Opinion
Case No. 8:13-bk-06852-MGW
2022-03-31
IN RE: Lisa S. DAVIS, Debtor.
Lydia M. Gazda, Esq., Tampa, Counsel for the Chapter 13 Trustee. Ronald R. Bidwell, Esq., The Law Office of Ronald R. Bidwell, P.A., Tampa, Counsel for the Debtor.
Lydia M. Gazda, Esq., Tampa, Counsel for the Chapter 13 Trustee.
Ronald R. Bidwell, Esq., The Law Office of Ronald R. Bidwell, P.A., Tampa, Counsel for the Debtor.
ORDER AND MEMORANDUM OPINION ON FEE-SHARING UNDER BANKRUPTCY CODE § 504
Michael G. Williamson, Chief United States Bankruptcy Judge Bankruptcy Code § 504 prohibits a person from sharing compensation received under § 503(b)(2), which includes fees awarded to a professional employed under § 327. Here, special counsel, who was employed to prosecute a personal injury action on the Debtor's behalf, agreed to pay Debtor's general counsel a $7,000 referral fee. Debtor's counsel contends the referral does not run afoul of § 504 because special counsel was employed under § 328—not § 327. Thus, Debtor's counsel contends, the fees were not received under § 503(b)(2). To the contrary, because all professionals (including special counsel) are employed under § 327, and § 328 simply tells us on what terms they may be employed, the referral fee is barred by § 504.
I. Background
Four years after filing this case, the Debtor was involved in a car accident. So the Debtor filed an application to employ Christopher Boyd, of Butler & Boyd, P.A., as special counsel to sue her insurer and the owner of the car. The Debtor proposed to pay Butler & Boyd a twenty-five percent contingency fee. Butler & Boyd, in turn, proposed to pay Ronald Bidwell, who is representing the Debtor in this chapter 13 case, a twenty-five percent referral fee. The Court approved the application to pay Butler & Boyd.
Doc. No. 43.
Id. at ¶ 5.
Id.
Doc. No. 44.
The Debtor settled her claim against her insurer for $39,999, which the Court approved. The Debtor later settled her remaining claim for $70,000. As part of the settlement, the Debtor proposed to pay Butler & Boyd $21,000 and Mr. Bidwell $7,000. The Trustee opposed the settlement on a variety of grounds, including that payment of a referral fee to Debtor's counsel violates Bankruptcy Code § 504.
Doc. Nos. 51 & 54.
Doc. No. 62, ¶ 6.
Doc. No. 62, ¶ 7.
Doc. No. 60, ¶ 2.
Although the Court approved the settlement, including the payment of $28,000 in fees to Butler & Boyd, it ordered Butler & Boyd to hold the $7,000 referral fee in its trust account until this Court decided whether § 504 permits payment of a referral fee. The Court assumes that fee sharing is permissible under state bar rules. The question is whether it is barred by Bankruptcy Code § 504.
Doc. No. 70, ¶¶ 4 & 5.
II. Conclusions of Law
Subject to three exceptions, none of which are present here, Bankruptcy Code § 504 bars a person receiving compensation under § 503(b)(2) or § 503(b)(4) from sharing it with another person. The reason is two-fold:
11 U.S.C. § 504(a)(1) – (2) ; 4 Collier on Bankruptcy ¶ 504.01 (16th ed. 2022) ("Section 504 of the Bankruptcy Code prohibits any person receiving compensation or reimbursement of expenses under subsection 503(b)(2) or (b)(4) from sharing such compensation with another person.").
Whenever fees or other compensation is shared among two or more professionals, an incentive may exist to adjust upward the compensation sought in order to offset any diminution to the share of either. Consequently, sharing of compensation can inflate the cost of a bankruptcy case to the bankruptcy estate and therefore decrease the distribution to creditors. Fee splitting also subjects the professional to outside influences over which the court has no control, which tends to transfer from the court some degree of power over expenditure and allowances.
4 Collier on Bankruptcy at ¶ 504.01; see also Goldberg v. Vilt (In re Smith) , 397 B.R. 810, 816 – 17 (Bankr. E.D. Tex. 2008) (quoting 4 Collier on Bankruptcy ¶ 504.01 (15th ed. Rev. 2005)).
Last year, in In re Bugay , Bankruptcy Judge Roberta Colton explained why payment of a referral fee in facts similar to those here violates § 504 ’s fee-sharing prohibition.
In re Bugay , 2021 WL 3162632, at *1 (Bankr. M.D. Fla. June 8, 2021).
There, like here, the debtor employed special counsel to pursue a personal injury action. The personal injury action was settled for $10,000. Under the settlement, $3,333 was to be paid to special counsel, who agreed to pay a portion of those fees to debtor's counsel as a referral fee. The chapter 13 trustee questioned the propriety of the referral fee.
Id.
Id.
Judge Colton explained that a referral fee violates § 504 when three elements are present. First, a person must have received compensation under § 503(b)(2) or § 503(b)(4). Second, the person receiving compensation under those sections shared (or agreed to share) the fees with another person. Third, the person sharing the compensation does not fall within any of the three exceptions in § 504(b). Having concluded that all three elements were present, Judge Colton disallowed the referral fee.
Id.
Id. at *1 – 2.
Here, Debtor's counsel argues this case is different from Bugay —and that two of the three elements for a § 504 violation are not present—because special counsel in this case did not receive compensation under § 503(b)(2) or § 504(b)(4). Section 503(b)(2), the only basis for the fees awarded to special counsel, expressly incorporates § 330(a). Section 330(a), in turn, permits compensation to (among others) "a professional employed under section 327." Debtor's counsel says special counsel was employed under § 328—not § 327.
11 U.S.C. § 503(b)(2) (providing an administrative expense claim for "compensation and reimbursement awarded under section 330(a) of this title").
This very argument was addressed by Bankruptcy Judge Leif Clark ten years ago in In re Age Refining, Inc. There, Judge Clark noted that "[p]ractitioners seem to believe that section 328 is another section under which a professional can be retained, as an alternative to section 327." To the contrary, Judge Clark explained, "professionals representing the trustee are only employed under section 327."
447 B.R. 786 (Bankr. W.D. Tex. 2011).
Id. at 795 n.1.
In other words, § 327 "tells us who the trustee may hire to represent him in a case"; § 328 "tell us on what terms the trustee may hire professionals to represent him"; and " § 330(a) is the single vehicle by which all professional persons employed under section 327 are paid—regardless on what basis they are paid."
Id. at 795.
Id.
Id. at 796.
III. Conclusion
Butler & Boyd was retained under § 327 and compensated under § 330(a). As a consequence, their compensation is subject to § 504 ’s prohibition against fee sharing. Debtor's counsel is therefore not entitled to a $7,000 referral fee. Accordingly, it is
ORDERED :
1. The Chapter 13 Trustee's objection to the referral fee is sustained. The payment of a referral fee to the Law Office of Ronald R. Bidwell, P.A., is disallowed.
2. The remaining $7,000 in attorney's fees being held in trust shall be disbursed to Butler & Boyd, P.A.
ORDERED.