Cuevas-Segarra v. Contrevas

• Court: Court of Appeals for the First Circuit
• Decided: January 29, 1998
• Docket: 97-1234
• Status: Published

Opinion

USCA1 Opinion

UNITED STATES COURT OF APPEALS

                                FOR THE FIRST CIRCUIT

                                 ____________________



          No. 97-1234



                     JOSE A. CUEVAS-SEGARRA, & AMNERIS MARTINEZ,

                                     Appellants,



                                          v.



                                MARIA LUISA CONTRERAS,

                                      Appellee.



                                 ____________________



                  ANTONIO R. CONCEPCION-VELAZQUEZ, AGNA I. MORALES,

                                      Appellees.



                                 ____________________



          No. 97-1265



                     JOSE A. CUEVAS-SEGARRA, & AMNERIS MARTINEZ,

                                      Appellees,



                                          v.



                                MARIA LUISA CONTRERAS,

                                      Appellee.



                                 ____________________



                  ANTONIO R. CONCEPCION-VELAZQUEZ, AGNA I. MORALES,

                                     Appellants.



                                 ____________________



                    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.
                                              ______________



                                _____________________



               Charles A.  Cuprill-Hern ndez, with whom  Carlos A. Surillo-
               _____________________________             __________________

          Pumarada and  Charles A.  Cuprill-Hern ndez Law  Offices were  on
          ________      __________________________________________

          brief for appellants.

               Mar a Luisa Contreras,  with whom Mar a Luisa  Contreras Law
               _____________________             __________________________

          Offices was on brief for appellees.
          _______


____________________



                                   January 23, 1998

                                 ____________________


____________________



          *  Of the District of New Hampshire, sitting by designation.



                                         -2-



Per  Curiam.  The bankrupt estate of Jos  M ndez-Rosado
                    Per  Curiam.
                    ___________



          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



          Concepci n   and  Jos   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



                    For  five   years,  the   players  in  the   bankruptcy



          proceedings took no notice of  the settlement.  In February 1994,



          a new bankruptcy trustee, Mar a Luisa Contreras, was appointed to



                              
          ____________________



          1  The relevant part of Bankruptcy Rule 2014 reads:



                    The application [for employment of attorneys]

                    shall be accompanied  by a verified statement

                    of  the person  to be employed  setting forth

                    the  person's  connections with  the  debtor,

                    creditors,  or any  other party  in interest,

                    their respective  attorneys and  accountants,

                    the  United States  trustee,  or any  persons

                    employed in  the office of  the United States

                    trustee.



          2  Cuevas  and Concepci n claim that they  thought the bankruptcy

          case was closed, and that bankruptcy court approval was no longer

          necessary for  the representation.   Nothing to that  effect ever

          issued from the bankruptcy court.



                                         -3-



the  case.   Ms. Contreras  soon  learned of  the settlement  and



          immediately  filed a complaint with the bankruptcy court alleging



          that  Cuevas  and  Concepci n 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 Concepci n



          must  return  $27,456.00 in  fees  that  they  received from  the



          settlement.  Cuevas and Concepci n  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 judgment for  the trustee, Ms.



          Contreras.



                    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



                              
          ____________________



          3  The section reads:



                    The Court  may issue  any order, process,  or

                    judgment that is necessary  or appropriate to

                    carry out the  provisions of this title.   No

                    provision  of this  title  providing for  the

                    raising  of an issue  by a party  in interest

                    shall be  construed  to  preclude  the  court

                    from, sua sponte, taking any action or making

                    any determination necessary or appropriate to

                    enforce or  implement court orders  or rules,

                    or to prevent an abuse of process.



                                         -4-



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



                    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 (1st Cir.
          ______________________________________



          1997)  ("[s]ection  105(a)  empowers  the   bankruptcy  court  to



          exercise  its   equitable   powers  --   where   'necessary'   or

                              
          ____________________



          4  The section provides for:



                    (1) the stay  of an act against  the property

                    of the  estate under  subsection (a) of  this

                    section continues  until such property  is no

                    longer property of the estate; and

                    (2)  the   stay  of  any   other  act   under

                    subsection (a) of the section continues until

                    the earliest of -

                    (A) the time the case is closed;

                    (B) the time the case is dismissed; or

                    (C) if the case is  a case under chapter 7 of

                    this title concerning an individual . . . the

                    time a discharge is granted or denied.



          5  The section reads:



                    Except as provided in  subsection (c) or  (d)

                    of this  section,  an entity,  other  than  a

                    custodian,   in   possession,   custody,   or

                    control,  during the  case, of  property that

                    the  trustee may  use, sell,  or lease  under

                    section 363 of this title . . . shall deliver

                    to  the   trustee,  and  account   for,  such

                    property  or  the  value  of  such  property,

                    unless  such property  is of  inconsequential

                    value or benefit to the estate.



                                         -5-



'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).
          _____



                    In light of these standards, we conclude that the broad



          authority of   105(a) was properly brought to bear against Cuevas



          and Concepci n 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 Concepci n'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).



                    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


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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.



                    Cuevas and Concepci n protest that much of the blame in



          this case belongs  to H ctor L. Urrutia, the  original trustee in



          this case and a predecessor  to Contreras.  Cuevas and Concepci n



          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 Concepci n



          to  check  with the  bankruptcy  court before  taking  any action



          regarding the malpractice action.  They did not do so.



                    For  the reasons  stated herein,  the  decision of  the



          district court  is  affirmed.   Costs  and  attorney's  fees  are
                              affirmed
                              ________



          awarded  to Ms. Contreras.   Furthermore,  the district  court is



          directed  to review  the  conduct  of  attorneys  Concepci n  and



          Cuevas-Segarra in this matter to determine whether they should be



          subject to disciplinary procedures. 


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