In re Fundamental Long Term Care, Inc. (Estate of Townsend v. Berman)

81 F.4th 1264

IN RE: FUNDAMENTAL LONG TERM CARE, INC., Debtor.

Estate of Arlene Townsend, Estate of Elvira Nunziata, Estate of James Henry Jones, Estate of Joseph Webb, Estate of Opal Lee Sasser, Estate of Juanita Jackson, Petitioning Creditor, Plaintiffs-Appellants, v. Steven M. Berman, Esq., Shumaker, Loop & Kendrick, LLP, Defendants-Appellees.

No. 21-10587

United States Court of Appeals, Eleventh Circuit

Filed: September 18, 2023

Appeal from the United States District Court for the Middle District of Florida, D.C. Docket No. 8:20-cv-00956-VMC, Bkcy No. 8:11-bk-22258-MGW

James L. Wilkes, II, Bennie Lazzara, Jr., Wilkes & Associates, PA, Tampa, FL, Daniel R. Fogarty, Harley E. Riedel, II, Stichter Riedel Blain & Postler, PA, Tampa, FL, for Plaintiffs-Appellants.

Steven M. Berman, Duane Allan Daiker, Seth P. Traub, Shumaker Loop & Kendrick, LLP, Tampa, FL, Stephen D. Busey, Smith Hulsey & Busey, Jacksonville, FL, for Defendants-Appellees.

Before Lagoa, Brasher, and Tjoflat, Circuit Judges.

Tjoflat, Circuit Judge:

Section 327(a) of the United States Bankruptcy Code, titled "Employment of professional persons," states that "the trustee, with the court's approval, may employ one or more attorneys, accountants, appraisers, auctioneers, or other professional persons, that do not hold or represent an interest adverse to the estate, and that are disinterested persons, to represent or assist the trustee in carrying out the trustee's duties." 11 U.S.C. § 327(a). Rule 2014 of the Federal Rules of Bankruptcy Procedure implements the disinterestedness provision of this section by requiring the trustee, in seeking court approval of the employment of a professional, to disclose "the person's connections with the debtor, creditors, [or] any other party in interest."¹ Fed. R. Bankr. P. 2014(a).

The bankruptcy proceeding underlying this case, In re Fundamental Long Term Care, Inc., was initiated by Wilkes & McHugh, P.A. ("Wilkes"), on December 5, 2011, when it filed an involuntary petition in the Bankruptcy Court for the Middle District of Florida under Chapter 7 of the Bankruptcy Code for relief against Fundamental Long Term Care, Inc. ("FLTCI") on behalf of the Estate of Juanita Jackson, deceased. The Jackson Estate, in a wrongful death tort action, had obtained judgments of $55 million against Trans Health, Inc. ("THI") and Trans Health Management, Inc. ("THMI") each, on July 22, 2010. In a post-judgment motion, the Jackson Estate obtained a default amended judgment on September 13, 2011, making FLTCI liable for the total $110 million award, along with THI and THMI—which were each liable for their respective $55 million judgment. But the Jackson Estate was unable to collect on the judgments due to a massive "bust-out" scheme² designed and executed in March 2006 to avoid paying the judgments.³

The Chapter 7 case became operative on January 12, 2012, when the Bankruptcy Court issued an "Order of Relief" after FLTCI—now the Debtor—failed to respond to the Jackson Estate's Chapter 7 petition. In June 2012, the trustee of the Debtor's estate (the "Trustee") employed Steven M. Berman and Shumaker, Loop & Kendrick, LLP ("Shumaker")⁴ as special litigation counsel. They served in that capacity until December 2015, following the distribution of the proceeds of a compromise presented to the Bankruptcy Court for approval in March 2015.

On June 4, 2018, Wilkes, representing the creditors of the Debtor's estate—namely the Jackson Estate and five other Probate Estates (collectively, the "Probate Estates")—moved the Bankruptcy Court nunc pro tunc to disqualify Shumaker as special litigation counsel and require it to disgorge the compensation it had received for its services. According to Wilkes, when the Trustee employed Shumaker in June 2012, it was not disinterested as required by § 327(a). Moreover, Shumaker failed to timely disclose its "connections with the debtor, creditors, [or] any other party in interest"—connections that revealed its disinterestedness—as required by Rule 2014. The Bankruptcy Court denied Wilkes's motion. It did so without an evidentiary hearing and based on the record of the bankruptcy case.⁵

The Probate Estates appealed the Bankruptcy Court's decision. On February 27, 2020, the District Court affirmed the Bankruptcy Court's order except on the issue of whether Berman had committed a disclosure violation pursuant to Rule 2014. The District Court then remanded the case to the Bankruptcy Court so it could decide whether Berman violated Rule 2014's disclosure requirements. On remand, the Bankruptcy Court held that Berman's omissions did not warrant sanctions under Rule 2014. In re Fundamental Long Term Care, Inc., 614 B.R. 753 (Bankr. M.D. Fla. 2020). On the Probate Estates' appeal, the District Court affirmed. In re Fundamental Long Term Care, Inc., No. 8:20-cv-956, 2021 WL 222779 (M.D. Fla. Jan. 22, 2021).

The Probate Estates now appeal the District Court's decision, contending that the Bankruptcy Court abused its discretion in denying their motion. With the benefit of oral argument and having examined the record before the Bankruptcy Court, we affirm.

We divide our discussion as follows. In part I, we consider the relevant events that took place prior to the Chapter 7 Trustee's appointment and the administration of the bankruptcy estate prior to Berman and Shumaker's employment as special litigation counsel.⁶ Part II begins with the Trustee's application to employ Berman and Shumaker; it then describes what they learned about the bust-out scheme, Wilkes's litigation in response to the scheme, and the conflict between the Trustee and counsel for the fraudulent transferees over control of the defense strategy in state court. Part III deals with the principal adversary proceedings held in the case, including the Bankruptcy Court's decision to treat THMI as if it had been included as a debtor in the Jackson Estate's petition for Chapter 7 relief against FLTCI and the compromises that resolved those proceedings. Part IV takes up Wilkes's motion to disqualify Shumaker and for disgorgement of the attorney's fees Shumaker received, the Bankruptcy Court's rulings on the motion, and the District Court's review of those rulings. Part V concerns the present appeal.

I.

On January 23, 2012, the Bankruptcy Court appointed Beth Ann Scharrer Trustee of the Debtor's (FLTCI's) estate. Two days later, the Bankruptcy Court approved her application to employ Allan C. Watkins as her general counsel. On February 22, the Trustee, through Watkins, moved the Bankruptcy Court to enter an order "authorizing the Trustee, on behalf of the [C]hapter 7 estate ... to borrow up to Ten Thousand Dollars ... from Wilkes & McHugh, P.A.... under 11 U.S.C. § 503(b)(1) as an administrative expense." The motion stated in relevant part:

No schedules have been filed by the Debtor, and no appearance has been made by counsel for the Debtor. No response was made by or on behalf of the Debtor, and no schedules or statement of financial affairs have been filed. As such, there is little information in the record upon which the Trustee can rely to determine the assets and liabilities of the Debtor.

. . .

Wilkes & McHugh represents a number of creditors asserting claims against the Debtor, including the Estate of Juanita Jackson, the petitioning creditor. The Lender [Wilkes] has agreed to loan to the [Debtor's] Estate up to $10,000.00, allowable as an administrative expense under § 503(c)(1) of the Bankruptcy Code.

. . .

The Debtor has not prepared any schedules, list of creditors, or statement of financial affairs. The Trustee needs to conduct discovery, including by deposition testimony as necessary, to produce the information necessary or available. The likely witnesses with knowledge of the Debtor's business affairs are located out of the State of Florida, so expenses would include travel costs, lodging, and meals as well.

Trustee's Motion for Final Approval of Postpetition Financing at 2-3, In re Fundamental Long Term Care, Inc., No. 8:11-bk-22258 (Bankr. M.D. Fla. Feb. 22, 2012). The Bankruptcy Court held a hearing on the motion on March 28, 2012, and approved it in an order dated April 6, 2012.

At the same time, Wilkes was involved in the prosecution of, or in post-judgment proceedings in, five of the six wrongful death cases it had brought on behalf of the Probate Estates in state courts—five in Florida and one in Pennsylvania.⁷ The six Probate Estate plaintiffs were the Probate Estate of Juanita Jackson,⁸ whose case had been prosecuted to final judgment pre-petition, and the Probate Estates of Elvira Nunziata,⁹ Joseph Webb,¹⁰ James Henry Jones,¹¹ Opal Lee Sasser,¹² and Arlene Townsend,¹³ whose cases were pending trial in state court.¹⁴ THMI was a defendant in all six cases, while THI was a defendant in all the cases except Nunziata.

Within a matter of weeks of her appointment, the Trustee became aware of the circumstances that led to Wilkes filing the Chapter 7 petition against FLTCI on December 5, 2011, and some of the untoward legal consequences that resulted from filing the petition against FLTCI instead of THMI. Importantly, the Trustee learned:

(1) On July 22, 2010, an "empty-chair" jury trial¹⁵ was held in Jackson,¹⁶ and the plaintiff obtained verdicts—and then judgments—of $55 million against each of THI and THMI.¹⁷ Three weeks later, on August 13, Wilkes, in an effort to discover THI and THMI's assets to satisfy the $55 million judgments, moved the trial court pursuant to Florida Rule of Civil Procedure 1.560(b)¹⁸ for an order requiring THI and THMI to complete Form 1.977 as required by that rule. The state trial court granted the motion four days later. Over the next three months, Wilkes noticed several depositions in aid of execution but was unable to discover enough assets to satisfy the judgments.

(2) By December 2010, Wilkes discovered why it was unable to obtain satisfaction of the Jackson Estate's $55 million judgment against THMI....