An attorney whose representation of different classes of creditors in the Woodbridge Group of Companies bankruptcy case allegedly created a conflict of interest agreed to stop fighting in the case in exchange for $500,000.

Joseph Sarachek and his law firm reached the agreement with the creditors’ committee after it brought a rare motion to revoke his right to appear in the case as a creditors’ attorney. Judge Kevin J. Carey of the U.S. Bankruptcy Court for the District of Delaware approved the agreement Dec. 19.

The creditor committee’s motion to revoke Sarachek’s pro hac vice status, which allows him to appear in a court where he is not already a member of the bar, is so unusual that it’s only the sixth time a bankruptcy court has issued an opinion on such a motion, according to Bloomberg Law data.

Sarachek didn’t respond to a request for comment.

Billion Dollar Ponzi

Woodbridge filed bankruptcy in December 2017, and the court later found the company was part of a billion-dollar real estate Ponzi scheme orchestrated by Robert Shapiro.

Carey approved the settlement with Sarachek after expressing satisfaction that all of the interested parties had signed off on the agreement.

Sarachek’s clients will be treated the same as the other creditors in the case, and the lawyer won’t be able to move for payment by the Woodbridge estates for any “substantial contribution” he might argue he made in the case, the agreement provides.

Sarachek won’t be barred from trying to have his clients pay more of the approximate $1.7 million he said he and affiliated firms are owed in the case. But the agreement provides that he will have to give his clients notice of the settlement—including reference to the allegations of his conflicts of interest—and specifically advise them they have a right to dispute the charges.

Conflicts?

Sarachek represented around 270 creditors in the Chapter 11 cases, he told the court. He was active and adversarial in the case, for example objecting to the debtor’s post-petition financing motion and the proposed plan of reorganization, which represented an agreed resolution to the case by all stakeholders.

He also filed a lawsuit on behalf of a small subset of his clients to have their claims deemed to be secured by valuable real estate owned by Woodbridge.

The creditors’ committee seeking to have Sarachek removed from the case said that lawsuit created an irreparable conflict of interest. If he won the case for that smaller group of clients, Sarachek would damage the rights of his other unsecured clients because they wouldn’t share in distributions from the valuable property, the committee said.

Carey asked on what basis under the Bankruptcy Code or rules he should authorize any payment to Sarachek.The committee’s lawyer, John Morris of Pachulski Stang Ziehl & Jones LLP, replied that the payment was in settlement of a number of disputes affecting and slowing down the case, at significant expense, which made it worthwhile to all stakeholders. He noted that the amount is less than one tenth of one percent of the money to be disbursed in the case.

Case Timeline

Within six weeks of the Woodbridge Group’s bankruptcy filing, the creditors committee, together with the Securities Exchange Commission, filed a motion to have a trustee appointed to take over the administration of the cases, Morris recounted at the hearing.

Two additional committees were appointed in the case—one representing creditors holding notes and another representing holders of units. Sarachek’s clients’ interests were represented by those committees, they argued.

Shapiro agreed to pay $120 million to the SEC to settle allegations he defrauded investors in the $1.2 billion Ponzi scheme around real estate investments.

Sarachek was represented by Jenner & Block LLP.

The case is In re: Woodbridge Group of Cos. LLC, Bankr. D. Del., 17-12560, Order Approving Stipulation 12/19/18.