In Re Laferriere
AMENDED 1 MEMORANDUM OF DECISION
The United States Trustee for the Northern District of New York and the District of Vermont (“U.S.Trustee”) filed a “Motion to Determine if Fees Paid were Excessive Pursuant to 11 U.S.C. § 329(a) & (b) and Fed. R. Bankr.P.2016 and 2017, to Compel Disclosure of Fees and to Disgorge Excessive Fees” (doc. # s 25-1 and 25-2) with regard to the attorneys’ fees of the Debtors’ original attorney, Diamond & Robinson, P.C. (hereinafter, “D & R”). D & R filed papers in opposition to the Motion (doc. # 36-1) (hereinafter, the “Opposition”). On February 12, 2002, the Court held a hearing on the U.S. Trustee’s Motion and D & R’s Opposition. The Court reserved judgment and requested the parties submit Memoranda of Law supporting their respective positions on the following three issues:
(1) Whether, pursuant to 11 U.S.C. § 329(a), D & R provided service “in contemplation of or in connection with” the Debtors’ case;
(2) Whether both the pre- and post-petition payments from the Debtors’ retainer account with D & R were “payments” requiring disclosure under 11 U.S.C. § 329(a) and Fed. R. Bankr.P 2016(b); and
(3) Whether the concept of “excusable neglect” applies when bankruptcy disclosure requirements are violated.
This Court has jurisdiction over this dispute pursuant to 28 U.S.C. §§ 157 and 1334 and finds this to be a core proceeding within the meaning of 28 U.S.C. § 157(b)(2)(A). Based upon the February 2002 hearing and the parties’ papers, and for the reasons stated below, the U.S. Trustee’s Motion is GRANTED.
I. Background
There is no dispute regarding the material facts of this case. At the February 12, 2002 hearing, the Court took testimony on the U.S. Trustee’s Motion and D & R’s Opposition to the Motion. Since the U.S. Trustee’s Motion provides a detañed outline of the facts presented at the hearing and the Court finds the U.S. Trustee’s recitation to be accurate, only an abbreviated summary of the facts is set forth here.
The record reflects that Debtors Arthur P. Laferriere and Ann M. Laferriere originally hired D & R in February 2000, at a time when they were contemplating filing for bankruptcy relief. To that end, D
&
R sent the Debtors a retainer letter seeking
In addition to the original $3,500 retainer deposit, the Debtors made two additional payments to D & R: $1,600.00 on May 15, 2001 and $1,200.91 on July 2, 2001. Thus, in total, the Debtors paid D & R $6,300.91. However, contrary to the requirements of 11 U.S.C. § 329 and Fed. R. Bankr.P. Rule 2016, these transactions were not revealed to the Court as part of the Debtors’ bankruptcy filing. Rather, the Rule 2016(b) Statement submitted by D & R disclosed the receipt of only $1,000.00, the flat fee it charged the Debtors for their chapter 7 case. Moreover, when the Debtors finally filed for bankruptcy protection, D & R did not include: (1) the Debtors’ retainer balance on Schedule B; or (2) the Debtors’ daughter as a secured creditor on Schedule D.
II. Discussion
A. The Standard Regarding Disclosure
Debtors’ transactions with attorneys are governed by 11 U.S.C. § 329, which provides:
(a) Any attorney representing a debtor in a case under this title, or in connection with such a case, whether or not such attorney applies for compensation under this title, shall file with the court a statement of the compensation paid or agreed to be paid, if such payment or agreement was made after one year before the date of the filing of the petition, for services rendered or to be rendered in contemplation of or in connection with the case by such attorney, and the source of such compensation.
(b) If such compensation exceeds the reasonable value of any such services, the court may cancel any such agreement, or order the return of any such payment, to the extent excessive, to—
(1) the estate if the property transferred—
(A) would have been property of the estate; or
(B) was to be paid by or on behalf of the debtor under a plan under chapter 11, 12, or 13 of this title; or
(2) the entity that made such payment.
Section 329(a) of the Bankruptcy Code “requires a debtor’s attorney to report to the court compensation paid or agreed to be paid for services rendered ‘in contemplation of or in connection with’ the case, ‘if such payment or agreement was made after one year before the date of the filing of the petition.’ ”
Arens v. Boughton
Further, complementary Bankruptcy Rule 2017 allows courts to determine whether any payment made in contemplation of the filing of a bankruptcy case by a debtor to an attorney, for services rendered or to be rendered, is excessive:
Rule 2017. Examination of Debtor’s Transactions with Debtor’s Attorney.
(a) Payment or Transfer to Attorney Before Order for Relief. On motion by any party in interest or on the court’s own initiative, the court after notice and a hearing may determine whether any payment of money or any transfer of property by the debt- or, made directly or indirectly and in contemplation of the filing of a petition under the Code by or against the debtor or before entry of the order for relief in an involuntary case, to an attorney for services rendered or to be rendered is excessive.
Fed. R. Bankr.P.2017 (emphasis added). Within bankruptcy practice, § 329 and Rule 2017 are part of what is colloquially referred to as “the disclosure requirements.”
The approach within the Second Circuit “has uniformly been to decide Bankruptcy Code and Rule disclosure violations with an inflexible standard. No exceptions are to be made based upon inadvertency (slipshodness) or good faith.”
Matter of Kero-Sun, Inc., 58
B.R. 770, 780 (Bankr.D.Conn.1986) (citing
General Motors Acceptance Corp. v. Updike (In re H. L. Stratton, Inc.),
Anything less than the full measure of disclosure leaves counsel at risk that all compensation may be denied.... The court may exercise its discretion to deny or reduce fees for counsel’s failure to disclose its fee arrangements whether or not actual harm accrues to the estate .... Whatever the explanation for disclosure inadequacies, it reflects poorly on responsible counsel; ...; and the resulting potential for frustration of the Code’s policy of thorough scrutiny is unacceptable....
Cohn v. U.S. Trustee (In re Ostas),
Complete disclosure is mandated under the Bankruptcy Code and Rules and failing to meet those disclosure requirements with total candor can result in severe consequences. “Indeed, it has long been the practice in [the Second Circuit] to
B. Services “in contemplation of or in connection with the case”
The analysis of § 329(a) of the Bankruptcy Code must begin with the observation that the phrase “in contemplation or in connection with” is written in the disjunctive.
See In re Mayeaux,
1. “In contemplation of’
If a debtor pays a fee for underlying professional services at a time he or she is thinking about or “contemplating” bankruptcy, then the payment is said to be made “in contemplation of’ the bankruptcy case.
See id.
Whether a debtor is contemplating bankruptcy is a subjective test, based upon the debtor’s state of mind, “ ‘i.e., whether, in making the transfer, the debtor is influenced by the possibility or imminence of a bankruptcy proceeding.’ ”
Id.
(quoting
Wootton v. Ravkind (In re Dixon),
In this instance, the Court finds the Retainer Letter clearly demonstrates the Debtors were contemplating bankruptcy as early as February 2000. First, the reference line of the Retainer Letter reads “Bankruptcy.” Second, the content of the letter explicitly evinces the Debtors’ payment of the retainer fee was intended to allow them to file bankruptcy. In its conclusion, D & R stated, “... we will not file bankruptcy on your behalf until we actually receive the $8,500 retainer fee.” Retainer Letter, attached as Ex. D. to U.S. Trustee’s Motion (emphasis added). The combination of the Retainer Letter’s reference line and the content of the letter persuades the Court that the Debtors’ March 20, 2000 payment of the $3,500 retainer fee was influenced by the anticipation or imminence of a bankruptcy proceeding.
Likewise, each invoice D
&
R generated for the Debtors, from February 2000 through October 2001, referenced “Bankruptcy.”
See
D & R Invoices, attached as Ex. B. to U.S. Trustee’s Motion (hereinafter, “D
&
R Invoices”). Like the Retainer Letter’s reference line, the repeated notation of “Bankruptcy” for the
The D & R Invoices also reflect when the Debtors paid D & R for its services rendered in contemplation of the Debtors’ bankruptcy case. For each month that a payment was made, there is a statement of receipt of payment at the bottom of the invoice. Thus, even if the Debtors deposited the $3,500 retainer fee with D & R outside the one-year look-back period, by its own admissions on its invoices, D & R was not paid for its services rendered in contemplation of the Debtors’ bankruptcy case until it earned the corresponding fees. 2 Cf., e.g., D & R Invoice # 18806 (Mar. 30, 2000) at 3 (indicating that, on March 20, 2000, there was a payment of $3,500 to D & R’s Trust Account), attached as Ex. B. to U.S. Trustee’s Motion, with D & R Invoice # 19187 (May 29, 2000) at 2 (indicating there was a $1,815.02 balance of Client funds and that, on May 1, 2000, there was a payment of $165 from D & R’s Trust Account), also attached as Ex. B. Thus, within the D & R Invoices, there is ample evidence showing the Debtors retained D & R and made payments to D & R — both within and outside § 329(a)’s one-year look-back period — because the Debtors anticipated the need for a bankruptcy proceeding.
Until D
&
R earned its fees however, the monies in the retainer account was owned by the Debtors. The Debtors had a $1,191.58 balance in their retainer account with D & R when they filed their chapter 7 ease. The Court finds that this retainer balance was property of the Debtors.
See Prudhomme,
2. “In connection with”
Just as the courts give broad interpretation to the phrase “in contemplation of,” bankruptcy courts also find the phrase “in connection with” to have a broad scope.
See Ostas,
[i]f it can be objectively determined that the services rendered or to be rendered by the attorney have or will have an impact on the bankruptcy case, then such services are deemed to have been rendered in connection with the bankruptcy case and the attorney has a duty to disclose any compensation received or to be received for such services.
The Debtors paid a $3,500 retainer fee to D & R in March 2000, over one year before filing for bankruptcy protection. D 6 R contends that because the retainer fee was deposited with D & R more than one year before the Debtors filed their chapter 7 case, the Court is barred from examining that fee. This Court finds the analysis to be more complicated than that and reaches a different conclusion.
The general rule is that courts are limited to a one-year look-back under § 329(a). However, this look-back period is based upon a presumption that may be rebutted by fraud or concealment.
See Prudhomme,
The Court is particularly persuaded by the rationale and conclusions of
Prudhomme,
which it finds materially analogous to the instant case and very instructive. In
Prudhomme,
the debtors agreed to pay their attorney a $75,000 retainer fee, with $50,000 being paid more than a year before debtors filed for bankruptcy protection.
See
Here, the U.S. Trustee has presented irrefutable evidence that during the one-year period prior to the Debtors’ bankruptey filing, D & R received far more than the $1,000 it revealed on its Rule 2016(b) Disclosure Statement. See, e.g., D & R Invoices, attached as Ex. B. to U.S. Trustee’s Motion. Thus, the Court finds that D & R concealed payments received from or on behalf of the Debtors in connection with their bankruptcy case during the one-year period prior to their filing of the bankruptcy case. Since the Court has found that all services rendered by D & R on behalf of the Debtors were either in contemplation of or in connection with their bankruptcy case, and now finds concealment on the part of D & R, it concludes it is well within its discretion to examine the payment of the $3,500 retainer and any payments made by the Debtor to D & R prior to the one-year look-back period set forth in § 329(a). 4
D. Applicability of “Excusable Neglect” Standard
In Bankruptcy Code and Rules disclosure matters, attorneys are held to the strictest standards. Within the Second Circuit, the disclosure standard “has uniformly been to
decide Bankruptcy Code and Rule disclosure violations with an inflexible standard.” Kero-Sun,
Given this clear precedent, the Court is persuaded that an “excusable neglect” standard should not be the rule for determining a Bankruptcy Code or Rule disclosure violation in this District. Under an “excusable neglect” standard, a court is permitted to consider arguments of inadvertence, mistake, carelessness, or intervening circumstances beyond a party’s control.
See, e.g., Pioneer Investment Services Co. v. Brunswick Assoc. Ltd. P’ship (In re Pioneer Investment Services Co.),
From the facts presented in the instant case, the Court finds that D & R’s Rule 2016 Disclosure Statement supplied less than the full measure of disclosure required by § 329 and Rule 2016. D & R disclosed receipt of only $1,000, the flat fee it charged the Debtors for their chapter 7 case while the evidence clearly establishes D & R received more than $1,000 from or on behalf of the Debtors for services rendered in contemplation of or in connection with the Debtors’ bankruptcy case. D & R’s invoices show the Debtors paid significantly more than $1,000 for services rendered in contemplation of or in connection with their bankruptcy case. The invoices also show two post-petition payments to D & R in connection with the Debtors’ bankruptcy case; and, the record makes clear that D & R never submitted an amended disclosure statement to report these additional payments. Thus, even assuming the Court did not examine the monies paid more than one year prior to the Debtors filing for bankruptcy relief, the U.S. Trustee’s evidence demonstrates D & R did not abide by the bankruptcy disclosure requirements regarding the payments made during the year prior to the Debtors’ filing their bankruptcy case or regarding the post-petition payments made by the Debtors.
Further, the Court finds D & R has not presented any extraordinary circumstances that justify it not fully disclosing all payments it received from Debtors in connection with their bankruptcy case. For example, “simply forgetting” to list the Debtors’ daughter as a secured creditor-after preparing loan documentation to ensure the loan was secured-clearly does not rise to the level of extraordinary. Rather, at best, it is a situation of slipshodness — an excuse not tolerated within the Second Circuit. The Court is equally unpersuaded by D
&
R’s other arguments
III. Conclusion
After consideration of the entire record, the Court finds, initially, that all services rendered by D & R on behalf of the Debtors, i.e., from the date of the Retainer Letter forward, were in contemplation of or in connection with the Debtors’ bankruptcy case. Secondly, the Court finds that because D & R concealed payments received from or on behalf the Debtors, the Court may examine whether any of the fees paid were excessive, without being limited to the one year period set forth in § 829(a). Thirdly, since D & R did not comply with the Bankruptcy Code and Rules’ disclosure requirements, the Court finds D & R in violation of the Rule 2016 requirements. Hence, all fees received by D & R are subject to disgorgement. Finally, the Court finds D & R has not demonstrated any extraordinary circumstances in the present case that warrant excusing it from complying with the Bankruptcy Code and Rules’ stringent disclosure standards. Thus, the Court GRANTS the U.S. Trustee’s Motion and orders that all fees paid are to be disgorged.
This Memorandum constitutes the Court’s findings of fact and conclusions of law.
Notes
. This Amended Memorandum of Decision supercedes the Memorandum of Decision entered October 23, 2002. The only substantive change made is changing the Debtors' filing date to April 30, 2001; all other changes are either grammatical or stylistic.
. See, e.g., Vermont Rules of Professional Conduct, R.1.5, History, Comment, "Terms of Payment” ("A lawyer may require advance payment of a fee, but is obligated to return any unearned portion.”); R. 1.16(d) ("Upon termination of representation, a lawyer shall take steps to the extent reasonably practicable to protect a client’s interest, such as giving reasonable notice ... and refunding any advance payment of a fee that has not been earned.”).
. $1,600.00 paid on May 15, 2001 and $1,200.91 paid on July 2, 2001.
. The Court further highlights that while the Debtors deposited $3,500 in a trust account with D & R, i.e., made a payment of a retainer fee, D & R was not paid from the trust account, i.e., the retainer money, until the Debtors authorized such payment. See supra note 2.