for the third-party complaint, theBankruptcy Court declined to exercise supplemental jurisdiction over Appellants' tortious interference claims againstthe Indenture Trustees. Id. at 814-15 . Accordingly, the Bankruptcy Court did not evaluate the merits of theInterference and Gadot claims as they pertained to Shapira and Mishmeret.5

B. The Retention Application and Subsequent Proceedings1. The Written SubmissionsAs noted, the Trustee's former law firm dissolved, and he joined TKD in early [*612] 2015. On April 17, 2015, theTrustee filed an application to retain TKD as his general counsel (the "Retention Application"), which application is thegenesis of the instant appeal. (R. 102).

In the accompanying Declaration, the Trustee indicated that he and Arthur Goldstein, who were "responsible foroverseeing the Chapter 7 case" while at Spizz Cohen, had joined TKD and intended to retain TKD as Trustee'scounsel, in the best interests of the estate, "for the sake of efficiency, continuity and economy." (R. 103). TheTrustee's Declaration enumerated the services to be provided by TKD and disclosed TKD's former representation of(i) Shapira, with regard to the Enforcement Motion, and (ii) Mishmeret, with regard to an earlier dispute over a sinkingfund, "which dispute was resolved by an agreement approved by the Court." ( Id. at 107). The Trustee thus averredthat "TKD no longer represent[ed] either of the aforementioned entities." ( Id.).

Separately, Arthur Goldstein filed a Declaration, similarly articulating the services to be provided by TKD to theTrustee, and stating that, to his knowledge, no member of the TKD firm "presently represent[ed]" a creditor of Ampal.(R. 111). Goldstein also affirmed that "[t]o the best of [his] knowledge and based upon the information presentlyavailable to [him], TKD [was] a 'disinterested' person" under the relevant provisions of the Code. ( Id. at 111-12).Goldstein's Declaration disclosed TKD's former representation of Shapira and Mishmeret, and stated that "TKD nolonger represents either of the aforementioned entities and will not represent such parties for the duration of thisChapter 7 case." ( Id. at 112).

Unsurprisingly, given the history outlined in the previous section, Appellants objected to the Retention Application onthe ground of TKD's prior involvement in the bankruptcy proceedings, arguing that TKD had represented Mishmeretand Shapira in this case, parties which had "a long history of engaging in conduct calculated to harm, at all costs, the



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Debtor's estate and Mr. Maiman, the Debtor's shareholder." (R. 119). Appellants pointed specifically to:

▪ The Trustee's prior application to retain Shapira as special counsel, and Shapira's subsequent retentionas counsel for non-debtor subsidiaries, which "mired [Shapira] in an irreconcilable conflict of interest,representing non-debtor subsidiaries which are controlled by the Trustee, and one of the Debtor's largestcreditors" ( id. at 122 (emphasis in original));

▪ The Discovery Order's prohibition [**6] on allowing Shapira access to certain files possessed by theTrustee, which Appellants interpreted to provide that "[b]y joining TKD, the Trustee [fell] within the ambit ofthe Discovery Order and [could] no longer access the Private Information" ( id. at 123);

▪ Mishmeret's and Shapira's opposition, filed by TKD, to the Enforcement Motion ( id. at 124-25);

▪ TKD's representation of Mishmeret in connection with the LFA ( id. at 126); and

▪ The estate's "valuable causes of action against Mishmeret and Shapira," including the InterferenceClaim, by virtue of which "TKD, and by imputation the Trustee, are irreconcilably conflicted" ( id. at126-27).

Appellants contended that, under 11 U.S.C. § 327(a) , TKD held or represented interests adverse to the estate andwas not disinterested, thereby barring its retention as counsel to the Trustee. (R. 127-28). Further, Appellantsasserted that TKD had an "actual conflict" that mandated disqualification by the Bankruptcy Court without [*613] resortto any equitable considerations. ( Id. at 128-29). The fact "[t]hat TKD allegedly no longer represents Mishmeret andShapira [did] not change the result," Appellants claimed, because TKD maintained ongoing duties and loyalties to itsformer clients and could not act adversely to them. ( Id. at 131-32).

Going one step further, Appellants argued that the Bankruptcy Court should remove the Trustee for cause, pursuant to§ 324 of the Code, which permits removal where a trustee is "not disinterested" or fails to perform his duties. (R. 133).They claimed that the mere fact of joining TKD — a firm that represented interests adverse to the estate — requiredthe Trustee's removal. ( Id. at 133-34). Cited as further evidence of cause was the fact that the Trustee had wrongfullydeclined to bring claims (namely, the Gadot and Interference Claims) against Mishmeret and Shapira, and was himselfin violation of the Bankruptcy Court's Discovery Order. ( Id. at 134-35).

In reply to Appellants' opposition, Goldstein reiterated that TKD no longer represented Mishmeret or Shapira, and thatTKD's involvement in the LFA had been limited. (R. 140-41). Further, the Trustee affirmed his awareness of TKD'sprior representation of Mishmeret and Shapira, but stated that he had advised by the partner-in-charge of TKD thatsuch representation had been limited and was resolved. ( Id. at 143). Moreover, the Trustee stated that, at the timethe third-party complaint was filed by Maiman and MNF, Mishmeret and Shapira were represented by a different lawfirm. ( Id. at 143-44). Still further, the Trustee related that "as long as there was no current representation of Mishmeretor Shapira by TKD," the U.S. Trustee would not object to the Trustee joining that firm or retaining it as counsel. ( Id. at144).

Proceeding to Appellants' other arguments, the Trustee indicated that (i) the Discovery Order had not been and wouldnot be violated, as the confidential files were maintained by Goldstein on a separate hard drive maintained under lockand key, and as TKD had established an "ethical wall" preventing access by anyone involved except Goldstein, theTrustee, and fellow former Spizz Cohen attorney [**7] Jill Makower; (ii) Mishmeret was not a post-petition lender to theTrustee under the LFA by dint of assigning away its rights; and (iii) the Trustee had evaluated Appellants' allegationsand determined there were no "valuable causes of action" against Mishmeret or Shapira concerning the Colombianethanol project or the Gadot Claim. (R. 145-47).

To amplify upon this last point, the Trustee detailed a series of facts that suggested that Appellants' proffered claimsagainst Mishmeret and Shapira were more apparent than real: These claims did not appear on Ampal's initial



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bankruptcy filings or schedules, and the Trustee only learned of them when Maiman filed a proof of claim severalyears later, in apparent response to MAG's September 2014 state-court complaint; even then, Maiman assertedclaims on behalf of himself and MNF against Ampal and the Trustee, rather than on the estate's behalf againstMishmeret and Shapira. (R. 147-48). After removal, when MAG brought its complaint against Appellants on the $20million note, Appellants raised the affirmative defense of tortious interference; they then asserted this argumentoffensively in their third-party complaint. ( Id. at 148-49). Most importantly, the Trustee opined, prosecution of thealleged Interference Claim, which he deemed "uncertain and speculative," could undermine the Trustee's moredefinite (and, as it happened, more lucrative) claims against Appellants. ( Id. at 149-50).

[*614] All of that said, the Trustee averred that he "ha[d] no reservations about pursuing claims against any partiesthat may potentially benefit the Ampal Estate," citing as example an earlier-contemplated complaint against theIndenture Trustees, including Mishmeret, that was ultimately settled by stipulation. (R. 150). Moreover, the Trusteeasserted, Appellants had failed throughout to specify the untrue or defamatory statements at issue in the InterferenceClaim, when or to whom they were made, how the purported investors learned of them or were influenced by them, orhow Appellants quantified the loss suffered. ( Id. at 151). As the Trustee maintained, "[t]he liability on the claimsseem[ed] dubious at best, and the damages [were] highly speculative"; accordingly, it would violate the Trustee's ownfiduciary duties to pursue those claims at the potential expense of his $25 million claim against Appellants. ( Id.).Nonetheless, he stated, he "continue[d] to keep an open mind" and "would not hesitate to appoint special conflictcounsel to investigate and if appropriate pursue those claims" had the Bankruptcy Court deemed it appropriate. ( Id.).6

Finally, the Trustee reaffirmed that if he determined there were valuable claims against Mishmeret or Shapira, hewould immediately retain conflicts counsel. (R. 153). And, as he explained, TKD had — in an abundance of caution —instituted an ethical wall preventing any employee involved in previous work for Mishmeret or Shapira from accessingAmpal files or working for the Trustee. ( Id.).

2. The Bankruptcy Court HearingsOn May 21, 2015, the Bankruptcy Court held a hearing on the Retention Application, [**8] at which the partiesexpounded on their extensive briefing. (R. 405-34). The Bankruptcy Court then requested additional testimony on thenature of TKD's prior representation of Mishmeret and Shapira and its institution of an ethical wall. ( Id. at 431). Inaddition, the Bankruptcy Court requested comment from the U.S. Trustee regarding the potential conflict issue. ( Id.at 432-33).7

On June 9, 2015, the Bankruptcy Court held an evidentiary hearing, at which Scott Markowitz — who had workedat TKD prior to the Spizz Cohen attorneys joining — testified about the duration, substance, and conclusion of thefirm's representation of Mishmeret and Shapira (see R. 446-56, 459-60, 468-69); Spizz's and Goldstein's joining thefirm in April 2015 ( id. at 460-61); and the ethical wall erected by TKD ( id. at 462-64). Arthur Goldstein also testifiedregarding TKD's ethical wall between the former Spizz Cohen attorneys and those who worked for Mishmeret andShapira, as well as his quarantine of the materials protected by the Discovery Order. ( Id. at 474-78).8

[*615] 3. The Bankruptcy Court's DecisionIn its findings of fact and conclusions of law, the Bankruptcy Court relayed the tortuous history of the case: itscommencement and conversion from Chapter 11 to Chapter 7 (Bankr. Op. 3-4 ); the Trustee's early motion to retainShapira, the Controlling Shareholders' fervent objections, and the ultimate retention of Shapira only to represent non-debtor subsidiaries ( id. at 4-5 ); the Shapira letter, and the Bankruptcy Court's finding that the automatic stay wasviolated but that neither damages nor termination of Shapira was warranted ( id. at 5-6 ); the Trustee's LFA with theIndenture Trustees, for which TKD represented Mishmeret, but pursuant to which Mishmeret did not ultimately serveas a lender ( id. at 6-7 ); the Discovery Order prohibiting access by Shapira to certain private information disclosed tothe Trustee ( id. at 7-8 ); and MAG's litigation against Appellants, which was countered by Maiman's proof of claim, theaffirmative defense, and the third-party complaint ( id. at 8-10 ).

a. The Trustee's Retention Motion










After outlining the parties' positions and the evidence obtained during the hearings (see Bankr. Op. 10-17 ), theBankruptcy Court set out to evaluate the merits of the competing motions. Beginning first with the Trustee's motion toretain TKD, the Court considered 11 U.S.C. § 327(a) , which permits a trustee to employ professionals, includingcounsel, who "do not hold or represent an interest adverse to the estate, and are disinterested persons." (Bankr. Op.17-18 ). It concluded, as a preliminary matter, that "[t]he adverse interest test under Bankruptcy Code § 327(a) speaksin the present tense and only examines present interests," and, further, that TKD did not "presently possess[] claimsor interests contrary to the estate, and consequently, d[ id] not hold an adverse interest within the meaning of § 327(a)." ( Id. at 18-19 ). As factual support, the Court found that TKD's representation of Mishmeret and Shapira had endedby July 2014; that there was "no basis to conclude that [TKD] ha[d] a predisposition in favor of Shapira, Mishmeret, oranyone [**9] else that renders it biased against the estate"; and, thus, that the firm did not have or represent amaterially adverse interest. ( Id. at 19 ).

In a similar vein, the Bankruptcy Court determined that TKD's prior representation of Mishmeret and Shapira did notcreate an "actual conflict" within the meaning of § 327(c) of the Bankruptcy Code because that representation hadbeen limited. (Bankr. Op. 19-20 ("The more limited the prior representation, even in the same bankruptcy case, theless likely the actual conflict.")). Analogizing this case to the bankruptcy proceedings in In re Diva Jewelry Design, Inc.,367 B.R. 463 (Bankr. S.D.N.Y. 2007), the Court observed that

the issue of actual conflict focuses on the relationship between the prior representation of the creditorsand the proposed representation of the estate and, as part of that inquiry, whether confidentialcommunications passed between proposed counsel and his former clients that would prevent him fromrepresenting the best interest of the estate.

( Id. at 21 ). However, the Court recognized, the "mere prior representation of creditors, even in the same bankruptcycase, does not automatically create an actual conflict or mandate disqualification under Bankruptcy Code § 327(c) ." (Id .). The Court found TKD's prior representation of Mishmeret and Shapira "was limited," and there was no evidenceTKD advised Mishmeret on its claim or received confidential communications about the claim. (Bankr. Op. 22 ). TheCourt further stated that [*616] TKD's work on the LFA failed to give rise to an actual conflict, as Mishmeret was not alender under the LFA. ( Id .).

With regard to the Enforcement Motion, the Bankruptcy Court acknowledged its previously-expressed concern about apotential conflict between Mishmeret/Shapira and the estate regarding the D&O insurance proceeds, but found that noactual conflict had emerged since its earlier decision. (Bankr. Op. 22 ). Additionally, because that motion had beenresolved, the Court "[did] not foresee any further proceedings" that could result in an actual conflict. ( Id .).

Next, the Bankruptcy Court assessed Appellants' arguments concerning the Discovery Order and the larger concernwith disclosure of confidential information. (Bankr. Op. 23 ). The Court concluded that the Order's prohibition ondisclosure to Shapira or its agents did not give rise to a conflict, as TKD's representation of Shapira in connection withthe Enforcement Motion was complete, and TKD thus could not be deemed Shapira's agent. ( Id .). Moreover, giventhe evidence that TKD and the Trustee had created an ethical wall "that effectively seal[ed] off the use of any suchconfidential information that may exist," the Court found that TKD and the Trustee had rebutted the presumption that"associated attorneys are presumed to share client confidences." ( Id. at 23-24 ).

Finally, with regard to Appellants' assertion of the Interference and Gadot Claims as grounds for conflict — contendingthat TKD and the Trustee would not investigate or prosecute these claims — the Bankruptcy Court first noted thatTKD had never represented Mishmeret [**10] or Shapira in connection with these claims. (Bankr. Op. 25 ). Moreover,the Trustee had "considered these claims and concluded that they [were] unsubstantiated, speculative and theirprosecution at [that] time [was] contrary to the best interests of the estate." ( Id .). Still further, the Court observed thatneither Mishmeret nor Shapira was a target of any proposed lawsuits by the Trustee. ( Id .). More broadly, becauseTKD had disclosed its prior relationship with Mishmeret and Shapira and had no ongoing relationship with them, andbecause it was "unlikely that the subject matter of its prior representations [would] become the subject matter of adispute between the estate and former clients," the Bankruptcy Court found that TKD had no incentive to act contrary






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to the estate's interests, and that Appellants had presented no evidence of bias. ( Id. at 26 ). As the Court stated,Appellants' opposition to the Retention Application, like their assertion of the Interference and Gadot Claims, wasmerely "strategic." ( Id. at 27 ).

b. Appellants' Cross-Motion to Remove the Trustee for CauseTurning then to Appellants' cross-motion to remove the Trustee for cause, the Bankruptcy Court noted that suchremoval "generally requires a showing of actual fraud or injury to a debtor's interest," citing In re Haworth, 356 F.App'x 529 , 530 (2d Cir. 2009) (summary order). (Bankr. Op. 28 ). The Court observed that Appellants had not allegedactual fraud or injury to the estate, but rather, relied on the mere fact of the Trustee joining TKD, in addition to hisrefusal to pursue the Interference and Gadot Claims. ( Id .).

The Bankruptcy Court reiterated that it had identified no conflict on TKD's part that could be imputed to the Trustee.The Discovery Order had not been violated, as neither TKD nor the Trustee was an "agent" of Shapira. (Bankr. Op. 28). With respect to the Interference and Gadot Claims, the Court accepted the Trustee's explanation for declining topursue those claims, and, indeed, found that "[t]he circumstances suggest[ed] that the Interference Claim wasinterposed as a litigation [*617] tactic to defeat [Appellants'] liability to MAG." ( Id. at 29-30 ). Significantly, theInterference Claim had been asserted against the Ampal estate in addition to the Indenture Trustees, and the Courtagreed with the Trustee's assessment that its assertion could undermine more substantial claims for recovery againstAppellants. Similarly, the Trustee had found the Gadot Claim "factually unsupportable," an assessment that theBankruptcy Court found credible. ( Id. at 30 ).

Lastly, the Court considered the Trustee's willingness to retain conflicts counsel to prosecute the above-referencedclaims. While finding that this "would not resolve an actual conflict arising from [TKD's] prior representation ofMishmeret and Shapira because that conflict would be imputed to the Trustee," the Court had already determined thatTKD would not have an actual conflict in those circumstances. (Bankr. Op. 30-31 ). Thus, the Trustee could, in hisbusiness judgment, retain special conflicts counsel rather than using TKD, though this would not be mandated. ( [**11]Id. at 31 ).

c. The Bankruptcy Court's Equitable ConsiderationsRecognizing its own discretion in resolving the motions, the Bankruptcy Court ended its opinion by considering theequities of a potential disqualification of TKD or a removal of the Trustee. (Bankr. Op. 31-32 ). The Court stated that"[w]hile it may be easy to err on the side of disqualification in what may appear to some to be a close case, thebankruptcy court presiding over the case is in the best position to assess the surrounding circumstances and considerthe interests of the estate and the creditors and the expeditious resolution of the case." ( Id. at 31 ). The Court thusfound that the Trustee's removal would have "a deleterious effect" and cause "unnecessary delay," given his two-yearterm overseeing the administration, his faithful and competent execution of his duties, and the Court's confidence thatthe Trustee would continue his "zealous representation of the estate." ( Id. at 32 ).

DISCUSSIONA. The Standard of ReviewA bankruptcy court's order permitting a trustee to retain counsel is a final order over which this Court has appellatejurisdiction pursuant to 28 U.S.C. § 158(a)(1) . See In re Kurtzman, 194 F.3d 54 , 57 (2d Cir. 1999); Bank BrusselsLambert v. Coan (In re AroChem Corp.), 176 F.3d 610 , 620 (2d Cir. 1999). The Court reviews the bankruptcy court'sconclusions of law de novo and its findings of fact for clear error, giving "due regard ... to the opportunity of thebankruptcy court to judge the credibility of the witnesses." Fed. R. Bankr. P. 8013 ; see also AroChem, 176 F.3d at620 . "[A] finding is 'clearly erroneous' when" the reviewing court is "left with the definite and firm conviction that amistake has been made." ASM Capital, LP v. Ames Dep't Stores, Inc. (In re Ames Dep't Stores), 582 F.3d 422 , 426(2d Cir. 2009) (quoting United States v. U.S. Gypsum Co., 333 U.S. 364 , 395 , 68 S. Ct. 525 , 92 L. Ed. 746 (1948)).

A district court "may affirm [the bankruptcy court's decision] on any ground that finds support in the record, and need





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not limit its review to the bases relied upon in the decision[] below." Freeman v. Journal Register Co., 452 B.R. 367 ,369 (Bankr. S.D.N.Y. 2010). That said, the district court may not consider evidence outside the record below. See Inre Bear Stearns High-Grade Structured Credit Strategies Master Fund, Ltd., 389 B.R. 325 , 339 (Bankr. S.D.N.Y.2008). Further, any argument not raised in the bankruptcy court is considered waived and will not be [*618]considered by the district court, unless such a waiver would result in manifest injustice. See Klein v. Civale & Trovato,Inc. (In re Lionel Corp.), 29 F.3d 88 , 92 (2d Cir. 1994); see also Best Payphones, Inc. v. Manhattan Telecomms.Corp. (In re Best Payphones, Inc.), 432 B.R. 46 , 60 (Bankr. S.D.N.Y. 2010), aff'd 450 F. App'x 8 (2d Cir. 2011)(summary order).

B. The Bankruptcy Court Properly Approved the Trustee's Retention Application1. Applicable LawUnder § 327(a) of the Bankruptcy Code, a trustee may employ professionals, including attorneys, provided that thoseprofessionals do not "hold or represent an interest adverse to the estate" and are "disinterested." 11 U.S.C. § 327(a) .The Bankruptcy Code defines a "disinterested" person as one who "does not have an interest materially adverse tothe interest of the estate or of any class of creditors or equity security holders, by reason of any direct or indirectrelationship to, connection with, or interest [**12] in, the debtor, or for any other reason." 11 U.S.C. § 101(14)(C) .

Although the Code does not provide a definition for "hold or represent an interest adverse to the estate," the SecondCircuit has found that a professional holds or represents an interest adverse to an estate where he:

[i] [ ] possess[es] or assert[s] any economic interest that would tend to lessen the value of the bankruptcyestate or that would create either an actual or potential dispute in which the estate is a rival claimant; or [ii][ ] possess[es] a predisposition under circumstances that render such a bias against the estate.

AroChem, 176 F.3d at 623 (citing In re Roberts, 46 B.R. 815 (Bankr. D. Utah 1985), aff'd in relevant part and rev'dand remanded in part on other grounds, 75 B.R. 402 (D. Utah 1987)). Further, an adverse interest "includes anyinterest or relationship, however slight, that would even faintly color the independence and impartial attitude requiredby the Code and the Bankruptcy Rules." Hogil Pharm. Corp. v. Sapir (In re Innomed Labs, LLC), No. 07 Civ. 4778(WCC), [2008 BL 24842], 2008 U.S. Dist. LEXIS 7017 , [2008 BL 24842], 2008 WL 276490 , at *2 (S.D.N.Y. Jan. 29,2008) (internal citations and quotation marks omitted); see also In re Granite Partners, L.P., 219 B.R. 22 , 33 (Bankr.S.D.N.Y. 1998) ("[T]he professional has a disabling conflict if it has either a meaningful incentive to act contrary to thebest interests of the estate and its sundry creditors — an incentive sufficient to place those parties at more thanacceptable risk — or the reasonable perception of one." (internal citation and quotation marks omitted)). A courtshould disqualify counsel where "it is plausible that the representation of another interest may cause the debtor'sattorneys to act any differently than they would without that other representation." In re Leslie Fay Cos., Inc., 175 B.R.525 , 533 (Bankr. S.D.N.Y. 1994).

Moreover, as the Second Circuit has stated, § 327(a) "is phrased in the present tense, permitting representation byprofessionals 'that do not hold or represent an interest adverse to the estate,' and limiting the class of acceptablecounsel to those 'that are disinterested persons.'" AroChem, 176 F.3d at 623 (emphases in original). As a result,"counsel will be disqualified under section 327(a) only if it presently holds or represents an interest adverse to theestate, notwithstanding any interests it may have held or represented in the past." Id . (internal quotation marks andalterations omitted).

Additionally, under the Code, a professional "is not disqualified for employment ... solely because of such person's[*619] employment by or representation of a creditor, unless there is objection by another creditor or the United Statestrustee, in which case the court shall disapprove such employment if there is an actual conflict of interest." 11 U.S.C. §327(c) . "An actual conflict involves the representation of two presently competing and adverse interests, while apotential conflict occurs where the competition may become active if certain contingencies arise." Granite Partners,219 B.R. at 33 ; see also Diva Jewelry, 367 B.R. at 472 (defining actual conflict of interest as "an active competitionbetween two interests, in which one interest can only be served at the expense of the other"). As the Granite Partners



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court stated, while "[t]he distinction often seems artificial, [**13] and some courts have rejected it," the Code"perpetuates it in certain situations," including § 327(a) . 219 B.R. at 33 .

Finally, the trustee bears the burden of demonstrating that the professional he seeks to employ is qualified for theappointment. See, e.g., In re 245 Associates, LLC, 188 B.R. 743 , 750 (Bankr. S.D.N.Y. 1995); Leslie Fay Cos., Inc.,175 B.R. at 531 .

2. DiscussionReiterating their arguments below, Appellants argue that the Bankruptcy Court erred in permitting appointment of TKDas counsel to the Trustee because: (i) TKD represents adverse interests, namely, Mishmeret and Shapira; (ii) TKDhas an actual conflict, in that it cannot act adversely to Mishmeret or Shapira; and (iii) the Discovery Order prohibitsTKD and the Trustee from accessing relevant materials for the representation. For the reasons stated in the remainderof this section, all of these arguments fall short.

a. TKD Does Not Presently Represent Mishmeret or ShapiraAppellants contend that Mishmeret and Shapira hold or represent interests adverse to the estate: Mishmeret is anIndenture Trustee with a $44 million proof of claim; Shapira transmitted the earlier demand letter, violating theAutomatic Stay, while counseled by TKD; and "the estate has viable causes of action against Mishmeret and Shapirabased on their conduct" underlying the Interference and the Gadot Claims. (Appellant Br. 29-30). Given these adverseinterests, Appellants argue, the Bankruptcy Court's reliance on AroChem to conclude that TKD had no presentrepresentation of either client was in error; whereas the proposed representation in AroChem was limited-purpose andconcordant with the goals of that counsel's prior representation, here the proposed representation is general purposeand will cover issues ostensibly contrary to TKD's prior representation of Mishmeret and Shapira. ( Id. at 30-32).

Moreover, Appellants claim, the Bankruptcy Court clearly erred in finding that TKD's representation of Mishmeret andShapira had ceased by July 2014, because "TKD continues to maintain duties and loyalties to Mishmeret and Shapirato this day." (Appellant Br. 33). Appellants ground this contention of ongoing representation on (i) TKD's purportedinability to bring suit against or take positions adverse to Mishmeret and Shapira, and (ii) TKD's possession of"privileged and confidential materials belonging to Mishmeret and Shapira pertaining to the services TKD rendered forthem in the Bankruptcy Case, which services were directly adverse to the Debtor's estate." ( Id. at 33-34). In thisregard, Appellants argue that TKD's completion of the work referenced in their engagement letters with Mishmeret andShapira does not alter this result, because [*620] (i) TKD admitted to performing work outside the scope of thoseletters, and (ii) TKD's loyalties to those clients persist to this day. ( Id. at 34-35).

Working backwards, this Court concludes that the Bankruptcy Court's finding that TKD's representation of Mishmeretand Shapira ended by July 2014 was not clearly erroneous. Relying on undisputed evidence obtained at the June2015 hearing, the Bankruptcy Court [**14] took note of Mishmeret's and Shapira's retainer agreements with TKD andthe conclusion of each discrete representation:

• Mishmeret retained TKD in June or July of 2013 to enforce its rights as an Indenture Trustee of a sinkingfund, which dispute was ultimately settled; TKD appeared on Mishmeret's behalf in June 2014 inconnection with the motion to approve the settlement agreement (Bankr. Op. 14-15 );

• Mishmeret and Shapira retained TKD in October 2013 in order to oppose the Enforcement Motion, whichdispute was resolved by the Bankruptcy Court's Order in January 2014 ( id. at 15 ); and

• TKD represented Mishmeret in connection with the LFA, "although no formal retainer agreement wassigned," which representation terminated following the Bankruptcy Court's approval of the LFA in June2014 ( id .).

Indeed, the Bankruptcy Court stated, TKD's "invoices confirmed the beginning and end of its representation of





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Mishmeret and Shapira," with the first invoice dated July 1, 2013, and the final invoice dated August 1, 2014. ( Id .).These records, in combination with testimony from Scott Markowitz that TKD did not perform work for Mishmeret orShapira after July 15, 2014, adequately substantiated the Bankruptcy Court's finding that TKD's representation ofthose entities had ceased by July 2014. ( Id. at 15-16 ). See Revise Clothing, Inc. v. Joe's Jeans Subsidiary, Inc., 687F. Supp. 2d 381 , 391 (S.D.N.Y. 2010) ("'In what is perhaps the most typical situation, an attorney-client relationship ...is terminated, simply enough, by the accomplishment of the purpose for which it was formed in the first place.'"(quoting 48 Am. Jur. Proof of Facts 2D § 18)).

While Appellants contend that TKD performed additional work outside the scope of these agreements, therebysuggesting that TKD's representation was not so clearly delineated, even this work is not alleged to have beenperformed later than July 2014, the date by which the Bankruptcy Court determined the representation had ended.(See R. 468-69 (Markowitz testified he received "maybe one e-mail" regarding the sinking funds in approximately July2014, and "spent a minute or two on it")). Such limited additional work — which related to TKD's prior work on thesinking funds, occupied only minutes, and ended contemporaneously with TKD's other work for Mishmeret andShapira — does not warrant a finding of clear error.

Appellants' legal challenge to the Bankruptcy Court's reliance on AroChem is equally unavailing. Although AroChemwas decided in the context of special counsel pursuing a claim aligned with the claim of the creditor itpreviously represented, the Second Circuit did not cabin its statement that "section 327(a) is phrased in the presenttense, permitting representation by professionals 'that do not hold or represent an interest adverse to the estate,' andlimiting the class of acceptable counsel to those 'that are disinterested persons.'" 176 F.3d at 623 (citing 11 U.S.C. §327(a) ) (emphases in original).

[*621] Moreover, as Appellees point out, Diva Jewelry makes clear that such considerations also apply in the generalcounsel context. That court stressed, using an analysis that is persuasive albeit [**15] not precedential, AroChem'sfocus on "the importance of distinguishing between past representation, on the one hand, and present and futurerepresentation, on the other," and stated that such past representation would pertain to the "existence or nonexistenceof an actual conflict" under § 327(c) . Diva Jewelry, 367 B.R. at 471-72 (emphasis in original); see also In re MFGlobal Inc., 464 B.R. 594 , 600 (Bankr. S.D.N.Y. 2011) (stating, in approving trustee's application for counsel, that "thetest for the presence of adverse interests is not retrospective; courts only examine present interests when determiningwhether a party has an adverse interest" (internal quotation marks and alterations omitted)).

Separately, Appellants' suggestion that TKD has ongoing duties and loyalties to Mishmeret and Shapira does not savetheir challenge. The Bankruptcy Court found — and did not clearly err in finding — that TKD had "no ongoingrelationship with Shapira or Mishmeret," because, as discussed above, all such representation had terminated by July2014. (Bankr. Op. 26 ). Appellees have also identified a logical flaw in this argument: While conceding that theNew York Rules of Professional Conduct impose duties relating to former clients, Appellees point out that theprinciple espoused by Appellants would render conflicted any proposed counsel who had previously representeda creditor. (See Appellee Br. 28-29 ("[T]he imposition of legal duties upon attorneys to their former clients surely doesnot convert a former client to a present client.... [C]arried to its logical conclusion, no attorney would be able to passthe adverse interest test regardless of how limited and remote the prior representation.")). As made clear by theprovisions of and law interpreting § 327 of the Code, this is not the case; the Code anticipates that a professional mayhave been employed previously by a creditor, and clearly states that the remedy in such situation is to discern thepresence or absence of "an actual conflict of interest." 11 U.S.C. § 327(c) . Thus, ongoing ethical duties to formerclients cannot, alone, prevent later representation of an estate.

Further, while Appellants state that TKD possesses privileged materials belonging to Mishmeret and Shapira,necessitating an ethical wall, this fact does not compel the conclusion that TKD has an actual conflict. Indeed, theethical wall militates against a finding that the privileged materials pose any issue. As the Bankruptcy Court found:

[T]here is no danger of the disclosure of confidential information. The Trustee produced uncontrovertedevidence of the creation of a bilateral ethical wall on May 8, 2015 that effectively seals off the use of any





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such confidential information that may exist. The Mishmeret files were moved off-site, and the Trustee'sconfidential information is under the exclusive control of the Trustee and the former Spizz Cohenattorneys. Goldstein also testified in this regard that the confidential information covered by the DiscoveryOrder was physically located in a portable hard drive in his possession. Moreover, neither group hascomputer [**16] access to the other group's files.

(Bankr. Op. 23 (emphasis in original); see also id . (finding "no evidence that any confidential information was actuallyexchanged prior to the creation of the ethical wall" (internal citation omitted)). These findings were based on testimonythat the Bankruptcy Court observed and credited, [*622] and this Court will not conclude that they are clearlyerroneous. Thus, TKD's mere possession of privileged materials — which are closely guarded from the Trustee andother former Spizz Cohen attorneys — does not present an issue.

As the Second Circuit has stated, the presumption that attorneys within a firm share client confidences can berebutted through evidence of such an ethical wall. See Hempstead Video, Inc. v. Village of Valley Stream, 409 F.3d127 , 138 (2d Cir. 2005) ("We see no reason why, in appropriate cases and on convincing facts, isolation — whether itresults from the intentional construction of a 'Chinese Wall,' or from de facto separation that effectively protectsagainst any sharing of confidential information — cannot adequately protect against that."). Here, the BankruptcyCourt correctly stated that the presumption of sharing confidences could be overcome, and found that the ethical wallimposed by TKD — governing both files and performance of past and future work — adequately rebutted thepresumption. This Court agrees. Accordingly, TKD's mere possession of privileged materials, if true, does not amountto current representation by TKD or, as discussed in the next subsection, an actual conflict.

b. TKD Does Not Have an Actual ConflictAppellants claim that TKD has an actual conflict under 11 U.S.C. § 327(c) , mandating denial of the RetentionApplication without consideration of equitable factors. (Appellant Br. 35-36). In support of this claim, Appellants firstcontend that TKD cannot act adversely to Mishmeret or Shapira — as, for example, by objecting to Mishmeret's proofof claim, bringing causes of action against Mishmeret or Shapira, or "taking any steps to protect the estate againstimproper acts by Mishmeret or Shapira," such as violations of the automatic stay or usurpation of estate assets. ( Id. at36). In addition, Appellants state that this "actual conflict" cannot be remediated by the retention of conflicts counsel,because "where proposed counsel is conflicted from representing [a trustee] with regards to matters central to thebankruptcy, even the presence of conflicts counsel does not make the retention appropriate." (Appellant Br. 36 (citingIn re Project Orange Assocs., LLC, 431 B.R. 363 , 376 (Bankr. S.D.N.Y. 2010))). Because Mishmeret is one of thelargest creditors, Appellants argue that its claims (and any potential claims against it) are central, and thus, conflictscounsel cannot mitigate this issue. ( Id. at 36-37).9

Appellants' contention on this ground falls short as well. As noted above, "[a]n actual conflict involves therepresentation of two presently competing and adverse interests, while a potential conflict occurs where thecompetition may become active if certain contingencies arise." Granite Partners, 219 B.R. at 33 . With regard toMishmeret's [**17] proof of claim, the Bankruptcy Court determined that it was filed on February 28, 2013, and hadbeen prepared by another law firm prior to TKD's initial retention. (Bankr. Op. 22 ). Further, Appellants "ha[d] notargued that Mishmeret's claim should be disallowed," which made sense, inasmuch as the claim itself was anobjective figure "based on the amount of the Series C bonds." ( Id .). Appellees underscore this point, noting that theproof of claim "is not objectionable on its face, asserting nothing beyond the amount owed on the Series C Bondsissued and outstanding [*623] as of the Petition Date." (Appellee Br. 53-54). As such, Appellants have not raised anactual, present conflict predicated on the fact of Mishmeret's proof of claim.

With respect to the prospect of bringing causes of action against Mishmeret or Shapira, the Bankruptcy Courtdetermined that the Trustee had adequately investigated these allegations and determined them unworthy of furtherpursuit; in fact, pursuing those claims could work to the detriment of more certain claims, namely, MAG's $25 millionclaim against MNF and Maiman. (Bankr. Op. 25 ). Given the successes outlined above, Appellants are hard-pressed to argue that the Trustee was unreasonable in forgoing a claim against Mishmeret and Shapira that hedeemed vague and unsubstantiated, and in bringing a claim on the estate's behalf against Appellants that the





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eschewed claims would only have weakened.10

Finally, Appellants' contention that TKD cannot "tak[e] any steps to protect the estate against improper acts byMishmeret or Shapira" (Appellant Br. 30) is entirely speculative, as no such conflict — actual or potential — has arisenat this point.

c. The Discovery Order Is Not an Impediment to TKD's RepresentationAppellants note that the Trustee and his former firm received confidential information relating to Ampal, some of whichthe Discovery Order expressly stated could not be shared with Shapira or its "employees, representatives, or agents."(Appellant Br. 37-38). According to Appellants, "[t]his provision was vital to the resolution of an extremely contentiousdiscovery dispute in the Bankruptcy Case and the Appellants would never have agreed to deliver Private Informationto any law firm that represented Shapira." ( Id. at 38 (emphasis in original)). Appellants claim that TKD represents andis an agent of Shapira, as its representation has not been formally terminated, and further claim that "[t]he fact that thePrivate Information is now in Shapira's lawyers' hands — regardless of if anyone besides Mr. Goldstein has seen it —is a violation of the Discovery Order." ( Id. at 38-39).

As detailed at length above, the Bankruptcy Court found that TKD had instituted an ethical wall that obviated any"danger of the disclosure of confidential information." (Bankr. Op. 23 ). This Court has identified no error in thatfinding. Appellants present no compelling argument that this ethical wall would not suffice to protect informationdisclosed to the Trustee and other Spizz Cohen attorneys pursuant to the Discovery Order, particularly given thetestimony [**18] that the evidence is segregated at the TKD firm and maintained, literally, under lock and key. WhileAppellants press that the Trustee's joining TKD violates the letter of the Discovery Order, the Court concurs with theBankruptcy Court that there is no danger of disclosure of this sensitive information to Shapira — particularly given thatTKD's relationship with Shapira has long since ended — and will not find this any impediment to TKD's representationof the Trustee.

C. The Bankruptcy Court Properly Denied the Cross-Motion to Disqualify the Trustee1. Applicable LawPursuant to 11 U.S.C. § 324(a) , a bankruptcy court may remove a trustee for cause, which generally requires [*624] ashowing of "fraud and actual injury to the debtor interests." In re Freeport Italian Bakery, Inc., 340 F.2d 50 , 54 (2d Cir.1965); accord Haworth, 356 F. App'x at 530 . "The party seeking to remove a trustee must make a 'strong showingbecause the effect of removal is deleterious to the continuity of the administration of the estate.'" In re Empire StateConglomerates, Inc., 546 B.R. 306 , 317 (Bankr. S.D.N.Y. 2016) (citing Matter of Carla Leather, Inc., 44 B.R. 457 , 473(Bankr. S.D.N.Y. 1984), aff'd, 50 B.R. 764 (S.D.N.Y. 1985)). "Removal should be exercised only 'if the administrationof the estate in bankruptcy would suffer more from the discord created by the present trustee than would be sufferedfrom a change in administration.'" In re Concept Packaging Corp., 7 B.R. 607 , 609 (Bankr. S.D.N.Y. 1980) (quotingFreeport Italian Bakery, Inc., 340 F.2d at 55 ).

"A bankruptcy court's denial of a motion to remove the trustee under 11 U.S.C. § 324(a) is reviewed for abuse ofdiscretion," and "[a] bankruptcy court abuses its discretion when its ruling is based on an erroneous view of the law ora clearly erroneous assessment of the evidence." In re Soundview Elite Ltd., F. App'x , [2016 BL 116964],2016 U.S. App. LEXIS 6730 , [2016 BL 116964], 2016 WL 1459533 , at *1 (2d Cir. Apr. 14, 2016) (summary order).

2. DiscussionAppellants do not allege, nor can they credibly do so, that the Trustee should be removed by reason of fraud or actualinjury to the debtor. Instead, Appellants argue that the Trustee should be removed because of (i) his connection toTKD, (ii) his purported refusal to pursue the Interference and Gadot Claims, and (iii) his alleged violation of theBankruptcy Court's Discovery Order. (Appellant Br. 33-34). For the reasons discussed below, the Bankruptcy Courtproperly determined, and certainly did not abuse its discretion in determining, that the Trustee should not be removedfor cause.




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a. The Trustee's Employment by TKD Does Not Warrant RemovalAppellants contend that the "actual injury" necessary under § 324(a) "may simply be the loss of creditor confidence tothe point that discord threatens the estate.... If it would suffer more from the discord created by the present trusteethan would be suffered from a change of administration, the removal of the trustee is necessarily the better solution."(Appellant Br. 39-40 (citing Dye v. Brown (In re AFI Hldg., Inc.), 355 B.R. 139 , 149 (B.A.P. 9th Cir. 2006), aff'd andadopted, 530 F.3d 832 (9th Cir. 2008))).

Appellants claim the Trustee should be removed for joining a law firm that purportedly represents interests adverse tothe estate, on the theory that the firm's conflicts are imputed to the Trustee. (Appellant Br. 40-41). As they argue,because TKD cannot be adverse [**19] to Mishmeret or Shapira, the Trustee now cannot take actions adverse tothose entities either. ( Id. at 41). Appellants also cite a portion of the transcript from the May 2015 hearing, duringwhich the Trustee offered a contrary (and, to Appellants, incorrect) view, stating that if the Bankruptcy Court were tofind "that [TKD] was disqualified because it had an ... actual conflict ... it wouldn't taint me, but I think I would have toseparate myself from the firm." ( Id. at 42 (citing R. 512-13)).

This Court does not need to pass upon the accuracy of the Trustee's position, although it takes seriously the positionof the U.S. Trustee that such a conflict would necessitate the Trustee's withdrawal. (R. 435-38). Even if Appellantswere correct that TKD's conflicts would be imputed to the Trustee, the Bankruptcy Court determined that "there [was]no conflict to impute [*625] to the Trustee because [TKD] is not conflicted." (Bankr. Op. 28 ). As discussed above, theBankruptcy Court's determination that TKD was not conflicted was not in error, and accordingly, there is no imputationof conflicts that would render TKD's appointment problematic.

b. The Trustee's Refusal to Pursue the Interference and Gadot Claims Does Not Warrant RemovalAs discussed at length above, the Trustee's decision not to bring the disputed Interference and Gadot Claims againstthe Indenture Trustees was based on a rational choice to pursue the more certain — and more lucrative — claimagainst Maiman and MNF, which decision appears to have been validated by subsequent court decisions. Moreover, itbears noting, the Trustee's unwillingness to pursue these claims long predates (and was in no way affected by) hismove to TKD. In light of the high standards imposed for removal of a properly elected trustee, this Court cannot saythat the Bankruptcy Court's decision was erroneous. See In re Soundview Elite Ltd., [2016 BL 116964], 2016U.S. App. LEXIS 6730 , [2016 BL 116964], 2016 WL 1459533 , at *1 ("Grounds for disapproval or removal of a trusteein bankruptcy are not to be found in his formal relationships, and the Court has traditionally stressed the elements offraud and actual injury to the debtor interests." (internal quotation marks omitted) (quoting Freeport Italian Bakery, Inc.,340 F.2d at 54 )).

c. The Trustee Has Not Violated the Bankruptcy Court's Discovery OrderIn addition, Appellants argue, the Discovery Order prohibits TKD from possessing information necessary for theTrustee to do his job; by virtue of joining TKD, the Trustee now "represents or acts as agent of Shapira," andaccordingly, the Trustee cannot possess this information either. (Appellant Br. 44). Because the Trustee does possessthis information, Appellants claim, the Bankruptcy Court should have removed him "to ensure that the PrivateInformation does not land in Shapira's hands, which could have disastrous ramifications for the parties producing suchdocuments." ( Id.).

As detailed above, the Bankruptcy Court determined that TKD's institution of an ethical wall and lock-and-key systemfor the Discovery Order materials adequately protected them from any disclosure to Shapira. As this Court hasidentified no error in those findings, [**20] the Bankruptcy Court sufficiently determined that there was no basis forremoval of the Trustee for violation of the earlier Discovery Order.

D. The Bankruptcy Court's Discussion of Equitable Factors Was Not ImproperFinally, Appellants argue that the Bankruptcy Court improperly considered "equitable and case management factors,"as the circumstances mandated denial of the Retention Application and removal of the Trustee. (Appellant Br. 44-45).



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Whereas the Bankruptcy Court took into account "the impact ... that disqualifying TKD and removing the Trusteewould have on the Bankruptcy Case; the Trustee's experience in the case; and the long history of litigation anddisputes between the Appellants and Mishmeret/Shapira," Appellants maintain that the Court had no such discretion. (Id. at 46). Moreover, Appellants claim, were such considerations permissible, "the equities plainly weigh in favor ofthe Appellants," given "the devastating impact on the estate from the inability of TKD and the Trustee to pursuevaluable causes of action" against Mishmeret and Shapira. ( Id.).

[*626] As discussed above, denial of the Retention Application and removal of the Trustee was not mandated, as theBankruptcy Court properly determined that TKD did not presently represent Mishmeret or Shapira, and TKD and theTrustee did not face an "actual conflict" by virtue of TKD's prior representation of Mishmeret and Shapira. Withoutsuch actual conflict, approval or denial of the Retention Application and the cross-motion to remove the Trustee wascommitted to the sound discretion of the Bankruptcy Court. Accordingly, in light of the substantial burden necessaryfor removal of a properly elected trustee, and Appellants' failure to demonstrate that any "devastating impact on theestate" could actually occur in light of TKD's retention by the Trustee, this Court believes the Bankruptcy Courtproperly considered equitable factors, including the delay that would inhere were the Trustee removed. See generally In re Vebeliunas, 231 B.R. 181 , 194-95 (Bankr. S.D.N.Y. 1999) (holding that Section 327(a) vests discretion inbankruptcy court to disapprove trustee's choice of special counsel not only for conflict of interest, but also for otherreasons serving the best interests of the estate).

CONCLUSIONThe instant appeal is predicated on the fundamental misperception that what is in Appellants' interest is also in theestate's interest. Particularly given the facts and procedural history outlined above, that simply is not the case. Cf. Inre Fletcher Int'l, Ltd., 536 B.R. 551 , 562 (S.D.N.Y. 2015) ("First, Appellant's interest and the estate's interest are notidentical. Appellant is one of many individuals asserting a claim to a portion of the estate. The Trustee's obligation,and that of his appointed professionals, is to make decisions in the best interest of the estate's creditors and investorsas a whole, not to do what is best for Appellant alone."). And while Appellants' professed concerns about estateprofessionals "switching sides" in the middle of a bankruptcy may be appropriate as a general matter, [**21] they arenot implicated here. The Trustee may have changed firms, but he has not changed his positions or his mode ofrepresenting the estate, both of which have frequently brought him in conflict with Appellants. The Bankruptcy Court,which was in the very best position to observe the proceedings, saw no reason to remove the Trustee (or to deny himthe professional assistance that he sought) and many reasons to keep him. This Court agrees.

The judgment of the Bankruptcy Court is affirmed in all respects, and the appeal is dismissed. The Clerk of Court isrespectfully directed to close the case.

SO ORDERED.

Dated: July 18, 2016

New York, New York

/s/ Katherine Polk Failla

KATHERINE POLK FAILLA

United States District Judge

fn 1

The facts set forth herein are taken from the Bankruptcy Court record designated on appeal by Appellants (Dkt.#10), and the docket of the bankruptcy case, No. 12-13689 (SMB) (Bankr. S.D.N.Y.) ("Bankr. Dkt."). Citations to



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"R. [number]" refer to the page number within the record. Included within the record is the Bankruptcy Court's July27, 2015 opinion detailing its findings of fact and conclusions of law on the parties' motions; it is cited in thisOpinion as "Bankr. Op." For convenience, the parties' memoranda of law will be referred to as follows: Appellants'opening brief as "Appellant Br." (Dkt. #10); Appellee's opposition as "Appellee Opp." (Dkt. #12); and Appellants'reply brief as "Appellant Reply" (Dkt. #14).

fn 2

The Bankruptcy Court would later term this claim "frivolous," at least as it pertained to Ampal, inasmuch as Maimaneffectively controlled Ampal during the relevant period. Ampal II, [2015 BL 284654], 2015 Bankr. LEXIS 2934 ,[2015 BL 284654], 2015 WL 5176395 , at *11-12.

fn 3

Technically speaking, Maiman and MNF are defendants and third-party plaintiffs in the adversary proceedingdiscussed in the text. For ease of reference, this Court will refer to them as Appellants when discussing thatlitigation in this Opinion.

fn 4

Although this decision and that of Judge Rakoff postdate this appeal and the designation of the record on appeal,the Court takes judicial notice of their occurrence here.

fn 5

In granting MAG's motion for summary judgment, the Bankruptcy Court looked askance at those claims as theypertained to Ampal itself. After concluding that Maiman was either barred from or had abandoned his defenses toMAG's claims, the Court observed:

In any event, MNF can assert defenses to the 2008 Note, and even if Maiman could too, the defensesthey asserted plainly lack merit. Their principal defense is to blame Ampal for their breach. Theycontend that the Third Party Defendants defamed MNF and Maiman and tortiously interfered withMNF's efforts to consummate the Project, Ampal failed to stop the Third Party Defendants (they don'tsay how this could have been accomplished) and Ampal's failure to stop the Third Party Defendants'tortious conduct breached the Further Assurances Provisions in the Option Agreement and the OptionExercise Agreement and excused payment. (Opposition at 9-10.)

The argument is frivolous. Maiman ran Ampal at the time and also controlled MNF. In essence, theDefendants are contending that they should be excused from honoring the 2008 Note and Guarantybecause they didn't do anything to stop the Third Party Defendants. Suffice it to say, a party may notcause a breach of contract and claim that the breach excused its own obligation to perform.

Ampal II, [2015 BL 284654], 2015 Bankr. LEXIS 2934 , [2015 BL 284654], 2015 WL 5176395 , at *11-12 (citationomitted).

fn 6

Separately, with regard to Appellants' assertion that the Trustee had failed to pursue the Gadot Claim, the Trusteestated that he had not received notice of the claim in the Debtor's filing, but had nonetheless "look[ed] into" it and"determined that [the] allegation [was] not borne out by the facts." (R. 155).

fn 7








On June 8, 2015, the U.S. Trustee submitted a response indicating that he would object to appointment of a "co-trustee" or "estate representative" to deal with Mishmeret's claims, and if the Bankruptcy Court found the Trusteeprecluded from investigating the estate's claims against Mishmeret or Shapira (or vice versa), "the proper remedywould be to remove the Chapter 7 Trustee." (R. 435-38).

fn 8

At the conclusion of the hearing, the Bankruptcy Court directed the Trustee to serve notice of the retentionapplication and objection on Mishmeret, giving Mishmeret an opportunity to respond. Mishmeret did not respond,and the Trustee filed a certificate of no objection. (Bankr. Op. 17 ).

fn 9

In their reply papers, Appellants supplement this argument by pointing to the U.S. Trustee's statement that if theTrustee could not investigate claims against Mishmeret and Shapira, conflicts counsel would not resolve thisproblem. (Appellant Reply 14-15).

fn 10

The Court recognizes that Appellants have appealed this affirmance to the Second Circuit. See In re Ampal-American Israel Corp., No. 16-979-cv (Mar. 30, 2016).





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December 01, 2016

Barton Doctrine

Yellowstone Club Founder's Claims Against Former Counsel May SurviveBNA Snapshot

• Bankruptcy court's permission not needed to bring prepetition claims in district court

• Bankruptcy court's permission needed for post-petition claims for conduct related to former counsel's actions

By Diane Davis

Nov. 30 — The latest chapter in the long-running saga of Montana's Yellowstone MountainClub's bankruptcy litigation may give its former owner a chance to move forward on claims thathis former attorney used confidential information to his detriment in his bankruptcy proceedings (Blixseth v. Brown (In re Yellowstone Mountain Club, LLC) , 2016 BL 393628, 9th Cir., No.

14-35363, 11/28/16).

Judge Alex Kozinski of the U.S. Court of Appeals for the Ninth Circuit Nov. 28 concluded thatplaintiff Timothy L. Blixseth needed the bankruptcy court's permission before bringing his post-petition claims against hisformer counsel and chair of the Unsecured Creditor's Committee (UCC), Stephen R. Brown.

Blixseth didn't need the bankruptcy court's permission to bring his prepetition claims against Brown, the court said.

The Ninth Circuit then remanded the case to the bankruptcy court to determine whether Brown is entitled to derived judicialimmunity for Blixseth's post-petition claims because his position on the UCC doesn't “entitle him to immunity for all actions asChair.” “Unless he is, we see no reason Blixseth couldn't proceed to discovery on these claims,” the court said, signaling thatthe case might yet move forward.

The court relied on the Barton doctrine, which “bars a broad range of suits against bankruptcy trustees absent prior approvalof the bankruptcy court,” according to Bloomberg Law: Bankruptcy Treatise, pt. IX, ch. 295 (D. Michael Lynn et al. eds., 2016).Under the Barton doctrine, plaintiffs must “first obtain authorization from the bankruptcy court before ‘initiat[ing] an action inanother forum’ against certain officers appointed by the bankruptcy court for actions the officers have taken in their officialcapacities,” the court said.

The question is whether the Barton doctrine applies to lawsuits against creditors’ committee members because some courtsof appeals have extended the doctrine to actors who aren't bankruptcy trustees or receivers. The Ninth Circuit said it is thefirst court to extend the Barton doctrine's application to protect creditor committee members.

Blixseth argued that Brown owed no duty to the estate and represented creditors seeking payment from the estate. Accordingto Blixseth, the Barton doctrine doesn't apply to his claims against Brown.

The Ninth Circuit rejected Blixseth's view of the UCC's interests as too narrow. “Because creditors have interests that areclosely aligned with those of a bankruptcy trustee, there's good reason to treat the two the same for purposes of the Bartondoctrine,” the court said.

Long Saga of Bankruptcy Litigation

Blixseth and his former wife Edra developed the Yellowstone Mountain Club as an exclusive ski and golf resort for the “ultra-wealthy” in the late 1990s.

Yellowstone Club Founder's Claims Against Former Counsel May Survive, Bankruptcy Law Reporter (BNA)



http://www.bloomberglaw.com/ms/public/document/Blixseth_v_Brown_In_re_Yellowstone_Mountain_Club_LLC_No_1435363_2

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Later, Blixseth borrowed $375 million from Credit Suisse on behalf of Yellowstone but used some of the proceeds to pay forhis personal debts. Blixseth said he relied on the advice of his attorney (Brown) before doing this.

The shareholders of the Yellowstone entities sued him in state court and Blixseth settled. He later divorced Edra and gave theYellowstone entities to her in the marital settlement agreement under advice of counsel (Brown).

Edra filed bankruptcy petitions on behalf of the Yellowstone entities and the U.S. Trustee appointed Brown as chair of theUCC.

Blixseth sued Brown in district court, alleging that he used confidential information in the bankruptcy proceedings. The districtcourt held it lacked jurisdiction because Blixseth hadn't first obtained the bankruptcy court's permission to sue as required byBarton.

Blixseth then asked the bankruptcy court for permission to bring his claims in district court. The bankruptcy court denied hisrequest, saying that it was “impossible … to isolate Blixseth's so-called ‘pre-petition malpractice and malfeasance’ claims fromBrown's activities as a member of the Unsecured Creditors Committee.”

The district court affirmed the bankruptcy court.

Barton Doctrine Applies to UCC Members

On appeal, the Ninth Circuit concluded that the Barton doctrine applies to UCC members like Brown who are sued for actsperformed in their official capacities.

The court, however, distinguished between Blixseth's pre- and post-petition claims, concluding that he only neededpermission from the bankruptcy court on post-petition claims.

The court also rejected Blixseth's argument that the bankruptcy court exceeded its authority under Stern v. Marshall, 564 U.S.462, 131 S. Ct. 2594 (2011), by adjudicating his claims on the merits. Stern doesn't preclude bankruptcy courts fromadjudicating Barton claims, the court said.

Judges Richard A. Paez and Marsha S. Berzon joined the opinion.

John C. Doubek, Doubek Pyfer & Fox LLP, Helena, Mont.; Michael J. Ferrigno, Law Office of Michael J. Ferrigno, Boise,Idaho, represented Plaintiff/Appellant Timothy L. Blixseth.

Dale R. Cockrell and Mikel L. Moore, Moore Cockrell Goicoechea & Axelberg P.C., Kalispell, Mont., representedDefendants/Appellees Stephen R. Brown.




Full text at: http://www.bloomberglaw.com/public/document/Blixseth_v_Brown_In_re_Yellowstone_Mountain_Club_LLC_No_1435363_2

Yellowstone Club Founder's Claims Against Former Counsel May Survive, Bankruptcy Law Reporter (BNA)


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