Opinion
Case No. 93-11599-AB, Chapter 7
October 29, 2001
Spencer D. Ault, Esquire, Johnson, Young Ault, P.L.C., Leesburg, VA, Counsel for the debtor.
Paul D. Scanlon, Esquire, Manassas, VA, Counsel for respondent.
James M. Towarnicky, Esquire, James M. Towarnicky, P.L.L.C., Springfield, VA, Counsel for intervenors James and Louise Hooper.
MEMORANDUM OPINION
This matter is before the court on the debtor's motion to invalidate a series of fee agreements between him and attorney Robert B. Patterson for legal representation in connection with his bankruptcy case. Ancillary to that relief, the debtor seeks the cancellation of certain assignments and a deed of trust given to secure those and other fees. He further seeks a ruling that he is entitled to offset against those fees a judgment against Mr. Patterson that he purchased at a discount from the original judgment creditor. Hearings were held in open court on August 6, August 20, September 17, and September 20, 2001. The debtor and Mr. Patterson were each present in person and were represented by counsel. James and Louise Hooper, who had been permitted to intervene because they claim to have supplied some of the funds paid to Mr. Patterson, were present by counsel. No appearance was made on behalf of respondents Mundaca Financial Services, LLC, and NMFB, LLC, who are alleged to be transferees, respectively, of the deed of trust and one of the assignments.
Findings of Fact
Eugene N. Hooper ("the debtor") is a real estate developer. He had previously filed a long-running chapter 11 case in this court in 1984 that was eventually converted to chapter 7 and ultimately dismissed in 1989 after a substantial distribution to creditors. The present case was commenced on April 16, 1993, by the filing of a voluntary chapter 11 petition. At that time the debtor was represented by Donald F. King of the law firm of Odin, Feldman Pittleman. P.C. On May 28, 1993, Charles A. Docter and Stephen W. Nichols of the law firm of Docter Docter, P.C., entered their appearance on behalf of the debtor. On June 15, 1993, the case was converted to chapter 7, and Robert G. Mayer was then appointed as trustee. The trustee brought an objection to the debtor's claimed exemption of certain assets and began efforts to liquidate the debtor's extensive real estate holdings. The debtor was unhappy at this turn of events and wished to have his case dismissed.
Several years after this case was closed, Mr. Mayer was appointed, and now sits, as a judge of this court.
In December 1993, the debtor and his brother James Hooper met with Mr. Patterson to discuss the debtor's legal problems in connection with both his own bankruptcy case and the bankruptcy case of Cedar Crest Country Club, Inc., which the debtor owned. The result of that meeting was a signed retainer agreement dated December 1, 1993, in which Mr. Patterson agreed to represent the debtor and his companies "in connection with potential legal action(s) to be brought against various parties in connection with your recent bankruptcies and the foreclosure sale of Cedar Crest Country Club and other properties" for $125.00 per hour and 25% of the value of any property recovered for the debtor. The agreement further provided that unpaid charges would be assessed interest at the rate of 1% per month on the total outstanding balance. A second agreement was signed on March 26, 1994, that increased the contingency fee to 30% and described the scope of services as the representation of the debtor and his companies "in connection with potential legal action(s) to be brought against various parties in connection with the foreclosure sale of Cedar Crest Country Club and adjacent properties."
Cedar Crest Country Club, Inc., filed a voluntary chapter 11 petition in this court on November 22, 1992, Case No. 92-15482-MVB. No plan was confirmed, and the case was dismissed on December 13, 1994.
Mr. Patterson's first formal appearance in the debtor's bankruptcy case occurred on April 26, 1994, when he made an oral appearance at a hearing on the trustee's objection to the debtor's claimed Florida homestead exemption. He filed a written entry of appearance as attorney for the debtor on April 28, 1994. He did not then, or ever, file with the court a disclosure of compensation paid or agreed to be paid by the debtor in connection with the bankruptcy representation.
Remarkably, he also filed an entry of appearance on the same date on behalf of unsecured creditor James Hooper.
On August 3, 1994, Mr. Patterson filed on the debtor's behalf a motion to dismiss the bankruptcy case, but that motion was objected to by numerous creditors and was denied at a hearing held on August 23, 1994. On August 29, 1994, the debtor executed an agreement with "Robert B. Patterson, Trustee" under which he undertook, "for value received," to pay Mr. Patterson $400,000 in four payments of $100,000 each from the proceeds of the sale or refinance of four specified parcels of real estate, with such payment being contingent upon the dismissal of the bankruptcy case. Two days later, Mr. Patterson filed a second motion to
The second motion to dismiss, like the first, was not well received by the creditors, and numerous objections were filed. However, the debtor and Mr. Patterson persuaded the trustee that the motion might have merit. In particular, the trustee was persuaded that the prompt liquidation of certain assets might provide creditors with as much money at an earlier date as would a complete administration, provided the bankruptcy estate did not have to bear the tax consequences of the sales. Under the resolution ultimately agreed to by the trustee and the creditors, certain properties would be sold and the proceeds of sale distributed to creditors as part of the dismissal of the case. Because the case was being "dismissed" rather than administered, the tax consequences of the sale would be borne by the debtor rather than the bankruptcy estate. Although the debtor would not receive a discharge, and a number of debts would survive bankruptcy, the debtor would retain many properties that would otherwise have been sold by the trustee. Convincing the creditors, many of whom had to agree to take less than they were owed, to accept this disposition took considerable effort on the part of both the debtor and Mr. Patterson. As the trustee observed in his testimony, effectively a reorganization was being carried out in the guise of a chapter 7 administration. Ultimately, the necessary agreements were reached, and an elaborate consent order was entered on February 7, 1995, dismissing the bankruptcy case with prejudice to refiling for six months and authorizing the trustee to make $3,257,289.98 in disbursements to creditors and to pay $318,066.50 in administrative claims. The trustee filed a final report and account on April 21, 1995, and an order was entered on July 11, 1995, closing the case.
In March 1995, the month after the case was dismissed, the debtor signed a financial statement reflecting a personal net worth of $12,831,000.
While the dismissal motion was pending, Mr. Patterson had filed on December 6, 1994, an application for approval and payment of $113,312.50 in legal fees and $5,791.68 in expenses for the period from April 18, 1994 through November 30, 1994. In the application, Mr. Patterson stated that he had expended 647 hours in connection with his bankruptcy representation of the debtor. Compensation was requested based on an hourly rate of $175.00 per hour, with no disclosure that the actual agreement between Mr. Patterson and the debtor provided for an hourly rate of $125.00 per hour. Astonishingly, the application made no mention whatsoever of the $22,500.00 in payments Mr. Patterson had received from the debtor up to that point. Nor did the application disclose that Mr. Patterson had a side deal with the debtor for payment of an additional $400,000.00 if he were successful in having the case dismissed.
According to Mr. Patterson, the fee application was a "negotiating ploy" to divert creditor anger from the debtor to himself and included everything he could "even remotely classify as bankruptcy work." Although the fee application was noticed for a hearing, no hearing was actually ever held. The trustee did not have sufficient funds to pay the amount requested, and he was certain that the creditors who were taking a haircut on their claims would not have consented to its payment. The trustee testified that when he told Mr. Patterson that he would not be paid through the dismissal order, Mr. Patterson replied that he was satisfied because he had made arrangements with the debtor for the payment of his fees.
Of the four properties listed on the August 29, 1994, payment agreement, three were sold in the course of the bankruptcy. The one property that the debtor retained after the dismissal of the bankruptcy was an undivided half-interest in an apartment complex in Ashville, North Carolina, known as the Biltmore Garden Apartments. After the order was entered dismissing the debtor's case, Mr. Patterson prepared an invoice dated February 28, 1995, in which he billed, in addition to the work for that month, $400,000 as an "agreed fee" and also added $35,402.00 in fees he testified were owed for representation of a trust set up by the debtor. Previously, he had added to the debtor's bill a separate charge of $37,816.94 for representing the debtor with respect to the Cedar Crest Country Club bankruptcy. The total balance shown due on the February 28, 1995, invoice, including monthly service charges beginning in July 1994, was $579,327.39.
The invoices refer to this as "Hooper Bankruptcy," but the supplied case number is that of the Cedar Crest Country Club case.
Following the dismissal of the bankruptcy, Mr. Patterson continued to represent the debtor on various matters, including the defense of a lawsuit brought against the debtor in the Circuit Court of Fairfax County by Gemini Organization, Ltd., and James E. Britt, and the prosecution of a lawsuit against First Federal Savings Loan of Shenandoah Valley. Annoyed because he felt the debtor was not making a good faith effort to pay his legal bills, Mr. Patterson, without withdrawing from the pending litigation, filed suit against the debtor on June 23, 1995, to recover $593,998.77 in unpaid legal fees. The debtor filed an answer denying that he was liable in the amount alleged and demanding an accounting.
While Mr. Patterson's lawsuit was pending, he and the debtor executed a document dated September 1, 1995, entitled "Restatement of Representation Agreement," which recited that it "replaces all prior agreements." In the agreement, Mr. Patterson undertook to represent Mr. Hooper's interests with respect to six specifically-described matters as well as "general representation" for $125.00 per hour plus 35% of all amounts recovered for the debtor. The debtor would be invoiced monthly, and unpaid charges would incur a service charge of 1/2% per month on the outstanding balance. The agreement further called for the debtor to pay $50,000 on or before September 30, 1995, from the sale of a specified parcel of land in Harrisonburg, Virginia, and $150,000 on or before October 1995, from the refinance of the Biltmore Garden Apartments. The agreement recited that $100,000 of the proceeds from Biltmore "shall be held [by Mr. Patterson] and applied to the payment of future fees and costs." Additionally, the agreement recited that as "partial security" for the payment of the debtor's bill, the debtor would assign his undivided one-half interest in a 237-acre tract in Jackson County, North Carolina, known as the Longbranch property to Mr. Patterson and would execute a $200,000 deed of trust on another property in North Carolina known as the Cullowhee Café. Finally, the agreement recited that the "hearing on legal fees suit shall be extended to October 14, 1995, and then withdrawn without prejudice." On December 1, 1995, an "Addendum" to the September 1, 1995, agreement was signed in which the debtor acknowledged that the amount he owed Mr. Patterson as of October 30, 1995, was $673,372.54. The Addendum increased the contingency fee to 40%; increased the interest rate on balances more than 12 months overdue to 2% per month; and added language making the debtor liable for "all costs of collection including reasonable attorneys fees and the costs of arbitration."
This was apparently a reference to a then-pending motion for partial summary judgment in Mr. Patterson's suit against the debtor.
In November and December 1995, the debtor signed at Mr. Patterson's insistence a number of security instruments that were more or less consistent with the September 1, 1995, restated fee agreement. Specifically, he signed on November 10, 1995, a deed of trust encumbering the Cullowhee Café to secure a $150,000 promissory note. On November 30, 1995, he executed an assignment to Mr. Patterson of his undivided one-half interest in the Longbranch Property "to assure full payment of all amounts owed by Assignor to Assignee." That assignment contained language stating that it could be replaced at the debtor's option with a $500,000 note and deed of trust. Finally, on December 1, 1995, the debtor signed an instrument entitled "Irrevocable Assignment of Proceeds" assigning to Mr. Patterson his one-half interest in the Biltmore Garden Apartments "to assure the payment to Robert B. Patterson, Trustee," of $150,000.00 "or such lesser amount as Hooper is entitled to receive from any refinance," with the assignment thereafter remaining in place as to distributions due the debtor "until all sums due from [the debtor] to Robert B. Patterson are fully paid." In the meantime, the Gemini lawsuit continued. In late January 1996, with a jury trial underway, Mr. Patterson told the debtor he intended to withdraw as counsel unless the debtor executed a consent judgment for his claimed attorneys fees up to that point. The debtor then endorsed a consent judgment in favor of Mr. Patterson in the amount of $682,328.29. That judgment, which did not expressly provide for post-judgment interest, was entered by the court on February 2, 1996. Shortly thereafter, judgment in the Gemini lawsuit was entered against the debtor in the amount of over $2 million. Mr. Patterson later moved to amend the consent judgment in the fee lawsuit to provide for interest at the rate of 6% per annum from February 2, 1996, and an amended judgment to that effect (which, however, was not endorsed by the debtor) was entered on May 17, 1996.
The note itself, for whatever reasons, was not signed until January 10, 1996, and the deed of trust was not recorded until May 16, 1996. At some point, the debtor conveyed the property to his daughter, who reconveyed it to the debtor on February 26, 1998. That same date, the debtor placed a $400,000 deed of trust on the property in favor of the Eugene N. Hooper Family Limited Partnership and then conveyed the property to an entity called the Café Family Limited Partnership. The debtor testified at the hearing that he has only a 1% interest in the partnership and the remaining 99% interest belongs to his children.
The trial took place on January 24, 25, and 29, 1996.
The judgment was actually signed on February 12, 1996, but was entered nunc pro tunc as of February 5, 1996.
In June 1996, the debtor assigned the amended judgment to his wife, Maureen Patterson, who subsequently claimed to hold it as trustee of an entity called The Children's Trust. Over the next four years or so, there were numerous efforts by Gemini and Mr. Patterson in various forums to enforce their competing claims. Additionally, Mr. Patterson filed an unsuccessful $35 million civil RICO action on Mr. Hooper's behalf against Gemini in Federal district court in December 1997. A full description of the legal proceedings — some of which resulted in the imposition of sanctions against Mr. Patterson — would add much color, but little of substance, to this opinion.
Actions taken by Mr. Patterson in connection with the voided consent judgment and the later enforcement efforts are also the subject of a pending disciplinary complaint against Mr. Patterson before the Virginia State Bar.
Brief mention is appropriate, however, of Mr. Patterson's filing of a chapter 11 petition on behalf of Leesburg Pike Associates Family Limited Partnership in this court on June 22, 1998. The debtor had owned a half interest in an office building located at 7115 Leesburg Pike, Falls Church, Virginia. His brother and sister-in-law, James and Louise Hooper, owned the other half. Mr. Patterson's and Gemini's judgments had both attached as liens to the debtor's one-half interest prior to the conveyance of the property to the limited partnership. Mr. Patterson, notwithstanding the ongoing efforts to enforce his own judgment, had continued to provide legal representation and advice to the debtor with respect to the office building and the threatened foreclosure of a deed of trust against it. When efforts to refinance the building failed, Mr. Patterson prepared and filed a chapter 11 petition for the limited partnership. Before the petition was filed, he was paid $5,000.00 by James Hooper, who promised an additional $10,000.00 within a few days. That $10,000.00 was paid shortly after the filing. James Hooper testified that he intended the $15,000.00 as a retainer for the Chapter 11 filing. Mr. Patterson, by contrast, testified that he was unwilling to represent the partnership unless payment was made on account of past due fees owed by the debtor. Having heard the testimony and considered the surrounding circumstances, the court finds James Hooper's account of the intended purpose of the payments to be the more credible. In any event, neither the attorney's fee disclosure nor the application for employment filed by Mr. Patterson in the Leesburg Pike case disclosed the prepetition $5,000.00 payment or the promised payment of the additional $10,000 post-petition. The employment application did, however, disclose Mr. Patterson's continued representation of Mr. Hooper as well as his wife's interest in the consent judgment. Based on those conflicts, then — Chief Judge Martin V. B. Bostetter, Jr., of this court denied Mr. Patterson's application to be employed as bankruptcy counsel for the partnership.
Eventually, Gemini Organization brought suit against the debtor, Mr. Patterson, and Mrs. Patterson in the Circuit Court of Fairfax County, Virginia, to set aside the consent judgment as having been incurred with intent to hinder, delay, and defraud Gemini in the collection of its claim. On January 19, 2001, the Circuit Court entered a decree voiding the consent judgment ab initio based on the court's determination that "the judgment was made in an effort to defraud creditors." As part of his findings, the chancellor held there was not "an adequate consideration to start with" for the judgment. In particular, the chancellor did not find Mr. Patterson's testimony credible concerning his entitlement to the $400,000 bonus. Although the chancellor noted that there was evidence of "some substantial legal service," he also noted that Mr. Patterson had been paid over $200,000 for his legal services. The chancellor further found that the contract for services in the bankruptcy case had not been submitted to this court for approval, and he ruled that the September 1, 1995, and December 1, 1995, agreements were invalid "to the extent they reflect fees earned during the bankruptcy." The chancellor did not, however, make findings as to the dollar amount of claimed fees attributable to the bankruptcy and those attributable to nonbankruptcy work.
In the meantime, Mr. Patterson assigned the $150,000 note secured by the Cullowhee Café deed of trust to an entity called Mundaca Financial Services, Inc., for $108,500 on October 5, 1999. Prior to the sale, an order had been entered by the Superior Court for Jackson County, North Carolina, on July 19, 1999, allowing foreclosure of the deed of trust and expressly finding that the $150,000.00 note "evidences a valid debt of which Robert B. Patterson is the Holder." Several months later, Mr. Patterson executed on February 22, 2000, a deed purporting to convey an undivided one-half interest in the Longbranch Property to NMFB, LLC. This entity was set up by Mr. Patterson's brother-in-law, Thomas J. Mitchell, III, an attorney. The debtor testified that the conveyance was intended as payment for legal fees which Mr. Mitchell had incurred in representing the Children's Trust with respect to the various court suits involving Gemini.
Mr. Patterson states the net amount received by him on the sale was $72,500.00 after satisfaction of a $30,000 lien. No additional information was provided concerning the nature or holder of the lien.
The debtor appealed to the North Carolina Court of Appeals, which affirmed the trial court by an opinion filed December 19, 2000. The debtor's petition to the Supreme Court of North Carolina for discretionary review was denied on May 3, 2001.
While all this was taking place, and in an admitted effort to gain leverage over Mr. Patterson, the debtor purchased from Riggs Bank on March 24, 2000, a money judgment that Riggs had previously obtained in this court against Mr. Patterson (who at that time was himself a chapter 11 debtor). The judgment, dated July 9, 1991, was in the amount of $253,946.12, with interest at the rate of 8% from April 15, 1991, and was determined to be nondischargeable. The purchase price paid to Riggs for the judgment was $40,000. The funds to make the purchase were loaned to the debtor by his brother, James Hooper.
On July 16, 2001 — some six years after the debtor's case was closed — the debtor filed the motion that is currently before the court seeking to invalidate the fees claimed by Mr. Patterson for his bankruptcy representation of the debtor, as well as to cancel, and enjoin enforcement of, the assignments and deed of trust executed by the debtor for the payment of those fees. An initial hearing was held on August 6, 2001. At that hearing, the court ruled that the motion to invalidate fees could not be heard unless the case were first reopened. A motion to reopen was then set for hearing on August 20, 2001. At that hearing, the court granted the motion to reopen and then proceeded to hear evidence with respect to the present motion.
Needless to say, the reopening of a case six years later to examine the fees of bankruptcy counsel will be justified only in exceedingly rare circumstances. The court's decision here to reopen the case was heavily influenced not only by the magnitude of the fees but more importantly by the state court's apparent conclusion that only this court had jurisdiction to determine what fees, if any, were owed with respect to the bankruptcy representation. Thus, if that festering issue were ever to be resolved, it had to be resolved in this court.
At the hearing, Mr. Patterson presented an outline of an accounting setting forth a total claim against the debtor for attorneys fees in the amount of $2,900,880.29. This consisted of $1,086,497.50 in billed fees and expenses through December 31, 1999; $520,929.32 in interest; an additional $100,000 in "estimated" fees and expenses for the year 2000; and "estimated" costs of $250,000 (including $125,000 of his own "estimated" time) incurred in efforts to collect those fees. Rather amazingly, the accounting used as its starting point the voided consent judgment. Credited against these amounts were $344,313.00 in payments and other credits (including a $40,000 credit for the Riggs judgment). Mr. Patterson offered invoices, which the debtor professed never to have seen before, reflecting $404,169.21 in billings in the four years following the judgment. Those invoices lack any supporting detail whatsoever: they simply state the total number of hours worked during the month in question and a dollar amount, without any indication of what the work involved. At the hearing, Mr. Patterson testified that copies of his "Day Timer" diaries for the years concerned were in the courtroom and that he prepared each month's invoice by adding up the time and payments recorded in those diaries.
Conclusions of Law and Discussion I.
The issues before the court may be simply stated, although not so simply resolved. First, what is the amount, if any, of legal fees to which Mr. Patterson is entitled for his representation of the debtor in connection with his bankruptcy? Second, should the Biltmore assignment, the Longbranch assignment, and the Cullowhee Café note and deed of trust be canceled? Third, what amount of legal fees, if any, does the debtor owe Mr. Patterson? And fourth, may the debtor offset against those fees the full amount due on the judgment purchased from Riggs, or only the amount paid for the judgment?
A.
As a preliminary matter, it is necessary to consider the extent of this court's jurisdiction both over the issues and over the parties. As will be discussed, the first and second issues squarely arise under the Bankruptcy Code and therefore constitute a core proceeding over which this court has subject matter jurisdiction under 28 U.S.C. § 1334(b) and 157(a) and the general order of reference from the United States District Court for the Eastern District of Virginia dated August 15, 1984. Venue is proper in this district under 28 U.S.C. § 1409(a). Mr. Patterson, as respondent, has been properly served and has appeared generally.
B.
Subject-matter jurisdiction over the third and fourth issues is far more problematical. It is true that neither party has questioned the court's jurisdiction to rule on the issues the parties have raised. Indeed, both parties have enthusiastically embraced the premise that this court can and should resolve all pending disputes between them, notwithstanding that well over half of the fees claimed by Mr. Patterson involve services performed long after the dismissal of the bankruptcy case. However, unlike personal jurisdiction, subject-matter jurisdiction cannot be conferred by consent. Bankruptcy courts, like other Federal courts, are courts of limited jurisdiction and must be constantly alert to overstepping their jurisdictional bounds. Poplar Run Five L.P. v. Virginia Electric Power Co. (In re Poplar Run Five L.P., 192 B.R. 848, 854-55 (Bankr.E.D.Va. 1995) (dismissing post-confirmation action to recover security deposit from electric company).
Under 28 U.S.C. § 1334(b) and the general order of reference from the United States District Court, this court has jurisdiction over civil proceedings "arising under" the Bankruptcy Code, "arising in" a bankruptcy case, or "related to" a bankruptcy case. A proceeding "arises under" the Bankruptcy Code if federal bankruptcy law creates the cause of action or if the plaintiff's right to relief necessarily depends on resolution of a substantial question of federal bankruptcy law. Poplar Run Five, 192 B.R. at 854-55. Proceedings "arising in" a bankruptcy case are those that "are not based on any right expressly created by [the Bankruptcy Code], but nevertheless would have no existence outside of the bankruptcy." Bergstrom v. Dalkon Shield Claimants Trust (In re A. H. Robins Co., Inc.), 86 F.3d 364, 372 (4th Cir. 1996), cert. denied, 519 U.S. 993, 117 S.Ct. 483, 136 L.Ed.2d 377 (1996). Finally, the "related to" category of proceedings is "quite broad and includes proceedings in which the outcome could have an effect upon the estate being administered." Id., citing Pacor, Inc. v. Higgins, 743 F.2d 984, 994 (3rd Cir. 1984) (explaining that test is whether "the outcome of that proceeding could conceivably have any effect on the estate being administered" or "could alter the debtor's rights, liabilities, options, or freedom of action."). Nevertheless, the "related to" category is not so broad as to encompass litigation of state law claims that will not have an effect on the bankruptcy estate, simply because one of the litigants filed a petition in bankruptcy. See Lux v. Spotswood Construction Loans, 176 B.R. 416 (E.D.Va. 1993) (after chapter 7 case was closed, there was no "related to" jurisdiction over adversary proceeding brought by debtor challenging a foreclosure), aff'd, 43 F.3d 1467 (4th Cir. 1994) (table); New Horizon of N.Y., LLC v. Jacobs, 231 F.3d 143 (4th Cir. 2000) (district court lacked even "related to" jurisdiction over state law claims by entity formed to purchase debtor's assets in accordance with a confirmed plan against parties who allegedly interfered with the sale), cert denied, 121 S.Ct. 2192, 149 L.Ed.2d 1024 (2001).
The difficulty in this case is that Mr. Patterson has claims against the debtor, not only for fees related to the bankruptcy, but for fees that bear no relationship to the bankruptcy. This court simply has no jurisdiction to rule upon the latter, except to the limited extent necessary to determine whether the challenged deed of trust and assignments relate to fees for bankruptcy as opposed to nonbankruptcy work. The court recognizes that a ruling limited to the bankruptcy fees will leave a great many unresolved disputes between the parties which will presumably have to be resolved in other forums, but the court cannot assume a jurisdiction not granted by Congress simply because it would be convenient for the parties.
C.
Comment is also appropriate with respect to the issue of personal jurisdiction over two of the named respondents, Mundaca Financial Services, LLC, and NMFB, LLC. Neither entity has responded to the motion or entered an appearance. As discussed, Mundaca is currently the holder of the Cullowhee Café note, while NMFB is the grantee of a deed from Mr. Patterson purporting to convey the debtor's one-half undivided interest in Longbranch.
To the extent the debtor seeks injunctive relief against either entity, such relief cannot be obtained by motion but requires the bringing of an adversary proceeding. Fed.R.Bankr.P. 7001. But even if relief could be obtained by motion, there has been no adequate service upon Mundaca. The Bankruptcy Rules require that a motion commencing a contested matter be served in the same manner as a summons and complaint in an adversary proceeding. Fed.R.Bankr.P. 9014. A summons and a complaint in an adversary proceeding may be served by first-class mail. Fed.R.Bankr.P. 7004(b). For effective service upon a corporation, partnership, or other unincorporated association, however, the summons and complaint must be mailed "to the attention of an officer, a managing or general agent, or to any other agent authorized by appointment or by law to receive service of process and, if the agent is one authorized by statute to receive service and the statute so requires, by also mailing a copy to the defendant." Fed.R.Bankr.P. 7004(b)(3).
The certificate of service appended to the motion reflects that service was made upon Mundaca by mailing a copy of the motion to a post office box in Franklin, Tennessee, and to an attorney in North Carolina representing Mundaca in the courts of that state. Neither mailing is sufficient to satisfy the requirements of Rule 7004. Accordingly, the court concludes that it lacks personal jurisdiction over Mundaca.
The debtor filed a motion to add Peter A. Paul, the substitute trustee under the Cullowhee Café deed of trust, as a party to the present motion. That motion to amend does not reflect that it was served on Mr. Paul. In any event, no order was entered prior to the conclusion of the evidentiary hearing making Mr. Paul a respondent, and the court declines to make him a party now that the evidentiary record is closed.
The situation is different with respect to NMFB. The certificate of service reflects that a copy of the motion and the notice of hearing were mailed to the company's registered agent. No challenge has been made to the adequacy of service, and accordingly, the court concludes that it does has personal jurisdiction over NMFB. As discussed above, however, the existence of personal jurisdiction does not by itself confer subject-matter jurisdiction, and the court's rulings will necessarily be limited to those matters as to which subject-matter jurisdiction exists.
II.
The substantive issues before the court are governed by § 329, Bankruptcy Code, and Federal Rules of Bankruptcy Procedure 2016 and 2017. Section 329 provides in relevant part as follows:
(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 . . . [or]
(2) the entity that made such payment.
(emphasis added). Rule 2016 amplifies this requirement:
(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 including whether the attorney has shared or agreed to share the compensation with any other entity. The statement shall include the particulars of any such sharing or agreement to share by the attorney, but the details of any agreement for the sharing of the compensation with a member or regular associate of the attorney's law firm shall not be required. A supplemental statement shall be filed and transmitted to the United States trustee within 15 days after any payment or agreement not previously disclosed.
(emphasis added). Finally, Rule 2017 prescribes the procedure for review of post-petition compensation agreements:
(b) Payment or Transfer to Attorney After Order for Relief. On motion by the debtor, the United States trustee, 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, or any agreement therefor, by the debtor to an attorney after entry of an order for relief in a case under the Code is excessive, whether the payment or transfer is made or is to be made directly or indirectly, if the payment, transfer, or agreement therefor is for services in any way related to the case.
(emphasis added).
A.
At the outset, it must be stressed that the Bankruptcy Code and Rules impose no requirement on debtor's counsel in a chapter 7 case to obtain court approval of his or her fees, except in those rare instances where counsel is seeking to be paid out of the bankruptcy estate. Rather, the duty is simply one of disclosure, with the court having the power to disapprove fees to the extent they are determined to be excessive if the reasonableness of the fees is raised either by the debtor or the United States Trustee, or by the court on its own motion. See Burd v. Walters (In re Walters), 868 F.2d 665 (4th Cir. 1989) (bankruptcy court had power to reduce fees of attorney hired by debtor to litigate against creditor in another forum from $29,000 to $15,000 even though the fees were being paid from exempt funds rather than estate assets). This is to be distinguished from the situation that is presented in a chapter 11 case in which a trustee has not been appointed and the debtor is a debtor in possession. The attorney for a debtor in possession is a professional for the estate and is subject to §§ 327 and 330, Bankruptcy Code, which require bankruptcy court approval both of the employment and of any fees. See § 1107(b), Bankruptcy Code. In the present instance, however, the debtor's case had already been converted to chapter 7 by the time Mr. Patterson came on board, and Mr. Patterson was never counsel to the debtor in possession, only to the debtor.
Courts are split as to whether counsel for a chapter 7 debtor may ever be paid from the bankruptcy estate. Compare In re American Steel Product, Inc., 197 F.3d 1354, 1356 (11th Cir. 1999) ("We agree with the district court that the plain reading of § 330 precludes an award of attorney's fees to a debtor's attorney in a Chapter 7 or Chapter 11 proceeding") with In re Century Cleaning Services, Inc., 195 F.3d 1053, 1058-60 (9th Cir. 1999) (opining that Congress made a drafting error of some kind when revising § 330 in 1994). In this District, it has been held that compensation may be paid to counsel for a chapter 7 debtor from the estate in appropriate circumstances. In re Taylor, 250 B.R. 869 (E.D.Va. 2000).
The debtor does suggest that, with respect to the $400,000 bonus, Mr. Patterson was seeking to be paid from the bankruptcy estate, and was therefore required to obtain actual court approval of such fee. The court disagrees. Although the bonus was to be paid from the sale or refinance of assets that were property of the bankruptcy estate at the time the agreement was signed, Mr. Patterson's right to the payment was expressly contingent upon the dismissal of the bankruptcy case. Upon dismissal of the case, any assets not previously abandoned or disposed of by the trustee ceased to be property of the bankruptcy estate. § 349(b)(3), Bankruptcy Code. Thus, by the time the agreement became effective, any remaining assets were no longer property of the bankruptcy estate but rather property of the debtor, and any payment would not be from property of the estate but from property of the debtor. Accordingly, court approval of the payment was not required.
Nevertheless, even though Mr. Patterson was not required to obtain prior approval for his fees, the Bankruptcy Code and Rules plainly required him to file with the court, and serve on the United States Trustee, a disclosure of "all compensation paid or agreed to be paid" and to supplement the statement within 15 days of any payment or agreement not previously disclosed. § 329(a), Bankruptcy Code; Fed.R.Bankr.P. 2015(b). This requirement existed regardless of whether Mr. Patterson intended to seek compensation from the bankruptcy estate and it existed even though Mr. Patterson was hired after the conversion of the case to chapter 7. There is no dispute that Mr. Patterson did not file with the court or serve on the United States Trustee a disclosure of the fees the debtor had agreed to pay him. The initial question to be resolved, therefore, is what consequence follows from the failure to make the required disclosure?
B.
Neither the Bankruptcy Code nor the Rules specifies the remedy where an attorney for the debtor has failed to make the required disclosure of fees paid and agreed to be paid. Walters, while affirming the bankruptcy court's power to examine those fees, does not address the issue of disclosure and does not state whether the debtor's counsel in that case filed a disclosure. It has been stated by other courts, however, that "[i]n cases involving an attorney's failure to disclose his fee arrangement under § 329 or Rule 2016 . . . the courts have consistently denied all fees." Mapother Mapother v. Cooper (In re Downs), 103 F.3d 472, 478 (6th Cir. 1996). See also Keller Financial Services of Florida, Inc., 248 B.R. 859, 886-87 (Bankr.M.D.Fla. 2000) (ordering disgorgement of entire $1,305,419 bankruptcy retainer for failure to make complete disclosure in violation of § 329 and Rule 2016); Arens v. Boughton (Matter of Prudhomme), 43 F.3d 1000 (5th Cir. 1995) (affirming bankruptcy court order requiring debtor's counsel to disgorge entire $75,000 retainer based on failure to disclose full amount received and a contingency fee agreement); In re Redding, 263 B.R. 874 (8th Cir. BAP 2001) (affirming bankruptcy court order requiring disgorgement of all but $1,000 of $11,011.40 received by experienced attorney based on failure to disclose amount and source of retainer); Law Offices of Nicholas A. Franke v. Tiffany (In re Lewis), 113 F.3d 1040, 1045 (9th Cir. 1997) (attorney's disregard of disclosure requirements warranted denial of all compensation, without inquiry into whether fees were reasonable or excessive).
This court agrees that denial of all fees is ordinarily the appropriate sanction where an attorney fails to file the disclosure required by § 329(a) and Rule 2016(b). Although such a sanction would unquestionably be harsh in those instances where the fees were in fact reasonable and the debtor had benefitted from the attorney's services, to allow the attorney to collect or retain some portion of the fees based on a theory of "no harm, no foul" would leave attorneys with little or no incentive to comply with the statutory disclosure requirements. In this connection, the Rule 2016 statement is not merely an incidental piece of paperwork. Quite the contrary: it is central to the court's ability to review bankruptcy fees for excessiveness, a matter that concerns not only the debtor and creditors, but also public perception of the bankruptcy system. Without complete and timely disclosure by the debtor's attorney, neither the United States Trustee nor this court can effectively exercise their respective oversight responsibilities.
There may well be exceptional instances where the disallowance of all fees would be so disproportionate to the harm and so unfair to the attorney that some lesser sanction, such as partial disallowance, would be appropriate. Additionally, the Bankruptcy Rules themselves provide an equitable safety valve in the form of the court's power to retroactively extend the time for filing a disclosure statement where the failure to file within the time specified by the Rules occurred as a result of excusable neglect. Fed.R.Bankr.P. 9006(b)(1). As the Supreme Court has explained, the term "excusable neglect" as used in Rule 9006 is "not limited to situations where the failure to timely file is due to circumstances beyond the control of the filer," but also extends to inadvertence, mistake, or carelessness. Pioneer Investment Svcs. Co. v. Brunswick Assocs., L.P., 507 U.S. 380, 391, 113 S.Ct. 1489, 1496, 123 L.Ed.2d 74 (1993). The Court elaborated that "[a]lthough inadvertence, ignorance of the rules, or mistakes construing the rules do not usually constitute `excusable' neglect, it is clear that `excusable neglect' . . . is a somewhat `elastic concept.'" 507 U.S. at 392, 113 S.Ct. at 1496. The Court then went on to hold:
With regard to determining whether a party's neglect of a deadline is excusable, we . . . conclude that the determination is at bottom an equitable one, taking account of all relevant circumstances surrounding the party's omission. These include . . . the danger of prejudice to the debtor, the length of the delay and its potential impact on judicial proceedings, the reason for the delay, including whether it was within the reasonable control of the movant, and whether the movant acted in good faith.
507 U.S. at 395, 113 S.Ct. at 1498 (footnotes and internal citation omitted).
Here, the court is unable to conclude that Mr. Patterson's failure to file a disclosure statement was the result of excusable neglect, or that otherwise exceptional circumstances justify some lesser sanction than complete disallowance of the undisclosed fees. This is not a case in which counsel intended to file a disclosure statement but simply overlooked it in the press of other matters. The most that Mr. Patterson can point to is his mistaken belief that he was not required to file a disclosure statement because he was retained after the case had converted from chapter 11 to chapter 7. Such "ignorance concerning the rules" is precisely the type of circumstance that the Supreme Court in Pioneer held "usually" does not constitute excusable neglect. Moreover, what was not disclosed — in particular the 30% contingency fee if Mr. Patterson recovered Cedar Crest Country Club for the debtor and the $400,000 bonus if the bankruptcy case were dismissed — was plainly material, given not only the magnitude of the bonus, but the fact that the debtor, with Mr. Patterson's assistance, was actively seeking at that point to convince the trustee and creditors that the case should be dismissed. Nor was the original omission to file a disclosure in any manner remedied by the subsequent fee application. If anything, the application compounded rather than cured the original failure to make a proper disclosure. Not only did it not disclose the bonus agreement, it also misrepresented the hourly rate the debtor had agreed to pay and made no mention of the $22,500.00 in payments Mr. Patterson had already received. Finally, the nondisclosure does not appear to have been an isolated occurrence, given Mr. Patterson's subsequent failure in the Leesburg Pike Associates Family Limited Partnership case to disclose the sums paid and promised to be paid to him by James Hooper. The court can only conclude, regretfully, that candor with the court is not a high priority for Mr. Patterson.
Needless to say, the court is not impressed with Mr. Patterson's explanation that the fee application was nothing more than a "negotiating ploy." The court and other parties have a right to assume that every pleading filed by counsel in a bankruptcy case is filed in a good faith belief that the movant or applicant is entitled to the relief requested. See Fed.R.Bankr.P. 9011.
In determining that the appropriate sanction is denial of all compensation, the court is not unmindful that Mr. Patterson did provide valuable services to the debtor, and that the debtor was willing enough to enter into the fee arrangement at the time. Put another way, the court is under no illusion that the debtor is the unsophisticated victim of an attorney who was able to get his way only because the debtor could not afford to hire anyone else. Quite the contrary. The debtor is a savvy and experienced businessman who has had many dealings with attorneys over the years and is clearly able to negotiate intelligently with respect to his own interests. The court understands perfectly well that the present motion is motivated, not by any dissatisfaction with the services Mr. Patterson provided during the bankruptcy, but because of a subsequent falling out. There can be little doubt, therefore, that complete disallowance of Mr. Patterson's bankruptcy fees confers an undeserved windfall on the debtor. Nevertheless, the disclosure requirements of § 329 and Rule 2016 do not exist solely to protect the debtor and the bankruptcy estate against overreaching attorneys, but also to protect the integrity of the bankruptcy system. The vindication of that interest fully justifies the disallowance of the undisclosed fees in this instance even though the attorney's services provided a benefit to the debtor.
C.
Because the court concludes that disallowance of all bankruptcy-related fees is the appropriate remedy for nondisclosure, the court need not and does not reach the issue of whether the claimed fees arising from that representation are "excessive." Put another way, in the absence of proper disclosure, all fees are excessive. Nor need the court reach the interesting question of whether the August 29, 1994, "bonus" agreement, if otherwise enforceable, would properly be read as obligating payment of a $100,000 bonus rather than a $400,000 bonus, given that each of the $100,000 payments was tied to the refinance or sale of a specific property, and that only one of them had not been sold and remained the debtor's property at the time the bankruptcy case was dismissed. Finally, the court need not reach the debtor's argument that the "bonus" arrangement was unethical, apart from its nondisclosure, because it created a conflict between the attorney's financial interest in securing dismissal of the case and his duty to fully advise the debtor of the consequence (inherent in dismissal) of his not receiving a discharge.
The bankruptcy-related billings, exclusive of services charges, totaled $141,734.28 before the addition of the $400,000 bonus. The determination of whether those fees are excessive is greatly complicated because the monthly invoices offered by Mr. Patterson contain no detail whatsoever as to the services provided. Instead, they simply state the total number of hours worked in a month. The fee application, it is true, contains a reasonably detailed break-down covering the period from April through November 1994, but it would be difficult for the court to place any reliance on that itemization, given that the monthly totals do not square with the invoices for the same months, and also given Mr. Patterson's testimony that the application was filed only as a "negotiating ploy." At the same time, the trustee, who had some general awareness of the work being done by Mr. Patterson, did not feel that the requested fees were out of line with what other professionals in the case were being paid. (Of course, the trustee was unaware that Mr. Patterson's fee agreement with the debtor called for time to be charged at $125 per hour rather than $175 per hour.) The debtor himself does not deny that Mr. Patterson performed substantial work in connection with the bankruptcy; indeed, in his testimony during the litigation to set aside the consent judgment, he essentially disputed only Mr. Patterson's entitlement to the $400,000 bonus.
The agreement was drawn up by Mr. Patterson. Under familiar principles, any ambiguity in its terms would be construed against him.
III.
The court's determination that Mr. Patterson is not entitled to payment of any bankruptcy-related fees and costs does not, however, easily answer the question of whether the Cullowhee Café deed of trust and the Biltmore and Longbranch assignments should be canceled under § 329(b), Bankruptcy Code. Those instruments were not executed during the bankruptcy case but many months later (after substantial additional work had been performed) and do not specifically refer to bankruptcy fees. The execution of those instruments, rather, followed the September 1, 1995, restated fee agreement. In voiding the consent judgment, the chancellor held that agreement to be invalid "to the extent" it included unapproved bankruptcy-related fees, but he did not determine what that "extent" might be.
The August 29, 1994, "bonus" agreement, however, had provided for the payment of $100,000.00 from the sale or refinance of Biltmore. Biltmore was apparently refinanced in March 1995, following the dismissal of the bankruptcy case, and $50,000 was paid to Mr. Patterson from the proceeds.
A.
The difficulty of determining the amount of fees that subject to disapproval and possible disgorgement arises because not all of Mr. Patterson's services prior to the dismissal of the debtor's bankruptcy case were necessarily bankruptcy-related. In this connection, the law seems clear that not all services performed by an attorney for a chapter 7 debtor are subject to court review, but only those services "in any way related" to the debtor's case. Walters, 868 F.2d at 667 ("Certain services by attorneys . . . are so unconnected to bankruptcy that a bankruptcy court is without jurisdiction to review them under § 329."); see Roland v. Unum Life Ins. Co. of America, 223 B.R. 499, 503 n. 9 (E.D.Va. 1998) (representation of debtor by criminal counsel was not related to bankruptcy case within meaning of § 329). The court's task in determining the dollar amount of fees subject to disallowance is complicated by several factors. First, during the time frame in question, Mr. Patterson maintained four billing accounts for services he provided to Mr. Hooper. These were designated "Hooper," "Hooper Trust," "Hooper Office," and "Hooper Bankruptcy," respectively. Only the invoices for Hooper Trust and Hooper Bankruptcy contain any breakdown of services. Furthermore, as shown by the following chart, the hours reflected on the monthly invoices cannot be reconciled with the monthly totals set forth in the fee application filed by Mr. Patterson:
Notwithstanding the account title, the "Hooper Bankruptcy" time entries relate to the Cedar Crest Country Club case; indeed the invoices reference the docket number for that case and not the debtor's personal bankruptcy case. The activities reflected on the Hooper Bankruptcy invoices were nevertheless closely interrelated with the ongoing representation of the debtor in his bankruptcy case. Indeed, most of the time entries that appear on the fee application filed in the debtor's case involve Cedar Crest. Additionally, the balance due on that account was folded-in to the main Hooper account in December 1994.
The court concludes, therefore, that of the fees and costs reflected on the February 1995 "Hooper" statement, only the $35,402.00 balance folded-in from the "Hooper Trust" account represents fees and costs not related to the bankruptcy case. Payments made to Mr. Patterson by the debtor through February 1995 for the bankruptcy representation totaled $38,750.00. The result is a small credit balance. As noted, however, Mr. Patterson continued to represent the debtor. Taking the billings and payments shown on the post-dismissal invoices, and recalculating the late charges and balance due based on the disallowance of the bankruptcy-related fees, gives the following adjusted claim for fees and costs due as of December 31, 1995:
Month Fees Costs Fin Chrg Payments Balance Bal Fwd $35,402.00 $38,750.00 (3,348.00) Mar-95 9,906.25 1,548.15 — 53,200.00 (45,093.60) Apr-95 17,375.00 4,931.16 — (22,787.44) May-95 23,143.75 4,166.18 — 9,500.00 (4,977.51) Jun-95 12,710.00 668.80 — 1,000.00 7,401.29 Jul-95 5,437.50 116.58 74.01 1,635.00 11,394.38 Aug-95 14,812.50 513.98 113.94 1,011.75 25,823.06 Sep-95 16,843.75 407.00 258.23 (2,296.04) 45,628.08 Oct-95 10,093.75 547.73 456.28 6,200.00 50,525.84 Nov-95 15,968.75 525.09 505.26 3,500.00 64,024.94 Dec-95 18,062.50 1,251.47 640.25 30,000.00 53,979.16 At the time therefore that the debtor executed the $150,000 Cullowhee Café note on January 10, 1996, the fees and costs that Mr. Patterson was lawfully entitled to collect were no more than $53,979.16.B.
It seems an inescapable conclusion that the $150,000 note and deed of trust, even though signed in connection with a post-dismissal agreement that made no reference to the bankruptcy and that contemplated substantial on-going legal representation of the debtor's interests, were nevertheless intended to secure the unpaid bankruptcy fees claimed by Mr. Patterson. Nearly two-thirds of the fees claimed by Mr. Patterson at the time the note was signed arose in connection with the bankruptcy, and it is impossible to imagine that the debtor would have signed the note and deed of trust but for the magnitude of the claimed bankruptcy fees.
At the same time, there are a number of equitable considerations that weigh against outright cancellation of the note, as sought by the debtor. First, substantial nonbankruptcy fees were unquestionably owed at the time the note was signed. The debtor (at least prior to the present motion) really disputed only Mr. Patterson's claim to the $400,000.00 bonus. Second, the debtor no longer has an ownership interest in the Cullowhee Café property, having conveyed that interest in 1998 (allegedly for estate planning reasons) to a family limited partnership in which he has only a 1% interest, the remaining 99% interest being held by his children. As regards the deed of trust, therefore, any cancellation would benefit third parties, not the debtor. At the same time, the debtor remains personally liable on the note, and could be sued for any deficiency. Having considered all the circumstances, this court concludes that the proper remedy would not be to cancel the note and deed of trust, but rather to reform the note by reducing the original principal balance to $53,979.16 so as to eliminate the disallowed bankruptcy-related fees.
It is suggested by Mr. Patterson, however, that any such equitable relief is barred because there has already been a state court order, affirmed on appeal, determining that the $150,000.00 note represents "a valid debt" and allowing foreclosure. Federal law of course requires that this court give the final judgments of state courts the same preclusive effect they are entitled to under state law. See 28 U.S.C. § 1738. Although neither party has offered into evidence the record of the North Carolina proceedings, this court has reviewed the record on appeal and the debtor's appellate brief before the North Carolina Court of Appeals, both of which are available on that court's Internet web site. No issue was raised by the debtor before the North Carolina courts concerning Mr. Patterson's underlying claim for attorneys fees. Rather, the debtor's argument was that the note, which was executed two months after the deed of trust, could not be the note "of even date" referred to in the deed of trust, and that the trial court erred in receiving testimony to identify the subsequently-signed note as the note secured by the deed of trust.
In North Carolina, the application of res judicata to a second suit between the parties is not limited to issues actually raised in the prior litigation; it extends also to any issues "which the parties, in the exercise of reasonable diligence, could and should have brought forward." Northwestern Fin. Group, Inc. v. County of Gaston, 430 S.E.2d 689, 693 (N.C.App. 1993) (emphasis added), review denied, 435 S.E.2d 337 (N.C. 1993). This serves "the dual purposes of protecting litigants from the burden of relitigating previously decided matters and promoting judicial economy by preventing needless litigation." Bockweg v. Anderson, 428 S.E.2d 157, 161 (N.C. 1993). At the same time, it appears that under North Carolina law the order allowing foreclosure of the Cullowhee Café deed of trust would not be res judicata as to the debtor's equitable defenses. 1 James A. Webster, Jr., Webster's Real Estate Law in North Carolina § 13-32(c) at 588. The petition for foreclosure was brought under North Carolina General Statutes § 45-21.16. As explained by the North Carolina Court of Appeals,
Historically, foreclosure under a power of sale has been a private contractual remedy. The intent of the 1975 General Assembly in enacting the notice and hearing provisions of G.S. 45-21.16 was not to alter the essentially contractual nature of the remedy, but rather to satisfy the minimum due process requirements of notice to interested parties and hearing prior to foreclosure and sale which . . . our then existing statutory procedure lacked.
In re Foreclosure of the Deed of Trust of Burgess, 267 S.E.2d 915, 918 (N.C.App. 1980) (internal citations omitted). Under the statute,
there are four issues before the clerk at a foreclosure hearing: the existence of a valid debt of which the party seeking to foreclose is the holder; the existence of default; the trustee's right to foreclose; and the sufficiency of notice to record owners of the hearing. Upon appeal from an order of the clerk . . . the judge is limited upon the hearing de novo to determining the four issues resolved by the clerk.
In re Foreclosure of the Deed of Trust of Kitchens, 437 S.E.2d 511, 512 (N.C.App. 1993).
An order allowing foreclosure is not res judicata as to equitable defenses, because the court has no jurisdiction under § 45-21.16 to consider them; rather, they must be raised in a separate action to enjoin the foreclosure. Meehan v. Cable, 489 S.E.2d 440, 443-44 (N.C.App. 1997) (holding that trial court had jurisdiction, notwithstanding order allowing foreclosure, to hear action seeking to enjoin foreclosure based on defenses of waiver, estoppel, and anticipatory breach). Additionally, a determination that a "valid" debt exists simply requires the court to find that "some" debt is owed, irrespective of the exact amount. Burgess, 267 S.E.2d at 918. Thus, the trial court has no jurisdiction in a proceeding under § 45-21.16 to determine the amount of the debt, and any challenge to the amount claimed due must be raised in a separate proceeding. Id.
The distinction between equitable and legal defenses under the North Carolina scheme is not entirely clear. For example, reported cases brought under § 45-21.16 have denied foreclosure where the trial court found a failure of consideration and where the noteholder's signature on the note was forged. See Kitchens (failure of consideration where note was given in exchange for broken promise not to prosecute); Espinosa v. Martin, 520 S.E.2d 108 (N.C.App. 1999) (forged signatures on note and deed of trust), cert. denied, 543 S.E.2d 126 (N.C. 2000). Nevertheless, the debtor's present defense — that the promissory note was given as payment for legal fees which Mr. Patterson is not entitled to collect because he never made proper disclosure to the bankruptcy court — would plainly appear to be equitable rather than legal in nature. For that reason, it could not have been raised and decided as a defense to the petition for foreclosure. Indeed, it would appear that under § 329(b), Bankruptcy Code, only this court has jurisdiction to hear a challenge to the amount of the claimed bankruptcy fees. Accordingly, the court concludes that the order of the Superior Court for Jackson County permitting foreclosure is not a bar to this court's reformation of the promissory note to eliminate the impermissible fees.
C.
In addition to the Cullowhee Café deed of trust, Mr. Patterson received as security for his fees the Longbranch assignment and the Biltmore Garden Apartments assignment. The assignments are not limited to specific sums but rather by their terms secure "all" sums which the debtor owes Mr. Patterson, which would necessarily include sums becoming due after the date of the assignment. At the hearing, Mr. Patterson presented invoices totaling $376,544.31, exclusive of finance charges, for services performed from January 1996 through December 1999. Like the earlier invoices, these are totally devoid of any information as to the nature of the legal services provided. The payments and credits shown on the invoices total $231,583. As with the Cullowhee Café, the debtor no longer owns a direct interest in either Longbranch or Biltmore, having conveyed his interest in each of those properties in 1998 to family limited partnerships in which he has only a 1% interest. Given this court's action in reforming the Cullowhee Café note to eliminate the disallowed fees, and given that the Longbranch and Biltmore assignments secured both existing and future obligations, invalidation of the assignments would afford the debtor more relief than he is entitled to and would not be equitable. Accordingly, the court declines to decree cancellation of the Biltmore or Longbranch assignments.
The Longbranch assignment did contain language permitting the debtor to "replace" it with a $500,000.00 note and deed of trust. Thus, the debtor has it within his power to limit the reach of the assignment. The record does not reflect, however, that the debtor has ever elected to do so.
Invoices were not included for December 1997 and November 1998. Based on beginning and ending balances for the surrounding months, it appears that the invoices for those two months would have added an additional $17,123.92 in fees and costs, for a total of $393,668.23.
IV.
The court recognizes that in restricting its ruling to the bankruptcy fees charged by Mr. Patterson, the court leaves many thorny issues to be resolved among the parties. Most notably the court makes no ruling concerning the amounts Mr. Patterson is owed for his post-bankruptcy representation of the debtor; the amount, if any, of collection fees to which he would be entitled; the appropriate offset for the Riggs judgment; whether the Riggs judgment can be used to compel the release of the deed of trust and assignments; and what interest, if any, Mr. Patterson's deed of Longbranch conveyed to NMFB. For the reasons already explained, this court simply does not have subject-matter jurisdiction to determine them. For better or worse, therefore, those issues will have to be tried in another forum unless the parties can reach a consensual resolution.
Under the December 1, 1995, addendum to the restated fee agreement, the debtor agreed to pay "all costs of collection including reasonable attorneys fees and the costs of arbitration." The collection costs asserted by Mr. Patterson at the hearing are simply "estimated," with no supporting detail whatsoever. Moreover, it is by no means clear what portion of those "estimated" collection costs relates to attempted enforcement of the now-voided consent judgment in various forums and to the unsuccessful defense of Gemini's suit to void that judgment. It is difficult to see how Mr. Patterson would be entitled to recover any of those amounts as "collection" costs, particularly in light of this court's ruling disallowing the bankruptcy fees.
With interest, the balance due on the Riggs judgment as of September 20, 2001, was $466,119.84. Mr. Patterson cites no legal authority for the proposition that the judgment is enforceable against him only to the extent of the $40,000 the debtor paid for it. His argument seems to be that the debtor, by paying $40,000 for the judgment instead of paying that amount toward the delinquent legal fees, acted in bad faith. While the purchase of the judgment was unquestionably shrewd, the court would be hard-pressed to conclude that it was so repugnant to commonly-accepted standards of fair dealing that the debtor should be denied the right to enforce it for the amount legally due.
The Longbranch assignment, as noted, was given as security "to assure full payment" of all amounts owed to Mr. Patterson by the debtor. It does not contain a power of sale. The record does not reflect that any court proceeding was brought by Mr. Patterson to enforce the security interest, nor does it appear that Mr. Patterson assigned to NMFB the claim secured by the assignment.
A separate order will be entered consistent with this opinion disallowing all fees and expenses claimed by Mr. Patterson related to the bankruptcy representation of the debtor and reforming the Cullowhee Café note to eliminate those fees and expenses.