In re Morton

In re SAMUEL ROBERT MORTON, JR. SHARON K. MORTON Debtors

Case No. 3:15-bk-30892-SHB

UNITED STATES BANKRUPTCY COURT FOR THE EASTERN DISTRICT OF TENNESSEE

September 30, 2015

MEMORANDUM OPINION

APPEARANCES:

LACY, PRICE & WAGNER, P.C

James H. Price, Esq.

249 North Peters Road

Suite 101

Knoxville, Tennessee 37923

Attorneys for Debtors

SAMUEL K. CROCKER, ESQ.

UNITED STATES TRUSTEE

Kimberly C. Swafford, Esq.

David Holesinger, Esq.

Tiffany A. DiIorio, Esq.

Howard H. Baker, Jr. United States Courthouse

800 Market Street

Suite 114

Knoxville, Tennessee 37902

Attorneys for United States Trustee

SUZANNE H. BAUKNIGHT UNITED STATES BANKRUPTCY JUDGE

On June 24, 2015, the Court entered an order directing James H. Price and Chadwick B. Tindell, who were at that time counsel for Debtors, to appear and show cause why they should not be sanctioned, including but not limited to a directive to disgorge fees, pursuant to 11 U.S.C. § 105(a) and Rule 9011 of the Federal Rules of Bankruptcy Procedure ("Show-Cause Order"). [Doc. 158.] The Show-Cause Order was issued in response to a number of procedural and substantive errors in violation of the Local Rules of the Bankruptcy Court for the Eastern District of Tennessee ("E.D. Tenn. LBR"), the Administrative Procedures for Electronic Case Filing for the United States Bankruptcy Court for the Eastern District of Tennessee ("ECF Administrative Procedures"), and the Federal Rules of Bankruptcy Procedure committed by Mr. Price and Mr. Tindell in their representation of Debtors. The final straw resulting in issuance of the Show-Cause Order was the alarming testimony of Debtor Samuel K. Morton ("Mr. Morton") during the trial held on June 23, 2015, on the Motion of Bank of Camden for Relief From the Automatic Stay ("Motion for Stay Relief") that Debtors' counsel had not obtained, as of that date, Debtors' original signatures on their bankruptcy petition, statements, or schedules that were filed in March 2015, or on any of the subsequently filed amendments.

An evidentiary hearing on the Show-Cause Order was held July 13, 2015,¹ at which time the Court heard the testimony of Debtors as well as the explanations and arguments of Mr. Price and Mr. Tindell. The Court entered fourteen exhibits at the evidentiary hearing, and three late-filed exhibits were submitted to the Court in camera on July 17, 2015. In addition to the proof tendered, the Court also takes judicial notice, pursuant to Rule 201 of the Federal Rules of Evidence, of all documents of record filed in Debtors' bankruptcy case and all sworn testimony given by either Mr. Morton or Mrs. Morton in any prior court proceeding or trial held in thisbankruptcy case. For the reasons set forth in this Memorandum, the Court has determined that sanctions are appropriate and will require Mr. Price, Mr. Tindell, and Lacy, Price & Wagner, P.C. (the "Firm") to disgorge the $15,000.00 retainer paid to them by Mrs. Morton's mother and to repay to Debtors' estate the payments totaling $6,000.00 received from Debtors in the ninety days before the filing of their case. The Court will also require Mr. Price and Mr. Tindell each to attend ten hours of ethics continuing legal education above what is required for maintaining their Tennessee law licenses, to be completed and certified to the Court no later than March 31, 2016. Finally, the Court will require Mr. Price and Mr. Tindell to self-report their conduct in this case and this Court's Memorandum Opinion to the Tennessee Board of Professional Responsibility on or before November 2, 2015, and provide evidence of such submission (including but not limited to a copy of the documents submitted) to this Court in camera on or before November 30, 2015.

I. FACTUAL AND PROCEDURAL BACKGROUND

This matter arises out of a litany of problems in this Chapter 11 case that was filed on March 24, 2015. The major impetus for this sanctions proceeding against Debtors' initial counsel were revelations that they had filed documents bearing the electronic signatures of Debtors when Debtors had not actually signed any documents and counsel's piecemeal disclosure of significant connections with Debtors, including pre-petition debt owed by Debtors and/or their related entities in an amount exceeding $150,000.00 and potential preferential payments made by Debtors to counsel in the amount of $6,000.00, only after such connections were unexpectedly discovered by the United States Trustee or the Court. The following facts catalogue by category the series of problems with counsel's disclosures and counsel's competency.

A Non-Disclosures

On April 2, 2015, Mr. Price and Mr. Tindell² filed the Application by Debtors-in-Possession for Approval of Employment of Bankruptcy Counsel ("Application to Employ"), accompanied by Mr. Price's Unsworn Declaration Under Penalty of Perjury ("Declaration"), through which Debtors sought to employ Mr. Price, Mr. Tindell, and the Firm. The Application to Employ also sought approval of compensation for Mr. Price and Mr. Tindell each at a rate of $300.00 per hour, asserting that both "attorneys have significant experience with regard to bankruptcy, reorganization and other matters under the Bankruptcy Code and Rules"; that the Firm was disinterested and held no adverse interest to Debtors; and that the Firm was holding a $15,000.00 retainer in its trust account. [Doc. 31-1.] The corresponding Declaration stated that Mr. Price and the Firm were "disinterested persons within the meaning of 11 U.S.C. § 101(14)[,]" that they "do not hold or represent an interest adverse to the Debtors and are eligible to serve as counsel for the Debtors pursuant to the provisions of 11 U.S.C. § 327(d)[,]" that the Firm had received a $15,000.00 retainer, and that the Firm "is not a creditor of the Debtors[.]" [Doc. 31-2.] The Court rejected the order accompanying the Application to Employ "because the certificate of service on the application was incomplete in that it did not attach the referenced mailing matrix" and advised that until an amended certificate of service was filed, the Application to Employ would not be considered. [Doc. 33.] Counsel complied on April 3, 2015, by filing a Certificate of Service reflecting service of the Application to Employ and Declaration.

After Bank of Camden, now Apex Bank,³ responded to the Application to Employ, stating that it would not agree to payment of attorneys' fees from its cash collateral and objecting to the $300.00 hourly rate, Debtors filed an Amended Application by Debtors-in-Possession for Approval of Employment of Bankruptcy Counsel ("Amended Application to Employ"), reducing the proposed hourly rates to $250.00.⁴ In addition to docketing problems with the Amended Application to Employ,⁵ counsel also submitted a non-compliant proposed order that violated section V.B.1 of the ECF Administrative Procedures requiring all proposed orders to have a four-inch top margin to allow for the Court's signature block. As a result, the Court rejected the order on the Amended Application to Employ. [Doc. 51.]

The passive notice deadline on the Amended Application to Employ expired on April 27, 2015; however, because of the numerous problems in the case and because the cash collateral issue raised by Apex Bank had not been resolved, the Court noticed the Application to Employ, the response filed by Apex Bank, and the Amended Application to Employ for hearing on May 21. One week after the hearing was noticed, Mr. Morton testified at the meeting of creditors that Debtors owed pre-petition legal fees to the Firm in the amount of $150,000.00. As a result, notwithstanding that the objection time had passed, the United States Trustee filed an objection to the Amended Application to Employ, notifying the Court of the previously undisclosed pre-petition debt, which violated the requirements for disclosure of all connections with debtorscontained in Rule 2014(a) of the Federal Rules of Bankruptcy Procedure, and arguing that Mr. Price, Mr. Tindell, and the Firm were not, in fact, disinterested under 11 U.S.C. § 327(a), as defined by 11 U.S.C. § 101(14).⁶

The day before the May 21 hearing, in response to the United States Trustee's objection to counsel's employment filed nine days earlier, Debtors filed a third iteration of the Application to Employ ("Second Amended Application to Employ"), disclosing the existence of the pre-petition legal fees owed to the Firm by Debtors and their closely-held limited liability companies: Jubilee Center, LLC; Jubilee Banquet Facility, LLC; Morton Construction, LLC; and S.R. Morton Properties, LLC. The Second Amended Application to Employ declared that all of the outstanding pre-petition attorneys' fees had been waived by the Firm with respect to Debtors and their related entities. In the Amended Unsworn Declaration Under Penalty of Perjury ("Amended Declaration") submitted in support of the Second Amended Application to Employ, Mr. Price stated that "[p]rior to the filing of this case, certain attorneys [sic] fees were owed to the Firm by the Debtors and/or entitles related to the Debtors. All prepetition attorneys [sic] fees owed by the Debtors and entities related to the Debtors have been waived and are no longer due or payable." [Doc. 78-2.] The Amended Declaration did not contain Mr. Price's original signature as required by section III.A.2 of the ECF Administrative Procedures, and he was later ordered to cure the deficiency.⁷ Following the hearing on May 21, 2015,⁸ at which theUnited States Trustee withdrew his objection to employment, the Court entered an order on May 22 granting the Second Amended Application to Employ "nunc pro tunc to May 20, 2015, the date of the second amended application that disclosed all material information concerning the disinterestedness of counsel."⁹ [Doc. 83 (emphasis added).]

During the June 23, 2015 trial on Apex Bank's Motion for Stay Relief, Mr. Morton testified that Debtors had been making regular monthly payments of $2,000.00 to the Firm in the...