598 B.R. 696
Bankr. E.D.N.Y.2019Background
- Debtor Persio Nunez filed a voluntary Chapter 7 petition on April 10, 2014; primary assets were two Corona, NY properties (99-09 and 99-11). Trustee later sued to avoid a 2010 transfer of 99-09 to Margarita Ferriera and obtained a default judgment; 99-09 was sold in 2017; discharge entered July 7, 2017.
- Post-petition, Rosen (attorney) entered two retainer agreements with Nunez and Ferriera: a May 15, 2015 flat-fee retainer for $20,000 and an August 4, 2015 retainer for $50,000; parties agree Rosen received $70,000 total.
- Rosen never filed the § 329(a) / Fed. R. Bankr. P. 2016(b) disclosures for those post-petition fees and did not appear as counsel of record; his involvement was revealed by the Debtor in February–March 2018 letters.
- Rosen argued (1) he was unaware of the bankruptcy at the time of the May retainer; (2) the August retainer disclaimed bankruptcy representation; and (3) payments came from a third party or intermediary (not the Debtor).
- Court found both retainers related to the bankruptcy (services would or did impact the case), Rosen had an independent duty to disclose regardless of source or claimed disclaimer, and nondisclosure deprived the court and parties of required oversight.
- Remedy: Court declined to disgorge the $20,000 May retainer (largely state-court work after stay lifted) but ordered disgorgement of $25,000 (one-half) of the $50,000 August retainer, to be returned to Ferriera.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether § 329(a) / Rule 2016(b) required disclosure of the post-petition retainers | Rosen represented the Debtor and thus must disclose all post-petition fees and their source | Rosen says he was unaware of the bankruptcy for the May retainer and did not represent the Debtor in the bankruptcy under the August retainer | Court: Disclosure obligations apply; Rosen liable for nondisclosure despite claimed ignorance or contractual disclaimer |
| Whether payments from a third party must be disclosed | U.S. Trustee/creditors: source must be disclosed even if a non-debtor paid | Rosen: payments came from intermediaries or third parties, so not the Debtor's obligation | Court: Source disclosure required regardless of payer; representation of debtor triggers duty |
| Whether the services were "in connection with" the bankruptcy | Plaintiff (court) contends both retainers related to estate assets and affected the bankruptcy | Rosen claims May retainer concerned state-court foreclosure separate from the bankruptcy; August retainer disclaims bankruptcy work | Court: Both retainers had sufficient connection; May retainer affected primary estate asset and August retainer expressly concerned bankruptcy matters |
| Appropriate sanction for nondisclosure | Plaintiff: nondisclosure may warrant disgorgement to protect estate and creditors | Rosen: fees earned were reasonable and largely for state-court work; full disgorgement is unwarranted | Court: Discretionary disgorgement ordered: no disgorgement of $20,000 May retainer; disgorgement of $25,000 (half) of August retainer, returned to Ferriera |
Key Cases Cited
- In re Chatkhan, 496 B.R. 687 (Bankr. E.D.N.Y. 2012) (Rule 2016(b) implements § 329 and disclosure timing; disclosure mandatory)
- Kohout v. U.S. Trustee, 513 B.R. 675 (N.D. W. Va. 2014) (ignorance of disclosure rules does not excuse nondisclosure)
- In re Gorski, 519 B.R. 67 (Bankr. S.D.N.Y. 2014) (attorney has independent duty to disclose post-petition fees even if not retained as counsel of record)
- Neben & Starrett Inc. v. Chartwell Fin. Corp. (In re Park-Helena Corp.), 63 F.3d 877 (9th Cir. 1995) (disclosure rules applied literally; negligent omissions do not excuse failure)
- Cohn v. U.S. Trustee (In re Ostas), 158 B.R. 312 (N.D.N.Y. 1993) (foreclosure work intertwined with bankruptcy may require disclosure and lead to disgorgement)
- Henderson v. Kisseberth (In re Kisseberth), 273 F.3d 714 (6th Cir. 2001) (bankruptcy courts have broad authority to deny compensation for failure to satisfy disclosure requirements)
- In re Frye, 570 B.R. 21 (Bankr. D. Vt. 2017) (disgorgement is discretionary; full disgorgement not automatic but court may tailor sanctions)
- In re Hall, 518 B.R. 202 (Bankr. N.D.N.Y. 2014) (Second Circuit approach enforces disclosure rules strictly; inadvertency not excused)