Opinion
CASE NO. 05-80136-G3-7, CASE NO. 03-80838-G3-7.
January 16, 2007
MEMORANDUM OPINION
The court has held a hearing on the "Trustee's Amended Application to Employ Special Counsel" (Docket No. 24, Case No. 05-80136-G3-7) and the "Trustee's Amended Application to Employ Special Counsel" (Docket No. 26, Case No. 03-80838-G3-7). The following are the Findings of Fact and Conclusions of Law of the court. Separate conforming judgments will be entered in each of the above captioned cases. To the extent any of the Findings of Fact are considered Conclusions of Law, they are adopted as such. To the extent any of the Conclusions of Law are considered Findings of Fact, they are adopted as such.
Findings of Fact The Hagewood Case
Anthony C. Hagewood and Sharon R. Hagewood filed a voluntary joint petition under Chapter 7 of the Bankruptcy Code on July 14, 2003.
The Hagewood case was administered by the Chapter 7 Trustee as a "no asset" case. In the Hagewood case, discharge was entered, and the case was closed, on October 31, 2003.
The Hagewoods had an asset which was undisclosed at the time of the first closing of the case: an unliquidated claim in a class action against Wyeth Laboratories related to the Fen-Phen diet drug.
On January 26, 2005, nearly fifteen months after the case had been closed, the Hagewoods filed an amended schedule B, disclosing their claim against Wyeth. On July 10, 2006, Debtors amended their schedule C to claim their recovery against Wyeth as exempt.
On July 14, 2006, Trustee moved to reopen the Hagewood case, in order to administer the estate's interest in the Hagewoods' claims against Wyeth. The motion to reopen was granted.
Prepetition, the Hagewoods contracted with Jim S. Adler, P.C. to pursue recovery against Wyeth. Jim S. Adler, P.C. referred the litigation to Fleming Associates, LLP, in exchange for a referral fee.
In the instant application, Trustee seeks to employ Fleming Associates, LLP, to pursue the estate's interest. Trustee states that any referral fee paid to Jim S. Adler, P.C. will be deducted from the attorneys fees to be paid to Fleming Associates, LLP, and no estate funds will be used to pay referral fees.
The Hepner Case
Ruby J. Hepner and Alan R. Hepner filed a voluntary joint petition under Chapter 7 of the Bankruptcy Code on January 13, 2005.
The Hepner case was administered by the Chapter 7 Trustee as a "no asset" case. In the Hepner case, discharge was entered, and the case was closed, on April 18, 2005.
The Hepners also had an undisclosed unliquidated claim in the class action against Wyeth Laboratories related to the Fen-Phen diet drug.
On July 14, 2006, Trustee moved to reopen the Hepner case, in order to administer the estate's interest in the Hepners' claims against Wyeth. The motion to reopen was granted.
On July 20, 2006, the Hepners filed an amended schedule B, disclosing their claim against Wyeth. The Hepners did not claim an exemption for their recovery against Wyeth.
Prepetition, the Hepners contracted with Pearson Pearson, LLP to pursue recovery against Wyeth. Pearson Pearson, LLP referred the litigation to Fleming Associates, LLP, in exchange for a referral fee.
In the instant application, Trustee seeks to employ Fleming Associates, LLP, to pursue the estate's interest. Trustee states that any referral fee paid to Pearson Pearson, LLP will be deducted from the attorneys fees to be paid to Fleming Associates, LLP, and no estate funds will be used to pay referral fees.
Conclusions of Law
Section 504 of the Bankruptcy Code provides in pertinent part:
A person receiving compensation or reimbursement under Section 503(b)(2) or 503(b)(4) of this title may not share or agree to share
(1) any such compensation or reimbursement with another person; or
(2) any compensation or reimbursement received by another person under such sections.
Section 503(b)(2) of the Bankruptcy Code allows administrative expenses for "compensation and reimbursement awarded under Section 330(a) of this title." 11 U.S.C. § 503(b)(2).
Section 330(a)(1) authorizes the court to award to a professional person employed under Section 327 reasonable compensation for actual necessary services, and reimbursement for actual, necessary expenses. 11 U.S.C. § 330(a)(1).
The purpose of the fee sharing prohibition of Section 504 is to ensure that lawyers preserve the integrity of the bankruptcy process and do not treat "bankruptcy matters as matters of traffic." In re Matis, 73 B.R. 228 (Bankr. N.D.N.Y. 1987).
Section 504 is unambiguous, although it is clearly out of step with the modern practice of class action tort law.
In the instant cases, although Trustee has asserted that no fees and expenses will be deducted from the estates' recovery to pay referral fees, the distinction is meaningless where the estates pay the fee in full, and the attorney to whom the matter is referred then pays the referral fee. The court concludes that the terms of the proposed employment violate the fee sharing prohibitions of Section 504. Thus, the court is constrained to deny them.
The court does not reach, however, the question of whether, if a portion of the recovery is claimed as exempt, the referral fee could be paid from the exempt portion rather than the property of the estate.
Based on the foregoing, a separate conforming Judgment will be entered in each of the two cases.