Court: United States Bankruptcy Court, W.D. New York; July 12, 2013; Us Bankruptcy; United States Bankruptcy Court
In this Chapter 11 proceeding, a law firm and three partners are seeking to dismiss a motion from the Official Committee of Unsecured Creditors to compel the disgorgement of legal fees and impose compensatory sanctions. Key issues include the relevance of a general release, limits on reviewing pre-petition legal fees, and the court's authority to reconsider prior allowances for post-petition services. Richard A. Maussner and his son, Mark E. Maussner, owned Rama Group of Companies, Inc. In 1999, they engaged Hurwitz, Fine, P.C. for assistance with restructuring and selling parts of their business. In early 2000, four divisions were transferred to Mark Maussner for what was later questioned as inadequate compensation, while Richard Maussner was negotiating a sale of remaining divisions to Strategic Publications, LLC for $8,425,000, including a $100,000 non-compete payment and a $25,000 consulting fee.
However, following an IRS search warrant on Richard Maussner's properties, the sale terms were revised significantly. The final Asset Purchase Agreement on May 8, 2000, stipulated a $5,000,000 payment to Rama, a $300,000 personal loan to Richard Maussner, and a five-year employment contract at $200,000 annually. The agreement also anticipated Rama filing for Chapter 11 protection. Rama retained Harter, Secrest, Emery, P.C. for bankruptcy petition preparation, while Richard Maussner engaged Bluestein, Muhlbauer, P.C. for representation. Hurwitz, Fine was appointed as special counsel to finalize the Asset Purchase Agreement.
Rama filed its Chapter 11 petition on May 19, 2000, followed by rapid developments, including the appointment of Harter, Secrest, Emery as general counsel and Hurwitz, Fine as special counsel approved by the Bankruptcy Court. The debtor moved to establish sale procedures for its assets, which were subsequently approved by the court, culminating in a successful sale to Metro Group, Inc. Meanwhile, the Office of the United States Trustee appointed an official committee of unsecured creditors, with Donald P. Sheldon approved as Committee counsel by August 7. By this time, Rama had completed the sale of substantially all its assets.
The Committee conducted an investigation into potential recovery sources and was authorized by the Bankruptcy Court on March 6, 2002, to pursue claims under Chapter 5 of the Bankruptcy Code. Following this, on March 7, 2002, the Committee initiated six adversary proceedings, notably Adversary Proceeding 02-1097, naming Richard Maussner as a defendant for fraudulent conveyances and preferences, alleging he diverted corporate assets valued at $1,274,379.15 prior to the bankruptcy petition. In Adversary Proceeding 02-1098, the Committee sought recovery of a salary due to Maussner from Metro Group, claiming misrepresentation to the Bankruptcy Court regarding the Asset Purchase Agreement, asserting that the salary constituted a fraudulent diversion of assets.
Settlements were reached with both Richard Maussner and Metro Group, with the Bankruptcy Court approving a $385,000 recovery from Maussner on August 29, 2006. The dispute with Metro Group resulted in a lengthy trial in 2010, which culminated in a $200,000 settlement approved by the court on June 30, 2011. Subsequently, on January 31, 2012, the Official Committee of Unsecured Creditors filed a motion for sanctions against the law firm Hurwitz, Fine, and three partners, alleging violations of fiduciary duties and professional responsibilities during the bankruptcy proceedings. The Committee claimed that Hurwitz, Fine benefitted at the expense of the debtor and creditors by concealing vital information regarding the Asset Purchase Agreement.
The Committee seeks disgorgement of fees paid, disallowance of additional fee requests, and compensatory sanctions exceeding $2 million. Hurwitz, Fine denies the allegations and has cross-moved to dismiss the motion, presenting ten arguments for consideration. The court will not resolve any factual disputes at this stage but will focus on the remedies sought by the Committee, which include compensatory sanctions, disgorgement and disallowance of pre-petition fees, and disgorgement of post-petition service fees. The request for compensatory sanctions is characterized as an attempt to recover damages, qualifying as a 'proceeding to recover money or property' under Bankruptcy Rule 7001, necessitating an adversary proceeding rather than a motion.
The Committee asserts that the Court has the authority to oversee claims of attorney misconduct, particularly for actions occurring in its presence or under its supervision. The Committee is permitted to file a motion for disgorgement of legal fees incurred post-petition but overreaches by also seeking compensatory damages through this motion. If an adversary proceeding were initiated, the Committee would face various jurisdictional challenges, including statutes of limitation. Consequently, the motion for compensatory sanctions or damages cannot be granted, leading to the approval of the cross-motion to dismiss this aspect of the Committee's request.
Additionally, a prior general release has exempted Hurwitz, Fine from liability regarding the damages the Committee seeks, which stem from legal advice provided to Richard Maussner. These damages were already pursued in settled Adversary Proceedings 02-1097 and 02-1098. A Settlement and Release Agreement, approved by the Bankruptcy Court on August 29, 2006, binds the Committee and the bankruptcy estate, containing a clause that releases all parties from potential claims related to the adversary proceedings.
The Committee argues that Hurwitz, Fine’s representation of both Maussner and Rama created a conflict of interest. However, due to the release agreed upon in the settlement, Hurwitz, Fine and its partners benefit from this release, which the Committee consented to. Furthermore, the Committee’s attorney previously stated that the Debtor approved the Settlement and Release Agreement, which aimed for a complete resolution of claims between the parties related to the Committee's allegations against Maussner.
The Settlement and Release Agreement includes a mutual release that extends to the debtor, Maussner, and their agents, representatives, and attorneys, which the Committee has used to release counsel from all claims related to the debtor’s estate, both known and unknown. This release precludes the Committee from recovering compensatory sanctions based on counsel's representation of Maussner. The Committee also seeks disgorgement of payments made to Hurwitz, Fine for pre-petition legal fees and the disallowance of any claims for further payments for pre-petition services. Pre-petition legal fees are distinct from post-petition fees, with the Bankruptcy Code requiring court approval for post-petition attorney employment and compensation, while pre-petition fees do not need judicial ratification. The representation of a debtor typically begins only upon the appointment order, and in this case, the role of bankruptcy counsel was fulfilled by other attorneys, separating it from Hurwitz, Fine’s previous representation.
The Court has limited authority over prior services, mainly in the context of objections to claims for pre-petition legal services. The Committee previously objected to Hurwitz, Fine's claim for pre-petition services, alleging misconduct, but ultimately settled for a general unsecured claim of $27,485.45, which the Court approved. Section 502(j) of the Bankruptcy Code allows for reconsideration of claims but requires new facts beyond previously asserted grounds. The Committee has not provided any new evidence to warrant reconsideration of the settled claim. Therefore, the Court will not revisit the Committee’s settlement of Hurwitz, Fine’s pre-petition claim, and would reject this aspect of the Committee’s motion even if review were permissible.
Hurwitz, Fine may have been involved in facilitating fraudulent asset conveyances for the Maussner family, potentially enabling the payment of pre-petition legal fees. However, pre-petition representation alone does not imply any misconduct by the counsel. While corporate management has heightened obligations in a zone of insolvency, corporate counsel does not share such duties prior to their appointment. Hurwitz, Fine had no duty to creditors or a non-existent bankruptcy estate before becoming special bankruptcy counsel, and the Committee has not presented evidence of pre-petition fraud warranting sanctions. Fraudulent conveyances do not equate to fraud without false representation; they occur when an insolvent debtor transfers assets for inadequate consideration. The pre-petition legal services do not justify the disgorgement of previously paid fees or the disallowance of fees owed.
Regarding post-petition fees, the Committee seeks the disgorgement of all previous allowances granted to Hurwitz, Fine for post-petition services. The firm received $81,391.86 for these services through two interim applications approved by the Court. Hurwitz, Fine argues that these awards should be considered final and that any delay by the Committee should prevent reconsideration. Under 11 U.S.C. § 330, the Bankruptcy Court can award compensation to attorneys for a debtor in possession, taking into account relevant factors. However, final awards are typically deferred until the attorney's representation is nearing completion, leading to interim compensation requests under 11 U.S.C. § 331. The prior court orders for Hurwitz, Fine’s fees were interim and do not settle the final compensation issue, which must consider any interim payments as per 11 U.S.C. § 330(a)(5). Although significant time has passed since the last interim allowance, any delay in finalizing fees is partly due to Hurwitz, Fine's failure to request a final allowance. Consequently, Hurwitz, Fine cannot justly claim that the Committee is responsible for undue delay.
The final allowance of post-petition fees for the firm Hurwitz, Fine is under review, as the Committee questions whether the firm has adequately fulfilled its duty to represent the bankruptcy estate loyally. The Committee invokes 11 U.S.C. § 328(c), which allows the court to deny compensation to professionals who are not disinterested or who may have conflicts of interest. These claims of interestedness and conflict remain unproven and will require the Committee to establish them by a preponderance of evidence. The court's decision on fee allowance will consider all relevant factors as outlined in 11 U.S.C. § 330(a)(3). The Committee's motion for sanctions is largely dismissed, except for its request for the disgorgement of post-petition fees paid to Hurwitz, Fine, P.C., as only the professional corporation can be held accountable for this. The motion is dismissed in full regarding individual respondents. A conference will be scheduled for an evidentiary hearing on the unresolved aspects of the Committee's motion, with the Honorable Michael J. Kaplan having presided over the case until his recusal on April 30, 2012.
