|
By Mark Hamblett The U.S. Court of Appeals for the Second Circuit cited "apparent misconduct" as providing more than enough cause for the bankruptcy judge to remove Manhattan practitioner Jeffrey H. Schwartz as a counsel of record in debtor Sueann Smith's personal injury case. But while the circuit affirmed removal of Mr. Schwartz by Chief Judge Carla Craig of the Eastern District Bankruptcy Court, it reversed the bankruptcy judge's refusal to dismiss the bankruptcy case and remanded for further proceedings. Judges Chester Straub, Robert Kaztmann and Barrington Parker decided the appeal. Judge Straub wrote for the panel. In April 2004, Ms. Smith filed for bankruptcy. She had debts of $14,000 and a single potential asset: a personal injury claim based on a sledding accident in which she was blinded in one eye. According to the circuit, "all parties agree that if the personal injury claim is successfully prosecuted, recovery would likely far exceed creditors' claims against Smith." Ms. Smith retained Mr. Schwartz for the personal injury case with the initial approval of bankruptcy trustee Robert Geltzer. But the trustee later slammed Mr. Schwartz for naming Ms. Smith, and not Mr. Geltzer, as plaintiff in the action and then stalling for more than nine months to change the caption in the case while he brought in another lawyer without court approval. The filing of the personal injury action under Ms. Smith's name, the circuit said in Schwartz v. Geltzer, 06-4450-bk and 06-5323-bk, "was the first in a litany of errors that, when viewed together, reflect at best a lack of understanding of the bankruptcy process and at worst an effort to circumvent its requirements." When Mr. Schwartz brought Robert M. Ginsberg of Ginsberg & Broome into the case, Mr. Ginsberg, aware that court approvals are required for appointments, sent Mr. Schwartz a letter with a plan to avoid this requirement. The letter said Mr. Schwartz, "can continue to remain the attorney of record - hire me as trial counsel - receive all of the mail in your office and then bring it upstairs - and simply announce that I am affiliated with your office on this case. Naturally our arrangements would remain the same." A second letter from Mr. Ginsberg showed he had already been working on the personal injury case and had hired an expert and prepared a bill of particulars. Mr. Geltzer moved to have Mr. Schwartz taken off the case. Ms. Smith objected, saying that she had a "substantial interest" in the outcome and Mr. Ginsberg was "one of the most highly regarded trial attorneys" in the field of personal injury. At a hearing on Dec. 7, 2006, Judge Craig asked the attorneys to step into the hallway and "work this out." An associate of Mr. Geltzer's later told the court that Mr. Ginsberg approached the associate and said, "Is there anything I can do to sweeten the pot?" Mr. Ginsberg denied making the offer. Fee Splitting Charge On Jan. 17, Judge Craig removed Mr. Schwartz, saying his actions had created "a legitimate and substantial concern in the mind of a reasonable person that this personal injury action, which was being handled by an attorney who had no authority to do so, might be settled in a similarly unauthorized fashion, possibly even without payment of the proceeds to the trustee." Judge Craig said the first Ginsberg letter amounted to a fee-splitting arrangement, which is barred by §504(a) of the Bankruptcy Code, and might amount to a violation of New York's Code of Professional Responsibility. "It is appalling, and incomprehensible that Mr. Ginsberg could think it was permissible, in the absence of consent by the trustee and court approval for him to act as counsel on [this] case and receive a fee for doing so, funneled through Mr. Schwartz as 'attorney of record,'" she wrote. Mr. Ginsberg's alleged offer to "sweeten the pot," she said, "is an additional reason why the trustee is amply justified in refusing to retain him, particularly in light of Mr. Ginsberg's persistent and flagrant disregard of his obligations as an attorney." Ms. Smith then moved to dismiss her case and argued she should be allowed to keep her lawyers and "obtain control of the prosecution" of the personal injury claim. She told the court she had arranged with Setareh Holding Corp. to obtain $17,500 to pay the claims on the bankruptcy estate in return for a lien against her personal injury recovery and had agreed to pay 8.3 percent interest per month on that amount. While the motion was pending, Mr. Schwartz and Mr. Ginsberg refused to hand over the personal injury file to Mr. Geltzer, which led Judge Craig to hold both attorneys in contempt and order them to pay fines and a portion of Mr. Geltzer's attorney's fees. Motion to Dismiss Judge Craig denied the motion to dismiss, saying that, while she would normally give Ms. Smith's request weight, the attorneys' failure to obey the court, and attend to their ethical obligations, as well as their "extraordinary record of . . . incompetence," justified the decision. The ruling was upheld by the district court and appealed. In the circuit, Judge Straub said Judge Craig committed no error in finding there was no reason to interfere with Mr. Geltzer's decision to remove Mr. Schwartz and replace him with his counsel of choice. "Indeed, the only factor weighing in favor of rejecting Geltzer's motion was Smith's preference to have Schwartz and Ginsberg prosecute the personal injury action," Judge Straub said. "But that preference alone is insufficient to turn this into one of the 'rarest cases' in which interference with the trustee's choice could be justified." On the denial of Ms. Smith's motion to dismiss, governed by §707 of the Bankruptcy Code, Judge Straub said the threshold question was whether a debtor's ability to repay her creditors can be adequate grounds for dismissal. Courts are split on the issue, he said, but the Second Circuit favored the view that §707(a) "does not preclude a debtor's ability to repay her debts from constituting cause for dismissal." While it is not "per se" grounds for dismissal, Judge Straub emphasized that the ability to repay was part of the inquiry into whether dismissal "would be in the best interests" of all the parties. But the bankruptcy court's "concerns about Schwartz and Ginsberg are unrelated to that aspect of the debtor's interest that is most relevant to the dismissal inquiry," he said. On remand, Judge Straub said, the court "should consider both the benefits and costs of Ms. Smith's proposed arrangement" with Setareh. David Mark of Feder, Kaszovitz, Isaacson, Skala, Bass & Rhine represented Ms. Smith. Battling Attorneys Mr. Schwartz, while contesting that any misconduct occurred, referred all questions to Mr. Ginsberg. Mr. Ginsberg has a different view of the events. He claims Mr. Geltzer was fine with the arrangement between himself and Mr. Schwartz until Mr. Ginsberg retained an expert who valued the personal injury case at $1 million. "What he [Mr. Geltzer] does is he uses his position as a trustee not to help his creditors, but to help himself make money," Mr. Ginsberg said. "After we got the expert, he sends Schwartz an affidavit he wants him to sign saying he can't handle the case. I realize that if Schwartz signs the affidavit, as soon as he signs it, he's going to be fired. So instead of sending the file back, I make a motion to reconsider. Mr. Ginsberg offers in his defense a total ignorance of bankruptcy law - an argument he made to Judge Craig after the finding of contempt against him was sent back to Judge Craig by Eastern District Judge Allyne Ross. Back before Judge Craig, Mr. Ginsberg argued he was acting in good faith. The judge, he said, ruled that good faith had nothing to do with it, and cut his $29,000 fine in half. Mr. Ginsberg said the contempt finding came while he was in the hospital with a ruptured appendix, and a per diem lawyer who was sent to bankruptcy court to argue for an extension was rebuffed by the judge. Mr. Ginsberg also said Mr. Schwartz was an innocent party here. "Everything they are saying about Schwartz is me - I was in control of the case," he said. "The big thing here . . . is that this woman has a million dollar case and her debts are $14,000. She can get a loan and completely pay off her creditors." Mr. Geltzer, in response to Mr. Ginsberg's claim that the trustee wanted to make money by appointing his own lawyer to handle the injury case, said, "That's a lie." "Trustees are awarded commissions on all amounts dispersed to everyone except the amounts that are returned to the debtor as surplus. So a trustee is awarded a commission on the amount paid to attorney, but it doesn't matter who the attorney is - it only matters if one attorney secures a better recovery than another," Mr. Geltzer said." He added that Mr. Ginsberg's comments are "another Ginsberg display of ignorance of bankruptcy law and bluff." "Nothing is wrong with ignorance, and I tried to teach Ginsberg on several occasions and he just continued to disregard all letters," Mr. Geltzer said. "At that point, he is no longer ignorant. He's just plain stupid." Robert Wolf of Bryan Cave, who represented Mr. Geltzer, said he was pleased with the decision because "the Second Circuit clearly upheld a bankruptcy trustee's right to retain his own counsel absent the most unusual and compelling circumstances dictating otherwise." Mr. Geltzer was also represented by Brian Cave attorney Christopher Strianese.
|
|
A Feast
|
