In re Grasso

586 B.R. 110

IN RE: Joseph GRASSO, Debtor.

Bankruptcy No. 12–11063–MDC

United States Bankruptcy Court, E.D. Pennsylvania.

Signed June 15, 2018

Leon R. Barson, Pepper Hamilton LLP, Regina Stango Kelbon, Blank Rome LLP, Michael G. Menkowitz, Fox, Rothschild, LLP, Damien Nicholas Tancredi, Steven D. Usdin, Flaster Greenberg P.C., Philadelphia, PA, Alan L. Frank, Alan L. Frank Law Associates PC, Jenkintown, PA, Robert H. Holber, Attorney Robert H. Holber PC, Media, PA, Christine C. Shubert, Medford, NJ, for Trustee.

Harry J. Giacometti, Flaster/Greenberg, P.C., Philadelphia, PA

OPINION

Magdeline D. Coleman, United States Bankruptcy Judge

I. INTRODUCTION

By Order dated January 17, 2014, this Court sustained objections to the Second Interim and Final Application for Compensation and Reimbursement of Expenses (the "Final Application"),¹ filed by the Law Offices of Paul J. Winterhalter, P.C. (the "Firm"), former counsel for the debtor, Joseph Grasso (the "Debtor"), and ordered the Firm to disgorge all fees paid to it by the Debtor in connection with this bankruptcy case (the "Compensation Denial Order").²

On July 10, 2014, the United States District Court for the Eastern District of Pennsylvania (the "District Court") vacated the Compensation Denial Order, and remanded to this Court for consideration of the benefit the Firm's legal services provided to the Debtor's estate ("District Court's Remand Order").³ As directed by the District Court, this Court identified the areas of concern relating to the Firm's representation and held several hearings to consider whether the Firm's legal services provided a benefit to the estate.

After consideration of the pleadings, evidence, testimony, and argument, the Court will sustain the objections and deny the Firm's Final Application. The Firm failed to establish that services identified by the Court, including but not limited to, those relating to (1) preparation of the Debtor's schedules and statements, monthly operating reports ("MORs"), and the financial reports required by Fed. R. Bankr. P. 2015.3 (" Rule 2015.3 Reports); (2) the sale and transfer of the Wilmington Savings Fund Society claim (the "WSFS Claim");⁴ and (3) the Debtor's distributions from his ownership interests in various entities provided any benefit whatsoever to the Debtor's estate. In addition, to the extent that any services delivered by the Firm provided a benefit to the Debtor's estate, any such benefit is far outweighed by the substantial harm caused to the estate by the poor and inadequate legal services rendered by the Firm and Paul J. Winterhalter, Esquire ("Winterhalter"), the attorney at the Firm primarily responsible for representing the Debtor in this bankruptcy case. Accordingly, the Court will deny all compensation to the Firm, and order disgorgement of all monies received by the Firm for representation of the Debtor in this bankruptcy case, including the unauthorized payment received during the Debtor's Chapter 11 case.

Further, the Court finds that Winterhalter failed to provide any competent evidence to allay the Court's concerns regarding his actions in this case. Winterhalter's poor representation of the Debtor combined with his breach of his duty of candor to the Court, in spite of the admonition rendered to him by the Court at the inception of this case, requires a judicial response that goes further than the mere denial of fees. Although it would much prefer not to undertake this action, the Court is required to forward for review this Opinion to the District Court and the appropriate disciplinary boards for the jurisdictions in which Winterhalter is authorized to practice.

II. FACTUAL/PROCEDURAL HISTORY

A. The Filing of the Petition, the Reassignment of the Bankruptcy Case, and Employment of the Firm

On February 6, 2012, Winterhalter filed the Debtor's Chapter 11 Voluntary Petition (the "Petition").⁵ The Debtor's case was assigned to now retired Judge Bruce I. Fox.⁶ In the Petition, the Debtor listed as "pending cases filed by any spouse, partner or an affiliate of this Debtor," Saxbys Coffee Worldwide, LLC, Bky. No. 09–15898 ("Saxbys "), a case that was assigned to my colleague Judge Eric L. Frank.⁷ As a result and in accordance with Court procedure, the Debtor's personal bankruptcy case was reassigned to Judge Frank.⁸

The next day, on February 7, 2012, the Debtor submitted an Application to Employ the Law Offices of Paul J. Winterhalter, P.C. (the "Application to Employ").⁹ Winterhalter filed an Affidavit in Support of the Application to Employ disclosing his representation as bankruptcy counsel in Union Trust Philadelphia, LLC , Bky. No. 11–12565 ("Union Trust ") and WSC 717 Associates, L.P. , Bky. No. 11–12567 ("WSC 717 ") (the "Related Cases"), both then active cases on this judge's docket and companies in which the Debtor held an ownership interest and served as bankruptcy representative.¹⁰

On February 14, 2012, Judge Frank issued an Order scheduling a hearing (the "Petition Hearing") to consider (1) whether the Debtor's case should be transferred to the undersigned judge's docket based upon the pending Related Cases; and (2) whether the Application to Employ should be granted in light of the Firm and Winterhalter's representation of the debtors in the Related Cases and the issues raised by same including whether there was "an actual conflict of interest, a potential conflict of interest or neither."¹¹ Judge Frank also directed, in relevant part, that at the hearing Debtor's counsel be prepared to (1) explain why the Debtor's petition and amended petition listed Saxbys as the only pending case of an affiliate of the Debtor; and (2) address whether the estimated number of creditors, estimated assets and estimated liabilities on the Debtor's disclosure statements were grossly inaccurate given the disclosure statements filed in the Union Trust case, and if so, to explain why this occurred.¹²

On March 5, 2012, the Debtor filed a Second Amended Voluntary Petition ("Second Amended Petition") disclosing the Related Cases.¹³ Thereafter, on March 7, 2012, Judge Frank held the Petition Hearing. The Office of the United States Trustee ("UST") appeared at the Petition Hearing and voiced an objection to the Application to Employ contending, among other things, that the Firm's representation in the Related Cases created an actual conflict of interest.

Following the Petition Hearing, Judge Frank issued an Order (i) overruling the objection of the UST, (ii) approving the Application to Employ, and (iii) transferring the Debtor's bankruptcy case to the undersigned judge's docket for further administration (the "Transfer Order").¹⁴ In the Transfer Order, Judge Frank noted that Winterhalter's decision to omit any reference to the Related Cases was "entirely inappropriate" and Winterhalter's actions "evidenced a fundamental misconception regarding the scope of his disclosure obligation."¹⁵ The Court further stated that "Winterhalter would be well advised not to tread further down this path and instead, in the future, err, if he must, on the side of making disclosure."¹⁶

On March 5, 2012, Winterhalter filed a Disclosure of Compensation of Attorney for the Debtor (the "2016(b) Statement").¹⁷ In the 2016(b) Statement, Winterhalter disclosed that the Firm had been paid $26,046.00 during the year prior to the Petition Date as a retainer (the "Initial Retainer") for services rendered on behalf of the Debtor in contemplation of or in connection with the administration of the Debtor's bankruptcy estate.¹⁸ The Initial Retainer was paid by Avalon Breezes Development, LLC ("Avalon Breezes"), a business entity owned and controlled by the Debtor.¹⁹ Winterhalter further disclosed that payment of monies beyond the Initial Retainer "shall only be made from the Debtor or on behalf of the Debtor from family or related business interests only after Court approval of an interim and or final fee application filed with and approved by the Bankruptcy Court."²⁰

On July 17, 2012, the Firm filed the First Interim Application for Compensation (the "First Interim Application," collectively with the Final Application, the "Applications"), seeking approval of interim compensation in the amount of $47,912.50 for 137.1 hours of legal services rendered and $1,388.66 for the reimbursement of expenses for the period February 6, 2012 to June 30, 2012.²¹

On August 10, 2012, Winterhalter filed a Supplemental Statement on the Disclosure of Compensation of Attorney for Debtors Pursuant to Federal Rule of Bankruptcy Procedure 2016(b) (the "Supplemental Statement").²² In the Supplemental Statement, Winterhalter revealed that on July 16, 2012, one day prior to filing the First Interim Application, "counsel for the Debtor had received an additional payment from Curtis Investors, L.P. on behalf of the Debtor on account of services rendered and fees incurred during the legal representation in the amount of $30,000.00" (the "Unauthorized Post–Petition Payment").²³ At the time of the payment, no Court order approving the First Interim Application had been entered. An order approving the First Interim Application was entered as unopposed on August 17, 2012.²⁴

B. The Motion to Convert Case, Appointment of Chapter 11 Trustee and Conversion to Chapter 7

On July 23, 2012, Madison Capital Company, LLC ("Madison"), a substantial unsecured creditor in the case, filed a Motion to Convert the Debtor's case from Chapter 11 to Chapter 7 (the "Conversion Motion").²⁵ On July 24, 2012, Madison filed the Ex Parte Motion to (A) Seal Certain Documents, (B) Limit Access to those Documents to Court Employees and (C) Waive any Requirements Under Federal Rules of Bankruptcy Procedure requesting, among other things, that the Court seal the exhibits to the Conversion Motion because they included personal financial information of the Debtor (the "Motion to Restrict").²⁶ On July 25, 2012, the Court entered an Order granting the Motion to Restrict and directed Madison to file a...