591 B.R. 68
Bankr. N.D. Okla2018Background
- Attorney J. Ken Gallon used a two-contract "BK Billing Model": a pre-petition retainer for filing (bare-bones petition) and a post-petition retainer for completing schedules and other work; he sold/assigned post-petition receivables to BK Billing, a factoring company.
- Gallon factored 14 consumer Chapter 7 client contracts to BK Billing and received immediate partial payments (60–75%) with the rest escrowed; clients were charged higher total fees than Gallon actually received.
- Many petitions were filed as "bare-bones" to invoke the automatic stay, with schedules and Statements filed post-petition; Gallon filed installment applications for court filing fees in 11 cases.
- Gallon did not disclose the BK Billing arrangement or the third-party payments properly on § 329/Rule 2016 disclosures; initial disclosures misrepresented amounts and stated he had not shared fees.
- The U.S. Trustee moved for review; after hearings the court found widespread nondisclosure, Rule 1006 violations (payments to BK Billing before filing fees were paid in full), and unreasonable fees; court ordered disgorgement of fees actually collected by BK Billing post-petition, voided post-petition agreements, and barred enforcement against debtors.
Issues
| Issue | Plaintiff's Argument (UST) | Defendant's Argument (Gallon) | Held |
|---|---|---|---|
| Adequacy of § 329/Rule 2016 disclosures (fee source/sharing) | Disclosures were false/misleading; factoring to BK Billing is a third‑party source and constitutes sharing that must be fully disclosed. | He treated BK Billing as a collector/finance source of his receivable and not a fee‑sharing relationship; amended disclosure sufficed. | Disclosures were grossly inadequate/misleading; negligent/inadvertent omissions do not excuse failure; remedy available under § 329. |
| Candor to tribunal & ethical duties (Rule 3.3, Rule 9011) | Gallon's filings (Installment Apps and disclosures) were misleading; signing Installment Apps while permitting post-petition collections violated Rule 1006 and Rule 9011. | He relied on BK Billing's training, lacked intent to deceive, and ceased use once issues were raised. | Gallon violated duties of candor; signature on Installment Apps was improper; ignorance and reliance on vendor not a defense. |
| Compliance with BAPCPA provisions on debt relief agencies (§§ 526–528) | Bifurcated contracts and factoring scheme risk violating BAPCPA prohibitions (misleading statements, improper contracts, inducing debt). | The model served clients by enabling faster relief; he believed it lawful and ceased use when questioned. | Court flagged serious BAPCPA implications but resolved case under § 329; reserved broader § 526/528 rulings for an appropriate adversary. |
| Remedy / Sanctions (disgorgement, contract voidance) | Disgorgement of amounts collected post‑petition by BK Billing and voidance of post‑petition contracts is necessary to remedy nondisclosure and protect debtors. | Argued model made him worse off financially; requested limited relief and continuation to represent clients. | Court ordered disgorgement equal to fees actually collected by BK Billing post‑petition remitted by Gallon to each paying debtor; post‑petition agreements are void and unenforceable; no further monetary sanctions beyond disgorgement given cooperation and eventual fee payment of filing fees. |
Key Cases Cited
- In re Inv. Bankers, 4 F.3d 1556 (10th Cir.) (bankruptcy attorney disclosure and § 329 principles regarding review of attorney payments)
- In re Woodward, 229 B.R. 468 (Bankr. N.D. Okla. 1999) (disgorgement of fees for inadequate disclosure)
- In re Brown, 371 B.R. 486 (Bankr. N.D. Okla. 2007) (mandatory full disclosure under § 329 and remedies for nondisclosure)
- In re Smitty's Truck Stop, 210 B.R. 844 (10th Cir. BAP) (courts may cancel agreements or order return of excessive payments under § 329)
- In re Stewart, 583 B.R. 775 (Bankr. W.D. Okla. 2018) (recent treatment of nondisclosure and disgorgement authority)
- Milavetz, Gallop & Milavetz, P.A. v. United States, 559 U.S. 229 (2010) (consumer debtors' attorneys qualify as debt relief agencies subject to BAPCPA)