Court Opinion

ID: 6899
Source: CourtListenerOpinion
Date Created: 2010-04-25 05:22:36+00
Date Added: 2024-06-11T12:30:05.071810
License: Public Domain

United States Court of Appeals,

                                 Fifth Circuit.

                                  No. 93-5467.

In the Matter of Daisy M. PRUDHOMME and John and Kathleen Batten,
Debtors.

                         John F. ARENS, Appellant,

                                          v.

              Al BOUGHTON, Trustee, et al., Appellees.

                                 Feb. 7, 1995.

Appeal from the United States District Court for the Western
District of Louisiana.

Before DAVIS, JONES and DUHÉ, Circuit Judges.

      DUHÉ, Circuit Judge:

      The bankruptcy court required Appellant John Arens to disgorge

a $75,000 retainer he received for legal services and to pay that

amount to the plan trustee in these two Chapter 11 cases.                 Appellee

Farm Credit Bank had moved for disgorgement of the fee, and the

United   States       Trustee     moved        for   examination     of   debtors'

transactions with their attorneys.               After an evidentiary hearing,

the bankruptcy court ordered disgorgement of the full retainer.

The   court   found    that     the   fee      was   paid   in   contemplation   of

bankruptcy, that it was excessive, and that the Arens firm (a sole

proprietorship owned by Arens) consciously breached its duty to

disclose the retainer fee as well as a contingency interest in the

debtor's cause of action 152 B.R. 91. The district court affirmed,

and we too affirm.

      At issue in Arens's appeal are 1) the court's power to reach

a fee paid or agreed to be paid more than one year before the
bankruptcy petitions were filed and 2) whether the fee was paid in

contemplation of or in connection with the bankruptcy cases.

                                I.

     The Bankruptcy Code requires a debtor's attorney to report to

the court compensation paid or agreed to be paid for services

rendered "in contemplation of or in connection with" the case, "if

such payment or agreement was made after one year before the date

of the filing of the petition."      11 U.S.C. § 329(a).   The Code

further provides, "If such compensation exceeds the reasonable

value of any such services, the court may ... order the return of

any such payment, to the extent excessive."    Id. § 329(b).   Arens

first complains that the court erred in reaching back more than a

year prepetition because of the one-year period in § 329(a).

     The debtors paid $50,000 as a first installment of Arens'

retainer charge in February 1990;      a year later they paid the

$25,000 balance. The retainer agreement also allowed the firm a 40

per cent contingency fee if the firm were successful in pursuing a

lender liability action against the debtors' major creditor, Farm

Credit Bank.   In July 1991 the firm filed Prudhomme's Chapter 11

petition, and in October 1991, the Battens'.    Because payment of

the $25,000 was made within a year of the filing of the petitions,

that part of the compensation plainly falls within § 329(a),

regardless of when the agreement was made.        Arens's one-year

argument fails with respect to disgorgement of that.

      With respect to the remaining $50,000 ordered disgorged, we

find the bankruptcy court's decision supportable on a number of

alternative grounds.   First, we agree with Appellees that § 329(a)
and related provisions do not provide a limitations period beyond

which the court cannot reach.            The reporting requirement of §

329(a)     does    not   expressly   provide   a   limitations   period   for

disgorgement.        Compare 11 U.S.C. § 329 (requiring reporting of

payments made within the year) with id. §§ 550(e), 549(d)(1)

(specifically providing that an action "may not be commenced after"

the respective time periods).             Nor does § 329(b) authorizing

disgorgement of excessive fees specify a limitations period.              See

In re Bennett, 133 B.R. 374, 380 (Bankr.N.D.Tex.1991) (no statute

of limitations on motion for recovery of attorney fees).

         Additionally, a bankruptcy rule allows the court to determine

"whether any payment of money ... by the debtor, made directly or

indirectly and in contemplation of the filing of a petition under

the Code ... to an attorney for services rendered or to be rendered

is excessive."       Bankr.R.Proc. 2017(a) (emphasis added).        The rule

plainly     contains     no   one-year   limitation   period.     The   court

determined under this rule that the fee was excessive,1 and the

remedy for excessiveness is return of any payment to the extent it

exceeds the reasonable value of services rendered.               11 U.S.C. §

329(b); 8 Collier on Bankruptcy, para. 2017.06[1] at 2017-11 (15th

ed. 1994);        In re Porter, 253 F. 552, 553 (7th Cir.1918), cert.

denied, 248 U.S. 585, 39 S.Ct. 182, 63 L.Ed. 433 (1919).

         Further support for the bankruptcy court's ruling lies in a

     1
      Ample evidence showed that the Arens firm did not render
any services that benefited any of the debtors or their estates,
that the firm's services were unsatisfactory, and that counsel
hurt the debtors more than helped them. (Arens's belatedly
offered time sheets suggesting how the fees were earned
pre-petition were appropriately stricken.) Accordingly, the
court did not clearly err in finding the fee unreasonable.
renowned        treatise    which    recognizes      that      the   one-year   period

mentioned in § 329(a) is based on the "apparent presumption" that

any compensation paid before the year prepetition was not for

services rendered in contemplation of bankruptcy. 2 Collier, para.

329.03 at 329-12.          To recognize that the one-year period is based

on   a       presumption   is   to   suggest      that   the    presumption     can   be

rebutted, as the bankruptcy court reasoned.                    See 2 R. 309 (finding

presumption        rebutted     by   fraud   or    concealment).         The    court's

treatment of the one-year period in § 329(a) as a presumption

rebutted by fraud or concealment is consonant with the principle

that, in a court of equity, a statute of limitations may be tolled

by the inequitable conduct of the parties.                     See Bennett, 133 B.R.

at 380-81 (quoting Bailey v. Glover, 88 U.S. (21 Wall.) 342, 348,

22 L.Ed. 636 (1875)).           The court found a pattern of nondisclosure

in both cases.2            We hold that such concealment was misconduct

         2
      This finding is also amply supported by the record.
Bankruptcy Rule 2014(a) requires an attorney applying for
employment to disclose the compensation arrangements and "all
connections" with the debtor. Local Rule 4.0(9) requires a
lawyer applying for appointment to disclose any compensation
received in the 18-month period prepetition. If the firm had
filed the scheduled required by Local Rule 4.0, it would have
disclosed the $50,000 payment as well as the $25,000 in Ms.
Prudhomme's case (because both were paid within 18 months of her
petition).

              The firm divulged in the statements of financial
         affairs in the bankruptcy cases the $25,000 payment to Arens
         but never disclosed the earlier $50,000 payment. The
         debtors testified that Arens requested payment of the
         $25,000 balance so that he could advise the bankruptcy court
         that nothing was owed.

              When seeking to enroll as counsel in these cases,
         various lawyers from the Arens firm swore that they were
         disinterested, despite the firm's 40 per cent interest in
         the debtor's cause of action. Their applications for
         appointment did not disclose the retainer or contingency
justifying the disgorgement even if § 329(a) would otherwise

preclude recovery of fees paid earlier than one year prepetition.

      Additionally, the court's broad discretion in awarding and

denying   fees   paid    in    connection      with   bankruptcy   proceedings

empowers the bankruptcy court to order disgorgement as a sanction

to debtors' counsel for nondisclosure.                See 11 U.S.C. §§ 327,

1107(a) (requiring court approval before debtor-in-possession may

employ counsel);         id.   §   330(a)   (requiring    court    approval    of

professional fees);      Woods v. City Nat'l Bank & Trust Co., 312 U.S.

262, 268, 61 S.Ct. 493, 497, 85 L.Ed. 820 (1941) (using denial of

compensation as tool for strict enforcement of conflict-of-interest

rules);   Anderson v. Anderson (In re Anderson), 936 F.2d 199, 204

(5th Cir.1991) (recognizing bankruptcy court's broad discretion as

court of equity to grant or deny fees and noting that attorney has

no absolute right to fee award absent compliance with Code and

rules);     In   re     Key    Largo   Land,    Inc.,    158   B.R.   883,    884

(Bankr.S.D.Fla.1993) (recognizing that any payment to debtor's

attorney, regardless of the source, is reviewable by the bankruptcy

court);   see also Futuronics Corp. v. Arutt, Nachamie, & Benjamin

(In re Futuronics Corp.), 655 F.2d 463, 469-71 (2d Cir.1981)

(holding that total denial of compensation is the only appropriate

sanction for nondisclosure of all facts bearing upon counsel's

     fee. The contingency arrangement was disclosed belatedly in
     the Battens' second amended disclosure statement six months
     after the Battens' petition was filed—never in the Prudhomme
     case. One affiant swore that he advised the debtor of the
     firm's willingness to serve as counsel upon the debtor's
     agreement to pay the firm's hourly fees, but the debtors
     testified that they made no agreement regarding hourly fees.
eligibility and all connections with debtor, including counsel's

retainer agreement), cert. denied, 455 U.S. 941, 102 S.Ct. 1435, 71

L.Ed.2d 653 (1982);        In re Arlan's Dept. Stores, Inc., 615 F.2d

925, 937-38 (2d Cir.1979) (finding no abuse of discretion in

court's order of disgorgement of all fees where counsel failed to

divulge all connections with debtor and to disclose all fees);                    In

re Crimson Investments, N.V., 109 B.R. 397, 401 (Bankr.D.Az.1989)

(redressing    counsel's    lack    of    candor    in    failing    to   disclose

retainers with the "only remedy"—immediate turnover of entire

retainer to the estate).

      A final ground to support disgorgement of the $50,000 is

discussed in part III of this opinion.

                                         II.

       Arens   also   argues      that    the   retainer     was    not   paid   "in

contemplation of bankruptcy" as is required for disgorgement.                    See

11 U.S.C. § 329(a) (requiring disclosure of fees paid or agreed

within one year prepetition for services "in contemplation of or in

connection with the case").          The court was faced with evidence

suggesting that the debtors were in desperate financial straits

when they first consulted Arens, that they sought representation in

resolving their disputes with their largest creditor, and that they

had   been   unsuccessful    in    restructuring         debt.     This   evidence

supports the court's finding that the fee was paid in contemplation

of or in connection with the case.              Arens fails to show that the

court's finding was clearly erroneous.

                                     III.

       Regardless of Arens's limitations argument and regardless of
whether fees were paid in contemplation of bankruptcy, one final

theory of recovery supports the court's order of disgorgement.     If

a debtor retains an equitable interest in an unearned prepetition

retainer, the unearned portion becomes property of the estate upon

the filing of the petition for bankruptcy.          See 11 U.S.C. §

541(a)(1) (equitable interests of the debtor become property of

estate); In re Mondie Forge Co., 154 B.R. 232, 238 (Bankr.N.D.Ohio

1993) (if debtor has legal or equitable interest in unearned

retainer under applicable state law, then unearned retainer becomes

estate property).    Under Louisiana law the unearned portion of

retainer fees are client funds and must be held by the lawyer in

trust for the client.   Louisiana State Bar Ass'n v. Kilgarlin, 550

So.2d 600, 605 n. 10 (La.1989).     An unearned retainer cannot be

used by the attorney until a fee request is first allowed by the

bankruptcy court.   See In re Chapel Gate Apts., Ltd., 64 B.R. 569,

574-75   (Bankr.N.D.Tex.1986)   (drawing   on   prepetition   retainer

without approval of bankruptcy court preempts court's power to

determine reasonableness and legality of fees; violations of § 329

and Rule 2016 subject counsel to order of disgorgement);      see also

Crimson, 109 B.R. at 402 (ordering surrender of unearned retainer

because of counsel's failure to disclose source of compensation).

     Attorneys must prove their entitlement to compensation before

the bankruptcy court will order a fee award.          See Neville v.

Eufaula Bank & Trust Co. (In re U.S. Golf Corp.), 639 F.2d 1197,

1207 (5th Cir.1981) (burden is on person seeking compensation to

establish value of his services).   Because the entire retainer was

unearned and Arens did not prove entitlement to be paid therefrom,
the court properly ordered the entire retainer disgorged.

                               IV.

     In view of the alternative grounds supporting the order of

disgorgement, the district court order affirming the bankruptcy

court is

     AFFIRMED.