### IN THE UNITED STATES COURT OF APPEALS FOR THE FIFTH CIRCUIT

No. 12

- 41125

In the Matter of: JAMES GLEN W H ITLEY, doing business as Whitley Properties, doing business as Edna Housing, doing business as Whitley Ranch & Seed Company, Debtor

------------------------------ REESE W. BAKER; BAKER & ASSOCIATES,
Appellants

v. TRUSTEE LOWELL T. CAGE,
Appellee

Appeal from the United States District Court for the Southern District of Texas

Before HIGGINBOTHAM, OWEN, and HIGGINS ON, Circuit Judges

. HIGGINSON , Circuit Judge: A bankruptcy judge may regulate attorney compensation by ordering debtor’s counsel to return to the estate excessive compensation. 11 U.S.C. § 329(b). 1 Separately , a bankruptcy judge has authority to discipline attorneys

1 Section 329 provides: (a) Any attorney representing a debtor in a case under this title, or in connection with such a case, whether or not such attorney applies for compensation under this title, shall file with the court a statement of the United States Court of Appeals Fifth Circuit 

### FILED December 16, 2013 Lyle W. Cayce Clerk Case: 12-41125 Document: 00512472573 Page: 1 Date Filed: 12/16/2013No. 12

- 41125 who violate the disclosure requirements of the Bankruptcy Code and Rules. Arens v. Boughton (In re Prudhomme ) , 43 F.3d 1000, 1003 (5th Cir. 1995).
B ecause a bankruptcy judge’s reach under the plain language of § 329 (b) is limited to a ttorney compensation , however, we REVERSE and REMAND the bankruptcy court order before us

. FACTS AND PROCEEDINGS
In 2008 and again in 2009, James Whitley made failed endeavor s to reorganiz e his debts under Chapter 13 of the Bankruptcy Code

. Appellants
Reese Baker a nd Baker & Associates (“Baker”) served as Whitley’s counsel in both proceedings. O n March 4, 2009, the bankruptcy court dismissed Whitley’s 2008 petition without prejudice and on July 20, 2009, the bankruptcy court dismissed Whitley’s 2009 pe tition with prejudice

. On October 8, 2009, the bankruptcy court vacated its order dismissing Whitley’s 2009 petition and
converted Whitley’s case to Chapter 7. Between July 20, 2009, when the bankruptcy court dismissed Whitley’s
2009 c ase with prejudice, and October 8, 2009, when the bankruptcy court vacated its order and converted Whitley’s case to Chapter 7, Whitley and Baker engaged in the transactions giving rise to this appeal

. Whitley was convict ed of sexual assault of a minor and on August 27, 2009 he wa s sentenced to life in

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 agr eement, or order the return of any such payment , to the extent excessive, to

-- (1) the estate , if the property transferred

-- (A) would have b een 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

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- 41125 prison

. Also o n August 27, 2009 , Whitley transferred two properties

— the Church Street property and the Highway 111 property

— to Baker’s wholly owned entity BK/HSH, LLC. 2 William and Miriam Ackley held liens on the two properties , and after Whitley transferred them to Baker, the Ackleys foreclosed. The Ackleys noticed the properties for foreclosure sale s on September 1, 2009

. Baker attended and won both foreclosure sales, bidding $60,040 for the Hi ghway 111 property and $38,735 for the Church Street

pro perty. Baker never disclosed these transactions to the bankruptcy court

. 3 On June 4, 2010 , Appell ee
- Trustee Lowell T. Cage (“Trustee”) filed an adversary proceeding against Baker claiming that Whitl ey’s various transfers to Baker, including Whitley’s transfer of the two properties , were voidable under 11 U.S.C. § § 548, 549, and 550 . The Trustee’s complaint alleges that “[a]lthough the case had been dismissed at [the time of the transfers],” the

tran sfer s w ere without court authority , were for less than reasonably equivalent value, and were executed in breach of Baker’s fiduciary relationship with Whitley

. The bankruptcy judge, Judge Steen , denied the Trustee’s motion for

su mmary judgment on these claims , reasoning that “although some very limited issues might be appropriate for summary judgment, the best procedure
is to d ecide, first, under Bankruptcy C ode § 329 whether Bake r must disgorge compensation. T h e re are material issues of fac t with respec t to that question

.

2 Baker stipulates that BK/HSH, LLC is his alter ego. Accordingly, we also refer to Baker’s wholly owned entity as “Baker.”
3 In the 2008 proceeding, Baker received a $1,800 retainer fee and r equested an additional $16,474.62. The Chapter 13 Trustee objected to Baker’s fee application as “unre asonable for the work performed ” and Baker withdre w his application in open court . In the 2009 proceeding, Baker filed another fee application disclosing that Whitley had paid him $12,074 and requested an additional $9,859.75. The Chapter 13 Trustee and multiple creditors objec ted to Baker’s fee application and Baker withdrew his fee application. On October 8, 2009, in the same order reopening Whitley’s 200 9 petition and converting it to Chapter 7, the bankruptcy court granted Baker’s motion t o withdraw his fee application. 3 Case: 12-41125 Document: 00512472573 Page: 3 Date Filed: 12/16/2013No. 12

- 41125 Determination of that question may make other issues moot.” Specifically, the
court noted that § 329 may be the most efficient way to recover the money Baker had already received as fees. If the court could recover the money under § 329 then it would not need to “address the preference issue[s]” under § 547. As to the Trustee’s action to recover the properties, the court did not refer
to § 329, but noted the following remaining material issues of fact and law: (1) “ [W] hat was the value of [Baker’s] legal services and was the transfer [of the real properties] for less than reasonably equivalent value, potentially making the property (or the value in excess of liens) recoverable under Bankruptcy Code § 548 as well as § 549?” (2) “What wa s the value of the real property when it was transferred and what did Baker pay for it?” (3) “On the date of the transfer of the real property, did Debtor and Baker intend to transfer the property with the intent to hinder . . . creditors” as to make the transfer avoidable “(or is the value of the equity thereby transferred on that date recoverable by the Trustee)” avoidable under § 548? (4) “Did the transfer of the real property constitute a breach of fiduciary duty and legal ethics” and “is Baker liable for the value (if any) removed from the estate by the transfer?”
After denying summary judgment, Judge Steen transferred the case to Judge Bohm. Judge Bohm , in turn, issued a show c ause order pursuant to § 329(b) instructing Baker to “provide evidence of the reasonable value of services rendered to the Debtor” in connection with Baker’s representation of Whitley and to “show cause why any compensation previously paid should not be disgorged to the extent in excess of the reasonable value of such services pursuant to 11 U.S.C. § 329(b)

. ” After an evidentiary hearing spanning multiple days , the bankruptcy court denied Baker all of his requested fees and
also ordered Baker to return all of the “ consideration ” that he had received . In total, the court ordered Baker to return $12,074 plus the two properties to the
estate

. 4 Case: 12-41125 Document: 00512472573 Page: 4 Date Filed: 12/16/2013No. 12

- 41125 The bankruptcy court found that Baker’s services provided Whitley “no reasonable value” and also that Baker violated his duty of disclosure. Noting
th at it “polices the disclosure requirements of the Bankruptcy Code and Rules with its sanction powers, including the discretion to order the disgorgement of all sums received by counsel and the forfeiture of all compensation paid to counsel in a particular case, ” the bankruptcy court admonished Baker for failing to disclose his property transactions with Whitley. “Disgorgement of the fees already paid,” the court held, “includes unwinding the transfers of the Hwy
11 [sic] Property and the Church Street Prope rty.” Baker filed an emergency motion to alter or amend the bankruptcy court’s order, arguing that the court failed to consider the $98,775 Baker himself paid to purchase the properties at the foreclosu re sales as well as money Baker had spent to maintain and repair the properties after his purchase of them

. The bankruptcy court denied Baker’s motion, reasoning that the amount Baker paid at the foreclosure sale s would not change the result because these “were payments to r etain ill

- gotten gains” and that Baker’s payments had “no relevance to the analysis on whether the Prop erties were properly acquired.” Baker appealed the bankruptcy court’s disgorgement order and denial of
his motion to alter to the district court. After a hearing , the district court affirmed the bankruptcy court . The district court rejected Baker’s attempts to justify his nondisclosures. The district court also held that the foreclosure sales did not “insulate the properties from disgorgement.” That Baker would forfeit his foreclosure purchase s of $98,775 to the estate, the district court explained, was “irrelevant” and “the price Baker must pay for concealing his

5 Case: 12-41125 Document: 00512472573 Page: 5 Date Filed: 12/16/2013No. 12

- 41125 compensation and relevant business dealings from the bankruptcy court and for failing to prov ide valuable services to his client.” 4 This appeal followed. STANDARD S OF REVIEW “This court reviews the decision of a district court, sitting as an appellate court, by applying the same standards of review to the bankruptcy court’s findings of fact and c onclusions of law as applied by the district court.” Waldron v. Adams & Reese, L.L.P. ( In re Am. Int’l Refinery, Inc. ) , 676 F.3d 455, 461 (5th Cir. 2012)

. This court reviews a bankruptcy court’s findings of fact under the clearly erroneous standard and decides conclusions of law de novo. Barron v. Countryman , 432 F.3d 590, 594 (5th Cir. 2005). “ A bankruptcy court’s decision to disgorge fees or impose a sanction is reviewed for abuse of discretion. ” In re Am. Int’l Refinery , 676 F.3d at 461. ANALYSI S Baker does not appeal the portion of the bankruptcy court’s order obliging him to return $12,074 he received as fees , nor does he dispute the bankruptcy court’s finding that his services were not worth any reasonable
value , which finding earlier had the effect of disallowing Baker’s two fee requests

. Instead, Baker appeals only the bankruptcy court’s order obliging
him to return the two properties outright

. A. The bankruptcy court rested its order obliging Baker to return the properties on two grounds . I t first held that Baker violated his duty of

4 Subsequent t o the bankruptcy court’s order obliging Baker to return the properties, the bankruptcy court granted the Trustee authority to sell the Church Street property for $32,400. The Trustee also requested court authority to sell the Highway 111 property and appraised its value as $33 ,000. The T rustee also requested an additional $5,000 to settle disputes bet ween the buyers and the e state. The court, however, did not approve the Trustee’s proposed resolution of a dispute with the tenant residing on the Highway 111 pro perty. 6 Case: 12-41125 Document: 00512472573 Page: 6 Date Filed: 12/16/2013No. 12

- 41125 disclosure. Specifically, the court ordered Baker to disgorge compensation he received in the 2008 case because he failed to make a timely disclosur e under § 329(a) and Rule 2016. Also , the court found that Baker failed to make a timely Rule 2016 disclosure in the 2009 proceeding and ordered him to disgorge all compensation in connection with the 2009 case. Further, with regard to Baker’s property transactions with Whitley, the court fa ulted Baker for failing to disclose his connections with the debtor. Noting that it “must protect the integrity of the bankruptcy system by ensuring that these disclosure requirements are satisfied,” and that it “polices the disclosure requirements of
the Bankruptcy Code and Rules with its sanction powers,” the c ourt held that the “forfeiture of all fees paid to Baker is both proper and necessary to protect the integrity of the bankruptcy system.” “Disgorgement of the fees already paid,” the court held, inc ludes “unwinding” the t ransfers of the two properties. Second, the bankruptcy court held that even assuming that Baker complied with his disclosure requirements, “his fees were nevertheless
unreasonable

— which provides still another basis for disgorging all monies paid to him and denying all fees that he requests.” After determining that “Baker’s services did not provide a benefit” to Whitley, the court held “the fees should be denied and any compensation already pai d should be disgorged.”

B. “Without doub t, the Bankruptcy Code seeks to protect both debtors and their estates from excessive or unnecessary legal fees.” Barron , 432 F.3d at
595. “While these provisions are potent, they are not limitless,” id. , and the plain language of § 329 (b) tethers the bank ruptcy court’s reach to attorney compensation. Section 329(b) provides that if “ such compensation exceeds the reasonable value of any such services, the court may cancel any such agreement , or order the re turn of any such payment , to the extent excessive, to 7 Case: 12-41125 Document: 00512472573 Page: 7 Date Filed: 12/16/2013No. 12

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. . . the estate, if the property transferred . . . would have been property of the estate.” Id. (emphasis added). Under § 329 (b) , then, it is the value Baker received as compensation that concerns the bankruptcy court

. See Pope v. Knostman ( In re Lee ) , 884 F.2d 897, 889 (5th Cir. 1989) (“The bankruptcy court is empowered . . . to order the return of any unreasonable or excessive portion of an attorney’s fee

. . . .”) ; see also Brown v. Luker ( In re Zepecki ) , 258 B.R. 719, 725 (B.A.P. 8th Cir. 2001) (“A disgorgement is allowed only to the extent that the fees are excessive.”)

. Because the record gives no details about any express agreement between Whitley and Ba ker and because Baker was paid , in part, in real property encumbered by liens that he later p urchased at a foreclosure sale, the value of his compensation for services rendered in these bankruptcy cases , on the existing record, cannot be ascertained

. 5 The parties have not cited any authority applying § 329 (b) to recover real property paid as compe nsation, but Wootton v. Ravkind ( In re Dixon ) , 143 B.R. 671 (Bankr. N.D. Tex. 1992), provides a comprehensive and helpful framework . In Dixon , the debtor paid his attorney $200,000 in cash and $100,000 worth of artwork without court approval and without making the proper disclosures. Id. at 674

– 75. The bankruptcy court ordered all but $35,000 of the fee returned to the estate. Id.
at 680. The a ttorney had sold some of the artwork, but the court found that the present value of the remaining art was $10,000 and it ordered that the attorney additionally return “$90,000 representing the value of the art disposed of.” Id. at 674, 679. The court also noted that the attorney “is to advise whether he wishes to offer more definitive testimony with respect to the credit for the value of the art ordered turned over.” Id. at 680.

5 At best, we have testimony from Whitley suggesting that Baker’s account for services was credited $20,000 afte r the transfer of the properties. The bankruptcy court, however, did not make any findings as to the value of the properties. 8 Case: 12-41125 Document: 00512472573 Page: 8 Date Filed: 12/16/2013No. 12

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Unlike the bankruptcy court in Dixon

— which used the $100,000 value of the artw ork paid as compensation as a basis for the funds and property it ordered returned under § 329 (b)

— the bankruptcy court here did not value the property at the time Whitley transferred it to Baker, nor did it value the property at the time it ordered Baker t o return it to the estate. 6 Accordingly,
the § 329(b) remedy the bankruptcy court imposed was not indexed to the

compen sation Whitley actually paid to Baker. See generally Palmer & Palmer, P.C. v. U

. S

. Tr ustee (In re Hargis ) , 895 F.2d 1025, 1026 (5th Cir. 1990); see also Schroeder v. Rouse ( In re Redding ) , 247 B.R. 474, 478 (B.A.P. 8 th Cir. 2000) (“Because § 329 is aimed solely at preventing overreaching by a debtor’s attorney

. . . a court’s consideration of whether to order disgorgement of fees
under § 329(b) is limited to the comparison of the amount of compensation received by the attorney with the reasonable value of the services performed.”)

. In fact, t he remedy imposed went beyond what Whitley paid to Baker as compensation because Baker did not u se estate funds to buy the prop erties at the foreclosure sales. It is undisputed that Baker paid the $98,775 foreclosure purchase from his account . As the district court recognized, “the foreclosure sale purchase and property maintenance costs were losses for Baker ” (emphasis added), not the estate. H ad the Ackleys kept the p roperties or sold them to a third party at the foreclosure sales, the bankruptcy court could not
have obliged Baker to pay $98,775 to the estate under § 329 (b)

. In that circumstance, th e bankruptcy court ’s § 329 (b) remedy against Baker would have been limited to the value of the properties that Baker received at the time Whitley transferred them as compensation. See In re Redding , 247 B.R. at 478

–

6 We observe that this step did not occur, in part, because this case was transferred between bankruptcy judges. Judge Steen had highlighted that “material issues of fact” existed relevant to § 329 disgorgement, and also highlighted various valuation de terminations needed to be made. 9 Case: 12-41125 Document: 00512472573 Page: 9 Date Filed: 12/16/2013No. 12

- 41125 79 (“The plain language of § 329 provides that there must first be a determination that the fees are excessive. Only after that determination, and only to the extent excessive, would there be a disgorgement.”). There is no reason to treat Baker differently in thi s case, as the $98,775 value he was obliged to return to the estate was not paid to him as compensation. Accordingly, the bankruptcy court improperly relied on § 329 (b) in ordering Baker to return the two properties outright

. C

. Section 329(a) requ ires a debtor’s attorney to disclose “a statement of the compensation paid or agreed to be paid,” and we have said that the bankruptcy court’s “broad discretion in awarding and denying fees paid in connection with bankruptcy proceedings empowers the bankru ptcy court to order disgorgement as a sanction to debtors’ counsel for nondisclosure.” In re Prudhomme , 43 F .3d
at 1003; see also Anderson v. Anderson ( In re Anderson ) , 936 F.2d 199, 204 (5th Cir. 1991) (“[T]he bankruptcy court is one of equity and thus ha s broad equitable

— and hence discretionary

— powers to award attorney’s fees.”)

. We have been clear that “[t] he bankruptcy court has inherent power to guard the practice of attorneys who appear in that court.” Suffness v. Petros ( In re Avante Real Estate, Inc

. ) , No. 95

- 10442, 1995 WL 625456, *8 (5th Cir. Oct. 11, 1995) (citing 11 U.S.C. § 105)

. “These powers are discretionary and the bankruptcy court has broad authority to discipline attorneys and to award or disgorge fees paid in connection with bankruptcy pr oceedings.” Id. While its authority is broad, w hen a bank ruptcy court imposes a disciplinary sanction it “must use the least restrictive sanction necessary to d eter the inappropriate behavior, ”
Harris v. First City Bancorporation of Tex., Inc. ( In re First City Bancorporation of Tex. , Inc.) , 282 F.3d 864, 867 (5th Cir. 2002), and “[t] he sanction levied must thus be commensurate with the egregiousness of the

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conduct.” Mapother & Mapother, P.S.C. v. Cooper ( In re Downs ) , 103 F.3d 472, 478 (6th Cir. 1996)

. In this case, the bankruptcy court ordered Baker only to “show cause why any compensation previously paid should not be disgorged to the extent in excess of the reasonable value of such s ervices pursuant to 11 U.S.C. § 329(b),” yet the court then order ed Bak er to “disgorge all of the consideration that [Baker] has a lready received from the Debtor ” (emphasis added). As described above, however, the bankruptcy court’s order obliging Baker to transfer the properties outright , now free of the Ackleys’ liens, impo s e d a sanction beyond the amount of compensation Baker received

. The bankruptcy
court did not address Baker’s $98,775 foreclosure purchase in its order , did not value the properties at the time that Whitley transferred them to Baker, and
did not value the properties at the time it ordered Baker to return the m to the estate. Further, w hen it denied Baker’s motion to amend, it held that Baker’s payments had “no relevance to the analysis on whether the Properties were properly acquired.” Accordingly, the bankr uptcy court did not assess the extent of the disciplinary sanction it imposed, nor asses s that amount in connection with Baker’s conduct in this case.
Both lower courts relied on SEC v. Huffman , 996 F.2d 800, 802 (5th Cir. 1993), for the proposition that d isgorgement is not “restitution” but an equitable remedy aimed at “ ‘wrest[ing] ill

- gotten gains from the hands of the wrongdoer. ’ ” T he bankruptcy court, in denying Baker’s motion to amend, relied

on Huffman ’s definit ion of disgorgement, and also elaborated that “if Baker
and the Baker

- Owned LLC paid money to keep and repair the Properties, then those payments were m ade to retain ill

- gotten gains. The [se] facts have no relevance to the analysis on whether the Properties were properly acquired.”
The bankruptc y court has authority to impose disciplinary sanctions on attorneys beyo nd the return of compensation, but the amount of the sanction
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- 41125 imposed is essential to a bankruptcy court ’ s sanction analysis because “[w]hen a court metes out a sanction, it must exercise such power with restraint and discretion.” In re Downs , 103 F.3d at 478. Although a $98,775 sanction may have been appropriate considering Baker’s conduct as adverted to in t hese proceedings (e.g. Baker’s “ill

- gotten gains ” and his “nasty habit of non

disclosure ” ) , in ord er to ensure that a sanction is “chosen to employ the least possible power to the end proposed,” the bankruptcy court must in the first
instance compare the s anction amount to the sanctioned party’s conduct. In re First City Bancorporation of Tex. , 282 F.3d at 867 (internal quotation marks omitted). CONCLUSION The bankruptcy court ordered Baker to return all consideration he
received , but in so doing it impos ed an additional sanction beyond return of compensation . Because such an order cannot rest on § 329 (b), and because the bankruptcy court did not develop the basis for and extent of any further sanction it imposed , we REVERSE and REMAND for further proceedi ngs consistent with this decision

.

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