Opinion
Case No. 94-31132
July 23, 1999
Elliot H. Feit, Toledo, OH., Atty. for Debtors.
Ronald R. Henderson, Toledo, OH., Former Atty. for Debtors
Philip R. Joelson, Toledo, OH., Atty. for Ronald Henderson
Elizabeth A. Vaughan, Toledo, OH., Former Trustee.
MEMORANDUM OPINION AND DECISION
This cause comes before the Court upon Ronald R. Henderson's (hereinafter Attorney Henderson) Application for attorney fees. The Debtors, William K. Kisseberth and Ekaterina Kisseberth (hereinafter Debtors), and the United States Trustee both filed objections to Attorney Henderson's Application. In addition, the Debtors and the United States Trustee both filed Motions seeking the disgorgement of any and all funds already paid to Attorney Henderson. The Court, for purposes of judicial expediency, has consolidated all the actions brought by the Debtors and the United States Trustee. On June 2, 1999, the Court held a Hearing on the merits of the case at which time the Parties were afforded the opportunity to present evidence and any arguments that they wished the Court to consider in reaching its decision. This Court has now reviewed the arguments of Counsel, the exhibits, as well as the entire record of the case. Based upon that review, and for the following reasons, the Court finds the Objections to Attorney Henderson's Application for Attorney Fees to be well taken. However, for the reasons set forth in this Opinion, Attorney Henderson shall still be entitled to Two Thousand Two Hundred Eighty-seven and 98/100 Dollars ($2,287.98) in compensation for all the legal services he performed for the Debtors in connection with their bankruptcy case.
FACTS
In the early 1990's the Debtors were the owners and operators of a jewelry store business in Toledo, Ohio. In 1994, however, the Debtors' business was destroyed by a fire/explosion. Thereafter, in accordance with a policy of insurance issued by the Eagle American Insurance Company, the Debtors filed a claim for their loss. However, Eagle American Insurance Company, on the basis of suspected arson, denied the Debtors' claim, and also commenced a civil action in state court against the Debtors seeking a declaration that they were not obligated to compensate the Debtors for their loss. On March 15, 1994, the State Court issued a favorable judgment for Eagle American Insurance Company, ruling that the Debtors had intentionally caused the fire/explosion to their business.
During this same time period, without any insurance proceeds forthcoming, the Debtors' financial situation began to deteriorate. This deterioration in the Debtors' state of financial affairs caused the Debtors, on March 11, 1994, to retain Attorney Henderson as their legal counsel. Upon his retention, Attorney Henderson, who by his own account was experienced in matters dealing with insolvency, reviewed the Debtors' financial situation, and counseled the Debtors regarding the various legal options available to them. However, as time progressed, it became clear that the only viable option available for the Debtors was to seek bankruptcy relief. Therefore, on May 12, 1994, the Debtors, with Attorney Henderson as their legal counsel, filed a joint petition under Chapter 7 of the United States Bankruptcy Code.
In the Debtors' bankruptcy petition, Attorney Henderson attached a Compensation Statement as is required by Bankruptcy Rule 2016 (b). In this Compensation Statement, Attorney Henderson disclosed that he had been paid a One Thousand Five Hundred dollar ($1,500.00) retainer, and was to thereafter bill the Debtors at the rate of One Hundred dollars ($100) per hour after the funds of the retainer had been exhausted. The record of this case, however, reveals that during the approximately two months preceding the filing of the Debtors' bankruptcy petition, Attorney Henderson had actually incurred Five Thousand Four Hundred Twenty dollars ($5,420.00) in legal fees as the result of billing to the Debtors approximately fifty (50) hours for his legal services. According to Attorney Henderson, these prepetition fees were incurred on the following activities: (1) preparing the Debtors' Chapter 7 Petition; (2) preserving the possible appeal of the unfavorable state court judgment; and (3) handling general matters concerning the Debtors' financial affairs.
The Debtors, however, testified that they were unaware that such a large amount of time and expense had been incurred by Attorney Henderson prior to the filing of their Chapter 7 Petition, a fact which Attorney Henderson upon cross-examination did not dispute. In addition, William Kisseberth testified that Attorney Henderson had told him immediately prior to the § 341 meeting of creditors that if the Chapter 7 Trustee (hereinafter Trustee) appointed to the Debtors' case were to ask any questions concerning his attorney fees, that William Kisseberth was to tell the Trustee that the information contained in the Bankruptcy Schedules was accurate. This assertion, however, could neither be substantiated nor refuted by the Trustee who was called as a witness in this case.
Once the Debtors' bankruptcy case had been commenced, the Trustee assigned to the Debtors case concluded that an appeal against the Debtors' former insurance company, Eagle American Insurance Company, was worth pursuing given the potential of a significant recovery for the benefit of the Debtors' bankruptcy estate. The Trustee hired Robert P. Rutter (hereinafter Attorney Rutter) and Martin Mohler (hereinafter Attorney Mohler) as special co-counsel to represent the Debtors' bankruptcy estate against Eagle American Insurance Company, and in accordance with 11 U.S.C. § 327 the Trustee, on March 2, 1995, obtained approval from the Honorable Judge Walter J. Krasniewski for such employment. Notwithstanding, as the Debtors would indirectly benefit from a favorable outcome in the State Court Appeal, the Debtors were personally required to bear some of the financial burdens of the Appeal. Specifically, the Debtors were required to come up with the funds necessary to cover the cost of the state court trial transcript before the Appeal against the Debtors' former insurance company would be prosecuted. However, at the time the Debtors did not personally have sufficient funds to cover this expense, and thus the actual source of the funds to pay for the trial transcript came from Bonnie Kisseberth, mother of the Debtor William Kisseberth, who contributed a total of Six Thousand One Hundred Ninety-six dollars ($6,196.00) to the Debtors' appeal. Bonnie Kisseberth testified that she tendered this money to the law firm of Mohler, Bingle Henderson, at which Attorney Henderson was a principal. However, Bonnie Kisseberth also testified, and the weight of the evidence in this case demonstrates, that this money was contributed with the express understanding that it was to be paid back as an expense of the State Court Appeal if any recovery or settlement was eventually realized.
Martin Mohler and Debtors' counsel are both principles at the law firm of Mohler, Bingle Henderson.
Judge Krasniewski, who retired in 1997, presided over all aspects of the Debtors' bankruptcy case except for the issue which is presently before the Court.
The total cost of the trial transcript was Six Thousand Forty-two and 07/100 dollars ($6,042.07).
The testimony given at the Hearing revealed that Four Thousand Five Hundred dollars ($4,500.00) was contributed from Bonnie Kisseberth personally, while another Seven Hundred dollars ($700.00) came from the bank account of Bonnie Kisseberth's mother over which Bonnie Kisseberth had power of attorney, with the remaining Nine Hundred Ninety-six dollars ($996.00) being advanced by another relative.
Over the entire course of the Debtors' Chapter 7 case, Attorney Henderson represented and performed legal services for the Debtors. In all, Attorney Henderson recorded a total of 147.2 billable hours on the Debtors' bankruptcy case, bringing the total cost for all of Attorney Henderson's legal services to Fifteen Thousand One Hundred dollars ($15,100.00). Attorney Henderson testified that his postpetition legal services for the Debtors involved, among other things, performing the following activities: (1) attend the Debtors' § 341 meeting of creditors; (2) fight off a possible adversary action to have a potential One Hundred Thousand dollar ($100,000.00) claim against the Debtors determined nondischargeable; and (3) conduct negotiations with a party that was contemplating bringing an action to deny the Debtors' discharge based upon fraud. In addition, the evidence of this case shows that Attorney Henderson participated in the Appeal of the Debtors' state court insurance case, for which the Debtors' were billed accordingly, even though Attorney Henderson had not been approved by the bankruptcy court to act as legal counsel, and even though neither the Trustee nor the Debtors specifically requested Attorney Henderson's help with the Appeal. However, according to Attorney Henderson the services he performed in connection with the State Court Appeal were necessary to benefit the Debtors' bankruptcy estate, and such services were performed at both the explicit and implicit request of Attorney Rutter.
Attorney Henderson justified the large number of hours spent on the Debtors case, both prepetition and postpetition, by maintaining that the Debtors' bankruptcy petition was "not an ordinary Chapter 7 no asset estate case." For example, Attorney Henderson points out that the Debtors' bankruptcy case, which was open for over twenty-seven (27) months, involved a failed business having over one hundred (100) unsecured creditors. In addition, Attorney Henderson points out that the Debtors' bankruptcy case involved special circumstances which had to be taken into account; namely, the arson verdict rendered against the Debtors, and the Debtors' having tax liabilities of Twenty-three Thousand Three Hundred Twelve and 46/100 dollars ($23,312.46), the payment of which would be a priority given the nondischargeability of these debts.
Over the course of the Debtors' bankruptcy case, Attorney Henderson received a total of Ten Thousand Three Hundred Eighty-seven and 98/100 dollars ($10,387.98) in postpetition payments. None of these payments, however, were disclosed to the Court or the United States Trustee in accordance with Bankruptcy Rule 2016 (b). The source of these postpetition payments came from essentially two sources: First, the Debtors personally made periodic payments, totaling Three Thousand Six Hundred dollars ($3,600.00), on their fee obligation to Attorney Henderson. Second, Attorney Henderson was able to apply an additional Six Thousand Seven Hundred Eighty-seven and 98/100 dollars ($6,787.98) to the Debtors' outstanding bill after the occurrence of the following chain of events:
The source of some of these funds was actually from Bonnie Kisseberth.
In May of 1995, Attorney Rutter entered into an agreement with Eagle American Insurance Company whereby the Debtors and the Trustee agreed to dismiss their appeal against Eagle American Insurance Company in exchange for Forty-five Thousand dollars ($45,000.00). Shortly after receiving this money Attorney Rutter forwarded a check to Attorney Henderson in the amount of Seven Thousand Six Hundred Nineteen and 03/100 dollars ($7,619.03), the explicit purpose of which was to cover the expenses incurred by Attorney Henderson's law firm in the State Court Appeal. In addition, pursuant to correspondences between Attorney Henderson and Attorney Rutter, the expenses incurred by Attorney Henderson's law firm in the State Court Appeal were to specifically include the reimbursement of the funds advanced by Bonnie Kisseberth to cover the costs of the trial transcript needed in the State Court Appeal. Additional evidence presented in the case supports this understanding between the Parties. However, despite this understanding, Bonnie Kisseberth was never reimbursed for the funds she contributed to the State Court Appeal. Instead, on December 4, 1995, Attorney Henderson, after notifying the Debtors in writing, applied a total of Six Thousand Seven Hundred Eighty-seven and 98/100 dollars ($6,787.98) of the funds marked for the expense reimbursement to his own outstanding fees. No evidence, however, exists demonstrating that the Debtors, or Bonnie Kisseberth ever consented to this action.
Bonnie Kisseberth later filed a civil suit in state court against Attorney Henderson to recover the funds she had provided to cover the costs of the Debtors' appeal against Eagle American Insurance Company. In her Complaint, Bonnie Kisseberth asserts that Attorney Henderson is liable for conversion on account of his failure to reimburse her out of the funds provided to the law firm Mohler, Bingle and Henderson as an expense reimbursement from the State Court Appeal.
After May of 1995 Attorney Henderson did not receive any additional payment for his legal services, but for approximately the next two years Attorney Henderson continued, under amicable terms, to try and collect the remaining balance due on his fees, which stood at Three Thousand Two Hundred Twelve and 02/100 ($3,212.02). However, by December of 1997 Attorney Henderson realized the Debtors were not going to pay the balance of his fees, and thus Attorney Henderson filed suit against the Debtors in state court in an effort to collect the balance of his bill. In response thereto, the Debtors filed the instant action which was later joined by the United States Trustee. Thereafter, in accordance with an Order entered by this Court on December 9, 1998, Attorney Henderson's action against the Debtors in State Court was removed to this Court pursuant to 28 U.S.C. § 1452.
The Debtors' case was originally closed on August 22, 1996, but the Debtors, in conformity with 11 U.S.C. § 350 (b) and Bankruptcy Rule 5010, made a Motion to Reopen their case in order to pursue their claim against Attorney Henderson. This Court, on October 20, 1998, granted the Debtors' Motion.
The action commenced by the Debtors and the United States Trustee against Attorney Henderson is predicated upon Attorney Henderson's failure to comply with both § 329 of the Bankruptcy Code and Bankruptcy Rules 2016 (b) and 2017. The violations to which the Parties specifically point to are the following: (1) the prepetition Disclosure Statement filed with the Debtors' Bankruptcy Petition was misleading in that it did not altogether disclose the full extent of the compensation to be paid to Attorney Henderson for his prepetition services; (2) Attorney Henderson entirely failed to file a supplemental fee disclosure statement accounting for all the postpetition compensation he received working on the Debtors' bankruptcy case; and (3) Attorney Henderson's fees, both prepetition and postpetition, were excessive given the nature of the Debtors' bankruptcy case.
Attorney Henderson contests these assertions, and, in addition, Attorney Henderson raises some ancillary considerations. Specifically, Attorney Henderson raises in his defense the following legal arguments: (1) this Court has no jurisdiction over Bonnie Kisseberth and the funds she contributed to the Debtors' bankruptcy estate; (2) the applicability of an estoppel and laches defense based upon the fact that the Debtors did not file their action against Attorney Henderson until approximately three years after Attorney Henderson's representation of the Debtors concluded; (3) other attorneys in this district also fail to file supplemental compensation statements and the original compensation statement filed by Attorney Henderson was "in a form and style no worse, nor better" than what other attorneys file; and (4) if the Court does order the disgorgement of any funds, the Debtors' bankruptcy estate, and not the Debtors, should be the beneficiary of such funds.
LAW
11 U.S.C. § 329. Debtor's transactions with attorneys
(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.
Bankruptcy Rule 2016 (b). Compensation for Services Rendered and Reimbursement of Expenses
(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.Bankruptcy Rule 2017. Examination of Debtor's Transactions with Debtor's Attorney.
(a) Payment or transfer to attorney before order for relief. On motion by any party in interest or on the court's own initiative, the court after notice and a hearing may determine whether any payment of money or any transfer of property by the debtor, made directly or indirectly and in contemplation of the filing of a petition under the Code by or against the debtor or before entry of the order for relief in an involuntary case, to an attorney for services rendered or to be rendered is excessive.
(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.
DISCUSSION
Determinations concerning the administration of the debtor's estate, the allowance or disallowance of claims against the estate, and orders to turn over property of the estate are core proceedings pursuant to 28 U.S.C. § 157. Thus, this case is a core proceeding.
All attorneys who undertake the legal representation of a client have certain fiduciary duties imposed upon them. For example, any attorney wishing to practice in this Court must abide by the ethical standards espoused in Ohio's Code of Professional Responsibility. LCrR 83.5 (b). However, the standards set forth in Ohio's Code of Professional Responsibility are only a floor and not a ceiling, and for those attorneys who represent debtors in bankruptcy cases, additional obligations are imposed by the Bankruptcy Code and the Bankruptcy Rules of Procedure. Specifically, § 329 (a) of the Bankruptcy Code requires that any attorney representing a debtor in a case under Title 11, or in connection with such a case, to disclose to the bankruptcy court any compensation paid or agreed to be paid for such representation. The triggering criteria under § 329 is that such payment or agreement was made within one year prior to the bankruptcy filing. In addition, § 329 (a) specifically requires that the source of any such compensation be disclosed as well. Bankruptcy Rule 2016 (b), which procedurally implements § 329 (a), clarifies that such disclosure is mandatory regardless of whether or not the attorney applies for the payment of compensation from the bankruptcy estate. Furthermore, Bankruptcy Rule 2016 (b) imposes upon an attorney a continuous duty of disclosure by mandating that fees not originally reported must be disclosed to the United States Trustee within fifteen (15) days after such fees are charged and/or paid. In re NBI, Inc., 129 B.R. 212, 217-18 (Bankr. D.Colo. 1991).
In the present case, the Court finds that Attorney Henderson did, in fact, fail to comply with the disclosure requirements of § 329 (a) and Bankruptcy Rule 2016 (b), with the evidence presented in this case clearly exhibiting the following two violations: First, Attorney Henderson violated § 329 (a) and Bankruptcy Rule 2016 (b) by only disclosing to the Court the receipt of a One Thousand Five Hundred dollar ($1,500.00) retainer, when in fact Attorney Henderson had incurred more than Five Thousand dollars ($5,000.00) in prepetition legal fees. Second, Attorney Henderson violated the continuous disclosure requirement of Bankruptcy Rule 2016 (b) by not disclosing to the United States Trustee the receipt of over Ten Thousand dollars ($10,000.00) in postpetition fees.
Attorney Henderson, however, puts forth to the Court two defenses for these violations. First, Attorney Henderson argues that the Court should overlook the above-mentioned violations because other attorneys practicing in this district engaged in a similar course of conduct regarding the disclosure of their attorney fees. This defense, however, for obvious reasons requires no substantive comment. Consequently, the Court will only consider the second defense put forth by Attorney Henderson whereby he contends that failing to disclose the billing of over Five Thousand dollars ($5,000.00) in prepetition fees does not in actuality violate § 329 (a) and Bankruptcy Rule 2016 (b) because the Compensation Statement he filed with the Court did, in fact, disclose that a One Thousand Five Hundred dollar ($1,500.00) retainer had been paid, and at this time that was all the money Attorney Henderson had actually received from the Debtors in compensation. Stated in another way, Attorney Henderson argues that § 329 (a) and Bankruptcy Rule 2016 (b) only require an attorney to disclose the prepetition fees actually received. However, for the following two reasons the Court rejects this argument:
First, § 329 (a) requires an attorney to disclose not only compensation "paid," but also any compensation "agreed to be paid." Specifically, § 329 (a) states that "[a]ny attorney representing a debtor . . . shall file with the court a statement of compensation paid or agreed to be paid . . ." Clearly, with the inclusion of the phrase "agreed to be paid" in § 329 it is clear that Congress was expressing an intent that all fees incurred by an attorney in connection with a bankruptcy case be disclosed, regardless of whether or not such fees were actually paid at the time the Compensation Statement was filed with the bankruptcy court. The Court notes that to hold otherwise would render the phrase "agreed to be paid" superfluous given the fact that this language is used in the disjunctive of the requirement that an attorney disclose compensation already "paid."
The second reason the Court rejects Attorney Henderson's argument is that by failing to disclose the billing of over Five Thousand dollars ($5,000.00) in prepetition fees, Attorney Henderson misled the Court, and such a practice cannot be tolerated. Simply put, a bankruptcy court must be able to rely on the veracity of the representations made by an attorney, and must be certain that an attorney who has filed a Compensation Statement will supplement that Statement if further compensation is charged and/or received. Law Offices of Nicholas A. Frank v. Tiffany, 113 F.3d 1040, 1045 (9th Cir. 1997); In re Florence Tanners, Inc., 209 B.R. 439, 443-44 (Bankr. E.D.Mich. 1997). As the bankruptcy court in In re Century Plaza Assc., so eloquently stated:
Disclosure of fees is a fundamental concept in bankruptcy and was of paramount import to Congress when enacting the Bankruptcy Code of 1978. Integrity is at the heart of the bankruptcy system and disrepute would result from inadequate disclosure, whether resulting from negligence or absent bad faith.
154 B.R. 349. 352 (Bankr. S.D.Fla 1992) citing In re B.E.S. Concrete Products, Inc., 93 B.R. 228 (Bankr. E.D.Cal. 1988).
Once it is established that an attorney has failed to comply with the disclosure requirements of § 329 (a) and Bankruptcy 2016 (b), the Court's task becomes to ascertain what, if any, sanctions should be imposed upon that attorney. In the Sixth Circuit the seminal case concerning the imposition of sanctions upon attorneys who do not comply with the disclosure requirements of § 329 (a) and Bankruptcy Rule 2016 (b) is Mapother Mapothet; P.S.C. v. Cooper (In re Downs), 103 F.3d 472 (6th Cir. 1996) (hereinafter referred to as In re Downs).
In In re Downs the Court held that bankruptcy courts, like Article III courts, have the inherent power to sanction attorneys for any breach of their fiduciary obligations. Id. at 477. The types of sanctions available to the bankruptcy courts can range from a complete denial of all fees, to a reduction in fees, to the imposition of economic sanctions. See, e.g., Id. (all compensation denied); In re National Liquidators, Inc., 182 B.R. 186 (Bankr. S.D.Ohio 1995) (denial of a portion of fees); In re The Leslie Fay Cos., 175 B.R. 525 (Bankr. S.D.N.Y. 1994) (economic sanctions); In re Imperial Corp. of America, 181 B.R. 501 (Bankr. S.D.Cal. 1995) (economic sanctions and denial of a portion of fees). In addition, if the circumstances of a case are particularly egregious, a court may even seek to suspend or disbar an attorney. 9 Collier on Bankruptcy ¶ 2016.20, (15th Ed. 1999). See also Beesley v. Burke (In re Beesley), 212 B.R. 4, 9 (Bankr. D.Me. 1997); In re Cupboards Inc., 190 B.R. 969, 970 (Bankr. M.D.Fla. 1996).
However, in In re Downs the Court went on to further explain that when a bankruptcy court does mete out sanctions it must do so with restraint and discretion so that the sanctions imposed upon the attorney are commensurate with the egregiousness of the conduct involved. In re Downs, 103 F.3d at 478. Accordingly, at one end of spectrum are those types of violations which are considered only a "technical breach," and to which no sanctions or very light sanctions should be imposed by the bankruptcy court. Id. at 479. On the other hand, and at the opposite end of the spectrum, the Sixth Circuit Court of Appeals in In re Downs held that a bankruptcy court should deny all compensation to any attorney who "exhibits a willful disregard of his fiduciary obligation to fully disclose the nature and circumstances of his or her fee arrangement under § 329 and [Bankruptcy] Rule 2016." Id. Specifically, in In re Downs the Court was referring to the situation whereby the attorney acted affirmatively to conceal his fee arrangement. Id.
Applying the foregoing principles to this case, the Court first holds that Attorney Henderson's actions, or lack thereof, were not sufficiently egregious enough to now justify warranting the complete denial of all his fees. More precisely, under the standards set forth in In re Downs there is insufficient evidence for this Court to find that Attorney Henderson affirmatively acted to conceal his fees. The Court bases its decision upon the following considerations: First, if Attorney Henderson had truly desired to conceal his fees from the Court, it is doubtful that Attorney Henderson would have brought his action against the Debtors in state court to collect the remainder of his fees. Second, although Attorney Henderson did not initially come forward with his fee arrangement with the Debtors, he did not attempt to hide it when required to do so by the Court. See In re Unitcast, Inc., 214 B.R. 979, 991 (Bankr. N.D.Ohio 1997). Consequently, this Court feels it is proper in this case to give Attorney Henderson the benefit of the doubt.
In addition, even if Attorney Henderson were not permitted to retain any attorney fees under § 29 (a) and Bankruptcy Rule 2016 (b), the particular facts of this case call for the allowance of attorney fees pursuant to the doctrine of quantum meruit, and this Court's equitable powers under 11 U.S.C. § 105 (a). Specifically, the Court notes that the efforts put forth by Attorney Henderson, which involved a considerable amount of time and effort, did in fact confer a benefit to the Debtors. For example, there is no question that Attorney Henderson's preparation of the Debtors' bankruptcy petition involved substantially more effort than what would be involved in a typical Chapter 7 case, and Attorney Henderson's legal services did confer a benefit upon the Debtors by warding off a potential claim to deny their discharge and a claim to hold a certain debt nondischargeable. Accordingly, it would be inequitable to permit the Debtors to gain the benefits of Attorney Henderson's services without having to pay at least some amount of compensation for such services. See In re Unitcast, Inc., 214 B.R. 979, 991 (Bankr. N.D.Ohio 1997).
Notwithstanding these considerations, the Court also does not find that Attorney Henderson should be compensated in full for the legal services he performed for the Debtors. The Court initially bases this decision upon the conclusion that some of the legal services Attorney Henderson rendered for the Debtors were unnecessary and superfluous, and thus in violation of the prohibition against excessive fees contained in Bankruptcy Rule 2017. Specifically, the Court perceives that the services Attorney Henderson performed in the Debtors' State Court Appeal should not be compensable given the fact the Debtors' bankruptcy estate already had two attorneys retained to prosecute the Appeal. As this Court in In re Unitcast, Inc. stated, "[t]he estate is not a cash cow to be milked for services rendered . . . which have not produced a benefit commensurate with the fees sought." 214 B.R. 992, 1008 (Bankr. N.D.Ohio 1997). The Court also deems the overall amount of time Attorney Henderson spent on the Debtors' case somewhat excessive given the overall nature of the Debtors' bankruptcy case. For example, the incurrence of over fifty (50) billable hours in prepetition services seems to the Court both excessive and unnecessary given the complexity of the Debtors' case.
However, merely disallowing the fees this Court deems excessive, without the imposition of any other penalty upon Attorney Henderson would not, in this Court's opinion, mete out an appropriate sanction. Simply put, this Court will not permit an attorney to disobey the clear and unequivocal provisions of § 329 (a) and Bankruptcy Rule 2016 (b) without imposing upon that attorney a penalty for his or her noncompliance.
In this case, after taking into account the directive of the Sixth Circuit Court of Appeals which holds that the sanctions imposed by the bankruptcy court should be commensurate with the egregiousness of the conduct involved, the Court finds that the appropriate sanction to impose in this case is to only allow Attorney Henderson Two Thousand Two Hundred Eighty-seven and 98/100 dollars (32,287.98) of his original fee of Fifteen Thousand One Hundred dollars ($15,100.00). Accordingly, as Attorney Henderson has already received Eleven Thousand Eight Hundred Eighty-seven and 98/100 dollars ($11,887.98) in compensation, Attorney Henderson shall be required to disgorge, a total of Nine Thousand Six Hundred dollars ($9,600.00) in fees. In making this determination, the following two factors were of upmost significance:
Thus, the Court is disallowing Twelve Thousand Eight Hundred Twelve and 02/100 dollars ($12,812.02) of Attorney Henderson's total fee, the amount of which represents the following: (1) the Five Thousand One Hundred dollars ($5,100.00) in fees that were personally paid by the Debtors to Attorney Henderson; (2) the Four Thousand Five Hundred dollar ($4,500.00) advancement personally contributed by Bonnie Kisseberth to cover the cost of the trial transcript; and (3) the Three Thousand Two Hundred Twelve and 02/100 dollar ($3,212.02) outstanding balance on the Debtors' fee obligation to Attorney Henderson.
Bankruptcy Courts have the power to order an attorney to disgorge his fees. See, e.g., Cuevas-Segarra v. Contreras, 134 F.3d 458, 459-60 (1st Cir. 1998) (the bankruptcy court has the power under § 105 (a) to order attorneys to disgorge fees that they received out of a settlement); Byrne v. United States Trustee (In re Basham), 208 B.R. 926, 931 (9th Cir. BAP 1997) (once a bankruptcy court determines that an attorney has violated § 329 and/or Bankruptcy Rule 2016, the court has the authority to order the attorney to disgorge any and all fees.)
First, the Court found very disconcerting that Attorney Henderson's failure to comply with the disclosure requirements of the Bankruptcy Code and Bankruptcy Rules was not simply the result of ignorance and/or inexperience as Attorney Henderson was, at the time of the violations, an experienced and competent practitioner in this bankruptcy court. This is not to say that the Court believes Attorney Henderson deliberately attempted to perpetrate a fraud upon the Court. If this were the case, the Court would without hesitation deny all of Attorney Henderson's fees and, in addition, the Court would take appropriate action regarding Attorney Henderson's license to practice law. Rather, the Court, given all the circumstances of this case, believes that Attorney Henderson became lax in his methods of reporting his fees. As Attorney Henderson himself stated in his Memorandum to the Court, "[n]othing nefarious or devious should be implied by such oversight(s)!" Notwithstanding, laxness is absolutely no excuse for failing to disclose attorney fees as is required by the Bankruptcy Code and the Bankruptcy Rules. Thus, given the fact that Attorney Henderson's failure to disclose his fees was not an isolated incident, but was instead an ongoing omission which took place over the entire course of the Debtors' bankruptcy case, such behavior warrants a significant reduction in allowable fees.
However, even more disturbing to the Court than Attorney Henderson's laxness concerns the circumstances surrounding the funds originally earmarked to reimburse Bonnie Kisseberth for the funds she advanced to cover the cost of the state court trial transcript, and which were instead applied by Attorney Henderson to his own outstanding fees. Although not ruling on the merits of Attorney Henderson's compliance or noncompliance with Ohio's Rules of Ethics, from the evidence presented in this case the Court simply cannot find that Attorney Henderson's actions were proper with respect to this action. This is not to say, as previously explained, that the Court believes that Attorney Henderson intended to perpetrate a fraud. For example, the Court takes notice of the fact that the Debtors were notified in writing by Attorney Henderson that such an action was going to taken. However, no consent for such an action was ever obtained from either the Debtors or Bonnie Kisseberth, and in a situation where an attorney applies funds from a client's settlement to his or her own outstanding fees, upmost precaution should be taken to ensure that such funds are rightfully applied. See Ohio Code of Prof Resp., DR 9-102 (2). In this case, Attorney Henderson simply did not take such precautions, and by not reporting the receipt of such fees in conformity with § 329 (a) and Bankruptcy Rule 2016 (b), a very significant reduction in Attorney Henderson's allowable fees is appropriate.
The Court's analysis, however, does not end there. Instead, before concluding the Court will address, in order, the following ancillary issues raised by Attorney Henderson in his Memorandum to the Court: (1) whether this Court has jurisdiction over Bonnie Kisseberth and the funds she contributed to the Debtors' bankruptcy estate; (2) the applicability of the equitable doctrines of estoppel and laches; and (3) who should be the recipient of the funds the Court is ordering Attorney Henderson to disgorge, the Debtors or the Debtors' bankruptcy estate?
Addressing the first issue, the Court finds, based upon the following analysis, that it need not actually determine whether it has jurisdiction over Bonnie Kisseberth as this Court's jurisdiction over the funds contributed by Bonnie Kisseberth is predicated solely upon this Court's authority over the Debtors' bankruptcy estate.
It is a fundamental principle of jurisdiction that for a court to issue an enforceable judgment or order it must be able to properly invoke either in rem or in personam jurisdiction over the property or persons the judgment or order concerns. Bankruptcy proceedings themselves fundamentally rest upon two jurisdictional bases: First, a determination of the existence and/or amount of a debtor's indebtedness to a particular creditor is a proceeding strictly in personam. By comparison, the collection and distribution of the debtor's property is a proceeding primarily in rem, although it may be supported by in personam jurisdiction. Kelley v. Nodine (In re Salem Mortgage Co.), 783 F.2d 626, 632-33 (6th Cir. 1986); In re Murchison, 54 B.R. 721, 727 (Bankr. N.D.Tex. 1985). In this case it is clear that this Court is not attempting to exercise in personam jurisdiction over Bonnie Kisseberth as the Court is not making a ruling whether Attorney Henderson is, or is not, indebted to Bonnie Kisseberth. Instead, this Court's jurisdictional authority over the funds contributed by Bonnie Kisseberth exists solely in rem based upon the fact that such funds were again made available from a prepetition claim of the Debtors, and thus such funds were property of the bankruptcy estate pursuant to 11 U.S.C. § 541 (a). Accordingly, since a bankruptcy court's in rem jurisdiction over a debtor's property empowers the court to determine all claims that anyone, whether named in the action or not, has to the property or thing in question, this Court has the jurisdictional authority to order Attorney Henderson to disgorge the funds contributed by Bonnie Kisseberth to the Debtors' state court appeal. O'Brien v. Vermont Agency of Natural Resources (In re O'Brien), 216 B.R. 731, 737 (Bankr. D.Vt. 1998); 28 U.S.C. § 1334 (e).
Attorney Henderson next argues that the Debtors should be barred under the doctrines of laches and estoppel from prosecuting their action, given the fact that the Debtors were dilatory in bringing their action against Attorney Henderson. In addressing this contention, the Court first rejects outright Attorney Henderson's estoppel defense because a prima facie case for estoppel requires at the very least both a (1) definite misrepresentation of fact and (2) another person's reasonable reliance upon that misrepresentation, elements which are clearly missing in this case. Heckler v. Community Health Servs. of Crawford County, Inc., 467 U.S. 51, 59, 104 S.Ct. 2223, 81 L.Ed.2d 42 (1984). Attorney Henderson's laches defense, however, requires further consideration.
In the Sixth Circuit, the equitable doctrine of laches requires that the following elements be established: (1) the lack of diligence by the party against whom the defense is asserted; and (2) prejudice, in the form of an unreasonable delay, to the party asserting the defense. Cleveland Newspaper Guild v. Plain Dealer Publishing Co., 839 F.2d 1147, 1153 (6th Cir. 1988); See Wells v. United States Steel Carnegie Pension Fund, Inc., 950 F.2d 1244, 1250 (6th Cir. 1991). Initially, given the facts of this case, it would appear that Attorney Henderson could possibly make out an argument for the applicability of the laches doctrine. For example, a question of reasonable diligence undoubtedly exists given the long delay the Debtors took in bringing their action against Attorney Henderson. Moreover, it is entirely possible that Attorney Henderson could establish prejudice as a result of the Debtors' delay in bringing their action. Notwithstanding, the Court must reject Attorney Henderson's laches defense because even if it were applicable against the Debtors, such a defense would not be applicable against the United States Trustee as they did not receive notice of Attorney Henderson's potential violations of§ 329 (a) and Bankruptcy Rule 2016 (b) until very recently, and thereafter they exercised due diligence in bringing their action against Attorney Henderson.
The final ancillary issue Attorney Henderson raises concerns who should actually be the recipient of the fees the Court is ordering disgorged, the Debtors personally or the Debtors' bankruptcy estate.
One of the primary purposes of the disclosure requirements of§ 329 (a) and Bankruptcy Rule 2016 (b) is to protect the debtor against excessive fees by informing the bankruptcy court and the United States Trustee of the fees being incurred by a debtor in a case. See In re Basham, 208 B.R. at 931. Thereafter, if a bankruptcy court does find the fees charged by an attorney are excessive, paragraph (b) of§ 329 empowers the court to cancel the agreement or order the disgorgement of any excessive fees already paid. Paragraph (b) of § 329 further spells out who should be the recipient of any funds the court orders disgorged. Specifically, § 329 (b) provides that if a bankruptcy court does order the disgorgement of attorney fees because such compensation exceeds the reasonable value of the services, then the court is directed to return the funds to the debtor's bankruptcy estate if such funds would have been property of the estate, or if such funds were paid by or on behalf of the debtor under a plan under chapter 11, 12, or 13 of the Bankruptcy Code. Otherwise, the debtor or other entity making the payment is entitled to receive such funds.
Section 329 (b) provides that, "[i]f such compensation exceeds the reasonable value of any such services, the court may cancel any such agreement, or order the return of any such payment, to the extent excessive, to (1) the estate, if the property transferred (A) would have been property of the estate; or (B) was to be paid by or on behalf of the debtor under a plan under chapter 11, 12, or 13 of this title; or (2) the entity that made such payment.
In this case, however, the Court has only in part held that Attorney Henderson's fees were excessive, with the real essence of this Court's decision resting upon Attorney Henderson's initial failure to properly comply with the disclosure requirements of § 329 (a) and Bankruptcy Rule 2016 (b). In such a situation, where the debtor's attorney has failed to disclose his or her fees, and the court orders the disgorgement of such fees, the Bankruptcy Code and the Bankruptcy Rules are completely silent as to whom the recipient of such fees should be. However, given the facts and circumstances of this case, and pursuant to this Court's authority under 11 U.S.C. § 105 (a), the Court holds that the just and equitable result is to have Attorney Henderson disgorge his fees to the Debtors' bankruptcy estate, not the Debtors. See United States v. Sutton, 786 F.2d 1305, 1307 (5th Cir. 1986) (§ 105 (a) authorizes a bankruptcy court to fashion such orders that are necessary to further the purpose of the substantive provisions of the Bankruptcy Code). The Court finds that to do otherwise would unjustly enrich the Debtors given the fact that a large portion of the fees charged by Attorney Henderson were not excessive and, in addition, many of the legal services performed by Attorney Henderson actually benefitted the Debtors.
One final note, the Court is aware that this decision may leave Bonnie Kisseberth without a recovery for the funds she contributed to the Debtors' cause of action. Thus, the Court will permit Bonnie Kisseberth to file another proof of claim against the Debtors' bankruptcy estate. Thereafter, if objections are taken against this claim, the Court will decide whether Bonnie Kisseberth's claim will be allowed. In reaching the conclusion found herein, the Court has considered all of the evidence, exhibits and arguments of counsel, regardless of whether or not they are specifically referred to in this opinion.
Accordingly, it is
ORDERED that the Objections of the Debtors, William K. Kisseberth and Ekaterina Kisseberth, and the United States Trustee, to the Application for Attorney Fees submitted by Ronald R. Henderson be, and is hereby, SUSTAINED to the extent that Attorney Henderson shall only be entitled to Two Thousand Two Hundred Eighty-seven and 98/100 Dollars ($2,287.98) in attorney fees for all the legal services he performed in connection with the Debtors' bankruptcy case.
It is FURTHER ORDERED that Ronald R. Henderson disgorge a total of Nine Thousand Six Hundred Dollars ($9,600.00) to the Debtors' bankruptcy estate.
It is FURTHER ORDERED the United States Trustee appoint, in conformity with 11 U.S.C. § 701, an interim trustee to further administer the bankruptcy estate of the Debtors, William K. Kisseberth and Ekaterina Kisseberth.
It is FURTHER ORDERED that Ronald R. Henderson's claim for back attorney fees against the Debtors in the amount of Three Thousand Two Hundred Twelve and 02/100 Dollars ($3,212.02), and which was removed to this Court pursuant to 28 U.S.C. § 1452 in Case Number 98-3266, be and is hereby, DISMISSED.
It is FURTHER ORDERED the Clerk permit Bonnie Kisseberth to file a Proof of Claim against the Debtors' bankruptcy estate.