458 B.R. 444
Bankr. N.D. Ill.2011Background
- Timothy K. Liou, a highly active consumer bankruptcy attorney in the district, faced sanctions for filing false fee applications in 317 Chapter 13 cases by misrepresenting that he and debtors entered into the court's Model Retention Agreement (MRA) when he had modified it with an addendum to charge extra fees.
- The Northern District of Illinois had a standing flat-fee regime for Chapter 13 cases, with a Court-approved Rights and Responsibilities Agreement (MRA) defining a presumptively reasonable $3,500 flat fee for the entire case and limited circumstances for additional fees via an itemized application.
- Liou used an addendum to the MRA in many cases to toll additional charges beyond the flat fee, and sometimes altered MRAs unilaterally or without proper execution, yet repeatedly checked the fee applications’ box stating that the debtor and Liou had entered into the MRA.
- The court issued show-cause orders in 321 cases (later consolidated) after Liou’s use of the addendum came to light, requiring Liou to show cause why he should not be sanctioned for Rule 9011(b) misrepresentations.
- Liou’s testimony revealed that the addendum listed multiple charges (late fees, NSF processing, post-termination work, $295 hourly rate for unspecified services, a 5% convenience fee, and reopening fees) that modified the MRA, contradicting the flat-fee structure.
- The court found Liou’s representations false, concluded he acted with culpable carelessness, and imposed monetary and non-monetary sanctions including a $10,000 fine, a mandatory legal-ethics course, and censure.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Did Liou violate Rule 9011(b)(3)? | Liou contends the MRA and addendum were separate and the representations were true in literal sense. | Liou argues changes via the addendum did not alter the MRA and were not misrepresentations. | Yes; Liou violated Rule 9011(b)(3) by false factual statements. |
| Were the MRA and addendum a single agreement? | Liou treated addendum as a separate document, not altering the MRA. | The addendum modified the MRA and functioned as a single agreement with the debtor. | They formed a single agreement; the addendum modified terms beyond the MRA. |
| Was Liou’s conduct culpably careless under Rule 9011(b)(3)? | Liou claims reasonable basis for belief in truthfulness due to counsel and practice. | As an experienced bankruptcy practitioner, Liou should have known the statements were false. | Yes; Liou’s misrepresentations were culpably careless and objective untruths. |
| What sanctions are appropriate for Liou’s Rule 9011(b)(3) violations? | Support sanctions based on pattern of misconduct and impact on the judiciary. | Liou seeks lighter sanctions given corrective actions and lack of intent to deceive. | Impose $10,000 fine, require a legal ethics course, and censure; forward to disciplinary authorities; publish opinion. |
Key Cases Cited
- In re Nelson, 424 B.R. 361 (N.D. Ill. 2009) (attorney compensation and integrity of bankruptcy process; sanctions)
- In re Kindhart, 160 F.3d 1177 (7th Cir. 1998) (flat fees in Chapter 13 and integrity of fees)
- In re Williams, 357 B.R. 434 (Bankr. N.D. Ill. 2007) (flat fee systems and presumptively reasonable fees)
- In re Geraci, 138 F.3d 314 (7th Cir. 1998) (approval of flat fees in Chapter 7 consumer cases)
- Mortakis, 405 B.R. 293 (Bankr. N.D. Ill. 2009) (modifications to flat-fee arrangements and related sanctions)
- Sullivan-Moore, 406 F.3d 467 (7th Cir. 2005) (sanctions considerations and proportional remedies)
- Ronco, 838 F.2d 212 (7th Cir. 1988) (liability for misrepresentations and care standards)