Estate of Arlene Townsend, et al v. Steven Berman, et al

[PUBLISH]
In the
United States Court of Appeals
For the Eleventh Circuit
____________________
No. 21-10587
____________________
In re: Fundamental Long Term Care, Inc.,
Debtor.
___________________________________________________
ESTATE OF ARLENE TOWNSEND,
ESTATE OF ELVIRA NUNZIATA,
ESTATE OF JAMES HENRY JONES,
ESTATE OF JOSEPH WEBB,
ESTATE OF OPAL LEE SASSER,
ESTATE OF JUANITA JACKSON,
Petitioning Creditor,
Plaintiffs-Appellants,
versus
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2 Opinion of the Court 21-10587
STEVEN M. BERMAN, Esq.,
SHUMAKER, LOOP & KENDRICK, LLP,
Defendants-Appellees.
____________________
Appeal from the United States District Court
for the Middle District of Florida
D.C. Docket No. 8:20-cv-00956-VMC,
Bkcy No. 8:11-bk-22258-MGW
____________________
Before LAGOA, BRASHER , and T JOFLAT, Circuit Judges.
TJOFLAT, Circuit Judge:
Section 327(a) of the United States Bankruptcy Code, titled
“Employment of professional persons,” states that “the trustee,
with the court’s approval, may employ one or more attorneys, ac-
countants, appraisers, auctioneers, or other professional persons,
that do not hold or represent an interest adverse to the estate, and
that are disinterested persons, to represent or assist the trustee in
carrying out the trustee’s duties.” 11 U.S.C. § 327(a). Rule 2014 of
the Federal Rules of Bankruptcy Procedure implements the disin-
terestedness provision of this section by requiring the trustee, in
seeking court approval of the employment of a professional, to
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21-10587 Opinion of the Court 3
disclose “the person’s connections with the debtor, creditors, [or]
any other party in interest.”1 Fed. R. Bankr. P. 2014(a).
The bankruptcy proceeding underlying this case, In re Fun-
damental Long Term Care, Inc., was initiated by Wilkes & McHugh,
P.A. (“Wilkes”), on December 5, 2011, when it filed an involuntary
petition in the Bankruptcy Court for the Middle District of Florida
under Chapter 7 of the Bankruptcy Code for relief against Funda-
mental Long Term Care, Inc. (“FLTCI”) on behalf of the Estate of
Juanita Jackson, deceased. The Jackson Estate, in a wrongful death
tort action, had obtained judgments of $55 million against Trans
Health, Inc. (“THI”) and Trans Health Management, Inc.
(“THMI”) each, on July 22, 2010. In a post-judgment motion, the
Jackson Estate obtained a default amended judgment on
1 Fed. R. Bankr P. 2014(a) states that the trustee, in applying for court approval
of the employment of a professional, must state:
to the best of the applicant’s knowledge, all of the person’s
connections with the debtor, creditors, any other party in in-
terest, their respective attorneys and accountants, the United
States trustee, or any person employed in the office of the
United States trustee. The application shall be accompanied
by a verified statement of the person to be employed setting
forth the person’s connections with the debtor, creditors, any
other party in interest, their respective attorneys and account-
ants, the United States trustee, or any person employed in the
office of the United States trustee.
A professional must disclose all connections to parties in interest “that are not
so remote as to be de minimis.” In re Fullenkamp, 477 B.R. 826, 834 (Bankr. M.D.
Fla. 2011) (quoting In re Leslie Fay Cos., 175 B.R. 525, 536 (Bankr. S.D.N.Y.
1994)).
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4 Opinion of the Court 21-10587
September 13, 2011, making FLTCI liable for the total $110 million
award, along with THI and THMI—which were each liable for
their respective $55 million judgment. But the Jackson Estate was
unable to collect on the judgments due to a massive “bust-out”
scheme2 designed and executed in March 2006 to avoid paying the
judgments.3
The Chapter 7 case became operative on January 12, 2012,
when the Bankruptcy Court issued an “Order of Relief ” after
FLTCI—now the Debtor—failed to respond to the Jackson Estate’s
Chapter 7 petition. In June 2012, the trustee of the Debtor’s estate
(the “Trustee”) employed Steven M. Berman and Shumaker, Loop
& Kendrick, LLP (“Shumaker”)4 as special litigation counsel. They
served in that capacity until December 2015, following the distri-
bution of the proceeds of a compromise presented to the Bank-
ruptcy Court for approval in March 2015.
2 While this opinion later explains the bust-out scheme in detail, see infra part
II.B, the gist of the scheme is that, in a series of transactions, THI separated
THMI’s assets and liabilities, and then hid those assets.
3 Why Wilkes had the Jackson Estate file a petition for Chapter 7 bankruptcy
relief against FLTCI and not THMI and THI will become apparent as this
opinion unfolds.
4 Berman was a Shumaker partner. Rule 2014(b) provides in relevant part:
If, under the Code and this rule, a law partnership . . . is em-
ployed as an attorney . . . or if a named attorney . . . is em-
ployed, any partner, member, or regular associate of the part-
nership . . . or individual may act as attorney . . . without fur-
ther order of the court.
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21-10587 Opinion of the Court 5
On June 4, 2018, Wilkes, representing the creditors of the
Debtor’s estate—namely the Jackson Estate and five other Probate
Estates (collectively, the “Probate Estates”)—moved the Bank-
ruptcy Court nunc pro tunc to disqualify Shumaker as special litiga-
tion counsel and require it to disgorge the compensation it had re-
ceived for its services. According to Wilkes, when the Trustee em-
ployed Shumaker in June 2012, it was not disinterested as required
by § 327(a). Moreover, Shumaker failed to timely disclose its “con-
nections with the debtor, creditors, [or] any other party in inter-
est”—connections that revealed its disinterestedness—as required
by Rule 2014. The Bankruptcy Court denied Wilkes’s motion. It
did so without an evidentiary hearing and based on the record of
the bankruptcy case.5
5 The Bankruptcy Court described the record of the case prior to March 20,
2014, in a Memorandum Opinion on Motion to Compromise and Motions for
Permanent Injunctive Relief as “exceedingly complex.” In re Fundamental Long
Term Care, Inc., 527 B.R. 497, 501 n.5 (Bankr. M.D. Fla. 2015). “The Court had
nearly 80 days of hearings in this case.” Id. The issues raised in those hearings
resulted in 17 reported decisions: In re Fundamental Long Term Care, Inc., 489
B.R. 451 (Bankr. M.D. Fla. 2013); In re Fundamental Long Term Care, Inc., 492
B.R. 571 (Bankr. M.D. Fla. 2013); In re Fundamental Long Term Care, Inc., 493
B.R. 613 (Bankr. M.D. Fla. 2013); In re Fundamental Long Term Care, Inc., 493
B.R. 620 (Bankr. M.D. Fla. 2013); In re Fundamental Long Term Care, Inc., 494
B.R. 548 (Bankr. M.D. Fla. 2013); In re Fundamental Long Term Care, Inc., 500
B.R. 140 (Bankr. M.D. Fla. 2013); In re Fundamental Long Term Care, Inc., 500
B.R. 147 (Bankr. M.D. Fla. 2013); In re Fundamental Long Term Care, Inc., 501
B.R. 770 (Bankr. M.D. Fla. 2013); In re Fundamental Long Term Care, Inc., 501
B.R. 784 (Bankr. M.D. Fla. 2013); In re Fundamental Long Term Care, Inc., 507
B.R. 359 (Bankr. M.D. Fla. 2014); In re Fundamental Long Term Care, Inc., 508
B.R. 224 (Bankr. M.D. Fla. 2014); In re Fundamental Long Term Care, Inc., 509
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6 Opinion of the Court 21-10587
The Probate Estates appealed the Bankruptcy Court’s deci-
sion. On February 27, 2020, the District Court affirmed the Bank-
ruptcy Court’s order except on the issue of whether Berman had
committed a disclosure violation pursuant to Rule 2014. The Dis-
trict Court then remanded the case to the Bankruptcy Court so it
could decide whether Berman violated Rule 2014’s disclosure re-
quirements. On remand, the Bankruptcy Court held that Berman’s
omissions did not warrant sanctions under Rule 2014. In re Funda-
mental Long Term Care, Inc., 614 B.R. 753 (Bankr. M.D. Fla. 2020).
On the Probate Estates’ appeal, the District Court affirmed. In re
Fundamental Long Term Care, Inc., No. 8:20-cv-956, 2021 WL 222779
(M.D. Fla. Jan. 22, 2021).
The Probate Estates now appeal the District Court’s deci-
sion, contending that the Bankruptcy Court abused its discretion in
denying their motion. With the benefit of oral argument and hav-
ing examined the record before the Bankruptcy Court, we affirm.
We divide our discussion as follows. In part I, we consider
the relevant events that took place prior to the Chapter 7 Trustee’s
appointment and the administration of the bankruptcy estate prior
to Berman and Shumaker’s employment as special litigation
B.R. 387 (Bankr. M.D. Fla. 2014); In re Fundamental Long Term Care, Inc., 509
B.R. 956 (Bankr. M.D. Fla. 2014); In re Fundamental Long Term Care, Inc., 512
B.R. 690 (Bankr. M.D. Fla. 2014); In re Fundamental Long Term Care, Inc., 515
B.R. 352 (Bankr. M.D. Fla. 2014); In re Fundamental Long Term Care, Inc., 515
B.R. 857 (Bankr. M.D. Fla. 2014); In re Fundamental Long Term Care, Inc., 515
B.R. 874 (Bankr. M.D. Fla. 2014).
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21-10587 Opinion of the Court 7
counsel.6 Part II begins with the Trustee’s application to employ
Berman and Shumaker; it then describes what they learned about
the bust-out scheme, Wilkes’s litigation in response to the scheme,
and the conflict between the Trustee and counsel for the fraudu-
lent transferees over control of the defense strategy in state court.
Part III deals with the principal adversary proceedings held in the
case, including the Bankruptcy Court’s decision to treat THMI as
if it had been included as a debtor in the Jackson Estate’s petition
for Chapter 7 relief against FLTCI and the compromises that re-
solved those proceedings. Part IV takes up Wilkes’s motion to dis-
qualify Shumaker and for disgorgement of the attorney’s fees Shu-
maker received, the Bankruptcy Court’s rulings on the motion, and
the District Court’s review of those rulings. Part V concerns the
present appeal.
I.
On January 23, 2012, the Bankruptcy Court appointed Beth
Ann Scharrer Trustee of the Debtor’s (FLTCI’s) estate. Two days
later, the Bankruptcy Court approved her application to employ Al-
lan C. Watkins as her general counsel. On February 22, the Trus-
tee, through Watkins, moved the Bankruptcy Court to enter an or-
der “authorizing the Trustee, on behalf of the [C]hapter 7 estate . .
. to borrow up to Ten Thousand Dollars . . . from Wilkes &
McHugh, P.A. . . . under 11 U.S.C. § 503(b)(1) as an administrative
expense.” The motion stated in relevant part:
6 In this opinion, we refer to Berman and Shumaker interchangeably.
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8 Opinion of the Court 21-10587
No schedules have been filed by the Debtor, and no
appearance has been made by counsel for the Debtor.
No response was made by or on behalf of the Debtor,
and no schedules or statement of financial affairs have
been filed. As such, there is little information in the
record upon which the Trustee can rely to determine
the assets and liabilities of the Debtor.
. . .
Wilkes & McHugh represents a number of creditors
asserting claims against the Debtor, including the Es-
tate of Juanita Jackson, the petitioning creditor. The
Lender [Wilkes] has agreed to loan to the [Debtor’s]
Estate up to $10,000.00, allowable as an administra-
tive expense under § 503(c)(1) of the Bankruptcy
Code.
. . .
The Debtor has not prepared any schedules, list of
creditors, or statement of financial affairs. The Trus-
tee needs to conduct discovery, including by deposi-
tion testimony as necessary, to produce the infor-
mation necessary or available. The likely witnesses
with knowledge of the Debtor’s business affairs are
located out of the State of Florida, so expenses would
include travel costs, lodging, and meals as well.
Trustee’s Motion for Final Approval of Postpetition Financing at 2–
3, In re Fundamental Long Term Care, Inc., No. 8:11-bk-22258 (Bankr.
M.D. Fla. Feb. 22, 2012). The Bankruptcy Court held a hearing on
the motion on March 28, 2012, and approved it in an order dated
April 6, 2012.
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21-10587 Opinion of the Court 9
At the same time, Wilkes was involved in the prosecution of,
or in post-judgment proceedings in, five of the six wrongful death
cases it had brought on behalf of the Probate Estates in state
courts—five in Florida and one in Pennsylvania.7 The six Probate
Estate plaintiffs were the Probate Estate of Juanita Jackson,8 whose
case had been prosecuted to final judgment pre-petition, and the
Probate Estates of Elvira Nunziata,9 Joseph Webb,10 James Henry
Jones,11 Opal Lee Sasser,12 and Arlene Townsend,13 whose cases
were pending trial in state court.14 THMI was a defendant in all six
cases, while THI was a defendant in all the cases except Nunziata.
7 The lawsuits alleged negligence and frequently other tort law theories of
recovery. We refer to the theories collectively under a wrongful death rubric.
8 Estate of Juanita Jackson v. Briar Hill, Inc., No. 53-2004CA-003229 (Fla. Cir. Ct.
filed July 30, 2004), in the Circuit Court of Polk County, Florida.
9 Estate of Elvira Nunziata v. Pinellas Park Nursing Home, Inc., No. 05-8540CI (Fla.
Cir. Ct. filed Dec. 23, 2005), in the Circuit Court of Pinellas County, Florida.
10 Estate of Joseph Webb v. Gainesville Health Center, Inc., No. 01-06-CA-2418 (Fla.
Cir. Ct. filed June 16, 2006), in the Circuit Court of Alachua County, Florida.
11 Estate of James Henry Jones v. TFN Health Care Investors, Inc., No. 06-06672 (Pa.
Ct. Com. Pl. filed July 17, 2006), in the Court of Common Pleas of Montgom-
ery County, Pennsylvania.
12 Estate of Opal Lee Sasser v. Briar Hill, Inc., No. 06CA-3511 (Fla. Cir. Ct. filed
Sept. 6, 2006), in the Circuit Court of Polk County, Florida.
13 Estate of Arlene Townsend v. Briar Hill, Inc., No. 53-2009CA-001025 (Fla. Cir.
Ct. filed January 29, 2009), in the Circuit Court of Polk County, Florida.
14 We refer to the cases in short-hand, e.g., Jackson, Nunziata, etc.
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10 Opinion of the Court 21-10587
Within a matter of weeks of her appointment, the Trustee
became aware of the circumstances that led to Wilkes filing the
Chapter 7 petition against FLTCI on December 5, 2011, and some
of the untoward legal consequences that resulted from filing the
petition against FLTCI instead of THMI. Importantly, the Trustee
learned:
(1) On July 22, 2010, an “empty-chair” jury trial15 was held in
Jackson,16 and the plaintiff obtained verdicts—and then judg-
ments—of $55 million against each of THI and THMI.17 Three
15 An empty-chair trial occurs when the defendant does not participate in the
trial. In Jackson, defense counsel for THI and THMI—Quintairos, Prieto,
Wood & Boyer, P.A.—moved the court on April 29, 2010, for leave to with-
draw as counsel for THI and THMI. The state trial court heard their motion
at a pretrial conference on May 18 and granted the motion on June 4.
16 The case was tried on the Jackson Estate’s fifth amended complaint filed on
July 31, 2009. The defendants were: Briar Hill, Inc. (the owner and operator
of Integrated Health Services at Auburndale a/k/a Auburndale Oaks
Healthcare Center, the nursing home in which Juanita Jackson once resided);
Lyric Health Care Holdings III, Inc; Lyric Health Care LLC; TFN Healthcare
Investors, LLC; IHS Acquisition No. 153, Inc.; Alliance Health Services, Inc.;
Integrated Health Services, Inc.; THMI; THI; Daniel H. Beeler; Richard
Kuhlmeyer; Rebecca Bachman; and Barbara Brown (the director of nursing at
Auburndale Oaks Healthcare Center). Auburndale Oaks and Lyric played a
role in the Probate Estates’ motion to disqualify Shumaker as discussed infra
part IV.
17 The Florida Second District Court of Appeal subsequently referred to the
judgments as “default judgment[s]” handed down “[a]fter [the plaintiff]
settl[ed] with eleven defendants.” Fundamental Long Term Care Holdings, LLC
v. Estate of Jackson ex rel. Jackson-Platts, 110 So. 3d 6, 7 (Fla. 2d Dist. Ct. App.
2012).
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21-10587 Opinion of the Court 11
weeks later, on August 13, Wilkes, in an effort to discover THI and
THMI’s assets to satisfy the $55 million judgments, moved the trial
court pursuant to Florida Rule of Civil Procedure 1.560(b)18 for an
order requiring THI and THMI to complete Form 1.977 as required
by that rule. The state trial court granted the motion four days
later. Over the next three months, Wilkes noticed several deposi-
tions in aid of execution but was unable to discover enough assets
to satisfy the judgments.
(2) By December 2010, Wilkes discovered why it was unable to
obtain satisfaction of the Jackson Estate’s $55 million judgment
against THMI. Those in control of THMI had THMI transfer its
assets to Fundamental Long Term Care Holdings, LLC (“FLTCH”)
in March 2006, in the execution of a fraudulent “bust-out” scheme
18 Rule 1.560 states in pertinent part:
(a) In General. In aid of . . . execution the judgment creditor
or the successor in interest, when the interest appears of rec-
ord, may obtain discovery from any person, including the
judgment debtor, in the manner provided in these rules.
(b) Fact Information Sheet. In addition to any other discov-
ery available to a judgment creditor under this rule, the court,
at the request of the judgment creditor, shall order the judg-
ment debtor . . . to complete form 1.977, including all required
attachments, within 45 days of the order or such other reason-
able time as determined by the court. Failure to obey the order
may be considered contempt of court.
Fla. R. Civ. P. 1.560.
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12 Opinion of the Court 21-10587
that rendered THMI judgment-proof.19 To obtain satisfaction of
the $55 million judgment against THMI, the Jackson Estate would
have to sue FLTCH and any other entities that received THMI’s
assets as part of the bust-out scheme (collectively, the “Targets”) as
fraudulent transferees under Florida’s version of the Uniform
Fraudulent Transfer Act (the “UFTA”).20
(3) The prescriptive period for bringing an action under Flor-
ida’s UFTA is four years. See Fla. Stat. § 726.110.21 Florida’s UFTA
19 The bust-out scheme is discussed at length infra part II.B.
20 Florida’s UFTA, Fla. Stat. § 726.101 et seq., states in relevant part:
(1) A transfer made . . . by a debtor is fraudulent as to a credi-
tor, whether the creditor’s claim arose before or after the trans-
fer was made . . . if the debtor made the transfer . . . :
(a) With actual intent to hinder, delay, or defraud any creditor
of the debtor; or
(b) Without receiving a reasonably equivalent value in ex-
change for the transfer . . . and the debtor:
. . .
2. Intended to incur, or believed or reasonably should have be-
lieved that he or she would incur, debts beyond his or her abil-
ity to pay as they became due.
Fla. Stat. § 726.105. As indicated infra, the parties and the Bankruptcy Court
agreed to apply the Florida UFTA rather than the comparable statutes of New
York, Pennsylvania, Delaware, or Maryland.
21 Section 726.110 states in relevant part:
A cause of action with respect to a fraudulent transfer . . . un-
der ss. 726.101-726.112 is extinguished unless action is
brought:
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21-10587 Opinion of the Court 13
has a statute of repose, not a statute of limitations.22 The four-year
period in which the Jackson Estate could sue FLTCH and the Tar-
gets expired in March 2010. Nonetheless, under Florida’s UFTA,
the prescriptive period would extend for one year following the
(1) Under s. 726.105(1)(a), within 4 years after the transfer was
made . . . or, if later, within 1 year after the transfer . . . was or
could reasonably have been discovered by the claimant.
22 In National Auto Service Centers, Inc. v. F/R 550, LLC, the Florida Second Dis-
trict Court of Appeal characterized Fla. Stat. § 726.110 as a statute of repose.
192 So. 3d 498, 509 (Fla. 2d Dist. Ct. App. 2016). Because the text of Fla. Stat.
§ 726.110 refers to extinguishing a cause of action rather than barring the rem-
edy, the court of appeal concluded that Fla. Stat. § 726.110 is a statute of repose
based on its plain text. Id. at 510. In CTS Corp. v. Waldburger, the United States
Supreme Court noted that statutes of limitations are subject to equitable toll-
ing, but statutes of repose are not and “generally may not be tolled, even in
cases of extraordinary circumstances beyond a plaintiff’s control.” 573 U.S. 1,
9, 134 S. Ct. 2175, 2183 (2014). The Supreme Court explained that because
statutes of repose dictate the time period after which a defendant will not face
liability, equitable tolling is not applicable:
Equitable tolling is applicable to statutes of limitations because
their main thrust is to encourage the plaintiff to pursu[e] his
rights diligently, and when an extraordinary circumstance pre-
vents him from bringing a timely action, the restriction im-
posed by the statute of limitations does not further the stat-
ute’s purpose. . . . But a statute of repose is a judgment that
defendants should be free from liability after the legislatively
determined period of time, beyond which the liability will no
longer exist and will not be tolled for any reason.
Id. at 10, 134 S. Ct. at 2183 (alteration in original) (internal quotation marks
and citations omitted). This Court has cited Waldburger favorably for the prop-
osition that statutes of repose are not subject to equitable tolling. See Sec’y,
U.S. Dep’t of Labor v. Preston, 873 F.3d 877, 883–84 (11th Cir. 2017).
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14 Opinion of the Court 21-10587
Jackson Estate’s discovery of the fraudulent transfer. Wilkes dis-
covered the bust-out scheme on or before December 10, 2010, so
the Jackson Estate had—at the latest—until December 10, 2011, to
sue FLTCH and the Targets to obtain satisfaction of the Estate’s
$55 million judgment against THMI.23
23 The fraudulent transfer occurred in New York City on March 28, 2006. A
New York statute provided a cause of action for voiding the transfer. N.Y.
Debt. & Cred. Law § 273. The statute did not have a prescriptive period, so
New York courts used the prescriptive period applicable to actions based on
fraud, N.Y. C.P.L.R. § 213, as the time bar. Under § 213, suit had to be brought
“six years from the date the cause of action accrued” or, if later, “two years
from the time the plaintiff . . . discovered the fraud, or could with reasonable
diligence have discovered it.” N.Y. C.P.L.R. § 213(8). Unlike Florida, where
the UFTA prescriptive period was a statute of repose, New York courts con-
sidered the § 213 prescriptive period to be a statute of limitations. See In re
Borriello, 329 B.R. 367, 372 (Bankr. E.D.N.Y. 2005). As it turned out, the Bank-
ruptcy Court applied the Florida UFTA to THMI’s fraudulent transfer of its
assets.
The Bankruptcy Court did so on March 20, 2014, in ruling on the suf-
ficiency of the fraudulent transfer claims asserted in the second amended com-
plaint which the Probate Estates filed in the adversary proceeding they initi-
ated against FLTCH and 15 defendants on October 1, 2013. See infra part III.
One of the Bankruptcy Court’s rulings denied the defendants’ motions to dis-
miss the claims as time-barred. The Bankruptcy Court treated the time bar as
an affirmative defense and thus upheld the sufficiency of the Probate Estates’
fraudulent transfer claims. In deciding which state law governed the period
for bringing fraudulent transfer claims, the Bankruptcy Court said:
There appears to be a dispute about which law applies to the
Plaintiffs’ fraudulent transfer claims. According to the Plain-
tiffs, the law of Delaware, Florida, Maryland, and New York
apply. But the Plaintiffs acknowledge the laws of those states
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21-10587 Opinion of the Court 15
(4) Once Wilkes discovered that it had been unable to obtain
satisfaction of the Jackson Estate’s judgment against THMI be-
cause of the bust-out scheme, it had two options. Either the Jack-
son Estate, as a THMI judgment creditor, could sue FLTCH and
the Targets pursuant to the applicable state fraudulent transfer law,
or it could put THMI into Chapter 7 bankruptcy. A trustee of
THMI’s estate, then, as a hypothetical THMI judgment creditor,
could utilize the “strong arm” power provided by the Bankruptcy
Code24 and sue the transferees of THMI’s assets pursuant to the
same state fraudulent transfer law.
contain substantially similar elements. So the Court will, as
Ventas suggests, analyze the claims under Florida law.
In re Fundamental Long Term Care, Inc., 507 B.R. 359, 380 n.25 (Bankr. M.D. Fla.
2014). The Bankruptcy Court applied Florida law without objection. In the
end, it did not matter whether Florida or New York law governed. The fraud-
ulent transfer claims were either extinguished (under Florida law) or time-
barred (under New York law).
2411 U.S.C. § 544 provides in relevant part:
(a) The trustee shall have, as of the commencement of the
case, and without regard to any knowledge of the trustee or of
any creditor, the rights and powers of, or may avoid any trans-
fer of property of the debtor or any obligation incurred by the
debtor that is voidable by–
(1) a creditor that extends credit to the debtor at the time of
the commencement of the case, and that obtains, at such time
and with respect to such credit, a judicial lien on all property
on which a creditor on a simple contract could have obtained
such a judicial lien, whether or not such a creditor exists.
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16 Opinion of the Court 21-10587
Wilkes pursued neither option. Instead, on December 10,
2010, Wilkes moved the Jackson state court for leave to implead two
of the Targets—Rubin Schron and General Electric Capital Corpo-
ration (“GECC”)25—pursuant to Fla. Stat. § 56.29,26 for the purpose
As the Bankruptcy Court for the Southern District of New York previously
explained,
Section 544(a) of the [Bankruptcy] Code clothes the trustee
with the mantle of a hypothetical judicial lien creditor, unsat-
isfied execution creditor, and a bona fide purchase for value as
of the date of the filing of the bankruptcy petition. While it is
federal law which provides the trustee with his “strong arm”
powers, his exercise of those powers is controlled by the sub-
stantive law of the jurisdiction governing the property in ques-
tion; here, the law of New York.
In re Roman Crest Fruit, Inc., 35 B.R. 939, 946–47 (Bankr. S.D.N.Y. 1983) (empha-
sis added) (citing In re Euro-Swiss Int’l Corp., 33 B.R. 872, (Bankr. S.D.N.Y. 1983).
25 Wilkes believed that GECC, which was a secured creditor of THI and
THMI, may have received loan payments from FLTCH and that Schron was
one of FLTCH’s owners.
26 In 2010, § 56.29 provided in relevant part:
(1) When any person or entity holds an unsatisfied judgment
or judgment lien obtained under chapter 55, the judgment
holder or judgment lienholder may file an affidavit so stating,
identifying, if applicable, the issuing court, the case number,
and the unsatisfied amount of the judgment or judgment lien,
including accrued costs and interest, and stating that the exe-
cution is valid and outstanding, and thereupon the judgment
holder or judgment lienholder is entitled to these proceedings
supplementary to execution.
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21-10587 Opinion of the Court 17
of pursuing THMI’s assets. The state court granted the motion
and entered an order on December 21, 2010, requiring Schron and
GECC to show cause why they should not be held liable for the
payment of the $55 million judgment entered against THMI.
Schron and GECC removed the § 56.29 proceeding to the United
(2) On such plaintiff’s motion the court shall require the de-
fendant in execution to appear before it . . . at a time and place
specified by the order in the county of the defendant’s resi-
dence to be examined concerning his or her property.
. . .
(4) Testimony shall be under oath, shall be comprehensive and
cover all matters and things pertaining to the business and fi-
nancial interests of defendant which may tend to show what
property he or she has and its location. Any testimony tending
directly or indirectly to aid in satisfying the execution is admis-
sible. A corporation must attend and answer by an officer who
may be specified in the order. Examination of witnesses shall
be as at trial and any party may call other witnesses.
(5) The judge may order any property of the judgment debtor,
not exempt from execution, in the hands of any person or due
to the judgment debtor to be applied toward the satisfaction
of the judgment debt.
(6)
. . .
(b) When any . . . transfer . . . of personal property has been made
or contrived by defendant to delay, hinder or defraud creditors,
the court shall order the . . . transfer . . . to be void and direct
the sheriff to take the property to satisfy the execution.
Fla. Stat. § 56.29 (effective June 17, 2005–June 30, 2014) (emphasis
added).
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18 Opinion of the Court 21-10587
States District Court for the Middle District of Florida on Decem-
ber 30, 2010, on the ground that the proceeding was a separate
cause of action, not a proceeding ancillary to Jackson.27
Wilkes moved to remand the case under the theory that, un-
der Florida law, a § 56.29 proceeding was “a supplementary pro-
ceeding . . . and thus was not removable.” Jackson-Platts v. Gen. Elec.
Cap. Corp., 727 F.3d 1127, 1132 (11th Cir. 2013). On September 16,
2011, the District Court, on Wilkes’s motion, remanded the pro-
ceeding to the state trial court. Schron and GECC timely appealed.
Id.at 1133. We reversed the District Court. Id. at 1140.28
On May 16, 2011, Wilkes moved the Jackson state court for
leave to implead FLTCH and 14 other Targets under § 56.29 for the
27 The defendants removed the case under 28 U.S.C. § 1441, asserting diversity
jurisdiction under 28 U.S.C. § 1332.
28 The question presented to this Court in Jackson-Platts was whether a § 56.29
proceeding was ancillary to the underlying case, as Wilkes argued, or an inde-
pendent cause of action like a case brought under Florida’s UFTA. Jackson-
Platts v. Gen. Elec. Cap. Corp., 727 F.3d 1127, 1130 (11th Cir. 2013). We con-
cluded that the Florida courts treated a § 56.29 proceeding as a separate cause
of action as if brought under Florida’s UFTA:
[T]he substance of the [Jackson] Estate’s legal claims is gov-
erned by Florida’s [UFTA], which is undoubtedly a substantive
statute that imposes liability. . . .
Indeed, had the Estate sued [GECC] and Schron in state court
under the [UFTA], the lawsuit plainly would have been a “civil
action” under [28 U.S.C.] § 1441.
Id. at 1137.
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21-10587 Opinion of the Court 19
purpose of asserting fraudulent transfer claims against them.29
The motion also sought to join FLTCI as a defendant in the case.
The state court granted the motion on May 18 and promptly issued
an order requiring FLTCH and the Targets to show cause, thus
placing the liability burden on the defendants. FLTCI did not ap-
pear in response to the show cause order, so on September 13, 2011,
the state court—treating FLTCI as an original defendant in the
case—entered an amended judgment making FLTCI jointly and
severally liable with THI and THMI for their respective $55 million
judgments—$110 million total.
The Targets named in Wilkes’s May 16 motion objected on
several grounds, including that they were beyond the reach of the
Florida long-arm statute and that the state court lacked personal
jurisdiction over them. The state court overruled their objections
and granted Wilkes’s motion. The Targets appealed the jurisdic-
tional ruling to the Florida Second District Court of Appeal, and
on November 28, 2012, that court affirmed the trial court’s ruling
and remanded the case for further proceedings. Fundamental Long
29 In addition to FLTCH, Wilkes’s motion sought leave to proceed against
Fundamental Administrative Services, LLC (“FAS”); THI-Baltimore, Inc.;
GTCR GolderRauner LLC; GTCR Partners VI, L.P.; Troutman Sanders LLP;
Murray Forman; Leonard Grunstein; Edgar Jannotta; and Concepcion, Sexton
& Martinez, P.A. Concepcion, Sexton & Martin was a Florida law firm, and
its presence eliminated the possibility of diversity jurisdiction.
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20 Opinion of the Court 21-10587
Term Care Holdings, LLC v. Estate of Jackson ex rel. Jackson-Platts, 110
So. 3d 6, 11 (Fla. 2d Dist. Ct. App. 2012).30
On December 5, 2011, Wilkes looked to the Bankruptcy
Court for the Middle District of Florida for assistance. Wilkes had
the Jackson Estate file an involuntary petition for Chapter 7 relief
against FLTCI, not THMI.31 Wilkes attached the Jackson Estate’s
$110 million judgment against FLTCI to the petition. As of the
date of filing, the Jackson Estate was the only estate with a final
state court judgment.
* * *
Commentary
The record does not reveal the reason Wilkes selected De-
cember 5, 2011, as the date for filing the Chapter 7 petition against
FLTCI. It could have been that the one-year extension provided by
Fla. Stat. § 726.110 for filing a fraudulent transfer action against
FLTCH and the Targets was about to expire. As previously dis-
cussed, that one-year period began at some point prior to Decem-
ber 10, 2010, when Wilkes, having learned about the transfer of
THMI’s assets to FLTCH, moved the Jackson court for leave to
30 The Trustee, and later Shumaker, were of course unaware of the Second
District Court of Appeal’s decision until late 2012. From Shumaker and the
Trustee’s point of view, a § 56.29 proceeding—like the one brought against
Schron and GECC—would be useless as a means of collecting on the Jackson
Estate’s judgment against THMI.
31 Wilkes filed a formal appearance for the Jackson Estate the same day along
with Stichter, Riedel, Blain & Prosser, P.A.
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21-10587 Opinion of the Court 21
implead Schron and GECC as fraudulent transferees pursuant to
§ 56.29. Wilkes may have thought that a potential trustee of
FLTCI’s Chapter 7 estate, exercising a trustee’s strong-arm power
as a hypothetical FLTCI judgment creditor, could pursue FLTCH
and the Targets with an UFTA cause of action—the same cause of
action the Jackson Estate could bring against the transferees in state
court.32 For that potential trustee to pursue the transferees as a
hypothetical FLTCI creditor, the Bankruptcy Court would have to
treat FLTCI and THMI as one entity. Treating them as one could
not have been part of Wilkes’s litigation strategy at that time. Its
steadfast position was that FLTCI and THMI were entirely separate
entities. Wilkes had to assume that position to avoid violating the
automatic stay that issues as a result of filing a Chapter 7 petition
pursuant to 11 U.S.C. § 362(a).
So why did Wilkes put FLTCI into bankruptcy instead of
THMI? The record yields several possibilities. One was that Wilkes
wanted to continue prosecuting the Probate Estates’ wrongful
death actions in state court where Wilkes could seek multimillion-
dollar jury verdicts. If THMI were in bankruptcy, the automatic
stay would bring an end to the state court litigation, and the pros-
ecution of the Probate Estates’ wrongful death actions would have
to move to the Bankruptcy Court in the form of wrongful death
claims against THMI’s estate, the value of which would be decided
32 Or a federal district court exercising diversity jurisdiction under 28 U.S.C.
§ 1332.
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22 Opinion of the Court 21-10587
by the Bankruptcy Court. See 11 U.S.C. § 502(a).33 Doing so would
diminish the value of the claims, and they would likely be worth
significantly less than they would be before a jury.
A second possible reason for putting FLTCI, rather than
THMI, into bankruptcy could have been the assistance the trustee
of the bankruptcy estate could provide Wilkes in its prosecution of
the Probate Estates’ actions in state court. The scope of the evi-
dence the trustee would be able to discover in marshalling FLTCI’s
assets would likely exceed what Wilkes could obtain under state
discovery rules. Access to what the trustee uncovered would aid
Wilkes in prosecuting the Probate Estates’ claims—and would be
helpful to use later in post-judgment proceedings supplementary,
such as impleading targets to collect judgments.
In exchange for the freedom to have their wrongful death
actions prosecuted to the hilt, the Probate Estates paid a price.
They gave up their fraudulent transfer claims against FLTCH and
the Targets under Florida’s UFTA since those claims became “ex-
tinguished” on or before December 10, 2011. As things turned out,
33 11 U.S.C. § 502(a) states in relevant part:
(a) A claim or interest, proof of which is filed under section
501 of this title, is deemed allowed, unless a party in inter-
est . . . objects.
(b) . . . [I]f such objection to a claim is made, the court, after
notice and a hearing, shall determine the amount of such
claim in lawful currency of the United States as of the date of
the filing of the petition, and shall allow such claim in such
amount.
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21-10587 Opinion of the Court 23
though, the Trustee and her special litigation counsel uncovered
evidence sufficient to enable the FLTCI estate to make out causes
of action against FLTCH and aligned Targets under theories of law
other than those the UFTA codifies.
* * *
The Jackson, Nunziata, and Webb Estates filed claims
against the Debtor’s—FLTCI’s—estate on February 22, 2012, in the
sums of $110 million, $200 million, and $900 million respectively.34
The Jones, Townsend, and Sasser Estates filed claims against the
Debtor’s estate on March 27, 2012, in the sums of $200 million
each.35 With the exception of the Jackson Estate, none of the Pro-
bate Estates had a claim against the Debtor. All of their claims were
based on THMI’s (and THI’s) negligence. Nonetheless, Wilkes, as
an officer of the court, in filing claims against the Debtor’s estate
that appeared to be against THMI rather than the Debtor, effec-
tively represented that the claims against the Debtor were derivative
34 At the time the Chapter 7 petition was filed, only the Jackson Estate had a
final state court judgment. As of March 6, 2013, however, these three claims
were all based on state court judgments.
35 On March 6, 2013, the cases of these three Probate Estates were pending in
state court. In Townsend, THI’s counsel had been retained by the THI Re-
ceiver after defense counsel (for THI and THMI) had withdrawn per instruc-
tions in April 2010. On October 17, 2012, THI, having acquired new counsel,
filed a “Motion to Disqualify” the trial judge on the ground of bias against THI.
Defendant Trans Healthcare, Inc.’s Motion to Disqualify and Supporting
Memorandum of Law, Estate of Arlene Townsend v. Briar Hill, Inc., No. 53-
2009CA-001025, 2012 WL 8139948 (Fla. Cir. Ct. Oct. 17, 2012)
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24 Opinion of the Court 21-10587
of THMI’s liability. At least, according to the Bankruptcy Court,
that is how the Trustee interpreted Wilkes’s representations. In re
Fundamental Long Term Care, Inc., 500 B.R. 147, 149–50 (Bankr. M.D.
Fla. 2013). If FLTCI’s liability was in fact derivative of THMI’s lia-
bility, Wilkes’s continued litigation of the Probate Estates’ cases
filed in state court pre-petition would appear to violate the auto-
matic stay because the litigation had the effect of increasing the
Debtor’s liability post-petition.
But Wilkes’s litigation strategy throughout had been, and
continued to be, that the Debtor—FLTCI—and THMI were sepa-
rate entities: a parent corporation and an independent subsidiary.
Accordingly, the Probate Estates’ claims against the Debtor’s estate,
if legitimate, must have been based on a theory other than THMI’s
conduct, because if the claims were based on a theory that ren-
dered the Debtor legally responsible for THMI’s conduct prior to
December 5, 2011, Wilkes’s continued litigation of the Probate Es-
tates’ wrongful death actions against THMI or its post-judgment
proceedings supplementary as a creditor of THMI would be barred
by the automatic stay in FLTCI’s bankruptcy.
In sum, each Probate Estate had a legitimate claim against
two entities. First, each Estate had a claim against the Debtor’s es-
tate that existed pre-petition against FLTCI. If allowed, the Bank-
ruptcy Court would “determine the amount” of such a claim. 11
U.S.C. § 502(b). Each Estate also had a claim against THMI. The
two claims could not both be based on the theory pursued in the
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21-10587 Opinion of the Court 25
state court wrongful death actions without violating the automatic
stay.
* * *
Commentary
As it turned out, the Bankruptcy Court eventually treated
THMI as part of the Debtor’s estate and the Probate Estates as hav-
ing filed claims against THMI’s (nonexistent) estate. The Bank-
ruptcy Court also impliedly afforded the Probate Estates standing,
as THMI creditors, to join the Trustee (now in effect acting as trus-
tee of two bankruptcy estates—FLTCI’s and THMI’s) in prosecut-
ing the surviving claims of the Second Amended Complaint in the
adversary proceeding initiated by Wilkes on October 1, 2013. See
infra part III. The claims were in two groups. One group consisted
of the Trustee’s strong-arm claims against FLTCH and several Tar-
gets as fraudulent transferees of THMI’s assets under the Florida
UFTA. The other group consisted of the Trustee’s claims against
the same defendants as the perpetrators of a variety of torts and
breaches of duty committed against THMI and as the successors in
interest of THMI.
* * *
On April 2, 2012, after the Probate Estates’ claims against the
Debtor’s estate had been filed, Berger Singerman LLP (“Singer-
man”) appeared in the case as the Debtor’s counsel and moved the
Bankruptcy Court to convert the Debtor’s Chapter 7 case to a case
under Chapter 11 of the Bankruptcy Code. The motion, which
stated that FLTCI and THMI had ceased operations six years ago,
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26 Opinion of the Court 21-10587
represented—among other things—that the $110 million judgment
the Jackson Estate obtained against FLTCI in Jackson was invalid
because FLTCI never appeared in the case and thus was not within
the state trial court’s jurisdiction. Consequently, the Jackson Estate
was not a valid judgment creditor of FLTCI, and its filing of the
Chapter 7 petition was effectively a nullity. Assuming the petition’s
validity, the motion stated that the “Trustee’s strategy and actions
[we]re being orchestrated by Wilkes, for the sole benefit of its cli-
ents and the firm itself through the ultimate recovery of astronom-
ical contingency fees” and that Wilkes was “using the Bankruptcy
Case and . . . the powers of the Chapter 7 Trustee to deny THMI
representation” in the cases Wilkes had brought against it.36
On April 3 and 4, after receiving Singerman’s motion to con-
vert, the Trustee, armed to a great extent with the information
Wilkes provided her, filed motions for leave to conduct Rule 2004
examinations of some of the individuals Wilkes had impleaded in
Jackson pursuant to Fla. Stat. § 56.29—including attorneys at Trout-
man Sanders, LLP (“Troutman”), the law firm that created the legal
36 If the Bankruptcy Court granted Singerman’s motion, FLTCI would func-
tion as a debtor-in-possession with the rights and powers of a Chapter 11 trus-
tee. In that capacity, FLTCI itself would be required to perform all except the
investigative functions and duties of a bankruptcy trustee. See 11 U.S.C.
§ 1107. These duties would include accounting for property, examining and
objecting to claims, and filing informational reports as required by the court.
Id. § 704. In that capacity, FLTCI would play a large part in determining who
would be examined under Rule 2004—and to what extent.
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21-10587 Opinion of the Court 27
structure for the bust-out scheme, and other individuals presuma-
bly having knowledge of the disposition of THMI’s assets.37
Singerman immediately objected to the Trustee’s motions.
Picking up where it left off in its motion to convert, Singerman had
this to say about Wilkes’s involvement in the Trustee’s decision-
making:
14. Based on the nature and scope of the 2004 Mo-
tions, it is abundantly clear that the Trustee continues
to advance a litigation strategy hoisted on her by
[Wilkes] on behalf of the Petitioning Creditor and
Claimants in this case to deprive the Debtor [FLTCI] and
[THMI] of legal representation and available defenses. At
the same time, the Trustee is improperly using . . . the
37 Rule 2004 states in subsection (b) in relevant part:
The examination of an entity under this rule or of the debtor
under § 343 of the [Bankruptcy] Code may relate only to the
acts, conduct, or property or to the liabilities and financial con-
dition of the debtor, or to any matter which may affect the ad-
ministration of the debtor's estate, or to the debtor’s right to a
discharge.’
Fed. R. Bankr. P. 2004(b). In subsection (c), Rule 2004 states in relevant part:
The attendance of an entity for examination and for the pro-
duction of documents or electronically stored information,
whether the examination is to be conducted within or without
the district in which the case is pending, may be compelled as
provided in Rule 9016 for the attendance of a witness at a hear-
ing or trial.
Fed. R. Bankr. P. 2004(c).
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28 Opinion of the Court 21-10587
2004 Motions to engage in broad, “fishing expedition”
discovery that the Wilkes plaintiffs have been unable
to obtain in any other forum.
15. Tellingly, the 2004 Motions each request that the
[Bankruptcy] Court order that “interested creditors”
be permitted to attend the examinations and “make
inquiry.” There is no doubt that the intent of that re-
quest is to give Wilkes a broad discovery platform to
pursue non-debtor targets in non-bankruptcy forums.
The request certainly has nothing to do with the prep-
aration of the Debtor’s Schedules or Statements of
Financial Affairs.
. . .
18. Based on the foregoing, the Debtor respectfully
submits that the [Bankruptcy] Court should deny the
2004 Motions, without prejudice, or, alternatively, not
adjudicate the 2004 Motions pending a ruling on the
Motion to Convert.
Debtor’s Objections to Motions of Chapter 7 Trustee for Rule 2004
Examinations at 4–5, In re Fundamental Long Term Care, Inc., No.
8:11-bk-22258 (Bankr. M.D. Fla. Apr. 5, 2012) (emphasis added)
(footnote omitted).
The Bankruptcy Court heard the Trustee’s Rule 2004 mo-
tions on April 12, granted the motions with respect to the produc-
tion of certain documents, and stated that it would consider the
Debtor’s objections to the motions on June 6. On April 24, the
Bankruptcy Court denied the Debtor’s motion to convert the case
to a Chapter 11 proceeding.
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21-10587 Opinion of the Court 29
* * *
Commentary
In sum, the Trustee, soon after her appointment, knew that
Wilkes: (1) was unable to execute the Jackson judgment against the
defendants in state trial court; (2) realized that THMI’s assets had
been fraudulently transferred to FLTCH and the Targets; and (3)
should have been aware of Florida’s UFTA and its four-year pre-
scriptive period. That period began to run at the time of the bust-
out scheme in March 2006. It therefore ran out by the time the
Jackson Estate received a state court judgment on July 22,
2012. But under the Florida UFTA discovery extension, Fla. Stat. §
726.110, the Jackson Estate had one year from Wilkes’s discovery
of the fraud, which occurred on or before December 10, 2012, to
bring a fraudulent transfer action under Florida’s UFTA.
Still attempting to collect on the Jackson judgment, Wilkes
tried to come to a solution. It first tried to bring a Florida UFTA
action via a § 56.29 motion to implead but was unable to obtain
relief. Wilkes then tried a second option: petitioning for Chapter 7
relief against FLTCI. Wilkes waited to file for this relief until De-
cember 5, 2011—five days before the absolute latest the § 726.110
discovery extension would have run for the Probate Estates’ UFTA
claims against FLTCH and the Targets. But Wilkes did not place
THMI in Chapter 7 bankruptcy—it petitioned the Bankruptcy
Court to put FLTCI into Chapter 7 bankruptcy. Wilkes therefore
allowed the one-year discovery extension to expire, thus extinguish-
ing the Probate Estates’ claims for fraudulent transfer against
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30 Opinion of the Court 21-10587
THMI. As it turned out, the Trustee later discovered evidence that
enabled the Probate Estates to sue FLTCH and the Targets as suc-
cessors to THMI, holding them responsible for THMI’s debts, in-
cluding the Probate Estates’ judgments.
Beyond the statute of repose issue, there was a further issue
with Wilkes’s plan. FLTCI had no assets except THMI shares.
FLTCI’s Trustee therefore could not pursue FLTCH and the Trus-
tees under the UFTA because FLTCI was not itself guilty as a fraud-
ulent transferor. So Wilkes’s strategy was two-fold: (1) have the
Chapter 7 Trustee in possession of the THMI shares seek evidence
of THMI causes of action against FLTCH and the Targets even
though such causes of action are not actually property of the es-
tate, thus using the Trustee as a discovery platform; and (2) allow
the Trustee to obtain evidence Wilkes could use in § 56.29 proceed-
ings to implead the Targets and other potential fraudulent transfer-
ees in state court.
II.
A.
On June 1, 2012, the Trustee moved the Bankruptcy Court
to approve the employment of Steven M. Berman, a partner at Shu-
maker, as special litigation counsel. The Bankruptcy Court granted
the motion on June 5. The same day, Singerman (the Debtor’s
counsel) moved the Bankruptcy Court to dismiss the Chapter 7
case on several grounds, including that Wilkes was abusing the
Chapter 7 process in seeking relief against a debtor it knew “ha[d]
no business activity, no going concern value, and no employees.”
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21-10587 Opinion of the Court 31
According to Singerman, Wilkes filed the petition “to further its
financial interests in maximizing claims, and facilitating execution
of default judgments, against the Debtor, THMI and other third
parties regardless of the resulting prejudice to the estate.”
Along with the motion to dismiss, Singerman filed two
other pleadings that complained that the Trustee, in assisting
Wilkes’s prosecution of claims against THMI, was breaching her
duty to maximize the Debtor’s estate by enhancing the value of
THMI’s shares—which were assets of the Debtor’s estate. The first
pleading supplemented the Debtor’s objections to the Trustee’s
motions for Rule 2004 examinations discussed above. The second
pleading responded to the Trustee’s motion for a protective order
regarding the notice of deposition the Debtor served on the Trus-
tee on May 23.
The gist of the two filings was essentially two-fold. First, the
$110 million judgment the Jackson court entered against FLTCI in
the proceeding supplementary was invalid because that court
lacked personal jurisdiction over FLTCI; therefore, the Jackson Es-
tate lacked a valid judgment on which to base its Chapter 7 petition
against FLTCI. Second, and as argued in Singerman’s motion to
dismiss, the Trustee was breaching her duty to the Debtor’s estate
in “acquiesce[ing] to Wilkes in connection with its unrelenting ef-
forts to (mis)use this Chapter 7 case to further its financial interests
in maximizing claims, and facilitating execution of default judg-
ments, against the Debtor, THMI and other third parties regardless
of the resulting prejudice to the estate.”
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32 Opinion of the Court 21-10587
* * *
Commentary
Singerman’s argument proceeds from two points. The first
is that THMI was part of the Debtor’s estate because THMI’s
shares were FLTCI’s sole asset. The Trustee was attempting to
maximize the value of THMI’s shares, and thus the value of the
Debtor’s estate, so that the Jackson Estate’s claim (based on its $110
million judgment against FLTCI) could be paid. The second point
is contradictory. Instead of maximizing the value of THMI’s shares
to the Debtor’s estate, the Trustee, in acquiescing to Wilkes’s pur-
suit of judgments against THMI, was minimizing the value of the
shares to the Debtor’s estate.38
* * *
Berman, on behalf of the Trustee, opposed the motion to
dismiss in a response filed on June 18.39 The Trustee lamented that
in her investigation into the assets of the Debtor’s estate, “the
Debtor and related parties have uniformly and defiantly refused to
produce [requested] documentation without broad confidentiality
38 The automatic stay issued in the FLTCI bankruptcy barred Wilkes from
prosecuting any pre-petition claims against FLTCI in state court, or from oth-
erwise increasing the liability of its bankruptcy estate. At the same time,
Wilkes was not barred from prosecuting claims against THMI, which, if they
resulted in judgments against THMI, would minimize the value of its shares
as assets of the Debtor’s estate.
39 Unless otherwise indicated, all of the Trustee’s pleadings were filed Shu-
maker.
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21-10587 Opinion of the Court 33
agreements, all in derogation of th[e] [Bankruptcy] Court’s direc-
tives and unquestionably clear statutory law.” Further, the Trustee
noted that she “received no substantive responses to her infor-
mation requests”—nothing but “rigorous opposition to avoid any
flow of even the most basic information” required.
In addition to the Trustee, the Probate Estates also opposed
the Debtor’s motion to dismiss on several grounds. Among the
reasons was that the Debtor had no standing to file the motion,
“particularly over the opposition of the Creditors”40—namely, the
Probate Estates. Wilkes stated that “[t]wo of the Creditors, the Es-
tate of Elvira Nunziata and the Estate of Joseph Webb, have un-
stayed judgments against THMI. The remaining creditors, with
the exception of the Estate of Jones,[] have default judgments as to
liability against THMI.”41
Responding to the Probate Estates’ opposition to dismissal,
the Debtor stated:
[T]his case gives [the Probate Estates] no substantive
right they do not already have. Their only aim in fil-
ing this case was to shop for a better forum for
broader discovery that they cannot get in their chosen
40 Wilkes appended this footnote to that statement: “[T]he Order for Relief is
conclusive as to the Debtor that the claim of the Petitioning Creditor, the Es-
tate of Juanita Jackson, is an undisputed, non-contingent claim that is owed by
the Debtor.”
41 The unstayed judgments that the Nunziata and Webb Estates obtained
were the result of empty-chair trials in state court.
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34 Opinion of the Court 21-10587
non-bankruptcy courts, which courts will, in any
event, be the ultimate arbiters of the parties’ rights
and defenses. This Court and its jurisdiction are being
used as a pawn to gain information and for other stra-
tegic litigation purposes, not for any legitimate bank-
ruptcy purpose.
Debtor’s Omnibus Reply to State Court Litigants’ and Trustee’s
Oppositions to Debtor’s Motion to Dismiss Chapter 7 Case at 9–10,
In re Fundamental Long Term Care, Inc., No. 8:11-bk-22258 (Bankr.
M.D. Fla. June 21, 2012) (emphasis in original). Following an evi-
dentiary hearing, the Bankruptcy Court denied the motion with-
out prejudice on July 6, 2012.
At a hearing on June 29, 2012, the Bankruptcy Court in-
structed Berman to confer with interested counsel and prepare a
draft of an omnibus order establishing discovery procedures and
protocol for the production of documents and the examination of
witnesses. The Bankruptcy Court considered Berman’s draft, and
on July 12, 2012, it incorporated parts of Berman’s draft into the
Omnibus Order it entered. The Omnibus Order established the
scope of the Trustee’s Rule 2004 examinations and stated that the
Trustee should coordinate the date, time, and location of the ex-
aminations to allow them to be completed by September 14, 2012.
It provided that the examinations and consequent discovery could
potentially include other business entities or assets in the Debtor’s
estate.
On July 19, 2012, the Trustee filed a multi-count complaint
for damages in the Circuit Court of Polk County, Florida—where
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21-10587 Opinion of the Court 35
the lawsuits brought by the Jackson, Sasser, and Townsend Estates
had been filed.42 The complaint charged the defendants with: (1)
legal malpractice in abandoning the defense of THI and THMI in
Jackson; (2) legal malpractice in failing to respond on behalf of
FLTCI to the Jackson court’s May 23, 2011, order to show cause,
which allowed the state trial court to enter a $110 million default
judgment against FLTCI; and (3) breach of fiduciary duties owed
to THMI and FLTCI.43 On July 20, 2012, the Trustee filed another
complaint in the Circuit Court of Polk County, charging the de-
fendants with unauthorized practice of law in unlawfully control-
ling or directing THMI’s defense in Jackson and in representing
themselves as counsel for FLTCI.44 The defendants in both cases
timely removed the cases to the United States District Court for the
Middle District of Florida.45
42 The complaint was filed against: FAS; Kristi Anderson (FAS in-house coun-
sel); Alan Grochal, the THI Receiver; two law firms, Tydings & Rosenberg
LLP and Quintairos, Prieto, Wood & Boyer, P.A.; and six lawyers of the re-
spective firms.
43 The filing of this lawsuit was no doubt prompted by the statements Singer-
man made in the Debtor’s April 2 motion to convert the case to a Chapter 11
proceeding and in the filings made on June 5, both referring to the entry of the
$110 million default judgment against FLTCI.
44 The defendants in this complaint were FAS, Anderson, and Christine Zack
(FAS’s in-house counsel).
45 The cases were removed to the District Court under 28 U.S.C. § 1441 based
on diversity of citizenship.
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36 Opinion of the Court 21-10587
Three weeks later, on August 10, 2012, the Debtor—
FLTCI—moved the Bankruptcy Court for leave to challenge the
Jackson court’s $110 million judgment against it pursuant to Florida
Rule of Civil Procedure 1.540(b)(4).46 The Bankruptcy Court heard
the motion on September 7 and denied it without prejudice in a
September 25 order.47 The Debtor renewed the motion on March
6, 2013.
46 Rule 1.540 states in pertinent part:
(b) Mistakes; Inadvertence; Excusable Neglect; Newly Dis-
covered Evidence; Fraud; etc. On motion and upon such
terms as are just, the court may relieve a party or a party’s legal
representative from a final judgment, decree, order, or pro-
ceeding for the following reasons:
. . .
(4) that the judgment, decree or order is void.
Fla. R. Civ. P. 1.540.
47 The dispositive portion of the order reads:
The Debtor’s Motion is DENIED without prejudice condi-
tioned on the Trustee (i) following through on obtaining an
extension of the deadline for filing a motion under Florida Rule
of Civil Procedure 1.540 in the action pending in Polk County
Circuit Court, styled Estate of Juanita Amelia Jackson v. Briar Hill,
Inc., et al., Case No. 2004-CA-3229; and (ii) meeting and con-
ferring in person with the [THI] Receiver, Alan Grochal.
Order Denying Debtor’s Motion for Leave to Challenge Judgments
and Claims at 1, In re Fundamental Long Term Care, Inc., No. 8:11-BK-
22258 (Bankr. M.D. Fla. Sept. 7, 2012).
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21-10587 Opinion of the Court 37
The Omnibus Order temporarily resolved the disputes re-
sulting from the Trustee’s efforts to conduct Rule 2004 examina-
tions of several Targets. The Omnibus Order gave the Trustee the
right to conduct discovery regarding: (i) the Debtor’s assets and li-
abilities; (ii) control of the Debtor’s assets and operations; (iii) po-
tential avoidance actions; and (iv) the possibility of including other
business entities or assets in the Debtor’s bankruptcy estate. The
Trustee’s mission, as she saw it, was to identify, secure, and recover
hundreds of millions of dollars (if not more than one billion dol-
lars) as the owner of THMI assets in the form of tort claims—in-
cluding claims for legal malpractice,48 breach of fiduciary duties,
and fraud. According to the Bankruptcy Court, the Trustee’s mis-
sion was “really no secret to anyone involved in this case. . . . [T]he
Trustee . . . openly stated what her goal [wa]s.” In re Fundamental
Long Term Care, Inc., 500 B.R. 147, 151 (Bankr. M.D. Fla. 2013).
* * *
Commentary
The property of the Debtor’s bankruptcy estate included
“all legal or equitable interests of the debtor in property,” 11 U.S.C.
§ 541(a)(1), such as causes of action belonging to the debtor. 5 Col-
lier on Bankruptcy ¶ 541.07 (16th ed. 2022). The Debtor’s estate
did not extend, however, to THMI’s assets, including THMI’s
causes of action. See Kreisler v Goldberg, 478 F.3d 209, 214 (4th Cir.
48 The multi-count lawsuits the Trustee filed in the Circuit Court of Polk
County in July 2012 were part of the Trustee’s mission.
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38 Opinion of the Court 21-10587
2007) (“The fact that a parent corporation has an ownership inter-
est in a subsidiary, however, does not give the parent any direct in-
terest in the assets of the subsidiary.”) (emphasis in original); In re
Com. Mortg. & Fin. Co., 414 B.R. 389, 395 (Bankr. N.D. Ill. 2009) (“As
a general rule, property of the estate includes the debtor’s stock in
a subsidiary, but not the assets of the subsidiary.”). As the owner
of 100% of THMI’s stock, though, the Trustee had full control of
THMI. In seizing THMI’s tort claims, which were the only assets
THMI possessed, the Trustee treated THMI as if it were dissolved
and its tort claims had become part of the Debtor’s estate. After
the Bankruptcy Court consolidated FLTCI and THMI at the trial
of the principal adversary proceeding in this case, THMI’s assets
were part of the bankruptcy estate.
B.
The Rule 2004 examinations, coupled with information pro-
vided by Wilkes and what Berman learned about the bust-out
scheme, led the Trustee to file claims she believed aided her mis-
sion. Before turning to the claims themselves, we explain the bust-
out scheme.49
1.
THI was incorporated under Delaware law in 1998.
Through subsidiaries, it operated nursing homes, assisted living
49 The description of the bust-out scheme draws on Chief Judge Williamson’s
summary from the Bankruptcy Court’s opinion in In re Fundamental Long Term
Care, Inc., 507 B.R. 359, 365–71 (Bankr. M.D. Fla. 2014).
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21-10587 Opinion of the Court 39
facilities, and long-term acute care hospitals across the United
States. THMI provided a wide variety of administrative services to
THI’s operating subsidiaries.
A private equity group referred to as the “GTCR Group”
provided THI’s initial funding.50 Between 1998 and 2005, the
GTCR Group invested $37 million of its own capital in THI. Ven-
tas, Inc. (“Ventas”) loaned THI $55 million followed by another $22
million, with the stock of THI and THMI serving as collateral.
GECC eventually assumed the $55 million loan. The GTCR Group
controlled THI’s Board of Directors and was instrumental in the
company’s day-to-day management and administration.
Early in 2003, the GTCR Group decided to increase THI’s
nursing home operations. Integrated Health Services (“Inte-
grated”), one of the nation’s largest nursing home operators, was
in bankruptcy in Delaware, and the GTCR Group planned on ac-
quiring its assets out of bankruptcy. To do that, the GTCR Group
restructured THI. First, it created THI Holdings, LLC (“THI Hold-
ings”), exchanging the GTCR Group’s 83% stock interest in THI
for an equal percentage of THI Holdings’s shares. Second, THI
Holdings created two new subsidiaries: THI of Baltimore, Inc.
(“THI-Baltimore”) and THI of Baltimore Management, LLC
(“THMI-Baltimore”). With the restructuring in place: (1) THI
Holdings became the parent of two wholly owned subsidiaries,
50 The GTCR Group consisted of GTCR VI Executive Fund; GTCR Fund VI,
LP; GTCR Associates VI; GTCR Partners VI, LP; and GTCR Golder Rauner,
LLC.
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40 Opinion of the Court 21-10587
THI and THI-Baltimore; (2) THI became the parent of the wholly
owned subsidiary THMI; and (3) THI-Baltimore became the parent
of the wholly owned subsidiary THMI-Baltimore.
With this restructuring, the GTCR Group intended to repli-
cate the old THI structure for holding the Integrated assets it
planned on acquiring. THI-Baltimore, operating as THI had,
would operate the acquired nursing homes, and THMI-Baltimore,
functioning as THMI had, would provide the management services
for the homes.
But the GTCR Group failed to acquire the Integrated nurs-
ing homes. It was outbid by ABE Briarwood (“Briarwood”). THI-
Baltimore was not out of the picture for long, however. It was soon
able to strike a deal with Briarwood because Briarwood was not a
licensed nursing home operator. Briarwood leased or subleased
the former Integrated homes to THI-Baltimore to operate. THI-
Baltimore then contracted with THMI-Baltimore to provide the
management services for the homes. THI-Baltimore would be
profitable, the GTCR Group thought, because the income gener-
ated by its nursing home operations would more than offset the
rent it paid Briarwood and the management fees paid to THMI-
Baltimore.51
51 THMI-Baltimore lacked a staff, so it used THMI’s employees and equip-
ment (and other assets) to provide management services to the newly acquired
Integrated nursing homes. THMI therefore shared in the revenue THMI-Bal-
timore received from THI-Baltimore for providing the services.
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21-10587 Opinion of the Court 41
The arrangement with Briarwood coupled with THI’s oper-
ations seemed successful. By mid-2003, THI was reporting gross
annual revenues of $1 billion and a net annual income of $6 mil-
lion. In reality, however, THI had sustained a $29 million loss and
was on the verge of defaulting on the Ventas and GECC loans.
GECC and Ventas therefore took steps to protect their positions.
First, GECC and Ventas forced THI to enter into a series of
forbearance agreements at a substantial cost in fees to THI. Sec-
ond, GECC took control of THI’s bank accounts. Pursuant to the
terms of the loan agreement between GECC and THI, THI’s cash
flowed through a series of lockboxes and sweep accounts. After
GECC learned of misrepresentations in THI’s financial reporting,
GECC began “trapping cash” in the sweep accounts. It instructed
the Bank of New York, which kept THI’s deposits, to capture all of
the money held in THI’s accounts. THI gave GECC control of a
large portion of its assets. At the same time, it deprived itself of
the ability to pay its bills and jeopardized patient care in its nursing
homes. A lawsuit brought against the GTCR Group, Edgar Jan-
notta (associated with the GTCR Group), and THI alleged that
they were conspiring to divert money loaned to certain nursing
home facilities to pay the obligations of other facilities.
By early 2006, THI and THMI were defendants in over 150
lawsuits—among them, the wrongful death actions Wilkes had
brought on behalf of the Jackson Estate in 2004 and the Nunziata
Estate in 2005.
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42 Opinion of the Court 21-10587
As the Jackson litigation was progressing and other cases like
it were about to be filed, THI and THMI’s boards of directors con-
sidered whether seeking protection in bankruptcy would be in the
best interests of the companies, their employees, and their credi-
tors. In January 2005, they authorized the companies to file for
bankruptcy. The GTCR Group overruled their decision. After con-
sulting counsel at Troutman,52 the GTCR Group decided to take a
different approach and execute a bust-out scheme to preserve the
THI conglomerate and keep its assets intact.
2.
The bust-out scheme was carried out in three phases. The
initial phase involved closing two transactions simultaneously in
March 2006. In the first transaction, THI Holdings sold THMI’s
assets, as well as its shares of THI-Baltimore, to FLTCH for $9.9
million—far less than their fair market value. As of January 2006,
those assets had been valued at more than $183 million.
In the second transaction, THI sold its shares of the now-
assetless THMI53 to FLTCI for $100,000. FLTCI therefore acquired
all of THMI’s liabilities but none of its assets. Troutman—where
Leonard Grunstein, who held an interest in FLTCH,54 was a part-
ner—had incorporated FLTCI just months before. FLTCI’s sole
52 On July 1, 2020, Troutman Sanders merged with Pepper Hamilton to be-
come Troutman Pepper Hamilton Sanders LLP.
53 THI owned 100% of THMI’s issued and outstanding shares of stock.
54 Murray Forman, an investment banker, also held an interest in FLTCH.
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21-10587 Opinion of the Court 43
shareholder was Barry Saacks, an elderly graphic artist who was
not aware that he owned FLTCI or that it acquired stock in THMI.
After acquiring the THMI assets, FLTCH rebranded them
and continued generating millions in profits without the burden of
THMI’s liabilities. Within six months, THMI-Baltimore changed
its name to Fundamental Clinical Consulting, LLC (“FCC”) and
took over the operations of the former Integrated nursing homes,
and Fundamental Administrative Services, LLC (“FAS”)55 was cre-
ated to take over the administrative services under the manage-
ment contracts previously held by THMI-Baltimore. All of THMI’s
employees became employees of either FCC or FAS, depending on
whether the employee provided operational aid, clinical support,
or administrative services.
THMI and FLTCI became defunct following the March 2006
closings, but THI remained an active corporation until the GTCR
Group launched the second phase of the bust-out scheme, winding
down THI.
The GTCR Group launched the second phase in November
2007 when it sold a THI entity for $4.7 million. Three months later,
the GTCR Group sold the remaining THI properties (except for
one facility in Maryland) to Omega Healthcare Investors, Inc. and
CommuniCare Health Services. As part of the latter transaction,
CommuniCare acquired THI’s right to operate those properties.
55 FLTCH was FAS’s sole member.
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44 Opinion of the Court 21-10587
The GTCR Group received nearly $48 million from the sale. The
proceeds of the sales were used to pay off THI’s creditors.
In January 2009, the GTCR Group had THI petition a Mar-
yland state court on behalf of itself and 143 subsidiaries—but not
THMI—for appointment of a receiver. The Maryland court
granted THI’s petition and the same day appointed a receiver, who
was subsequently replaced by Alan Grochal, an attorney in the law
firm that filed the petition. The purpose of the receivership was to
obtain a stay in the litigation of Wilkes’s cases while the receiver-
ship was ongoing.
With the receivership underway, the GTCR Group executed
the third—and final—phase of the bust-out scheme: concealing the
March 2006 transactions. The transactions had to be concealed
long enough for the statute of limitations to run on a fraudulent
transfer suit against FLTCH.56 The prescriptive period for an action
to void a fraudulent transfer was four years in Florida and Delaware
and six years in New York. Prior to the trial of the adversary pro-
ceeding in this case in October 2014, the parties—with the
56 The lawyers counseling the GTCR Group apparently assumed that Wilkes
would not pursue FLTCH until Wilkes had obtained a judgment in the earliest
of the Probate Estate cases it had brought, Jackson, and that with the judgment
in hand, Wilkes would file an UFTA action against FLTCH and any of the
recipients of THMI’s assets. As it turned out, those lawyers were correct—
Wilkes did not pursue FLTCH with an UFTA claim until after it filed an ad-
versary complaint against FLTCH and others in the FLTCI bankruptcy case
on October 1, 2013.
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21-10587 Opinion of the Court 45
Bankruptcy Court’s consent—agreed to apply the Florida UFTA,
Fla. Stat. § 726.101 et seq.
In an effort to ensure that the prescriptive period would run
before Wilkes established that its clients’ negligence claims were
meritorious and thus could support a free standing UFTA cause of
action, the GTCR Group had to take control of THI and THMI’s
defense in those cases in order to delay their completion. The re-
ceivership order had given the receiver the right to defend THMI
in Wilkes’s cases even though THMI was not one of the THI sub-
sidiaries included in the THI receivership. In June 2009, as a delay
tactic, Grochal (the THI Receiver) filed an action, Trans Health Care,
Inc. v. Creekmore, in the Circuit Court of Miami-Dade County for
the domestication of the receivership in Florida.57 No. 2009CA-
11513, 2013 WL 11015914 (Fla. Cir. Ct. June 19, 2013). Grochal im-
mediately sought a stay of the actions Wilkes was prosecuting
against THI and THMI. The circuit court granted the domestica-
tion of the receivership but denied Grochal’s application for a stay,
leaving the decision whether to grant a stay to the state courts in
which Wilkes’s cases were pending.
To reiterate, the four-year prescriptive period for filing an ac-
tion to void the March 2006 sale of THMI’s assets to FLTCH and
any other recipients of the assets would expire in March 2010. Gro-
chal, aware of that fact and the status of Wilkes’s cases, directed
57 Creekmore was a Wilkes client. None of Wilkes’s cases were pending in
Miami-Dade County.
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46 Opinion of the Court 21-10587
the lawyers that the receivership had retained to defend THI and
THMI in Wilkes’s cases to withdraw their representation in April
2010—just over four years after the March 2006 transactions had
closed and 16 months after the receivership’s creation.
The lawyers defending THI and THMI in Jackson withdrew
their representation of the defendants with leave of court on May
18, 2010. The case went to trial before a jury on July 22, 2010, with-
out the lawyers’ presence. It was thus an empty-chair trial and re-
sulted in verdicts of $55 million each against THI and THMI. Judg-
ments were entered accordingly.
* * *
Commentary
In a nutshell, the bust-out scheme involved THMI’s assets
and liabilities being split into two separate entities. FLTCH got the
assets. FLTCI got the liabilities. If they could get away with it,
THI’s owners could enjoy THMI’s money without being subject to
THMI’s legal liabilities. It goes without saying that this is wrong.
That is why fraudulent transfer statutes exist. The bust-out scheme
continued by attempting to avoid liability under those statutes.
Namely, the powers that be in the THI corporate family orches-
trated a defense strategy that allowed the UFTA prescriptive period
to run without alerting potential creditors like Wilkes’s clients that
something untoward was going on behind the scenes.
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21-10587 Opinion of the Court 47
3.
In a way, the bust-out scheme continued through the bank-
ruptcy proceedings in the Trustee’s conflict with the Debtor—
FLTCI—FLTCH, and the Targets over the representation of THI
and THMI in Wilkes’s state court proceedings. After Wilkes put
FLTCI into bankruptcy in December 2011, the Targets realized that
the withdrawal of defense counsel in Wilkes’s wrongful death ac-
tions was unwise. Although they appeared to have solid time bar
defenses to Wilkes’s fraudulent transfer actions in the form of post-
judgment motions under Fla. Stat. § 56.29, Wilkes’s litigation strat-
egy was of considerable concern. After obtaining multimillion-
dollar verdicts in empty-chair jury trials, Wilkes would use the evi-
dence the bankruptcy trustee uncovered to reinforce its § 56.29 mo-
tions or support an adversary proceeding in the FLTCI bankruptcy.
To bring the empty-chair trials to an end and reduce their § 56.29
exposure, the Targets concluded that they had to provide defense
counsel for THI and THMI in Wilkes’s cases. In a memorandum
opinion issued on March 20, 2015, the Bankruptcy Court recalled
the steps they took:
[T]he targets decided to provide a defense for THI
and THMI as an outer firewall to any liability to the
Probate Estates. In an effort to ensure the remaining
cases did not go undefended, the targets entered into
a settlement agreement with the THI Receiver [Gro-
chal] on January 5, 2012.
Under the January 2012 agreement, FAS—one of the
targets—agreed to defend THI, the THI Receiver, and
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48 Opinion of the Court 21-10587
the THI receivership estate from any claims arising
out of the negligence or wrongful death cases filed by
the Probate Estates. FAS agreed to deposit $800,000
in escrow to fund the costs of that defense. GECC—
one of THI’s lenders who was also a target—likewise
agreed to contribute up to $200,000 toward the de-
fense costs. FAS fairly immediately delegated the
duty to defend THI back to the THI Receiver, and the
THI Receiver immediately set out to retain counsel
for THI and THMI.
In re Fundamental Long Term Care, Inc., 527 B.R. 497, 504 (Bankr.
M.D. Fla. 2015).
As the Bankruptcy Court pointed out, however, the Receiver
didn’t act soon enough:
Newly retained counsel for THMI attempted to ap-
pear on the company’s behalf on the morning of trial
in the case filed by the Nunziata Estate. But the court
in that case would not let counsel appear. Likewise,
the court in the case filed by the Webb Estate would
not let newly retained counsel appear for either THI
or THMI. Because the state courts would not let
newly retained counsel appear on behalf of THI and
THMI, both of those cases proceeded to empty-chair
trials, and the juries ultimately returned more than $1
billion in verdicts combined.
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21-10587 Opinion of the Court 49
Id. (footnote omitted).58 By the time Berman and Shumaker joined
the Trustee’s team, lawyers retained by the THI Receiver—Gro-
chal—were actively representing THI and THMI in Wilkes’s
wrongful death cases. At the same time, the Trustee was seeking
access to their litigation files. The THI Receiver objected, so Ber-
man moved the Bankruptcy Court for an order requiring the Re-
ceiver to show cause why the files should not be produced. The
58 The verdict against THMI in Nunziata, which was tried on January 9, 2012,
was $60 million in compensatory damages and $140 million in punitive dam-
ages. Almost immediately after the entry of judgment, Wilkes moved the
court ex parte for an injunction against FLTCH, FAS, Forman, Grunstein (all
Targets), the THI Receiver, and his attorney—none being parties in the case—
that “purport[ed] to prohibit the [THI] Receiver and his ‘agents and assignees’
from challenging in any court anywhere in the country any aspect of the
[Nunziata] Estate’s entitlement to collect on its judgment.” Trans Health
Mgmt., Inc. v. Nunziata, 159 So. 3d 850, 856–57 (Fla. 2d Dist. Ct. App. 2014).
The state court granted the injunction. THMI, represented by Shumaker, ap-
pealed the judgment, and the enjoined parties appealed the injunction. The
Second District Court of Appeal dismissed THMI’s appeal under Fla. Stat.
§ 607.1622(8) because THMI had been dissolved for failure to file an annual
report. Id. at 855. The Second District Court of Appeal also vacated the in-
junction because it “was issued without notice to any of the nonparties, with-
out the issuance of process on any of them, and without the presentation of
admissible evidence.” Id. at 858. In a consolidated appeal, FAS challenged a
pretrial discovery order finding that it “had committed a fraud on the court.”
Id. at 854. The Second District Court of Appeal quashed the order because it
“was not based on evidence admitted at a properly noticed evidentiary hear-
ing.” Id. at 859–60.
The judgment in Webb was reversed and the case was remanded for
further proceedings. Trans Health Mgmt., Inc. v. Webb ex rel. Webb, 132 So. 3d
1152 (Fla. 1 st Dist. Ct. App. 2013) (per curiam).
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50 Opinion of the Court 21-10587
Receiver did not dispute that the Trustee should generally have ac-
cess to THMI’s books and records, but he claimed that the lawyers’
litigation files were privileged. In re Fundamental Long Term Care,
Inc., No. 8:11-bk-22258, 2012 WL 4815321, at *2 (Bankr. M.D. Fla.
Oct. 9, 2012) (internal quotation marks omitted). He also took the
position that he had the exclusive right to control the defense of
any claims against THMI. Id. This was so, he said, because he had
assumed the obligation of defending THMI “to ensure that no
THMI obligation might by default exhaust the limited assets of the
THI estate to the detriment of THI’s other creditors.” Id. (internal
quotation marks omitted).
The Bankruptcy Court held a hearing on the Receiver’s ob-
jection on September 27, 2012, and on October 9, 2012, the Bank-
ruptcy Court issued an order stating that
the Trustee—as the sole shareholder of the Debtor’s
wholly owned subsidiary—should have (i) access to
the books and records relating to the Debtor and its
subsidiary (including any litigation files); and (ii) the
right to control THMI activities (including the right
to assert any attorney-client privilege, to the extent it
exists, on THMI’s behalf ).
Id. at *11.
On October 29, 2012, the THI Receiver appealed that order
and promptly moved the Bankruptcy Court to stay its order pend-
ing the appeal. Wilkes opposed the motion, alleging that FLTCI
was merely “a shell and its purchase of THMI was a sham transac-
tion designed to benefit a few wrongdoers by transferring the
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21-10587 Opinion of the Court 51
valuable assets of THMI, lodging the liabilities in a shell company,
and concealing the whole scheme from the creditors.” Wilkes
went on to allege that the Receiver was an integral part of the
scheme:
In January 2012, sixteen parties including General
Electric Capital Corporation, Inc., GTCR, Ventas, Ru-
bin Schron, Leonard Grunstein, Murray Forman, and
the state court receiver for THI, entered into a specific
agreement, memorializing an extant conspiracy, to
fund a massive effort to conceal discovery of the facts
related to their fraud. The signatories attempted to
gain legitimacy for these efforts by using the color of
the state law receivership of THI.
Creditors’ Opposition to Motion of Alan M. Grochal for Stay Pend-
ing Appeal at 3–4, In re Fundamental Long Term Care, Inc., No. 8:11-
bk-22258 (Bankr. M.D. Fla. Nov. 5, 2012). Wilkes concluded by say-
ing that “the Debtor and the other ‘interested parties’ have no
standing in this case.”
The Bankruptcy Court heard the motion on November 16,
2012, and took it under advisement. The day before, unbeknownst
to the Trustee and the Bankruptcy Court, FLTCH and FAS sued
THMI in the Southern District of New York for a declaration that
the fraudulent transfer claims Wilkes was attempting to prosecute
via its § 56.29 post-judgment motions in Nunziata and Webb—which
had resulted in jury verdicts and judgments of $200 million and
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52 Opinion of the Court 21-10587
$900 million, respectively—were time-barred.59 Fundamental Long
Term Care Holdings, LLC. v. Trans Health Mgmt., Inc., No. 1:12-cv-
8339 (S.D.N.Y. filed Nov. 15, 2012). Six days later, the lawyer who
brought that action also filed a complaint for Christine Zack (a FAS
in-house counsel) against Shumaker in the Southern District of
Ohio, seeking unrelated relief. Zack v. Shumaker, Loop & Kendrick,
LLP, No. 2:12-cv-1075 (S.D. Ohio filed Nov. 21, 2012).
Before the defendants were served with process in those
cases, the Trustee decided to take over THMI’s defenses in the
Wilkes cases. On December 10 and 21, 2012, Shumaker moved the
appellate courts in Webb and Nunziata, where THMI’s appeals were
pending, to appear as appellants’ counsel in place of the lawyers the
THI Receiver had retained. Then, on December 27, 2012, the Trus-
tee, having notice of the federal district court cases in New York
and Ohio, sought to enjoin their prosecution by commencing an
adversary proceeding against FLTCH, FAS, and Zack with a two-
count complaint.60
59 The complaint alleged that the post-judgment motions were time-barred
under the laws of Delaware, Florida, Maryland, New York, and Pennsylvania.
60Count I was lodged against Zack and Count II was against FLTCH and FAS.
The complaint alleged that following the entry of the Omnibus Order on July
12, the Respondents
in concert with the Debtor and other interested parties, ha[d]
undertaken a concerted effort to undermine the Trustee’s ad-
ministration of this case with the sole purpose of reducing the
potential exposure of third parties, including FLTCH and FAS,
who were clearly involved in the fraudulent efforts to place the
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21-10587 Opinion of the Court 53
On January 4, 2013, the Bankruptcy Court entered an order
denying the THI Receiver’s motion to stay the Bankruptcy Court’s
October 9, 2012, ruling pending the THI Receiver’s appeal to the
District Court for the Middle District of Florida.61 Although it de-
nied the motion, the Bankruptcy Court ordered counsel for the
Trustee, the Receiver’s counsel, and counsel hired by the Receiver
Debtor and THMI’s [assets], exceeding more than $700 Million
in value, beyond the reach of creditors.
Complaint for Temporary and Permanent Injunctive Relief at ¶ 24, Scharrer v.
Zack, No. 8:12-ap-1198 (Bankr. M.D. Fla. Filed Dec. 27, 2012). The complaint
also alleged that “according to an FAS representative’s recent 2004 Examina-
tion testimony, FAS is paying various sets of lawyers more than $500,000 per
month just in connection with the instant bankruptcy case, related litigation,
oppositions, and discovery.” Id. at ¶ 19. The complaint further alleged that in
filing suit against THMI in the Southern District of New York, FLTCH and
FAS sought to “avoid consideration and resolution by this Court of the very
issues the Trustee is statutorily obligated to investigate [as] authorized by this
Court.” Id. at ¶ 31.
According to the Trustee, Zack’s suit against Shumaker alleged that
Shumaker’s representation of the Trustee “constituted an abuse of process.”
Id. at ¶ 34. The Trustee contended that Zack filed the suit “shortly after th[e
Bankruptcy] Court cautioned Zack’s counsel against pursuing various re-
quests for sanctions against lawyers and other parties,” id. at ¶ 33, at a hearing
in which the Bankruptcy Court “denied Zack’s Motion for Sanctions and sug-
gested that all parties would be well served focusing on the merits of the bank-
ruptcy case and avoiding. . . personal attacks and reflexive assertions of rights
to sanctions.” Id. at ¶ 35.
61 On December 21, 2012, the Trustee moved the District Court to dismiss
the appeal. On September 12, 2013, the District Court entered an order stay-
ing the appeal “pending a resolution by the Bankruptcy Court of the interrela-
tionship between THMI and FLTCI.”
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54 Opinion of the Court 21-10587
to represent THMI in the Wilkes cases to confer so the Trustee
could “evaluate the positions she will take on behalf of THMI in
the Wilkes Litigation.” Regarding the current representation of
THMI, the Bankruptcy Court provided that:
The law firms who have made appearances on behalf
of THMI are authorized to continue to defend the
Wilkes Litigation to prevent prejudice to THMI’s
rights and to ensure that defaults are not entered or
permitted to remain in place uncontested (including
prosecuting appeals with respect to previously en-
tered judgments) against THMI until the Trustee ei-
ther (i) authorizes existing THMI counsel to continue
to represent THMI; or (ii) obtains substitute counsel
(who enters his or her appearance in each Wilkes Lit-
igation matter) and releases existing THMI counsel
from any further obligations.
. . .
In any event, the Trustee shall take any and all actions
necessary to ensure that disputed claims are de-
fended, including prosecuting appeals with respect to
previously entered judgments.
Order Denying Motion for Stay Pending Appeal at 2, In re Funda-
mental Long Term Care, Inc., No. 8:11-bk-22258 (Bankr. M.D. Fla. Jan.
4, 2013). The Bankruptcy Court also stated that “[a]ny substantive
information regarding the personal injury claims and defenses
shared with the Trustee during the . . . conferences will not be
shared with the Petitioning Creditors or their counsel absent fur-
ther order of this Court.” Id. at 3.
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21-10587 Opinion of the Court 55
The same day this order was entered, FLTCH and FAS
moved the Bankruptcy Court to enter an order disqualifying Shu-
maker as Trustee’s counsel on the ground that Shumaker had a
conflict of interest in favor of Wilkes.62 The motion alleged that
Wilkes had brought the Chapter 7 case for two reasons:
The first reason was to remove THMI’s defense
against the plaintiffs’ outrageous claims from compe-
tent counsel that serves only THMI’s interest, and
place it under the control of counsel with loyalties to
the plaintiffs and their counsel. The second reason
was to obtain a trustee, with the mantle of independ-
ence and court appointment, to assist in collecting
THMI’s bogus liabilities from unrelated third par-
ties. . . . This case and this Court are being used to
perpetrate a gross violation of fundamental due pro-
cess, and [Shumaker’s] representation of THMI is
critical to pulling it off.
Joint Motion of Fundamental Administrative Services, LLC and
Fundamental Long Term Care Holdings, LLC for an Order (A) Dis-
qualifying Shumaker, Loop & Kendrick LLP as Counsel to Trans
Health Management, Inc. Due to Conflict of Interest, and (B)
Granting Related Relief at 3, In re Fundamental Long Term Care, Inc.,
No. 8:11-bk-22258 (Bankr. M.D. Fla. Jan. 4, 2011).
62 Contrast this motion with the motion for disqualification and disgorgement
Wilkes will later bring, which argues that Shumaker had a conflict of interest
against Wilkes. See infra part IV.
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56 Opinion of the Court 21-10587
On January 30, 2013, the Bankruptcy Court, “having heard
argument of counsel for the Trustee, FAS, and FLTCH,” entered
an order denying FLTCH and FAS’s motion to disqualify Shu-
maker. The order stated that the Bankruptcy Court would conduct
a status conference on February 4, 2013, “at which time the Trustee
shall report to the Court the status of pending state court litigation
and appeals involving the Debtor or THMI,” and the “current rep-
resentation of the Debtor and THMI in such cases.” The Bank-
ruptcy Court required that prior to the status conference, the Trus-
tee and the THI Receiver confer about “the prior and future repre-
sentation of THMI.” On February 5, 2013, FLTCH and FAS ap-
pealed that order to the District Court.
Meanwhile, on January 23, 2013, the Bankruptcy Court
granted the Trustee’s motion for a preliminary injunction barring
FLTCH and FAS from prosecuting their declaratory judgment ac-
tion in the Southern District of New York and barring Zack from
proceeding with her case in the Southern District of Ohio.
On March 7, 2013, the Debtor—FLTCI—renewed the mo-
tion it had filed on August 10, 2012, pursuant to Florida Rule of
Civil Procedure 1.540(b)(4), challenging the $110 million judgment
entered against it as void.63 One day earlier, on March 6, the
63 The same day, the Debtor objected to the Jackson Estate’s $110 million
claim on the ground that the judgment had been obtained via extrinsic fraud.
The Bankruptcy Court overruled the objection on June 21, 2013, following an
evidentiary hearing. In re Fundamental Long Term Care, Inc., 500 B.R. 140
(Bankr. M.D. Fla. 2013).
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21-10587 Opinion of the Court 57
Trustee moved the Bankruptcy Court to authorize and direct me-
diation of all claims. On March 19, 2013, FLTCH and FAS jointly
responded to the Trustee’s motion. They repeated their concern
from the hearing on their motion seeking Shumaker’s disqualifica-
tion. Their concern was that Shumaker would enter into “collusive
settlements of the six [wrongful death] actions with [Wilkes] ‘to set
THMI’s liabilities at amounts that . . . are going to be astronomical
windfalls to the plaintiffs . . . set in stone behind closed doors.’” “In
the mediation envisioned by the Trustee, there will be no party ar-
guing to the mediator that THMI or the Debtor has zero liability
to these plaintiffs.” The Bankruptcy Court heard the motion on
March 26 and granted it over the objections of the Debtor, FLTCH,
and FAS, appointing a retired bankruptcy judge as mediator.64
On June 6, 2013, following five days of mediation, the Trus-
tee filed an expedited motion to compromise the claims that the
Sasser, Jones, and Townsend Estates had brought against THMI in
state court and filed as claims against the Debtor’s estate in the
bankruptcy proceeding.65 In Sasser and Jones, THMI and the
64 As a result of the Bankruptcy Court’s September 12, 2013, decision, the me-
diation ended.
65 Also on June 6, 2013, the Trustee and Kristi Anderson jointly moved to com-
promise the claims brought in the lawsuits filed against FAS and Anderson
(and others) on July 19 and 20, 2012. FLTCH and FAS objected to the com-
promise. In a memorandum opinion issued on June 21, 2013, the Bankruptcy
Court overruled the objection and approved the compromise. FLTCH and
FAS appealed the ruling on June 27, 2013. FAS voluntarily dismissed the appeal
on March 11, 2014.
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58 Opinion of the Court 21-10587
Debtor stipulated to a claim for compensatory damages of $5 mil-
lion and punitive damages of $5 million—a total of $20 million be-
tween the two cases. In Townsend, THMI and the Debtor stipulated
to a claim for compensatory damages of $10 million and punitive
damages of $10 million. The Trustee filed an amendment to her
expedited motion to compromise on July 10.
The Trustee’s motion was met with vehement opposition by
FLTCH, FAS, FCC, THI Holdings, the THI Receiver, GECC, and
the Debtor on a variety of substantive and procedural grounds.
The objections led to reciprocal exchange of documentary evi-
dence. The Trustee produced documents on which she and Shu-
maker relied in determining that the settlement proposed was in
the best interests of the bankruptcy estate. The objectors produced
documents supporting their objections.
The Bankruptcy Court heard the Trustee’s motion on July
10–12, 2013, and on July 12 the Bankruptcy Court entered an order
approving the compromise. The order was perfunctory. The trial
date in Townsend was looming and the Bankruptcy Court wanted
its ruling to serve as notice well in advance of the trial. The Bank-
ruptcy Court anticipated that the parties would agree on a super-
seding replacement order. As a precaution, the Debtor, joined by
the Receiver, appealed that July 12 order to the District Court, as
did FAS and FCC. On December 18, 2013, the District Court re-
versed the July 12 order and remanded the matter to the Bank-
ruptcy Court with the instruction that it reconsider the settlements
after it concluded the adversary proceeding and resolved the issue
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21-10587 Opinion of the Court 59
of the identity of interest between FLTCI and THMI, if any. The
District Court observed that many of the issues plaguing the Bank-
ruptcy Court were “created because the creditors placed [FLTCI]
into bankruptcy as the debtor, rather than its subsidiary THMI
against which the [Probate Estates] have causes of action.” As in-
dicated infra part III, the Bankruptcy Court resolved this issue by
treating THMI and FLTCI as one entity for Chapter 7 purposes.
On July 30, 2013, FLTCH and FAS moved the Bankruptcy
Court for authority either to transfer their New York declaratory
action to the Middle District of Florida with referral to the Bank-
ruptcy Court or, in the alternative, to dismiss the New York action
without prejudice and refile it in the Bankruptcy Court. On August
2, FLTCH and FAS supplemented their motion to include a request
for injunctive relief “based on the flagrant misconduct of the
[Townsend] Estate and its counsel, Wilkes,” that took place follow-
ing the jury trial in Townsend and entry of judgment for the Town-
send Estate on July 29, 2013.
What Wilkes had done in Townsend after the entry of judg-
ment was described by the Florida District Court of Appeal in Gen-
eral Electric Capital Corp. v. Shattuck, 132 So. 3d 908 (Fla. 2d Dist. Ct.
App. 2014). On July 29, 2013—after the state court had entered a
default against THI and a jury returned a verdict against THI of
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60 Opinion of the Court 21-10587
$1.1 billion ($1 billion of which was for punitive damages)—the
trial court entered judgment against THI.66
Two days later, the [Townsend E]state filed a “motion
to alter and amend the judgment to conform with ev-
idence at trial.” The motion asked the court to add
the sixteen Appellants to the final judgment pursuant
to Florida Rule of Civil Procedure 1.530(g). The mo-
tion was served only on the attorney for the THI
[R]eceiver, not on any of the sixteen Appellants. Later
that same day the trial court, without soliciting re-
sponses or holding a hearing, granted the motion and
entered the amended final judgment at issue in these
proceedings. The amended judgment added the six-
teen Appellants as judgment debtors, jointly and sev-
erally liable for the damages award “based on the evi-
dence adduced at trial” demonstrating that they were
“the real parties in interest.”
Id. at 910–11.67
66 The Townsend case was tried after the trial judge denied THI’s motion to
recuse on the ground of bias. FLTCH and FAS’s August 2 supplement to their
July 30 motion stated that the “heavily one-sided damages trial was riddled
with procedural and substantive errors, and the verdict will be appealed and is
very unlikely to withstand appellate review.”
67 The 16 appellants included: FLTCH; FAS; THI-Holdings; THI-Baltimore;
GECC; GTCR Golder Rauner, LLC; GTCR Fund VI, L.P.; GTCR Partners VI,
L.P.; GTCR VI Executive Fund, L.P.; GTCR Associates VI; Edgar D. Jannotta,
Jr.; Murray Forman; Leonard Grunstein; Ventas; Ventas Realty, L.P.; and Rubin
Schron. The Second District Court of Appeal reversed the judgment and re-
manded the case for further proceedings. Shattuck, 132 So. 3d at 914.
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21-10587 Opinion of the Court 61
The Bankruptcy Court heard the motion to transfer on Au-
gust 20, 2013, and took it under advisement. As it turned out, a
ruling was unnecessary since the purpose of the motion was ac-
complished when the Bankruptcy Court entertained FLTCH and
FAS’s statute of limitations defense at the trial of the principal ad-
versary proceeding (initiated by the Probate Estates) in September
and October 2014 as affirmative defenses to the Probate Estates’
claims. See In re Fundamental Long Term Care, Inc., 507 B.R. 359, 384
(“Denial of the motions to dismiss [as time-barred] is without prej-
udice. The Defendants are free to raise the statute of limitations
as an affirmative defense.”).
On September 3, 2013, the District Court decided FLTCH
and FAS’s appeal of the Bankruptcy Court’s January 30, 2013, order
denying their motion to disqualify Shumaker. The District Court
did so with these observations:
Appellants contend the [T]rustee has a direct conflict
with making decisions for [THMI] even though the
debtor [FLTCI] owns 100% of the stock in THMI. Be-
cause of this asserted conflict, Appellants contend
[T]rustee’s counsel, [Shumaker], also has a conflict.
. . .
This asserted conflict is occasioned because of the un-
usual posture of this case. This is an involuntary
bankruptcy brought by a creditor of THMI’s parent
corporation. By putting THMI’s parent corporation
[FLTCI,] in bankruptcy rather than THMI, the
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62 Opinion of the Court 21-10587
creditors are allowed to continue to pursue litigation
against THMI.
Since THMI is not the debtor, it does not receive any
of the benefits of bankruptcy, such as an automatic
stay of civil litigation against it. Therefore, civil liti-
gation has been proceeding against THMI outside the
control of the Bankruptcy Court. The [T]rustee has
been making decisions (such as allowing “claims”) for
THMI as if THMI were in bankruptcy.
It is apparent that a decision needs to be made
whether in fact THMI and the Debtor should be
treated as the same entity under theories of alter ego,
substantive consolidation, or other legal or equitable
theory. If so, THMI should be brought into the bank-
ruptcy as a debtor which would afford it the benefits
of bankruptcy as well as the burdens. If THMI is not
to be treated as the same entity as the debtor, then the
litigation against THMI may be moot in this bank-
ruptcy estate and the issues involved in this appeal
may become moot.
Order of Remand at 1–2, In re Fundamental Long Term Care, Inc., No.
8:11-bk-22258 (Bankr. M.D. Fla. Sept. 5, 2013). The District Court
therefore remanded the case with the instruction that the Bank-
ruptcy Court determine at the earliest practical time whether
“THMI should be brought into the bankruptcy case as a debtor.”
* * *
Commentary
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21-10587 Opinion of the Court 63
The District Court observed the obvious. Other than the
Jackson Estate, none of the Probate Estates had a claim against the
Debtor. Their claims were against THMI, an entirely separate en-
tity. And they could not be allowed in the Debtor’s estate. That is
why it was necessary that the Bankruptcy Court consider THMI,
qua separate entity, as a bankrupt entity together with FLTCI.
* * *
The Bankruptcy Court followed the District Court’s lead on
September 12, 2013. In a Memorandum Opinion, the Bankruptcy
Court held that the Bankruptcy Court was the proper forum for
Wilkes’s fraudulent transfer claims. In re Fundamental Long Term
Care, Inc., 500 B.R. 147 (Bankr. M.D. Fla. 2013). In doing so, the
Bankruptcy Court addressed Wilkes’s argument that the Probate
Estates should be allowed to continue their state court litigation:
In asking the Court not to enjoin their efforts in state
court, the creditors argue the Court should be guided
by the Trustee’s judgment as to what is in the best in-
terests of the estate. That is not quite right. The
Court is first and foremost guided by the Bankruptcy
Code. And the Bankruptcy Code grants this Court
exclusive jurisdiction over property of the estate.
There is no question in the Court’s mind that contin-
uation of the proceedings supplementary—given the
Estate of Nunziata’s acknowledgement that the assets
that were allegedly transferred to the “targets” belong
to THMI—is an attempt (even if unintentional) to ob-
tain or take control of property of the estate, and that
alone warrants requiring the creditors [the Probate
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64 Opinion of the Court 21-10587
Estates] to pursue any fraudulent transfer or alter ego
claims in this Court.
Id. at 160. The Bankruptcy Court then set a hearing to set “the
parameters of a single proceeding—involving the Trustee, the
creditors, and the ‘targets’—for resolving any fraudulent transfer
and alter ego claims.” Id. The Trustee, as a hypothetical creditor
of THMI, could not mount fraudulent transfer causes of action
against FLTCH and the Targets unless THMI was in bankruptcy.
* * *
Commentary
As evidenced by the various disputes over control of THMI’s
defense strategy, the Chapter 7 proceeding pitted Wilkes, the Pro-
bate Estates, the Trustee, and Shumaker against FLTCI, FLTCH,
and the Targets.
III.
A.
On October 1, 2013, the Probate Estates initiated an adver-
sary proceeding in the Bankruptcy Court against 16 entities and in-
dividuals with a two-count complaint for declaratory relief.68
Count I alleged that six of the defendant parties assumed the debts
68 The defendant parties were: GECC; FAS; THI-Baltimore; GTCR Golder
Rauner, LLC; FLTCH; Murray Forman; Leonard Grunstein; Rubin Schron;
Ventas, Inc; Ventas Realty, LP; GTCR Fund VI, LP; GTCR Partners VI, LP;
GTCR VI Executive Fund, L.P.; GTCR Associates VI; Edgar D. Jannotta, Jr;
and THI-Holdings. Each count rested on 502 paragraphs of allegations.
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21-10587 Opinion of the Court 65
and liabilities of THI, THMI, and FLTCI as successors to those en-
tities. Count II alleged that eleven of the defendant parties were
the alter egos of THI, THMI, and FLTCI and therefore assumed
their debts and liabilities.
On October 24, 2013, the Trustee moved the Bankruptcy
Court pursuant to Federal Rule of Bankruptcy Procedure 702469
for leave to intervene as a party plaintiff to bring additional claims
that constitute the property of the Debtor’s estate.70 The Bank-
ruptcy Court granted the motion on October 31 and, on November
18, the Trustee filed a Complaint in Intervention which added a
Count III to the Probate Estates’ complaint “to substantively con-
solidate THMI into the Debtor’s bankruptcy estate.” Count III al-
leged that “[t]there is such a unity of interest and ownership be-
tween FLTCI and THMI that the independence of each corpora-
tion had, in effect, never begun, and therefore adherence to the fic-
tion of separate identities serves only to defeat justice.”
The next day, in a Memorandum Opinion on Motions for
Temporary Injunction and Motion to Approve Compromise, the
69 The Trustee stated in her motion that Rule 9024incorporates Federal. Rule
Civil Procedure 24. But actually, Rule 7024 incorporates that rule, which al-
lows intervention by a party that “has a claim or defense that shares with the
main action a common question of law or fact.” Fed. R. Civ. P. 24(b)(1)(B).
70 On November 13, 2013, in a Memorandum Opinion on the Trustee’s Mo-
tion to Enlarge Time Period to Bring Avoidance and Other Actions, the Bank-
ruptcy Court extended the two-year limitations periods in sections 108 and
546 of the Bankruptcy Code to April 13, 2014.
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66 Opinion of the Court 21-10587
Bankruptcy Court concluded that “THMI’s fraudulent transfer and
alter ego claims (if any) potentially belong to the estate” and en-
joined the Probate Estates “from pursuing any proceedings supple-
mentary or other collection efforts that could conceivably affect
property of the estate.” In re Fundamental Long Term Care, Inc., 501
B.R. 770, 774, 784 (Bankr. M.D. Fla. 2013). The Bankruptcy Court
also denied a motion to compromise made by the Trustee (involv-
ing the claims of the Sasser, Jones, and Townsend Probate Estates)
because one of its provisions would allow the Probate Estates to
maintain their lawsuits against THMI, suggesting that the Bank-
ruptcy Court viewed lawsuits against THMI as affecting property
of FLTCI. Id. at 784.
The Probate Estates amended their adversary complaint on
December 19, 2013. This pleading consisted of 228 pages with 1201
paragraphs and 22 counts. It was a typical shotgun complaint in
that each count incorporated all preceding paragraphs of the com-
plaint such that Count XXII was an amalgamation of all counts.
On March 14, 2014, the Bankruptcy Court, in a Memoran-
dum Opinion on Motions to Dismiss, identified the counts and the
claims they asserted. According to the Bankruptcy Court:
The twenty-two counts in the complaint can be bro-
ken down into eight claims for relief: one count for
substantive consolidation by the Trustee (Count I),
two counts for breach of fiduciary duty (Counts II &
III), four counts for aiding and abetting a breach of
fiduciary duty (Counts IV–VII), one count for succes-
sor liability (Count VIII), two counts for piercing the
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21-10587 Opinion of the Court 67
corporate veil (Counts IX & X), three counts for alter-
ego liability (Counts XI–XIII), eight counts for (actual
or constructive) fraudulent transfer (Counts XIV–
XXI), and one count for conspiracy to commit a
fraudulent transfer (Count XXII).
In re Fundamental Long Term Care, Inc., 507 B.R. 359, 372 (Bankr.
M.D. Fla. 2014).
* * *
Commentary
Before passing on the sufficiency of any of the counts,
though, the Bankruptcy Court shared the frustration Judge Mer-
ryday expressed on November 8, 2013, in reviewing a complaint
Wilkes filed in the Middle District of Florida on behalf of the Jack-
son Estate against McGraw-Hill Companies, Inc.; Standard &
Poor’s Financial Services, LLC; Credit Suisse Securities (USA), LLC;
and Credit Suisse First Boston Mortgage Securities Corporation.
See Jackson-Platts v. McGraw-Hill Cos., No. 8:13-cv-850-T-23MAP,
2013 WL 6440203, at *1 (M.D. Fla. Nov. 8, 2013). This complaint
alleged that “the [Jackson] Estate holds a $110 million judgment
against [THI], and [THMI] . . . which is uncollected.” Id. The com-
plaint and charged the defendants with
an expansive and enduring conspiracy among an ar-
ray of conspirators, including S & P and Credit Suisse,
who together allegedly undertook “a shell game” ef-
fected by a scheme the complaint denominates a
“Propco–Opco–Oldco” (P–O–O) business structure,
designed to “loot the assets” of the THI entities,
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68 Opinion of the Court 21-10587
among many other targets, and—as part of an “un-
lawful and improper professional liability and general
liability claim reduction strategy”—designed to ren-
der the THI entities unable to satisfy the [Jackson] Es-
tate’s judgment. The conspiracy allegedly sought to
further the malevolent purpose of capturing enor-
mous profit for the conspirators at the expense of
nursing home occupants.
Id. Judge Merryday described the complaint as “a confusing, am-
biguous, generalized, conclusory, and uninformative (and intermit-
tently melodramatic) paper” and dismissed it.71 Id. at *4, *6.
71 The judge said a bit more:
The complaint requires considerable energy to read with pa-
tience and to attempt to understand with confidence. Alt-
hough alleging an encompassing, malevolent, and predatory
scheme, the complaint provides to the disinterested reader lit-
tle or nothing on which to conclude that the allegations arise
from a sound factual basis or, more to the point, that the
pleader has even the least notion that the allegations arise from
a sound factual basis. The constant attribution of acts to “the
Defendants” and “the Co–Conspirators” disguises much infor-
mation necessary to glean the meaning, if any, of the allega-
tions. The almost entire absence of allegations of time, place,
and manner and the pertinent absence of the identity of the
particular actors is wholly disabling to the disinterested reader.
These omissions are so impairing and so obvious that the dis-
interested reader tends to doubt their inadvertence.
Jackson-Platts v. McGraw-Hill Cos. , 2013 WL 6440203, at *4.
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21-10587 Opinion of the Court 69
On December 6, 2013, Wilkes voluntarily dismissed the case.72
* * *
Nevertheless, despite the deficiencies in this amended com-
plaint, the Bankruptcy Court, “(particularly given the two years it
ha[d] spent dealing with all of these parties in the main bankruptcy
case) [wa]s able to glean the meaning of the critical allegations—
albeit not without considerable energy.” In re Fundamental Long
Term Care, Inc., 507 B.R. at 386.
In ruling on the motions, the Bankruptcy Court indicated
how it viewed the case. To the Bankruptcy Court, it was obvious
that
the main thrust of this case is the Plaintiffs’ claims for
fraudulent transfer. In all, the Plaintiffs allege a total
of eight counts for fraudulent transfer against the De-
fendants (Counts XIV–XXI).
. . .
The complaint unquestionably states claims for
fraudulent transfer against THI–Baltimore and
FLTCH.
. . .
[T]he facts of the complaint plausibly allege that the
transfer of THMI’s assets to FLTCH was for the ben-
efit of Forman and Grunstein since they owned
FLTCH—a closely held company.
72 Wilkes dismissed the case pursuant to Fed. R. Civ. P. 41(a)(1).
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70 Opinion of the Court 21-10587
Id. at 380–81. In essence, the Bankruptcy Court viewed the Probate
Estates’ sprawling and tangled amended complaint as simply a
fraudulent transfer action. That said, it was clear to the Bank-
ruptcy Court that the plaintiffs “fail[ed] to state a claim for relief
under any alter-ego or veil-piercing theories.” Id. at 386. Plaintiffs
did, however, state claims for breach of fiduciary duty, aiding and
abetting breach of fiduciary duty, fraudulent transfer, conspiracy
to commit fraudulent transfer, and successor liability against a va-
riety of defendants. Id.
The Bankruptcy Court dismissed the remaining claims with-
out prejudice and with leave to amend. Id. It granted leave with
the expectation that the amendment would cure the many defects
of the amended complaint. Id. In passing on the sufficiency of the
claims asserted in the amended complaint, the Bankruptcy Court
did not consider the defendants’ argument that the claims were
time-barred. It stated that the defendants’ statute of limitations
grounds for dismissing the adversary proceeding would be treated
as affirmative defenses and addressed later See id. at 384.
On April 4, 2014, the Probate Estates filed a second amended
complaint with 32 claims—more claims than were contained in the
first amended complaint. Instead of rehabilitating the dismissed
claims and curing the previous complaint’s defects, the second
amended complaint: (1) incorporated several hundred paragraphs
of the first amended complaint by reference; (2) repleaded five
claims the Bankruptcy Court had dismissed in their entirety; (3)
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21-10587 Opinion of the Court 71
offered a new, but largely repetitive, restatement of several claims;
and (4) added four new claims against several defendants.
The defendants responded to the second amended com-
plaint by filing motions to dismiss.73 On June 26, 2014, the Bank-
ruptcy Court dismissed the following claims: “alter ego liability
(Count 23), aiding and abetting against Schron (Count 26), abuse
of process (Count 27), conspiracy to commit abuse of process
(Count 28), negligence (Count 29), fraudulent transfer against
Schron (Count 30), civil conspiracy against GECC (Count 31), and
avoidance of a post-petition transfer (Count 32).” The Bankruptcy
Court then gave the plaintiffs seven days to file another amended
complaint restating the claims that had not been dismissed.
In the end, the claims that survived were: (1) a claim for sub-
stantive consolidation of THMI and FLTCI; (2) two claims of
breach of fiduciary duty; (3) six claims of aiding and abetting
breach of fiduciary duty; (4) a request for declaratory relief against
FLTCH, FAS, and THI-Baltimore on a successor liability theory; (5)
73 While the motions were pending, on June 2, 2014, the Trustee commenced
an adversary proceeding against Troutman in the Bankruptcy Court. The
complaint alleged the following: Count I, a claim for negligence in abandoning
FLTCI in Jackson resulting in a $110 million judgment; Count II, negligence in
failing to inform FLTCI and its sole shareholder of their right to independent
counsel in connection with the March 2006 transaction—the bust-out
scheme—in which FLTCI acquired THMI; Count III, fraudulent concealment
of the harm the March 2006 transaction could cause FLTCI; Count IV, fraud—
participating in a scheme that defrauded FLTCI, THMI, and their creditors;
and Count V, negligent supervision of a Troutman employee.
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72 Opinion of the Court 21-10587
one claim each of actual and constructive fraudulent transfer; and
(6) one claim of civil conspiracy to commit fraudulent transfer.
The Bankruptcy Court concluded that “any further attempts by the
Plaintiffs to amend their complaint would be futile or unfairly prej-
udicial to the Defendants.” In re Fundamental Long Term Care, Inc.,
512 B.R. 690, 707 (Bankr. M.D. Fla. 2014).
On August 26, 2014, as the Bankruptcy Court and the parties
were preparing for a trial on the remaining claims of the second
amended complaint, the Bankruptcy Court denied the defendants’
motions for summary judgment without a hearing in a two-page
order.74
The trial of the case began on September 22, 2014. It ended
fifteen days later, on October 7. On December 16, the Bankruptcy
Court tentatively announced the following findings of fact and con-
clusions of law:
(1) FLTCI and THMI are consolidated and ought to be
treated as if they are one.
(2) The claims for breach of fiduciary duty and aiding and
abetting breach of fiduciary duty fail for lack of proof.
Indeed, “the evidentiary record shows that the chal-
lenge[d] transactions were entirely fair.”
74 There was one exception. On September 15, 2014, the Bankruptcy Court
granted Ventas and Ventas Realty, LP summary judgment on one count of
aiding and abetting breach of fiduciary duty.
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21-10587 Opinion of the Court 73
(3) The claims of constructive fraud and actual fraud fail for
lack of proof that THMI’s assets were sold to defraud
THI or THMI’s creditors. The transferor of THMI was
THI. THI sold 100% of THMI’s shares to FLTCI, but
THI did not do so to defraud its creditors or THMI’s
creditors.
(4) The claim of successor liability is established. “FAS and
possibly [THI-Baltimore] and FLTCH [we]re the mere
continuation of THMI and . . . the 2006 transaction [the
bust-out scheme] was a fraudulent effort to avoid the li-
ability of a predecessor corporation.” “The parties ap-
pear to agree that the Delaware law governs” whether
the successor liability claim is time-barred. The statute
of limitations’ three-year prescriptive period began to
run when the March 2006 transaction closed, and the
plaintiffs didn’t file their successor liability claim until Oc-
tober 1, 2013. The Bankruptcy Court tolled this time pe-
riod because the injury sustained was “inherently un-
knowable,” and the plaintiffs’ claims were “concealed” by
the defendants.
Following the conclusion of the adversary proceeding, on
January 9, 2015, Wilkes, for the Townsend Estate, moved the Bank-
ruptcy Court “for Relief to Comply with the Mandate of the Flor-
ida Second District Court of Appeal” in General Electric Capital Corp.
v. Shattuck, 132 So. 3d 908 (Fla. 2d Dist. Ct. App. 2014). Wilkes asked
that the Townsend Estate be allowed to “proceed with its motion
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74 Opinion of the Court 21-10587
to alter or amend the judgment” it procured in the state court
wrongful death action to include the 16 parties it wished to be
bound by the Townsend Estate’s $1.1 billion judgment in that ac-
tion. Following a hearing on May 27, 2015, the Bankruptcy Court
denied that motion without prejudice.
Meanwhile, on February 2, 2015, the Bankruptcy Court is-
sued an order requiring the Trustee, the “Fundamental Defend-
ants,”75 the Probate Estates, and other interested parties to submit
to mediation on February 3–4, 2015. The parties attended media-
tion on February 3, 4, 5, 9, and 10. Also on February 10, the Bank-
ruptcy Court granted the Trustee’s motion to “consolidate” the
bankruptcy to include THMI, pursuant to the Bankruptcy Court’s
finding that FLTCI and THMI could be treated as one.
On February 23, 2015, the Trustee moved the Bankruptcy
Court to compromise two controversies involving the Trustee, the
Probate Estates, and the Fundamental Defendants.
The Trustee presented two compromises. In one, the Fun-
damental Defendants would pay the Trustee $18.5 million76 and
would receive the Trustee’s and Probate Estates’ general releases
75 The “Fundamental Defendants” included FLTCH, FAS, FCC, THI-Balti-
more, Murray Forman, and Leonard Grunstein.
76 $4 million of that amount would be paid over time.
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21-10587 Opinion of the Court 75
and a bar order in exchange.77 In re Fundamental Long Term Care,
Inc., 527 B.R. 497, 507–08 (Bankr. M.D. Fla. 2015). The second com-
promise was with the Quintairos law firm. It would pay the Trus-
tee $1.25 million and receive general releases like the ones the Fun-
damental Defendants would receive, as well as the same bar order.
Id. at 508.
In addressing the motions in its March 20 Memorandum
Opinion on Motion to Compromise and Motions for Permanent
Injunctive Relief, the Bankruptcy Court described what the Chap-
ter 7 case had become: “at least 27 lawsuits and 15 appeals before
13 different courts and 17 judges in 5 states” involving 16 defend-
ants.78 Id. at 501. The Bankruptcy Court listed the defendants and
their tentative dispositions. Id. at 501 n.6. In short, only five of the
defendants were potentially liable on a successor liability theory.
The Bankruptcy Court then assessed the compromises un-
der the Justice Oaks factors79 and found that they met the factors.
77 Third parties, such as the non-settling defendants that prevailed, would be
barred from asserting claims against the Fundamental Defendants arising out
of or relating to the claims the Fundamental Defendants were released from.
78 The Bankruptcy Court provided the citations for the 18 reported decisions
the litigation had spawned. In re Fundamental Long Term Care, Inc., 527 B.R. at
501 n.5.
79 Those factors are: (i) the probability of success in the litigation between the
settling parties; (ii) the difficulties, if any, to be encountered in collection; (iii)
the complexity of the litigation involved and the expense, inconvenience, and
delay necessarily attending it; and (iv) the paramount interests of the creditors
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76 Opinion of the Court 21-10587
Id. at 509. But it stated it would only approve “the proposed com-
promises and bar orders conditioned on the entry of a final, non-
appealable order enjoining the Probate Estates from pursuing any
claims arising out of the nucleus of facts set forth in the adversary
complaint in this proceeding.” Id. at 517. The Probate Estates were
free to appeal any of the Bankruptcy Court’s orders, as well as liti-
gate their negligence claims against the THI Receiver and in Jones,
Sasser, and Webb. Id.
But they [we]re enjoined from (i) pursuing any pend-
ing proceedings supplementary; (ii) litigating their
civil rights claim against the GTCR Group, GECC,
and Ventas; and (iii) pursuing any claims against the
GTCR Group, GECC, Ventas, and Schron as “real
parties in interest” in the Townsend, Jones, or Sasser
cases.80 In short, there will be no sequel.
and a proper deference to their reasonable views. Wallis v. Justice Oaks II,
Ltd., 898 F.2d 1544, 1549 (11th Cir. 1990).
80 The Bankruptcy Court added this footnote:
In Townsend, the Townsend Estate obtained a $1.1 billion ver-
dict against THI. After the trial, the Townsend Estate at-
tempted to add the non-settling Defendants to the judgment
as the “real parties in interest.” The Sasser and Jones Estates
similarly attempted to add the non-settling Defendants as de-
fendants in those state court actions—albeit before judg-
ment—based on the same “real party in interest” theory. All
three of those cases have been removed to this Court. In the
Court’s view, the “real party in interest” theory, which is based
on the January 5 settlement agreement [between the THI Re-
ceiver and Targets], is completely without merit. In any case,
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21-10587 Opinion of the Court 77
Id.
On March 23, the Bankruptcy Court entered an order ap-
proving the Trustee’s proposed compromises; the approval was
conditioned on the entry of an injunction permanently enjoining
the Probate Estates from pursuing claims against any of the non-
settling defendants—in other words, the non-Fundamental De-
fendants. In addition to enjoining them in the manner it described
on March 20, the Bankruptcy Court also enjoined the Probate Es-
tates from “pursuing any claims against the non-settling Defend-
ants arising out of the nucleus of facts set forth in the adversary
complaint in this proceeding.” The Bankruptcy Court added this
proviso: “In the event any part of this Order is reversed on appeal,
the Motion to Compromise shall not be approved, and none of the
terms of the parties’ compromise shall become effective.”
On March 27, 2015, the THI Receiver appealed the Bank-
ruptcy Court’s decisions from March 20 and 23. On April 3, the
Probate Estates appealed the Bankruptcy Court’s March 20 Mem-
orandum Opinion and the final judgment it entered on March 27.
* * *
it is essentially the same as several of the claims asserted here
just recast under a different name, and even if it is somehow
distinct, that claim could have been litigated here.
In re Fundamental Long Term Care, Inc., 527 B.R. at 517 n.113.
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78 Opinion of the Court 21-10587
Commentary
As the Bankruptcy Court recognized, “the main thrust of
this case is the Plaintiffs’ claims for fraudulent transfer.” Wilkes let
the Probate Estates’ fraudulent transfer claims extinguish to pre-
serve its ability to seek multimillion-dollar jury verdicts in state
court, then filed a baseless Chapter 7 petition against an inoperative
shell corporation with no assets—not even potential causes of ac-
tion against FLTCH and the Targets. This, Wilkes thought, would
essentially set the Trustee to work for Wilkes. In the bankruptcy
proceeding, the Trustee could discover evidence that Wilkes could
not discover in various state court wrongful death cases. Wilkes
could use this evidence to potentially bring unrelated claims against
the defendant entities.
B.
On September 9, 2015, the Trustee moved the Bankruptcy
Court: (i) to approve another compromise, this time between the
Trustee and the bankruptcy estate’s professionals; (ii) to reconsider
and vacate in part the March 20 Memorandum Opinion and the
March 23 Order approving the two compromises described above;
(iii) to enter a separate opinion or order unconditionally approving
the $18.5 million settlement; and, if appropriate, (iv) to enter a sep-
arate opinion or order addressing the Targets’ requests for perma-
nent injunction, independent of the compromises discussed
herein, subject to the ongoing rights of all parties. The Settlement
Term Sheet attached to this motion provided that the proceeds of
any claims against Troutman would be placed in a Litigation Trust
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21-10587 Opinion of the Court 79
for the benefit of deferred litigation expenses and the Probate Es-
tates, that the Trustee (of the instant bankruptcy estate) would
serve as trustee of the Litigation Trust, and that she would take
“direction from a steering committee made up exclusively by the
Probate Estates and their representative(s).”
Following a hearing on October 5, the Bankruptcy Court
granted the compromise in an order entered on October 23, 2015.
The order adhered to the Bankruptcy Court’s position in its March
20 Memorandum Opinion that the $18.5 million settlement satis-
fied the Justice Oaks factors, but the order declined to condition ap-
proval of the settlement on a permanent non-appealable injunc-
tion. The Bankruptcy Court concluded that the compromise was
“fair and equitable in light of the permanent injunction the [Bank-
ruptcy] Court will enter enjoining the Probate Estates from pursu-
ing any claims against the non-settling Defendants arising out of
the same nucleus of facts” alleged in the complaint the Probate Es-
tates filed in initiating the adversary proceeding back on October 1,
2013.
On October 28, 2015, the Bankruptcy Court entered an or-
der granting the Trustee’s amended motion for approval of the
third compromise—the compromise between the Trustee, the
bankruptcy estate professionals, and the Probate Estates—which
included a payment to Shumaker: $5 million as an attorney’s fee
and costs of $620,148.48, for a total payment of $5,620,148.48. In
addition, the order approved the continuing work of the Trustee
found in the Settlement Term Sheet, providing that the proceeds
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80 Opinion of the Court 21-10587
of “[a]ny bankruptcy estate claims against [Troutman] and related
parties [were to] be put into a Litigation Trust” administered pur-
suant to the Settlement Term Sheet and that the Trustee would
serve as the trustee of the Litigation Trust after concluding her du-
ties as Trustee of the bankruptcy estate. The Bankruptcy Court
also approved the payment of certain administrative expenses and
the distribution of the balance:
[The] Initial Settlement Proceeds [go] to the trust ac-
count of Wilkes & McHugh, P.A. . . . for distribution
to the Probate Estates in accordance with the existing
fee agreements between them and their professionals,
as well as applicable Florida and Pennsylvania law re-
garding settlements of personal injury and wrongful
death claims, trust accounts, and contingency fee
agreements.
Finally, the Court granted four motions to compromise: one
with the Quintairos firm for $1.25 million; a second with GTCR-
related parties for $1.5 million; a third with Ventas and GECC for
$250,000 and $1.5 million, respectively; and a fourth with the THI
Receiver for $700,000—for a total of $5.2 million. Added to the
$18.5 million the Trustee received from the Fundamental Defend-
ants, the Trustee received settlements totaling $23.7 million. Of
the $23.7 million, the Probate Estates received about $16.2 million.
But as provided in settlement agreements between the Estates and
their attorneys, each estate received $1 million, less a $50,000 future
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21-10587 Opinion of the Court 81
cost reserve. The attorneys received the remainder as fees and
costs.81
On December 22, 2015, the Bankruptcy Court entered an
order granting Berman and Shumaker’s motion to withdraw as
special litigation counsel. The order provided that Shumaker
would “continue to assist with preparation of the Litigation Trust
Agreement” referred to in the October 28 order “at no additional
cost to the Trustee.”
C.
While the adversary proceeding Wilkes initiated on October
1, 2013, was coming to a close, the adversary proceeding the Trus-
tee initiated against Troutman on June 2, 2014,82 was still pending
on a motion to dismiss the complaint for failure to state a claim for
relief. Because the Troutman adversary proceeding affected the on-
going work of the Trustee, Berman, and Shumaker through the
Litigation Trust as described above, the opinion now turns to that
litigation.
On December 8, 2015, the Bankruptcy Court granted Trout-
man’s motion, dismissing Count I with prejudice and Counts II–V
with leave to amend. On May 6, 2016, the Trustee filed an amended
complaint against Troutman alleging four counts: conspiring with
FLTCH and others to defraud, and actually defrauding, THI’s
81 The law firms receiving these fees were: Wilkes; Howell & Thornhill, P.A.;
Stichter, Riedel, Blain & Postler, P.A.; and Kynes, Markman & Feldman, P.A.
82 See supra note 73.
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82 Opinion of the Court 21-10587
creditors; aiding and abetting the fraud; aiding and abetting
FLTCH’s conversion of THMI’s assets; and aiding and abetting
THI’s officers’ breach of their fiduciary duties to THMI.
Troutman answered the amended complaint, denying the al-
legations of wrongdoing and asserting 29 affirmative defenses. The
Trustee and Troutman thereafter entered into a settlement agree-
ment which required Troutman to pay FLTCI’s bankruptcy estate
the sum of $6.5 million—placed in the Litigation Trust—in ex-
change for a bar against future claims. On December 16, 2016, the
Trustee moved the Bankruptcy Court to approve that settlement
agreement. Wilkes objected to the Trustee’s motion on January
27, 2017. After a hearing, on May 17, 2017, the Bankruptcy Court
granted the Trustee’s motion. The Bankruptcy Court ruled with-
out considering Wilkes’s objection to the compromise because the
Probate Estates “lack[ed] a pecuniary interest” in the matter. On
May 31, Wilkes appealed the Bankruptcy Court’s decision to the
District Court.
On February 2, 2018, the Trustee moved to dismiss the ap-
peal on the ground that the Probate Estates did not have standing
to challenge her settlement with Troutman because the Probate
Estates were not “persons aggrieved.” The Probate Estates had
been “cashed-out” of the bankruptcy case, meaning that they
would receive nothing from the $6.5 million Troutman settlement.
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21-10587 Opinion of the Court 83
Rather, the entire sum would go to Wilkes (in the form of attor-
ney’s fees and costs).83
On May 30, 2019, in the midst of Wilkes’s attempts to dis-
qualify Shumaker and the bankruptcy judge, explained infra part
IV, the District Court issued an order holding that the Probate Es-
tates had standing to challenge the Troutman compromise agree-
ment, vacating the Bankruptcy Court’s order approving the settle-
ment, and remanding the matter so that the Bankruptcy Court
could determine in the first instance whether the Trustee had vio-
lated the provisions of the Settlement Term Sheet—which was part
of the compromise—by settling with Troutman without the Pro-
bate Estates’ approval.
On August 2, 2019, the Bankruptcy Court, on remand,
granted the Trustee’s motion to approve the Troutman compro-
mise. The Bankruptcy Court explained that because the Trustee
had not been discharged from her duties as Trustee of the bank-
ruptcy estate and the Bankruptcy Court had not approved the Liti-
gation Trust, the Trustee had the authority to enter into the settle-
ment with Troutman in her capacity as Chapter 7 Trustee.
Wilkes appealed the Bankruptcy Court’s decision on August
16, 2019, and on September 30, 2020, the District Court affirmed.
The District Court first held that the Bankruptcy Court did not
83 We assume in this opinion that Wilkes would share the proceeds of the
Troutman settlement with the other lawyers who represented the Probate Es-
tates.
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84 Opinion of the Court 21-10587
abuse its discretion in concluding that the Trustee had the authority
to enter into a settlement with Troutman because, according to the
plain language of the Settlement Term Sheet, the Probate Estates
could not gain control over any potential settlements until the
bankruptcy closed and the Trustee transitioned from Chapter 7
trustee to the trustee of the Litigation Trust. The District Court
also held that the Bankruptcy Court did not commit plain error by
finding the Troutman settlement fair because the Bankruptcy
Court’s determination had “substantial evidentiary support.”
Wilkes filed a motion for reconsideration on October 28,
2020. The District Court denied the motion on December 18, 2020.
The settlement with Troutman became final on January 20, 2021,
and on February 19, 2021, Troutman paid the Bankruptcy Estate
$6.53 million.
IV.
A.
While the dispute over the Troutman compromise was play-
ing out, several other disputes arose. These disputes stemmed
from a potential conflict of interest on Shumaker’s part. In short,
Wilkes believed Shumaker to have a conflict of interest and moved
to disqualify the firm from participating in the bankruptcy pro-
ceedings and disgorge the attorney’s fees it had received. But
Wilkes also believed that Chief Bankruptcy Judge Williamson had
a conflict of interest and moved to have him recused so that an-
other judge could decide the motion to disqualify Shumaker.
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21-10587 Opinion of the Court 85
According to Berman, some time after the Bankruptcy
Court approved the Trustee’s compromise with Troutman, Wilkes
approached the Trustee, her general counsel—Watkins—and the
Office of the United States Trustee, and alleged that Shumaker had
an undisclosed conflict of interest while representing the Trustee
such that Shumaker could not be considered “disinterested” under
11 U.S.C. § 327(a). The alleged conflict was based on Shumaker’s
long-standing legal representation of Healthcare REIT, Inc.
(“HCN”). Berman and Shumaker considered the allegation to be
meritless, so on May 4, 2018, under the penalty of perjury, Berman
filed a “Supplemental Disclosure” with the Bankruptcy Court,
which focused on Shumaker’s relationship with HCN.
The Supplemental Disclosure revealed the following: Shu-
maker had represented HCN, “a publicly traded real estate invest-
ment trust based in Toledo, Ohio,” for thirty years as outside coun-
sel “in corporate, real estate, and other transactional matters.”
HCN’s only connection with any of the Probate Estates was its
ownership of real estate leased to Lyric Health Care Holdings III,
Inc., the owner and operator of the Auburndale Oaks nursing
home in which Townsend and Jackson once resided. Under the
lease, HCN surrendered possession and control of the premises to
its lessee and therefore had no liability for injuries to anyone on the
premises. In the complaint it filed in Townsend (in state court) in
January 2009, Wilkes named HCN as a defendant. But once it ap-
peared that HCN had no involvement in the operation of the nurs-
ing home, Wilkes dismissed HCN from the case.
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86 Opinion of the Court 21-10587
On June 4, 2018—while the Trustee’s motion to dismiss the
Probate Estates’ appeal of the Bankruptcy Court’s May 17, 2017,
order approving the Troutman compromise was pending in the
District Court—Wilkes moved the Bankruptcy Court to disqualify
Berman and Shumaker as the Trustee’s special litigation counsel
nunc pro tunc and require them to disgorge the $5,620,148.48 they
received as costs and an attorney’s fee.84 The motion asserted that
the Bankruptcy Court should declare Berman and Shumaker dis-
qualified from the moment the Trustee sought its approval of their
employment as special litigation counsel because they were not dis-
interested as required by § 327(a). Moreover, the motion alleged
Berman and Shumaker failed to timely disclose their “connections
with the debtor, creditors, [or] any other party in interest”—con-
nections that revealed their disinterestedness—pursuant to Rule
2014. While the Supplemental Disclosure revealed Shumaker’s
connections to HCN, as well as its relationship with the Auburn-
dale Oaks property and the nursing home tenant, that disclosure
was untimely, according to Wilkes.
Wilkes accompanied that motion with a second motion—
this one seeking to “withdraw the reference” of the motion for dis-
qualification and disgorgement. If granted, the motion to with-
draw the reference would place the motion for disqualification and
disgorgement before the District Court, rather than the
84 We assume that the motion requesting disgorgement included the fee and
costs because it refers to “all past and future compensation.”
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21-10587 Opinion of the Court 87
Bankruptcy Court. For that reason, the motion to withdraw the
reference was placed on the District Court’s docket on July 3.
The motion to withdraw the reference reiterated the reasons
Shumaker should be disqualified: because HCN, which Shumaker
had been representing for thirty years, “was the owner of the nurs-
ing homes where four of the six [Probate] Estates resided [and] was
also a previous state court litigation adversary of the Townsend Es-
tate [in Townsend].” The motion to withdraw the reference then
leveled another allegedly disqualifying accusation, this one aimed
at the bankruptcy judge presiding over the case—Chief Judge Wil-
liamson.
According to that motion, Chief Judge Williamson should
not hear the motion to disqualify Shumaker because his law clerk,
Edward J. Comey, had been an associate at Shumaker and had
worked on bankruptcy cases with Berman. Had Shumaker dis-
closed that information in the Supplemental Disclosure before its
appointment as special litigation counsel, Chief Judge Williamson
could have considered whether to recuse himself—especially if
Comey’s history had come to light.
The District Court issued an order denying Wilkes’s motion
to withdraw the reference on November 1, 2018. In doing so, it
dealt straightforwardly with the points Wilkes made in the motion
to withdraw the reference:
The [Probate E]states contend in the motion that Shu-
maker’s representation of HCN, an owner of nursing fa-
cilities, creates a disqualifying conflict of interest.
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88 Opinion of the Court 21-10587
Also, the estates contend that Shumaker failed to dis-
close that a law clerk for the bankruptcy judge is a former
Shumaker associate and is married to a Shumaker partner.
Armed with these conflict theories, the [Probate
E]states demand that Shumaker disgorge all fees
earned in representing the trustee. . . .
The bankruptcy judge’s determination of the disqual-
ification motion promotes the efficient use of judicial
resources and advances uniformity in bankruptcy
procedure. The bankruptcy judge enjoys the ad-
vantage of presiding for six years over litigation in-
volving the estates, the trustee, and their counsel.
The bankruptcy judge “bring[s] a unique expertise to
the question of when simultaneous representa-
tion . . . is a conflict that works to the detriment of
the estate in bankruptcy [or] its creditors.” And the
bankruptcy judge “is on the front line, in the best po-
sition to gauge the ongoing interplay of factors and
to make delicate judgment calls” about the retention
and disqualification of counsel.
The resolution of a motion to disqualify counsel in
this circumstance is a core proceeding and the perti-
nent considerations decisively favor denying with-
drawal.
Order Denying Motion to Withdraw the Reference at 1–3, Estate of
Juanita Jackson v. Scharrer, No. 8:18-cv-01602 (M.D. Fla. Nov. 1, 2018)
(third and fourth alterations in original) (emphasis added) (citations
omitted).
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21-10587 Opinion of the Court 89
After failing in the District Court, on January 17, 2019,
Wilkes moved both Chief Judge Williamson and his law clerk to
recuse pursuant to 28 U.S.C. § 455 and Federal Rule of Bankruptcy
5004.85 The motion for recusal essentially tracked the points the
District Court elaborated on in its November 1 order: Shumaker’s
longstanding client, HCN, owned nursing facilities involved in the
bankruptcy case; Chief Judge Williamson’s law clerk was a former
Shumaker associate and is married to a Shumaker partner; and all
of this created an unacceptable conflict.
On June 7, 2019, Chief Judge Williamson decided Wilkes’s
recusal motion. He observed that § 455(b) “provides for the recusal
85 28 U.S.C. § 455 provides in relevant part:
(a) Any . . . judge . . . of the United States shall disqualify him-
self in any proceeding in which his impartiality might reason-
ably be questioned.
(b) He shall also disqualify himself in the following circum-
stances:
1. Where he has a personal bias or prejudice concerning a
party, or personal knowledge of disputed evidentiary facts con-
cerning the proceeding;
2. Where in private practice he served as a lawyer in the matter
in controversy, or a lawyer with whom he previously practiced
law served during such association as a lawyer concerning the
matter.
Rule 5004 provides: “[a] bankruptcy judge shall be governed by 28 U.S.C. §
455, and disqualified from presiding over the proceeding or contested matter
in which the disqualifying circumstances arise[] or, if appropriate, shall be dis-
qualified from presiding over the case.” Fed. R. Bankr. P. 5004(a).
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90 Opinion of the Court 21-10587
of a judge if the judge’s spouse has an interest that could be affected
by the outcome of the case, or if the judge has a personal bias or
personal knowledge of disputed facts in the case.” Chief Judge Wil-
liamson read Wilkes’s motion as centering on these points: (1) “that
Comey was previously associated with Shumaker”; (2) that Comey
“may have personal knowledge of the relationship” between HCN
and Shumaker; (3) that “Comey’s spouse has a financial interest in
Shumaker”; and (4) that “Comey’s conflict should be imputed to
the Court,” thereby necessitating the Bankruptcy Court’s recusal.
In responding to these points, Chief Judge Williamson stated
that he screened Comey from the case following the filing of the
motion to disqualify Shumaker and would not impute Comey’s
prior association with Shumaker or Comey’s wife’s status with the
law firm to himself. The judge acknowledged that
in evaluating a request for recusal of a judge, Courts
should consider whether there is an actual and rea-
sonable doubt concerning the judge’s impartiality.
Congress has required that a judge’s impartiality must
reasonably be questioned before the judge recuses
himself, “because there is a need to prevent parties
from manipulating the system for strategic reasons,
perhaps to obtain a judge more to their liking.”
In this case, the timing and circumstances of the Recusal
Motion suest that the request may stem from a search for
a different judge to consider the Disqualification Motion
and related issues, rather than a concern for the Court’s im-
partiality.
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21-10587 Opinion of the Court 91
The Probate Estates filed the Disqualification Motion
and the Recusal Motion, but will retain no money
from any settlements reached by the bankruptcy es-
tate. Wilkes, as attorney for the Probate Estates, has
admitted that the Probate Estates “[a]re not going to
get any cash” from future settlements generated by
the Trustee. Instead, the Probate Estates have con-
tractually agreed to convey any distributions from the
bankruptcy estate to their attorneys as payment of
the attorneys’ deferred fees and costs totaling more
than $7 million.
In the Disqualification Motion, the Probate Estates
seek the disgorgement from Shumaker of “any and
all past and future compensation approved by this
Court.” It appears, therefore, that the Probate Estates may
seek to collect any funds that Shumaker is required to dis-
gorge, solely in an effort to recoup their attorneys’ deferred
fees and costs. To the extent that the disgorged funds
are property of the bankruptcy estate, the Court pos-
sesses jurisdiction over the ultimate award of the dis-
gorged funds.
The Probate Estates initially moved to withdraw the
reference of the Disqualification Motion in order to
have it decided by a District Court judge. The Recusal
Motion was filed only after the District Court denied
the Motion to Withdraw the Reference, in part be-
cause the bankruptcy judge “enjoys the advantage of
presiding for six years over litigation involving the es-
tates, the trustee, and their counsel.”
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92 Opinion of the Court 21-10587
Under these circumstances, the Court has considered
whether the Recusal Motion was filed because of rea-
sonable doubts about its impartiality, or whether the
Recusal Motion was filed for the strategic purpose of
obtaining a different judge, and finds that recusal is
not warranted.
Order and Memorandum Opinion on Probate Estates’ Motion for
Recusal at 17–19, In re Fundamental Long Term Health Care, Inc., No.
8:11-bk-22258 (Bankr. M.D. Fla. June 7, 2019) (alteration in original)
(emphasis added) (citations and footnotes omitted).
On June 21, 2019, Wilkes moved the District Court for leave
to appeal the interlocutory order denying its motion to recuse. The
heart of Wilkes’s argument, in the District Court’s view, was that
the “late screening of Comey was insufficient to cure the alleged
bias” of Chief Judge Williamson.
On July 30, 2019, the District Court denied Wilkes leave to
appeal because it established none of the three elements required
under 28 U.S.C. § 1292(b) for an interlocutory appeal: (1) the appeal
did not present a controlling question of law; (2) the appeal failed
to present a substantial ground for difference of opinion; and (3)
resolution of the appeal would not advance the ultimate determi-
nation of litigation.86
86 The District Court noted that Wilkes had petitioned the District Court for
a writ of mandamus requiring Chief Judge Williamson “to recuse himself from
the entire Chapter 7 proceeding.” That petition was pending before another
district judge at the time the District Court denied Wilkes’s motion for leave.
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21-10587 Opinion of the Court 93
B.
On August 21, 2019, while Wilkes’s appeal of the Bank-
ruptcy Court’s approval of the Troutman settlement was pending,
the Bankruptcy Court decided the Probate Estates’ motion to dis-
qualify Berman and Shumaker and for disgorgement of their pay-
ment in a Memorandum Opinion. In re Fundamental Long Term
Care, Inc., 605 B.R. 249 (Bankr. M.D. Fla. 2019). The Bankruptcy
Court began by noting why Wilkes filed the motion two and a half
years after Shumaker’s withdrawal from the case as the Trustee’s
special litigation counsel: “The attorneys were dissatisfied with the
Trustee’s settlement of the proceeding against Troutman . . . be-
cause the projected $2.8 million distribution to the Probate Estates
from the settlement was insufficient to pay their deferred attor-
ney’s fees in the amount of $7,352,104.38.”87 Id. at 256.
87 As the Bankruptcy Court noted:
The [motion for disqualification and disgorgement] was also
filed after the Probate Estates unsuccessfully objected to the
Trustee’s compromise of the proceeding against Troutman
Sanders LLP. In the Objection, the Probate Estates com-
plained that the Trustee’s compromise improperly barred
them from pursuing their own claims against Troutman, and
that the compromise did not fairly disclose the amount of any
distribution that the Probate Estates would receive from the
settlement funds.
The Probate Estates ha[d] already received approximately
$16.2 million out of $23.7 million in settlements generated by
the Trustee during the course of the bankruptcy case. Of the
$16.2 million paid to the Probate Estates in the aggregate . . .
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94 Opinion of the Court 21-10587
The Bankruptcy Court then turned to the argument Wilkes
advanced in support of the Probate Estates’ motion:
In their Summary of Argument . . . the Probate Es-
tates assert that they have uncovered connections be-
tween Shumaker and at least four entities that af-
fected Shumaker’s disinterestedness: (1) Healthcare
REIT [HCN], which they assert is “an actual or poten-
tial adversary” of the Probate Estates and the bank-
ruptcy estate; (2) two entities known as Lyric Health
Care, LLC and Lyric Health Care Holdings III, Inc.
(together, Lyric), which they assert are adversaries of
the Probate Estates and THMI, the Debtor’s subsidi-
ary; and (3) Home Quality Management, Inc. (HQM),
which they assert is an adversary of two of the Pro-
bate Estates.
Id. at 256.
As the Bankruptcy Court saw it, Wilkes was contending that
Shumaker’s connections to HCN, Lyric, and HQM rendered Ber-
man and Shumaker “unable to fulfill [their] fiduciary duties to the
each individual probate estate actually received $1 million less
a $50,000.00 “future cost reserve.” The balance of the distri-
bution paid to the Probate Estates from the bankruptcy estate
was disbursed to their attorneys for their fees and other
charges. Consequently, the six Probate Estates received less
than $6 million from their total distribution of $16.2 million,
and the remaining $10 million was used to pay the Probate Es-
tates’ attorney’s fees and costs.
In re Fundamental Long Term Care, Inc., 605 B.R. at 255–56 (footnote omitted).
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21-10587 Opinion of the Court 95
only creditors in the bankruptcy case,” the Probate Estates, and
therefore incapable of being disinterested as required by 11 U.S.C.
§ 327(a). Id. at 256–57. In addressing this disinterestedness point,
the Bankruptcy Court first recalled the service § 327(a) and Rule
2014 perform in the administration of a bankruptcy estate.
Section 327(a) authorizes a trustee, with the court’s ap-
proval, to employ one or more attorneys or other professional per-
sons “that do not hold or represent an interest adverse to the estate,
and that are disinterested persons, to represent or assist the trustee
in carrying out the trustee’s duties.” Id. at 254 (quoting 11 U.S.C.
§ 327(a)). A “disinterested person” is a person who “does not have
an interest materially adverse to the interest of the estate or of any
class of creditors or equity security holders, by reason of any direct
or indirect relationship to, connection with, or interest in, the
debtor, or for any other reason.” Id. (emphasis added) (quoting 11
U.S.C. § 101(14)(C)). The Bankruptcy Code does not define the
phrase “interest materially adverse to the estate.” This Court has,
however, and we define a “materially adverse interest” as
an “economic interest that would tend to lessen the
value of the bankruptcy estate or that would create
either an actual or potential dispute in which the es-
tate is a rival claimant . . . or . . . a predisposition under
the circumstances that render such a bias against the
estate.”
Electro-Wire Prods., Inc. v. Sirte & Permutt, P.C., 40 F.3d 356, 361 (11th
Cir. 1994) (alteration in original) (quoting Roger J. Au & Son, Inc. v.
Aetna Ins. Co., 64 B.R. 600, 604 (N.D. Ohio 1986)).
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96 Opinion of the Court 21-10587
Federal Rule of Bankruptcy Procedure 2014 implements the
disinterestedness provision of § 327(a) by requiring professional
persons to make certain disclosures at the time they seek approval
of their employment. Specifically, a professional must set forth any
“connections with the debtor, creditors, or any other party in inter-
est, their respective attorneys and accountants, the United States
trustee, or any person employed in the office of the United States
trustee.” Fed. R. Bankr. P. 2014(a). Under the rule, a professional
must disclose all “connections” to parties in interest “that are not
so remote as to be de minimis.” In re Fullenkamp, 477 B.R. 826, 834
(Bankr. M.D. Fla. 2011) (quoting In re Leslie Fay Cos., Inc., 175 B.R.
525, 536 (Bankr. S.D.N.Y. 1994)) (internal quotations omitted).
As the Bankruptcy Court observed:
A professional who violates § 327(a) and Rule 2014
may be disqualified and may be required to disgorge
any fees that they have received for the representa-
tion. Section 328(c) of the Bankruptcy Code, for ex-
ample, provides that the Court may deny compensa-
tion to a professional person employed under § 327 if,
at any time during the professional person’s employ-
ment, he “is not a disinterested person, or represents
or holds an interest adverse to the interest of the es-
tate with respect to the matter on which such profes-
sional person is employed.” Similarly, a failure to dis-
close the connections required by Rule 2014 “can war-
rant disqualification, denial of compensation, and dis-
gorgement of any compensation already received.”
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21-10587 Opinion of the Court 97
In re Fundamental Long Term Care, Inc., 605 B.R. at 255 (footnotes
omitted).
With these principles in hand, the Bankruptcy Court consid-
ered the arguments Wilkes advanced in support of the Probate Es-
tates’ motion. Wilkes’s primary contention, as characterized by the
Bankruptcy Court, was that “Shumaker also represent[ed] [HCN],
which leased the underlying real property to certain of the nursing
homes involved in the wrongful death actions.” Id. at 252. Conse-
quently, HCN’s interest was “adverse to” the Probate Estates and
to the bankruptcy estate, and Shumaker’s representation of HCN
was not timely disclosed to creditors or the Bankruptcy Court. Id.
Characterizing HCN as the owner of the real property
leased to the nursing homes was only half true. HCN, according
to Wilkes, was “the owner of the nursing homes where the major-
ity of the [Probate Estates’ decedents] resided.” Id. at 257. And
Lyric and HQM were adversaries of the Probate Estates and THMI.
The Bankruptcy Court meticulously examined the way in
which HCN, Lyric, and HQM may have affected Shumaker’s disin-
terestedness under § 327(a). Here is what the Bankruptcy Court
found, starting with HCN.
HCN
It was undisputed that Shumaker represented HCN, a real
estate investment trust, and had done so for several years. The only
tangible connection between HCN and any of the Probate Estates
occurred in June 2005, when HCN purchased the real property on
which the Auburndale Oaks nursing home was located and in
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98 Opinion of the Court 21-10587
which Townsend and Jackson resided. Contrary to Wilkes’s repre-
sentation, however, HCN did not own or operate the facility. HCN
merely leased the property to a tenant—one of the Lyric entities—
and that entity operated the home. As the Bankruptcy Court noted:
Despite scores of hours of deposition testimony and
thousands of exhibits developed through a joint dis-
covery effort, [Wilkes] and the Trustee never consid-
ered [HCN] as potentially liable to the bankruptcy es-
tate because of any prepetition transactions. In fact,
[Wilkes] acknowledge[s] that [HCN]’s existence and
contact with THI appeared in deposition exhibits,
Bates-stamped documents, and other discovery mate-
rials in the case. But [HCN] never emerged from the
materials as a potential target for recovery. The
March 2006 transaction [the bust-out scheme], for ex-
ample, was “front and center” of the [Adversary] Pro-
ceeding, but the joint investigation by the Trustee and
[Wilkes] never revealed any potential claim against
[HCN] arising out of a connection with THI.
Id. at 260 (footnote omitted).
The Bankruptcy Court cited a letter that Watkins, the Trus-
tee’s general counsel, wrote to Wilkes on January 18, 2018—four
and a half months before Wilkes filed the motion to disqualify Shu-
maker as the Trustee’s litigation counsel. The letter was in re-
sponse to Wilkes’s letter to Watkins of December 29, 2017, in
which Wilkes attached 18 items purportedly showing that Shu-
maker’s relationship to HCN disqualified Shumaker from serving
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21-10587 Opinion of the Court 99
as the Trustee’s counsel. The Bankruptcy Court quoted the follow-
ing from Watkins’s letter to Wilkes:
The Involuntary [Chapter 7] petition was filed on De-
cember 5, 2011. Despite your knowledge that [HCN]
was a party to the Briar Hill suit for a short period of
time, I have no records or recollection of [HCN] be-
ing a topic of discussion (as a potential target or oth-
erwise) in the bankruptcy case. [HCN] was also not
a creditor in the bankruptcy case, and did not appear
to have any ongoing business or contact with the
Debtor, [FLTCI]. In fact, the first time [HCN] was
brought to our attention is when you raised Shu-
maker’s alleged conflict of interest in or about Sep-
tember 2017, nearly 6 years after the involuntary pe-
tition had been filed.
Id.
The Bankruptcy Court then stated that “[b]ased on [its] re-
view of the documents sent by [Wilkes], the Trustee’s general
counsel did not see how [HCN] had any relationship to the
Debtor[] and did not find a conflict created by Shumaker’s repre-
sentation of [HCN].” Id. (internal quotation marks omitted). The
Bankruptcy Court ended its analysis of the HCN issue by conclud-
ing that Shumaker’s relationship with HCN was not disqualifying
under § 327:
In summary, [Wilkes] allege[s] that [HCN] had prepe-
tition connections to THI that were not investigated
in the bankruptcy case because of [HCN]’s attorney-
client relationship with Shumaker. But the
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100 Opinion of the Court 21-10587
prepetition transactions were the subject of exhaus-
tive joint discovery and litigation in multiple proceed-
ings, and neither [Wilkes] nor the Trustee ever con-
sidered [HCN] as potentially liable to the bankruptcy
estate. For these reasons, Shumaker’s representation
of [HCN] did not lessen the value of the bankruptcy
estate, create a potential dispute between the bank-
ruptcy estate and [HCN], or create a circumstance
that would generate a bias against the bankruptcy es-
tate.
Id. at 260–61.
Lyric
The Bankruptcy Court provided a brief explanation of Shu-
maker’s relationship with Lyric:
[HCN] leased the property underlying the Auburn-
dale Oaks nursing facility to Lyric . . . after [HCN] pur-
chased the property in 2005, and Lyric thereafter op-
erated the nursing home facility. [HCN] sold the
property in December 2012. Shumaker acknowl-
edges that Lyric may have made payments to Shu-
maker in relatively small amounts during Lyric’s lease
of the property[,] . . . such payments represent[ing]
compensation for work performed by Shumaker
for . . . [HCN]. Shumaker’s services were not pro-
vided to Lyric, and Lyric made the payments only
pursuant to its obligations under the lease.
Id. at 261.
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21-10587 Opinion of the Court 101
Summarizing, the Bankruptcy Court found that “Shumaker
did not serve as Lyric’s attorney, and [] its representation of Lyric’s
landlord did not create a disqualifying conflict of interest in the
bankruptcy case.” Id.
HQM
HQM operated nursing homes in Florida under leases with
HCN; HCN served as landlord and owned the real estate on which
the homes were situated. Shumaker never served as HQM’s attor-
ney—but, as with Lyric, Shumaker may have received payments
from HQM pursuant to its contract with HCN. The payments
would be for work Shumaker performed for HCN. Id. at 262.
The Probate Estates sued HQM in Nunziata and Webb, but
HQM was dismissed from the lawsuits in 2009, two years prior to
the Chapter 7 bankruptcy case here. Neither Wilkes nor the Trus-
tee considered HQM a Target—that is, a transferee of THMI’s as-
sets—so HQM was not mentioned in the complaint Wilkes filed in
the bankruptcy case to initiate the adversary proceeding. In sum,
the Bankruptcy Court found that Shumaker’s representation of
HQM’s landlord, HCN, did not create a conflict of interest in the
bankruptcy case. Id.
Having concluded that Shumaker’s legal representation of
HCN and Shumaker’s interactions with Lyric and HQM were, in
effect, immaterial to its § 327(a) analysis, the Bankruptcy Court re-
turned to Wilkes’s contention that Shumaker failed to comply with
Rule 2014 by omitting its representation of HCN from its initial
disclosures. The Bankruptcy Court found no violation because
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102 Opinion of the Court 21-10587
Shumaker’s representation of [HCN] was not adverse
to the Probate Estates or to the bankruptcy estate
[and] there [was] no evidence that Shumaker was
aware of any alleged connection between [HCN] and
the Probate Estates, or [HCN] and the bankruptcy es-
tate, before [Wilkes] raised the issue in 2017. In other
words, this [was] not a situation in which Shumaker
knew of the alleged connections and deliberately
chose not to disclose them, or in which Shumaker’s
conflict check system was wholly inadequate.
Id. at 263.
Based on the foregoing analysis, the Bankruptcy Court, on
August 21, 2019, entered an order denying the motion for disquali-
fication and disgorgement.
C.
The Probate Estates appealed that order to the District
Court. The District Court found no error in the Bankruptcy
Court’s conclusion that Shumaker’s pre-petition connections with
HCN, Lyric, and HQM did not create a disqualifying conflict of in-
terest in the bankruptcy case under § 327(a).88 In re Fundamental
Long Term Care, Inc., No. 8:19-cv-2176-T-33, 2020 WL 954982, at *8–
9 (M.D. Fla. Feb. 27, 2020). The District Court did find error,
88 Whether Shumaker’s connections with HCN, Lyric, and HQM created a
disqualifying conflict of interest under 11 U.S.C. § 327(a) presented a mixed
question of fact and law. The District Court found no clear error in the Bank-
ruptcy Court’s fact findings regarding Shumaker’s involvement with HCN,
Lyric, and HQM and the entities’ relationship to the bankruptcy estate.
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21-10587 Opinion of the Court 103
however, in the Bankruptcy Court’s analysis of the issues presented
by the Probate Estates’ argument that Shumaker violated Rule
2014.
The District Court began its discussion of the Bankruptcy
Court’s order denying Wilkes’s motion for disqualification and dis-
gorgement by noting that the Bankruptcy Court found that Shu-
maker did not violate Rule 2014 by omitting its representation of
HCN in its initial disclosures. Id. at *11. The Bankruptcy Court
reached this conclusion based on its finding that there was no evi-
dence that Shumaker was aware of any alleged connection be-
tween HCN and the Probate Estates or between HCN and the
bankruptcy estate. Id. This, the Bankruptcy Court added, was not
a situation in which Shumaker knew of the alleged connections and
deliberately chose not to disclose them, or one in which the opera-
tion of the conflict system in the Shumaker law office was wholly
inadequate and thus could not be relied on. Id. In short, there was
“no knowing violation of Rule 2014 by Shumaker.” Id.
Although the District Court saw no error in the Bankruptcy
Court’s finding that Shumaker did not knowingly violate Rule
2014, it was concerned about what the order did not say. It was
“unclear . . . whether the Bankruptcy Court considered a negligent
or inadvertent nondisclosure after the initial disclosure was made.”
Id. at *12. As the District Court explained, the order was
ambiguous . . . [and] otherwise silent as to whether
the Bankruptcy Court analyzed—under a negligence
lens—Shumaker’s failure to identify and disclose po-
tential connections between its 30-year, long term
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104 Opinion of the Court 21-10587
client and the bankruptcy estate, its creditors, and
other parties of interest after the initial disclosures
were made. Additionally, the [order was] silent as to
the nondisclosures of connections to Lyric and HQM.
Id.89
The District Court therefore vacated the Bankruptcy
Court’s Rule 2014 ruling and remanded the matter to the Bank-
ruptcy Court so it could consider the record through the negli-
gence lens and determine, in the first instance: (1) whether there
was “an unintentional, negligent and/or inadvertent nondisclo-
sure” of Shumaker’s connections to HCN, Lyric, and HQM; (2)
whether a Rule 2014 violation occurred; (3) if so, whether sanctions
were warranted; and (4) if sanctions were warranted, what type of
sanctions would be warranted. Id. In all other respects, the District
Court affirmed the order denying the motion for disqualification
and disgorgement. Id. at *13.
D.
On remand, the Bankruptcy Court complied with the Dis-
trict Court’s mandate, answering the questions the District Court
put to it:
Th[is] Court has considered the record on remand
and finds that Shumaker inadvertently and non-negli-
gently failed to disclose all of its connections with the
Debtor, creditors, or other interested parties in this
89 The District Court appears to have overlooked the payments Lyric and
HQM made to Shumaker pursuant to the lease agreements with HCN.
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21-10587 Opinion of the Court 105
case. The Court further finds that no sanctions are
warranted because the connections did not create a
disqualifying conflict of interest, the nondisclosures
were inadvertent, the connections were not material,
Shumaker corrected the inadvertent nondisclosures,
and Shumaker’s representation of the Trustee greatly
benefited the bankruptcy estate.
In re Fundamental Long Term Care, Inc., 614 B.R. 753, 756 (Bankr.
M.D. Fla. 2020).
After making these findings, the Bankruptcy Court ex-
plained how it reached them. It did so after citing the disclosures
Wilkes says Shumaker should have made. Wilkes again alleged that
Shumaker failed to disclose its connections with HCN, Lyric, and
HQM pre-petition. See id. at 757.
According to Wilkes, Shumaker’s connections with these en-
tities should have been revealed on June 1, 2012, in Shumaker’s dec-
laration of disinterestedness filed with the Trustee’s application for
approval of Shumaker’s employment. If not then, Wilkes argued,
the disclosures should have been made at any of the following
times: on March 22, 2013, in a supplemental disclosure in support
of the application; on February 6, 2014, in an amended declaration
of disinterestedness to accompany the Trustee’s motion to modify
the terms of Shumaker’s retention as special counsel; or on July 27,
2016, in a notice related to continued disinterestedness.
Neither the first declaration nor any of the supplements
Wilkes mentioned disclosed any connection between Shumaker
and HCN, Lyric, or HQM. The Bankruptcy Court found that “the
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106 Opinion of the Court 21-10587
omission was inadvertent and not the result of negligence.” Id. at
760–61. The case law did not explain what constitutes negligent
nondisclosure under Rule 2014, so the Bankruptcy Court drew on
Florida law in concluding that the omissions were not caused by
negligence:
Generally, . . . a misrepresentation is negligent under
Florida law if the representor “should have known the
representation was false.” To state a claim for negli-
gent misrepresentation, for example, a plaintiff must
allege that the representation was made “without
knowledge of its truth or falsity, or . . . under circum-
stances in which he ought to have known of its fal-
sity.”
Id. at 761 (footnote omitted).
In determining whether Shumaker was negligent, the Bank-
ruptcy Court was mindful that:
[U]nder Rule 2014, an attorney is not charged with
the duty to disclose “every conceivable interpretation
of its connections and possible consequence resulting
from the connections; as well as a prediction of the
outcome of any litigation that may result from, or be
related to, the referenced connection.” When an at-
torney seeks employment in a bankruptcy case, the
disclosure required by Rule 2014 should not be “an
impossible task subject to endless litigation over what
would be enough.”
Id. (footnotes omitted).
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21-10587 Opinion of the Court 107
In the Bankruptcy Court’s view, the record “d[id] not show
that Shumaker knowingly omitted its connections with HCN,
Lyric, and HQM from its Declarations,” or that “Shumaker omit-
ted the connections under circumstances in which it should have
known of the requirement to disclose.” Id.
The Bankruptcy Court considered whether Shumaker’s sup-
plemental disclosures—of May 4, 2018, after Wilkes raised the is-
sue of Shumaker’s potential conflict of interest, and on July 3, 2018,
in a memorandum Shumaker filed in opposition to the motion for
disqualification and disgorgement—cast light on Shumaker’s dec-
larations so that Shumaker should have known that it had been re-
quired to disclose its connections with HCN, Lyric, and HQM from
the outset. The Bankruptcy Court found that the May 4 and July 3
supplemental disclosures contained nothing indicating that Shu-
maker, from the start, omitted disclosing its connections with
those entities under circumstances in which it should have known
that it had to disclose them.
Regarding HCN, the Bankruptcy Court reasoned:
The [May 4] Supplemental Disclosure include[d] the
following representations with respect to HCN: (1)
Shumaker did not represent HCN in the action com-
menced on behalf of the Townsend Estate, and there-
fore did not find any client representation adverse to
the Debtor’s creditors when it ran its conflicts checks;
(2) Shumaker was never litigation counsel for HCN as
against any of the Probate Estates; (3) Shumaker took
only limited action as outside counsel in the
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108 Opinion of the Court 21-10587
Townsend litigation by signing interrogatory re-
sponses, did not open a file for the Townsend litiga-
tion, and did not find any connection between the
Townsend Estate and Shumaker in its conflicts
checks; (4) none of the Probate Estates had any claim
against HCN as of the date that the bankruptcy peti-
tion was filed; (5) neither Shumaker nor the Trustee
knew of a connection between HCN and the Town-
send Estate before the Probate Estates raised the issue
in 2017; and (6) HCN was never a target of any poten-
tial litigation by the Trustee, and was never discussed
by the Trustee or the Probate Estates’ attorneys.
Id. at 761–62 (footnotes omitted).
Regarding Lyric, the May 4 disclosure revealed:
(1) Lyric was never Shumaker’s client; (2) Shumaker’s
conflict system reflects that Lyric was an adverse
party to HCN in corporate or real estate transactions
that Shumaker worked on for HCN; (3) any payments
received by Shumaker from Lyric likely represented
reimbursement to HCN for charges that HCN had in-
curred; and (4) Lyric was never a target of any litiga-
tion by the Trustee in the bankruptcy case.
Id. at 762 (footnotes omitted).
In the memorandum from July 3, 2018, Shumaker “ad-
dressed the [Probate Estates’] allegations regarding HQM by stat-
ing that HQM [was] not its client, that HQM had leased real prop-
erty from HCN upon which it operated nursing homes in Florida,
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21-10587 Opinion of the Court 109
and that HQM was never a target of any litigation in the bank-
ruptcy case.” Id.
Taking the supplemental disclosures of May 4 and July 3 into
account, the Bankruptcy Court found:
Shumaker did not omit its connections with HCN,
Lyric, and HQM under circumstances in which it
should have known of the requirement to disclose.
Shumaker did not represent HCN in any pre-bank-
ruptcy litigation involving the Probate Estates, and
none of HCN’s pre-petition transactions ever sur-
faced as targets in the bankruptcy case despite exhaus-
tive discovery and litigation. Lyric and HQM were
not Shumaker’s clients. Instead, they were adverse to
Shumaker’s client because of their landlord-tenant re-
lationships.
Shumaker performed its customary conflicts checks,
and no conflict appeared in its files. There is nothing
in the record to show that Shumaker disregarded flags
that should have alerted it to the connections, that
Shumaker’s conflict check system is inherently
flawed, or that Shumaker maintains the system in a
manner that reflects poor intra-firm communication
and data input.
Id.
After noting that circumstances involving a conflict check
system may constitute grounds for finding an intentional violation
of Rule 2014, the Bankruptcy Court then quoted In re Fullenkamp:
“[G]iven the various relationships between the parties, the Court is
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110 Opinion of the Court 21-10587
comfortable that [the] failure to discover the relationship was not .
. . the result of a woefully inadequate conflict check system.” Id.
(quoting In re Fullenkamp, 477 B.R. 826, 834 (Bankr. M.D. Fla. 2011)
(internal quotation marks omitted)).
Next, the Bankruptcy Court noted that
[i]n Fullenkamp, the Court concluded that the omis-
sion was inadvertent and did not rise to the level of a
sanctionable nondisclosure. In this case, as in Ful-
lenkamp, the record does not show that Shumaker in-
itially omitted its connections to HCN, Lyric, and
HQM under circumstances in which it should have
known of the requirement to disclose. The omission
was not the result of negligence.
Id. at 762–63 (footnote omitted).
Finally, the Bankruptcy Court addressed the question of
sanctions. It concluded that “no sanctions [were] warranted for the
omission because the connections did not create a disqualifying
conflict, the omission was inadvertent, the connections were not
material to the bankruptcy estate, Shumaker corrected the omis-
sions, and Shumaker’s representation provided a substantial benefit
to the estate.” Id. at 765–66.90
90 Regarding sanctions—that is, the disgorgement the Probate Estates were
seeking from Shumaker—the Bankruptcy Court noted that “any compensa-
tion recovered from Shumaker would be used to pay the balance of the attor-
ney’s fees or costs owed by the [Probate] Estates” to Wilkes and would not go
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21-10587 Opinion of the Court 111
E.
The Probate Estates appealed the Bankruptcy Court’s reso-
lution of the Rule 2014 liability issues to the District Court. Wilkes
argued that the Bankruptcy Court: (1) abused its discretion in deny-
ing the Probate Estates an opportunity to conduct discovery on
whether Shumaker’s omission to disclose its pre-petition connec-
tions with HCN, Lyric, and HQM was unintentional, negligent,
and/or inadvertent; (2) abused its discretion in failing to hold a
hearing on whether such omission was unintentional, negligent,
and/or inadvertent; and (3) used an inapplicable standard in deter-
mining whether such omission was unintentional, negligent,
and/or inadvertent. See In re Fundamental Long Term Care, Inc., No.
8:20-cv-956, 2021 WL 222779, at *3 (M.D. Fla. Jan. 22, 2021).
Addressing the first argument, the District Court recalled
that, in the prior appeal, it “held that the Bankruptcy Court had a
sufficient record to conclude that there was no intentional violation
of Rule 2014.” Id. (citing In re Fundamental Long Term Care, Inc.,
2020 WL 954982, at *11). Wilkes contended that that record was
insufficient, though, to permit the Bankruptcy Court to determine
that Shumaker’s nondisclosure of its connections with HCN, Lyric,
and HQM was an unintentional, negligent, or inadvertent nondis-
closure. Wilkes also contended that the Bankruptcy Court’s denial
of its request to reopen discovery for the purpose of establishing a
to the Probate Estates themselves. In re Fundamental Long Term Care, Inc., 614
B.R. at 755.
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112 Opinion of the Court 21-10587
record sufficient to resolve that issue constituted an abuse of its
right to discovery.
The District Court disagreed and held that the Bankruptcy
Court did not err in limiting discovery on remand. Id. The District
Court noted that the Bankruptcy Court was intimately familiar
with the factual and procedural history of the case, which had
spanned several years. “Discovery was voluminous, as evidenced
by [Wilkes’s] thirty-seven-page Motion to Disqualify and thirty-
four attached exhibits, consisting of hundreds of pages. Shu-
maker’s response also exceeded thirty pages and contained nine-
teen attached exhibits.” Id. Elaborating on the record before the
Bankruptcy Court, the District Court said:
A negligence inquiry may differ from an intentional-
ity inquiry, but these filings indicate the parties exten-
sively briefed all facets of disqualification. The record
provided the Bankruptcy Court with a thorough his-
tory of Shumaker’s relationship with HCN, including
the nature of previous legal representations, the pre-
cise legal tasks Shumaker performed for HCN, and
how HCN affected Shumaker’s conflict checks. The
record likewise contained detailed information on
Shumaker’s interactions with Lyric and HQM, and
how those entities appeared in the conflict system.
The Bankruptcy Court was well within its discretion
to base its decision on this information and to limit
discovery it deemed unnecessary.
Id. (citations omitted).
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21-10587 Opinion of the Court 113
Like its first argument, Wilkes’s second argument asserted
an abuse of discretion. Wilkes argued that the Bankruptcy Court
should have held an evidentiary hearing because material issues of
fact existed regarding Shumaker’s failure to disclose its connections
with HCN, Lyric, and HQM. Again, the District Court disagreed,
reasoning that the extensive filings presented to the Bankruptcy
Court in support of and in opposition to the motion to disqualify
provided the Bankruptcy Court with “ample evidence” from which
to make the findings the District Court requested. Id. at *4. The
District Court then explained that “a bankruptcy judge ‘does not
abuse her discretion in reaching a decision without holding an evi-
dentiary hearing where the record provided ample evidence on
which the court could make such a decision.’” Id. (quoting In re
Garcia, 532 B.R. 173, 182 (B.A.P. 1st Cir. 2015)). The District Court
noted that this was not a case where the record was inadequate to
allow the Bankruptcy Court to resolve disputed issues of material
fact and it was “unnecessary to conduct an evidentiary hearing on
a contested matter unless there are disputed issues of material fact
that a Bankruptcy Court cannot decide based on the record.” Id.
(internal quotation marks and citation omitted).
Wilkes’s third argument was that the Bankruptcy Court
abused its discretion in relying on the negligent misrepresentation
standard of Florida law in determining whether Shumaker’s failure
to disclose its pre-petition interactions with HCN, Lyric, and HQM
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114 Opinion of the Court 21-10587
in its Rule 2014 disclosure was negligent.91 Because “Shumaker had
an affirmative duty to disclose any relevant connections,” Wilkes
argued, “the correct analysis should have been one of reasonable-
ness.” Id. “By erroneously appl[ying] the elements of the fraud-
based tort of negligent misrepresentation, rather than conducting
a reasonableness analysis, [Wilkes] claim[s] the Bankruptcy Court
abused its discretion.” Id. (first alteration in original) (internal quo-
tation marks and citation omitted).
The District Court disagreed with Wilkes’s characterization
of the Bankruptcy Court’s opinion. According to the District
Court:
The Estates argue that the Bankruptcy Court focused
“almost entirely on [Shumaker’s] asserted lack of
knowledge,” but Shumaker’s “purported lack of its
undisclosed connections is not determinative to a
negligence analysis.” Therefore, according to the Es-
tates, the Bankruptcy Court used an incorrect legal
standard because it “never analyzed the reasonable-
ness of [Shumaker’s] asserted lack of knowledge un-
der the circumstances.”
But the Bankruptcy Court specifically examined the
circumstances under which Shumaker failed to dis-
close its connections. In concluding that the omission
was not the result of negligence, the Bankruptcy
91 Whether a court has misapplied the substantive law controlling its decision
presents a question of law, not of discretion. The District Court’s analysis of
the third argument correctly treated the negligence issue as a question of law.
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21-10587 Opinion of the Court 115
Court not only considered what Shumaker purport-
edly knew through its conflict check system, but also
noted that (1) Shumaker never represented HCN in
any pre-bankruptcy litigation involving the Estates,
(2) HCN never surfaced as a target in the bankruptcy
action despite exhaustive discovery on potential tar-
gets, and (3) Shumaker never represented Lyric or
HQM, but only dealt with them in an adverse posture
as counsel for their landlords.
Based on Shumaker’s purported knowledge at the
time of the omissions, and these surrounding circum-
stances, the Bankruptcy Court held that the omis-
sions were not made under circumstances in which
Shumaker “should have known of the requirement to
disclose.” Therefore, the Court disagrees with the Es-
tates’ contention that the Bankruptcy Court entirely
eschewed the issue of reasonableness. The Bank-
ruptcy Court considered the circumstances in which
the omission was made and concluded that under the
circumstances, the omission was “not the result of
negligence.”
The Court disagrees that the use of a negligent mis-
representation standard constituted an abuse of dis-
cretion. As noted by the Bankruptcy Court, no case
law explains what constitutes a negligent nondisclo-
sure under Rule 2014. Even the Estates’ cited case law
states that there is “no clear definition of [the term
negligence] in the context of discovery misconduct.”
Therefore, the Court cannot say that the Bankruptcy
Court used a clearly incorrect legal standard in
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116 Opinion of the Court 21-10587
evaluating Shumaker’s omissions as negligent misrep-
resentations.
Id. at *5 (alterations and emphasis in original) (citations omitted).
Based on what Shumaker knew at the time of the omissions
and these surrounding circumstances, the Bankruptcy Court held
that Shumaker’s omissions “were not made under circumstances in
which Shumaker ‘should have known of the requirement to dis-
close.’” Id. (quoting In re Fundamental Long Term Care, Inc., 614 B.R.
at 763). The District Court therefore disagreed with Wilkes’s claim
that the Bankruptcy Court “entirely eschewed the issue of reason-
ableness.” Id. “The Bankruptcy Court considered the circum-
stances in which the omission was made and concluded that under
the circumstances, the omission was ‘not the result of negligence.’”
Id. (quoting In re Fundamental Long Term Care, Inc., 614 B.R. at 763).
The District Court noted that, contrary to Wilkes’s position,
the Bankruptcy Court acted consistent with the instructions it was
given on remand when it used a negligent misrepresentation stand-
ard. The Bankruptcy Court was instructed “to examine whether
there was an ‘unintentional, negligent and/or inadvertent nondis-
closure by Shumaker.’” Id. (quoting In re Fundamental Long Term
Care, Inc., 2020 WL 954982, at *13). “By definition, failing to dis-
close all relevant connections would be a negligent misrepresenta-
tion by omission.” Id. Therefore, the District Court found itself
unable to say that the Bankruptcy Court erred in evaluating Shu-
maker’s omission under a negligent misrepresentation standard.
Id.
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21-10587 Opinion of the Court 117
In addition, the District Court agreed with Shumaker that
the use of the negligent misrepresentation legal
standard [was] consistent with the purpose of Rule
2014. The rule requires an applicant for appointment
by the trustee to “state the specific facts showing . . .
to the best of the applicant’s knowledge, all of the
person’s connections with the debtor, creditors, any
other party in interest, their respective attorneys and
accountants, the United States trustee, or any person
employed in the office of the United States trustee.”
. . . [T]his rule does not require attorneys to raise
“every conceivable interpretation of its connections
and possible consequence resulting from the connec-
tions, as well as a prediction of the outcome of any
litigation that may result from, or be related to, the
referenced connection.”
Id. (citations omitted). The District Court concluded its consider-
ation of Wilkes’s third argument by holding: “Examining Shu-
maker’s omission under a negligent misrepresentation standard
(that is, whether Shumaker omitted the connections under circum-
stances in which it ‘ought to have known of its falsity’) [was] con-
sistent with this purpose” and was not an abuse of discretion. Id.
at *6.
Based on the filings the parties submitted regarding Shu-
maker’s Rule 2014 disclosures, the Bankruptcy Court had found
that “there was no evidence showing Shumaker disregarded any
red flags that should have alerted it to the connections or that the
conflict system was inherently flawed, or that Shumaker
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118 Opinion of the Court 21-10587
maintained the conflict system in a manner that reflects poor intra-
firm communication and data input.” Id. The District Court found
no error in the Bankruptcy Court’s conclusion that Shumaker’s fail-
ure to disclose its connections with HCN, Lyric, and HQM was
non-negligent and inadvertent. Id. The District Court therefore
affirmed the Bankruptcy Court’s denial of the motion for disquali-
fication and disgorgement. Id. at *7.
V.
The Probate Estates now appeal the District Court’s deci-
sion affirming the Bankruptcy Court’s April 16, 2020, order deny-
ing the motion for disqualification and disgorgement. They pre-
sent five issues for our review; Shumaker presents three.92 They
92 The issues that the Probate Estates present are:
I. Whether the District Court erred in affirming the Bank-
ruptcy Court’s determination on remand when the District
Court found that [Shumaker] did not dispute that it repre-
sented [HCN], or that [HCN] was the landlord and owner of
[Lyric] at one time.
II. Whether the District Court erred in affirming the Bank-
ruptcy Court’s determination on remand that [Shumaker’s] vi-
olations were nonnegligent.
III. Whether the District Court erred in affirming the Bank-
ruptcy Court’s use of a negligent misrepresentation standard
rather than conducting a reasonableness analysis of [Shu-
maker’s] violations.
IV. Whether the District Court erred in determining that the
use of the negligent misrepresentation legal standard is
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21-10587 Opinion of the Court 119
are essentially the same set of issues: (1) whether the District Court
erred in affirming the Bankruptcy Court’s decision that Shumaker
did not have a disqualifying interest under 11 U.S.C. § 327(a); (2)
whether the District Court erred in affirming the Bankruptcy
Court’s decision that Shumaker’s omission in its Rule 2014 disclo-
sures of its pre-petition connections with HCN, Lyric, and HQM
was inadvertent and not negligent; and (3) whether the Bankruptcy
Court abused its discretion in finding that sanctions were not war-
ranted for the omission.93
consistent with the purpose of Federal Rule of Bankruptcy
Procedure 2014.
V. Whether the District Court erred in affirming the Bank-
ruptcy Court’s determination on remand that [Shumaker’s] vi-
olations were inadvertent.
Appellants’ Br. at 1. Shumaker’s brief presents the issues this way:
(1) whether the Bankruptcy Court abused its discretion when
it found that Shumaker did not possess a disqualifying interest
under 11 U.S.C. § 327(a), which finding was affirmed by the
District Court; (2) whether the Bankruptcy Court abused its
discretion when it found that Shumaker’s omission of imma-
terial connections from its Rule 2014 disclosures was inadvert-
ent and not negligent; and (3) whether the Bankruptcy Court
abused its discretion when it found no sanctions were war-
ranted for Shumaker’s omissions.
Appellees’ Br. at 2.
93 Because we resolve the first two issues in Shumaker’s favor, we need not
consider the third issue.
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120 Opinion of the Court 21-10587
In entertaining these issues, we sit as a second court of re-
view. We therefore examine independently the factual and legal
determinations of the Bankruptcy Court and employ the same
standards of review the District Court employed. In re Issac Leaseco,
Inc., 389 F.3d 1205, 1209 (11th Cir. 2004). We review legal conclu-
sions of the Bankruptcy Court or the District Court de novo, and
we review the Bankruptcy Court’s findings of fact for clear error.
In re Fin. Federated Title & Tr., Inc., 309 F.3d 1325, 1328–29 (11th Cir.
2002).
We review denials of motions for sanctions, disqualification,
and disgorgement for abuse of discretion. See In re Hood, 727 F.3d
1360, 1363 (11th Cir. 2013) (sanctions); Giles v. Garwood, 853 F.2d
876, 878 (11th Cir. 1988) (disqualification); S.E.C. v. Levin, 849 F.3d
995, 1001 (11th Cir. 2017) (disgorgement). “An abuse of discretion
occurs if the judge fails to apply the proper legal standard or to fol-
low proper procedures in making the determination or bases an
award upon findings of fact that are clearly erroneous.” Electro-
Wire Prods., Inc. v. Sirte & Permutt, P.C., 40 F.3d 356, 359 (11th Cir.
1994) (internal quotation marks and citations omitted).
A.
Section 327(a) of the Bankruptcy Code provides that “the
trustee, with the court’s approval, may employ one or more attor-
neys, accountants, appraisers, auctioneers, or other professional
persons, that do not hold or represent an interest adverse to the
estate, and that are disinterested persons, to represent or assist the
trustee in carrying out the trustee’s duties.” 11 U.S.C. § 327(a). The
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21-10587 Opinion of the Court 121
concept of “adverse interests” appears twice in §327(a). First, coun-
sel may “not hold or represent an interest adverse to the estate.”
Second, counsel must be a “disinterested person,” which means
that counsel may not, among other things, “have an interest mate-
rially adverse to the interest of the estate or of any class of creditors
or equity security holders.” Id. § 101(14)(C). The Bankruptcy Code
does not define the phrase “hold or represent an interest materially
adverse to the estate.” Hence, as the Second Circuit observed,
“[w]hether an adverse interest exists is best determined on a case-
by-case basis.” In re Arochem Corp., 176 F.3d 610, 623 (2d Cir. 1999).
This appeal focuses on Shumaker’s representation of HCN
as outside counsel and whether Shumaker was “disinterested”
given its relationship with HCN. As the Second Circuit observed:
[S]ection 327(a) is phrased in the present tense, per-
mitting representation by professionals “that do not
hold or represent an interest adverse to the estate,” and
limiting the class of acceptable counsel to those “that
are disinterested persons.” 11 U.S.C. § 327(a) (empha-
sis added). . . . Thus, counsel will be disqualified under
section 327(a) only if it presently “hold[s] or repre-
sent[s] an interest adverse to the estate,” notwith-
standing any interests it may have held or represented
in the past. . . .
This reasoning finds support in related portions of the
Bankruptcy Code, which draw explicit distinctions
between current and past relationships. For example,
the Bankruptcy Code defines a “disinterested person”
as a person that, among other things, “is not and was
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122 Opinion of the Court 21-10587
not an investment banker for any outstanding security
of the debtor,” see 11 U.S.C. § 101(14)(B) (emphasis
added); “has not been, within three years before the date
of the filing of the petition, an investment banker for a
security of the debtor, or an attorney for such an in-
vestment banker in connection with the offer, sale, or
issuance of a security of the debtor,” id. § 101(14)(C)
(emphasis added); and “is not and was not, within two
years before the date of the filing of the petition, a director,
officer, or employee of the debtor,” id.
§ 101(14)(D) (emphasis added). The Bankruptcy
Code thus recognizes a distinction between past and
present representation.
Id. at 623–24 (alterations in original). We will assume for purposes
of this appeal that § 327(a) applies to Shumaker’s pre-petition and
post-petition representation of HCN.
Wilkes begins the Probate Estates’ argument on the first is-
sue with this statement:
The Bankruptcy Court and District Court erred when
they concluded that [Shumaker] was disinterested
and did not possess a disqualifying interest under
§ 327. In the underlying Disqualification Order, the
Bankruptcy Court found that although HCN owned
the Auburndale Oaks nursing home where the loved-
ones of three of the six decedents of the [Probate]
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21-10587 Opinion of the Court 123
Estates resided,[94] HCN was not adverse because
HCN “had no involvement in the operation of the
nursing home.” However, the record before the Dis-
trict Court established that [Shumaker] “does not dis-
pute that it represented HCN, or that HCN was the
landlord and owner of Lyric [the operator of the nurs-
ing homes] at one time.”
Appellants’ Br. at 30 (fifth alteration in original) (first emphasis
added) (citations omitted).
How could the District Court have held that Shumaker was
disinterested and did not possess a disqualifying interest under
§ 327 in the face of Shumaker’s admission that its client, HCN,
owned the Lyric nursing home where six decedents resided? In
Wilkes’s telling, HCN was not just the landlord—it was the owner
of the Auburndale Oaks facility. As such, the District Court—and
the Bankruptcy Court earlier—inexplicably overlooked that HCN
actually owned the nursing home.
94 The Probate Estates’ opening brief is apparently referring to the following
statement in the Bankruptcy Court’s memorandum opinion denying their mo-
tion to disqualify and require disgorgement:
[HCN] owned the real property on which the Auburndale Oaks nurs-
ing facility was located, but had no involvement in the operation
of the nursing home. [HCN] was initially named as a defend-
ant in a wrongful death action brought by one of the Probate
Estates, but was dismissed from the action with prejudice be-
fore the bankruptcy case was filed.
In re Fundamental Long Term Care, Inc., 605 B.R. at 258 (emphasis added).
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124 Opinion of the Court 21-10587
Did Wilkes call this “oversight” to the District Court’s atten-
tion and move it to reconsider its conclusion that Shumaker was
disinterested? No. It made a strategic decision. Because Wilkes’s
motion would have been rejected out of hand, Wilkes did not move
the District Court to reconsider its affirmance of the Bankruptcy
Court’s finding that Shumaker’s representation of HCN did not
disqualify Shumaker from serving as the Trustee’s counsel. The
notion that HCN owned the Auburndale Oaks nursing home was
squarely refuted by the evidentiary record in the Bankruptcy Court
and the Bankruptcy Court’s findings of fact based on that record.
Wilkes chose instead to forego moving the District Court for re-
consideration and ask this Court, on appeal, to declare Shumaker
bound by the “Shumaker does not dispute” statement under the
doctrine of judicial estoppel.
The District Court would have rejected any such motion for
reconsideration brought by the Probate Estates for the same rea-
sons the District Court gave in its order affirming the Bankruptcy
Court’s finding on the ownership of the Auburndale Oaks nursing
home issue. See In re Fundamental Long Term Care, Inc., 2020 WL
954982. The District Court recalled those reasons in the order we
review today. In re Fundamental Long Term Care, Inc., 2021 WL
222779.
The District Court cited the Probate Estates’ motion for dis-
qualification and disgorgement, which was based on Shumaker’s
representation of HCN and HCN’s connection to Lyric among oth-
ers. “In the [motion], the [Probate] Estates argued that Shumaker
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21-10587 Opinion of the Court 125
had a long-standing relationship with [HCN], a real estate invest-
ment trust. At the time of the bankruptcy proceedings, Shumaker
had acted as HCN’s general counsel for over thirty years.” Id. at *1
(citations omitted). The District Court then recited what the evi-
dentiary record in the Bankruptcy Court revealed and why in de-
ciding the Probate Estates’ earlier appeal it agreed with the Bank-
ruptcy Court that Shumaker, in representing HCN, had not pos-
sessed a disqualifying interest under § 327(a):
HCN owned and leased the real property to some of the
nursing homes involved in the wrongful death ac-
tions. Specifically, [HCN] had connections to THI,
THMI, and the related company THI Holdings, all of
which were litigation targets in the underlying bank-
ruptcy proceedings. HCN also had connections with
[Lyric] and [HQM], which operated the nursing homes
where some of the deceased residents lived.
The [Probate] Estates argued that (1) these connec-
tions constituted representations of adverse interests,
disqualifying Shumaker under Section 327(a), and (2)
Shumaker violated Rule 2014 by failing to disclose
these connections in its initial declaration of disinter-
estedness.
The Bankruptcy Court denied the Motion to Disqual-
ify (Disqualification Order) on August 21, 2019, find-
ing that Shumaker did not possess a disqualifying in-
terest under Section 327(a) and that Shumaker’s omis-
sions in the initial disclosures did not violate Rule
2014. The [Probate] Estates appealed the decision.
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126 Opinion of the Court 21-10587
On appeal, this Court adopted and affirmed the Dis-
qualification Order “in all respects except to the ex-
tent the Bankruptcy Court found no violation of the
disclosure requirements of Rule 2014.”
Id. at *1–2 (emphasis added) (citations omitted).
The District Court could have gone further in elaborating
on Shumaker’s representation of HCN and HCN’s connections
with Lyric and others involved in the nursing home industry by
quoting from the Bankruptcy Court’s order denying the motion
for disqualification and disgorgement. See In re Fundamental Long
Term Care, Inc., 605 B.R. 249 (Bankr. M.D. Fla. 2019). The order
presented the Bankruptcy Court’s holding at the outset and then
explained it.
The holding:
[HCN] owned the real property on which certain
nursing homes were located, but had no involvement
in the operation of the facilities. Additionally, despite
exhaustive investigation, neither the Probate Estates
nor the Chapter 7 Trustee ever considered [HCN] as
potentially liable to the bankruptcy estate because of
any prepetition transactions. Accordingly, Shu-
maker’s representation of [HCN] was not adverse to
the Probate Estates or the bankruptcy estate.
Id. at 252.
The explanation:
[HCN] is a real estate investment trust with its princi-
pal place of business in Toledo, Ohio. In the sworn
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21-10587 Opinion of the Court 127
Supplemental Disclosure, Berman stated that the
“only tangential connection between [HCN] and any
of the Probate Estates, [is that] on or about June 30,
2005, . . . [HCN] purchased the real property located
at 919 Old Winter Haven Road, Auburndale, Flor-
ida—the location of the Auburndale Oaks facility in
which Ms. Townsend and Ms. Jackson resided for a
period of time (the ‘Auburndale Oaks Property’).”
But [HCN] did not operate the Auburndale Oaks nursing
home. It leased the Auburndale Oaks Property to a tenant
(one of the Lyric entities) that operated the nursing
home. In an Affidavit filed in state court in 2010, a
Vice President of [HCN] stated:
6. [HCN] leased the Real Property to
Lyric Health Care Holdings III, Inc.
(“Tenant”) on June 30, 2005.
7. [HCN] serves only as a Landlord to
its Tenant for the Real Property.
8. [HCN] does not control the services pro-
vided by its Tenants or its Tenant’s agents,
employees or representatives. It does not
operate, nor has it ever operated, Auburn-
dale Oaks Healthcare Center, nor does it
control, nor has it ever controlled, the
services provided by Auburndale Oaks
Healthcare Center, its agents, employ-
ees or representatives.
9. [HCN] has never had any control
over the hiring, supervision, or
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128 Opinion of the Court 21-10587
management of employees at Auburn-
dale Oaks Healthcare Center and it does
not administer, direct, supervise, or pro-
vide health care or skilled nursing ser-
vices at any facility, including Auburn-
dale Oaks Healthcare Center.
Even though [HCN] had no involvement in the operation
of the nursing home, the Probate Estates contend that
it was potentially liable to the residents of Auburn-
dale Oaks because its lease required the tenant/oper-
ator to provide [HCN] with certain financial and li-
censing documents. But the Probate Estates provide
no authority for the proposition that a property
owner is liable for a tenant nursing home’s negli-
gence. Further, even if such potential liability did ex-
ist, Ms. Townsend’s estate is the only party that as-
serted a claim against [HCN], and that claim was dis-
missed with prejudice.
Specifically, [HCN] was named as a defendant in the
wrongful death action filed by the Townsend Estate
in state court in 2009. In the sworn Supplemental Dis-
closure, Berman states that Shumaker did not repre-
sent [HCN] in the action by the Townsend Estate,
took only limited action in the case consistent with its
role as outside general counsel, did not take any ac-
tion related to the substantive claims in the case, and
did not open a file for the litigation.
In January 2011, Townsend’s Estate filed a Notice of
Voluntary Dismissal of [HCN] from the action with-
out prejudice. In August 2011, more than three
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21-10587 Opinion of the Court 129
months before the bankruptcy case was filed, the
state court entered an order dismissing the action
against [HCN] with prejudice.
In summary, [HCN] owned the real property on which
the Auburndale Oaks nursing facility was located, but had
no involvement in the operation of the nursing home.
[HCN] was initially named as a defendant in a wrong-
ful death action brought by one of the Probate Es-
tates, but was dismissed from the action with preju-
dice before the bankruptcy case was filed. For these
reasons, [HCN] is not adverse to the Probate Estates,
and Shumaker’s representation of [HCN] did not
lessen the value of the bankruptcy estate, create a po-
tential dispute between the bankruptcy estate and
[HCN], or create a circumstance that would generate
a bias against the bankruptcy estate.
Id. at 257–58 (third alteration in original) (emphasis added) (foot-
notes omitted).
The order denying Wilkes’s motion states that HCN “owned
the real property on which the Auburndale Oaks nursing facility was
located.” Id. at 258 (emphasis added). So what did Wilkes find to
support its statement that: “In the underlying [order,] the Bank-
ruptcy Court found that . . . HCN owned the Auburndale Oaks
nursing home”? Appellants’ Br. at 30. And its statement that:
“[Shumaker] does not dispute that it represented HCN, or that
HCN was the landlord and owner of Lyric [the operator of the
nursing homes] at one time”? Id. (emphasis in original).
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130 Opinion of the Court 21-10587
The first statement is squarely contradicted in both the
Bankruptcy Court’s order and the District Court’s order affirming
it. The Bankruptcy Court’s order is replete with unassailable state-
ments that HCN owned the real estate on which nursing homes, in-
cluding the Auburndale Oaks nursing home, were located—not the
nursing homes themselves.95 The order also notes that the homes
were operated by lessees like Lyric, not HCN, their landlord. The
statement that HCN owned the Auburndale Oaks facility was not
made by the Bankruptcy Court or the District Court in the decision
on review here.
The second statement was in the record before the District
Court, as the Probate Estates’ brief represents, but the words,
“[Shumaker] does not dispute that it represented HCN, or that
HCN was the landlord and owner of Lyric [the operator of the
nursing homes] at one time,” id., do not appear in the underlying
order denying Wilkes’s motion or the District Court order affirm-
ing it (as to the § 372(a) issues) or the District Court’s order here on
appeal. Rather, the second statement appears in an order the Dis-
trict Court entered on September 25, 2020, while the Probate Es-
tates’ appeal of the Bankruptcy Court’s order was pending. See Es-
tate of Arlene Townsend v. Shumaker, No. 8:20-cv-956-T-33, 2020 WL
10318565, at *1 (M.D. Fla. Sept. 25, 2020).
95 The statements are unassailable because the District Court, in affirming the
Bankruptcy Court’s disposition of the §327(a) disqualification issue, found the
statements supported by the evidence and thus not clearly erroneous. See gen-
erally In re Fundamental Long Term Care, Inc., 2020 WL 954982.
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21-10587 Opinion of the Court 131
The September 25 order denied Wilkes’s motion to supple-
ment the Bankruptcy Court’s record with a “Closing Checklist”
that, according to Wilkes, would show “Shumaker’s relationship
with [HCN], the landlord and owner of two nursing homes in-
volved in this action.” Id. at *1. The September 25 order contained
this statement: “Shumaker does not dispute that it represented
HCN, or that HCN was the landlord and owner of Lyric at one
time.”96 Id. at *2.
As indicated supra, Wilkes did not move the District Court
to reconsider its affirmance of the Bankruptcy Court’s finding that
HCN neither owned Lyric nor operated the Auburndale Oaks fa-
cility. A finding that HCN did own and operate the facility was crit-
ical to the Probate Estates’ position. It went to the heart of their
motion for disqualification and disgorgement and is the sine qua non
of their disqualification argument here. If the Probate Estates had
96 The District Court entered its order deciding the Probate Estates’ appeal of
the Bankruptcy Court’s April 16, 2020, order on January 22, 2021. In re Funda-
mental Long Term Care, Inc., 2021 WL 222779. After making the statement
quoted above, the order went on to state:
The only issues before the Court on appeal are whether the
Bankruptcy Court abused its discretion in determining that the
failure to mention this connection was inadvertent and non-
negligent, and that the omission did not warrant sanctions.
The Closing Checklist does nothing to further this inquiry, as
it merely confirms the relationship all parties agree existed. In
short, the Court “is not convinced that supplementing the rec-
ord will assist it in deciding this appeal.”
Estate of Townsend v. Shumaker, 2020 WL 10318565, at *2 (citation omitted).]
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132 Opinion of the Court 21-10587
moved the District Court to reconsider, we have no doubt the Dis-
trict Court would have gotten to the bottom of the apparent incon-
sistency—created by the “Shumaker does not dispute” statement
and the Bankruptcy Court’s contrary statements in In re Fundamen-
tal Long Term Care, Inc., 605 B.R. 249—and held an evidentiary hear-
ing.97 Shumaker contends that the statement from the September
25 order was a pure scrivener’s error that the District Court simply
didn’t catch. Appellees’ Br. at 21. Shumaker could have brought
the error to the District Court’s attention but neglected to do so.
So we are faced with an argument Wilkes chose not to pre-
sent to the District Court on behalf of the Probate Estates and Shu-
maker’s neglect in failing to point the District Court to what it be-
lieved was a scrivener’s error. Because Shumaker “never objected
to or denied this statement by the District Court,” Wilkes contends
that Shumaker is judicially estopped from contending here that
HCN did not own and operate the Auburndale Oaks nursing
home. Appellants’ Br. at 30. It matters not to Wilkes whether the
“Shumaker does not dispute” statement was a scrivener’s error.
“The equitable doctrine of judicial estoppel is intended to protect
courts against parties who seek to manipulate the judicial process
by changing their legal positions to suit the exigencies of the mo-
ment.” Slater v. United States Steel Corp., 871 F.3d 1174, 1176 (11th
97 We assume that at such a hearing, Shumaker would introduce the docu-
ments establishing HCN’s ownership of the real estate, and its leases with
those owning and operating the nursing homes, into evidence.
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21-10587 Opinion of the Court 133
Cir. 2017) (en banc). According to Wilkes, that is what Shumaker
is doing here—manipulating the judicial process.
In considering whether the judicial estoppel doctrine should
be invoked, Wilkes would have us start with Shumaker’s “does not
dispute” position, as reflected in the District Court’s September 25
order: HCN owned and operated the Auburndale Oaks nursing
home.98 Wilkes says that the manipulation of the judicial process
occurred when Shumaker took the position he advances here, on
appeal: HCN did not own and operate the Auburndale Oaks facil-
ity. According to Wilkes, Shumaker changed its position as indi-
cated in the September 25 order “to suit the exigencies of the mo-
ment.”
What Wilkes ignores is that the position Shumaker took—
as reported in the September 25 order—was directly contrary to
the position Shumaker had taken successfully at the hearing on the
motion for disqualification and disgorgement in the Bankruptcy
Court and in the District Court on appeal. If the doctrine of judi-
cial estoppel was in effect on September 25, 2020, Shumaker’s
98 The doctrine of judicial estoppel would not work for the Probate Estates if
we started with the position Shumaker took throughout the litigation over the
motion for disqualification and disgorgement: HCN owned the real estate on
which the nursing home was located, while Lyric leased the land, created the
nursing home, and thereafter operated it.
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134 Opinion of the Court 21-10587
position as announced that day abused the judicial process99 and
should be disregarded as manipulative of that process.
We are unaware of a situation like the one here, and Wilkes
has not cited one. Wilkes describes the instant scenario as follows.
A party’s lawyer fails to call to a court’s attention a statement in the
court’s order that, in the party’s view, misstates the party’s legal
position and under the circumstances had to be a scrivener’s error.
Despite the misstatement, the party prevails. On appeal, when the
party’s adversary relies on the statement as written in the order, the
party objects, explains why it believes the statement is a scrivener’s
error, and takes the legal position it had been taking prior to the
entry of the order. The adversary responds. Judicial estoppel bars
the party from changing the legal position attributed to it in the
order.
Judicial estoppel is an equitable doctrine. It applies when a
party advances a legal or factual position in one court, and the
court relies on the position in deciding an issue. At the same time
or later in another court, the party advances an entirely new legal
or factual position—one that is contrary to the position advanced
in the first court. That is not the case here. We would be hard
pressed to say that equity requires that we accept Wilkes’s argu-
ment.
99 If the statement that Wilkes points to was not a scrivener’s error, Shumaker
abused the judicial process because its statement was flatly contrary to the po-
sition it previously took in the Bankruptcy Court and in the District Court on
appeal.
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21-10587 Opinion of the Court 135
We therefore hold that Shumaker was not disqualified from
representing the Trustee of the Debtor’s (FLTCI’s) estate by virtue
of its pre-petition representation of HCN or HCN’s connections
with Lyric, HQM, or any of the other entities Wilkes has identified
as rendering Shumaker disqualified. And we find nothing relating
to Shumaker’s post-petition representation of HCN that disquali-
fied Shumaker from representing the Trustee. Shumaker’s repre-
sentation of HCN did not lessen the value of the bankruptcy es-
tate, create a dispute between the bankruptcy estate and HCN, or
create a circumstance that could be considered a bias against the
bankruptcy estate. We therefore affirm the District Court’s order
as it relates to Shumaker’s alleged disqualification under § 327(a).
B.
We turn now to the second issue this appeal presents:
whether the District Court erred in affirming the Bankruptcy
Court’s decision that Shumaker’s omission in its Rule 2014 disclo-
sures of its pre-petition connections with HCN, Lyric, and HQM
was inadvertent and not negligent.
The District Court remanded the disqualification issue to
the Bankruptcy Court with this instruction: “to determine, in the
first instance, if there was an unintentional, negligent and/or inad-
vertent nondisclosure by Shumaker.” In re Fundamental Long Term
Care, Inc., 2020 WL 954982, at *13. Whether the nondisclosure was
negligent called for the determination of a mixed question of fact
and law. Thus, an error would occur if the Bankruptcy Court
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136 Opinion of the Court 21-10587
applied the wrong legal standard for negligence or committed clear
error in making its factual findings.
Wilkes argues that the Bankruptcy Court made an error of
law. The Bankruptcy Court, according to Wilkes, “erroneously ap-
plied a negligent misrepresentation standard under Florida law to
analyze [Shumaker’s] conduct, rather than negligence standard.”
Appellants’ Br. at 37. And, Wilkes contends, the District Court
erred in not vacating the Bankruptcy Court’s decision and remand-
ing the case for further proceedings. See id. at 26.
This is essentially the same argument Wilkes made to the
District Court. Berman and Shumaker had a “duty to thoroughly
investigate and disclose any connections that might be relevant to
their disinterestedness.” Id. at 42. Whether their investigation was
“reasonable” under the circumstances would determine whether
they were negligent. See id. at 43. In Wilkes’s view:
It was and is manifestly unreasonable that, [Shu-
maker] failed to disclose the true nature of its HCN
relationship which, at a minimum, included: (1) HCN
and [Shumaker]’s status as litigation adversaries to the
Townsend Estate just prior to Berman’s employment;
(2) HCN’s ownership at the time of Berman’s employ-
ment of the nursing homes where four of the six Creditor
Estates’ decedents resided and were injured; and (3)
[Shumaker]’s role in drafting HCN’s master lease
agreement governing the subject-nursing homes at is-
sue in this bankruptcy. That the HCN connections
went undisclosed for so long implies an unreasonable
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21-10587 Opinion of the Court 137
lack of disclosure, or an unreasonable system for
compliance with Rule 2014.
Id. at 43–44 (emphasis added). The first item is inaccurate and
meaningless. HCN was an adversary purely on paper, added to the
complaint by Wilkes in shotgun fashion, and was ultimately dis-
missed from the case. Shumaker did not enter the case as HCN’s
counsel. The second item, as previously discussed, was false.
The District Court disagreed with Wilkes’s treatment of the
Bankruptcy Court’s order—thus addressing the third item:
[T]he Bankruptcy Court specifically examined the cir-
cumstances under which Shumaker failed to disclose
its connections. In concluding that the omission was
not the result of negligence, the Bankruptcy Court
not only considered what Shumaker purportedly
knew through its conflict check system, but also
noted that (1) Shumaker never represented HCN in
any pre-bankruptcy litigation involving the Estates,
(2) HCN never surfaced as a target in the bankruptcy
action despite exhaustive discovery on potential tar-
gets, and (3) Shumaker never represented Lyric or
HQM, but only dealt with them in an adverse posture
as counsel for their landlords.
In re Fundamental Long Term Care, Inc., 2021 WL 222779, at *5 (cita-
tions omitted). The District Court found that the Bankruptcy
Court fully considered the circumstances under which the alleged
failure to disclose occurred and concluded that the failure was not
the result of negligence. Id. We agree with the District Court’s
conclusion and accordingly affirm its judgment.
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138 Opinion of the Court 21-10587
VI.
In conclusion, Chief Judge Williamson was right: this expan-
sive and decade-plus dispute is, at its heart, a fraudulent transfer
case. Wilkes, in representing the Probate Estates, sought huge
sums in the form of damages in state court against the companies
affiliated with the decedents’ nursing homes. After having received
one multimillion-dollar judgment in Jackson, Wilkes realized that
the powers that be in the THI corporate structure had executed a
bust-out scheme to separate THMI’s liabilities from its assets and
to hide those assets to avoid paying the Jackson judgment—as well
as any potential future judgments awarded to the other estates.
Upon learning of this scheme, which THI and company
went to great lengths to hide, Wilkes could still have obtained some
recovery for its clients by placing THMI in Chapter 7 bankruptcy
or by pursuing fraudulent transfer actions against FLTCH and the
Targets. This likely would have resulted in a smaller total recovery
for the Probate Estates—and smaller attorney’s fees—because a
bankruptcy court, rather than a jury, would evaluate the Estates’
claims. Instead, Wilkes concocted a scheme of its own in which it
placed FLTCI—THMI’s assetless parent company—into Chapter 7
bankruptcy. Once the Bankruptcy Court appointed a trustee for
FLTCI, Wilkes could then use the Trustee and the Trustee’s strong-
arm power to enhance its own discovery and pursue causes of ac-
tion that it would not be able to pursue alone, attempting to get at
THMI’s assets through FLTCI.
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21-10587 Opinion of the Court 139
Though this scheme was an abuse of the bankruptcy pro-
cess, it appeared to work for Wilkes, until the final compromises
were approved and Wilkes saw how much less in attorney’s fees it
stood to earn—receiving far less than it stood to receive as contin-
gency fees for roughly $2 billion in state court judgments. Wilkes
then turned on the Trustee, Shumaker, and the Bankruptcy Court,
seeking Chief Judge Williamson’s recusal, as well as Shumaker’s
disqualification as the Trustee’s special counsel and disgorgement
of the fees Shumaker received. The Bankruptcy Court held that
Shumaker was disinterested, as required by 11 U.S.C. § 327(a), and
that sanctions were not warranted because any violation of Rule
2014 was non-negligent. The District Court agreed.
Not only do we agree with the Bankruptcy and District
Courts’ reasoning, but when this saga is viewed as a whole, it is
clear that the idea that Shumaker had a bias against Wilkes and the
Probate Estates is baseless; if anything, Shumaker acted in a way
that suggested a bias toward Wilkes and the Probate Estates.
The judgment of the District Court is therefore
AFFIRMED.
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