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In re Derrick

United States District Court, D. Arizona

January 15, 2014

In Re Gayle Ann Derrick, Debtor.
v.
National Health Finance DM, LLC; and Williams & Halladay, Appellees. Gayle Ann Derrick, Appellant, ADV. BK. No. 10-BK-36666-SSC

ORDER

NEIL V. WAKE, District Judge.

Appellant-Debtor Gayle Ann Derrick appeals the Bankruptcy Court's August 1, 2013 Order Disqualifying Counsel for Debtor (Doc. 45-1 at 2; Bankr. Doc. 196). Her appeal is fully briefed, and the Court heard extended oral argument on January 6, 2014. The Bankruptcy Court disqualified Isidore Yetnikoff as counsel for Derrick for violating 11 U.S.C. § 329(a) by not disclosing that Larry A. Zier, her attorney in her state court personal injury action, was also representing her in this bankruptcy proceeding.

The order of the Bankruptcy Court will be reversed. Zier's attorney-client relationship and obligations included advising Derrick to retain a bankruptcy lawyer and conferring with her and that lawyer about facts and bankruptcy strategy. But Zier was not an "attorney representing a debtor in a case under this title" and there was no "compensation paid or agreed to be paid." 11 U.S.C. § 329(a). Therefore, § 329 did not obligate him to file a statement of such compensation. Any different view of the facts would be clearly erroneous.

Moreover, 28 U.S.C. § 329 deals with judicial supervision of debtors' attorney fees. In light of this reversal, this Court need not decide whether, if this were a non-compliance with § 329, it would warrant the extreme remedy of depriving the debtor of her lawyer, rather than depriving the lawyer of his compensation.

I. BACKGROUND

A. The state court and bankruptcy court proceedings

Derrick suffered injuries in a car accident in January 2006. Two months later, she obtained financed medical treatment from Defendant National Health Finance DM, LLC ("NHF"), and NHF recorded a statutory lien against any personal injury recovery. In April 2009, Derrick hired Zier to represent her regarding the accident. NHF subsequently claimed $5430 for the treatment, and Zier filed an action in state court to adjudicate a dispute over the validity of the lien and the amount NHF claimed (the "state court action"). NHF answered and counterclaimed against Derrick, Zier, and his law firm.

In November 2010, Derrick filed a bankruptcy petition. She received a discharge in April 2011. Despite the discharge, NHF maintained its counterclaims against Derrick. In May 2012, Derrick retained Yetnikoff to remedy the discharge violation in bankruptcy court. A month later, the Bankruptcy Court concluded that NHF violated the discharge injunction and ordered that Derrick be dismissed as a counter-defendant in the state court action. The Bankruptcy Court also set an evidentiary hearing to prove damages. That hearing was continued and has not occurred.

The state court action has continued without Derrick. Zier remains a counter-defendant, and in July 2012, Yetnikoff substituted in as his counsel. Yetnikoff and NHF exchanged discovery regarding the bankruptcy case, and both listed Zier as a potential witness to the violation of the discharge injunction. Activity in the state action appears to have stopped at least in part because the Bankruptcy Court ordered that NHF depose Derrick in the bankruptcy case before deposing her in the state court action, in which she is a witness.

In June 2013, NHF moved in the Bankruptcy Court to disqualify Yetnikoff and Zier based on a conflict of interest between Derrick and Zier. Doc. 42 at 26-41. After a hearing on the motion on July 23, the Bankruptcy Court disqualified both Yetnikoff and Zier for a different reason not argued-disclosure violation-and instructed NHF to submit a form of order. See Doc. 12-1 at 189-90. On August 1, 2013, the Bankruptcy Court issued the Order Disqualifying Counsel for Debtor. Doc. 43 at 1. That same day, Zier filed on his own behalf a "Motion to Stay Order; and Motion to Set Hearing" seeking a hearing to challenge the Bankruptcy Court's finding. See id. at 2. The Bankruptcy Court held a hearing on Zier's motion on November 14, 2013. In both the order setting the hearing and the hearing itself, the Bankruptcy Court expounded its rationale for disqualifying Yetnikoff and Zier. See generally Doc. 45-1 at 24-30; Doc. 48-1.

Derrick filed a notice of appeal in Bankruptcy Court on August 12, 2013. See Doc. 1 at 1. On September 3, 2013, she filed in the Bankruptcy Court her own motion to stay pending the appeal. See Doc. 45 at 1. She subsequently filed two emergency motions in this Court to stay the bankruptcy proceedings pending her appeal. This Court denied the first motion as premature (Doc. 26) and granted the second on January 7, 2014 (Doc. 50).

B. Zier's involvement in the bankruptcy case

Derrick initially filed her bankruptcy petition without a lawyer. When she later sought representation, Zier referred her to Yetnikoff. On May 2, 2012, Derrick and Zier informed Yetnikoff of the discharge violation in the state proceedings, and Derrick retained Yetnikoff. Both Yetnikoff and Derrick signed a retainer agreement, which literally defines both Zier and Yetnikoff as "Attorney" and which covers representation "in connection with a claim/action for damages (or other appropriate relief) against or brought by [NHF] in both the Federal Bankruptcy Court, Case No. 2:10-BK-36666-SSC and/or the Maricopa County Superior Court, Case No. CV 2010-007848. (This does not cover any representation in connection with Client's underlying Bankruptcy itself, which has been discharged[.])" Doc. 41 at 4. It appears to say literally that both lawyers are counsel in both cases. As counsel acknowledged, however, the references to Zier and the state court matter were erroneous. Zier's paralegal prepared the document for Yetnikoff, working off the retainer agreement Zier and Derrick had executed in the state court action. But she mistakenly left in reference to Zier and the state court action in this retainer agreement, which was supposed to be for Yetnikoff and the bankruptcy enforcement proceeding. Zier never signed it or saw it, and Yetnikoff admitted that he signed it without reading it. The agreement does not contain any other references to Zier or co-counsel; for example, it does not discuss how any contingent fee would be divided between Yetnikoff and Zier.

On July 18, 2013, a month after NHF filed its motion to disqualify, Derrick signed an amended retainer agreement clarifying that Zier was not representing and never had represented Derrick in the bankruptcy case. See Bankr. Doc. 184-1 at 2-3. On June 23, 2013, she also executed a conflict waiver, after receiving independent legal advice, in which she acknowledged that Yetnikoff represents Zier in state court, that Zier represents Derrick in state court, and that "Zier does not represent Gayle Derrick in Bankruptcy Court." Doc. 42 at 174.

After Derrick retained Yetnikoff, he and Zier discussed the bankruptcy case. Yetnikoff's billing records reflect that between May 2 and June 13, 2012, he met with Zier or discussed Derrick's case with him for 2.1 hours out of the 46.2 total hours he invested in the case. See Doc. 41 at 18-20.

Zier did not file an appearance on behalf of Derrick in any of the bankruptcy proceedings. At the June 13, 2012 hearing establishing the discharge violation, Yetnikoff announced for the record his appearance for Derrick and introduced Zier, who sat in the audience, see Bankr. Doc. 214 at 5, as "Debtor's counsel in the state action." Doc. 12-1 at 5. Similarly, Yetnikoff disclosed Zier's status as Derrick's state court counsel in bankruptcy court filings on May 25, May 31, and October 24, 2012. See Doc. 12 at 8. Zier did not sign any bankruptcy filings or accept or apply for any attorney fees.

Derrick filed an affidavit on October 24, 2012, in support of her request for the Bankruptcy Court to find the discharge violations. Doc. 41 at 8-13. She asserted that when Zier suggested she seek relief in bankruptcy court, he advised her to retain a bankruptcy lawyer because he did not practice bankruptcy law. See id. at 11-12. Because the affidavit, like the original retainer agreement, was fundamental to the Bankruptcy Court's disqualification decision, the pertinent language follows:

11. On or about April 14, 2009, I hired the Law Office of Larry A. Zier, P.C (the "Zier Law Firm"), to ...

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