Virginia Lawyers Weekly VA Lawyers Weekly
Where a Chapter 7 panel trustee received a share of commissions from a realtor to whom he referred business, and that arrangement was not disclosed to the court, the trustee must disgorge his fees in this case.
Background
This matter was before the court for a hearing on the court’s order to show cause why Tranzon and Bryan Ross, a Chapter 7 panel trustee in the District of Columbia, should not be sanctioned in connection with an undisclosed referral arrangement between the two. That arrangement resulted in undisclosed fees being paid to Mr. Ross in a number of bankruptcy cases in D.C, Maryland and Virginia.
At the hearing the court dismissed the show cause against Tranzon in deference to the settlement agreement described below that had previously been reached between the U.S. Trustee and Tranzon. Additionally, Mr. Ross offered to disgorge his fees in connection with this case.
Nondisclosure
Section 327 of the Bankruptcy Code allows a debtor in possession, with court approval, to employ professionals that do not hold or represent an interest adverse to the estate. At the core of the bankruptcy process is disclosure and transparency.
While Mr. Ross may claim that the disclosure obligation belongs to Tranzon and not to him, the court is not persuaded by this argument based on the facts in this case. First, Mr. Ross actually drafted the employment application and even offered advice regarding objections to it. Second, by drafting but not signing the employment application and offering advice on the document and the sale process while simultaneously choosing not to appear as an attorney of record in the case (i.e., ghostwriting), Mr. Ross violated Federal Rule of Bankruptcy Procedure 9011.
While the court will not enter sanctions under Rule 9011, Mr. Ross’ violation of that rule, combined with his patently untrue response to the show cause order underscores why he should not be able to escape liability for his nondisclosure when he should have signed the document in the first place. The court finds that Mr. Ross’ extensive experience as a bankruptcy attorney and panel trustee further underscores why this court must hold him accountable.
Fee sharing
Mr. Ross argues that the compensation terms of the Tranzon retention were approved under § 328, that his fees ultimately were not paid from estate property and that based on the foregoing, the fee is not subject to the prohibition on fee sharing in § 504. The court finds these arguments unpersuasive.
Mr. Ross appears to conflate the “approval” of fees with the “payment” of fees to professionals. First, his reliance on § 328 which requires that fees be reasonable is misplaced. It cannot be confused with § 327, which controls the employment of professionals. In fact, the order approving Tranzon’s employment specifically states that the employment application is approved under 11 U.S.C. § 327(a) rather than § 328.
Second, approval of payment of fees to professionals is controlled by § 330. This section contains no restrictions on the source of the funds from which fees may be paid. Moreover, the applicability of § 504, which addresses fee sharing, is not limited to property of the estate, so Mr. Ross’ argument that the source of his portion of the commission – the buyer’s premium – places the payment outside the constraints of this section is simply incorrect.
While § 504 specifically lays out express exceptions in subsections (b) and (c) that are not applicable here, it contains no carve out for payments that are not made from property of the estate. It would be improper for this court to read in language that simply does not exist in the statute. As a result, the court is left with the inescapable conclusion that the referral arrangement violated § 504 because a person, Tranzon in this case, received compensation under § 503(b)(2) as compensation paid under § 330, and that compensation was shared with another person, Mr. Ross.
Sanctions
The only remaining issue is what sanction would be the appropriate to impose for the violation of § 504 and Mr. Ross’ failure to disclose, had Mr. Ross not offered to disgorge the $9,150 consulting fee he collected.
In this case, the net proceeds of sale were more than sufficient to pay all unsecured creditors in full, and the remaining surplus was turned over to the debtor so the estate was not directly harmed by the referral arrangement. However, based on Mr. Ross’ failures to disclose the referral arrangement, his violation of the fee sharing prohibition and the misrepresentations regarding his involvement in the employment application, the court finds that disgorgement is appropriate in this case. Therefore, those fees will be disgorged and paid to the debtor.
In re: Tigist Kebede, Case No. 18-12086, May 2, 2023. EDVA Bankr. at Alexandria (Kindred). VLW No. 023-4-009. 9 pp.
