Special Counsel Violates Code and Rules by Failure to Disclose Fee Agreements

Posted by NCBRC - December 11, 2017

Special counsel representing a bankruptcy debtor in a separate tort action must comply with bankruptcy statutes and rules relating to disclosure of their employment arrangements, including any fee-sharing agreements. Wright v. Csabi (In re Wright), No. 13-10472, Adv. Proc. No. 16-1004 (Bankr. S.D. Tex. Dec. 2017).

During her bankruptcy, chapter 13 debtor, Vicky Wright, presented to the court an agreement she had entered into with James Grissom to represent her in a contingency-fee tort claim. The court approved the agreement. Unbeknownst to the court, Mr. Grissom had separately entered into fee-sharing agreements with Francisco Rodriguez and William Csabi. After the tort case settled for $650,000, the court ordered that Mr. Grissom be paid $90,000 pursuant to the prior-approved agreement, and that the rest of the settlement proceeds go to the chapter 13 estate for distribution to creditors. Notwithstanding this order, Mr. Grissom distributed $73,330 each to Mr. Rodriguez and Mr. Csabi pursuant to the fee-sharing agreements. Ms. Wright’s bankruptcy counsel, Abe Limon, sent demand letters to Messrs. Rodriguez and Csabi notifying them that the transferred funds were property of the bankruptcy estate and demanding turnover. Mr. Csabi turned the funds over several months later and Mr. Rodriquez did not turn over the funds. Ms. Wright filed an adversary complaint seeking disgorgement and turnover.

The court proceeded to address the allegations in the adversary complaint with the following conclusions having been established in previous orders: 1) Ms. Wright’s portion of the settlement proceeds were part of the bankruptcy estate, and 2) Mr. Grissom never disclosed his fee agreements with either Mr. Rodriguez or Mr. Csabi to the court.

The court began with the admonition that special counsel seeking employment in a tort case related to a chapter 13 bankruptcy must comply with Rule 2014, local rule BLR 2014-1, and section 327(e), including filing an application with the bankruptcy court disclosing the terms of employment and fee-sharing agreements, and that, under Fifth Circuit precedent, this obligation is ongoing. As these violations were not specifically pled in the adversary complaint, the court relied on its power under section 105(a) to “attend to” them.

The court went on to address the statutory violations alleged in the complaint.

Section 329 and Rule 2016 mandate that any lawyer representing a debtor in connection with a bankruptcy case, including in a capacity that will impact the debtor’s case, must disclose to the court the financial arrangement under which he is employed. Section 504 prohibits fee sharing including fee-sharing agreements that might be permitted under non-bankruptcy state bar rules.

The court further found that because the settlement proceeds, except that portion carved out to pay the court-approved fees to Mr. Grissom, were property of the bankruptcy estate, Mr. Grissom’s unauthorized use of those funds to comply with his fee-sharing agreements violated the automatic stay. Both Mr. Rodriguez and Mr. Csabi also violated the automatic stay by accepting and retaining the funds after being made aware of the bankruptcy at the latest, when Ms. Wright’s chapter 13 attorney notified them in a letter seeking turnover of the funds.

As this order dealt only with liability, the court did not address the allegations in the complaint relating to damages. Nor did the court address alleged violation of the Texas Disciplinary Rules of Professional Conduct, citing interests of comity.

Wright Bankr SD Tex opinion Dec 2017

 

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