Bankruptcy Misconduct Draws Proposed Negotiated Sanction

A petition for negotiated discipline of a one-year suspension has been submitted in the District of Columbia for misconduct in Virginia and District of Columbia bankruptcy matters.

In 2013, Respondent entered into an agreement with Fox & Associates Partners, Inc. TIA Tranzon Fox (Tranzon or Tranzon Fox), a company which auctions real estate and acts as a real estate broker for debtors and trustees in bankruptcy matters in D.C., Maryland, and Virginia.

Tranzon receives a commission for its auction and brokerage services. To obtain business, the company enters into referral arrangements under which it pays a percentage of the commission to the source of the referral.

Respondent's agreement with Tranzon provided that the company would pay Respondent a percentage of its commission for transactions referred by Respondent. After making the referral, Respondent would consult with Tranzon about the transaction.

Respondent received referral fees in 17 of 18 matters

Tranzon and Respondent also did not make any disclosure about Respondent's involvement or fee in the subsequent motions to approve the sale and the report of sale that were filed with the bankruptcy courts.

The misconduct comes to light

In or around July or August of 2020, the U.S. Trustee learned that Respondent was involved in a D.C. case on behalf of Tranzon after reviewing the time records of the debtor's counsel in that case, In re 1006 Webster, LLC, Case No. 20- 00302-ELG (Ch. 11). The time records reflected multiple discussions between the debtor's counsel and Respondent on behalf of Tranzon.

The U.S. Trustee sought and obtained court permission to examine the principal of Tranzon, Jeff Stein, pursuant to Federal Rule of Bankruptcy Procedure 2004. Based on Stein's testimony and Tranzon's production of documents, the U.S. Trustee learned of the arrangement between Tranzon and Respondent, including the fees Tranzon had paid to Respondent in multiple bankruptcy cases. As stated, none of these fees had been disclosed to the bankruptcy courts or the U.S. Trustee.

Trustee learned of the arrangement between Tranzon and Respondent, including the
fees Tranzon had paid to Respondent in multiple bankruptcy cases. As stated, none of
these fees had been disclosed to the bankruptcy courts or the U.S. Trustee.

In a D.C. matter

In the 1006 Webster case, Tranzon and the U.S. Trustee entered into a settlement agreement in which Tranzon agreed to pay the bankruptcy estate $32,400 - the amount Tranzon paid to Respondent as his share of the commission -and to file an amended declaration in support of Tranzon's application for approval of employment in which Tranzon disclosed Respondent's involvement and the fee he was to receive.

In a reopened Virginia case

The Kebede court found that Respondent violated Bankruptcy Rule 9011 by his "ghostwriting" and advising on an employment application without signing it and without disclosing his involvement in the employment application. The court further found that Respondent made false representations about his involvement in the filing of legal documents and that he had engaged in impermissible fee sharing in violation of Section 504 of the Bankruptcy Code. The court accepted Respondent's offer of disgorgement "as a sanction" finding that "it is the only meaningful remedy to the inexcusable nondisclosure and fee sharing in this case."

On May 2, 2023, the Kebede court issued an order of disgorgement, directing Respondent to pay the estate $9,150 within 30 days.

The D.C. bankruptcy court issued an order to show cause to Respondent

In his response to the D.C. Bankruptcy Court's show cause order, Respondent notified the court that on June 8, 2023, he had resigned from the panel of bankruptcy trustees that the U.S. Trustee maintained for the District of Columbia. Respondent also repeated his offer to the U.S. Trustee to disgorge $30,010.46 - the fees received in the other four D.C. cases in which Tranzon paid him (Tranzon already had disgorged the fee paid to Respondent in the 1006 Webster case).

Respondent further responded to the court that he would defer to the court about his continued involvement in the seven Chapter 7 cases in D.C. that were designated as asset cases in which he served as trustee, many of which he expected would be resolved within a few months.

The D. C. Bankruptcy Court held a hearing on August 17, 2023, which Respondent attended with counsel. The court ruled that:
a. It was unnecessary to reopen all the D.C. cases in which Tranzon was retained, but it would refer its opinion to the Clerk of the Court and the bankruptcy judges in the District of Maryland;
b. It would not reopen the two cases in which Respondent served as the Chapter 7 Trustee and retained Tranzon because it was satisfied that there was no compensation shared in those two matters, but the court "nevertheless
f[ ound] that the disclosures in those case were entirely and completely insufficient" and reserved the right to reopen them subject to certain conditions;
c. Respondent must provide notice to all parties in interest in the other D.C. cases of (i) the court's opinion, and (ii) their right, within 60 days, to file for a distribution from the disgorged funds;

d. Respondent would disgorge $30,010.46, as he had agreed to do;
e. Despite there being "more than sufficient evidence of cause to have removed [Respondent] under§ 324 of the Bankruptcy Code," Respondent could continue to be involved in the five asset cases then pending that were close to completion; and
f. It would refer Respondent to the federal court's Committee on Judicial Conduct.

Agreed proposed sanction

Because Respondent's misconduct occurred in multiple court matters over an extended period of time, the parties agree that a fully-served suspension of one year is warranted. Because Respondent has taken responsibility for his actions, including by entering into this petition for negotiated discipline, Disciplinary Counsel is not requesting a fitness requirement.

The Kebede opinion is linked here.

The opinion concerning Respondent's conduct in the Webster case may be accessed here.

Mr. Ross served as a chapter 7 panel trustee in the District of Columbia for forty-two years until his resignation from that panel on June 8, 2023. Beginning in 2013, Mr. Ross had what the parties called a "business relationship" with Fox & Associates Partners, Inc. t/a Tranzon Fox ("Tranzon"), in which Mr. Ross received compensation in the form of a referral fee in cases in the Bankruptcy Courts of the District of Columbia, District of Maryland, and the Eastern District of Virginia. The referral fee was calculated as a percentage of any commission or buyer's premium received by Tranzon in such cases. While business relationships between professionals are not per se impermissible, the Bankruptcy Code and Bankruptcy Rules require clear, concise, and full disclosure of all the terms and conditions of employment and compensation including referral fees. See 11 U.S.C. §§ 327, 328; Fed.R.Bankr.P. 2014.

(Mike Frisch)