557 B.R. 609
Bankr. E.D. Tenn.2016Background
- Debtor filed Chapter 11 on February 9, 2016; counsel Hodges, Doughty & Carson, PLLC (HD&C) sought $26,659.33 in fees/expenses for work from Jan 27–Apr 30, 2016 and later amended to seek nunc pro tunc fees to the petition date.
- HD&C disclosed a $20,000 retainer but did not disclose that it had performed thirteen days of pre-petition services (Jan 27–Feb 8) totaling $5,938 that it intended to seek post-petition.
- The United States Trustee and the Court raised concerns about non‑disclosure of pre‑petition fees and whether pre‑petition, case‑related fees convert counsel into a pre‑petition creditor affecting disinterestedness under § 327 and § 101.
- The Court required briefing on (a) whether pre‑petition fees may be awarded post‑petition when a retainer existed but was not drawn down pre‑filing and (b) whether counsel who is owed pre‑petition bankruptcy‑related fees is disinterested.
- The Court concluded § 329 and Rule 2016(b) disclosure failures were dispositive: HD&C’s failure to disclose the pre‑petition fees warranted denial of those fees as a sanction and reduction of the application.
- After disallowing $5,938 for undisclosed pre‑petition services and further reductions ($1,601.50) for clerical, excessive, lumped, and unrelated entries, the Court allowed $18,334.00 in fees and $785.83 in expenses.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether pre‑petition bankruptcy‑related fees can be awarded post‑petition when a pre‑petition retainer existed but was not drawn down | HD&C argued it was not a creditor pre‑petition because fees are not a claim until court approval and sought post‑petition approval of pre‑petition services | U.S. Trustee and Court argued counsel must disclose pre‑petition fees and drawing down the retainer (or waiving fees) is typical to avoid creditor status; non‑disclosure violates § 329/Rule 2016 | Court denied recovery of undisclosed pre‑petition fees as sanction under § 329; reduced application by $5,938 |
| Whether unpaid pre‑petition, case‑related fees make counsel not "disinterested" under § 327 and § 101(14) | HD&C and some authorities contend strict reading of § 327 is impractical and that pre‑petition, case‑related fees do not automatically disqualify counsel | Other courts (and the Trustee) advocate strict construction: unpaid pre‑petition fees are a claim/creditor status unless retainer is applied or fees waived | Court did not decide the substantive § 327 question here; instead resolved the case on § 329 disclosure grounds |
| Whether failure to disclose pre‑petition fees warrants disgorgement or denial of fees | HD&C implied nondisclosure was inadvertent and argued later disclosure sufficed | Trustee and case law argue full and timely disclosure is mandatory; failure (even negligent) can support disgorgement/denial | Court held nondisclosure violated § 329/Rule 2016(b) and sanctioned by disallowing the undisclosed pre‑petition fees |
| Reasonableness of post‑petition fees billed | HD&C sought full requested post‑petition fees | Trustee supported application in full; Court reviewed entries for clerical, excessive, lumped or unrelated billing | Court allowed post‑petition fees in reduced amount after trimming clerical/excessive/lumped entries and unrelated time entries |
Key Cases Cited
- In re Martin, 817 F.2d 175 (1st Cir.) (strict literal reading of § 327 would be overbroad; counsel performing post‑petition work becomes a creditor but courts have been reluctant to bar representation on that basis)
- Henderson v. Kisseberth (In re Kisseberth), 273 F.3d 714 (6th Cir.) (attorney has affirmative duty to disclose all fee arrangements; failure to disclose may justify denial or disgorgement)
- In re Park-Helena Corp., 63 F.3d 877 (9th Cir.) (even negligent failure to disclose relevant Rule 2016 information can result in denial of fees)
- In re Pillowtex, 304 F.3d 246 (3d Cir.) (when there is a facially plausible, substantial preference claim, courts cannot defer resolution of retention issues conditioned on later preference determinations)
- In re Eagle-Picher Indus., 999 F.2d 969 (6th Cir.) (§ 1107(b) exception is narrow; § 327 requirements are strictly construed and courts may not use equitable powers to circumvent § 327)