Bankruptcy

Doctrine Of Equitable Mootness Does Not Protect Debtor's Counsel From Disgorgement Of Fees

By Scott Riddle

From law.com,  Winstead Ordered to Disgorge up to $500,000 in Bankruptcy Case:

A 5th U.S. Circuit Court of Appeals opinion that one former bankruptcy judge calls "scary" for lawyers requires Dallas-based Winstead to disgorge up to $500,000 in attorney fees the firm received for its work on the restructuring of a restaurant chain that filed for bankruptcy.

In an Aug. 28 decision in Wooley v. Faulkner, a three-judge panel of the 5th Circuit concluded that the doctrine of equitable mootness did not apply to attorneys representing clients in a Chapter 11 bankruptcy… Under the equitable mootness doctrine, appeals courts typically recognize that there is a point at which they cannot order fundamental changes in a debtor's reorganization plan approved by a bankruptcy court once that plan has been consummated…

The Wooley case stems from the August 2004 filing for Chapter 11 bankruptcy protection by Schlotzsky's Inc., a chain of sandwich restaurants... Citing the 9th U.S. Circuit Court of Appeals' 2004 decision in Focus Media Inc. v. National Broadcasting Co., the 5th Circuit reasoned in Wooley II that an order compelling disgorgement of attorney fees and expenses would not unravel a complicated bankruptcy plan but instead "would require only that one party disgorge the money it has received, money that would then be distributed pursuant to the bankruptcy court's final decree." …

[R. Glen] Ayers, the former bankruptcy judge, says the 5th Circuit's opinion in Wooley leaves open the possibility that a lawyer's fees in a Chapter 11 bankruptcy case are subject to recapture for an indefinite period.  Notes Ayers, "This is scary, because it leaves you in the dark as to when a Chapter 11 case is finally over."
 

Full post as published by Georgia Bankruptcy Blog on September 08, 2008 (boomark / email).