The court granted a secured creditor’s motions for sanctions and disgorgement of fees against counsel for a debtor whose case was dismissed for acting in bad faith. The debtor was a successor entity to a previous Chapter 11 debtor. The prior debtor defaulted on its plan payments and the secured creditor obtained relief from the automatic stay. The debtor’s principal transferred the assets of the prior debtor in which this secured creditor held an interest to a newly created entity and had counsel file a new Chapter 11 petition on the eve of the secured creditor’s scheduled foreclosure sales. The court agreed with the secured creditor that the new case was filed solely to hinder, delay, and harass the secured creditor, and sanctioned the debtor and its principal for the secured creditor’s fees and expenses.
The court also determined that counsel’s conduct violated Rule 9011 and well-established legal standards, in that some of the problems with creditors in the prior case could have and should have been dealt with via motions to enforce the confirmation order instead of by filing a new case. In addition, the transfer of assets was done without the secured creditor’s knowledge or permission, the new debtor had no realistic chance of a successful reorganization, and the actions taken by the debtor and its counsel hindered and delayed the secured creditor and caused it to incur additional costs. Because an attorney who should have known the second reorganization effort was futile provides no service to the bankruptcy estate, he is not entitled to compensation for such service. As a result, counsel was ordered to disgorge the full amount of the retainer received and his fees for the case were denied.