Brett A. Elam v. Bank of New York

• Court: Court of Appeals for the Eleventh Circuit
• Decided: August 19, 2019
• Docket: 18-13030
• Status: Unpublished

Opinion

Case: 18-13030 Date Filed: 08/19/2019 Page: 1 of 14

[DO NOT PUBLISH]

IN THE UNITED STATES COURT OF APPEALS

FOR THE ELEVENTH CIRCUIT ________________________

No. 18-13030 Non-Argument Calendar ________________________

D.C. Docket No. 9:17-cv-81289-RLR, Bkcy No. 9:14-bkc-28923-PGH

In Re: KIM C. CRAWFORD,

Debtor.

_____________________________________________________

BRETT A. ELAM,

Plaintiff - Appellant,

versus

BANK OF NEW YORK,

Defendant – Appellee,

KIM C. CRAWFORD,

Intervenor. Case: 18-13030 Date Filed: 08/19/2019 Page: 2 of 14

________________________

Appeal from the United States District Court for the Southern District of Florida ________________________

(August 19, 2019)

Before BRANCH, GRANT, and JULIE CARNES, Circuit Judges.

PER CURIAM:

Brett Elam appeals portions of the bankruptcy court’s order sanctioning him

for misconduct in the Chapter 11 proceeding below. As debtor’s counsel, Elam

sought court approval for compensation exceeding $40,000. But before the court

ruled on those fees, the debtor paid $34,400 to Elam’s trust account, labeling the

“purpose” of that payment as “attorney’s fees.” When a skeptical creditor asked

about the transfer, Elam insisted that he was holding this money in trust until the

court approved his fees. In truth, however, Elam began tapping into those funds

for personal use without waiting for court approval. Worse still, he flouted

multiple court orders directing him to prove that these funds remained in the trust

account. As a result, the bankruptcy court ordered Elam to pay the creditor’s

attorney’s fees and suspended him from practicing before it for one year. Elam

does not contest either of those sanctions.

Still, the bankruptcy court went further and sanctioned Elam for

misappropriating his client’s funds. It also found that he made false statements by

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describing the “purpose” of the $34,400 payment as “attorney’s fees.” And in so

doing, the bankruptcy court levied certain penalties that do not reflect the record or

serve the targeted purpose of compensating the debtor for Elam’s misconduct. We

therefore affirm the bankruptcy court’s order in part, vacate it in part, and remand

for further proceedings.

I.

A.

Kim Crawford filed a voluntary petition for Chapter 11 bankruptcy in

August 2014. Soon after, she sought to employ Elam as counsel to the debtor-in-

possession. The bankruptcy court approved that request, thereby authorizing Elam

to advise Crawford in negotiations with creditors, represent her before the

bankruptcy court, and prepare a plan of reorganization. A few months in, Elam

applied for interim compensation in the amount of $14,350, which the bankruptcy

court also approved.

But more than two years after initiating the bankruptcy proceeding,

Crawford had yet to confirm of a plan of reorganization. In October 2016, she

filed her Fourth Amended Plan of Reorganization, to which one of her creditors—

The Bank of New York (BONY)—objected. Apparently expecting confirmation

over that objection, Elam also filed an application for final compensation in the

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amount of $46,790. The bankruptcy court, however, denied confirmation and thus

deferred ruling on Elam’s request for compensation.

Following that denial, Crawford filed her Monthly Operating Report for

March 2017, detailing her monthly cash receipts and disbursements. Among other

things, the report listed a check payment to “Brett Elam” for “Attorney’s Fees” in

the amount of $34,400. That caught BONY’s attention, seeing as the bankruptcy

court had not approved any attorney’s fees since its order allowing interim

compensation. When BONY’s counsel asked Elam about the check, he stated:

“she wrote it to me and it is held in trust. I had it for the confirmation hearing. It

hasn’t been disbursed. I just had it in anticipation of confirmation. I am still

holding it.”

Not willing to take Elam at his word, BONY’s counsel asked him for proof

that the $34,400 remained in his trust account. When Elam kept dodging those

requests, BONY raised the issue with the bankruptcy court for the next status

hearing. At the status hearing, Elam reiterated that this “money was put there,”

meaning his trust account, “based upon a pending confirmation hearing.” The

bankruptcy court then ordered Elam to produce copies of his trust account

statements showing that the $34,400 payment “has always been maintained in” the

trust account.

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Elam failed to comply, leading the bankruptcy court to once again order him

to produce the trust account information. And when Elam continued to drag his

feet, BONY moved for an order to show cause why he should not be held in

contempt and sanctioned. About a month later, however, Crawford consented to

the dismissal of her bankruptcy case. In response, the bankruptcy court dismissed

the case but agreed to rule on the trust account issue and thus retained jurisdiction

to enforce any pending orders.

At the show cause hearing, Elam conceded that he removed funds from the

trust account without court approval. He testified that if he had told the court that

those funds were “always” in his trust account, then “it was incorrect” and that he

would “stand before the Court and take whatever punishment I need.” When the

bankruptcy court asked about the reason for “the misappropriation,” Elam stated,

“that was in an emergency situation, and they were put back.” The bankruptcy

court pressed Elam to explain “where in the ethical rules there’s any provision that

says, I can take a client’s funds out of [a] trust account based on an emergency,” to

which Elam responded, “[t]here is none.” Instead, Elam asserted that “the funds

were there, and my wife had surgery, and I needed to use the funds to live for a

bit.” He further testified that he did not tell Crawford about his use of those funds.

B.

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After the show cause hearing, the bankruptcy court sanctioned Elam for

three reasons. First, Elam “willfully violated multiple court orders”—namely, the

court’s discovery orders requiring him to produce his trust account statements.

Second, Elam “committed professional misconduct” by failing to keep his client’s

funds separate from his own property, and by spending those funds for personal

reasons, in violation of Florida Bar regulations. Third, Elam “made false

representations to the Court by listing ‘Attorney’s Fees’ as the ‘Purpose or

Description’ of the $34,400.00 check” that Crawford transferred to Elam’s trust

account. The bankruptcy court found that the real purpose of these funds was to

facilitate plan confirmation—not to compensate Elam for his legal services.

Given these findings, the bankruptcy court imposed civil contempt sanctions

against Elam, requiring him to compensate BONY and Crawford “for actual losses

they sustained” as a result of Elam’s misconduct. To that end, the bankruptcy

court ordered Elam to pay BONY $8,557.50 as compensation for the attorney’s

fees that BONY incurred in litigating the trust account issue. The bankruptcy court

also required Elam to pay Crawford $34,400—representing the amount that was

transferred to Elam’s trust account. In addition, the bankruptcy court ordered Elam

to return any of the $14,350 in attorney’s fees that it had awarded on an interim

basis—to the extent that Crawford had paid those fees separate and apart from the

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$34,400 payment. Finally, the bankruptcy court suspended Elam from practicing

before it for one year.

Elam filed a motion for reconsideration, which the bankruptcy court denied.

Elam argued that the $34,400 payment to his trust account was, in fact, meant to

compensate him for legal services. Although Elam acknowledged that he should

have waited for court approval before he withdrew these funds from the trust

account, he insisted that he did not misappropriate them, seeing as they were

earned attorney’s fees. The bankruptcy court, however, reiterated its finding that

Elam held these funds in trust “for confirmation of the Debtor’s plan, not for

attorney’s fees.” Elam then appealed to the district court, which affirmed the

bankruptcy court’s order.

On appeal to this Court, Elam does not contest the attorney’s fees awarded

to BONY or his one-year suspension. He agrees that “he acted inappropriately

toward his opposing counsel, failed to produce documents and was appropriately

sanctioned in those regards.” Instead, Elam disputes that he made false

representations to the bankruptcy court and that he committed professional

misconduct by misappropriating client funds. Elam also argues that—

notwithstanding these sanctions—he still deserves compensation for the reasonable

value of the legal services that he provided to Crawford.1

1 After Elam appealed the bankruptcy court’s sanctions order to the district court, Crawford filed 7 Case: 18-13030 Date Filed: 08/19/2019 Page: 8 of 14

II.

“In a bankruptcy appeal, this Court ‘sits as a second court of review and thus

examines independently the factual and legal determinations of the bankruptcy

court and employs the same standards of review as the district court.’” In re

Yerian, 927 F.3d 1223, 1227 (11th Cir. 2019) (quoting In re Hood, 727 F.3d 1360,

1363 (11th Cir. 2013)). Here, that means we must determine “whether the

sanctioning court abused its discretion.” In re Mroz, 65 F.3d 1567, 1571 (11th Cir.

1995). “In determining whether the court has abused its discretion we ask whether

it applied the wrong legal standard or made findings of fact that are clearly

erroneous.” In re Sunshine Jr. Stores, Inc., 456 F.3d 1291, 1304 (11th Cir. 2006)

(internal quotation marks, alterations, and citation omitted); see also In re Porto,

645 F.3d 1294, 1303 (11th Cir. 2011) (explaining that an abuse of discretion

occurs when “a court applies the wrong legal standard, makes clearly erroneous

findings of fact, or bases its decision on a clear error in judgment”).

a motion for attorney’s fees, arguing that Elam’s appeal was frivolous. Although the district court largely agreed with Crawford’s position, it nonetheless denied her motion without prejudice out of “an abundance of caution,” given that it was not certain that Crawford could obtain attorney’s fees as an intervenor (as opposed to an appellee). Dist. Ct. Dkt. 40, at 16. Elam seeks to appeal the district court’s view that his appeal was frivolous, but the district court ruled in his favor. We therefore decline to exercise jurisdiction to decide that issue. See Keating v. City of Miami, 598 F.3d 753, 760 (11th Cir. 2010) (explaining that “a party normally may not appeal from a favorable judgment”); United States v. Rivera, 613 F.3d 1046, 1052 (11th Cir. 2010) (“Most circuits have declined to exercise jurisdiction over challenges to naked findings of fact about even attorney misconduct.”). We also deny Crawford’s pending motion for appellate attorney’s fees and costs. 8 Case: 18-13030 Date Filed: 08/19/2019 Page: 9 of 14

III.

The bankruptcy court clearly erred in finding that Elam made false

representations by describing the “Purpose” of Crawford’s $34,400 payment to the

trust account as “Attorney’s Fees.” The record shows that Crawford, Elam, and

even BONY’s counsel all understood that this payment was, in fact, intended to

compensate Elam for his legal services. Of course, Elam should not have

withdrawn those funds from the trust account unless and until the bankruptcy court

approved them as attorney’s fees. Section 330 of the Bankruptcy Code vests

bankruptcy courts with the authority to award “reasonable compensation for actual,

necessary services rendered by” counsel employed by a debtor-in-possession. 11

U.S.C. § 330(a)(1)(A). But the fact that Elam prematurely tapped into those funds

does not mean that he lied when he described their purpose as attorney’s fees.

In the bankruptcy court’s telling, “the specific purpose for which the funds

were being held in the trust” by Elam “was for confirmation of the Debtor’s plan,

not for attorney’s fees.” But the record does not contain evidence supporting that

view. To begin, when Elam first applied for final compensation, he asked the

bankruptcy court to approve $34,370 in fees and $30 in expenses. In other words,

$34,400 in total—the precise amount that Crawford tendered to Elam’s trust

account. After Crawford transferred that sum to the trust account, Elam jumped

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the gun in disbursing those funds to himself without court approval. But the record

does not indicate that those funds were meant for anything else other than

attorney’s fees.

Indeed, Crawford never hinted—let alone stated—that she transferred those

funds to Elam for plan confirmation, such as for potential distribution to creditors.

Far from it, Crawford stated that she wrote this $34,400 check as payment for

“attorney’s fees.” Bankr. Ct. Dkt. 362, at 46:7–23. Likewise, when BONY’s

counsel pressed Elam about this transfer, it did so out of concern that the

bankruptcy court had yet to approve his “fee apps.” Bankr. Ct. Dkt. 294, at 14. In

response, Elam asserted that in “every case I have ever been in,” “the fees are held

in trust until the order is entered.” Id. at 13 (emphasis added). Elam further

explained that he kept these fees in his trust account pending court approval for

“the same reasons [BONY] worries about it”—“I don’t want them dissipated.” Id.

Elam may not have acted properly in holding onto unapproved fees simply out of

concern that his client might deplete them. But the point remains that Elam did not

lie when he described the purpose of these funds as attorney’s fees.

The bankruptcy court expressly rested its sanctions order in part on its

finding that Elam made this allegedly false statement about the purpose of the

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retained funds—but it is unclear to what extent. We therefore vacate this portion

of the sanctions order and remand for further proceedings.

All that said, the bankruptcy court did not err in finding that Elam

committed professional misconduct by “misappropriating his client’s funds for his

own personal use.” Although the ultimate “purpose” of these funds may have been

to compensate Elam, that does not mean that he could start withdrawing them

absent court approval. As the bankruptcy court explained, Rule 5–1.1(a) of the

Rules Regulating the Florida Bar requires attorneys to keep client funds held in

trust “separate from the lawyer’s own property.” Moreover, money held in trust

“for a specific purpose,” such as “advances for fees,” “must be applied only to that

purpose.” Rules Regulating the Florida Bar R. 5–1.1(b). Here, the bankruptcy

court properly determined that Elam violated this rule by (1) “failing to keep the

Trust Account funds ‘separate from [his] own property,’” and (2) “failing to apply

the Trust Account funds ‘only to’ the ‘specific purpose’ for which the funds were

being held.”

For his part, Elam concedes that he may have violated section 330 of the

Bankruptcy Code by failing to obtain court approval for these fees—he agrees that

he took this money too soon. But, according to Elam, failing to obtain court

approval in violation of the Bankruptcy Code does not necessarily amount to

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misappropriation in violation of Florida’s Bar rules. He insists that he did not

violate Florida’s Bar rules by withdrawing these funds absent court approval—he

disputes that he took money that wasn’t his. Elam argues that he earned this

$34,400 payment, and so it qualified as his money—not client property that needed

to be kept in a trust account.

But fees held in trust for a client do not become the attorney’s property

“until they are earned.” The Florida Bar v. Bailey, 803 So.2d 683, 692 (Fla. 2001)

(per curiam). And fees for counsel to a debtor-in-possession do not become

enforceable—in other words, earned—unless the bankruptcy court approves them.

In re 5900 Assocs., Inc., 468 F.3d 326, 331 (6th Cir. 2006); cf. Bailey, 803 So.2d at

692 (finding that fees were not “earned” because they were required to be

“determined and approved” by the trial court judge). Indeed, before the

bankruptcy court, even Elam acknowledged that these funds were not yet his;

rather, they remained “an asset of the estate” that he was holding in trust for the

debtor pending court approval. Bankr. Ct. Dkt. 408, at 17:25–18:4. Likewise, in

his application for final compensation, Elam represented that his “fees sought”

were “dependent upon Court approval.” Bankr. Ct. Dkt. 175, at 11 (emphasis

added). Accordingly, the bankruptcy court did not err in sanctioning Elam for his

misappropriation of those funds. See Mroz, 65 F.3d at 1575 (explaining that

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bankruptcy courts retain “inherent powers” to “discipline attorneys appearing

before it,” including for misconduct).

C.

Elam also disputes the amount of sanctions awarded in favor of Crawford.

He argues that forcing him to refund fees to Crawford, “who received the benefit

of [his] work,” would amount to “a windfall.” But, as explained above, Elam

failed to earn the $34,400 that he took from the trust account, and so the

bankruptcy court properly ordered him to return that money to Crawford.

Still, the bankruptcy court went further—ordering Elam to return the

$14,350 in fees that it had approved as interim compensation. And it is unclear

how forcing Elam to return those fees would serve the bankruptcy court’s stated

goal of compensating Crawford “for actual losses” that she sustained as the result

of Elam’s misappropriation of the separate $34,400 payment. The bankruptcy

court likely could have ordered Elam to disgorge these fees as punishment for his

misconduct. See In re Whitley, 737 F.3d 980, 987 (5th Cir. 2013) (explaining that

“the bankruptcy court has broad authority to discipline attorneys and to award or

disgorge fees paid in connection with bankruptcy proceedings” (citation omitted)).

In addition to their ability to impose contempt sanctions (which serve to

compensate or coerce), courts also enjoy “inherent power to police against bad

faith conduct before it.” Sciarretta v. Lincoln Nat. Life Ins. Co., 778 F.3d 1205,

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1214 n.7 (11th Cir. 2015). But, here, the bankruptcy court only awarded monetary

sanctions for “compensatory” purposes. On remand, the bankruptcy court should

therefore consider whether and to what extent Elam must return the $14,350 in fees

already awarded. Cf. Porto, 645 F.3d at 1306 (remanding to the bankruptcy court

“so that it can either flesh out its reasons” for imposing sanctions or decide that

sanctions are not warranted).

Finally, we note that Elam has not necessarily given up any and all rights to

payment for the work that he performed in this Chapter 11 proceeding. We neither

consider nor decide the amount of compensation, if any, that Elam ultimately

deserves. Of course, Elam’s conduct may warrant disallowing or disgorging him

of certain fees that he might have otherwise been owed. But that is a matter that

the bankruptcy court should consider in the first instance on remand.

IV.

Accordingly, we vacate the bankruptcy court’s order insofar as it grants

sanctions based on its finding that Elam made false representations and requires

Elam to return the $14,350 in attorney’s fees awarded, and remand for further

proceedings. We affirm the bankruptcy court’s sanctions order in all other

respects.

VACATED AND REMANDED IN PART, AFFIRMED IN PART.