Jeffrey Klobucar, Bassford Remele, P.A.
Contributing Editor: Kesha Tanabe, Tanabe Law
Eighth_Circuit___Oetting_v__Sosne__In_re_Green_Jacobson__P_C__.pdf
Oetting v. Sosne (In re Green Jacobson, P.C.), 911 F.3d 924 (8th Cir. 2018)
In 2002, the Debtor law firm obtained a $333 million settlement for a class of plaintiff-shareholders. A settlement fund was established for members of the class. The fund made two substantial distributions to members of the class, but it was also defrauded by the claims administrator, resulting in a loss of $5.87 million that would otherwise have been distributed to members of the class. The Debtor law firm also made a controversial decision to relinquish over $2.6 million in settlement money in the form of a cy pres donation.
Prior to the bankruptcy, David Oetting, the class representative in the original shareholder class action, commenced a lawsuit against the Debtor law firm, alleging it had committed malpractice and breached its fiduciary duty by negligently supervising the claims agent and failing to prevent the $5.87 million loss. Mr. Oetting filed a proof of claim in the Debtor’s case, asserting a general unsecured claim for approximately $10.5 million on behalf of the class. The proof of claim was based on 4 separate issues: (1) the $5.87 million loss due to allegedly negligent supervision of the claims agent; (2) a previously vacated fee award of $98,114; (3) a previously vacated cy pres award of $2.6 million; and (4) disgorgement of $1.89 million in previously awarded attorneys fees. The Chapter 7 Trustee objected to Mr. Oetting’s proof of claim and the Bankruptcy Court entered an order disallowing the claim. The District Court affirmed.
The Eighth Circuit ultimately reached the same conclusion and agreed the proof of claim was correctly disallowed, but it set forth its own reasoning (and disagreed in part with the Bankruptcy Court’s and District Court’s reasoning below). First, the Eighth Circuit agreed the cy pres awards had previously been vacated and were no longer in issue, and therefore the claim should not be allowed for such amounts. Second, the Eighth Circuit agreed the $5.87 million claim for negligence was time barred under applicable state law. On the final issue of disgorgement, the Eighth Circuit did not agree the claim was time-barred (because the District Court’s equitable power to order disgorgement of previously awarded attorneys’ fees is not subject to a statute of limitations). Nonetheless, the Eighth Circuit agreed the claim for disgorgement should be disallowed because no such disgorgement had been ordered by any court, making the proof of claim premature.