Charles Harold Sledge and Margaret Lynn Sledge

UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF NORTH CAROLINA
WILMINGTON DIVISION
IN RE:
CHARLES H. SLEDGE
MARGARET L. SLEDGE,
DEBTORS
CASE NO.
03-02654-8-RDD
ORDER TO DISGORGE FEES
The matter before the court is the debtors’ motion to disgorge fees paid to Mr. Peter Gemborys
for legal services rendered in the above-captioned matter and in the adversary proceedings filed under this
case file. The court held a hearing in Wilson, North Carolina which began on September 27, 2006 and
concluded on October 2, 2006.
FINDINGS OF FACT
The debtors paid Mr. Gemborys $1400.00 for representing them in the filing of a bankruptcy
petition pursuant to chapter 13 of the Bankruptcy Code. Mr. Gemborys met with Mr. Sledge regarding
the filing of the petition. Mr. Gemborys provided Mr. Sledge with information regarding the different
chapters of bankruptcy for Mr. Sledge to share with Mrs. Sledge. The debtors returned to Mr. Gemborys’
SO ORDERED.
SIGNED this 11 day of October, 2006.
________________________________________
Randy D. Doub
United States Bankruptcy Judge
____________________________________________________________
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office and met with his paralegal, Mary Tatum, regarding the completion and signing of the petition on
March 3, 2003. Mrs. Sledge provided Ms. Tatum with the information requested, including bank
statements which showed deposits made from a trust created by Mrs. Sledge’s grandfather and tax returns
which showed income received by Mrs. Sledge from the trust. When Mrs. Sledge provided Ms. Tatum
with information regarding a judgment owed to BB&T, she was unable to provide the exact amount of the
debt. Ms. Tatum noted the amount of the debt as “Unknown” on the petition. Ms. Tatum explained to the
debtors that there was a formula which had to be used to determine if the plan was feasible. Ms. Tatum
was concerned about the feasibility of the plan because of the debtors’ insufficient income. However, when
Mrs. Sledge provided her with documentation of the trust income, Ms. Tatum informed her that the trust
income gave them just enough income to propose a confirmable plan. The debtors were missing some
necessary information, including amounts of federal and state tax liens. Ms. Tatum indicated that the
petition could not be completed until that information was provided. The debtors agreed that Mr. Sledge
would bring the information to Ms. Tatum at a later time. Ms. Tatum requested that the debtors sign the
signature pages of the petition prior to her preparing the petition so that it could be filed promptly upon Mr.
Sledge providing the necessary information to complete the petition. The debtors did not read the petition
at the time of signing, nor were they instructed to do so. Mr. Gemborys did not meet with Mrs. Sledge on
that day or at any time prior to the filing of the petition. Mr. Gemborys did not review the petition with the
debtors. The debtors were not provided a copy of the petition at that time. The petition was filed on
March 24, 2003.
After receiving the notice regarding the 341 meeting, Mrs. Sledge contacted Ms. Tatum to
determine if the debtors needed to meet with Mr. Gemborys prior to the meeting. Ms. Tatum instructed
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Mrs. Sledge that a meeting was not necessary and that they should just appear at the noticed meeting. Mrs.
Sledge had not met Mr. Gemborys prior to the date of the 341 meeting. The chapter 13 meeting of
creditors was held on May 5, 2003, after which the trustee filed a motion to confirm the debtors’ plan as
proposed. On July 15, 2003, BB&T filed a motion to dismiss and objection to chapter 13 plan because
the debtors exceeded the debt limitations for chapter 13 because of the amount of the debt owed to
BB&T. As a result of this motion and objection, the trustee filed a motion to dismiss based upon the failure
of the debtors to file a confirmable plan. Thereafter, Mr. Sledge met with Mr. Gemborys who suggested
that Mr. Sledge meet with the firm of Algernon C. Butler, Jr.’s firm to create a conflict should Mr. Butler
be appointed trustee upon conversion to chapter 7. After Mr. Sledge consulted with Bradford Sanders,
an attorney in the offices of Butler & Butler, the debtors paid Mr. Gemborys $500.00 to convert their case
to chapter 7. A notice of conversion was filed on August 19, 2003.
The debtors were provided a copy of their petition for the first time at the chapter 7 meeting of
creditors on September 15, 2003, but had insufficient time to review it prior to their case being called. At
the 341 meeting, Mr. Janvier, the trustee assigned to the debtors’ case, asked if the debtors had read their
petition. The debtors stated that they had, although all Mrs. Sledge had reviewed was the income amount.
Mr. Janvier also asked if everything in the petition was true and accurate. The debtors stated that the
petition was true and accurate. At the end of the meeting, Mr. Janvier requested that the debtors provide
him with tax returns and bank statements for the two years preceding the filing of their petition.
Immediately after the 341 meeting, Mrs. Sledge discovered the omission of the existence of her
trust from Schedule B, Line 19. The debtors notified Mr.Gemborys of the error prior to leaving the building
where the 341 meeting was conducted. They requested that Mr. Gemborys notify Mr. Janvier of the
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omission. Mr. Gemborys instructed the debtors to contact his assistant, Ms. Tatum, about the errors so
that she could file an amendment to their petition. Mrs. Sledge requested that they find Mr. Janvier to
explain the omission to him, but Mr. Gemborys indicated that Mr. Janvier had already left and could not
be reached. Mrs. Sledge contacted Ms. Tatum. Mrs. Sledge was assured that the errors could be
corrected by the filing of an amendment. Upon reviewing the petition further, Mrs. Sledge noticed income
listed as pension income on the petition rather than the trust income. Mrs. Sledge again called Ms. Tatum
to request that error also be corrected. Mrs. Sledge gathered the documents requested by Mr. Janvier and
provided them to Mr. Gemborys within a few days. However, Mrs. Sledge did not have any further
conversation with Mr. Gemborys about the necessary amendments to the petition. Mr. Janvier testified
that, had he been notified of the errors in the petition at the 341 meeting or shortly thereafter, he would not
have been inclined to file an adversary proceeding objecting to the debtors’ discharge. As a result of the
complaint objecting to the discharge, Mrs. Sledge settled the case by agreeing to pay Mr. Janvier otherwise
nonexempt trust income for a period of seven years.
On October 16, 2003, Mr. Gemborys sent a letter to Mr. Janvier, providing him with the requested
tax returns and bank statements, and enclosing copies of the amended schedules which had been filed to
correct the omission of the trust income and existence of the trust. On October 21, 2003, Mr. Gemborys
filed amended schedules B & I and an amended Statement of Financial Affairs, without the signature of the
debtors. Mr. Gemborys indicated that Schedule B had been amended “to state the female debtor’s
interests in nonbankruptcy estate property, i.e., spendthrift trust(s). . .” On November 18, 2003, Mr.
Janvier filed a motion to take a Rule 2004 examination of the debtors. The motion was granted on
November 19, 2003. The debtors appeared at Mr. Janvier’s office on December 3, 2003 for the 2004
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examination. Mr. Gemborys did not meet with the debtors prior to the date of the exam in preparation for
the exam. Immediately prior to the exam, Mr. Gemborys asked Mr. Sledge, in his testimony, not to
disclose Gemborys’ request that the debtor meet with Algernon Butler, Jr. to create a conflict.
Based upon the omission of the trust income from the petition, Mr. Janvier filed two adversary
proceedings against the debtors. On January 12, 2004, he filed an adversary proceeding objecting to the
discharge of the debtors because of their willful failure to disclose the existence of the trust and the income
received from the trust. After receiving notice of the adversary proceeding, Mrs. Sledge made numerous
phone calls to Mr. Gemborys’ office. Mr. Gemborys never returned the calls of Mrs. Sledge to explain
the possible consequences of the adversary proceeding. After several days of attempting to contact Mr.
Gemborys by telephone, Mrs. Sledge faxed a letter to him on January 23, 2004, requesting an update on
the status of the debtors’ case. Mrs. Sledge testified that she was most successful in receiving a response
from Mr. Gemborys when she faxed letters to him. On February 10, 2004, Mr. Janvier filed an adversary
proceeding complaint for turnover of trust funds. Upon receipt of that adversary proceeding, Mrs. Sledge
met with Mr. Gemborys. She gave the name of the banker in Kentucky who administers the trust and the
name of the bank’s attorney to Mr. Gemborys. The debtors paid Mr. Gemborys $375.00 total for
representation in each of the adversary proceedings. Mr. Gemborys filed answers to both adversary
proceeding complaints on behalf of the debtors. The debtors were not given an opportunity to review the
answers or to assist with the preparation of the answers in either of these cases.
In the adversary proceeding regarding the trust corpus, Mr. Gemborys filed a motion for summary
judgment. After a hearing and additional time for the debtors to file a memorandum regarding the trust
corpus issue, the court entered an order on July 15, 2004, denying the motion for summary judgment filed
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by Mr. Gemborys on behalf of the debtors and granting summary judgment in favor of Mr. Janvier sua
sponte, ruling that the trust corpus was property of the estate. Mrs. Sledge was not made aware of the
hearing on the motion for summary judgment. A copy of the court’s order was mailed to Mr. Gemborys
on the date it was entered. Mr. Gemborys allegedly mailed a letter to Mr. and Mrs. Sledge on July 19,
2004 notifying them of the entry of the judgment and their right to file an appeal. Mr. Gemborys filed a
notice of appeal in the adversary proceeding on July 29, 2004, more than 10 days after the entry of the
court’s order. On July, 29, 2004, Mrs. Sledge faxed a letter to Mr. Gemborys requesting answers about
the consequences of the appeal, his representation, and the status of the hearing on the appeal. On August
17, 2004, Mr. Janvier filed a motion to dismiss the appeal because of its untimeliness and the failure of the
debtors to seek an extension of time to file the notice of appeal. Mrs. Sledge first learned about the failure
of Mr. Gemborys to file a timely notice of appeal in a letter from the court dated August 17, 2004. After
numerous attempts at contacting Mr. Gemborys, he indicated to Mrs. Sledge in a letter dated August 19,
2004, that he would perfect the appeal for her upon receipt of $5000.00. Mr. Gemborys’ letter also
mentions the letter from the court, which he refers to as “self-explanatory.” On August 24, 2004, Mrs.
Sledge paid Mr. Gemborys $1250.00 to pursue the appeal, after his assurance that the appeal would move
forward despite the untimeliness of his filing. No motion for extension of time for filing the notice of appeal
under Rule 8002 was made. On August 30, 2004, Mr. Gemborys filed a designation of items to be
included in the record on appeal and statement of issues to be presented on appeal. The court docket
reflects that responses to Mr. Janvier’s motion to dismiss were due by September 9, 2004. On October
6, 2004, Mr. Gemborys filed an objection to Mr. Janvier’s motion to dismiss filed on August 17, 2004.
On October 8, 2004, Mr. Janvier filed a reply to Mr. Gemborys’ objection. On October 20, 2004, the
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United States District Court entered an order dismissing the appeal because it was filed in an untimely
manner and because of the failure to seek an extension of time.
On November 17, 2004, the trial of the adversary proceeding regarding the trustee’s objection to
discharge began. The case was continued to allow the debtors to obtain new counsel. On February 10,
2005, the hearing was continued with the debtors represented by Mr. John Bircher. Following testimony
on that date, the debtors reached a settlement with Mr. Janvier, which allowed them to receive their
discharge. The settlement required Mrs. Sledge to pay to the trustee a portion of her otherwise nonexempt
income from the trust for a period of seven years in exchange for her debts being discharged.
Mrs. Sledge testified that, on numerous occasions, she made telephone calls to Mr. Gemborys that
were not returned. In response, Mrs. Sledge faxed letters to Mr. Gemborys on the following dates: January
23, 2004, July 29, 2004, August 20, 2004 (two faxes on this date). One of the faxes on August 20, 2004
indicated that, as of August 19, 2004, Mrs. Sledge’s attorney in Kentucky had left two messages for Mr.
Gemborys, neither of which had been answered by Mr. Gemborys.
DISCUSSION
Reasonableness of Fees:
The debtors move the court to disgorge the fees paid to Mr. Gemborys pursuant to 11 U.S.C. §
329 and Bankruptcy Rule 2017. 11 U.S.C. § 329(b), in referring to the compensation of attorneys, states
If such compensation exceeds the reasonable value of any such services, the court
may cancel any such agreement, or order the return of any such payment, to the extent
excessive, to –
(1) the estate, if the property transferred –
(A) would have been property of the estate; or
(B) was to be paid by or on behalf of the debtor under a plan under
chapter 11, 12, or 13 of this title; or
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(2) the entity that made such payment.
Rule 2017 allows the court, upon motion, to determine whether any payment made by the debtors to an
attorney, either before or after entry of an order for relief, is excessive.
In determining the reasonableness of the fees paid to Mr. Gemborys by the debtors in this case and
the related adversary proceedings, the court should review the actions of Mr. Gemborys in light of his
professional responsibility to his clients. See In re Soulisak, 227 B.R. 77, 82 (Bankr. E.D. Va. 1998) (“In
addition to state law sanctions, Bankruptcy Code § 329 permits unethical conduct to serve as a factor
considered in analyzing the reasonableness of legal fees paid by a debtor.”(citations omitted)).
The North Carolina State Bar Rules of Professional Conduct provide a basis by which an
attorney’s actions may be measured to determine reasonableness. Rule 1.1 requires attorneys to render
competent representation, which includes thoroughness and preparation. Rule 1.3 requires “reasonable
diligence and promptness in representing a client.” Comment 4 to Rule 1.3 states:
Unless the relationship is terminated as provided in Rule 1.16, a lawyer should carry
through to conclusion all matters undertaken for a client. If a lawyer’s employment is
limited to a specific matter, the relationship terminates when the matter has been resolved.
If a lawyer has served a client over a substantial period in a variety of matters, the client
sometimes may assume that the lawyer will continue to serve on a continuing basis unless
the lawyer gives notice of withdrawal. Doubt about whether a client-lawyer relationship
still exists should be clarified by the lawyer, preferably in writing, so that the client will not
mistakenly suppose the lawyer is looking after the client’s affairs when the lawyer has
ceased to do so. For example, if a lawyer has handled a judicial or administrative
proceeding that produced a result adverse to the client and the lawyer and the client have
not agreed that the lawyer will handle the matter on appeal, the lawyer must consult with
the client about the possibility of appeal before relinquishing responsibility for the matter.
See Rule 1.4(a)(2). Whether the lawyer is obligated to prosecute the appeal for the client
depends on the scope of the representation the lawyer has agreed to provide to the client.
See Rule 1.2.
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Rule 1.4 requires prompt and reasonable communication between the attorney and his client regarding all
aspects of the client’s case.
Based on the foregoing Rules of Professional Conduct, the court finds that when a person hires an
attorney, he or she is entitled to a certain level of professional services and those services are to be
rendered in a competent manner. An attorney should regularly communicate with his clients to insure that
the clients understand the impact and scope of their case and the consequences of certain actions that may
be taken in the case. There is a professional standard of care that must be met by the reasonably prudent
attorney. That professional standard of care requires attorneys practicing in this court to meet with each
debtor personally and review the petition with the debtor prior to filing to insure the correctness of the
information contained therein and the client’s comprehension of the seriousness and consequences of filing
the petition. It is not sufficient for the debtor to meet only with the paralegal unless an exceptional or
emergency situation exists. The attorney should provide a copy of any and all paperwork, including the
petition, contemporaneously with the final review, signing and filing of the petition. In addition to the
requirements of the Rules of Professional Conduct Rule 1.3, the Local Rules of this court require attorneys
to “remain the attorney of record for all purposes, including the representation of the debtor in all matters
that arise in conjunction with the proceeding, until the case is closed or the attorney is relieved upon
application and court order.” E.D.N.C. LBR 9011-1.
In this case, Mr. Gemborys failed to properly communicate with his clients and failed to carry out
this case in a proper and timely manner. Mr. Gemborys delegated the responsibility of preparing the
petition, meeting with the clients and reviewing the petition with them to his paralegal. Mr. Gemborys failed
to properly supervise his paralegal. The paralegal allowed Mrs. Sledge to sign the signature pages of the
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petition before the petition was prepared. Mr. Gemborys failed to provide the clients with a copy of the
bankruptcy petition until immediately prior to their chapter 7 meeting of creditors. He failed to timely and
properly inform Mr. Janvier of the omissions and misrepresentations in the bankruptcy petition. This
information should have been provided to Mr. Janvier immediately upon discovery, especially with regard
to the omission of the trust. He failed to properly communicate with Mrs. Sledge regarding his filing of the
answers in both adversary proceedings. He failed to properly advise Mrs. Sledge regarding the summary
judgment hearings and the consequences of those hearings. He failed to properly communicate with his
client in regard to the appeal of the adversary proceeding dealing with the trust and the adverse decision
in that matter. He failed to competently handle matters with regard to the appeal. He accepted $1250.00
after expiration of the time for designating or properly providing the items necessary to perfect the appeal,
and did not file motions for extensions of time to give notice of appeal and the filings necessary to perfect
the appeal.
Failure to file statement of compensation:
In addition to the requirements of reasonableness found in 11 U.S.C. § 329(b), § 329(a) requires
attorneys to:
file with the court a statement of the compensation paid or agreed to be paid, if such
payment or agreement was made after one year before the date of the filing of the petition,
for services rendered or to be rendered in contemplation of or in connection with the case
by such attorney, and the source of such compensation.
In this case, Mr. Gemborys admits that he received $1400.00 for the original filing of the petition
under chapter 13, which was disclosed in the petition. In addition to that fee, Mr. Gemborys received
$500.00 for the conversion of the debtors’ case to chapter 7, $375.00 for representation of the debtors
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in the adversary proceeding objecting to discharge, $375.00 for representation of the debtors in the
adversary proceeding for turnover of the trust, and $1250.00 for representation of the debtors during the
appeal. The court docket in this case reflects no filings by Mr. Gemborys disclosing the compensation
received from the debtors or the source of the compensation received after the filing of the petition, as
required by § 329(a). Although the Bankruptcy Code does not specify the remedy for failure to comply
with the requirements of § 329(a), “in cases involving an attorney’s failure to disclose his fee arrangement
under § 329 or Rule 2016 . . . the courts have consistently denied all fees.” In re Hooper, No. 93-11599-
AB, 2001 WL 34054526, at *10 (Bankr. E.D. Va. Oct. 29, 2001) (quoting Mapother & Mapother v.
Cooper (In re Downs), 103 F.3d 472, 478 (6th Cir. 1996)).
Sanction of Attorney’s Fees
At the conclusion of the hearing, debtors’ counsel requested the court award him attorney’s fees
for the representation provided by him in this matter. 11 U.S.C. § 105(a) states
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.
The plain language of this statute indicates “that a court of bankruptcy has authority to issue any order
necessary or appropriate to carry out the provisions of the bankruptcy code.” In re Asbill, No. CIV. A.
98-05819-W., 1999 WL 33486100, at *3 (Bankr. D.S.C. February 1, 1999). Other courts have found
that § 105 allows a bankruptcy court to enter sanctions for abuse of judicial process. See Matter of
Volpert, 110 F.3d 494, 501 (7th Cir. 1997); Matter of Rimsat, Ltd., 229 B.R. 914, 921 (Bankr. N.D. Ind.
1998); Knepper v. Skekloff, 154 B.R. 75, 80 (N.D. Ind. 1993). In addition to § 105(a), “[i]t is well-
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recognized . . . that courts have the inherent authority to impose sanctions upon counsel who is found to
have acted in bad faith, vexatiously, wantonly or for oppressive reasons.” In re Heck’s Properties, Inc.,
151 B.R. 739, 765 (S.D. W.Va. 1992). See also Chambers v. NASCO, Inc., 501 U.S. 32, 43-44, 111
S. Ct. 2123, 115 L. Ed. 2d 27 (1991).
This court believes that the imposition of attorney’s fees against the negligent attorney prevents an
abuse of the bankruptcy process. Disgorgement of fees and liability for the attorney’s fees and costs of the
movant creates an economic and professional incentive to all attorneys practicing in the bankruptcy court
to follow not only the Bankruptcy Code and Bankruptcy Rules, but also the Rules of Professional Conduct,
and to provide a level of professional service commensurate with the standards of practice in the Eastern
District of North Carolina.
The court further believes that the imposition of attorney’s fees in disgorgement actions such as this
will encourage attorneys to seek relief when they observe ethical violations, negligence, or irresponsibility
on the part of other attorneys. The Rules of Professional Conduct of the North Carolina State Bar require
attorneys to maintain the integrity of the profession by bringing ethical violations to the attention of the State
Bar or “the court having jurisdiction over the matter.” Rule 8.3. Typically, the economic and personal
costs of bringing such actions would outweigh the monetary recovery for the moving clients and their
counsel. Therefore, the court finds that if a movant is successful on a motion for fee disgorgement in a case
of this nature, the moving party should be allowed to file an application for reasonable fees for services
rendered in support of the motion to disgorge. Attorneys have a professional duty to bring such motions
to fulfill their ethical obligations, and now have an economic incentive as well.
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CONCLUSION
Because of Mr. Gemborys’ failure to maintain the professional standard of care of a reasonably
prudent attorney in this case, his failure to adhere to the standards of conduct set forth in the Rules of
Professional Responsibility, and his failure pursuant to § 329(a) to disclose the fees paid by the debtors for
their representation, Mr. Gemborys is ordered to reimburse Mr. and Mrs. Sledge in the amount of
$2500.00 for fees paid. 11 U.S.C. § 329(b) provides for return of payment to the trustee in instances
where the funds would have been property of the bankruptcy estate. Therefore, Mr. Gemborys is ordered
to transfer $1400.00 to Mr. Janvier for fees paid by the Sledges prior to the filing of the petition, which
would have been part of the bankruptcy estate.
In this case, Mr. John Bircher, counsel for the debtors has submitted a report and application for
approval of compensation and allocation of costs. After reviewing the application, the court orders Mr.
Gemborys to pay Mr. Bircher $9,662.45 in fees and $1,169.95 in expenses, for a total of $10,832.40,
which represents Mr. Bircher’s reasonable fees and expenses in the pursuit of this matter.
Mr. William Janvier, attorney for the trustee for the estate has submitted a report and application
for approval of compensation and allocation of costs. After reviewing the application, the court orders Mr.
Gemborys to pay Mr. Janvier $2,260.00, which represents Mr. Janvier’s reasonable attorney fees in the
pursuit of this matter.
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All payments as set forth above shall be made by Mr. Gemborys on or before the thirtieth day after
the entry of this order.
SO ORDERED.
END OF DOCUMENT
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