Webber, Reis, Holler & Urso, LLP v. Miller, Faignant & Behrens

Webber, Reis, Holler & Urso, LLP v. Miller, Faignant & Behrens (2002-395);
175 Vt. 592; 834 A.2d 6

2003 VT 65

[Filed 15-Jul-2003]

                                 ENTRY ORDER

                                 2003 VT 65

                      SUPREME COURT DOCKET NO. 2002-395

                              MARCH TERM, 2003

  Webber, Reis, Holler & Urso, LLP     }	APPEALED FROM:
                                       }
                                       }
       v.	                       }	Rutland Superior Court
                                       }	
  Miller, Faignant & Behrens and       }
  Lisa Chalidze	                       }
                                       }	DOCKET NO. 298-5-01 Rdcv

                                                Trial Judge: William D. Cohen  

             In the above-entitled cause, the Clerk will enter:

       ¶  1.  This appeal of an order of the Rutland Superior Court
  granting summary judgment to defendants, Lisa Chalidze and Miller, Faignant
  & Behrens, PC, arises from plaintiff's attempt to recover a portion of the
  attorney's fees awarded to defendants in a bankruptcy case still pending in
  Bankruptcy Court.  Plaintiff Webber, Reis, Holler & Urso, LLP contends that
  it deserves this fee award due to its work in the bankruptcy case and also
  pursuant to an agreement between plaintiff and defendant Chalidze to share
  the fees.  Plaintiff argues on appeal that the superior court erred in
  concluding that it lacked subject matter jurisdiction because the
  Bankruptcy Court had exclusive jurisdiction.  Based on the facts of this
  case and the procedural posture of the underlying bankruptcy case, we find
  that the superior court lacked subject matter jurisdiction over this
  dispute, and therefore affirm. 

       ¶  2.  The following facts are undisputed.  From July 1992 through
  January 1997, defendant Chalidze was a partner at Hull, Webber & Reis
  (HWR), the predecessor firm of plaintiff.  Attorneys Robert Reis and Lisa
  Chalidze, both of HWR, filed an application for employment with the
  Bankruptcy Court as required by 11 U.S.C. § 327 and Fed. R. Bankr. P. 2014,
  in order to represent their clients, the Vescios, in bankruptcy proceedings
  involving Merchants Bank.  The Bankruptcy Court approved the application on
  July 26, 1996.          
   
       ¶  3.  On January 1, 1997, defendant Chalidze left Hull, Webber &
  Reis and became "of counsel" to defendant Miller, Faignant & Behrens, PC. 
  As a result of the change, attorneys Reis and Chalidze then filed an
  amended employment application with the Bankruptcy Court on January 3,
  1997.  Around that same time, attorney Christopher Reis joined HWR, and on
  January 16, 1997, Merchants Bank filed a motion to disqualify HWR from
  representing the Vescios due to Christopher Reis's prior representation of
  Merchants Bank in a number of bankruptcy and foreclosure cases, which
  exposed him to confidential information related to the bankruptcy case
  involving the Vescios.  The Bankruptcy Court granted the Bank's motion to
  disqualify, and in an order filed on February 7, 1997, declared, "The Court
  holds that [Christopher] Reis is disqualified from representation because
  his involvement in the Vescios' case would violate the dictates of Canons
  4, 5 and 9 of the State of Vermont's Code of Professional Responsibility. 
  As a result, the firm of HWR is also disqualified from representation of
  the Vescios."

       ¶  4.  On May 2, 1997, defendant Lisa Chalidze filed another amended
  employment application, this time with attorney John Paul Faignant.  The
  Bankruptcy Court approved the application in an order amending the July 26,
  1996 employment application order to approve the employment of Chalidze,
  Faignant, and Miller & Faignant, PC, Faignant's firm at that time, "to
  serve as special co-counsel nun[c] pro tunc to July 26, 1996."  The
  presiding bankruptcy judge recused himself from the case in June 1999, and
  the case was referred to the United States District Court for the District
  of Vermont.  In December 1999, the Vescios waived the right to present
  further live testimony in exchange for $195,000 from Merchants Bank.  On
  April 27, 2001, the U. S. District Court approved the agreement, ordering
  the matter to be decided on the written record, with no further evidence
  taken, and disbursement of $202,165.25, paid by Merchants Bank, to the
  Vescios "free and clear of the claims of all creditors or other parties or
  entities, less one-third thereof payable to Lisa Chalidze, Esq. and Miller,
  Faignant & Behrens PC pursuant to the previously-approved contingency fee."

       ¶  5.  Plaintiff then filed this suit in Rutland Superior Court on
  May 17, 2001, alleging breach of contract, constructive trust and unjust
  enrichment.  Defendants filed motions for summary judgment arguing that the
  Bankruptcy Code prohibits the payment of fees to plaintiff because
  plaintiff was denied approval by the Bankruptcy Court.  The court granted
  summary judgment to defendants on June 24, 2002, "on the grounds that this
  court lacks jurisdiction to hear this matter," and on July 30, 2002, the
  court entered a final judgment in favor of defendants on all claims.  This
  appeal followed.  The underlying bankruptcy proceedings were still pending
  at the time of appeal. 

       ¶  6.  Bankruptcy courts, through the United States district courts,
  have exclusive jurisdiction over the matter of attorney's fees in a
  bankruptcy proceeding.  Edgewater Sun Spot, Inc. v. Pennington & Haben,
  P.A. (In re Edgewater Sun Spot, Inc.), 183 B.R. 938, 943 (N.D. Fla. 1995);
  aff'd 84 F.3d 438 (11th Cir. 1996); Bright v. Fred C. Sproul, Inc., 616 P.2d 189, 190 (Colo. Ct. App. 1980).  Several provisions of the federal
  bankruptcy code enable the bankruptcy courts to retain strict control over
  the employment and compensation of attorneys in bankruptcy proceedings. 
  Under 11 U.S.C. § 327, attorneys must receive court approval of their
  employment in bankruptcy court so that the bankruptcy court may determine
  that they do not hold or represent an interest adverse to the estate and
  that they are disinterested persons.  An attorney's fee must also be
  approved by the bankruptcy court, and the attorney must prove that such
  fees are reasonable.  11 U.S.C. § 330.  Additionally, federal bankruptcy
  law prohibits the sharing of compensation, received under § 503(b)(2) or
  (b)(4) of the Bankruptcy Code, among attorneys.  11 U.S.C. § 504.  These
  code sections allow the bankruptcy court to closely supervise any award of
  attorney's fees in bankruptcy proceedings, decreasing the possibility that
  an attorney will inflate the amount of compensation sought from the estate
  in order to counterbalance any reduction in the attorney's portion of the
  shared fee award.  In re Greer, 271 B.R. 426, 430 (Bankr. D. Mass. 2002); 4
  A. Resnick & H. Sommer, Collier on Bankruptcy § 504.01, at 504-3 (15th ed.
  2003).
        
       ¶  7.  There is no question that the superior court would be without
  jurisdiction to determine a claim for attorney's fees in an open bankruptcy
  proceeding if plaintiff had brought its claim against the estate directly. 
  Plaintiff argues, however, that because this is a lawsuit between
  attorneys, and not a lawsuit directly against the bankruptcy estate, the
  superior court has jurisdiction.  We disagree.  We cannot permit plaintiff
  to circumvent the bankruptcy court's authority to determine the allocation
  of attorney's fees, which Congress conferred upon it, simply because
  plaintiff brings a suit against the employed attorneys and not directly
  against an estate.  By bringing suit in superior court, plaintiff
  effectively strips the bankruptcy court of the ability to determine the
  reasonableness of plaintiff's fee, 11 U.S.C. §§ 330, 503, as well as
  whether plaintiff's application for compensation should be denied pursuant
  to 11 U.S.C. § 328(c), which grants the bankruptcy court the discretion to
  deny compensation if, at any time during employment, the attorney is not a
  disinterested person or represents or holds an interest adverse to the
  interest of the estate. 

       ¶  8.   Plaintiff's argument - that the bankruptcy court does not
  have exclusive jurisdiction because plaintiff is suing the attorneys and
  not an estate directly - ignores the fact that the bankruptcy case is still
  open and that future awards of attorney's fees could be made, thereby
  affecting the property or assets of the estate under the core control of
  the bankruptcy court.  These standards and prohibitions were put in place
  so that the bankruptcy court would have full control, during the pendency
  of the underlying proceedings, over any award of attorney's fees related to
  the bankruptcy case.  See, e.g., Deronde v. Shirley (In re Shirley), 134 B.R. 940, 944 (B.A.P. 9th Cir. 1992) (holding that the Bankruptcy Code
  precludes an attorney from pursuing, in state court, the recovery of "fee
  awards for services performed on behalf of a bankruptcy estate based upon
  state law theories not provided for by the Code").

       ¶  9.  Significantly, this case does not involve a lawsuit brought
  after the conclusion or dismissal of the underlying bankruptcy case by the
  bankruptcy court.  The case cited by plaintiff, Lemonedes v.
  Balaber-Strauss (In re Coin Phones, Inc.), 226 B.R. 131, 134 (S.D.N.Y.
  1998), aff'd 189 F.3d 460 (2d Cir. 1999), is distinguishable on this basis. 
  In Coin Phones, the Southern District of New York affirmed the bankruptcy
  court's refusal to adjudicate a fee sharing dispute between an "of counsel"
  attorney and a law firm, and concluded that the state court was the more
  appropriate forum for such a dispute.  After finding that the attorney was
  free from statutory limitations on fee sharing arrangements due to his
  status as an "of counsel" attorney, the district court explained: 

    The state court provides an adequate forum and appropriate
    remedies both in equity and at law, for the general run of
    disputes between law partners, joint venturers and persons in
    similar relationships. . . . The regular work of a bankruptcy
    court could be compromised seriously should it hold itself out as
    the arbiter of disputes between law partners or between lawyers
    who have become joint venturers as to a single matter.    

  Id. at 134.  The underlying bankruptcy case in Coin Phones, however, had
  been resolved and the bankruptcy court had already ordered a final award of
  compensation and reimbursement of expenses from the estate to the law firm. 
  In contrast, the underlying bankruptcy case here has not concluded and the
  fee award was made in the interim based on one-third of the $202,165.25
  disbursement gained from the agreement with Merchants Bank regarding the
  presentation of witnesses at trial.  Additionally, there has been no
  finding that such a fee-sharing arrangement would not violate the
  prohibition on fee-sharing contained in the Bankruptcy Code.  See 11 U.S.C.
  § 504. 
   
       ¶  10.  Plaintiff claims that the fee-sharing arrangement between
  plaintiff and defendant Chalidze falls within an exception to this
  prohibition on fee splitting.  Section 504(b)(1) states, "A member,
  partner, or regular associate in a professional association, corporation,
  or partnership may share compensation or reimbursement received under
  section 503(b)(2) or 503(b)(4) of this title with another member, partner,
  or regular associate in such association, corporation, or partnership . . .
  ."  Id. § 504(b)(1).  Defendant Chalidze, however, is no longer a partner
  in plaintiff's law firm, and defendant Miller, Faignant & Behrens has never
  been associated with plaintiff in this regard.  The appropriate forum for a
  determination of whether plaintiff is entitled to a share of the fee
  awarded to defendants is the Bankruptcy Court. 

       ¶  11.  We will not usurp the jurisdiction of the Bankruptcy Court
  where the court has already acted on the matter by issuing an order
  granting attorney's fees solely to defendants based on the preliminary
  agreement between Merchants Bank and the Vescios, and where the underlying
  bankruptcy case remains open.  The superior court correctly concluded that
  this case falls within the exclusive jurisdiction of the Bankruptcy Court.   
         
       Affirmed.


                                       BY THE COURT:



                                       _______________________________________
                                       Jeffrey L. Amestoy, Chief Justice

                                       _______________________________________
                                       John A. Dooley, Associate Justice

                                       _______________________________________
                                       Denise R. Johnson, Associate Justice

                                       _______________________________________
                                       Marilyn S. Skoglund, Associate Justice

                                       _______________________________________
                                       Frederic W. Allen, Chief Justice (Ret.)
                                       Specially Assigned