Halbert v. YousifHalbert v. Yousif
ORDER
On this appeal from a decision of the Eastern District of Michigan Bankruptcy Court, the Appellant, Todd M. Halbert, claims that the court below erred in holding that he had repeatedly violated his fiduciary duties as the attorney for the Appellees, Sami Yousif, Sana Yousif and Florence Tanners, Inc., during his representation of their legal interests in their Chapter 11 bankruptcy proceedings. The Bankruptcy Court determined, inter alia, that (1) he had breached his legal and ethical duty to fully and accurately disclose his financial arrangements with the Appellees, and (2) his appointment to represent the Appellees in the bankruptcy proceedings was invalid because of his failure to publicly disclose those facts which rendered him financially interested in the bankruptcy estates. Because of these deficiencies, the Bankruptcy Court sanctioned Halbert by completely denying his fee applications, a decision that he also challenges.
For the reasons that have been stated below, the decision of the' Bankruptcy Court
I.
Appellees, Sami and Sana Yousif, are husband and wife. During the time period that is pertinent to this dispute, Sami Yousif was the sole shareholder and president of a retail store, Florence Tanners, Inc. (Tanners), also an Appellee in this cause of action. Tanners sells leather and fur coats to the general public. Halbert is an attorney who represented Tanners for approximately three years before it filed for protection under Chapter 11 of the Bankruptcy Code on December 9, 1994. Tanners’ bankruptcy petition was filed because (1) it had entered into several unprofitable shopping leases, and (2) Sami Yousif feared that the bank, which had handled his business account, would not renew its annual line of credit. Because the Yousifs were the guarantors of a certain bank debt and a number of shopping leases, they also filed a bankruptcy petition under Chapter ll. 1
A reorganization plan was confirmed on September 18,1995 for each Chapter 11 case. The Tanners’s reorganization resulted in a discharge of 75% of its unsecured debts as well as a release of all of its guaranteed debts, amounting to an extinguishment of $2,443,000. The Yousifs’. reorganization brought about the discharge of $686,000 in debts, which represented a discharge of 70% of their unsecured debts as well as a release of approximately $413,000 of their guaranteed debt.
Although the Appellees acknowledge that Halbert obtained good results for them in the Bankruptcy Court, they have challenged the fiduciary propriety of his conduct and the amount of fees that he has requested for his services. 2 Halbert filed a motion for a summary judgment on his fee applications, to which the Appellees responded in opposition along with a counter motion for a summary judgment.
At the completion of the oral argument, the Bankruptcy Court concluded that Halbert had violated his fiduciary duties to the Appellees.
In re Florence Tanners, Inc.,
These provisions require an attorney to disсlose all fee payments and agreements made after one year before the bankruptcy filing, for services in contemplation of, or in connection with, the bankruptcy filings. Such disclosures must be made within 15 days of the filing, or within 15 days of a payment or agreement not previously disclosed. Each payment and each agreement must be separately disclosed.
Id. at 442 (citation omitted).
Specifically, the Bankruptcy Court determined that Halbert, in executing the form upon which the challenged financial disclosure was made, (1) gave the “impression” that (a) he had only charged his clients a flat $25,000 fee, whereas his legal services were being compensated on an hourly basis, and (b) he had been paid another $26,600 fee although this amount was actually a retainer, (2) had failed to disclose his fee agreement ■with the Appellees for pre-petition services in contemplation of their bankruptcy petitions, 3 (3) gave the misimpression that the $26,600 retainer was the only payment that he had received from the Appellees for his legal services during the year immediately preceding the filing of the bankruptcy petition, and (4) failed to disclose the post-petition payments that he had received during the bankruptcy proceedings, which violated his supplemental disclosure obligation even if the confirmation plan made those fees not subject to prior Court review and approval. Id. at 442-44.
The Bankruptcy Court also found that Halbert had obtained fees without official approval, in violation of 11 U.S.C. § 380, when he removed funds from the retainer that had been paid to him by Tanners. Id. at 449-50. Additionally, it opined that Halbert had violated Article 11.2 of the confirmed plan when he obtained other payments from the Appellees based on conversations with Yousif because Article 11.2 provided that Halbert should submit a written statement for services performed. Id. at 450.
Thereafter, the Bankruptcy Court issued a second opinion in which it denied Halbert’s motions for summary judgment, granted the Yousifs’ and Tanners’ summary judgment motions, and denied in full Halbert’s fee applications.
5
In re Florence Tanners, Inc.,
The disrespect that Halbert has demonstrated for the disclosure requirements of the law, for this Court’s orders, and for proper fee processes is extraordinary and unprecedented in the Court’s experience. In every bankruptcy case, debtor’s counsel must understand that matters of disclosure and payment of fеes affect the administration of justice in bankruptcy cases in fundamental ways, and therefore must be addressed with the greatest seriousness, caution, and deliberation. The only proper response to the concerns raised here is denial of Halbert’s fees.
Id. at 132. The opinion also noted that Hal-bert’s failure to disclose potentially preferential pre-petition transfers of merchandise was in itself a sufficient ground to deny fees. Id. at 132. Finally, inasmuch as the receipt of the merchandise from Tanners created a conflict of interest for Halbert, the Court found that a denial of fees was a mandatory sanction because only disinterested attorneys may be appointed to serve a bankruptcy estate. Id. at 133. Consequently it denied both of his fee applications.
The appeals by Halbert of the Yousifs’ and Tanners’ cases have been consolidated by this Court for the purpose of this proceeding. Since the decisions by the Bankruptcy Court were rendered on competing summary judgment motions, a de novo standard of review will be utilized.
See Northeast Ohio Coalition for the Homeless v. City of Cleveland,
The Bankruptcy Court correctly concluded that (1) Halbert unlawfully withdrew funds from a $26,600 retainer fee that he had obtained from Tanners, and (2) prior to the confirmation of the Tanners bankruptcy plan, he withdrew funds from it оn four occasions until it was fully depleted without filing supplemental disclosures or seeking Court approval.
In re Florence Tanners,
Halbert does not contest the factual findings of the Bankruptcy Court on this issue, but argues that the sanction of denying all of the fees that he requested in the Yousif and Tanners bankruptcies constitutes an abuse of discretion. Halbert’s argument lacks merit because he incorrectly limits his misconduct to his misappropriation of the Tanners’ retainer fee. Upon review of the record, this Court concludes that the Bankruptcy Court correctly determined that Halbert violated several other fiduciary obligations that had been imposed upon him by bankruptcy law. Based on these acts of misconduct, the Bankruptcy Court assessed the totality of Halbert’s violations and concluded that “[t]he only proper response” to those deficiencies was to deny his fee applications.
See In re Florence Tanners,
III.
The Bankruptcy Court found that Halbert violated Fed. R. Bankr.P.2014(a) by failing to disclose that he had received merchandise transfers within ninety days before the Tanners bankruptcy filing, which were potentially preferential. As a result, Halbert was disqualified from employment as the Appel-lees’ attorney under 11 U.S .C. § 327(a), which allows for the appointment of only disinterested professionals. Halbert, in maintaining that he fully complied with the disclosure requirements оf Rule 2014(a), challenges the accuracy of this conclusion with regard to (1) the amount of merchandise transfers, and (2) the application of certain transfers to particular time entries in such a way as to create potentially preferential transfers. However, this challenged ruling is amply supported by evidence that Halbert received valuable property within a period of ninety days of the Yousif and Tanners bankruptcy filings.
In an attempt to maximize the size of the bankruptcy estate for the benefit of creditors, the Bankruptcy Code contains special provisions concerning the pre-petition transfer of a debtor’s property. For example, the bankruptcy trustee may avoid any property transfer by a debtor that occurs within the ninety days immediately preceding the bankruptcy filing, provided that certain conditions are satisfied and no defenses validate the transfer. 11 U.S.C. §§ 547(b), (c). Such transfers are known as “preferences.” 7
During the course of Halbert’s representation of Tanners prior to the filing of the Yousif and Tanners petitions for bankruptcy, Halbert says that he “reluctantly agreed” to
(1) September 17, 1994: $250 retail price, credited at $100.
(2) October 1, 1994: $1,000 retail price, credited at $400.
(3) November 19, 1994: $5,943 retail price, 9 credited at $2,377. 10
The Bankruptcy Court erred in finding that the merchandise, which was transferred during this period, had a value of $17,655.
11
See In re Florence Tanners,
The Bankruptcy Court correctly determined that, as a result of receiving transfers of value from Tanners within the ninety-day preference period, Halbert became ineligible to serve as its attorney, at least in the absence of curative measures which did not occur here. The Bankruptcy Code authorizes the employment only of professionals who (1) do not hold an interest adverse to, or (2) are disinterested in, the bankruptcy estate. 11 U.S.C. § 327(a);
12
see In re Middleton Arms, L.P.,
It was well-settled by the time that Halbert filed the instant petitions that an individual who possesses an interest which is
;potentially
adverse to the estate could be disqualified from employment under § 327(a).
See Rome v. Braunstein,
“It is the duty of counsel for the debtor in possession to survey the landscape in search of property of the estate, defenses to claims, preferential transfers, fraudulent conveyances and other causes of action that may yield a recovery to the estate. The jaundiced eye and scowling mien that counsel for the debtor is required to cast upon everyone in sight will likely not fall upon the party with whom he has a potential conflict....”
In re Interwest Business Equip., Inc.,
Despite these well-established bankruptcy principles, Halbert objects to the decision by the Bankruptcy Court that “[a]s a matter of law ... debtor’s counsel must disclose in the attorney’s affidavit of disinterestedness each payment received from the debtor within 90 days before the bankruptcy filing,”
In re Florence Tanners,
First, the concept of disinterestedness in § 327(a) unquestionably covers not only actual, but also potential, conflicts of interest, and includes the avoidance of an appearance of a conflict of interest.
See, e.g.,
Halbert argues that he did not violate any disclosure duty because the possibility that some of the merchandise transfers might be preferential never even occurred to him.
16
That, however, is not the issue. The standard is whether that issue
should
have occurred to him since the language of Rule 2014(a) requires mandatory disclosure, imрoses upon those professionals who are appointed under § 327(a) a duty to fully and completely disclose any and all connections with debtors, and precludes them from exercising any discretion in deciding which connections merit disclosure. Significantly, negligence regarding disclosure is no excuse.
See Rome,
Thus, it is no defense for Halbert to argue that it did not occur to him to perform a preferential transfer analysis because the merchandise transfers he received were so unlike preferential transfers, as he understood them. The precedents cited clearly establish that, to preserve its role and the integrity of the bankruptcy process, full disclosure of all connections with a debtor which existed within the ninety day period immediately prior to the filing of the bankruptcy petition must be disclosed to the Bankruptcy Court.
See also In re Decor,
Moreover, the merchandise transfers that Halbert received are not exempt from this disclosure duty because they lacked “badges of impropriety” which he considers to be controlling,
19
such as that their value was not sufficiently high as to be indicative of a preferential transfer. The only determinative issue with regard to a
potentially
preferential transfer is whether an interest in the
Halbert also complains that the Bankruptcy Court incorrectly evaluated his defenses on the issue of whether the merchandise transfers were actually preferential.
In re Florence Tanners,
To the extent that Halbert relies upon arguments that are premised on 11 U.S.C. § 329 and Fed. R. Bankr.P.2016(b),
21
which require the disclosure of payments received within one year before the bankruptcy filing for legal services in connection with the bankruptcy, they are rejected as inapplicable. These provisions played no part in the ninety day disclosure requirement that was established by the Bankruptcy Court.
In re Florence Tanners,
Thus, the Bankruptcy Court properly found that Halbert had failed to disclose his receipt of potentially preferential transfers from Tanners, in violation of his duties under bankruptcy law. Thereafter, the Bankruptcy Court opined that it would not have appointed Halbert to serve as Tanners’ attorney because he would have failed the disinterestedness requirement in § 327(a).
In re Florence Tanners,
For several reasons, this Court does not find any merit in Halbert’s contention that the Bankruptcy Court, in rejecting his fee application, established new law which should be applied only prospectively so as not to apply to him.
First, this argument has previously been rejected under reasonably similar circumstances.
See In the Matter of Arlan’s Dep’t Stores,
In 1991, three and a half years before Halbert initiated the instant bankruptcies, the Sixth Circuit Court of Appeals (Sixth Circuit) held that § 327(a) “clearly states ... that the court cannot approve the employment of a person who is not disinterested, even if the person does not have an adverse interest.”
In re Middleton Anns,
This holding can only be taken to mean that disinterested professionals are disqualified by § 327(a) from representing debtors in bankruptcy. The Sixth Circuit later eon-firmed this reading in a case which also held that “a valid appointment under § 327(a) is a condition precedent to the decision to grant or deny compensation under § 330(a) or § 328(c).”
In re Federated,
Halbert asserts that he cannot be attributed with constructive knowledge that his fees could be denied because the law on disinterestedness has been subject to conflicting authority. It is true that some courts have refused to follow a strict disqualification rule, preferring to engage in a case-by-case evaluation,
In re Decor,
First, his position ignores the import of In re Middleton Arms and In re Eagle-Picher, which led to the holding by the Sixth Circuit in In re Federated. Despite these decisions, Halbert never made protective supplemental disclosures to the Bankruptcy Court, and his receipt of property from Tanners within the ninety days preceding the filing of its petition was first brought to the attention of the Bankruptcy Court on December 26, 1996, over two years after he should have disclosed that information, and then only in the Appel-lees’ objections to his fee applications.
Second, the existence of conflicting authority clearly suggests that Halbert should have adopted a more conservative approach and erred on the side of disclosure.
See Rome,
Halbert implies that his actions were justified because, in addition to the law on this subject being unclear,
In re Federated
puts professionals in the difficult position of balancing the desire to do business with the risk of not being compensated. However, the fiduciary duties that were imposed upon him under bankruptcy law do not exist to foster his economic vitality but to preserve the integrity of the bankruptcy process and protect vulnerable debtors from overreaching by the professionals from whom they seek assistance.
See In re EWC,
Finally, Halbert submits that a more cautious approach to a finding of disinterestedness than that which was advanced by the Bankruptcy Court would be appropriate, especially in view of the mandatory denial of earned fees in In re Federated. In support of this proposition, he identifies the following language:
[i]t simply exceeds rational bounds to rule that an adverse interest exists merely because a committee member’s or а creditor’s transactions with the debtor will be investigated, or because a remote, speculative, hypothetical possibility exists that, in the future, the estate or the Committee may dispute the creditor’s claim or bring a cause of action against the creditor.
In re National Liquidators,
IV.
Attorneys have a duty (1) to file with the Bankruptcy Court a statement of compensation paid, or agreed to be paid, (2) if such payment or agreement was made in the year preceding the filing of the petition, (3) for services rendered or to be rendered by the attorney in contemplation of or in connection with the bankruptcy, and (4) which discloses the source of such compensation. 11 U.S.C. § 329(a). Corresponding Rule 2016(b) requires that the statement be filed within fifteen days after the order for relief or of a payment or agreement not previously disclosed. Fed. R. Bankr.P.2016(b). Halbert had attempted to comply with this rule by filing a commonly used, although unofficial, court form that contained the following language:
[t]he undersigned, pursuant to Rule 2016(b), Bankruptcy Rules, states that:
(2) The compensation paid or agreed to be paid by the debtor(s) in this case.
(a) for legal services rendered or to be rendered in contemplation of and in connection with this case $25,000.00
(b) prior to filing this statement, debtor(s) have paid $26,600.00
See In re Florence Tanners,
The Bankruptcy Court found that these disclosures violated § 329(a) and Rule 2016(b) in numerous ways.
In re Florence Tanners,
Halbert submits that the Bankruptcy Court committed reversible error in concluding that he violated § 329(a) and Rule 2016(b) by failing to fully and accurately disclose his fee agreements or fee payments because it (1) did not accept the uncontested facts that were submitted by him as being true, (2) failed to draw all reasonable inferences in his favor, and (3) resolved the case on its substantive merits instead of determining whether genuine issues of material facts existed for trial, as required on the competing motions for a summary judgment.
A.
Halbert asserts that several of the findings by the Bankruptcy Court are incorrect because, in actuality, there was no misunder-. standing between the parties. For instance, Halbert claims that (1) none of the parties shared the impression, which was incorrectly found by the Bankruptcy Court, that he was handling Tanners’ Chapter 11 proceeding for a flat $25,000 fee, citing Tanners’ Statement of Affairs and the Appellee’s applications to employ him, (2) it was understood by Tanners that the $26,600 payment was a retainer, as reflected in Tanners’ Statement of Affairs, and (3) the Bankruptcy Court erroneously assumed that he was attempting to conceal his bankruptcy fee agreement with Tanners because his hourly rate was disclosed in Tanners’ application to employ him as counsel.
However, if Halbert’s arguments are fully accepted, they would render the’ fiduciary obligations that are owed by a debtor’s counsel pursuant to § 329(a) and Rule 2016(b) absolutely meaningless. Moreover, his comments аlso fail to recognize the very reason why these duties were imposed upon him. The current Bankruptcy Code and Rules were promulgated because past abuses of the bankruptcy system necessitated, among other things, bankruptcy court supervision of fee agreements and payments.
Because of the common fund nature of bankruptcy estates and, in part, due to past problems associated with attorney employment and compensation professionals performing duties for the estate are held to high fiduciary standards, and act as officers of the court.
In order to assure compliance with these duties the 1978 Bankruptcy Code implemented a system of checks and balances on employment and compensation of professionals for, previously, “the Bankruptcy system operate(d) more for the benefit of attorneys than for the benefit of creditors.” Towards this end, Congress enacted standards for professional employment and compensation in the Bankruptcy Code “to guard against a recurrence of the ‘sordid chapters’ in the history of fees in corporate reorganizations.”
In re EWC,
Compensation of debtors’ counsel is closely scrutinized because of “the temptation of a failing debtor to deal too liberally with his property in employing counsel”, and because transactions with debtor’s attorney provide potential for “evasion of creditor protection provisions of bankruptcy laws” and “overreaching by the debtor’s attorney.”
In re Whitman,
There are also instances wherein debtors will not object to their attorney’s fee applications because they “may be ‘in no position to make an objective judgment as to the value of the legal services involved, [and ... may lack the] inclination to object to whatever fee is requested by the attorney who has made it possible ... to continue business.’ ”
In re Busy Beaver Bldg. Ctrs., Inc.,
It is also insufficient that material details of the compensation agreement between Halbert and the Appellees were located in other writings submitted to the Bankruptcy Court. 23
[The] disclosure requirements [of Rules 2014 and 2016] are not discretionary. The duty of professionals is to disclose all connections with the debtor, debtor-in-possession, insiders, creditors, and parties in interest as well as fee arrangements....
The bankruptcy court has' neither the obligation nor the resources to investigate the truthfulness of information supplied, or to seek out conflicts of interest not disclosed.
In re EWC,
Thus, Halbert’s failure to disclose material aspects of his fee agreement with Tanners is not remedied by (1) their mutual accord over the amount and the method by which his fees would be paid, or (2) the disclosure of this information in other documents that were submitted to the Bankruptcy Court.
B.
The Bankruptcy Court found that Halbert violated § 329(a) and Rule 2016(b) by failing to specify that his receipt of $26,-
Halbert also argues that “[t]here is no reason to require the disclosure of a retainer, because a counsel for a debtor is not authorized to be paid until the entry of a court order authorizing payment of fees, whether or not a retainer was received.”
24
This argument is remarkable for its absolute 'failure to acknowledge the primary purpose for which the disclosure duties under bankruptcy law, including § 329(a) and Rule 2016(b), were implemented in this case. These rules and regulations have been established for the purpose of providing a bankruptcy court with sufficient statutory authority to supervise all financial agreements between a debtor and its counsel and to make certain that attorneys do not take advantage of a client’s desperate circumstances by seeking unreasonable compensation amounts which could be detrimental to the bankruptcy estate.
See In re EWC,
Finally, Halbert asserts that the admonition of drawing all reasonable inferences in his favor should have precluded the Bankruptcy Court from finding that he failed to disclose the retainer in his Rule 2016(b) statement, which simply states that Tanners “paid” him $26,600. Certainly, this form of payment has the practical and legal effect of retaining an attorney and preventing his or her retention by an adversary. Black’s Law Dictionary 1479 (4th ed.1951). In this sense, Halbert’s disclosure (to wit, that he had been “paid” a certain sum of money) is consistent with an acknowledgment that a retainer had been obtained by him.
Nevertheless, the Court cannot agree with Halbert’s reasoning because it ignores a key difference between retainers and other payment of professional compensation; namely, that a retainer is an unearned fee.
See In re Doors and More,
Thus, § 329(a) requires the disclosure and explicit identification of retainers so that the Bankruptcy Court may assure that they are not excessive.
See
11 U.S.C. § 329(b);
In re Saturley,
the prospective client was about to embark upon a bankruptcy proceeding in which its attorneys fees unquestionably were subject to judicial review and scrutiny. It was not a venture involving simply attorney and client, but one in which the creditors of the bankrupt and the court had an undeniable interest.... We are not insensitive to the financial drain imposed upon a law firm which is about to undertake the arduous and complicated tasks here envisaged no matter how promising the prospects that the Chapter XI proceedings will eventually succeed. Again the question is not merely the sum taken but whether it should have been disclosed. The law firm is not expected to disregard its own welfare, but neither is it expected to ignore its obligation to advise the court so that the court might make the determination of propriety based on the circumstances in the case. The arguments made to support the receipt of the retainer should have been raised at the outset and not six months after the event.
Id. at 936 (citation omitted) (emphasis added).
Although no similarly grave situation occurred in the Tanners’ case, the point is that justifiable reasons exist for requiring not only the disclosure, but also the separate and specific identification of, retainer amounts received by a debtor’s counsel. This duty should have been a familiar one to Halbert because compliance with § 329 and Rule 2016 requires disclosure of “ ‘the precise nature of the fee arrangement.’ ”
In re Park-Helena Corp.,
Under these circumstances, the Bankruptcy Court was not required to conclude that Halbert had sufficiently disclosed the retainer by saying he had been “paid” a certain amount of money. Arguably, Halbert’s argument may have been meritorious if the decision by the Bankruptcy Court on this issue was governed by a factual finding. But it was not. Instead, it was determined by a legal conclusion that the Bankruptcy Court was entitled to make even on summary judgment. Having concluded that § 329(a) and Rule 2016(b) required the separate and distinct identification of retainer amounts received, the Bankruptcy Court correctly ruled that Halbert violated this duty because there was no genuine issue of a material fact regarding his disclosure.
C.
Halbert claims that the Bankruptcy Court impermissibly drew inferences against him when it concluded that he gave the “impression” that his receipt of $25,000 was a flat fee for Tanners’ bankruptcy.
In re Florence Tanners,
His second argument asserts that it is common knowledge that Chapter 11 bankruptcies are handled on an hourly fee basis in this district. Consequently, he submits that “[i]n drawing an ‘inference’ without evidence, certainly where the interest is adverse to a respondent to a motion for summary judgment, the Court must at a minimum have an obligation to take notice of the practices of which it is aware.”
26
He cites no authority for this proposition other than
In re Beesley,
Perhaps most importantly, Halbert cannot deny that his statement that $25,000 was paid or agreed to be paid by Tanners for services in contemplation of, or in connection with, the bankruptcy fails to fully and accurately disclose the hourly fee agreement that he аcknowledges existed. Thus, the Bankruptcy Court, faced with the uncontested content of Halbert’s disclosure, was correct to take that statement at face value and conclude that he had violated his duty to disclose.
D.
Halbert also contests the determination by the Bankruptcy Court that he failed to disclose an hourly fee arrangement with the Appellees which was agreed upon by the parties within one year of the bankruptcy filing.
In re Florence Tanners,
In its ruling, the Bankruptcy Court determined that the agreement existed among the parties when it referred to a December 5, 1994 billing from Halbert which was considered along with certain portions of an affidavit that he submitted in support of his motion for a summary judgment. Id. From these sources, the Court correctly noted that (1) the billing was for legal services from January 27, 1994 through December 3, 1994, (2) discussions regarding a Chapter 11 filing for Tanners first occurred on April 21, 1994, and (3) further discussions in contemplation of bankruptcy did not take place until the actual filing of the petition. Id. The Court, after noting that “[e]learly, there was an agreement that Tanners would pay for those services, but Halbert did not disclose such an agreement,” concluded that Halbert’s failure to disclose this agreement violated his disclosure duties under § 329(a) and Rule 2016(b). Id.
Although it is undoubtedly plausible to deduce that a fee agreement existed between Halbert and Tanners for these services in contemplation of bankruptcy, there is no direct information relating to any such agreement in any of the material upon which the Bankruptcy Court relied. Thus, there is no
Strict compliance with the directive to draw all reasonable inferences in favor of Halbert should have resulted in the Bankruptcy Court making no finding about such an agreement. Apart from whether this directive required the assumption that Halbert agreed to work on the bankruptcy pro bono, about which this Court expresses no opinion, the Bankruptcy Court improperly assumed that any such agreement fell within the bounds of § 329(a) and Rule 2016(b). This conclusion was reached even though Halbert presented uncontested extrinsic evidence which indicated that his only fee agreement with Tanners was achieved on September 1, 1993, more than one year before its petition was filed. 28 Indeed, Halbert contends on appeal that this fee agreement, which provided for an hourly fee of $165, is the only one relating to the bankruptcy, a claim which is undisputed by the Appellees. 29
While the Court expresses no opinion as to whether Halbert was under a duty to disclose this fee agreement, it is apparent that the Bankruptcy Court drew inferences against him based on an incomplete understanding of the facts and the parties’ positions on this issue. The Bankruptcy Court also failed to set forth on the record the basis for this alleged violation while at the same time being unable to establish the date on which the alleged agreement was entered.
Cf. In the Matter of Prudhomme,
E.
Halbert also contests another decision of the Bankruptcy Court which held that the failure to report his receipt of the merchandise from Tanners on November 19, 1994 constituted a violation of his fiduciary duties because it represented a payment in contemplation of bankruptcy and made within one year preceding the filing of the petition.
In re Florence Tanners,
While at least one of Halbert’s arguments (e.g., he had the legal right to apply the payments received from Tanners to any invoice, time entry or future unearned professional fees) appear to raise questionable ethical behavior, the Bankruptcy Court gives no indication of having evaluated his argument that the November 19, 1994 merchandise transfer, as well as other merchandise deliveries, could be appliеd exclusively to non-bankruptcy related services that were provided before the petitions were filed. 30 Moreover, the Bankruptcy Court does not appear to have addressed Tanners’ argument that all of the merchandise transfers to Hal-bert were in payment of pre-1994 fee obligations.
As a consequence, it appears that the Bankruptcy Court did not evaluate this issue in a light most favorable to Halbert. Hence, its findings and conclusions with regard to this matter must be vacated.
F.
The Bankruptcy Court held that Halbert violated his disclosure duties under Rule 2016(b) by not revealing the receipt of six post-confirmation fees from Tanners, totaling
Notwithstanding the positions that have been advanced, the record on this issue is insufficient and, thus, it precludes any meaningful judicial review of the contested issue. In fact, the only case which has been cited by the Bankruptcy Court in support of its conclusion that Rule 2016(b) applies to post-confirmation proceedings is
In re John G. Berg Assocs., Inc.,
In addition, the Bankruptcy Court did not address a factor which the
Berg
court found controlling; to wit, that the “power [of the bankruptcy court] over fee applications must be related to the issue of its subject-matter jurisdiction to hear the post-confirmation matters in furtherance of which services were rendered” because “[a] bankruptcy is not ‘forever;’ after confirmation, a debtor must normally ‘go about its business without further supervision or approval’ from the bankruptcy court.”
Berg,
For these reasons, the findings and conclusions of the Bankruptcy Court on this issue are vacated.
V.
Before examining the propriety of the sanctions imposed by the Bankruptcy Court upon Halbert, the Court notes that most of his challenges relate to conclusions by the Bankruptcy Court that he violated several prescribed statutory rules which required him to make a full and complete disclosure of his financial relationship with the Appellees. However, one other challenged conclusion by the Bankruptcy Court pertains to his appointment to represent the Appellees in violation of § 327(a), which can be characterized as a violation of disinterestedness rules that are imposed upon a debtor’s counsel by bankruptcy law.
34
Violations of
Three possible consequences have been identified for disinterestedness violations: (1) the discretionary setting aside of a professional’s employment pursuant to § 327(a),
35
(2)the mandatory setting aside of the § 327(a) employment and denial of compensation for services performed during the period of the conflict pursuant to 330(a),
36
or (3)the discretionary denial of all or part of the compensation requested pursuant to 1 U.S.C. § 328(c).
37
In re EWC,
By contrast, a violation of the bankruptcy disclosure rules can be sanctioned by denying a counsel’s requested compensation, as well as through an order of disgorgement of fees that have already been received.
In re EWC,
In the case at hand, the Bankruptcy Court sanctioned Halbert by denying his requested compensation.
In re Florence Tanners,
In large measure, Halbert’s argument on appeal appears to be based on his perception of the harshness of the various decisions by the Bankruptcy Court, especially inasmuch as he did not purposefully violate his disclosure duties or willfully withhold information from the Bankruptcy Court. This position-relies on the doctrine that the severity of an attorney’s conduct and the excessiveness or reasonableness of the fees charged should be considered by a reviewing court when assessing sanctions, a power which must be exercised “with restraint and discretion.”
See In re Lewis,
However, a debtor’s counsel who is appointed under the Bankruptcy Code can lay no claim of right to a lesser sanction than a bankruptcy court is authorized to impose for a disinterestedness or disclosure violation. This is especially true in those situations in which there has been a clear failure
Moreover, it is not unusual for bankruptcy attorneys who represent debtors to be denied the compensation for their services if they have failed to satisfy their disclosure duties. Such cases were prevalent well before Halbert filed the instant petitions in December 1994. For example, in one case an attorney failed to disclose approximatеly half of the compensation that he had received from the debtors prior to the hearing on his fee application.
In re Meyer,
Although an argument may be made about the distinctions that may exist between his circumstances and those found in the cases which were relied upon by this Court and the Bankruptcy Court,
“[l]ittle profit will come from a dissection of the precedents.... What is similar in many, or so its seems to us, is the animating principle.” The animating principle here is the fiduciary obligation owed by counsel for the debtor to the bankruptcy court.
In the Matter of Arlan’s Dep’t Stores,
VI.
Having found that the Bankruptcy Court’s denial of Halbert’s fee application in the Tanners’ case was fully warranted, there remain several arguments by Halbert that require attention.
A.
Halbert submits that this Court should enter a summary judgment in his favor and against the Yousifs because the Bankruptcy Court did not cite any law and found no facts upon which to support its denial of his request for attorney fees relating to services rendered in the Yousifs’ bankruptcy. This Court agrees. All of his deficiencies, which were the subject of the two opinions by the Bankruptcy Court, relate to his conduct in the Tanners bankruptcy proceeding. In fact, there is no discussion or evaluation of Halbert’s compliance or noncompliance with his disclosure and disinterestedness duties in the Yousif case. 39
Therefore, the entry of a summary judgment by the Bankruptcy Court in favor of the Yousifs is vacated. Further, the issue of whether a summary judgment should be en
B.
Halbert argues that the Bankruptcy Court denied his fee applications for reasons raised for the first time in its opinions, in violation of his right to respond and to due process, as guaranteed by the United States Constitution. .In his judgment, the Bankruptcy Court went far beyond any of the issues that were raised by the Appellees in their objections to his fee application.
40
In support of this argument, Halbert cites
In re Busy Beaver
for its discussion regarding the procedures to be followed by a bankruptcy court in reviewing fee applications. That case held that 11 U.S.C. §§ 329(b) and 330(a), Fed. R. Bankr.P.2017(b), “and perhaps even the dictates of due process” under the Fifth Amendment of the Constitution, require that a “good faith” fee applicant be informed of particular concerns regarding the application and allowed a meaningful opportunity to respond with evidence or argument.
In re Busy Beaver,
However, In re Busy Beaver is inapposite to the case at bar, in that it is limited to those situations in which only the bankruptcy court raises objections to a fee application. Id. at 838, 840-45. As the Court explained, its ruling was in large part premised on the absence of an adversary proceeding, as a result of which the fee applicant would have no basis to know of the concerns at issue unless it was informed of them by the reviewing court in advance of the hearing. See id. iat 842, 845-47 & n. 16. Thus, In re Busy Beaver does not represent an extension of a litigant’s due process rights when a bankruptcy fee application is being reviewed in what is essentially an adversary process after a debtor’s objections are filed.
At most, the case should be construed as being consistent with generally understood principles of due process and fair play, standing only for the proposition that a litigant has a right to meaningful input into the decision-making process by the court when rights or benefits attendant to the litigant are at issue. Here, Halbert was given such an opportunity in the Bankruptcy Court below where objections to his fee applications were raised by the debtors — not the court — and a classic adversarial process ensued which resulted in Halbert making numerous arguments and producing an extensive amount of extrinsic evidence in support of his position. The circumstances in this controversy do not parallel the facts in the other cases in which violations of due process were found.
Cf. In re Yellow Cab Coop.,
Halbert has produced no authority which suggests that the Bankruptcy Court was circumscribed in its ruling by the parties’ arguments. In the absence of any controlling authority in support of this position, the Court will not adopt any such doctrine. Halbert was fully aware that the validity of his fee applications was at issue. Moreover, the objections by the Appellees, to which Halbert was given notice and an opportunity to respond, adequately brought into issue all the disclosure and disinterestedness matters that the Bankruptcy Court addressed in its opinions.
C.
Halbert argues that the failure of Tanners to provide the Court with sufficient extrinsic
D.
Halbert complains that the statements by the Bankruptcy Court which described his disclosures as “false, misleading, and incomplete,” and asserted that he had “systematically violated” his disclosure obligations,
In re Florence Tanners,
VII.
Accordingly, for the reasons that have been set forth above, the granting of the Appellees’ summary judgment motion, and the denial of a similar request by Halbert, is affirmed in part, vacated in part, and remanded. The denial by the Bankruptcy Court of Halbert’s fee application in the Tanners’ bankruptcy case is affirmed, although certain findings of fact and conclusions of law upon which the holding by the Bankruptcy Court was based are vacated and remanded to the Bankruptcy Court. The denial by the Bankruptcy Court of Halbert’s fee application in the Yousifs’ bankruptcy case is vacated and remanded.
IT IS SO ORDERED.
Notes
. Halbert was the attorney of record for the three Appellees during all of the bankruptcy proceedings that are pertinent to this controversy.
. In the Yousifs’ cases, Halbert requested $26,-242.32 in fees. In the Tanners case, he sought $138,733.68.
.The Bankruptcy Court expressed the view that Halbert's obligation to disclose his agreement with the Appellees existed regardless of his waiver of the pre-petition bankruptcy fees.
. Halbert had raised five alternate defenses to the claim that these transfers were preferential, one of which was that Tanners was not insolvent at the time of the transfers. The Bankruptcy Court was troubled by Halbert’s assertion because this defense ostensibly jeopardized the settlements, which totaled the sum of $134,568, that Tanners had obtained in eight preference adversary proceedings. Halbert contests the validity of this reasoning and asserts that (1) no impro- ' priety was committed when he set forth his belief that Tanners was solvent in the ninety days pre-petition, and (2) no jeopardy can inure to his corporate client as a result of this allegation.
. In their summary judgment motion, the Appellees asked for the entry of an order of disgorgement. (R. 13 & 14, at 12.) Although the Bankruptcy Court granted their motion, it appears to have limited its sanction to a denial of the attorney fees that had been requested by Halbert. (R. 21);
In re Florence Tanners,
. Halbert's four pre-confirmation withdrawals from the retainer could be characterized as attempts to obtain interim payments for his bankruptcy services, which are governed by 11 U.S.C. § 331. By not following the prescribed procedure for obtaining interim payments, Halbert appears to have violated the statute. Moreover, under § 331 an award of interim compensation can only be granted in conformance with the terms of § 330. 3 Collier’s on Bankruptcy ¶ 331.01 [4]. Section 330 provides that the requested compensation may be obtained by a court order only after notice and a hearing, and consideration of certain guidelines by the court. By ignoring these procedures, it appears that Halbert violated § 330 as well. In any case, Halbert clearly violated at least one of these statutes, if not both. Consequently, the conclusion of the Bankruptcy Court on this issue must be affirmed even if it relied on the wrong ground or gave the wrong reason.
Olympic Fastening Sys., Inc. v. Textron, Inc.,
. The Appellees' ninety-day preference window began on September 9, 1994.
. R. 12, Ex. 2.
. The Bankruptcy Court found that this particular transfer was for merchandise with a retail value of $5,895.
In re Florence Tanners,
. (R. 12 at 5; R. 7, Ex. 2.) The correct credit value to attribute to the merchandise is confused by a dispute regarding the meaning of the term "retail sales price” in the fee agreement between Halbert and Tanners. As a marketing device, Tanners listed a higher and lower price on the sales tags of its coats. Tanners alleged that the higher price should have been used to calculate Halbert’s 40% credit discount. (See R. 13 at 2, Ex. 1 ¶ 3.) Halbert asserts that he properly used the lower price on the basis of the plain language within their agreement, and credibly explains the implausibility of Tanners' position. (R. 15 at 18-19, Ex. B.)
. The Bankruptcy Court derived this figure by totaling the retail value of merchandise that Hal-bert had received.
See In re Florence Tanners,
. Section 327(a) (emphasis added) provides:
[ejxcept as otherwise provided in this section, the trustee, with the court's approval, may employ one or more attorneys, accountants, appraisers, auctioneers, or other professional persons, that do not hold or represent an interest adverse to the estate, and that are disinterested persons, to represent or assist the trustee in carrying out the trustee's duties under this title.
In Chapter 11 proceedings a debtor-in-possession generally has all the rights of a trustee. 11 U.S.C. § 1107(a). Thus, provisions of the Bankruptcy Code, such as § 327(a) which facially ’ apply only to the bankruptcy "trustee,” are nevertheless applicable to Tanners because it was a debtor-in-possession during its Chapter 11 reorganization.
See In re Federated Dep't Stores, Inc.,
. Fed. R. Bankr.P.2014(a) (emphasis added) states:
[a]n order approving the employment of attorneys, accountants, appraisers, auctioneers,agents, or other professionals pursuant to § 327 ... of the Code shall be made only on application of the trustee or committee. The application shall be filed and ... a copy of the application shall be transmitted by the applicant to the United States trustee. The application shall state the specific facts showing the necessity for the employment, the name of the person to be employed, the reasons for the selection, the professional services to be rendered, any proposed arrangement for compensation, and, to the best of the applicant's knowledge, all of the person's connections with the debtor, creditors, any other party in interest, their respective attorneys and accountants, the United States trustee, or any person employed in the office of the United States trustee. The application shall be accompanied by a verified statement of the person to be employed setting forth the person's connections with the debtor, creditors, any other party in interest, their respective attorneys and accountants, the United States trustee, or any person employed in the office of the United States trustee.
. The
McKinney
decision has been the subject of some disagreement, but not on the ground at issue here.
See In re Atkins,
. When faced with a similar factual situation, the Second Circuit Court of Appeals (Second Circuit) rebuffed an attorney’s argument which was substantively comparable to the arguments that Halbert has submitted to this Court. At the trial level, a law firm had been denied its fee applications and ordered to disgorge pаyments on account of violating its duty to disclose "all of [its] connections with the ... debtor,” including a failure to initially disclose a retainer paid to it.
In the Matter of Arlan’s Dep't Stores,
. Halbert Combined Er. at 39-41.
. Although In re National Liquidators discusses disclosure duties in the context of 11 U.S.C. § 1103, which applies to creditor committees, the provisions in Fed. R. Bankr.P.2014(a) from which that court derives its holding are equally applicable to § 327(a).
. This argument is more pertinent to the issue of sanctions and is addressed more fully in that portion of this Order. See infra Part V.
. Halbert Combined Br. at 39-41.
. Although not directly on point because it is neither premised on § 327(a) nor Rule 2014(a), the following discussion is nevertheless instructive:
[plroper disclosure and evaluation of fee arrangements are required by 11 U.S.C. § 329 as necessary in the early stages of the case not only to avoid remedial adjustment of fees in later stages of the case but also to prevent the escalation of a potential conflict into an actual one. If allowed to percolate without proper disclosure, a conflict may mature and either disrupt the case to the dеtriment of the debtor, creditors or the estate or simmer below the horizons of view by the Court or creditors, thereby accomplishing real damage unperceived until incurable, except by disgorgement or disallowance of fees. Other “unattractive options” may be necessary, including appointment of a trustee with its associated expense, removal of counsel with its implications on the ability to reorganize, and continuation of the case in spite of the conflict with its attendant risks. Such a result would affect not only the debtor’s attorneys but also the estate and its creditors.
In re Automend, Inc.,
. Halbert Combined Br. at 38-39.
. Arguably, this limited claim for compensation would then be subject to rejection by the Bankruptcy Court on account of his other disclosure violations. Moreover, the Court notes that any claim by Halbert that he is entitled to compensation for the first month is quite open to debate, inasmuch as the Sixth Circuit has indicated that the 1991 decision date of
In re Middleton Arms
establishes the notice threshold up to which fees can be awarded to interested professionals.
In re Federated,
. For example, Halbert argues that "[tjhere is simply no chance that the [Bankruptcy] Court, or anyone reviewing the file with even a modicum of care, could be misled, or could reach the conclusion that [he] would be handling the Chapter 11 case for a flat fee.” (Halbert Combined Br. at 17.)
. Halbert Combined Br. at 19.
. An expression of satisfaction by the debtor’s counsel in a Chapter 11 bankruptcy that the confirmation plan will provide for cash payment of his allowed compensation, 11 U.S.C. § 1129(a)(9)(A), is not necessarily sufficient to overcome this concern because at the initial stages of a case, when the retainer is requested. the counsel does not generally know whether the proceeding might be converted into one under Chapter 7. Under such circumstances, the debt- or’s counsel would be left to compete for his (or her) fees with other officers of the estate who also have first priority in the eventual distribution of the estate pursuant to 11 U.S.C. § 507(a)(1).
. Halbert Combined Br. at 17-18.
. The alternate standard for taking judicial notice (to wit, a fact must be “capable of accurate and ready determination by resort to sources whose accuracy cannot reasonably be questioned”), Fed.R.Evid. 201(b)(2), does not appear to be applicable here.
. R. 12, Exs. 2, 4 at ¶ 5.
. The Appellees’ applications for authority to appoint Halbert as their counsel confirms that he was charging his clients at the rate of $165 per hour.
In re Florence Tanners,
.Halbert made this argument to the Bankruptcy Court in his reply brief. (R. 15 at 8 & Ex. A.)
. This holding actually extended to ten fee payments that Halbert received.
In re Florence Tanners,
. Halbert makes the same argument in the case at bar.
. As suggested above and confirmed by the
Berg
court, "this is a confusing area [of the law].”
Berg,
.Bankruptcy cases reviewed by this Court appear to interchangeably use the terms "disinterestedness” and "conflict of interest.” As a consequence, this Court will treat these two terms as being equivalent.
.
See, e.g., In the Matter of PHM Credit Corp.,
.
See, e.g., In re Gray,
.
See, e.g., In re Micro-Time Management Sys., Inc.,
. See supra note 22 and accompanying text.
. Although the Bankruptcy Court did recite the Rule 2016(b) disclosures made by Halbert in the Yousif case,
In re Florence Tanners,
. In their objections to the application for attorney fees, the Yousifs and Tanners contended that (1) Halbert was not a disinterested participant in these proceedings because he was a creditor, a debtor or a preference recipient, (2) his fees during and after the Chapter 11 proceedings were excessive and unreasonable, (3) he engaged in unethical conduct or conduct which created an appearance of impropriety during their bankruptcy proceedings, and (4) the retainer, and retained amounts that were recovered through settlements of two adversary post-confirmation preference proceedings, were withdrawn by him without prior court approval. Subsequent to filing their objections, the Appellees abandoned their allegation-that Halbert was a creditor.