577 B.R. 573
Bankr. D. Haw.2017Background
- In September 2015 the Hanawahines paid Volks Anwalt Law $1,615 as a retainer for Chapter 7 representation (including a $335 filing fee); Volks promised to hold fees in trust and perform specified bankruptcy services.
- Volks routed local Hawaii work to attorney Christopher Woo, who met the clients once and provided draft documents but then ceased communication after May 2016; the clients’ credit counseling certificate expired and Volks never filed their case.
- From December 2016 to April 2017 Ms. Hanawahine suffered wage garnishment totaling $1,437; the Hanawahines later retained new counsel who filed the bankruptcy on April 30, 2017.
- The U.S. Trustee moved to compel disgorgement under 11 U.S.C. § 329 and to sanction Volks and Woo for violating 11 U.S.C. § 526; Volks and Woo did not timely oppose the motion.
- The court found Volks and Woo failed to deliver promised services, retained the full retainer (including the filing fee), and had participated in a pattern of similar misconduct in other jurisdictions.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether fees paid in contemplation of bankruptcy should be disgorged under Fed. R. Bankr. P. 2017 and 11 U.S.C. § 329 | U.S. Trustee: $1,615 was paid in contemplation of filing and is excessive because Volks performed no meaningful services and retained the filing fee | Volks/Woo: no timely opposition; Woo later claimed nonpayment by Volks and attempted late opposition | Court ordered disgorgement of the full $1,615; found reasonable value of services was less than zero and held Volks and Woo jointly liable |
| Whether a non-counsel/payee can be subject to disgorgement under § 329 | U.S. Trustee: § 329 reaches anyone paid for services rendered in contemplation of the case, even if not counsel of record | Defendants: (no timely answer; Woo suggested he was not paid) | Court held § 329 covers firms/attorneys not of record when services were in contemplation of bankruptcy; disgorgement permitted |
| Whether Volks/Woo violated 11 U.S.C. § 526(a)(1) and consequences | U.S. Trustee: Volks/Woo, as debt relief agencies, failed to perform promised services; § 526(c) voids the retainer and requires refund | Defendants: no timely opposition; Woo’s claimed nonpayment did not mitigate abandonment | Court found clear § 526(a)(1) violations, voided the retainer, and ordered refund of $1,615 jointly and severally |
| Whether civil penalties under § 526(c)(5) are warranted and amount | U.S. Trustee: pattern/practice and intentional abandonment justify a penalty; damages equal wage loss may be trebled as deterrent | Defendants: no timely opposition; no mitigating evidence presented | Court imposed a civil penalty equal to treble the garnished wages ($1,437 x 3 = $4,311), joint and several against Volks and Woo |
Key Cases Cited
- Milavetz, Gallop & Milavetz, P.A. v. United States, 559 U.S. 229 (2010) (discussing purpose of § 526 reforms and BAPCPA context)
- In re Prudhomme, 43 F.3d 1000 (5th Cir.) (courts may review and disgorge fees paid more than one year before petition)
- In re Zepecki, 258 B.R. 719 (B.A.P. 8th Cir.) (attorney not of record may be subject to § 329 disgorgement when services tied to imminent bankruptcy)
- In re Garcia, 456 B.R. 361 (N.D. Ill.) (attorney not on the record can be subject to § 329 where services were in contemplation of bankruptcy)
- In re Laferriere, 286 B.R. 520 (Bankr. D. Vt.) (review of fees paid outside § 329(a)’s one-year reporting window)
- Eastern Star, Inc. S.A. v. Union Bldg. Materials Corp., 712 P.2d 1148 (Haw. Ct. App. 1985) (discussion of treble damages as deterrence under Hawaii law)