Opinion ID: 835208
Heading Depth: 2
Heading Rank: 1

Heading: Facts in the Bankruptcy Matter[3]

Text: The accused represented Kara, the debtor, in a Chapter 13 bankruptcy proceeding. The most important asset of the bankruptcy estate was a piece of real property known as the Phoenix Club. Three secured creditors had liens on the property. The Dorsey Trust (Dorsey) [4] held the lien that was in first position, the Ziegenhagen family (Ziegenhagens) was in second position, and First Call Mortgage (First Call) held the third secured interest in the property. The bankruptcy court ordered that the bankruptcy be converted from a Chapter 13 to a Chapter 7 proceeding and appointed Tracy Trunnell, an attorney, to serve as trustee for the bankruptcy estate. At that time, the debtor owed the accused attorney fees of approximately $20,000 for work in the Chapter 7 case, and the accused was an administrative expense creditor of the estate. See 11 U.S.C. § 503 (describing administrative expense claims). Shortly after the conversion, Dorsey, the senior lien creditor, began to take steps to obtain judicial authority to foreclose its lien. The accused discussed with Trunnell the possibility that she retain him to challenge the validity of Dorsey's lien, and Trunnell agreed to employ him to bring an adversary proceeding against Dorsey. [5] In his application for appointment as special counsel, the accused disclosed his earlier representation of the debtor in the Chapter 13 case and stated that the interests of the debtor and the trustee in employing him to file an adversary proceeding against Dorsey were the same. The accused reasoned that, if the challenge to Dorsey's lien were successful, the benefits of that challenge would redound to the junior secured creditors, the Ziegenhagens and First Call, and possibly also to unsecured creditors. Furthermore, defeat of Dorsey's security interest would make payment of the administrative expenses of the estate, including the fees of the accused in the Chapter 13 case, more likely. The accused sought a preliminary injunction to prevent Dorsey from foreclosing. Before the injunction hearing, the parties engaged in settlement discussions. Trunnell, who had begun to have concerns about both the merits and potential expense of the adversary proceeding, changed her position and negotiated a settlement that permitted Dorsey to proceed with foreclosure on the condition that it pay the trustee $18,000 out of the sale proceeds. The accused thought, however, that those terms wrongly granted Dorsey a windfall, precluded payment of the claims of the other creditors, and possibly also precluded payment of his fees. The accused decided that he could not advocate for the settlement and informed Trunnell that he needed to resign as special counsel in the adversary proceeding. After the court permitted the accused to withdraw as special counsel, [6] the accused filed an objection to the settlement on behalf of his law firm and encouraged the Ziegenhagens and First Call to do the same. Despite those objections, the bankruptcy court entered an order permitting the settlement. The accused then, on his own behalf but also as the attorney for the Ziegenhagens and First Call, filed an appeal to the Bankruptcy Appellate Panel of the Ninth Circuit and then to the Ninth Circuit itself. In re Kara, 258 Fed Appx 154, 2007 WL 4292575 (9th Cir.2007). The appeals were unsuccessful, and the appellate courts upheld the settlement that Trunnell had negotiated. Trunnell incurred $18,000 in attorney fees to contest those appeals.