Louie Joseph Aquilino and Robin Aquilino v.
Shawn D. Hutchison [ARGUED]
Law Offices of S. Daniel Hutchison, P.C.
135 N Broad Street
Woodbury, NJ 08096
Counsel for Appellants
Daniel J. Dugan [ARGUED]
Spector Gadon Rosen & Vinci P.C.
1635 Market Street
7th Floor
Philadelphia, PA 19103
Counsel for Appellee
Wendy Cox [ARGUED]
United States Department of Justice
Executive Office for United States Trustees
441 G Street NW
Suite 6150
Washington, DC 20530
Counsel for Amicus Curiae United States Trustee for Regions 3 and 9 in Support of Neither Party
OPINION OF THE COURT
KRAUSE, Circuit Judge.
To effectuate its core purposes of maximizing recoveries for creditors and giving debtors a fresh start, our bankruptcy system demands openness and transparency. So when attorneys represent debtors, the Bankruptcy Code requires them not only to disclose the fees they originally charge and collect for services rendered in connection with the case,
As explained below, that was error, so we will reverse the District Court‘s judgment, reinstating that of the Bankruptcy Court.
I. Background
To fully understand the parties’ arguments and the relevance of various provisions, we first explain some mechanics of
A. Statutory Framework
1. Chapter 7
In Chapter 7 bankruptcies, individual debtors liquidate their nonexempt property to receive a discharge of eligible prepetition debts. Like all bankruptcies, this process begins by filing a petition under the Bankruptcy Code, which automatically creates an estate comprised of “all legal or equitable interests of the debtor in property as of the commencement of the case.”
Relative to the Chapter 7 trustee who conducts most of the post-petition work, debtors and their attorneys have a comparatively limited role. The Bankruptcy Code reflects this division of labor by excluding Chapter 7 debtors’ attorneys from the category of professionals whose fees may be paid from the estate.1 See Lamie v. U.S. Tr., 540 U.S. 526, 538–39 (2004); see also
2. Fee Disclosure Provisions
Given the need for transparency in bankruptcy cases, the Code requires attorneys who represent debtors to “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.”
Together, these two provisions yield a “[p]lain and simple” rule: “attorneys must inform the bankruptcy court of their compensation and promptly update the filing if their fees change.” In re Dordevic, 62 F.4th 340, 342 (7th Cir. 2023). And to facilitate this disclosure, the Director of the Administrative Office of the United States Courts has issued a standard
B. Factual and Procedural Background
In April 2020, the Debtors petitioned for Chapter 7 bankruptcy in the United States Bankruptcy Court for the District of New Jersey. Before their filing, they retained Spector Gadon as bankruptcy counsel and agreed to pay a flat fee of $3,500 and a $335 filing fee. Spector Gadon disclosed this agreement to the Bankruptcy Court on the petition date in a form2 completed by one of its attorneys.3
Importantly for this case, section 6 of that form provides that, in exchange for the fee charged by counsel—which Spector Gadon identified as a $3,500 flat fee—counsel has “agreed to render legal service for all aspects of the bankruptcy case,” including prepetition analysis and advice of the Debtors’ financial situation, preparation of required petitions, schedules, and statements, representation of the Debtors at the meeting of creditors and confirmation hearing, and representation in adversary proceedings and contested matters. App. 77. Under the subsection entitled “Other provisions as needed,” Spector Gadon listed “[p]re-bankruptcy planning, preparation of [p]etition and [s]chedules, [and] attendance at [the §] 341(a) hearing.” Id.
The form also contains a section that permits counsel to enter any exclusions from the services it has agreed to provide after the prompt, “By agreement with the debtor(s), the above-disclosed fee does not include the following service.” Id. Spector Gadon left that space empty. And at the conclusion of the form, the Spector Gadon attorney “certif[ied] that the foregoing is a complete statement of any agreement or
arrangement for payment to me for representation of the debtor(s) in this bankruptcy proceeding.” Id.
As it turned out, contrary to the Debtors’ representation that it would be a simple, no-asset bankruptcy, their case was anything but. According to Spector Gadon, the Debtors “withheld and concealed information regarding the existence and/or value of their assets,” requiring it to “conduct[] its own extensive valuation analysis of the Aquilinos’ properties several times, correct[] the Aquilinos’ bankruptcy schedules and other submissions several times, and defend[] the Aquilinos in litigation” in the Bankruptcy Court. Answering Br. 6. Unsurprisingly, the $3,500 the Debtors paid up front did not cover all the additional work Spector Gadon had to do, so Spector Gadon billed the Debtors for its post-petition services, which, by August 2021, tallied approximately $151,000.
On August 23, 2021, the parties struck a deal to reduce the Debtors’ fee bill to $113,000, with $100,000 to be paid from the proceeds of the then-imminent sale of one of the Debtors’ homes,4 and the balance and costs to be paid later. Although that agreement (the Letter Agreement) was memorialized in a contract the same day, Spector did not disclose it to the Bankruptcy Court. Notwithstanding its obligation to supplement its original filing “within 14 days after any payment or agreement not previously disclosed,”
As with their original agreement, the Letter Agreement did not play out as intended. When the Debtors did sell their home, they never paid Spector Gadon. Instead, they kept the money and used it to purchase a new home. Spector Gadon then withdrew as their bankruptcy counsel and sued the Debtors in the United States District Court for the Eastern District of Pennsylvania, requesting a jury trial on its breach of contract and related claims (the Collection Action). Before answering that complaint, however, the Debtors promptly (but unsuccessfully) sought to transfer venue to the District of New Jersey or, in the alternative, a stay of these proceedings and, in parallel, moved in the Bankruptcy Court in New Jersey for an examination of the reasonableness of Spector Gadon‘s fees under
Spector Gadon, recognizing the preclusive effect that a ruling from the Bankruptcy Court was likely to have on its Collection Action, opposed that motion and sought to stay the Bankruptcy Court proceeding. Notably, at the hearing held by the Bankruptcy Court to allow for argument and evidence on the motion, Spector Gadon did not contest the Bankruptcy Court‘s jurisdiction; to the contrary, it advised the Bankruptcy Court “you have jurisdiction, but you should stay . . . because this action is proceeding in the Eastern District [of Pennsylvania].” App. 1279; see also id. (“I‘m not saying you don‘t have jurisdiction over this, Your Honor. I‘m saying that you should stay this.“). In addition to arguing that the Seventh Amendment entitled it to first proceed with a jury trial in the Eastern District of Pennsylvania, Spector Gadon also urged
that, in any event, it did not violate
After the hearing, the Bankruptcy Court rejected Spector Gadon‘s arguments. In a thorough and well-reasoned opinion, the Bankruptcy Court held that it had “core” subject matter jurisdiction over the motion and that Spector Gadon violated
On appeal to the District Court, Spector Gadon revised its position and claimed the Bankruptcy Court lacked jurisdiction to consider the Debtors’ motion. On that claim, the District Court was unpersuaded. But on Spector Gadon‘s Seventh Amendment claim, it agreed the firm was entitled to a jury trial in the Collection Action and that the Bankruptcy Court‘s ruling on the Debtors’
II. Jurisdiction and Standard of Review
As addressed below, the Bankruptcy Court had jurisdiction under
III. Discussion
Spector Gadon raises four arguments in support of affirmance. First, it asserts the Debtors forfeited their objection to Spector Gadon‘s jurisdictional and Seventh Amendment arguments in the District Court and this forfeiture precludes our review of those issues here. Second, it argues to us, contrary to its position before the Bankruptcy Court, that the Bankruptcy Court lacked “core” subject matter jurisdiction over the proceeding to examine fees under
A. The Debtors Did Not Forfeit Their Arguments
As Spector Gadon would have it, we need not reach the merits of this case because the Debtors forfeited6 their arguments regarding both the Bankruptcy Court‘s jurisdiction and the applicability of the Seventh Amendment. We disagree.
In the ordinary course, parties must raise issues in the trial court in order to preserve them for argument on appeal. See In re Bestwall LLC, 47 F.4th 233, 242 (3d Cir. 2022). This “general rule serves several important judicial interests,” including “protecting litigants from unfair surprise” and “preventing [trial] courts from being reversed on grounds that were never urged or argued before them.” In re Diet Drugs Prod. Liab. Litig., 706 F.3d 217, 226 (3d Cir. 2013) (quoting Tri-M Grp., L.L.C. v. Sharp, 638 F.3d 406, 416 (3d Cir. 2011)). But “preserving an argument ‘does not demand the incantation of particular words; rather, it requires that the lower court be fairly put on notice as to the substance of the issue.‘” In re Bestwall, 47 F.4th at 242 (quoting Nelson v. Adams USA, Inc., 529 U.S. 460, 469 (2000)).
Here, while the Debtors did not precisely articulate arguments concerning the Bankruptcy Court‘s jurisdiction and the Seventh Amendment, they did assert “the bankruptcy court was correct when it disallowed all of [Spector Gadon]‘s
B. The Bankruptcy Court Had Core Jurisdiction
We next consider Spector Gadon‘s challenge to the Bankruptcy Court‘s jurisdiction. Bankruptcy courts have jurisdiction over four different categories of proceedings: (1) cases under the Bankruptcy Code; (2) proceedings that “arise under” the Bankruptcy Code; (3) proceedings that “arise in” a bankruptcy case; and (4) proceedings “related to” a bankruptcy case. See In re Resorts Int‘l, Inc., 372 F.3d 154, 162 (3d Cir. 2004). The first three categories fall under bankruptcy courts’ “core” jurisdiction, see In re Combustion Eng‘g, Inc., 391 F.3d 190, 225 (3d Cir. 2004), meaning bankruptcy courts can “hear and determine” those proceedings without intervention from a district court,
We have little difficulty concluding that this action fits the second category because proceedings for the imposition of sanctions for the failure to disclose attorneys’ fees under
the issue would result in a miscarriage of justice or where the issue‘s resolution is of public importance,‘” id. (quoting Bagot v. Ashcroft, 398 F.3d 252, 256 (3d Cir. 2005)). Here, the District Court‘s decision, which stands to “unduly restrict bankruptcy courts’ authority to enforce the protections of section 329(a) in chapter 7 cases,” U.S. Trustee Amicus Br. 8, and disrupt the administration of thousands of bankruptcy cases, is undoubtedly a legal question of significant public importance.
Auto. Indus., 612 B.R. 824, 854 (Bankr. D. Del. 2020)). Section 329(a) expressly provides for the disclosure at issue here. Specifically, it sets forth an obligation on “[a]ny attorney representing a debtor” to disclose “the compensation paid or agreed to be paid” “in connection with the case” if it was “made after one year before the date of the filing of the petition,”
So the Bankruptcy Code provides both the right and remedy, and proceedings initiated under
C. The Seventh Amendment Does Not Apply
Although the Bankruptcy Court had “core” subject matter jurisdiction to impose sanctions for violations of
But that right only attaches to claims that are “legal in nature,” not ones that are equitable. Granfinanciera, S.A. v. Nordberg, 492 U.S. 33, 53 (1989). So we must first determine the nature of a claim under
Whether a claim is legal or equitable generally turns on both “the cause of action and the remedy it provides.” SEC v. Jarkesy, 603 U.S. 109, 123 (2024). But where a “cause[] of action sound[s] in both law and equity,” the Supreme Court has “concluded that the remedy [is] the ‘more important’ consideration.” Id. (quoting Tull v. United States, 481 U.S. 412, 421 (1987)). While monetary penalties generally indicate that a claim is “legal,” remedies that merely “order a defendant to return unjustly obtained funds” are equitable. Id. So where a violation calls for a monetary remedy designed “solely to ‘restore the status quo,‘” it does not trigger the Seventh Amendment jury-trial right. Id. (quoting Tull, 481 U.S. at 422).
Under this rubric, violations of
Our treatment of sanctions in other contexts confirms this result. The Supreme Court has long held that the power to sanction conduct—either through contempt or otherwise—“is inherent in all courts.”10 Chambers v. NASCO, Inc., 501 U.S. 32, 44 (1991) (quoting Ex parte Robinson, 86 U.S. (19 Wall.) 505, 510 (1874)). And both the Supreme Court and our Court
have recognized that such civil sanctions do not trigger a party‘s Seventh Amendment right to a jury trial. See Shillitani v. United States, 384 U.S. 364, 370–71 (1966); United States v. Harris, 582 F.3d 512, 514 (3d Cir. 2009).
Spector Gadon objects that the Bankruptcy Court‘s sanction, as a practical matter, will preclude it from proceeding to trial in the Collection Action, rendering its Seventh Amendment right illusory. But the Supreme Court has long held that “the right to a jury trial does not negate the issue-preclusive effect of a judgment, even if that judgment was entered by a juryless tribunal.” B & B Hardware, Inc. v. Hargis Indus., Inc., 575 U.S. 138, 150 (2015) (citing Parklane Hosiery Co., Inc. v. Shore, 439 U.S. 322, 337 (1979)). So in evaluating whether the Seventh Amendment entitles a party to a jury trial in one proceeding, we do not consider the potential preclusive effect of that proceeding on another. Instead, we consider only the instant proceeding and the nature of the claim raised in it.
Here, we have a
D. Spector Gadon‘s Remaining Arguments Fail
Spector Gadon‘s last argument in favor of affirming the District Court‘s decision is that the equities weigh in its favor. Specifically, it contends (1) that it did not violate
First, Spector Gadon did violate
As a threshold matter, the firm urges that its original
condition to trigger sanctions for violating
77. We appreciate that Bankruptcy Form 203014 is not a model of clarity and that Spector Gadon may have believed, in good faith, that its initial $3,500 fee covered only those services listed in subsection 6(e).15 So
Even so, Spector Gadon’s subsequent failure to update that statement and disclose the Letter Agreement unequivocally violated its disclosure obligation. The firm defends that no update was necessary because the firm “never filed any proof of claim nor any application for fees” and “was only seeking to collect . . . from non-bankruptcy assets.” Answering Br. 17. But that is beside the point: Its disclosure obligation extended to all payments and fee agreements for services rendered “in connection with” the bankruptcy case, “whether or not [it] applie[d] for compensation” from the estate.
Second, in an argument advanced for the first time at oral argument,
To the extent Spector Gadon asserts that material factual disputes exist that would have prevented the Bankruptcy Court from ruling on the Debtors’ motion, it is mistaken. All agree that (1) the Letter Agreement was entered after one year before the petition date; (2) the Letter Agreement was for services rendered “in connection with” the bankruptcy case; and (3) Spector Gadon did not disclose the Letter Agreement to the Bankruptcy Court. Those facts suffice to conclude Spector Gadon violated
Nonetheless, Spector Gadon insists that its attorneys’ intentions are relevant to the Bankruptcy Court’s inquiry. Specifically, it touts that “the Chair of [Spector Gadon]’s Bankruptcy and Creditors’ Rights Practice Group,” Leslie Baskin, “has always filled out her [Bankruptcy Rule 2016(b)] disclosure forms” as was done here, “and she has never had any issues with this method.” Answering Br. 5. But in light of the undisputed facts, we fail to see how this practice bears on the legal question of whether Spector Gadon fulfilled its disclosure obligation. And pleading (questionable) past practice neither displaces the Code’s requirements nor establishes compliance with those requirements on this occasion.
Finally, Spector Gadon maintains that the Bankruptcy Court failed to consider the Debtors’ malfeasance, rendering its order of disgorgement and cancellation of the Letter Agreement unreasonable. But the Bankruptcy Court was well aware of the Debtors’ misconduct, as even Spector Gadon’s counsel conceded at oral argument. And the Bankruptcy Court helpfully issued a detailed opinion and explained in compelling terms its reasons for nonetheless imposing these sanctions, including that Spector Gadon failed to disclose and sought to collect fees for “work done immediately after the Petition Date”; “even if the services inserted in paragraph 6.e. [of its disclosure] were the only services included in the fee, they were billed and
In these circumstances, the Bankruptcy Court’s sanctions order was not an abuse of discretion. Courts of Appeals that have addressed the issue have regularly held that full disgorgement and cancellation of fee agreements can be an appropriate sanction for violating the Code’s disclosure requirements.19 See, e.g., In re Dordevic, 67 F.4th at 343; In re Stewart, 970 F.3d at 1264; In re Lewis, 113 F.3d 1040, 1045 (9th Cir. 1997); In re Downs, 103 F.3d 472, 478 (6th Cir. 1996); In re Park-Helena Corp., 63 F.3d at 882; In re Futuronics Corp., 655 F.2d at 471. And with that much, we agree—total disgorgement and cancellation of fee agreements can be a permissible sanction depending on the facts of the case.
But because bankruptcy courts “are equitable tribunals that apply equitable principles in the administration of bankruptcy proceedings,” Off. Comm. of Unsecured Creditors of Cybergenics Corp. ex rel. Cybergenics Corp. v. Chinery, 330 F.3d 548, 567 (3d Cir. 2003) (en banc), they must take account of all relevant circumstances in determining the appropriate sanction for violating
As Spector Gadon included in its opposition to the Debtors’ motion and conceded at oral argument, the Bankruptcy Court was aware of and considered the Debtors’ misconduct that necessitated Spector Gadon’s post-petition services. Nonetheless, it determined that total disgorgement and cancellation of the Letter Agreement was warranted—a fortuitous result for the Debtors.20 Because the Bankruptcy Court considered all relevant factors, including the balance of equities, before sanctioning Spector Gadon, its decision was not an abuse of discretion.
IV. Conclusion
For the foregoing reasons, we will reverse the District Court’s judgment and
their respective sections most relevant to this case. Section 5 of Bankruptcy Form 2030 (section 6 of Spector Gadon’s form) states, “In return for the above-disclosed fee, I have agreed to render legal service for all aspects of the bankruptcy case,” and then lists subcategories of common bankruptcy services at (a)–(d), followed by “[o]ther provisions as needed” at (e). That could lead debtors’ counsel completing the form to believe that a notation at subsection (e) or a marking on some, but not all, of the other subsections would effectively communicate that the remainder were excluded from the representation and that no additional notations were needed in section 6, as Spector Gadon seemingly believed here. We acknowledge that the use of this form is not mandatory, see
APPENDIX A
APPENDIX B
B2030 (Form 2030) (12/15)
United States Bankruptcy Court
_______________ District Of _______________
In re _________________________ Case No. ___________________
Debtor Chapter ____________________
DISCLOSURE OF COMPENSATION OF ATTORNEY FOR DEBTOR
- Pursuant to
11 U .S.C. § 329(a) andFed. Bankr. P. 2016(b) , I certify that I am the attorney for the above named debtor(s) and that compensation paid to me within one year before the filing of the petition in bankruptcy, or agreed to be paid to me, for services rendered or to be rendered on behalf of the debtor(s) in contemplation of or in connection with the bankruptcy case is as follows:For legal services, I have agreed to accept . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $______________
Prior to the filing of this statement I have received . . . . . . . . . . . . . . . . . . . . . . . . $______________
Balance Due . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $______________
- The source of the compensation paid to me was:
☐ Debtor ☐ Other (specify)
- The source of compensation to be paid to me is:
☐ Debtor ☐ Other (specify)
-
☐ I have not agreed to share the above-disclosed compensation with any other person unless they are members and associates of my law firm.
☐ I have agreed to share the above-disclosed compensation with a other person or persons who are not members or associates of my law firm. A copy of the agreement, together with a list of the names of the people sharing in the compensation, is attached.
- In return for the above-disclosed fee, I have agreed to render legal service for all aspects of the bankruptcy case, including:
- Analysis of the debtor’ s financial situation, and rendering advice to the debtor in determining whether to file a petition in bankruptcy;
- Preparation and filing of any petition, schedules, statements of affairs and plan which may be required;
- Representation of the debtor at the meeting of creditors and confirmation hearing, and any adjourned hearings thereof;
- Representation of the debtor in adversary proceedings and other contested bankruptcy matters;
- [Other provisions as needed]
- By agreement with the debtor(s), the above-disclosed fee does not include the following services:
CERTIFICATION
I certify that the foregoing is a complete statement of any agreement or arrangement for payment to me for representation of the debtor(s) in this bankruptcy proceeding.
______________________ __________________________________________
Date Signature of Attorney
__________________________________________
Name of law firm