USCA1 Opinion
UNITED STATES COURT OF APPEALS
FOR THE FIRST CIRCUIT
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No. 97-1234
JOSE A. CUEVAS-SEGARRA, & AMNERIS MARTINEZ,
Appellants,
v.
MARIA LUISA CONTRERAS,
Appellee.
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ANTONIO R. CONCEPCION-VELAZQUEZ, AGNA I. MORALES,
Appellees.
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No. 97-1265
JOSE A. CUEVAS-SEGARRA, & AMNERIS MARTINEZ,
Appellees,
v.
MARIA LUISA CONTRERAS,
Appellee.
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ANTONIO R. CONCEPCION-VELAZQUEZ, AGNA I. MORALES,
Appellants.
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APPEALS FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF PUERTO RICO
[Hon. Salvador E. Casellas, U.S. District Judge]
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Before
Torruella, Chief Judge,
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Lynch, Circuit Judge,
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and DiClerico, Jr.,* District Judge.
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Charles A. Cuprill-Hern ndez, with whom Carlos A. Surillo-
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Pumarada and Charles A. Cuprill-Hern ndez Law Offices were on
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brief for appellants.
Mar a Luisa Contreras, with whom Mar a Luisa Contreras Law
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Offices was on brief for appellees.
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January 23, 1998
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* Of the District of New Hampshire, sitting by designation.
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Per Curiam. The bankrupt estate of Jos M ndez-Rosado
Per Curiam.
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and his wife, Alejandra Becerra, had few assets. One of the most
significant was a malpractice claim against Dr. Karl Horn and
Dr. Julio Westerband. On August 26, 1988, attorneys Antonio
Concepci n and Jos A. Cuevas-Segarra filed a Motion for
Designation of Special Counsel, hoping to obtain bankruptcy court
approval to settle the malpractice suit on behalf of the debtors.
The Motion was denied without prejudice because the attorneys had
failed to abide by Bankruptcy Rule 2014, which required the
inclusion of a verified statement that the attorneys were
disinterested persons.1 Instead of amending the application to
include the verified statement, the attorneys settled the case in
February 1989, without bankruptcy court approval or notice to
creditors, dividing $70,000 between themselves and the debtors.2
For five years, the players in the bankruptcy
proceedings took no notice of the settlement. In February 1994,
a new bankruptcy trustee, Mar a Luisa Contreras, was appointed to
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1 The relevant part of Bankruptcy Rule 2014 reads:
The application [for employment of attorneys]
shall be accompanied by a verified statement
of the person to be employed setting forth
the person's connections with the debtor,
creditors, or any other party in interest,
their respective attorneys and accountants,
the United States trustee, or any persons
employed in the office of the United States
trustee.
2 Cuevas and Concepci n claim that they thought the bankruptcy
case was closed, and that bankruptcy court approval was no longer
necessary for the representation. Nothing to that effect ever
issued from the bankruptcy court.
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the case. Ms. Contreras soon learned of the settlement and
immediately filed a complaint with the bankruptcy court alleging
that Cuevas and Concepci n were improperly in possession of
property belonging to the debtors' estate. On November 3, 1995,
the bankruptcy court entered a decision and order that, pursuant
to 11 U.S.C. 105(a), 362(c), and 542(a), Cuevas and Concepci n
must return $27,456.00 in fees that they received from the
settlement. Cuevas and Concepci n appealed this decision to the
federal district court in Puerto Rico, which subsequently
affirmed the bankruptcy court opinion. They again appealed the
decision, and we now reaffirm the judgment for the trustee, Ms.
Contreras.
The decisions of the bankruptcy and district courts are
premised upon three alternative grounds. First, the decisions
rely upon Bankruptcy Code (the "Code") 105(a), a "catch-all"
section which provides a bankruptcy court with broad powers to
enforce the Code, preserving the integrity of the bankruptcy
system.3 Second, reliance is placed on Bankruptcy Code 362(c),
which provides for an automatic stay of any act against property
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3 The section reads:
The Court may issue any order, process, or
judgment that is necessary or appropriate to
carry out the provisions of this title. No
provision of this title providing for the
raising of an issue by a party in interest
shall be construed to preclude the court
from, sua sponte, taking any action or making
any determination necessary or appropriate to
enforce or implement court orders or rules,
or to prevent an abuse of process.
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of the estate unless approved by the court.4 Any non-approved
monetary transaction affecting estate assets is thus voided.
Finally, the opinions look to Bankruptcy Code 542(a), which
requires an entity in control of property of a bankrupt estate to
return that property to the trustee.5
We need look no further than 105(a) to affirm the
courts' decisions. The broad authority conferred by this section
of the Code provides "teeth" to the equitable powers of a
bankruptcy court. See Noonan v. Secretary of Health & Human
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Servs. (In re Ludlow Hosp. Soc., Inc.), 124 F.3d 22, 27 (1st Cir.
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1997) ("[s]ection 105(a) empowers the bankruptcy court to
exercise its equitable powers -- where 'necessary' or
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4 The section provides for:
(1) the stay of an act against the property
of the estate under subsection (a) of this
section continues until such property is no
longer property of the estate; and
(2) the stay of any other act under
subsection (a) of the section continues until
the earliest of -
(A) the time the case is closed;
(B) the time the case is dismissed; or
(C) if the case is a case under chapter 7 of
this title concerning an individual . . . the
time a discharge is granted or denied.
5 The section reads:
Except as provided in subsection (c) or (d)
of this section, an entity, other than a
custodian, in possession, custody, or
control, during the case, of property that
the trustee may use, sell, or lease under
section 363 of this title . . . shall deliver
to the trustee, and account for, such
property or the value of such property,
unless such property is of inconsequential
value or benefit to the estate.
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'appropriate' -- to facilitate the implementation of other
Bankruptcy Code provisions"). A proper application of 105(a)
will effectuate the Bankruptcy Code without fashioning or
altering substantive rights of debtors or creditors, ensuring
that "technical considerations will not prevent substantial
justice from being done." Pepper v. Litton, 308 U.S. 295, 305
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(1939); see also Noonan, 124 F.3d at 27; Gens v. Resolution Trust
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Corp., 112 F.3d 569, 576 (1st Cir. 1997).
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In light of these standards, we conclude that the broad
authority of 105(a) was properly brought to bear against Cuevas
and Concepci n in this case. A bankruptcy court has a duty to
review the fees paid to professionals and 105(a) provides
authority to effectuate judgments such as the denial of Cuevas
and Concepci n's Motion for Designation of Special Counsel. In
spite of the fact that they had been refused court permission to
settle the pending malpractice action, these attorneys forged
ahead, settling the case and failing to apprise the creditors or
the court of the payments received by the debtors and by
themselves. Such behavior undermines the integrity of the
bankruptcy system and public confidence therein. See In re E Z
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Feed Cube Co., 123 B.R. 69, 74 (Bankr. D. Or. 1991) (holding that
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professionals' fees must be returned to the trustee under
105(a) in a similar situation).
Most of the energy expended in this case has been
directed toward the dispute over whether 542(a) can be used to
recover a post-petition transfer. The appellants argue that only
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549 provides for such recoveries, and that a two-year statute
of limitations bars the trustee's action in this case. This
argument is moot. Although the equitable powers of the
bankruptcy court are limited, see Noonan, 124 F.3d at 27, only a
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hopelessly strained interpretation of the Code would tie the
court's hands while attorneys ignore a direct court ruling,
hoping that the statute of limitations will run before the
creditors, trustees or judge catch on.
Cuevas and Concepci n protest that much of the blame in
this case belongs to H ctor L. Urrutia, the original trustee in
this case and a predecessor to Contreras. Cuevas and Concepci n
allegedly wrote numerous letters to Urrutia requesting that he
submit to the bankruptcy court an application for their
employment, which would have paved the way for them to receive
court approval for their representation. According to the
authors, these letters received no response. Nevertheless, it is
undisputed that Urrutia ultimately advised Cuevas and Concepci n
to check with the bankruptcy court before taking any action
regarding the malpractice action. They did not do so.
For the reasons stated herein, the decision of the
district court is affirmed. Costs and attorney's fees are
affirmed
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awarded to Ms. Contreras. Furthermore, the district court is
directed to review the conduct of attorneys Concepci n and
Cuevas-Segarra in this matter to determine whether they should be
subject to disciplinary procedures.
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