William R. Sawyer, United States Bankruptcy Judge.
"What we've got here is failure to communicate."
Billy Jack Smith, II, ("Smith"), a policeman in Columbus, Georgia who lives in Alabama, was injured on the job in June 2010. (Doc. 55, ¶ 5). In March 2011, Smith approached John T. Martin ("Martin"), an attorney licensed to practice in Alabama and Georgia, about filing a worker's compensation claim. (Doc. 55, ¶ 5). Martin referred Smith to Samuel W. Oates, Jr. ("Oates"), a former Georgia attorney who specialized in worker's compensation claims, pursuant to a fee-splitting arrangement they had. Oates filed a worker's compensation claim in Georgia on behalf of Smith.
On August 11, 2011, Smith filed this Chapter 13 bankruptcy case. (Doc. 1). His bankruptcy attorneys are Charles M. Ingrum, Jr. ("Ingrum"), and Jarret A. Layson ("Layson").
(Doc. 15, ¶ 14(b)). The only lawsuit of any kind that was listed in Smith's Schedule B was his worker's compensation suit. (Doc. 1, p. 15). Aside from the potential worker's compensation proceeds, Smith's plan did not provide for any payment to unsecured creditors, whose claims totaled roughly $41,000. (Docs. 15 & 59). The Court confirmed this plan on November 18, 2011. (Doc. 20). Up to that point, the Bankruptcy Attorneys had not listed Smith's worker's compensation attorneys as creditors, had not informed them of the terms of Smith's Chapter 13 plan, had not made any effort to notify them of the bankruptcy, and apparently had not even ascertained their identities or whereabouts.
On December 20, 2011, the Trustee emailed Ingrum, requesting the name and
In January 2012, Oates retired from his law practice and referred Smith's worker's compensation claim to J. Franklin Burns ("Burns"), another worker's compensation attorney in Georgia. (Doc. 46, Ex. 13; Doc. 55, ¶ 8). Smith signed an employment contract with Burns on May 16, 2012, and Burns apparently assigned Smith's case to associate attorney Shannon D. Rolen ("Rolen"). Apparently, neither Burns nor Rolen checked on PACER to see if Smith was in bankruptcy, and Smith did not disclose to them that he was in bankruptcy.
Meanwhile, the Trustee's efforts to contact Martin continued to be frustrated. The Trustee sent follow-up letters to Martin at the 233 12
On February 22, 2013, the Post Office returned the copy of the February 8 letter that had been sent to Martin, and marked the 233 12th St. address as "insufficient." (Doc. 46, p. 2). The Trustee called Martin's office, and Martin's paralegal claimed none of the previous letters had been received, and provided the Trustee a new address of P.O. Box 1436.
Rolen first became aware of Smith's bankruptcy in February 2014, when Smith mentioned it and asked her how much of any settlement proceeds he would be required to pay to his creditors. (Doc. 50, p. 1). Rolen referred Smith to his Bankruptcy Attorneys. (Doc. 50, p. 1). After Smith met with Layson on February 14, 2014, he declined to settle his worker's compensation case for $30,000 at that time. (Doc. 50, p. 1; Doc. 54, ¶ 12). On April 29, 2014, the Georgia Worker's Compensation Board entered a consent order in which Smith was paid arrears on a Permanent Partial Disability rating pursuant to GA. CODE § 34-9-263. (Doc. 50, Ex. 3).
On August 5, 2014, having received no update from Martin despite sending him
Rolen did not respond to the Trustee. (Doc. 46, p. 2). Instead, she called Layson "for help" in preparing the application for approval of her employment on August 19, 2014. (Doc. 50, p. 3). Layson informed Rolen that he would not prepare her application for her, and referred her to the Trustee's website for the proper forms. (Doc. 50, p. 3; Doc. 54, ¶ 19). Rolen prepared her application for employment and emailed it to Layson on August 27, 2014 so that he could file it for her because she did not have a PACER account. (Doc. 50, p. 3 & Ex. 4; Doc. 54, ¶ 20 & Ex. A). Importantly, Rolen acknowledged in the last paragraph of her application for employment that she would need to seek the Court's approval of any settlement and of her fees. (Doc. 50, Ex. 4).
On August 28, 2014, Martin communicated with the Trustee for the first time. (Doc. 46, p. 3 & Ex. 9). He disclosed Oates's past association and retirement, as well as Burns' and Rolen's associations. Martin acknowledged that he and Burns were aware of Smith's bankruptcy, and that he was aware of the obligation to seek approval of any settlement. (Doc. 46, Ex. 9).
On September 9, 2014 Layson emailed Rolen, saying he "asked the Trustee" about filing her application for employment on her behalf and that if he did that the Trustee would ask him to withdraw it. Layson also said that the Trustee recommended that Rolen mail the application for employment to the clerk's office. (Doc. 54, ¶ 21 & Ex. B). Though Rolen asserts that she never received this email (Doc. 50, p. 3), it was sent to the email address she has listed on Burns' website and on the website of the Georgia State Bar. Rolen did not mail or otherwise file her application for employment with the Court, and Layson did not file it for her.
In late 2014, Smith decided to try settling his worker's compensation claim. (Doc. 50, p. 3-4). He was nearing completion of his monthly payments under his Chapter 13 plan, and told Rolen that he would have no further obligation under his plan. Rolen advised Smith to consult with his Bankruptcy Attorneys, but did not verify this herself. (Doc. 50, p. 3-4). On January 5, 2015, Smith agreed to settle his worker's compensation claim for $30,000. (Doc. 50, p. 4).
On January 22, 2015, Smith called Layson and asked why he had not received a discharge, and Layson explained the discharge process to him. (Doc. 54, ¶ 22). Smith did not mention his worker's compensation claim, and Layson apparently did not ask for an update on it. (Doc. 54, ¶ 22).
On January 29, 2015, the Georgia Worker's Compensation Board approved Smith's settlement. (Doc. 50, p. 4 & Ex. 5). The Board distributed the settlement proceeds to Rolen on February 3, 2015. She retained $5,025.00 in attorney's fees on behalf of herself and Burns, paid Oates $2,475.00 in fees pursuant to their fee-splitting arrangement, and reimbursed
On February 6, 2015, the Trustee's paralegal called Martin, asking for an update on Smith's worker's compensation claim. (Doc. 46, p. 2). Martin emailed his paralegal and copied the Trustee. (Doc. 46, p. 2 & Ex. 10). When Martin's paralegal could provide no update, the Trustee's paralegal called Rolen on February 27, 2015. (Doc. 46, p. 2-3). Rolen informed the Trustee of the settlement and disbursement, and learned that Layson had not filed her application for employment. (Doc. 46, p. 3; Doc. 50, p. 4). On March 10, 2015, the Trustee filed another "Motion to Examine the Debtor's Transactions with Attorneys and Motion to Examine Attorneys' Fees," and also filed a motion to dismiss Smith's bankruptcy case. (Docs. 31, 32).
On April 6, 2015, Ingrum called Smith, who informed him of the settlement of the worker's compensation suit. (Doc. 54, ¶ 24). The Bankruptcy Attorneys amended Smith's Schedules B and C to value Smith's worker's compensation suit at $22,000 and to claim all of it as exempt under ALA. CODE § 25-5-86, contrary to his confirmed plan. (Doc. 34). The Court heard the Trustee's motions on April 8, 2015. Ingrum offered no useful information and the Court continued the hearing to May 13, 2015. The Trustee objected to Smith's amended Schedule C. (Doc. 35).
At the May 13, 2015 hearing, Smith heard testimony from Smith and his worker's compensation attorneys. Smith testified that Layson told him he had completed his monthly plan payments and that he was under the assumption he had no more obligations under the plan. (Doc. 59, p. 13). He also testified that he only had about $1,000 of the settlement proceeds left. (Doc. 59, p. 14). The Court did not believe him, and dismissed his case with prejudice under 11 U.S.C. § 349(a) and with a five-year injunction against refiling bankruptcy. In re Smith, 536 B.R. 478 (Bankr. M.D. Ala. 2015). The Court also ordered the attorneys to show cause why sanctions should not be imposed. (Doc. 44). The Trustee filed a Report and Recommendation (Doc. 46), and the attorneys filed responses and belated applications to approve their employments, the settlement, and their fees. (Docs. 47, 48, 49, 50, 54, 55, 56). A hearing was held on September 16, 2015, at which the Court heard testimony from the Trustee and each of the attorneys involved.
The Court has jurisdiction under 28 U.S.C. § 1334(a) and 11 U.S.C. § 105(a). Green Point Credit, LLC, v. McLean (In re McLean), 794 F.3d 1313, 1319 (11th Cir.2015). This is a core proceeding. 28 U.S.C. § 157(b)(2)(A). This is a final order.
Section 105(a) of the Bankruptcy Code provides that:
11 U.S.C. § 105(a). Under § 105(a), the Court "may impose sanctions if a party violates a court order or rule." In re Evergreen Sec., Ltd., 570 F.3d 1257, 1273 (11th Cir.2009); see also McLean, 794 F.3d
In addition to their obligations under a bankruptcy court's confirmation order, a debtor's attorneys also have obligations under the Bankruptcy Code and Rules. A Chapter 13 debtor's bankruptcy attorney may charge no more for representing the debtor's interests than is reasonable "based on a consideration of the benefit and necessity of such services to the debtor...." 11 U.S.C § 330(a)(4)(B). Likewise, it is a good idea for an attorney representing a bankruptcy debtor in a civil suit to seek the bankruptcy court's approval of his or her employment under 11 U.S.C. § 327(e) and FED. R. BANKR. P.2014(a), seek the bankruptcy court's approval of any settlement under FED. R. BANKR. P. 9019(a), and seek the bankruptcy court's approval of his or her compensation under 11 U.S.C. § 330(a)(1) and FED. R. BANKR. P.2016(a).
The Court will discuss the roles of each of Smith's attorneys in the preceding events and determine the extent to which each is responsible for what has happened.
When an attorney takes a civil case on a contingent basis or is otherwise owed money by a client for his or her services, that attorney becomes a creditor of the client. Moreover, that attorney has a lien on the client's papers and money, and on all real and personal property the attorney recovers for the client. ALA. CODE § 34-3-61; GA. CODE § 15-19-14. It follows that when a debtor who has a pending civil suit files bankruptcy, the debtor's civil attorneys should be listed as creditors, and probably as secured creditors, by the debtor's bankruptcy attorney. Sawyer, supra, at 292-93. Doing so allows the civil attorneys to file proofs of claim in the bankruptcy for services rendered, and helps to keep them apprised of what is happening in the bankruptcy and what their obligations are. At a minimum, it provides the bankruptcy attorney some protection from accusations of impropriety in the event a civil attorney violates a bankruptcy obligation. Oates and Martin were both pre-petition creditors of Smith, but the Bankruptcy Attorneys did not list them as creditors or otherwise notify them of the bankruptcy. Worse, it is apparent from
The Bankruptcy Attorneys' lack of candor and professionalism is even more egregious upon consideration of the nature of Smith's civil suit. In both Alabama and Georgia, worker's compensation proceeds are fully exempt from execution by creditors. ALA. CODE § 25-5-86(2); GA. CODE § 34-9-84. A Chapter 13 debtor may nevertheless choose not to claim the exemption and instead pay his worker's compensation proceeds into his plan. When a debtor does that, however, it is incumbent upon the debtor's bankruptcy attorney to alert the debtor's worker's compensation attorneys as to what the debtor is proposing to do; otherwise, the worker's compensation attorneys will be blindsided because they will not expecting the possibility that the worker's compensation proceeds should be paid to a third party.
The Bankruptcy Attorneys have insisted that they explained to Smith several times that he was obligated to pay any proceeds from his worker's compensation suit into his bankruptcy estate. (Doc. 54). They should also have explained that to his worker's compensation attorneys. Smith is a layman and is self-interested, and his Bankruptcy Attorneys were not entitled to simply rely on him to relay his obligations to his worker's compensation attorneys. By failing to directly notify either Martin or Oates of their obligations under Smith's confirmed plan, the Bankruptcy Attorneys placed Martin and Oates in grave risk of conversion liability and of violation of this Court's confirmation order, and left themselves and the Trustee unaware of the entry of Burns and Rolen into the worker's compensation case. Simply put, the negligence demonstrated by the Bankruptcy Attorneys set the worker's compensation attorneys up for failure.
Finally, the Bankruptcy Attorneys should have disclosed the particulars of the worker's compensation lawsuit, such as the case number and the court it was filed in, in Schedule B so that the Trustee could have located the asset. Merely listing "Worker's Compensation Lawsuit," as the Bankruptcy Attorneys did in Smith's Schedule B, is unhelpful.
Martin asserted in his response and at the September 16 hearing that the Trustee's first four letters to him were mailed to the wrong address. Even assuming that to be true, Martin chose to ignore at least three letters from the Trustee that were clearly mailed to the correct address. Martin's conduct in this respect was unprofessional. In addition, he simply relied on Burns and Rolen to file the necessary paperwork without bothering to send them a copy of the Trustee's letter or to inform them of the bankruptcy.
A referring attorney's responsibilities do not end upon the referral if he is actively practicing and claiming a fee for the case he has just referred. During the period between February 2013 and February 2014, Martin was the only person (besides Smith) who was aware of both the bankruptcy and of Rolen's involvement in the worker's compensation case. The Trustee and the Bankruptcy Attorneys were unaware of the existence of Rolen, and Rolen was unaware of the bankruptcy. Martin should have bridged this communication gap by responding to the Trustee's letters or by picking up the phone and speaking directly to him. Had he done so, the Trustee would have had an earlier opportunity to communicate with Rolen and to impress upon her the need to pay the
Martin acknowledged in his August 2014 letter to the Trustee that he was aware of his obligations under the Bankruptcy Code and Rules. However, he accepted payment of attorney's fees from the worker's compensation suit during the pendency of the bankruptcy and without notifying the Trustee or seeking the Court's approval of either his employment or his fees. Moreover, he took part in a sequence of events that resulted in conversion of property of the estate.
When a civil attorney initiates representation of a client, it is a good idea to check PACER to see if the client or any opposing party is in bankruptcy. At a minimum, a civil attorney undertaking representation of a new client should ask the client if he is in bankruptcy. Upon learning that a client is in bankruptcy, a civil attorney should contact the client's bankruptcy attorney and the bankruptcy trustee to see if he or she has any pertinent obligations. Rolen apparently took none of these steps.
Rolen made an effort, albeit ineffective, to prepare and file her application for employment in August 2014. However, that does not excuse her failure to respond to the Trustee's letter. Rolen is also directly responsible for the conversion of the settlement proceeds because she handled the money and paid it over to Smith. In doing so, she violated the Court's order confirming Smith's plan. Rolen stated in her response that she relied on Smith's representations that his bankruptcy obligations were finished. However, as with the Bankruptcy Attorneys, Rolen was not entitled to rely on Smith's representations because he is a layman and was self-interested. She should have followed up with either the Bankruptcy Attorneys, the Trustee, or the Court to confirm that Smith had no further bankruptcy obligations. Also, Rolen should have known of her obligation to pay the settlement proceeds to the Trustee because she acknowledged it in the application for employment that she prepared. Burns, as Rolen's managing attorney, is responsible for supervising her work and is vicariously liable for the converted proceeds.
Compared to the other attorneys involved in this case, Oates appears to be blameless. His representation of Smith preceded the bankruptcy so he would not have been able to discover it initially, and Oates had no continuing duty to check for bankruptcy filings; rather, Smith and his Bankruptcy Attorneys had a duty to inform Oates of the bankruptcy. They did not. When Oates retired in January 2012, he could not have known of Smith's bankruptcy and thus could not have apprised Rolen or Burns of it.
Based on the Trustee's report, it appears that Oates first learned of Smith's bankruptcy in April 2015. By that point, the settlement proceeds had been converted and dissipated. In light of all that, the Court does not hold Oates responsible for what happened in this case and will take no action against him.
The offenses in this case are already completed and cannot be undone. Therefore, whatever sanctions the Court chooses to impose will necessarily be punitive. McLean, 794 F.3d at 1323. To that end, the Court notes that it ordered the Trustee to issue his Report and Recommendation together with his supporting evidence, and provided the attorneys an opportunity
A bankruptcy attorney's obligations extend beyond shuffling papers and charging fees. The bankruptcy attorneys in this case, Ingrum and Layson, have clearly forgotten that. According to the plan they filed on behalf of Smith, the Bankruptcy Attorneys were to be paid $2,750 out of Smith's monthly plan payments. (Doc. 15). The Court concludes that disgorgement of this fee is appropriate because they did not do their job. The Bankruptcy Attorneys, Ingrum and Layson, are hereby ordered to pay the Trustee $2,750 for the benefit of Smith's unsecured creditors.
As for Martin, he did not handle the settlement proceeds and cannot be held responsible for Rolen's conversion of them. However, the Court is dismayed at his unresponsiveness to the Trustee's correspondence and the general lack of professionalism he displayed, and will disgorge his attorney's fee from Smith's worker's compensation case. Martin stated in his response that Oates is currently holding a check for $2,532.54 in attorney's fees and costs from Smith's worker's compensation suit. (Doc. 55). Martin further states that he is entitled under their fee-splitting agreement to $1,237.50. Therefore, the Court orders Martin to pay the Trustee $1,237.50 for the benefit of Smith's unsecured creditors.
At the September 16 hearing, Burns acknowledged that he and Rolen were responsible for converting Smith's settlement proceeds. Aside from the tort liability, however, Rolen's conduct was no more egregious than that of Martin and the Bankruptcy Attorneys, in that she attempted (albeit ineffectively) to comply with her bankruptcy obligations and was placed at a disadvantage by their lack of professionalism. In light of that, sanctioning Burns and Rolen for the full $30,000 would be excessive relative to the sanctions imposed on Martin and the Bankruptcy Attorneys. In advance of the September 16 hearing, Rolen submitted a check to the Court for $7,500, representing both her share and Oates's share of the attorney's fees from Smith's worker's compensation case. The Court is satisfied that amount is a sufficient sanction for their role in this case.
This case is a cautionary tale that demonstrates the need for open and direct communication between a debtor's bankruptcy attorney and civil attorney. If the attorneys involved in this case, at all levels, had simply been more responsive and communicative about their intentions and respective obligations, this unpleasantness could have been avoided.
A separate order will be entered consistent with this opinion.
