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Shubert v. Law offices of Winterhalter

United States District Court, E.D. Pennsylvania

May 12, 2015

CHRISTINE C. SHUBERT, CHAPTER 7 TRUSTEE, Plaintiff,
v.
LAW OFFICES OF PAUL J. WINTERHALTER, AND PAUL J. WINTERHALTER, Defendants

Decided Date: May 8, 2015

For CHRISTINE C. SHUBERT, Plaintiff: ALAN L. FRANK, ALAN L. FRANK LAW ASSOCIATES PC, JENKINTOWN, PA.

For LAW OFFICES OF PAUL J. WINTERHALTER, P.C., PAUL J. WINTERHALTER, INDIVIDUALLY, Defendants: PAUL J. WINTERHALTER, LEAD ATTORNEY, PHILADELPHIA, PA.

MISC MATTER

MEMORANDUM OPINION

RUFE, J.

Plaintiff Christine C. Shubert, trustee of the bankruptcy estate of Joseph Grasso, filed this case as an adversary proceeding in the United States Bankruptcy Court for the Eastern District of Pennsylvania (the " Bankruptcy Court" ). Defendants Paul J. Winterhalter and his law offices (the " Firm" ), proceeding pro se, have moved to withdraw the reference from the Bankruptcy Court and transfer the case to this Court.

I. FACTUAL AND PROCEDURAL HISTORY

On February 6, 2012, Joseph Grasso, a businessman with interests in numerous companies, filed for bankruptcy. On February 7, 2012, Defendants filed an application pursuant to 11 U.S.C. § 327(a) to represent Mr. Grasso as debtor-in-possession and assist him in performing his duties under the Bankruptcy Code. As required by § 327(a), Defendants' application represented that Defendants were disinterested persons who did not hold an interest materially adverse to the bankruptcy estate. The Bankruptcy Court approved the application and, as counsel to the debtor-in-possession, Defendants acquired " fiduciary duties to the estate, including ensuring that the rights of creditors are protected." [1]

Plaintiff alleges that Defendants repeatedly breached their duties as counsel for the debtor-in-possession and aided and abetted Mr. Grasso in breaching his duties as debtor-in-possession. Defendants allegedly failed to counsel Mr. Grasso regarding his obligation to disclose his assets, including his interest in several businesses, and allegedly " substantially assisted" Mr. Grasso in improperly transferring more than $488,494.09 from his businesses in order to pay the personal expenses of Mr. Grasso and his wife.[2] Plaintiff also alleges that Defendants were " involved" in Mr. Grasso's undisclosed purchase of a proof of claim filed against the estate by the Wilmington Savings Fund Society, FSB (the " WSFS claim" ) and thereby " they ceased to be disinterested, they actively put the Debtor's personal interests ahead of the estate's collective interests, they failed to disclose the estate's opportunity in purchasing the WSFS claim at a discount, they failed to disclose their involvement in the transaction, and in fact, misrepresented their involvement to the Court." [3]

On December 28, 2012, Defendants filed a Second Interim and Final Application for Compensation in the Bankruptcy Court in order to obtain payment for the fees and costs that the Firm had incurred in its representation of Mr. Grasso during the period of July 1, 2012 to October 31, 2012. On February 5, 2013, one of Mr. Grasso's creditors, Madison Capital Company, objected to the Firm's application pursuant to 11 U.S.C. § 328(c) and requested disgorgement of all fees previously paid to the Firm pursuant to 11 U.S.C. § 330(a)(5) on the basis that Mr. Winterhalter had been improperly involved in the purchase of the WSFS claim. Ms. Shubert, acting as trustee of the bankruptcy estate, joined in Madison's objection.

The Firm's fee application subsequently became the subject of extensive litigation in the Grasso bankruptcy, which culminated in the Bankruptcy Court's memorandum opinion and order dated January 17, 2014 denying the fee application, ordering disgorgement of all fees previously paid to the Firm, and referring Mr. Winterhalter to the appropriate body for professional discipline.[4] Mr. Winterhalter timely appealed to this Court, and by memorandum opinion and order dated July 10, 2014, this Court vacated the Bankruptcy Court's January 17, 2014 order and remanded the fee application to the Bankruptcy Court for further proceedings.[5]

On February 10, 2014, while Mr. Winterhalter's appeal was pending, Plaintiff filed this case as a separate adversary proceeding in the Bankruptcy Court. The amended complaint raises five claims against Defendants: 1) Breach of Fiduciary Duty; 2) Negligence; 3) Aiding and Abetting Breach of Fiduciary Duty; 4) Fraudulent Concealment; and 5) Conspiracy to Commit Fraudulent Concealment. Defendants answered the complaint and filed a motion to dismiss for lack of subject matter jurisdiction, which was denied by the Bankruptcy Court on June 27, 2014. Defendants then moved to withdraw the reference and transfer the adversary proceeding to this Court. To date, the Bankruptcy Court has not made any further ruling on the Firm's application for fees in the Grasso bankruptcy or on any matter in the adversary proceeding filed by Plaintiff.

II. STANDARD OF REVIEW

Pursuant to 28 U.S.C. ยง 157(a) and the Standing Order of Reference for this District, " any and all proceedings arising under Title 11 or arising in or related to a chapter 7, 11, 12, or 13 case under Title 11 are and shall be referred to the Bankruptcy Judges for the district." Section 157(d) provides that " the district court may withdraw, in whole or in part, any case or proceeding referred under ...


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