Opinions of the United
2003 Decisions States Court of Appeals
for the Third Circuit
4-25-2003
Wasserman v. Bressman
Precedential or Non-Precedential: Precedential
Docket 02-1725
Follow this and additional works at: http://digitalcommons.law.villanova.edu/thirdcircuit_2003
Recommended Citation
"Wasserman v. Bressman" (2003). 2003 Decisions. Paper 576.
http://digitalcommons.law.villanova.edu/thirdcircuit_2003/576
This decision is brought to you for free and open access by the Opinions of the United States Court of Appeals for the Third Circuit at Villanova
University School of Law Digital Repository. It has been accepted for inclusion in 2003 Decisions by an authorized administrator of Villanova
University School of Law Digital Repository. For more information, please contact Benjamin.Carlson@law.villanova.edu.
PRECEDENTIAL
Filed April 25, 2003
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
No. 02-1725
IN RE: ANDREW E. BRESSMAN,
Debtor
ROBERT B. WASSERMAN, Chapter 7 Trustee of the
Bankruptcy Estate of Andrew E. Bressman,
Appellant
v.
ANDREW E. BRESSMAN; STEFANIE BRESSMAN;
ARTHUR BRESSMAN, individually and as Trustee for the
Bressman Family Trust; PHYLLIS BRESSMAN; PERRI
BRESSMAN, a minor; HADLEY BRESSMAN; HYLA
BRESSMAN, a/k/a Hyla Jacobs; BANNON & WHITNEY,
INC., a corporation; PERSHING & CO., a corporation;
KOPSTEIN, VAN ALEN, NASH & CO., a corporation; MID
OCEAN TRUST LIMITED, a Cook Islands corporation, as
Trustee for the Bressman Family Trust; BRESSMAN
FAMILY TRUST; *NEWMAN & GREENBERG, a
partnership; *THE LAW OFFICES OF ROBERT HILL
SCHWARTZ; COLE, SCHOTZ, MEISEL, FORMAN &
LEONARD, P.C., a professional corporation;
SHAPIRO & CROLAND, a partnership including
professional corporations
*(Amended pursuant to Clerk’s Order dated 6/11/02)
On Appeal From the United States District Court
For the District of New Jersey
(D.C. Civil Action No. 00-cv-00925)
District Judge: Honorable Joseph A. Greenaway, Jr.
2
Argued December 12, 2002
BEFORE: FUENTES and STAPLETON, Circuit Judges,
and O’KELLEY,* District Judge
(Filed April 25, 2003)
Harry M. Gutfleish (Argued)
Wasserman, Jurista & Stolz
225 Millburn Avenue
Millburn, NJ 07041
Attorney for Appellant
Michael D. Sirota (Argued)
Cole, Schotz, Meisel, Forman &
Leonard
25 Main Street
P.O. Box 800
Hackensack, NJ 07601
Attorney for Appellees
OPINION OF THE COURT
STAPLETON, Circuit Judge:
I.
The Trustee in the Chapter 7 bankruptcy proceedings of
Andrew Bressman (“Debtor”) appeals the District Court’s
affirmance of the Bankruptcy Court’s grant of summary
judgment to Appellees, attorneys Newman & Greenberg,
The Law Offices of Robert Hill Schwartz (together, “Newman
& Schwartz”), and Cole, Schotz, Meisel, Forman & Leonard,
P.A. (“Cole Schotz”). The Trustee seeks to recover certain
funds received by appellees as counsel fees. We will affirm
the judgment of the District Court.
* Honorable William C. O’Kelley, United States District Judge for the
Northern District of Georgia, sitting by designation.
3
II.
In July, 1996, the Debtor filed voluntarily for bankruptcy
protection under Chapter 11 of the Bankruptcy Code. The
Bankruptcy Court approved Cole Schotz to represent the
Debtor as debtor-in-possession. On June 9, 1997, the
Chapter 11 proceedings were converted to Chapter 7
proceedings. Cole Schotz continued to represent the Debtor
in the bankruptcy proceedings, but as counsel for the
debtor out-of-possession. Upon his appointment, the
Trustee engaged the same litigation counsel that had
represented the Creditors Committee since the beginning of
the Chapter 11 proceeding.
Upon the conversion to Chapter 7, Cole Schotz advised
the Debtor that all payments for future services would have
to be paid from non-estate sources. It thereafter received
four fee payments: a check from the savings account of
Stefanie Bressman, the Debtor’s wife, on August 18, 1997;
a check from Stefanie’s PNC checking account on October
30, 1997; a check from the same account on December 8,
1997; and a check from PAS Realty, a firm owned by the
Debtor’s father, on January 2, 1998. It is only the
December 8, 1997, check for $12,218.57 that is at issue
here. On November 7, 1997, and January 7, 1998, Cole
Schotz filed certifications with the Bankruptcy Court in
accordance with § 329 of the Code reporting these fees for
representing the debtor out of-possession and their source.1
In the summer of 1996, the Securities and Exchange
Commission (“S.E.C.”) commenced disciplinary proceedings
against the Debtor as a result of his activities as president
and C.E.O. of A.R. Baron & Co., Inc., a securities firm,
which had also declared bankruptcy. In August, 1996,
Stefanie Bressman hired Newman & Schwartz to provide
1. Pursuant to 11 U.S.C. § 329, “[a]ny attorney representing a debtor in
a case under [the Bankruptcy code], or in connection with such a case,
whether or not such attorney applies for compensation under this title,
shall file with the court a statement of the compensation paid, . . . if
such payment . . . was made after one year before the date of the filing
of the petition, for services rendered or to be rendered in contemplation
of or in connection with the case by such attorney, and the source of
such compensation.”
4
representation for the Debtor in the S.E.C.’s proceedings as
well as in any criminal proceedings that might ensue. The
retention agreement required Mrs. Bressman to pay
Newman & Schwartz a retainer of $50,000 and to make
that payment and all ensuing payments of their fees with
non-estate assets. At that time, Stefanie and the Debtor
assured the attorneys responsible for the firm’s
representation that Stefanie came from a family of
substantial financial means and had adequate assets,
separate from the Debtor, with which to pay for the
representation. Three days after she entered the retention
agreement, Stefanie caused $50,000 to be wire transferred
from her personal account at Chase Bank to Newman &
Schwartz. The S.E.C.’s investigation led to a state court
indictment of the Debtor for a variety of crimes. Upon
Newman & Schwartz’s advice, the Debtor exercised his Fifth
Amendment right against self incrimination in both the
criminal case and the bankruptcy proceedings. Eventually,
the Debtor pled guilty to fraud and grand larceny.
Between August 8, 1996, and August 18, 1997, Newman
& Schwartz was paid an additional $125,000 for services
rendered to the Debtor. With the exception of one $50,000
payment received from his mother, each payment came
from Stefanie. These payments are not at issue here.
Rather, the Trustee seeks to recover six payments received
by the firm from Stefanie’s personal account at PNC Bank
between November 20, 1997, and December 3, 1997.
More than a year before his bankruptcy, the Debtor
established a trust in the Cook Islands. The Debtor’s
contingent interest in this trust was disclosed in the
schedules filed with the Bankruptcy Court on July 18,
1996, and the Debtor testified concerning the terms of this
trust at a hearing twenty days later that was attended by
counsel for the Creditors Committee.
Between November 19 and December 5, 1997, six wire
transfers totaling $430,000 passed from the Cook Islands
trust to Mrs. Bressman’s personal account. On the
business day following each of the six transfers, Stefanie
paid a substantial portion of the amount transferred to Cole
Schotz and Newman & Schwartz in satisfaction of bills for
5
their respective representations of the Debtor. The six
payments made to Newman & Schwartz totaled $380,000.
The Trustee, after his appointment on June 23, 1997,
continued the efforts of the Creditors’ Committee to identify
and recover assets of the estate. On December 23, 1997, he
instituted this suit against Stefanie, other family members
and numerous firms to recover the assets of the Cook
Islands trust for the estate. The complaint was amended to
seek recovery of the fees paid to Newman & Schwartz and
to Cole Schotz on May 26, 1998. The claims against all
other defendants were settled without a determination of
whether the trust was part of the Debtor’s estate.
The Trustee and the law firms filed cross-motions for
summary judgment. In support of their motions and in
opposition to the Trustee’s, the law firms filed affidavits of
the responsible attorneys, which set forth the facts
recounted above and averred that they had no knowledge
that the Cook Islands trust was the source of the funds
used by Stefanie to pay the fees at issue. Neither
questioned Stefanie about the source of the funds because
they believed they had no reason to do so.
In response to these affidavits, the Trustee filed an
affidavit of his counsel. With respect to Cole Schotz, he
described correspondence between that firm and himself in
which he had inquired concerning the source of the fees
being paid to Cole Schotz. This correspondence culminated
in a letter to Cole Schotz on November 10, 1997, which
stated in part as follows:
I am in receipt of your supplemental Certification,
dated November 7, 1997, acknowledging that, since the
conversion of the within bankruptcy proceedings to
Chapter 7, your firm has received approximately
$18,000.00 from Stefanie Bressman in payment of fees
incurred by your firm in connection with the within
bankruptcy proceedings.
I know that you are fully aware of the pending
adversary proceeding against Stefanie Bressman,
seeking recovery of funds transferred to Mrs. Bressman
as fraudulent conveyances. The purpose of this letter is
to advise you that Mr. Wasserman, as Bankruptcy
6
Trustee, will likely be forced to seek disgorgement of
the fees paid to your firm by Stephanie [sic] Bressman
if it is ultimately determined that such fees are the
“fruit” of fraudulent conveyances by Mr. Bressman.
Please be guided accordingly.
App. IV at Tab 24, pp. 5-6.
With respect to Newman & Schwartz, Trustee’s counsel
stressed the following telephone conversation with one of
the firm’s attorneys who represented the Debtor in the on-
going criminal proceedings:
16. On October 15, 1997, I received a telephone call
from Richard A. Greenberg, Esq. of Newman &
Schwartz, concerning the Trustee’s Rule 2004
Subpoena. Mr. Greenberg wanted to know (a) why the
Trustee was interested in the source of Newman &
Schwartz’s fees; and (b) whether Mr. Newman was
required to appear for a deposition of October 31,
1997.
17. In response, I advised Mr. Greenberg that the
Trustee was investigating whether his firm had received
payment from funds or assets that constituted property
of Andrew Bressman’s bankruptcy estate and that the
Trustee would seek disgorgement of any fees paid from
estate property. Mr. Greenberg stated this his firm had
not received payment from Andrew Bressman. I
responded that the mere fact that the payments were
not received from Andrew Bressman did not mean that
Newman & Schwartz was not paid with estate assets.
App. IV at Tab 24, p. 7.
Before the Bankruptcy Court, the Trustee contended that
the challenged fee payments were unauthorized post-
petition transfers recoverable under §§ 549 and 550. He
further asserted that Newman & Schwartz had violated
§ 329 by failing to report the challenged fee payments to the
Bankruptcy Court and that both firms had violated §§ 327
and 330 by receiving funds of the Debtor’s estate without
court approval. According to the Trustee, these violations of
§§ 327, 329 and 330 required that the challenged fees be
“disgorged.”
7
The Bankruptcy Court assumed without deciding that
the trust was an asset of the bankrupt’s estate. It held that,
even making this assumption, §§ 327, 329 and 330 were
not applicable to the situation before it and that the only
remedies potentially available to the Trustee were
authorized by §§ 549 and 550. It further ruled, however,
that the firms were transferees “for value, . . . in good faith,
and without knowledge of the voidability of the transfer”
within the meaning of § 550(b)(1). The law firms’ affidavits
provided prima facie evidence that they had no reason to
know that the challenged fees came from the trust and the
Trustee had not satisfied its burden of producing sufficient
evidence to support a contrary inference. On appeal, the
District Court affirmed.
The Trustee advances the same arguments before us,
urging that we reverse the judgment of the District Court
and remand with instructions to enter summary judgment
for the Trustee.
III.
Section 549(a) of the Bankruptcy Code authorizes the
Trustee to avoid post-petition transfers of property of the
estate that are not authorized by the Code or an order of
the Bankruptcy Court. Section 550(a) provides that, to the
extent a transfer is avoided under § 549(a), the Trustee may
recover the property transferred or its value from the initial
transferee or from any subsequent transferee. Under
§ 550(b)(1), however a Trustee may not recover an otherwise
avoidable transfer from a subsequent transferee “that takes
for value . . . , in good faith, and without knowledge of the
voidability of the transfer avoided.” We may assume
arguendo for present purposes that § 550(b)(1) creates an
affirmative defense with respect to which the transferee has
the burden of persuasion, as held by the Sixth Circuit
Court of Appeals in In re Nordic Village, Inc., 915 F.2d
1049, 1055-56 (6th Cir. 1990), rev’d on other grounds, 530
U.S. 30 (1992).2
2. This court has never addressed this burden of persuasion issue, and
we find it to be a difficult one. The Nordic Village court reached its
8
The Trustee acknowledges that the firms “took for value.”
He insists, however, that the law firms were on “inquiry
notice” that the original source of Stefanie’s payments was
the trust, that the trust assets were a part of the estate,
and accordingly that the transfers were voidable. Like the
Bankruptcy Court and the District Court, we will assume in
our analysis of the Trustee’s arguments that the trust was
an estate asset. We accept, as the controlling law, the
precepts articulated in the following quotation from the
conclusion based on the text of § 550(b)(1) and an analogy to § 549(c),
which under certain circumstances bars the trustee from avoiding an
initial transfer of real property from the estate to a good faith purchaser
for value and without knowledge of the commencement of the
bankruptcy case. Bankruptcy Rule 6001 places the burden of persuasion
on a transferee relying on § 549(c). It is not at all clear to us that “the
language of the statute clearly places the burden of showing value, good
faith, and lack of knowledge, on the transferee as a defense.” Id. at 1055.
Moreover, we agree with the Nordic Village dissent that the Code treats
initial transferees in a different manner than subsequent transferees and
that a substantial argument can be made in favor of placing the burden
of proof on the trustee with respect to subsequent transferees. As the
dissent in Nordic Village put it:
Although the Code makes clear that initial transferees are
generally presumed to be on notice of the voidability of a transfer
and have few if any defenses to the trustee, (see 11 U.S.C. §§ 549,
550(a)(1); Bankruptcy Rule 6001), the Code also makes clear that
subsequent transferees are not under such a severe disability. 11
U.S.C. § 550(b). Such a dichotomy is rationally related to the fact
that initial transferees will generally have knowledge and therefore
act in bad faith since they deal directly with the bankrupt. In
contrast, subsequent transferees are much more likely to be
innocent third parties. They have little ability to protect themselves
by making cursory checks on their transferor. Absent an express
rule placing the burden of proof on subsequent transferees, I believe
the burden should rest on the party seeking to recover the property,
at least as to the issues of the subsequent transferee’s good faith
and knowledge.
Nordic Village, 915 F.2d at 1063-64.
Because we conclude that the law firms have made a sufficient
showing even assuming they have the burden of persuasion, we reserve
this issue for another day.
9
Trustee’s brief (quoting from In re Sherman, 67 F.3d 1348,
1357 (8th Cir. 1995):
“No one supposes that ‘knowledge of voidability’ means
complete understanding of the facts and receipt of a
lawyer’s opinion that such a transfer is voidable; some
lesser knowledge will do.” Bonded Fin. Servs., 838 F.2d
[890, 898 (7th Cir. 1988)] (citations omitted). . . .
Accordingly, we believe that a transferee has knowledge
if he “knew facts that would lead a reasonable person
to believe that the property transferred was
recoverable.” In re Nordic Village, Inc., 915 F.2d 1049,
1055 (6th Cir. 1990) (quoting Smith, 788 F.2d at 232
n.2), rev’d on other grounds sub nom. United States v.
Nordic Village, Inc., 503 U.S. 30, 117 L. Ed. 2d 181,
112 S. Ct. 1011 (1992). In this vein, some facts suggest
the underlying presence of other facts. If a transferee
possesses knowledge of facts that suggest a transfer
may be fraudulent, and further inquiry by the
transferee would reveal facts sufficient to alert him that
the property is recoverable, he cannot sit on his heels,
thereby preventing a finding that he has knowledge. In
such a situation, the transferee is held to have
knowledge of the voidability of the transfer. In re
Agricultural Research & Technology Group, 916 F.2d
[528, 536 (9th Cir. 1990)]; Bonded Fin. Servs., 838
F.2d at 898; In re Goodwin, 115 B.R. 674, 677 (Bankr.
C.D. Cal 1990).
Appellant\Trustee’s Br. at 41.
We will, however, supplement this quotation with the
following observations of the Court in Bonded Financial
Services v. European American Bank, 838 F.2d 890, 898
(7th Cir. 1988), from which the Sherman Court took its law:
Some facts strongly suggest the presence of others; a
recipient that closes its eyes to the remaining facts may
not deny knowledge. See Bosco v. Serhant, 836 F.2d
271[, 276-78] (7th Cir. 1987). But this is not the same
as a duty to investigate, to be a monitor for creditors’
benefit when nothing known so far suggests that there
is a fraudulent conveyance in the chain. “Knowledge” is
a stronger term than “notice”, see Smith v. Mixon, 788
10
F.2d at 232. A transferee that lacks the information
necessary to support an inference of knowledge need
not start investigating on his own.
It is undoubtedly true, as the Trustee insists, that he put
the firms on notice just prior to their receipt of the
challenged payments that he was investigating whether
they were being paid from estate assets and would seek to
recover them if his investigation revealed that they were.
This does not mean, however, that the giving of such notice
gave them “knowledge of the voidability” or imposed a duty
on them to initiate their own investigation. Rather, the
issue is whether the facts known to the firms and the
reasonable inference to be drawn from those facts would
affirmatively suggest to a reasonable person in their
position that they were receiving assets of the estate. If not,
there would be no duty to investigate.
Having determined the applicable substantive law, we
turn to the law of summary judgment and the application
thereof to the record before us. Summary judgment is
appropriate only where the court is satisfied “that there is
no genuine issue as to any material fact and the moving
party is entitled to judgment as a matter of law.” Fed. R.
Civ. P. 56(c). Insofar as the Trustee’s motion for summary
judgment is concerned, the law firms’ burden in opposing
that motion, even assuming they have the trial burden of
persuasion on the good-faith\no-knowledge issue, is simply
to come forward with evidence which, if believed, would
support a finding in its favor or, stated otherwise, such
evidence as would entitle it to “successfully resist a motion
for a directed verdict.” United States v. One 107.9 Acre
Parcel of Land, 898 F.2d 396, 398 (3d Cir. 1990). The
affidavits filed by the law firms clearly satisfied this burden,
and it follows that the Trustee is not entitled to summary
judgment on the record before us.
Turning to the law firms’ motions for summary judgment
and assuming, again, that they have the burden of proof on
the good-faith\no-knowledge issue, they had the burden of
supporting their motions “with credible evidence . . . that
would entitle [them] to a directed verdict if not controverted
at trial.” Celotex Corp. v. Catrett, 477 U.S. 317, 331
11
(Brennan, J., dissenting3); Anchorage Assocs. v. V.I. Bd. of
Tax Review, 922 F.2d 168, 175-76 (3d Cir. 1990); Chaplin
v. Nationscredit Corp., 307 F.3d 368, 372 (5th Cir. 2002)
(“To obtain summary judgment, ‘if the movant bears the
burden of proof on an issue . . . because . . . as a defendant
he is asserting an affirmative defense, he must establish
beyond peradventure all of the essential elements of the . . .
defense to warrant judgment in his favor.’ ” (quoting from
780 F.2d 1190 (5th Cir. 1986)); United States v. Four
Parcels of Real Property, 941 F.2d 1428, 1438 (11th Cir.
1991) (“When the moving party has the burden of proof at
trial, that party must show affirmatively the absence of a
genuine issue of material fact: it . . . must show that, on all
the essential elements of its case on which it bears the
burden of proof at trial, no reasonable jury could find for
the non-moving party.”). See also Nat’l State Bank v. Fed.
Reserve Bank, 979 F.2d 1579, 1582 (3d Cir. 1992);11
Moore, Federal Practice § 56.13[1] p.56-138. Once a moving
party with the burden of proof makes such an affirmative
showing, it is entitled to summary judgment unless the
non-moving party comes forward with probative evidence
that would demonstrate the existence of a triable issue of
fact. Fed. R. Civ. P. 56(e); Four Parcels, supra.
The most difficult issue here is whether the law firms’
support for their motions was sufficient to meet this
concededly high standard and thereby put the burden on
the Trustee to come forward with evidence demonstrating
that there is a genuine issue for trial. While we think it is
a close issue, we conclude that this burden has been met.
It is, of course, true that the probative value of the law
firms’ denial of relevant knowledge depends on the
credibility of their witnesses. But their testimony finds
substantial corroborating evidence in the record and, in the
absence of any contrary evidence, we believe it would have
to be accepted by a reasonable jury.
3. Justice Brennan’s dissent does not differ with the opinion of the Court
regarding the appropriate standards for summary judgment. The
disagreement is with respect to the application of those standards to the
record before the Court in Celotex.
12
The record demonstrates that the members of each
firm handling their respective representations were
sophisticated, experienced lawyers who understood the risk
entailed in being paid with estate assets and specifically
focused on that issue. This is corroborated in the case of
Newman & Schwartz by the fact that the responsible
attorney insisted in the representation agreement on
receiving payment for their services from non-estate assets.
In the case of Cole Schotz, corroboration comes from the
fact that the firm changed its arrangement with the Debtor
for the payment of its fees upon the conversion of the
Chapter 11 proceeding to a Chapter 7 proceeding.
The record also demonstrates that each firm anticipated
providing a very substantial amount of legal services in the
course of its representation. Investing those services while
having knowledge that they were being paid with estate
assets involved a risk of loss that it is economically
unrealistic to attribute to the firms. The firms’ conduct in
making the investment of their services in their respective
representations thus corroborates their sworn denial of
knowledge. Because of that corroboration, we believe a
reasonable jury could not reject those denials in the
absence of some substantial evidence that they had the
knowledge they deny having.
Having concluded that the firms adequately supported
their motions for summary judgment, we now turn to the
issue of whether the Trustee carried its burden of
demonstrating that there is a genuine issue of material fact
for trial. Like the Bankruptcy Court and the District Court,
we conclude that he has not.
As we have noted, the Trustee’s primary argument is that
he put the firms on notice that recovery would be sought if
his investigation revealed payments from estate assets and
that they are, therefore, chargeable with the facts they
would have learned through an investigation. We have
already held that this “putting on notice” did not, by itself,
give rise to a duty to conduct an independent investigation.
We hold as well that the firms’ knowledge of the fact that
the Trustee was investigating is not itself probative on the
issue of whether the firms had reason to believe they were
being paid from estate assets. Conducting an investigation
13
and attempting to identify and recover estate assets are
responsibilities of the Trustee and the fact that he is
pursuing those responsibilities does not suggest that any
particular asset is recoverable by the Trustee.
Next, the Trustee points to evidence tending to show that
the firms were aware of the existence of the Cook Islands
trust. Knowledge of the existence of the trust, however, is
not probative of knowledge that the trust was an asset of
the estate, much less of knowledge that the challenged
payments originated with the trust. The Debtor left a
tangled web of affairs. The Creditors Committee and
litigation counsel for the Trustee were aware of the
existence of this trust in the summer of 1996 and did not
know enough to assert a claim that it was an estate asset
until December 23, 1997. A claim that the challenged
checks came from the trust was not asserted until May 26,
1998.
The Trustee also finds significance in the fact that Cole
Schotz, though not Newman & Schwartz,4 became aware
prior to its receipt of the challenged payments that the
Creditors Committee had instituted an adversary
proceeding against the Debtor, Stefanie, their minor
daughter, and 28 others seeking to avoid allegedly
fraudulent transfers. This proceeding, however, did not
mention the Cook Islands trust or either of the law firms.5
Even wider of the mark, in our judgment, is the Trustee’s
emphasis on the facts that the Debtor had been indicted for
supervising a criminal enterprise and that in a May 1997
press conference statement, the Manhattan District
Attorney had asserted that the Debtor and his codefendants
4. Newman & Schwartz’s affidavit avers that it had no knowledge of
the Committee’s adversary proceeding until this proceeding is
uncontradicted in the record.
5. We note that, even if the Committee’s claims against others, with
respect to different assets, had been sufficient to require the law firms to
insist upon a demonstration that Mrs. Bressman had non-estate assets
at the outset of their representations, the record does not indicate that
they would have discovered that she did not. Prior to the receipt of the
challenged checks, both firms had received a series of checks from
Stefanie that have not been challenged.
14
had put money in Swiss and other off-shore banks,
including a Cook Islands trust. As we have indicated,
everyone involved knew from the summer of 1996 that the
Debtor had created a Cook Islands trust in which he
retained a contingent interest. Yet even those specifically
responsible for tracing the Debtor’s assets made no claim
that the Cook Islands trust was an estate asset until
December 1997 and made no claim that the challenged
payments came from the trust until May of 1998, long after
the law firms received the challenged payments.
In summary, each of the law firms came forward with
persuasive evidence that they knew they could not accept
payment from estate assets, that they so advised their
clients, that the clients committed to pay from non-estate
assets, that the challenged payments came from non-estate
sources, and that they were unaware of any connection
between the payments and estate assets. In response, the
Trustee came forward with no probative evidence of the
firms being aware of facts that would affirmatively suggest
they were receiving assets from the estate. Accordingly, the
District Court appropriately entered summary judgment in
favor of the law firms.6
IV.
We also agree with the Bankruptcy Court and the District
Court that it is §§ 549 and 550 of the Code that govern the
liability of the law firms in a situation of this kind. While it
is true that a bankruptcy court may order the disgorgement
of fees received by an attorney when he or she has ignored
reporting and court approval duties imposed by the Code,
see 11 U.S.C. § 329; In re W.T. Mayfield Sons Trucking Co.,
Inc., 225 B.R. 818 (Bankr. N.D. Ga. 1998) (ordering
disgorgement for a violation of § 327), the Trustee had
identified no statutory sections that imposed such duties
on the firms in the situation before us. While the Trustee
contends that Newman & Schwartz failed to comply with
6. Given the absence from the record of a Rule 56(f) affidavit asking for
a continuance and setting forth the additional discovery the Trustee
desired to take, it would be inappropriate for us to grant the Trustee’s
request that we remand for further discovery.
15
the reporting requirement of § 329 and that both firms
received fees from the estate in violation of § 330, we, too,
conclude that those provisions are inapposite.
A.
Pursuant to § 329,
[a]ny attorney representing a debtor in a case under
[the Bankruptcy Code], or in connection with such a
case, whether or not such attorney applies for
compensation under this title, shall file with the court
a statement of the compensation paid . . . if such
payment . . . was made after one year before the date
of the filing of the petition, for services rendered or to
be rendered in contemplation of or in connection with
the case by such attorney, and the source of such
compensation.
11 U.S.C. § 329.
The Trustee urges that the representation provided to the
Debtor by Newman & Schwartz was “in connection with”
the bankruptcy case and, therefore, Newman & Schwartz
had an obligation under § 329 to disclose the amount and
source of their compensation to the bankruptcy judge.
Since they failed to do so, the Trustee urges, their fees
should be disgorged.
The Trustee concedes, as he must, that § 329 does not
require a report to the Bankruptcy Court regarding all
counsel fees paid by a debtor during, or within a year prior
to, bankruptcy. It speaks only of fees paid for
representation of the debtor in a case under the
Bankruptcy Code or in connection with such a case. Thus,
representation of a debtor in a criminal case during the
period of bankruptcy would not normally require a report
any more than would representation of the debtor in a
divorce proceeding during that period. See, e.g., In re
Swartout, 20 B.R. 102 (Bankr. S.D. Ohio 1982). While
acknowledging this, the Trustee nevertheless insists that
this case is different because of three alleged connections
between Newman & Schwartz’s representation of the Debtor
and the bankruptcy proceeding. First, the Debtor pled
16
guilty in the criminal proceeding and agreed to cooperate
with the District Attorney, and those decisions of the
Debtor “led to” a settlement of civil claims which benefitted
the estate. Second, Newman & Schwartz advised the Debtor
to claim the Fifth Amendment in the bankruptcy
proceedings and reviewed a brief filed in those proceedings
which relied upon the Debtor having to assert the Fifth
Amendment in the criminal proceedings. Finally, the
Trustee points to three entries in Newman & Schwartz’s
billing records that refer to an attorney having reviewed
“bankruptcy related” documents, as well as a small number
of telephonic conferences with bankruptcy counsel.
We find no § 329 violation. Nothing in the record suggests
that Newman & Schwartz did anything other than provide
representation to the Debtor in the criminal proceedings
against him. It advised him to assert his Fifth Amendment
privilege in those proceedings and, when he decided to do
so, it advised him on what he must do to preserve the
privilege, including asserting it in the bankruptcy
proceeding. While its fee sheets indicate that it spent a
minimal amount of time reviewing “bankruptcy related”
documents and speaking to the Debtor’s bankruptcy
counsel, nothing suggests that this was for any purpose
other than providing effective representation in the criminal
proceedings. Finally, while the Debtor’s guilty plea may
have made a civil settlement possible, the Trustee concedes
that Newman & Schwartz played no role in negotiating the
settlement agreement that benefitted the bankruptcy estate.
Although there was thus a “but for” causal relationship
between the plea and the settlement, we conclude that this
does not satisfy the “in connection with” requirement of
§ 329. Actions taken by a client in the course of a
representation will normally have a multitude of side
effects, with respect to which counsel has assumed no
responsibility and, indeed, of which counsel may have no
knowledge. If § 329 were held to sweep so broadly, it is
difficult to understand how even the most conscientious of
counsel could assure compliance.
B.
Section 327(a) provides that the trustee may, with court
approval, engage an attorney to assist the trustee in
17
fulfilling her responsibilities. Section 327(e) provides further
authority for the Trustee, with court approval, to “employ,
for a specified special purpose, other than to represent the
trustee in conducting the case, an attorney that has
represented the debtor, if in the best interests of the
estate.” Section 330 authorizes the court to provide
“reasonable compensation” for attorneys employed under
§§ 327(a) and (e), so long as the services were “reasonably
likely to benefit the debtor’s estate or . . . necessary to the
administration of the case.” 11 U.S.C. § 330(a)(4)(A)(ii). The
purpose of §§ 327 and 330 is to allow for the necessary
participation of lawyers in the bankruptcy process, while
remedying the lack of incentive, on the part of the debtor,
to negotiate attorneys’ fees and to find representation at a
cost-effective level. In re Engel, 124 F.3d 567, 572-73 (3d
Cir. 1997).
Section 327(e) does not apply to either the representation
of the Debtor by Newman & Schwartz or that by Cole
Schotz and, accordingly, we find no violation of the
compensation scheme provided by §§ 327 and 330. Neither
firm was engaged for the direct or indirect benefit of the
bankrupt estate, and neither was looking to the bankrupt
estate for payment of its fees. Contrary to the Trustee’s
suggestion, we find nothing in the text or legislative history
of §§ 327 and 330 indicating that they were intended to
impose strict liability on an attorney whenever he receives
estate funds without § 330 court approval, albeit
unknowingly. Rather, we agree with the District Court that,
where estate funds are paid to an attorney other than for
the benefit of the estate, the trustee’s remedy is provided by
sections of the Code other than §§ 327 and 330 — in this
instance, §§ 549 and 550.
We find the cases relied upon by the Trustee inapposite.
Suffice it to say that none involved payment of estate funds
to an attorney for representation of a debtor out of
possession nor for representations unconnected with a
bankruptcy proceeding when the attorney lacked knowledge
of the source of the funds.
V.
The judgment of the District Court will be affirmed.
18
A True Copy:
Teste:
Clerk of the United States Court of Appeals
for the Third Circuit