This is a bankruptcy case. During the course of Chapter 11 proceedings, the bankruptcy court imposed sanctions' against the debtors’ attorney, Charles Friedman, and his firm, Mapother and Mapother (“Mapother”), for failure to disclose Friedman’s fee arrangement in accordance with the Bankruptcy Code and Rules of Bankruptcy Procedure. The bankruptcy court further denied the motion of the trustee and Southern American Insurance Company (“SAIC”) to sanction Friedman under Federal Rule of Bankruptcy Procedure 9011 for filing a motion to convert the debtors’ petition to a Chapter 11 petition. The district court affirmed the bankruptcy court in all respects. We affirm in part and reverse in part the decision of the district court.
I.
This case has a long and intricate history, so we will recite only the facts pertinent to the immediate appeals. Hardscrabble Farms, Inc., a dairy farm owned by debtor Joseph P. Downs, filed a Chapter 11 reorganization petition in 1986, listing approximately $3.3 million of indebtedness. In an attempt to reorganize, Hardscrabble entered into a loan with SAIC. Mr. Downs eventually defaulted on the loan payments, causing the fiduciary relationship between Hardscrabble and SAIC to fall apart.
After the attempt to reorganize Hardscrabble failed, Downs and his wife, Helen P. Downs, filed a Chapter 7 bankruptcy liquidation petition on July 17,1990. The Downs-es’ petition listed 100% stock ownership in Hardscrabble, valued at zero, as an asset. The petition also listed as an asset the Downses’ pending lender liability suit against SAIC in Nelson County Circuit Court. Hardscrabble Farms, Inc., et al. v. Southern American Ins. Co., Case No. 89-06081(A) (Nelson County Kentucky Circuit Court filed July 25, 1989). Attorney August Klapheke represented the Downses in the Chapter 11 proceedings. The Downses pledged full ownership of the Hardscrabble stock to Klapheke as consideration for his services. Despite the fact that he held a security interest in the stock, Klapheke proceeded to solicit bids for purchase of the stock. Eventually, an entity known as P & Y submitted a bid. After learning of Klapheke’s.interest, however, the bid was withdrawn. Thereafter, SAIC offered to purchase the stock in settlement of the Downses’ state court claim. The Trustee filed motions in the bankruptcy court to determine the status of Klapheke’s security interest in the stock, to sell the stock, and to settle Downses’ claims against SAIC.
In April 1991, Klapheke became incapacitated by what was later discovered to be k brain tumor. As a result, the president of Heaven Hill, Inc., a creditor of the Downses and Hardscrabble Farms, contacted Friedman and asked him to replace Klapheke as the Downses’ counsel. Friedman agreed, and Mr. Downs paid Friedman a $40,000 retainer. Mr. Downs had received this money from Bourbon-Aid Feed, a company owned by his children. Bourbon-Aid, however, had acquired the money from Heaven Hill.
On June 17, 1991, Friedman entered an appearance on behalf of the Downses at the hearing on the Trustee’s settlement motions. At the hearing, Friedman moved to convert the Chapter 7 case to a Chapter 11 reorganization case pursuant to 11 U.S.C. § 706, and posted a $16,500 appeal bond with the bankruptcy court. In August 1991, Friedman received an additional $6,000 from Bourbon-Aid Feed.
On August 20, 1991, the bankruptcy court granted the Trustee’s settlement motion. Furthermore, the bankruptcy court denied the Downses’ motion to convert, reasoning that reorganization was impossible. In so doing, the bankruptcy court concluded that the Downses’ motion was filed in bad faith, in light of the fact that the debtors’ bankruptcy had been pending for over one year and the motion to convert was filed on the “very eve, on the very day, almost a moment before the trustee was going to consummate a sale that the Court had been contemplating and working with for over six months.” J.A. at 175 (Transcript of Hearing of 8/20/91). The court also noted that the motion.was filed “solely for the purpose of delaying the sale.”
On remand, the bankruptcy court held a four-day evidentiary hearing. In a June 3, 1992, Memorandum Opinion, the bankruptcy court found that “from the evidence concerning the financial condition of the Downs [sic] and [Hardscrabble] and Mr. Downs’ admission that no plan had been reviewed, evaluated, or formulated until well after the initial conversion motion was filed, that the motion to convert this case to Chapter 11 was filed in objective bad faith and that on this ground the motion to convert should be denied.” J.A. at 217. Furthermore, the bankruptcy court directed the Downses and Friedman to disclose all information relating to the retainer. Id. at 218. Accordingly, Friedman filed a statement with the bankruptcy court on June 11, 1992, wherein he disclosed his fee arrangement with Heaven Hill and Bourbon-Aid Feed. J.A. at 856-59.
On August 28, 1992, SAIC filed a Motion for Sanctions, pursuant to Rule 9011 of the Rules of Bankruptcy Procedure, against the Downses and Friedman on grounds that the § 706 Motion was filed in bad faith. The Trustee subsequently joined SAIC’s Motion, alleging that 1) Friedman had failed to disclose his fee arrangement with Heaven Hill under Bankruptcy Rule § 2016, and 2) Friedman had failed to disclose a potential conflict of interest arising out of his Chapter 7 representation of the Downses in violation of 11 U.S.C. § 101(14). Friedman responded with 1) a Motion for Sanctions against the Trustee for failure to notify the Downses of offers of settlement in relation to the stock, and 2) a Motion for Sanctions against SAIC’s attorneys for improperly filing the original Motion for Sanctions.
On March 23, 1993, the bankruptcy court denied in part and granted in part SAIC and the Trustee’s Motion against Friedman and denied Friedman’s Motion outright. The court reasoned that Rule 9011 sanctions would not be appropriate with regard to the filing of the § 706 Motion because 1) given the time constraints, Friedman adequately reviewed the ease before he made the filing, and 2) the Motion was not filed in subjective bad faith. J.A. at 1656. On the other hand, the court granted the Motion with regard to Friedman’s failure to disclose the fee arrangement. Accordingly, the court ordered Friedman and his firm to disgorge the entire retainer, minus the appeal bond and reimbursable expenses. As a further “sanction,” it held that “no allowance for professional fees shall be granted by this Court to Friedman or his firm under 11 U.S.C. § 330.” Id. at 1661. Both parties moved for reconsideration; consequently, the bankruptcy court issued a revised opinion wherein it affirmed its earlier decision on the Rule 9011 sanctions, but amended the earlier order by reducing the amount of-the § 329 sanction to $20,000 and rescinding its bar on § 330 fees. Friedman appealed to the district court on the § 329 ruling, while SAIC and Cooper cross-appealed on the Rule 9011 issue. In a 7-page Memorandum Opinion, the district court affirmed. These appeals followed.
The issues to be addressed on appeal are: 1) whether the bankruptcy court properly imposed sanctions on Friedman and Mapother for Friedman’s failure to comply with § 329 and Rule 2016; 2) whether the bankruptcy court properly reduced the amount of those sanctions so as to allow Friedman and Mapother to retain a portion of the retainer; and 3) whether the bankruptcy court properly denied SAIC and the Trustee’s motion for sanctions under Rule 11. We will address each issue in turn.
II.
The applicable standard of review for a decision of a district court concerning a bankruptcy is dependent on whether such
We will consider Friedman’s appeal first. He argues that the district court erred in upholding the bankruptcy court’s Amended Order requiring him to remit $20,000 of the funds received by him. We disagree.
Section 329 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 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 service, 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 the 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.
Under this provision, then, an attorney must disclose any fee arrangements made within or after a year of the filing of the petition. Id.
Rule 2016 states, in pertinent part:.
(b) DISCLOSURE OF COMPENSATION PAID OR PROMISED TO ATTORNEY FOR DEBTOR. Every attorney for a debtor, whether or not the attorney applies for compensation, shall file and transmit to the United States trustee within 15 days after the order for relief, or at another time as the court may direct, the statement required by § 329 of the Code ... A supplemental statement shall be filed and transmitted to the United States trustee ■within 15 days after any payment or agreement not previously disclosed.
It is clear from the record that Friedman violated both § 329(a) and- Rule 2016. The Chapter 7 filing occurred on July 7, 1990. Consequently,'- under § 329, the Downses’ attorney was bound to disclose any fee arrangements made after July 7, 1989. Friedman’s fees, however, were received in May 1991, one year and 10 months after the Downses’ petition was filed. Thus, the statute applies to Friedman; the fact that he was not counsel on the date of the filing is not relevant to the statutory application. Furthermore, with respect to the fifteen day requirement of Rule 2016, Friedman failed to disclose as required by the statute within the time frame mandated by the Rule. Thus, Friedman’s arguments to the contrary are without merit.
In light of Friedman’s conduct, we believe that the bankruptcy court properly exercised its authority in issuing sanctions against Friedman and Mapother. Bankruptcy courts, like Article III courts, enjoy inherent power to sanction parties for improper conduct. In re Rainbow Magazine, Inc.,
Friedman, however, argues that the sanction was inappropriate because 1) the sums paid to Friedman were not property of the estate and therefore not subject to sanctions under § 329, and 2) § 329 allows remittance of unreasonable fees but does not mandate forfeiture of fees paid. This argument fails on both grounds. Retainers paid to counsel for the debtor are to be held in trust for the debtor, and the debtor’s equitable interest in the trust is property of the estate. See In re Rittenhouse,
III.
We next consider the argument proffered by the Trustee and SAIC that the district court erred in affirming the bankruptcy court’s amended Order reducing the amount of sanctions against Friedman. They argue that a complete disgorgement and denial of fees was warranted because Friedman intentionally concealed his fee arrangement for over a year, and also because his dual representation of the Downses in a Chapter 7 proceeding and Hardscrabble in a Chapter 11 proceeding constituted a conflict of interest. Because the bankruptcy court is given a great deal of latitude in fashioning an appropriate sanction, see Chapel Gate,
When a court metes out a sanction, it must exercise such power with restraint and discretion. Chambers v. NASCO, Inc.,
We find two of the aforementioned cases to be particularly persuasive. First, in the Futuronics case, the law. firm of Arutt, Nachonie, and Benjamin (“Arutt firm”), counsel for a Chapter 11 debtor, sought the assistance of the Israel & Raley law firm (“Israel firm”) in negotiating a contract dispute with the government.
The Second Circuit affirmed the district court. The court found that although Rule 219, which had superseded the mandatory sanction provision of 11 U.S.C. § 102(d) (1976), was discretionary, “the principal purpose for the revision of the rule was not to dilute its underlying policy but to make additional discretionary sanctions----”
Whatever discretion a bankruptcy court judge may have to fashion an appropriate sanction for an attorney’s violation of the bankruptcy rules and breaches of his fiduciary obligation to the court, given the egregiousness of the conduct here, it was an abuse of that discretion to permit the [firms] to retain any of the fees they had received, let alone to allow any further compensation. '
Id. at 471.
The second case we cite with favor is Crimson Investments, a case which is more directly on point here. In that ease, the attorney for the debtor entered into a fee arrangement to represent the debtor in Chapter 11 proceedings. The arrangement provided for a pre-petition payment and a post-petition payment, which together would constitute the attorney’s retainer. The attorney’s Rule 2016 affidavit stated that neither he nor his firm had any connection with the debtor, its creditors, or any other parties in interest. The court then held a hearing to ascertain the source of the attorney’s retainer. It was only after the hearing that an officer for the debtor revealed that the retainer was to be paid by two of the debt- or’s largest unsecured creditors, both of whom happened to be controlled by the sole shareholder of the debtor. After that disclosure, the attorney withdrew from the case, but requested fees and costs. The bankruptcy court not only ordered the attorney to disgorge the retainer, but also denied his firm legal fees.
The Futuronics and Crimson Investments cases each stand for the proposition that the bankruptcy court should deny all compensation to an attorney who exhibits a willful disregard of his fiduciary obligations to fully disclose the nature and circumstances of his fee arrangement under § 329 and Rule 2016. The authority to do so is inherent, and in the face of such infractions should be wielded forcefully.
In light of this precedent, we conclude that a complete denial of fees is the only appropriate sanction in the' instant case. We are not faced with a simple “technical breach” of § 329 and Rule 2016 here. Futuronics,
In reducing the amount of sanctions, however, the bankruptcy court relied on a 16-factor test set forth in In re Omega Trust,
IV.
Finally, we consider the Trustee and SAIC’s cross-appeal with regard to the bankruptcy court’s denial of Rule 9011 sanctions. At the outset, we must determine the standard of review to be applied. On its face, Rule 9011 closely tracks Federal Rule of Civil Procedure 11
SAIC contends that Friedman should have been sanctioned under Rule 9011 for filing a motion to convert the Downses’ Chapter 11 petition to Chapter 7 petition. Generally, an attorney is subject to Rule 9011 sanctions if, after the movant makes a reasonable inquiry prior to filing, the motion was not well grounded in fact or warranted by existing law or a good faith argument for the extension or modification, or reversal of existing law. Fed. R. Bankr.P. 9011(a); In re Marino,
Similarly, both SAIC and the trustee contend that the bankruptcy court’s finding of “objective bad faith” on the part of Friedman required the imposition of Rule 9011 sanctions. This argument is misguided. As with Rule 11, the test for imposing Rule 9011 sanctions is whether the individual’s conduct was reasonable under the circumstances. See Hartleip v. McNeilab, Inc.,
Y.
In summary, we find that Friedman violated § 329 and Rule 2016. We further find that the bankruptcy court erred by refusing to compel Friedman and Mapother to disgorge their retainer.in toto. Finally, we find that the bankruptcy court did not abuse its discretion in refusing to sanction Friedman
Notes
. Because neither party has addressed the bankruptcy court's decision as it relates to § 330, we will not address it here.
. Rule 9011 reads in pertinent part:
(a) Signature
Every petition, pleading, motion and other paper served or filed in a case under the Code on behalf of a party represented by an attorney, except a list, schedule, statement of financial affairs, statement of executory contracts, Chapter 13 Statement, or amendments thereto, shall be signed by at least one attorney of record in his individual name, whose office address and telephone number shall be stated.... The signature of an attorney or a party constitutes a certificate by him that he has read the document; that to the best of his knowledge, information, and belief formed by reasonable inquiry it is well grounded in fact and is warranted by existing law or a good faith argument for the extension, modification, or reversal of ex:isting law; and that it is not interposed for any improper purpose, such as to harass, to cause delay, or increase the cost of litigation. If a document is not signed, it shall be stricken unless it is signed promptly after the omission is called to the attention of the person whose signature is required. If a document is signed in violation of this rule, the court on motion or on its own initiative, shall impose on the person who signed it, the represented party, or both, an appropriate sanction, which may include an order to pay to the other party or parties the amount of the reasonable expenses incurred because of the filing of the document, including a reasonable attorney’s fee.
. In adopting the "abuse of discretion” standard for review of Rule 9011 cases, we find Cascade Energy particularly compelling. In that opinion, the Tenth Circuit held that the district court erred in reviewing the bankruptcy court's order imposing Rule 9011 sanctions de novo rather than for an abuse of discretion.
The bankruptcy court judge is on the "front lines of [bankruptcy] litigation” and is clearly the "judicial actor ... better positioned than another to decide the issue in question.” Coot-er & Gell,496 U.S. at 403-04 ,110 S.Ct. at 2459-60 ... The determinations required to support the imposition of sanctions under Rule 9011 are the same as those required under Rule 11. They are fact-specific and almost invariably require assessments of credibility. Finally, the same policy goals that favor review by courts of appeals of Rule 11 sanctions orders under an abuse-of-discretion standard apply equally when a district court, sitting as an appellate court, reviews Rule 9011 sanctions orders.... The forceful reasoning of the Supreme Court in concluding that an abuse-of-discretion standard applies to all aspects of the determination compels the conclusion that a district court should apply the same standard across the board when reviewing a bankruptcy*481 court's Rule 9011 decision. Only by applying an abuse of discretion standard can the district court properly function as an appellate court.
Cascade Energy,
The Ninth Circuit, however, endorsed a tripartite standard of review in In re Taylor,