5th Circuit Bankruptcy Summary: Baker v. Cage (In re Whitley), No. 12-41125 (5th Cir. Dec. 16, 2013).
James Whitley was a serial bankruptcy filer and all around bad guy. He is currently serving a life sentence for sexually harassing a minor. About a month prior to that conviction, his latest Chapter 13 bankruptcy case had been dismissed with prejudice. On the same day as his criminal conviction, Whitley transferred two pieces of real property to an entity controlled by his bankruptcy attorney, Reese Baker. Then about two months after that, the bankruptcy court vacated its prior dismissal order and converted Whitley’s Chapter 13 case to Chapter 7.
There were liens on the properties that were transferred to Baker and, prior to the bankruptcy court vacating the previous dismissal order, the properties were purchased by Baker’s entity at a foreclosure sale. Thereafter, the Chapter 7 Trustee in Whitley’s Chapter 7 case sued Baker alleging that the transfers were fraudulent and also alleging that the transfers (which were without notice to the bankruptcy court and without court authority) were in breach of Baker’s fiduciary duty to Whitley.
The bankruptcy court framed the matter under Bankruptcy Code section 329 to determine whether Baker was required to disgorge the fees he was paid relating to Whitley’s bankruptcy cases. The total fees were $12,074. Judge Bohm held a multi-day hearing on the issue and concluded that Baker was required to return the $12,074, plus the two properties. Baker did not quarrel with the $12,074 disgorgement, but argued that he should not be required to return the properties because he paid $98,775 for them and that the sanction therefore was denying him both the compensation, plus $98,775. Judge Bohm said that the payments were to retain “ill-gotten gains” and the payments had no relevance to whether the properties should be returned to the estate. The district court affirmed.
The Fifth Circuit agreed that section 329 clearly allows a bankruptcy court to enter an order requiring fees to be disgorged. But, the sanction is this case went beyond the fees to include the value of these properties. The court also noted that bankruptcy courts have the power to issue disciplinary sanctions that could have included return of the properties. But, the bankruptcy court’s ruling was based only on section 329 and a record had not been established about the value of the properties and whether that entire value should be included as a disciplinary sanction. The court therefore reversed and remained for further proceedings on the issue.
The ultimate lesson in this case is that if you are seeking disgorgement plus other damages, you cannot rely solely on section 329 and you must lay down a sufficient evidentiary record for those other sanctions.