In Re Martin
- Reporters:
- ,
- Before:
- Krieger
THIS MATTER comes before the Court on the United States Trustee’s Application for an Examination of Attorney’s Fees and Fee Agreement pursuant to
I.JURISDICTION
This Court has jurisdiction in this matter pursuant to
II. FACTS
1. The above-captioned case was initiated by voluntary petition filed under Chapter 7 of the United States Bankruptcy Code on December 13,1995.
2. At all times relevant hereto the Debtor was represented in this case by Monty Ho-gue (Hogue), an attorney employed as an associate by Sharon W. Grossenbach (Gros-senbach). 1
3. The Debtor initially consulted with Ho-gue for the purposes of obtaining information with regard to a potential bankruptcy filing. The Debtor inquired about bankruptcy because she was being vigorously pursued by a collection company holding a judgment against her. At the initial consultation, Ho-gue advised the Debtor of alternatives under Chapter 7 and Chapter 13 and offered two fee arrangements for a Chapter 7 ease. The fee options were either a flat fee of $500, plus the filing fee of $175, payable prior to the bankruptcy filing or a flat fee of $600 plus the $175 filing fee, with the filing fee payable prior to the filing and the flat fee payable in monthly installments of $75 beginning approximately one month after the bankruptcy was filed.
4.The Debtor decided to file a Chapter 7 bankruptcy case and chose the second fee arrangement. On or about December 7, 1995, she executed a written fee agreement (Fee Agreement) which provides in pertinent part:
a. Grossenbach would provide legal representation to the Debtor in a Chapter 7 “including all required preparation and filing of the petition and other supporting documents and appearance at the first meeting of creditors.”
b. For such services the Debtor would pay the sum of $775 comprised of $600 in attorney fees and a court filing fee of $175. The filing fee was paid as a retainer on December 7, 1995. The attorney fees were payable in installments of $75 per month beginning on January 13, 1996 and due on the 13th day of each month thereafter until paid in full.
c. Additional charges would be made for identified post-petition services such as “defending any objection in a Chapter 7 case [sic],” a “2004 examination,” and “appearing at a reaffirmation hearing,” billed at an hourly rate of $175. For other post-petition services an additional flat fee would be charged. These include conversion from one chapter to another, adding a creditor to the case, and $100 for any unattended § 341 meeting.
d. In addition to the court filing fee, the Debtor agreed to pay for all costs incurred in connection with the case.
e. In the event that the Debtor failed to timely pay the required monthly amounts, she would be assessed a $25 late charge. Grossenbach was entitled to accelerate the entire obligation if it became more than ten days overdue and cease post-petition representation until the sum was paid. If the matter was referred to collection, the Debtor was obligated for attorney fees incurred.
f. In the event the case was dismissed through no fault of Grossenbach or at the request of the Debtor, the Fee Agreement converted to an hourly arrangement with all time “invested in the case” billed against the fees paid at the rate of $175 per hour.
5. Neither Grossenbach nor Hogue discussed the dischargeability of the pre-petition fees which were unpaid at the time of the bankruptcy filing with the Debtor or advised her that collection of the pre-petition fee was stayed during the pendency of the bankruptcy. Grossenbach and Hogue believed that the pre-petition fee obligation was not dischargeable and therefore no legal advice was required.
6. The Debtor paid the $175 retainer, but has paid none of the required installments. Grossenbach has not initiated any collection proceeding, assessed a late charge, or accelerated the obligation.
7. Grossenbach filed an initial disclosure pursuant to
8. Neither the Debtor nor the United States Trustee complains about the competency of Grossenbach’s representation. Other than failing to advise the Debtor as to the dischargeability of the attorney fee obligation, there is no evidence that Grossenbach or Hogue has represented the Debtor in other than a competent and professional manner.
III. ANALYSIS
The United States Trustee requests that the Court cancel the fee arrangement between Grossenbach and the Debtor pursuant to
§ 329 . Debtor’s transactions with attorneys.
(a) Any attorney representing a debtor in a case under this title, or in connection with such a ease, 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.
Two rules of bankruptcy procedure implement
The purpose of
A. Adequacy of Disclosure
The United States Trustee argues that Grossenbach’s disclosure with regard to the Fee Agreement was inadequate because it did not disclose all of the terms of the Fee Agreement, particularly Grossenbach’s remedies should the Debtor default in making the post-petition installment payments. Gros-senbach argues that the disclosure satisfies the requirements of
The disclosure requirements of
The purpose of the disclosure requirement is to alert the United States Trustee, the court and any creditor as to the amount of the compensation, when it is to be paid, and to whom it is to be paid. The disclosure requirements are not broad in scope, but they are absolute and include a duty of supplementation. Thus they reflect a balancing between the burden of disclosure upon an attorney and the need for information in order to scrutinize the attorney’s transactions with a debt.or. The Code and Rules provide opportunity for further investigation by the United States Trustee or creditors at the § 341 meeting, by examination conducted pursuant to
The statement filed by Grossenbach complies with the requirements of
B. The Fee Agreement
Alternatively, the United States Trustee argues that the fee arrangement should be canceled because the Fee Agreement creates a pre-petition dischargeable debt and a conflict of interest between Grossenbach and the Debtor. Grossenbach has a number of responses.
Several of Grossenbach’s arguments obscure the fundamental issue and can be disposed of readily. First, Grossenbach argues that the Fee Agreement is an execu-tory contract which the Debtor has assumed. This argument is misdirected. While pre-petition contracts can be executory, they are assumable only by the bankruptcy estate, which right is exercised in a Chapter 7 case by the Trustee.
Grossenbach next argues that the Court’s review under
1. Dischargeability of the Fee Obligation
The pivotal issue in this matter is whether a Fee Agreement created a dis-chargeable debt, and therefore a conflict of interest between Grossenbach and the Debt- or, which requires cancellation of the fee arrangement. I have found no binding Tenth Circuit authority. A number of courts have recently considered the dischargeability of debts arising from pre-petition attorney fee agreements which set a flat fee for representation and provide for post-petition payment of the fee. The United States Trustee relies upon four opinions determining such debts to be dischargeable. In re Hessinger & Assoc., 192 B.R. 211, 217-18 (N.D.Cal.1996); Hessinger & Assoc. v. Voglio (In re Voglio), 191 B.R. 420, 422 (D.Ariz.1996); Hessinger & Assoc. v. U.S. Trustee (In re Biggar), 185 B.R. 825, 829 (N.D.Cal.1995); In re Symes, 174 B.R. 114, 119 (Bankr.D.Ariz.1994). Grossenbach relies upon In re Mills, 170 B.R. 404, 412 (Bankr.D.Ariz.1994), in which the court determined such a debt to be nondischargeable.
All of the above cases concern one law firm, Hessinger & Associates. Several of the opinions describe problems in the adequacy of the representation provided to the debtors. Grossenbach argues that the reasoning of such opinions must be confined to the specific facts in each ease. I disagree. Although there is no issue in this ease as to Grossenbach’s competency or rendering of legal services, the nature of the obligation and the applicable law is the same in those opinions as in this matter.
Hessinger, Voglio, Biggar
and
Symes
all conclude that an unpaid debt arising from a pre-petition attorney fee agreement is dis-chargeable. The fact that the attorney’s fees are incurred in connection with the bankruptcy case and that payment is to be made in installments does not make the debt non-dischargeable. The reasoning in these cases is that the pre-petition fee agreement gives
The courts in
Hessinger, Voglio,
and
Big-gar
consider and reject the reasoning of
Mills.
In
Mills,
the court perceived an irreconcilable conflict between the regulatory provisions of
This Court is persuaded by the analysis in Hessinger, Voglio, Biggar and Symes and respectfully disagrees with Mills. Rules of statutory construction compel a strict and literal interpretation of §§ 727 and 329. Courts are admonished to apply the following principle of statutory construction:
[I]f the statutory language is unambiguous, in the absence of “a clearly expressed legislative intent to the contrary, that language must ordinarily be regarded as conclusive” [citation omitted]. United States v. Turkette, 452 U.S. 576, 580, 101 S.Ct. 2524, 2527, 69 L.Ed.2d 246 (1981).
This Court perceives no conflict in the provisions of
Though I agree with the court in Mills that there are legitimate and important public policy concerns about access to the bankruptcy system for indigent debtors, Biggar correctly concludes that:
Public policy concerns cannot trump the plain language of the Bankruptcy Code. Moreover, the public policy concerns are not one-sided. On the other side is the public interest in providing an honest debt- or with a fresh start unhindered by debt. If Congress wishes to amend the code to provide an exception for the debt owed to an attorney who has prepared and filed a bankruptcy petition it may, but it is not the Court’s role to create such an exception. Biggar, 185 B.R. at 829.
There are any number of creative solutions which can assist indigent debtors who have difficulty raising funds for legal representation prior to filing a bankruptcy case. Debtors commonly defer payment of other debts or borrow from family and friends in order to pay attorneys. Attorneys can lessen the financial burden by quantifying the fee for pre-petition and post-petition services, requiring only payment for pre-petition services prior to the filing. If a debt for fees will be dischargeable, some attorneys accept payment by a third-party guarantor. Some courts authorize reaffirmation of the debt. See In re Perez, 177 B.R. 319 (Bankr.D.Neb.1995).
2. Conflict of Interest
Under
“Reasonable compensation for services rendered” necessarily implies loyal and disinterested service in the interest of those for whom the claimant purported to act. Where a claimant, who represented members of the investing public, was serving more than one master or was subject to conflicting interests, he should be denied compensation. It is no answer to say that fraud or unfairness were not shown to have resulted. The principle enunciated by Chief Justice Taft in a case involving a contract to split fees in violation of the bankruptcy rules, is apposite here: “What is struck at in the refusal to enforce contracts of this kind is not only actual evil results but their tendency to evil in other cases.” Furthermore, the incidence of a particular’ conflict of interest can seldom be measured by any degree of certainty. The bankruptcy court need not speculate as to whether the result of the conflict was to delay action where speed was essential, to close the record of past transactions where publicity and investigation were needed, to compromise claims by inattention where vigilant assertion was necessary, or otherwise to dilute the undivided loyalty owed to those whom the claimant purported to represent. Where an actual conflict of interest exists, no more need be shown in this type of case to support a denial of compensation. Id. at 268, 61 S.Ct. at 497.
An actual conflict of interest can justify total disallowance of fees, cancellation of a fee agreement, or a court can determine the effect of the conflict of interest and deny fees in proportion to the scope of the conflict. See Devers, supra; Woods, supra; Land, supra.
The existence of a conflict of interest does not require bad motive or intent. Most often it arises where the attorney’s duty to one client conflicts with his/her duty to another or with the attorney’s self-interest. In Colorado, representation of a client where there is conflict of interest between the attorney’s self-interest and the legal interests of the client is prohibited by the Colorado Rules of Professional Conduct. Rule 1.7(b) provides:
(b) A lawyer shall not represent a client if the representation of that client may be materially limited by the lawyer’s responsibilities to another client or to a third person, or by the lawyer’s own interest....
The comment following Rule 1.7 offers explanation:
Loyalty to a client is also impaired when a lawyer cannot consider, recommend or carry out an appropriate course of action for the client because of the lawyer’s other responsibilities or interests.... The lawyer’s own interest should not be permitted to have adverse affect on the representation of the client.
In this case, the Fee Agreement itself created no conflict of interest between Grossenbach and the Debtor. Payment of fees to an attorney over time is common and does not pit the attorney’s interest against that of the client. However, because legal fees were owed by the Debtor to Grossen-bach, the filing of the bankruptcy petition conferred a new relative legal status upon each. Ms. Martin became a debtor whose legal interest was to obtain the broadest possible discharge of pre-petition debts. Grossenbach became a creditor whose self-interest was to except the pre-petition attorney fee obligation from discharge. Since the bankruptcy filing there has been a conflict between Grossenbach’s duty to the Debtor and her own self-interest.
This conflict of interest has impaired Gros-senbach’s representation of the Debtor in two ways. First, the Fee Agreement contains a number of remedies designed to coerce the Debtor’s post-petition payment of the pre-petition debt. If the Debtor defaults in payment of the post-petition installments, the debt can be accelerated, bears interest, accrues a late charge, and if submitted to collection may result in additional attorney fees. The Fee Agreement also authorizes Grossenbach to withhold post-petition representation if the pre-petition debt is not paid as required. For any other creditor, exercise of such remedies to collect a pre-petition debt would be stayed as acts to “recover a claim against the debtor that arose before the commencement of the case”.
The second problem compounds the first. A debtor expects and is entitled to legal advice from his/her attorney as to the dis-chargeability of particular debts. In this case, the Debtor was given no advice with regard to the dischargeability of the fee obligation. Both Grossenbach and Hogue testified that no advice was given because they concluded the pre-petition attorney fee obligation was nondischargeable under the Mills rationale. Had Mills been binding precedent in this jurisdiction, such conclusion would have been justified. But an accurate advisement of the law would have required disclosure to the Debtor that the issue was unresolved in the Tenth Circuit, but had been considered by several courts in the Ninth Circuit, the majority of which concluded the debt was dischargeable. The combination of the Fee Agreement terms and Grossenbach’s failure to advise the Debtor leaves the impression thgt the pre-petition attorney fee debt is not discharged and is collectible during and after the bankruptcy case. This impression obviously benefits Grossenbach’s interests and impairs the Debtor’s.
The conflict and its results are examples of overreaching by Debtor’s counsel which
Because the conflict of interest arose on the filing date, only the post-petition fees are unreasonable and therefore excessive. However, no apportionment between pre-petition and post-petition fees is possible because a flat fee for both was charged and no evidence for separate calculation was presented. The Court cannot speculate as to the portion of the fee incurred either prior or subsequent to the conflict; therefore entire fee is determined to be excessive and the Fee Agreement is canceled.
IT IS THEREFORE ORDERED that the fee agreement between Sharon W. Grossen-bach and Connie L. Martin for representation prior to and in connection with Bank
Notes
. After the
. Woods involved a case under Chapter X of the Bankruptcy Act in which the indenture trustee, a bondholders committee and committee’s counsel requested fees and expenses. The bankruptcy trustee objected because counsel to the committee was also counsel to the indenture trustee and other interested parties. Under § 221 of the Act, the court was authorized to review all fees and expenses in connection with the reorganization proceeding for “reasonableness”.