Opinion
ORDER TO THOMAS C. NELSON TO RESPOND AND SHOW CAUSE WHY HE SHOULD NOT BE SANCTIONED AND/OR REFERRED TO THE STANDING COMMITTEE ON DISCIPLINE.
JAMES W. MEYERS, Bankruptcy Judge
The Court issued an order to Thomas C. Nelson ("Mr. Nelson") on September 30, 2009, ("September 30 Order") which required Mr. Nelson to file a supplemental declaration to provide the full disclosure required of counsel for a debtor-in-possession in this case. To date, Mr. Nelson has not complied with the September 30 Order.
A copy of the September 30 Order is attached hereto as Exhibit A.
Unless otherwise indicated, all references to "chapter" and section" are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532, and all references to "rule" are to the Federal Rules of Bankruptcy Procedure (Fed.R.Bankr.P.) XXXX-XXXX.
This Order is issued to provide Mr. Nelson one more opportunity to respond to the Court's concerns, before the Court considers whether to impose sanctions against Mr. Nelson, and what type of sanctions may be appropriate. This Order is issued pursuant to the Court's inherent authority under 11 U.S.C. § 105 , as well as authority specifically granted under CivLR 83.1 and 83.5, Code §§ 327, 328 and 329, and B.R. 2014, 2016 and 2017.
Unless otherwise indicated, all references to "chapter" and section" are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532, and all references to "B.R." are to the Federal Rules of Bankruptcy Procedure (Fed.R.Bankr.P.) XXXX-XXXX.
The sole asset was a block of real property in downtown San Diego valued at $26,500,000 in the Left Field Motion and at $65,525,000 in Debtor's Schedule A. Left Field stated its claim was $18,600,000 as of the petition date.
Local Rules of Practice for the United State District Court for the Southern District of California.
In addition to his failure to respond to the September 30 Order, there have been problems with other recent cases in which Mr. Nelson appeared on behalf of Chapter 11 debtors before the undersigned. In each of these cases, Mr. Nelson appeared as counsel for the Debtor-in-Possession, but failed to obtain an order approving his employment as required by B.R. 2014. The debtors in each of these cases failed to file monthly operating reports as required by B.R. 2015, failed to pay quarterly fees owing to the U.S. Trustee, and had instances of tardy schedules or failure to appear for the 341(a) meeting of creditors. Each case was dismissed or converted to Chapter 7 for cause. Mr. Nelson did not file a fee application in any of the cases.
These cases include: In re Jules Elliot Briskin, Case No. 08-10018-JM11; In re Ahmad Hajiyousfi and Shalah Salah-Isfanhani, Case No. 09-04303-JM11; In re Prize Properties. LLC, 09-09817-JM7; In re Marshall Shields, Case No. 09-14224-JM11; and In re Marshall Shields, Case No. 09-17085-JM7.
The Court has the authority to impose a broad range of sanctions for attorney misconduct. See, CivLR 83.1 and 83.5, In re Brooks-Hamilton , 400 B.R. 238(9th Cir. BAP 2009); Hale v. U.S. Trustee , 509 F.3d 1139 (9th Cir. 2007); In re Lehtinen , 332 B.R. 404 (9th Cir. BAP 2005); and In re Crayton 192 B.R. 970 (9th Cir. BAP 1996). After the deadline to file a response expires, the Court will set any hearing which is necessary to consider an appropriate sanction, which may include a finding of contempt, imposition of monetary sanctions, an order requiring disgorgement of fees received by Mr. Nelson, or referral of the matter to the Standing Committee on Discipline or other disciplinary body.
Therefore, IT IS ORDERED THAT:
On or before February 25, 2010, Thomas C. Nelson shall file a Response to the September 30 Order with a supplemental declaration. In addition to the information required by the September 30 Order, Mr. Nelson should provide any other information or mitigating circumstances which he would like the Court to consider in deciding an appropriate sanction for his misconduct in this case. A copy of the supplemental declaration shall be served on the U.S. Trustee. The Court shall continue to retain jurisdiction over this matter pending satisfactory disclosure by Mr. Nelson and resolution of any issues related thereto.
The court reviewed the Declaration of Thomas C. Nelson Regarding Compensation Received From the Debtor, and the history of this case. After this review, the Court orders Mr. Nelson to file a supplemental declaration to provide the full disclosure required of counsel for a debtor in possession. This Order is issued pursuant to the Court's inherent authority under 11 U.S.C. § 1051, as well as authority specifically granted under §§ 327, 328 and 329 and Rules 2014, 2016 and 2017.
This case was initiated with a "bare-bones" petition submitted by Fresno attorney Hanno T. Powell on March 4, 2008. On March 13, 2008, a substitution of Attorney Thomas C. Nelson was filed. There was no disclosure of fees included with the substitution, and no application for appointment of counsel.
SDG-Left Field, a creditor secured by the sole asset2 of the estate, filed a motion for relief from the automatic stay on March 17, 2008 ("Left Field Motion"). The balance of schedules and the Rule 2016(b) disclosure of compensation to attorney were due on March 19, 2008. Mr. Nelson eventually submitted the balance of schedules on April 1, 2008. The § 341(a) meeting of creditors was scheduled for April 8, 2008.
The preliminary hearing on the Left Field Motion was held on April 16, 2008. The Debtor's opposition rested on a claim of significant equity in the property, and the understanding that replacement financing was imminent. During the preliminary hearing, the Court inquired about the status of Mr. Nelson's appointment as counsel for the Debtor. The hearing on the Left Field Motion was continued to May 1, 2008. At the May 1 hearing, Mr. Nelson represented to the Court that the Debtor expected to file a motion to approve the anticipated financing within ten days, and that Mr. Nelson had not yet submitted an application for appointment as counsel due to illness.
On May 23, 2008, Mr. Nelson submitted an application for appointment as counsel for the Debtor ("Application"). The declaration he submitted with the Application proclaimed that he "[is] well qualified to represent the Debtor generally in this matter... [does] not hold any interests adverse to the above-entitled estate and I am a disinterested person, as that term is defined in 11 U.S.C. § 101(14)." The declaration continued to disclose that Mr. Nelson "received a pre-petition retainer of $2,500 from the Debtor. That amount was billed to the Debtor for pre-petition services and applied to the bill." No information was provided to explain why Hanno T. Powell had filed the petition as attorney for the Debtor. In addition, the declaration lacks any disclosure of any connections Mr. Nelson had to the debtor, creditors, any other party in interest, or their respective professionals, as required by Bankruptcy Rule 2014(a).
On May 27, 2008, at the third hearing on the Left Field Motion, Mr. Nelson presented a Motion to Incur Post-Petition Secured Debt and for Conditional Dismissal of Chapter 11 Proceeding. According to the proof of service and caption, Mr. Nelson had already obtained a hearing date of July 3, 2008, and sent notice of that hearing to interested parties. During the May 27 hearing, the hearing date on the motion to incur financing was advanced to June 25, 2008, and the Left Field Motion was continued to the same date and time. On June 25, the hearings were continued to 2:00 p.m. on July 16, 2008, to provide more time for the details of the financing to be worked out.
On July 16, at 10:46 a.m., Mr. Nelson filed an Amended Motion to Incur Post-Petition Secured Debt and for Dismissal. At the hearing that afternoon, Mr. Nelson represented that the Debtor now had a loan for $35 million, and that the Debtor had been ""in dialogue" with junior lienholders to obtain subordination agreements. Mr. Nelson claimed that with a final number for financing, he could at last successfully negotiate with creditors or propose a confirmable plan of reorganization. Mr. Nelson assured the Court that by July 24, 2008, the Debtor would either file a plan or begin making adequate protection payments to Left Field. Based on these representations, the Court continued the hearing to the next available date of August 4, 2008, with the condition that if the Debtor did not file a plan of reorganization or begin making payments to Left Field by July 25, then Left Field would be entitled to relief from the automatic stay.
During the hearing, Mr. Nelson was reminded that the Debtor had not submitted a single monthly operating report required under Bankruptcy Rule 2015 during the four months the case had been pending. He filed the operating reports for March 2008, April 2008 and May 2008 on July 23, 2008. Late in the day on July 25, 2008, Mr. Nelson filed a plan of reorganization, along with a notice setting the hearing on confirmation for September 25, 2008. The plan was not accompanied by a disclosure statement, and there was no notice of any hearing scheduled for a disclosure statement. Section 1125(b) prohibits the solicitation of an acceptance or rejection of a plan unless the solicitation is accompanied by a disclosure statement that has been approved by the court as containing adequate information, after notice and a hearing.
On August 4, 2008, the Court conducted another hearing on the relief from stay and financing. Mr. Nelson explained that the Debtor expected the loan to fund by August 29, and then the case would be dismissed. They would only proceed with a plan if they could not reach an agreement with the junior lenders. The financing order was informally approved to allow the funding process to begin. Mr. Nelson was to prepare precise escrow instructions, determine amounts to be paid to junior lienholders and submit a proposed order. The hearing was continued to August 13, 2008. At the August 13 hearing, Mr. Nelson reported that the parties were closer, but they still did not have an agreement for subordination from the second priority lienholder. He expected to have a stipulated order signed by August 18, 2008. If the loan did not fund by August 29, Left Field was to have relief from the automatic stay unless the Debtor made a showing of good cause for a further extension of the stay.
The loan did not fund by August 29. An emergency motion to extend the automatic stay was heard on September 2, 2008. Mr. Nelson explained it was taking longer than expected to close the loan, so the hearing was continued to September 5. Left Field was granted immediate relief from the stay, but if an adequate protection payment was made by September 8, the foreclosure sale could not occur until October 6. This provided the Debtor with an additional month to secure funding. The financing never materialized, and Left Field acquired the property through foreclosure.
After that, the case languished. The Debtor did not pursue confirmation of the plan, did not file operating reports and did not seek to dismiss or convert the case. Eventually, the United States Trustee filed a motion to convert or dismiss the Chapter 11 for cause as evidenced by the failure to file operating reports, pay quarterly fees due under 28 U.S.C. § 1930(a)(6), or to pursue any form or reorganization or exit strategy. Mr. Nelson filed a limited objection on behalf of the Debtor, to state a preference for dismissal over conversion to Chapter 7.
On June 10, 2009, the date of the hearing on the motion to convert or dismiss, Mr. Nelson filed the operating reports for June 2008 through May 2009, to obtain dismissal rather than conversion to Chapter 7. At the June 10 hearing, the case was dismissed with conditions. Mr. Nelson was to submit a declaration concerning the fees he received, and the Court retained jurisdiction over the case for sixty days to hear and resolve any issues concerning the funds received by Mr. Nelson in connection with the case.
On July 2, 2009, Mr. Nelson filed a document in which he declared:
1. I am an attorney admitted to practice in the State of California and before this Court.
2. As indicated in the Declaration I filed on May 23, 20 08, support (sic) of the Debtor's Application to Employ General Counsel, I received a pre-petition retainer of $2,500.00 from the Debtor. That amount was billed to the Debtor for pre-petition service and applied to that bill. A true and accurate copy of my Declaration, which is item 59 on the Court's Docket in this matter, is attached hereto for the Court's convenience.
3. I have not submitted any invoices or bills to the Debtor since I became Debtor's Counsel in this matter. The Debtor sent a check in the amount of $2,000.00 to me in October 2008. I returned the check because no payment to me had been given by the Court (sic), nor had I submitted an application to the Court for approval of interim fees.
4. The 2, 500.00 I received prior to the filing, which was disclosed to the Court in my Declaration, is the only compensation I have received from the Debtor.
Although the Declaration technically complied with the language of the order of dismissal, it did not contain the full disclosure required by § 329 and Rules 2016 and 2017. An attorney is required to disclose compensation received in connection with a case, directly or indirectly, from any source, and to disclose the source. In re Park-Helena Corp. , 63 F.3d 877, 880-881 (9th Cir. 1995). The language in the order of dismissal presented by the parties, and the Declaration limiting the disclosure to fees received from the Debtor, is not sufficient to allow the Court to consider issues regarding any compensation received by Mr. Nelson in connection with the case.
Counsel for a debtor in possession must be disinterested and has an ongoing duty to disclose any connections with the debtor, creditors and any other party in interest. §§ 327(a), 328(c). In reviewing this matter, the Court notes that on the captions of some pleadings, Mr. Nelson used the address of 9089 Clairemont Mesa Blvd., Suite 100, San Diego 92123. The Court also notes that this is remarkably close to the address of World Wide Money Center, located at 9089 Clairemont Mesa Blvd., Suite 200, San Diego 92123. This is significant in this case, and requires further explanation by Mr. Nelson, because World Wide Money Center is listed as the recipient of notice for the majority of creditors in Case No. 08-01200-LT11, filed by a Debtor called Ash & State, LLC. A notice of related case was filed in both the Simplon case and the Ash & State case to indicate that the cases were related. Each Debtor filed pleadings in support of positions taken by the other Debtor. Given the overlapping interests in the two cases and related addresses of Mr. Nelson and most of the secured claims listed in the Ash & State petition, this Court requires a full disclosure by Mr. Nelson of any connection he may have to World Wide Money Market, as well as any other party who may have an interest in this case.
IT IS ORDERED that:
On or before October 16, 2009, Thomas C. Nelson shall file with this Court a supplemental declaration addressing the Court's concerns recited herein. Specifically, the supplemental declaration should include:
1) All information about any compensation received in connection with a case, directly or indirectly, from any source, and to disclose the source;
2) Any connections between Mr. Nelson and World Wide Money Market; and
3) Any additional information to provide complete disclosure of the information required by §§ 327, 328 and 329 and Rules 2014, 2016 and 2017.
A copy of the supplemental declaration shall be served on the United States Trustee. The Court shall continue to retain jurisdiction over this matter pending satisfactory disclosure by Mr. Nelson and resolution of any issues related thereto.