UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF KENTUCKY
BABETTE YARBROUGH POWELL CASE NO. 93-20470
This matter is before the Court upon a Motion to Examine Payment to Debtor's Counsel herein filed by the United States Trustee on April 14, 1995 and the Trustee's Objections to Exemptions filed June 26, 1995. After the matter was rescheduled several times at the behest of the parties, a hearing was held, briefs were filed and the matter has been submitted to the Court for ruling.
The debtor filed her petition on April 26, 1993. Michael Baker was appointed trustee in that proceeding. The Statement of Affairs filed in the proceeding revealed a claim of the debtor against Fluor Daniel Corporation for sexual harassment that was pending at the time the petition was filed. This claim was pending before the Equal Employment Opportunity Commission (EEOC) and, after the petition was filed, a lawsuit was filed in federal court as will be set forth later herein. There appeared to be no other assets available for liquidation in the estate. While listed in the Statement of Affairs, the claim was not listed as an asset nor was any exemption claimed initially in any recovery from the claim. However, the Statement of Affairs was sufficient to call it to the trustee's attention and the matter was discussed at the'341 meeting of creditors.
At the first meeting, the debtor informed the trustee that Barbara Bonar, a local attorney, represented debtor in the EEOC claim. Bonar was not the attorney of record in the bankruptcy proceeding where Attorney Stephen Basinger was representing the debtor. At the first meeting, the trustee indicated to the debtor that the claim was an asset of the estate and any settlement of the claim would require his consent.
The trustee, on June 30, 1993, wrote to Bonar indicating his office and that, as trustee, he had an interest in the claim. He requested information from Bonar concerning the potential for liability and an evaluation of the claim and its collectibility. The trustee pointed out to Bonar that a recovery by way of settlement on a claim owned by the estate was subject to notice to creditors and opportunity for hearing on any objection thereto. The trustee further pointed out the potential limitations of his interest in the claim in that his interest was limited by any valid exemption which might be claimed by the debtor with respect to the matter. No exemption had been claimed at that time. Bonar then called the trustee and discussed the merits of the claim. The trustee requested that Bonar keep him apprised of any settlement offer in the matter. The trustee followed up with three or four letters over the next 15 months requesting an update on the status of the case. A discharge was entered October 27, 1993.
In January 1995, the trustee mailed a letter to Bonar requesting an update on the case. She called back indicating that the case had been settled in August, 1994. The trustee was unaware of the settlement prior to this time. The trustee requested copies of the settlement documents and Bonar indicated that she must obtain her client's approval prior to releasing that information. The trustee then moved to dismiss the case and, at that point, it was revealed by Bonar's law partner that the matter had been settled for $75,000 with $25,000 of that amount being paid to Bonar and her firm as attorney's fees. The settlement was a lump sum settlement in the amount of $75,000 and no separate recovery of attorney's fees was identified by the settlement. At the hearing on the motion to dismiss, the trustee pointed out that claims totalling approximately $22,500 had been listed in the bankruptcy proceeding. The trustee requested that the Court issue an order directing the debtor to pay this sum to the trustee in lieu of dismissal of the case. The debtor later amended her schedules to claim an exemption for the recovery. The trustee then objected to the claimed exemption. The Court sustained the trustee's motion and issued an order requiring the debtor to pay over to the trustee the sum of $22,500.
At the hearing on the present motions, the trustee testified that claims totalling approximately $6,300 had been filed after a notice to file claims was given in the case and that the sum of $7,000 would pay claims and administrative expenses in full. The trustee testified that, in his initial conversations, he discussed with Bonar the possibility of her being retained as attorney for the estate to represent the estate's interest in the pending claim. However, nothing further was done with regard to Bonar representing the estate. The trustee testified that he informed Basinger, debtor's bankruptcy counsel, of the settlement of the EEOC claim in January 1995 and that Basinger was not aware until that point in time.
The debtor testified that, by virtue of conversations with the trustee, she understood that if the claim settled after September 7, 1993, the money would belong to her and the estate would have no interest therein. She admitted that she had not complied with the Court's earlier order requiring her to turn over $22,500 of the settlement.
Bonar testified that she was the attorney who represented the debtor in the EEOC claim and filed an action in the United States District Court for the Southern District of Ohio against Fluor Daniel under Title 7 of the Civil Rights Act of 1964 and'4112 of the Ohio Revised Code and under Ohio tort and contract law. The complaint alleged sexual harassment at the debtor's job at Fluor Daniel and wrongful termination of employment. That complaint was verified on May 4, 1993, some eight days after the bankruptcy was filed. Bonar acknowledged her communications with the trustee in the matter. She testified that approximately a year after filing the claim, when settlement negotiations began in earnest, she discussed the need to involve the bankruptcy trustee in the matter with her client. Her client informed her that she had discussed this matter with her bankruptcy counsel, Basinger, and that there was no further need to be concerned about the bankruptcy proceeding since the entire action had been concluded. Bonar requested her client to verify this again with Basinger. Later, the debtor reaffirmed that she had discussed this matter again with Basinger with the same result. Apparently, Bonar relied upon her client's representations in this regard without bothering to consult the trustee in the matter. Bonar received several letters from the trustee, including a final one dated January 3, 1995 in which he requested information concerning the case. Bonar replied on January 12, 1995, indicating the case was settled and that she did not believe the bankruptcy estate had any interest in the settlement. Basinger, no longer counsel for the debtor, was not present when the current motions were heard.
Presently before the Court is the Motion to Examine Payment to Debtor's Counsel filed on April 14, 1995 by the United States Trustee. Also, before the Court is the Trustee's Objection to Exemptions filed June 26, 1995. In the United States Trustee's Motion, she contends that, because this was an asset of the estate,'327 of the Bankruptcy Code requires Court approval for an professional to represent the estate in the matter and that, pursuant to ''330 and 331 compensation may be received by such professional only upon Court approval. The United States Trustee argues that the Court should order the return of the entire $25,000 fee received by Bonar for her services.
The first question before the Court is the interest of the estate in the EEOC claim. Clearly, until an exemption is claimed in specific property by the debtor, that property is property of the estate pursuant to 11 U.S.C.'541. No exemption was claimed in this property until June 26, 1995 which occurred many months after settlement of the lawsuit filed in the United States District Court for the Southern District of Ohio. While it is clear that the settlement neither broke out specific attorney's fees or sums to settle each element of the claim, one substantial element of the claim was lost wages of the debtor which occurred prior to her filing of the bankruptcy proceeding. Obviously, this element of damages includes non-exempt property since the wage exemption provided by KRS 427.010 does not provide a total exemption for debtor's wages. Other elements of the damages may also have had a non-exempt character. The Court again points out that this was of no consequence until an exemption was claimed by the debtor. Because the damages were not itemized, there is no clear answer as to what portion of the settlement proceeds would be non-exempt although, clearly, some of the proceeds were non-exempt.
With respect to Bonar's representation on the claim, when the petition was filed, the claim became property of the estate and Bonar was, in effect, representing the estate in this proceeding without benefit of having been retained to represent the estate pursuant to'327 of the Bankruptcy Code. In her defense, it may be pointed out that the trustee did not insist that an order retaining her to represent the estate be secured, although this does not relieve her of the burden of complying with the provisions of the Bankruptcy Code. She was clearly aware at all times of the trustee's asserted interest in the settlement on behalf of the estate. The Court accepts Bonar's testimony that she accepted the representations of her client that the bankruptcy proceeding had been completed and no involvement by the trustee was necessary in the settlement of the case. However, in the light of the correspondence from the trustee asserting an interest in any settlement proceeds, it would seem prudent for Bonar to have verified this with the trustee prior to settlement.
The testimony of the debtor in this case combined with arguments of her counsel contend that the debtor kept her bankruptcy counsel, Basinger, fully apprised of all that was proceeding and that he somehow is to blame for not warning the debtor that the trustee needed to be involved in the proceeding. The Court rejects this testimony and argument since the Court simply does not believe this assertion and, even if the Court believed the assertion, advice of counsel is not a defense for failure to turn over assets to the trustee. The facts reveal that Basinger was not even aware of the settlement of the claim until the trustee advised him. The Court further rejects the debtor's claim that the trustee told her that any settlement after September 7, 1993 would not be subject to any claim by the trustee.
The Court is presented with a situation where the debtor has failed to abide by an order of the Court in refunding money that she collected to the trustee. The matter is complicated by the failure of Bonar to seek proper authority to represent the estate's interest in the claim against Fluor Daniel and consult with the trustee concerning settlement. Plainly, if Bonar had contacted the trustee and secured an appropriate order from the Court approving the settlement, the subsequent distribution of proceeds would have included payment to the estate for the estate's interest in the claim.
The alternatives available in this situation include setting aside the order granting the discharge to the debtor. However, there is no adversary proceeding pending pursuant to Bankruptcy Rule 7001 to set aside such discharge. What is pending before the Court is the United States Trustee's Motion to Examine Payment to Debtor's Counsel and the Trustee's Objection to Exemptions.
The testimony indicated to the Court that the total claims and administrative expenses in the matter do not exceed $7,000. For that reason, the Court finds that this sum should be paid into the estate for satisfaction of the claims of creditors who have filed claims. The Court holds and finds that $7,000 of such settlement proceeds were non-exempt assets of the estate and will sustain the trustee's objection to that extent.
As to allocation of the recovery by the estate in this matter, it appears that both the attorney and the debtor each had a clear hand in depriving the estate of assets. Bonar collected $25,000 attorney's fees when the claim was settled and the debtor had an amount slightly less than $50,000 after payment of costs involved in prosecuting her claim. It appears that an allocation of $4,000 to be refunded by Bonar and her law firm and $3,000 to be paid in by the debtor is an appropriate allocation for recovery of assets by the estate.
A separate order will be entered in this proceeding.
Dated this ______ day of ______________________, 1995.
BY THE COURT
Joseph J. Golden, Esq.
Barbara Bonar, Esq.
Leonard Rowekamp, Esq.
Michael Baker, Esq.
Edwin F. Kagin, Esq.
Stephen Basinger, Esq.