519 B.R. 67
Bankr. S.D.N.Y.2014Background
- Chapter 13 debtor hired divorce counsel Levinson after filing for bankruptcy; the divorce case arose soon after the bankruptcy case commenced.
- Levinson received a retainer of $7,150, with $5,350 paid by a third party, Aquapurity Plus, LLC.
- An April 26, 2013 invoice showed $7,150 paid, $3,936.25 earned, and $3,213.75 credit balance for unearned fees.
- The debtor sought disgorgement of the $3,213.75 credit balance and reimbursement of $2,396.43 in fees and expenses for bringing the motion.
- Levinson did not disclose the fee arrangement or source of compensation, despite applicable disclosure requirements.
- The court found the disclosure violations and ordered partial disgorgement and a future fee application under § 330(a)(4)(B).
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether § 329(a) disclosure was violated | Gorski asserts Levinson failed to disclose compensation and its source. | Levinson contends no disclosure was required or he learned late. | Yes; disclosure violation found. |
| Whether the services were 'in connection with' the bankruptcy case | Gorski argues divorce-related work impacted the bankruptcy, triggering § 329 disclosure. | Levinson contends services could be unrelated to the case. | Yes; services were 'in connection with' the case. |
| Appropriate sanction for failure to disclose | Disgorgement or other sanctions are warranted for nondisclosure. | Some sanctions or lesser penalties could be appropriate given inadvertence. | Disgorgement of $500 ordered; further disgorgement possible if noncompliance continues. |
| Whether § 330(a)(4)(B) applies and warrants a fee application | Fees must be reviewed for reasonableness after the § 329 disclosure issue. | Fees may be payable only upon court-approved application under § 330(a)(4)(B). | Yes; the court will allow a fee application within 30 days; review for reasonableness to follow. |
| Attorney fees for bringing the motion | Debtor seeks fees and costs for bringing the disgorgement motion. | American Rule generally disfavors shifting costs; bad faith not shown. | No award of attorney fees or costs for bringing the motion. |
Key Cases Cited
- In re Laferriere, 286 B.R. 520 (Bankr. D. Vt. 2002) (disclosure requirements are mandatory; no exceptions for inadvertence)
- In re LewiS, 113 F.3d 1040 (9th Cir. 1997) (fee disgorgement authority and source disclosure under § 329)
- In re Downs, 103 F.3d 472 (6th Cir. 1996) (courts deny all fees for disclosure violations in some contexts)
- In re Swartout, 20 B.R. 102 (Bankr. S.D. Ohio 1982) (divorce-related services not entitled to priority absent direct bankruptcy connection)
- In re GSC Group, Inc., 502 B.R. 673 (Bankr. S.D.N.Y. 2013) (disclosure and reasonableness considerations under § 329/330)
- In re Jackson, 401 B.R. 333 (Bankr. N.D. Ill. 2009) (§ 329(b) remedy to prevent overreaching by attorneys)
- In re Chez, 441 B.R. 724 (Bankr. D. Conn. 2010) (reasonableness and burden of proof on the attorney)
- In re New York Skyline, Inc., 471 B.R. 69 (Bankr. S.D.N.Y. 2012) (American Rule considerations in fee shifting for bankruptcy litigation)
- In re Garris, 496 B.R. 343 (Bankr. S.D.N.Y. 2013) (fee entitlement and application timing in bankruptcy counsel payments)