638 B.R. 341
Bankr. E.D. La.2022Background
- Debtor Brandin G. Learson, owner/manager of several LLCs, retained Sandler Michaud, LLC (Sandler and Michaud) for multiple matters and paid approximately $11,000 for services pre- and post-petition.
- Sandler filed Learson’s individual Chapter 13 petition on Nov. 7, 2019 and listed a business (Bellus Development Group) mailing address, which improperly impeded a foreclosure sale on Bellus property.
- Sandler never timely filed the Debtor’s schedules, statement of financial affairs, Chapter 13 plan, or the Rule 2016(b) disclosure of compensation; she advised the Debtor not to attend §341 meetings.
- The chapter 13 trustee moved to dismiss; the Court denied the sale request, found lack of transparency and converted the case to chapter 7 on Feb. 12, 2020.
- New counsel filed schedules and a motion to reconvert; Debtor moved to compel disgorgement of fees paid to the Firm.
- The Court held the Firm failed to disclose fees required by 11 U.S.C. §329 and Fed. R. Bankr. P. 2016(b), found the fees excessive for services rendered, and ordered disgorgement of $9,000.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the Firm’s pre- and post-petition fees were subject to disclosure under §329 and Rule 2016(b) | Fees were paid for services tied to the bankruptcy and therefore required disclosure; failure to disclose warrants disgorgement | Firm asserted some services were separate state-court matters or not bankruptcy counsel and/or refunded some fees | Court: Payments were made "in contemplation of" or "in connection with" the bankruptcy; disclosure required and none was made — disgorgement warranted |
| Whether the fees paid were excessive under §329(b) and §330 factors | Fees were excessive because promised bankruptcy services were not provided and some work was minimal or unnecessary | Firm offered no evidence of reasonableness or market value of services rendered | Court: Firm failed to meet burden to show reasonableness; disgorgement ordered for specific amounts totaling $9,000 |
| Whether specific services (foreclosure defense, state fraud defense, eviction defense) were "in contemplation of" or "in connection with" the bankruptcy | These services were motivated by or would impact the bankruptcy (e.g., stopping foreclosure, preserving income/assets) and thus fall under §329 | Firm contended certain matters were separate non-bankruptcy representations | Court: Services were sufficiently related/impactful on the bankruptcy; subject to §329/Rule 2016(b) disclosure and review |
| Whether additional sanctions (e.g., Rule 9011 or §105 bad-faith sanctions) were appropriate | Debtor sought remedies limited to disgorgement; counsel argued conduct might warrant further sanctions | Firm could be subject to Rule 9011 or §105, but separate procedures/standards apply | Court: Declined to find bad faith or impose additional sanctions beyond disgorgement; noted Rule 9011 motion would require separate filing and higher burden |
Key Cases Cited
- Chambers v. Nasco, Inc., 501 U.S. 32 (1991) (inherent authority to sanction requires specific bad-faith finding)
- Arens v. Boughton (In re Prudhomme), 43 F.3d 1000 (5th Cir. 1995) (bankruptcy courts may order disgorgement under §329)
- Futuronics Corp. v. Arutt, Nachamie & Benjamin (In re Futuronics Corp.), 655 F.2d 463 (2d Cir. 1981) (authority to review and order return of excessive attorney payments)
- Wiredyne, Inc. v. (In re Wiredyne, Inc.), 3 F.3d 1125 (7th Cir. 1993) (§330 factors guide fee reasonableness analysis)
- Lewis v. Tiffany (In re Lewis), 113 F.3d 1040 (9th Cir. 1997) (failure to disclose under §329 permits disgorgement)
- Downs v. (In re Downs), 103 F.3d 472 (6th Cir. 1996) (discussing disgorgement for undisclosed or excessive fees)