CUEVAS-SEGARRA v. CONTRERAS, 134 F.3d 458 (1st Cir. 1998)

JOSE A. CUEVAS-SEGARRA, AMNERIS MARTINEZ, APPELLANTS, v. MARIA LUISA CONTRERAS, APPELLEE. ANTONIO R. CONCEPCION-VELAZQUEZ, AGNA I. MORALES, APPELLEES. JOSE A. CUEVAS-SEGARRA, AMNERIS MARTINEZ, APPELLEES, v. MARIA LUISA CONTRERAS, APPELLEE. ANTONIO R. CONCEPCION-VELAZQUEZ, AGNA I. MORALES, APPELLANTS.

Nos. 97-1234, 97-1265.United States Court of Appeals, First Circuit.Heard November 3, 1997.
Decided January 23, 1998.

Charles A. Cuprill-Hernandez, with whom Carlos A. Surillo-Pumarada and Charles A. Cuprill-Hernandez Law Offices were on brief for appellants.

Maria Luisa Contreras, with whom Maria Luisa Contreras Law Offices was on brief for appellees.

Appeals from the United States District Court for the District of Puerto Rico, Hon. Salvador E. Casellas, U.S. District Judge.

Before Torruella, Chief Judge, Lynch, Circuit Judge, and DiClerico, Jr.,[*] District Judge.

PER CURIAM.

[1] The bankrupt estate of Jose Mendez-Rosado and his wife, Alejandra Becerra, had few assets. One of the most significant was a malpractice claim against Dr. Karl Horn and Dr. Julio Westerband. On August 26, 1988, attorneys Antonio Concepcion and Jose

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A. Cuevas-Segarra filed a Motion for Designation of Special Counsel, hoping to obtain bankruptcy court approval to settle the malpractice suit on behalf of the debtors. The Motion was denied without prejudice because the attorneys had failed to abide by Bankruptcy Rule 2014, which required the inclusion of a verified statement that the attorneys were disinterested persons.[1]
Instead of amending the application to include the verified statement, the attorneys settled the case in February 1989, without bankruptcy court approval or notice to creditors, dividing $70,000 between themselves and the debtors.[2]

[2] For five years, the players in the bankruptcy proceedings took no notice of the settlement. In February 1994, a new bankruptcy trustee, Maria Luisa Contreras, was appointed to the case. Ms. Contreras soon learned of the settlement and immediately filed a complaint with the bankruptcy court alleging that Cuevas and Concepcion were improperly in possession of property belonging to the debtors’ estate. On November 3, 1995, the bankruptcy court entered a decision and order that, pursuant to 11 U.S.C. §§ 105(a), 362(c), and 542(a), Cuevas and Concepcion must return $27,456.00 in fees that they received from the settlement. Cuevas and Concepcion appealed this decision to the federal district court in Puerto Rico, which subsequently affirmed the bankruptcy court opinion. They again appealed the decision, and we now reaffirm the judgement for the trustee, Ms. Contreras.

[3] The decisions of the bankruptcy and district courts are premised upon three alternative grounds. First, the decisions rely upon Bankruptcy Code (the “Code”) § 105(a), a “catch-all” section which provides a bankruptcy court with broad powers to enforce the Code, preserving the integrity of the bankruptcy system.[3] Second, reliance is placed on Bankruptcy Code § 362(c), which provides for an automatic stay of any act against property of the estate unless approved by the court.[4] Any non-approved monetary transaction affecting estate assets is thus voided. Finally, the opinions look to Bankruptcy Code § 542(a), which requires an entity in control of property of a bankrupt estate to return that property to the trustee.[5]

[4] We need look no further than § 105(a) to affirm the courts’ decisions. The broad authority conferred by this section of the Code provides “teeth” to the equitable powers of a bankruptcy court. See Noonan v. Secretary of Health Human Servs. (In re Ludlow Hosp. Soc., Inc.), 124 F.3d 22, 27

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(1st Cir. 1997) (“[s]ection 105(a) empowers the bankruptcy court to exercise its equitable powers — where `necessary’ or `appropriate’ — to facilitate the implementation of other Bankruptcy Code provisions”). A proper application of § 105(a) will effectuate the Bankruptcy Code without fashioning or altering substantive rights of debtors or creditors, ensuring that “technical considerations will not prevent substantial justice from being done.” Pepper v. Litton, 308 U.S. 295, 305
(1939); see also Noonan, 124 F.3d at 27; Gens v. Resolution Trust Corp., 112 F.3d 569, 576 (1st Cir. 1997).

[5] In light of these standards, we conclude that the broad authority of § 105(a) was properly brought to bear against Cuevas and Concepcion in this case. A bankruptcy court has a duty to review the fees paid to professionals and § 105(a) provides authority to effectuate judgments such as the denial of Cuevas and Concepcion’s Motion for Designation of Special Counsel. In spite of the fact that they had been refused court permission to settle the pending malpractice action, these attorneys forged ahead, settling the case and failing to apprise the creditors or the court of the payments received by the debtors and by themselves. Such behavior undermines the integrity of the bankruptcy system and public confidence therein. See In re E Z Feed Cube Co., 123 B.R. 69, 74 (Bankr. D. Or. 1991) (holding that professionals’ fees must be returned to the trustee under § 105(a) in a similar situation).

[6] Most of the energy expended in this case has been directed toward the dispute over whether § 542(a) can be used to recover a post-petition transfer. The appellants argue that only § 549 provides for such recoveries, and that a two-year statute of limitations bars the trustee’s action in this case. This argument is moot. Although the equitable powers of the bankruptcy court are limited, see Noonan, 124 F.3d at 27, only a hopelessly strained interpretation of the Code would tie the court’s hands while attorneys ignore a direct court ruling, hoping that the statute of limitations will run before the creditors, trustees or judge catch on.

[7] Cuevas and Concepcion protest that much of the blame in this case belongs to Hector L. Urrutia, the original trustee in this case and a predecessor to Contreras. Cuevas and Concepcion allegedly wrote numerous letters to Urrutia requesting that he submit to the bankruptcy court an application for their employment, which would have paved the way for them to receive court approval for their representation. According to the authors, these letters received no response. Nevertheless, it is undisputed that Urrutia ultimately advised Cuevas and Concepcion to check with the bankruptcy court before taking any action regarding the malpractice action. They did not do so.

[8] For the reasons stated herein, the decision of the district court is affirmed. Costs and attorney’s fees are awarded to Ms. Contreras. Furthermore, the district court is directed to review the conduct of attorneys Concepcion and Cuevas-Segarra in this matter to determine whether they should be subject to disciplinary procedures.