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In re Resource Technology

October 20, 2008


The opinion of the court was delivered by: Matthew F. Kennelly, District Judge


This bankruptcy appeal arises from an order entered in the bankruptcy of Resource Technology Corporation (RTC) requiring appellant Ungaretti & Harris, LLP (Ungaretti) to disgorge to RTC's Chapter 7 trustee payments totaling $376,235.54 that Ungaretti received from RTC's estate. Ungaretti contends that the bankruptcy court abused its discretion by ordering disgorgement. For the reasons set forth below, the Court affirms the bankruptcy court's ruling.


RTC has been in bankruptcy since 1999. From 1999 until August 2003, RTC operated as a debtor in possession. Problems at that point led to the appointment of Gregg Szilagyi, an attorney then employed by Ungaretti, as RTC's Chapter 11 trustee. Szilagyi retained Ungaretti as his counsel. Szilagyi remained the trustee, and Ungaretti remained his counsel, until September 2005, when the bankruptcy court converted the case to a Chapter 7 proceeding and appointed Jay Steinberg as the Chapter 7 trustee. Over the course of its representation, Ungaretti claims it incurred over $2 million in attorney's fees and out-of-pocket costs that it has not been paid.

On September 18, 2003, while the case was still a Chapter 11 case, the bankruptcy court entered an order that established procedures for professionals retained by the Chapter 11 trustee to apply for interim compensation and reimbursement of expenses every 120 days. Under that order, professionals seeking interim compensation were required to circulate monthly invoices to RTC's creditors within twenty days of the conclusion of each month. Those creditors then had ten days to file a written objection to the monthly invoice. For expenses to which there was no objection, the trustee was authorized to make partial payments -- subject to the bankruptcy court's subsequent approval pursuant to the requirements of 11 U.S.C. § 331.

It is undisputed that Ungaretti did not strictly comply with the bankruptcy court's order governing interim compensation payments. Without citing to the record, Ungaretti claims that it "circulated certain monthly invoices for the months of September 2003 through April 2005, to the designated creditors and parties in interest, with no party objecting to any of the bills. . . ." Ungaretti Br. at 4. Ungaretti did not, however, circulate monthly invoices in the manner prescribed by the order and does not explain in its brief what it means when it claims to have sent out "certain monthly invoices." Nor did Ungaretti apply to the bankruptcy court for interim compensation, as the court's order required, over most of the two years it represented the Chapter 11 trustee. Rather, Ungaretti submitted a single application for interim compensation on September 2, 2005. That application detailed the work Ungaretti performed on behalf and for the benefit of RTC's estate. Ungaretti subsequently filed a final application for compensation.

Despite Ungaretti's failure to comply with the bankruptcy court's order, Ungaretti received payments totaling $376,235.54 between November 2003 and May 2005. Ungaretti claims that $215,181.31 of that amount was for reimbursement of out-of-pocket expenses and the balance was for legal fees. It fails, however, to cite anything in the record supporting that breakdown. The payments were generally made in round amounts between $15,000 and $30,000 on a monthly basis. Ungaretti claims the amounts paid were a fraction of what it would have been entitled to receive on a monthly basis pursuant to the bankruptcy court's order.

After RTC's bankruptcy was converted to a Chapter 7 case, Ungaretti attempted to reach a settlement with Steinberg as part of a related adversary proceeding. Under the putative settlement, Ungaretti would have received additional payments from RTC's estate and Steinberg would have waived claims for disgorgement of payments already received by Ungaretti. The bankruptcy court rejected that settlement, finding it was not in the interests of RTC's estate and that the settlement was inappropriate given the strength of the estate's potential disgorgement claims. This Court affirmed that decision on appeal. See Ungaretti & Harris LLP v. Steinberg, No. 07 C 1292, 07 C 1293, 2008 WL 681023 (N.D. Ill. Mar. 5, 2008).

Steinberg subsequently moved the bankruptcy court for an order to disgorge the compensation that had been paid to Ungaretti. That bankruptcy court granted that motion, offering two rationales.*fn1 First, the payments received by Ungaretti were unauthorized transfers because Ungaretti had failed to comply with the order governing interim professional compensation and section 331 of the Bankruptcy Code. Second, the bankruptcy court found that RTC's estate was insolvent and that it would be impossible to pay all of the administrative claims incurred during the Chapter 11 phase of the bankruptcy; accordingly, disgorgement was required to ensure a pro rata distribution to all Chapter 11 administrative claimants.


The Court has jurisdiction pursuant to 28 U.S.C. § 158(a). In general, under Federal Rule of Bankruptcy Procedure 8013, the Court reviews the bankruptcy court's findings of fact for clear error and its conclusions of law, including its interpretation of the Bankruptcy Code, de novo. In re Heartland Steel, 389 F.3d 741, 743-44 (7th Cir. 2004). In this context, the Court acts as an appellate court and applies the same standards of review as are appropriate in other appellate decisions. Green v. Mass. Cas. Ins. Co., 269 B.R. 782, 787 (N.D. Ill. 2001). The bankruptcy court's decision to order disgorgement is reviewed for abuse of discretion. See In re Geraci, 138 F.3d 314, 319 (7th Cir. 1998) (holding award of attorney's fees by bankruptcy court subject to abuse of discretion review).

1. Disgorgement of Unauthorized Payments

It is uncontested that Ungaretti failed to comply with the bankruptcy court's order concerning applications for interim compensation. It is also undisputed that Ungaretti only made a single application to the bankruptcy court for such compensation -- in September 2005, long after it had received most of its compensation from RTC's estate. Ungaretti tries to characterize its actions as merely a failure to dot the i's and cross the t's. The bankruptcy court, however, correctly found that Ungaretti's actions were more than technical violations and provided grounds for disgorgement.

The interim compensation order clearly required Ungaretti to circulate monthly invoices within a specified time and also required court approval every 120 days of compensation that had been paid. Ungaretti's claim (without citation to the record) to have circulated "certain monthly invoices" prior to its decision to file a single interim application for compensation after two years does not come close to complying with the order. See Dalton Dev. Project #1 v. Unsecured Creditors Comm. (In re Unioil), 948 F.2d 678, 682 (10th Cir. 1991) (noting that bankruptcy courts, like other courts, have the inherent power to enforce their own lawful orders). It also does not comply with the plain language of the Bankruptcy Code, which requires that the bankruptcy court approve, after notice and a hearing, interim compensation paid to attorneys and other ...

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