Court Opinion

ID: 4555771
Source: CourtListenerOpinion
Date Created: 2020-08-14 17:00:46.30073+00
Date Added: 2024-06-11T09:25:01.076720
License: Public Domain

PUBLISH                                  FILED
                                                                     United States Court of Appeals
                         UNITED STATES COURT OF APPEALS                      Tenth Circuit

                                FOR THE TENTH CIRCUIT                      August 14, 2020
                            _________________________________
                                                                        Christopher M. Wolpert
                                                                            Clerk of Court
 In re: DAVID A. STEWART; TERRY P.
 STEWART,

        Debtors.

 ------------------------------

 SE PROPERTY HOLDINGS, LLC,

        Appellant,

 v.                                                   Nos. 19-6103 & 19-6104

 DAVID A. STEWART; TERRY P.
 STEWART; DOUGLAS GOULD, Chapter
 7 Trustee; RUSTON C. WELCH; WELCH
 LAW FIRM, P.C.; KIRKPATRICK
 BANK,

        Appellees.
                            _________________________________

                       Appeals from the Bankruptcy Appellate Panel
                          (BAP Nos. WO-18-068 & WO-18-079)
                          _________________________________

Richard M. Gaal, McDowell Knight Roedder & Sledge, LLC, Mobile, Alabama (S.
Fraser Reid, III, McDowell Knight Roedder & Sledge, LLC, Mobile, Alabama, Mark B.
Toffoli, The Gooding Law Firm, Oklahoma City, Oklahoma, with him on the briefs), for
Appellant.

David Cheek, Cheek & Falcone, PLLC, Oklahoma City, Oklahoma (Ruston C. Welch,
Welch Law Firm, P.C., Oklahoma City, Oklahoma, with him on the brief) for Appellees.
                      _________________________________

Before HARTZ, BALDOCK, and EID, Circuit Judges.
                         _________________________________

HARTZ, Circuit Judge.
                         _________________________________

       Attorney Ruston Welch received $348,404.41 in fees for representing David and

Terry Stewart in their Chapter 7 bankruptcy proceedings. This appeal arises out of his

failure to disclose his fee arrangements and payments, as required by 11 U.S.C. § 329(a)

and Federal Rule of Bankruptcy Procedure 2016(b), until ordered to do so by the

bankruptcy court more than two years after he should have disclosed his fee agreement

and more than a year after he should have disclosed the payments. For these violations

the bankruptcy court sanctioned Mr. Welch by requiring him to pay $25,000 to the

bankruptcy estate.

       The bankruptcy appellate panel (BAP) affirmed the sanction after the Stewarts’

largest creditor, SE Property Holdings (SEPH), which had initiated the proceedings as an

involuntary bankruptcy, challenged the sanction as so inadequate as to constitute an

abuse of discretion. SEPH appeals that decision. Exercising jurisdiction under 28 U.S.C.

§ 158(d), we agree with SEPH and reverse and remand for further consideration. The

presumptive sanction for a violation of § 329(a) is forfeiture of the entire fee. For good

reason the bankruptcy court can impose a lesser sanction. But the court thus far has not

provided good reason. It assumed facts that were not in evidence and, most importantly,

apparently assumed good faith without examining the possible motives for nondisclosure.

                                             2
      I.     ATTORNEY DISCLOSURE REQUIREMENTS UNDER
             BANKRUPTCY LAW

      Attorneys for debtors perform an essential role in bankruptcy proceedings. But

when it comes to compensation, they play second fiddle to creditors. In a Chapter 7

proceeding, such as the one before us, the attorney can be paid out of the bankruptcy

estate only if first employed by the trustee and approved by the bankruptcy court. See

Lamie v. U.S. Tr., 540 U.S. 526, 538–39 (2004). As a check on debtor attorneys, the

Bankruptcy Code and the Federal Rules of Bankruptcy Procedure require them to

promptly disclose their fee arrangements and all payments for their bankruptcy services.

Section 329(a) of the Bankruptcy Code states:

      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.

Rule 2016(b), which implements § 329, states:

      Every attorney for a debtor, whether or not the attorney applies for
      compensation, shall file and transmit to the United States trustee within 14
      days after the order for relief [see 11 U.S.C. § 303(h) (requirements that
      must be satisfied before issuance of order for relief after filing of a petition
      for involuntary bankruptcy)], 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 14 days after any payment or
      agreement not previously disclosed.

                                             3
These provisions “require[] every attorney representing a debtor in bankruptcy to file

with the court [within 14 days of the order for relief] a statement of all compensation

received during the preceding year, or to be received, in connection with the bankruptcy.”

Bethea v. Robert J. Adams & Assocs., 352 F.3d 1125, 1127 (7th Cir. 2003). The

disclosure obligation is a continuing one. Rule 2016(b) requires attorneys to submit

supplemental statements “within 14 days after any payment or agreement not previously

disclosed.”

       The disclosure requirements enable bankruptcy judges to perform their core and

traditional role of overseeing lawyers who represent bankrupt debtors. See 3 Richard

Levin & Henry J. Sommer, Collier on Bankruptcy ¶ 329.LH, at 329–34 (16th ed. 2020)

(“Under prior law, as under the modern Bankruptcy Code, compensation of the attorney

for the debtor was scrutinized more closely than the compensation of other officers and

professional persons.”). The oversight is justified by two significant concerns. Debtors

can be exploited by overreaching lawyers who overcharge for their services. And

creditors can be denied their proper share of the bankruptcy estate if debtors (particularly

those who believe they will net nothing from the nonexempt assets of the estate) direct

money to their attorneys in preference to other creditors. See Bethea, 352 F.3d at 1127

(when facing bankruptcy, “[d]ebtors may not care who gets what money remains (if the

attorney gets more, other creditors get less), and, when clients do not haggle over price,

some attorneys will be tempted to divert the funds to themselves by charging excessive

fees”); In re Redding, 263 B.R. 874, 878 (B.A.P. 8th Cir.) (§ 329 “reflects Congress’

concern that payments to attorneys in the bankruptcy context might be the result of

                                             4
evasion of creditor protections and provide the opportunity for overreaching by

attorneys”), revised on rehearing on other grounds, 265 B.R. 601 (B.A.P. 8th Cir. 2001);

H.R. Rep. No. 95–595, at 329 (1977) (Congress adopted § 329 because “[p]ayments to a

debtor’s attorney provide serious potential for evasion of creditor protection provisions of

the bankruptcy laws, and serious potential for overreaching by the debtor’s attorney, and

should be subject to careful scrutiny”); S. Rep. No. 95–989, at 39 (1977) (same). The

required disclosures are necessary for that oversight. See Bethea, 352 F.3d at 1127

(disclosures “enable[] the court to determine whether the lawyer has received a

preferential transfer”); Law Offs. of Nicholas A. Franke v. Tiffany (In re Lewis), 113 F.3d

1040, 1045 (9th Cir. 1997) (court must be able to rely on attorney’s disclosures).

       II.    THE RELATIONSHIP BETWEEN SEPH AND THE STEWARTS

       SEPH has complained that Mr. Welch, through arrangements not timely disclosed

to the bankruptcy court, has been paid large sums that should have gone to SEPH and

other creditors. To understand this issue, we must review the relationship between SEPH

and the Stewarts.

       SEPH is the largest creditor in the Stewarts’ bankruptcy, with a claim exceeding

$20 million. It has loaned millions of dollars to businesses that were controlled and

largely owned by the Stewarts, in particular Neverve, LLC, in which David Stewart

owned at least a 50% interest. The Stewarts personally signed or guaranteed the loans.

       As the maturity date of a $16 million note approached, SEPH agreed to extend it

in return for additional security. The security was the assignment by the Stewarts and

companies they controlled of an interest in claims against British Petroleum (BP) arising

                                             5
out of the disastrous 2010 “Deepwater Horizon” oil spill in the Gulf of Mexico.

According to SEPH, the assignment document gave SEPH a security interest in the BP

claims of all entities that David Stewart owned directly or indirectly.

       The new maturity date came but the note was not paid. SEPH therefore filed on

September 30, 2014, a petition in the United States Bankruptcy Court for the Southern

District of Alabama to place the Stewarts in involuntary Chapter 7 bankruptcy. On

March 18, 2015, the court ordered entry of orders for relief, and it entered an order on

April 24 for joint administration of the cases for the two Stewarts.

       The case was moved on June 12, 2015, to the United States Bankruptcy Court for

the Western District of Oklahoma. Mr. Welch, who had not entered an appearance in

Alabama, entered his appearance as attorney for the Stewarts in the Oklahoma

proceedings on June 17.

       III.   WELCH’S FEE ARRANGEMENT AND PAYMENTS

       On the same day that Mr. Welch entered an appearance, he executed a

representation agreement with the Stewarts. The engagement included general

representation, debt counseling, and corporate-structure and bankruptcy representation to

the Stewarts and certain named business affiliates. Also at that time, the named affiliates,

including Neverve, guaranteed Mr. Welch’s legal fees in connection with the bankruptcy

representation.

       The BP claims were settled in spring 2016. By that time Mr. Welch had obtained

an interest in the settlement proceeds. Under a fee-sharing agreement executed on

April 19, 2016, the total attorney fee was 40% of the proceeds; that amount was split

                                             6
three ways with 52% of it going to the chief attorney, 32% to Mr. Welch, and 16% to the

person who referred the matter to the chief attorney. Mr. Welch’s fee would therefore be

about 13% of the amount recovered on the claims. There had been a previous attorney-

compensation agreement governing the BP claims. But according to Mr. Welch, it could

not be found; and the record apparently does not show what the terms of that earlier

agreement were, or even whether he was a party to it. To explain his receipt of a

contingency fee, Mr. Welch told the bankruptcy court that he “advised and assisted the

non-debtor claimants in providing substantiating documents to support [the chief

attorney] in the settlement process and negotiated specific language to the settlement

agreements.” Aplt. App., Vol. 13 at 3305.

       The settlement proceeds were disbursed in August 2016. All of Mr. Welch’s

$348,404.41 in fees in this case came out of proceeds that were wired to him. He

received $144,591.85 under his contingency-fee contract, but he then credited all that

toward what he was owed for his bankruptcy work. In his own words, this was “a matter

of fairness and efficiency in [his] mind.” Id. at 3198. The remaining $203,812.56 came

out of the $275,572.27 in net-settlement proceeds for Neverve. Mr. Welch paid himself

because of Neverve’s guarantee of his fee.

       Although 11 U.S.C. § 329 and Bankruptcy Rule 2016(b) require attorneys for

debtors to disclose their fee arrangements and all payments for their bankruptcy services,

Mr. Welch failed to do so until September 2017, more than two years after entering into

the bankruptcy-fee arrangement and more than a year after being paid. His disclosure

was not voluntary. The failure to disclose was pointed out by SEPH during proceedings

                                             7
on August 30, 2017, to determine whether the bankruptcy court would approve an

agreement between the Trustee and the Stewarts signed in April. The agreement stated

that the Trustee would abandon (thereby relinquishing to the Stewarts) all nonexempt

property, including the Stewarts’ membership interests in various limited liability

companies, and the Stewarts would pay $750,000.

       Before negotiations on the settlement agreement the Stewarts had argued that the

Trustee should abandon those membership interests because they were valueless. In

particular, on November 3, 2015, the Stewarts had moved in bankruptcy court to have the

Trustee abandon their membership interests in three companies: Raven Resources, LLC,

Oklamiss Investments, LLC, and Shimmering Sands Development Company, LLC,

claiming that the three entities were in so much debt that they provided no value to the

Stewarts’ bankruptcy estate. See 11 U.S.C. § 554(a) (“[T]he trustee may abandon any

property of the estate that is burdensome to the estate or that is of inconsequential value

and benefit to the estate.”). At a hearing on the matter on January 20, 2016, Mr. Welch

acknowledged that at least one of the entities, Shimmering Sands, had a $600,000 claim

against BP and that “an attorney’s contingency fee firm [had] agreed to try it” (he makes

no mention that he was to receive any of that contingency fee). Aplt. App., Vol. 6

at 1516. But he downplayed the value of the claim, saying that it was “years from ever

even being heard” and that they still would need to put on evidence and witnesses and the

result was uncertain. Id. On March 18, however, Mr. Welch informed the Trustee that

he had just learned that there was movement on the BP claims. On April 13 the

                                              8
bankruptcy court denied the motion to abandon, at least in part because of the possibility

the estate could benefit from the BP claims.

       This led to the settlement agreement between the Stewarts and the Trustee, and

then the August 30, 2017 hearing on whether the court should approve it. It was when

Mr. Welch stated at the hearing that he had paid himself out of the BP proceeds, that

SEPH and the bankruptcy court began questioning Mr. Welch about his compensation

arrangements. SEPH brought up that Mr. Welch had never filed his required disclosures,

including anything regarding his compensation or representation agreement. Offering no

explanation, Mr. Welch merely acknowledged his obligation to make disclosures. The

bankruptcy court said that it did not understand why he had not turned over the Neverve

BP claim proceeds to the Trustee, telling Mr. Welch that the Trustee “should be the one

making these decisions, not you and not David Stewart.” Aplt. App., Vol. 29 at 6568.

It told Mr. Welch to immediately make his disclosures. He filed disclosures on

September 14 and 20, 2017.

       IV.    BANKRUPTCY COURT PROCEEDINGS ON FAILURES TO
              DISCLOSE

       In October 2017 SEPH filed a motion seeking disgorgement of Mr. Welch’s fees

and the denial of future compensation for violation of his disclosure obligations under

§ 329(a) and Rule 2016(b). SEPH cited precedent within (and outside of) the Tenth

Circuit that such strong medicine was appropriate for violations like Mr. Welch’s. SEPH

also argued that it was entitled to the money received by Mr. Welch because it had a

security interest in the Neverve funds or, alternatively, they were property of the estate.

                                               9
It accused Mr. Welch of “conceal[ing] the fact that he was in possession of assets that

belonged to either the Estate or to SEPH and then [] convert[ing] those assets to pay

himself legal fees.” Aplt. App., Vol. 13 at 3105. SEPH also pointed out that Mr. Welch

had never said that he failed to disclose “because of ignorance of the law or because of

oversight.” Id. at 3106.

       To excuse his failure to disclose some of the payments, Mr. Welch argued that his

contingency fees did not need to be disclosed because they were “earned for services not

in connection with the bankruptcy case.” Id. at 3194; see 11 U.S.C. § 329(a) (requiring

reporting of compensation for services in connection with the bankruptcy case). He did

not otherwise seek to justify his failures to disclose even after SEPH’s accusations.

Instead, he argued that he had not taken property of the estate to pay his fees. He also

requested that the bankruptcy court consider the beneficial work he had done for the

estate. In reply, SEPH again argued that Mr. Welch’s payments were from estate

property and that in any event his violations warranted full disgorgement and denial of

his fees.

       The bankruptcy court did not conduct a hearing on the motion for disgorgement.

In its written order it found to be meritless Mr. Welch’s argument that the contingency

fee was not for services rendered “in connection with” the bankruptcy case because he

applied the BP funds to his bankruptcy fees. It found Mr. Welch to be in clear violation

of § 329(a) and Rule 2016(b). The bankruptcy court said it was “incredulous” that such

an able and experienced bankruptcy practitioner as Mr. Welch would commit such

misconduct. In re Stewart, 583 B.R. 775, 784 (Bankr. W.D. Okla. 2018). It lamented

                                            10
that the concealment of Mr. Welch’s fees, in light of the lack of candor and veracity of

the debtors, 1 generated even more suspicion and mistrust in the already contentious

bankruptcy proceedings. And it doubted that Mr. Welch would ever have made the

requisite disclosures without being ordered to do so. The bankruptcy court recognized

that Mr. Welch’s violations allowed it to order disgorgement of all his fees. But it did

not choose that path.

       Relying in part on a case involving sanctions against attorneys under Federal Rule

of Civil Procedure 11, the bankruptcy court applied “the overriding principle in applying

sanctions that ‘the appropriate sanction should be the least severe sanction adequate to

deter and punish’ the offender and deter future violations of the rules.” Id. at 786

(quoting White v. Gen. Motors, Inc., 908 F.2d 675, 684 (10th Cir. 1990)). Also, the court

agreed with Mr. Welch that his services had benefited the bankruptcy estate. Notably, it

deviated from the parties’ briefing to consider mitigating factors never raised by the

parties:

       • “[T]o this Court’s knowledge, Welch has not been previously
         sanctioned.”
       • “It appears that he has not had much experience representing debtors in
         Chapter 7 in which court approval is not required for either employment
         or payment of counsel.”

1
  For example, the Trustee brought a fraudulent-transfer proceeding to recover property
given by the Stewarts to their children and to a trust for which David Stewart was the
primary beneficiary. The bankruptcy court found that the transfers took place after SEPH
had commenced litigation against the Stewarts and were made without consideration, that
the Stewarts’ personal tax returns continued to claim losses with respect to the property,
that financial statements provided to lenders continued to claim personal ownership, and
that David Stewart retained control over the companies.
                                             11
       • “It may well be that Welch . . . overlooked the attorney fee disclosure
         requirements imposed upon counsel in all chapters of the Bankruptcy
         Code.”
       • “The Court also believes that ordering disgorgement of all fees as
         sought by SEPH (or even a substantial portion of such fees) would be
         financially catastrophic to someone as Welch engaged in a largely solo
         practice.”

Id. at 786–87. In addition, the court expressed its view that it lacked authority to require

Mr. Welch to pay funds to the debtors’ estate, which never had an interest in them, so it

would have to order repayment to the entities that paid him and the entities would then

likely simply repay him. The bankruptcy court ordered Mr. Welch to pay $25,000 to the

Trustee for the benefit of the estate. It said that this disgorgement and the court’s public

chastisement of Mr. Welch would adequately deter him from future misconduct.

       Unsatisfied with only a 7% reduction in Mr. Welch’s fee, SEPH moved to alter or

amend the bankruptcy court’s order. It argued that the bankruptcy court’s sua sponte

consideration of mitigating circumstances lacked an evidentiary basis in the record

because the parties themselves had not anticipated that such mitigating circumstances

would be applied. SEPH also asked the bankruptcy court to clarify whether it concluded

that the BP funds were property of the estate.

       The bankruptcy court declined to alter the $25,000 sanction. It justified its sua

sponte consideration of mitigating factors in light of the bankruptcy judge’s common

sense and 30 years of experience in bankruptcy private practice. The only specific

argument it addressed on that score was its agreement that Mr. Welch never raised the

issue of his ability to pay. But the bankruptcy court maintained that “it was appropriate

for the Court to not require specific evidence as to Welch’s net worth, but to exercise its

                                             12
significant discretion in determining the amount of sanctions . . . subject to the principle

that the sanction should not be more severe than reasonably necessary to deter repetition

of the conduct by the offending person or comparable conduct by similarly situated

persons.” In re Stewart, Bankr. No. 15-12215-JDL, 2018 WL 3388925, at *3 (Bankr.

W.D. Okla. July 10, 2018). Although the bankruptcy court had appeared to say in its

initial order that the BP proceeds were not property of the estate, it clarified that it had

not decided the issue.

       SEPH appealed to the BAP, which affirmed the $25,000 sanction and the denial of

SEPH’s motion to alter or amend as within the bankruptcy court’s discretion. See SE

Prop. Holdings, LLC v. Stewart (In re Stewart), 600 B.R. 425, 436 (B.A.P. 10th Cir.

2019). It stated that the sanction fell under the bankruptcy court’s inherent power and

should be exercised with restraint. Although it acknowledged that the Tenth Circuit had

not previously recognized the mitigating factors relied on by the bankruptcy court, the

BAP saw no problem with the bankruptcy court’s considering them in deciding on its

sanction. It did not address SEPH’s argument that the bankruptcy court’s sua sponte

assessment of mitigating factors was without evidentiary basis.

       V.     ANALYSIS

       “Although this appeal is from a decision by the BAP, we review only the

Bankruptcy Court’s decision.” First Nat’l Bank of Durango v. Woods (In re Woods), 743

F.3d 689, 692 (10th Cir. 2014) (internal quotation marks omitted). “We review the

imposition of an attorney-fee sanction, whether rooted in statute, rule, or a court’s

inherent authority, only for an abuse of discretion.” Farmer v. Banco Popular of N. Am.,

                                              13
791 F.3d 1246, 1256 (10th Cir. 2015); see Jensen v. U.S. Tr. (In re Smitty’s Truck Stop,

Inc.), 210 B.R. 844, 846, 847–48 (B.A.P. 10th Cir. 1997) (reviewing sanctions for

violations of § 329(a) and Rule 2016(b) for abuse of discretion). “A [bankruptcy] court

abuses its discretion when it (1) fails to exercise meaningful discretion, such as acting

arbitrarily or not at all, (2) commits an error of law, such as applying an incorrect legal

standard or misapplying the correct legal standard, or (3) relies on clearly erroneous

factual findings.” Farmer, 791 F.3d at 1256.

              A.     Required Disclosures and Sanctions for Noncompliance

       It is undisputed that Mr. Welch violated the disclosure requirements of § 329(a) of

the Bankruptcy Code and Bankruptcy Rule 2016(b). The attorney’s duty of disclosure is

that of a fiduciary. See Mapother & Mapother, P.S.C. v. Cooper (In re Downs), 103 F.3d

472, 480 (6th Cir. 1996) (“Section 329 and Rule 2016 are fundamentally rooted in the

fiduciary relationship between attorneys and the court. Thus, the fulfillment of the duties

imposed under these provisions are crucial to the administration and disposition of

proceedings before the bankruptcy courts.”); Futuronics Corp. v. Arutt, Nachamie &

Benjamin (In re Futuronics Corp.), 655 F.2d 463, 470 (2d Cir. 1981).

       Courts have found violations of the duty to be intolerable, and the sanctions

imposed have been harsh, going far beyond the need to compensate for the damage done

or even to deter the specific offender. For example, in Futuronics a law firm had failed

to disclose a fee-sharing arrangement with another firm. See id. at 470. Such

arrangements are prohibited by the bankruptcy statute “because of their natural tendency

to cause an attorney to inflate his fees in order to offset the diminution in compensation

                                             14
caused by the agreement.” Id.; see Fed. R. Bankr. P. 2016(b) (disclosure shall include

“whether the attorney has shared or agreed to share the compensation with any other

entity”). The law firm argued that “none of the evils that otherwise might be attributable

to fee-sharing or their other acts manifested themselves” in the case because the

bankruptcy proceedings were a great success, Futuronics, 655 F.2d at 471, with general

creditors possibly receiving 100% payment, see id. at 466. Apparently recognizing this,

the bankruptcy judge allowed the firm $850,000 in fees (including a $200,000 bonus!)

after imposing a penalty of $190,000. See id. at 468. But because of the potential harm

from the firm’s conduct, the circuit court affirmed the district court’s ruling that the

bankruptcy court had abused its discretion by allowing any fees. See id. at 471. Perhaps

the harshness of sanctions has had the desired deterrent effect, because there are

relatively few reported cases of violations among the many, many bankruptcy

proceedings that are filed.

       Other circuits have similarly supported the full disgorgement or denial of fees for

§ 329(a) violations. See Lewis, 113 F.3d at 1045–46 (affirming bankruptcy court’s

exercise of its inherent authority over debtor attorney’s compensation by completely

denying attorney fees for failure to disclose under § 329(a)); Downs, 103 F.3d at 478

(reversing district court’s affirmance of bankruptcy court’s order because it failed to

impose complete disgorgement and denial of fees, explaining 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.”); Neben & Starrett, Inc. v. Chartwell Fin. Corp.

(In re Park-Helena Corp.), 63 F.3d 877, 882 (9th Cir. 1995) (“Even a negligent or

                                              15
inadvertent failure to disclose fully relevant information may result in a denial of all

requested fees. . . . The court’s denial of all fees was within its discretion.”). See

generally Redding, 263 B.R. at 880 (“It is well settled that disgorgement of fees is an

appropriate sanction for failure to comply with the disclosure requirements of section 329

and Rule 2016. Indeed, the Courts of Appeal which have addressed this and similar

disclosure issues are emphatic in affirming the grant of sanctions.”).

       The view underlying the imposition of total disgorgement for failure to disclose

has been well-expressed by Bankruptcy Judge Michael of this circuit:

       Ours is a system built upon the principle of full and candid disclosure.
       Debtors must truthfully and accurately list all of their assets and all of their
       liabilities. Counsel must honestly and completely disclose the full nature of
       their relationship with their clients. Creditors must honestly and correctly
       calculate and state their claims. It is these disclosures which allow the
       public to have confidence in the system, and hopefully to believe that
       bankruptcy laws exist to protect the “honest but unfortunate” debtor, that
       those creditors who receive funds receive only their just and proper share,
       and that those who represent debtors perform a service beyond satisfaction
       of their selfish avarice. Without those beliefs, public confidence in the
       bankruptcy process, and perhaps far more, is placed at risk.

       The fragility of the system is found in the fact that many of the required
       disclosures are difficult if not impossible to police, at least in a cost-
       effective manner.

In re Lewis, 309 B.R. 597, 602–03 (Bankr. N.D. Okla. 2004). As a result, sanctions must

sting hard: “The bankruptcy system functions on the premise that the overwhelming

                                              16
majority of those who utilize it are honest, that those who are dishonest are [not] 2 likely

to be caught, and that the penalties for dishonesty are severe.” Id. at 603 n.16.

       It should come as no surprise that this circuit, and, at least until now, the lower

courts in this circuit, have also consistently affirmed the denial of all fees for § 329(a)

violations. See Turner v. Davis, Gillenwater & Lynch (In re Investment Bankers), 4 F.3d

1556, 1565 (10th Cir. 1993) (“[A]n attorney who fails to comply with the requirements of

§ 329 forfeits any right to receive compensation for services rendered on behalf of the

debtor, . . . and a court may order an attorney sua sponte to disgorge funds already paid to

the attorney.”); Fairshter v. Stinky Love, Inc. (In re Lacy), 306 F. App’x 413, 419–20

(10th Cir. 2008) (unpublished) (following Turner); Quiat v. Berger (In re Vann), 986

F.2d 1431, at *2 (10th Cir. 1993) (unpublished) (affirming full disgorgement of fees

2
  The not is not in the original text. But we assume that is a scrivener’s error. After all,
the sentence appears in a footnote to the sentence in the text that says that “many of the
required disclosures are difficult if not impossible to police, at least in a cost-effective
manner.” 309 B.R. at 603. And it would be somewhat inconsistent to say that we are so
dependent on the honesty of lawyers in bankruptcy cases if we are usually able to detect
the dishonesty. Besides, the usual thinking is that sanctions must be harsher when
detection of misconduct is difficult. A severe sanction on those who misbehave may
deter people even if the likelihood of being caught is small. See Jeremy Bentham, The
Theory of Legislation 325 (C.K. Ogden ed. 1931) (“The more deficient in certainty a
punishment is, the severer it should be.”); cf. Dixon v. District of Columbia, 666 F.3d
1337, 1343 (D.C. Cir. 2011) (“An individual officer can catch only so many speeding
motorists. . . . It is precisely the severity of such sanctions that can be expected to deter
some motorists from speeding.”); Directv, Inc. v. Barczewski, 604 F.3d 1004, 1010 (7th
Cir. 2010) (“One economically sound way to determine a penalty is to divide the harm
done by the probability of apprehension. See Gary S. Becker, Crime and Punishment: An
Economic Approach, 76 J. Pol. Econ. 169 (1968), a theory of sanctions that played a role
in his receipt of a Nobel Prize in 1992. . . . Thus if signal theft enables a person to avoid
paying $200 in fees to DirecTV, and only 1 in 50 signal thieves is caught, the appropriate
penalty would be $10,000.”).
                                              17
when attorney failed to comply with Rule 2016(b) and disclosure statements were wholly

inadequate to determine reasonableness of fees); Smitty’s Truck Stop, 210 B.R. at 847,

849 (affirming full disgorgement of $5000 retainer and denial of fees even though

Chapter 11 attorney argued inadvertence and that the information was disclosed in part in

debtor’s statement of affairs because “a clear violation of § 329 and Rule

2016(b)[,] . . .[e]ven if this failure was negligent or inadvertent, . . . is sufficient, in itself,

to deny all fees”); In re Brown, 371 B.R. 486, 492 n.17, 501–04 (Bankr. N.D. Okla.

2007) (ordering disgorgement of all $10,697.08 in payments because of failure to seek

approval under § 330 and to disclose under § 329, but allowing $460 used toward court

costs), amended on other grounds by 370 B.R. 505 (Bankr. N.D. Okla. 2007); In re

Bartmann, 320 B.R. 725, 750 (Bankr. N.D. Okla. 2004) (ordering disgorgement of

undisclosed compensation in the amount of $28,000 for violations of §§ 327 and 329, and

Bankruptcy Rules 2014 and 2016; although the Trustee argued that the attorney should

disgorge all undisclosed fees and the attorney had been paid $38,000 prepetition, the

Trustee sought disgorgement of only $28,000, perhaps because it was debatable whether

some of the fees were paid in connection with the bankruptcy); Lewis, 309 B.R. at 606,

611 (ordering disgorgement of all $892 in one case and denial of all fees sought in

another because of failure to disclose); In re Woodward, 229 B.R. 468, 475 (Bankr. N.D.

Okla. 1999) (ordering disgorgement of $2500 fee because the “law is clear that the failure

to properly disclose compensation received is in and of itself grounds for disgorgement”).

       In short, the disgorgement sanction imposed on attorneys for violating their duties

of disclosure to the bankruptcy court is of the nature of a sanction for breach of fiduciary

                                                18
duty. The case law under Federal Rule of Civil Procedure 11 invoked by the bankruptcy

court and the BAP in this proceeding is inapposite. Unlike a failure to make disclosures

required by § 329(a) and Bankruptcy Rule 2016(b), a violation of Rule 11—generally

based on the lack of factual or legal support for a party’s claims or defenses—is highly

likely to see the light of day. When the great majority of violations are likely to be

discovered, the need for harsh sanctions is greatly diminished. The lesson of the case law

discussed above is that imposition of the least possible sanction as the standard for

violations of § 329(a) and Bankruptcy Rule 2016(b) would not be effective in assuring

compliance. Or, to put the matter another way, the least possible sanction to assure

compliance by others is generally disgorgement of the entire fee.

       A better analogy than Rule 11 is presented by Eastman v. Union Pacific Railroad

Co., 493 F.3d 1151, 1158–60 (10th Cir. 2007), where we held that a debtor who failed to

disclose to the bankruptcy court a cause of action that could be an asset of the estate was

judicially estopped from bringing the claim after closure of the bankruptcy proceeding.

Before filing for bankruptcy, the debtor had brought a personal-injury suit against nine

defendants in federal court. See id. at 1153, 1159. He intentionally failed to disclose this

litigation in his filings and testimony in bankruptcy court. See id. at 1153–55, 1158–59.

About a year after the debtor obtained a discharge in his Chapter 7 bankruptcy, his

personal-injury lawyer discovered that there had been bankruptcy proceedings and

promptly informed the bankruptcy trustee. The trustee successfully moved to reopen the

bankruptcy and was substituted as the real party in interest in the personal-injury action.

See id. at 1154. The trustee settled with two of the personal-injury defendants, obtaining

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enough funds to pay all allowable creditor claims. See id. at 1155. The district court

ruled that the debtor could not pursue the personal-injury claims, holding that he was

judicially estopped because he had obtained his discharge in bankruptcy on the

representation that he had no such asset. See id. at 1154–55 & n.3. We affirmed. In light

of the seductive “motive to conceal legal claims and reap the financial rewards,” “[t]he

doctrine of judicial estoppel serves to offset such motive, inducing debtors to be

completely truthful in their bankruptcy disclosures.” Id. at 1159. We explained that it

would not be enough to simply return the debtor to the position he would be in if he had

made the proper disclosures:

       That [the debtor’s] bankruptcy was reopened and his creditors were made
       whole once his omission became known is inconsequential. A discharge in
       bankruptcy is sufficient to establish a basis for judicial estoppel, even if the
       discharge is later vacated. Allowing [the debtor] to “back up” and benefit
       from the reopening of his bankruptcy only after his omission had been
       exposed would suggest that a debtor should consider disclosing potential
       assets only if he is caught concealing them. This so-called remedy would
       only diminish the necessary incentive to provide the bankruptcy court with
       a truthful disclosure of the debtor’s assets.

Id. at 1160 (original brackets, citations, and further internal quotation marks omitted). In

our view, a similar approach is warranted when the debtor’s attorney does not make the

required disclosures regarding the terms of the representation and compensation received.

       This is not to say that full disgorgement is always appropriate for failure to

disclose under § 329. But it should be the default sanction, and there must be sound

reasons for anything less. For example, in a case where the attorney violated a different

fiduciary duty (the attorney had a conflict of interest when he acquired a creditor’s

interest in the bankruptcy estate while providing legal services to the trustee) we said:

                                              20
“In exercising the discretion granted by the statute we think the court should lean

strongly toward denial of fees, and if the past benefit to the wrongdoer fiduciary can be

quantified, to require disgorgement of compensation previously paid that fiduciary even

before the conflict arose. This approach is most in keeping with common law fiduciary

principles and best serves the deterrence purpose of the rule.” Gray v. English, 30 F.3d

1319, 1324 (10th Cir. 1994) (emphasis added). Nevertheless, we held that the

bankruptcy court had not abused its discretion in declining to require disgorgement of

fees earned before the conflict of interest arose or of fees for work by other attorneys in

the conflicted attorney’s law firm, who knew nothing of his conflict. We noted that the

bankruptcy court had “credited [the attorney] with having performed extraordinary

services to the estate both before and after he acquired the creditor’s interest,” that there

was no embezzlement or self-dealing, and that “the principal harm done by [the

conflicted attorney] was to the creditor whose claim he acquired” and that creditor had

apparently obtained satisfaction from the attorney for that harm. Id. We concluded, “It is

a close case, and we might well have upheld more severe punishment of [the conflicted

attorney] and his law firm, to whom his conflict was attributable under ordinary agency

principles,” but we deferred to the bankruptcy judge. Id. at 1324–25.

       It would be unwise to try to catalog all potential mitigating circumstances. But

they must be compelling ones. For example, in In re Wright, 591 B.R. 68 (Bankr. N.D.

Okla. 2018), an opinion consolidating 13 bankruptcy proceedings, the court said that full

disgorgement of all fees was appropriate, but it limited disgorgement to postpetition

payments. See id. at 95. According to the court, ordering disgorgement of the prepetition

                                              21
fees, often less than $200, “would be administratively unworkable, since some of the funds

paid by the debtors pre-petition were allocated to court fees and other miscellaneous

services.” Id.

       Or the breach may have been only a technical one. See Vergos v. Mendes &

Gonzalez PLLC (In re McCrary & Dunlap Const. Co.), LLC, 79 F. App’x 770, 780

(6th Cir. 2003) (unpublished) (“[W]hile a bankruptcy court does not abuse its discretion

if it denies all compensation where, through mere negligence, an attorney fails to satisfy

the requirements of the Code and Rules, . . . a ‘technical breach’ of the Code and Rules

generally warrants a sanction far more lenient than full disgorgement and denial of all

compensation.”). But see id. at 786 (Batchelder, J., dissenting) (full disgorgement was

appropriate because law firm held itself out as experienced and should be held to that

standard).

       Additional situations when leniency may be warranted can be addressed when

they arise.

                 B.   Application to This Case

       Mr. Welch egregiously violated the disclosure requirements of § 329(a) and

Bankruptcy Rule 2016(b). As the bankruptcy judge noted, he probably never would have

made the disclosures had the court not ordered him to. The disclosures came more than

two years after he was required to disclose his compensation agreement with the Stewarts

and more than a year after he was required to report the $350,000 paid him.

       As explained above, the default sanction for Mr. Welch’s failures to disclose is

that he must disgorge all fees received in connection with the bankruptcy. The

                                            22
bankruptcy court could order a lesser disgorgement, but only for sound reasons supported

by solid evidence. Otherwise, the failure to disgorge all fees is an abuse of discretion.

On the record before us, we must hold that there was an abuse of discretion in this case.

       The bankruptcy court’s reasons for disgorging only a small fraction of Mr.

Welch’s fee were wholly inadequate. Without any evidence, or even a supporting

argument from Mr. Welch, it speculated that Mr. Welch had never been sanctioned, had

not represented debtors in Chapter 7 proceedings and was not familiar with the disclosure

requirements, and would face financial catastrophe if he had to disgorge the full fee. The

court relied on its common sense and long experience with bankruptcy practice. We fail,

however, to see how those sources could provide a basis for those grounds favoring only

partial disgorgement. We believe the bankruptcy judge’s experience and participation in

the proceedings could support its determination that Mr. Welch had provided exceptional

representation to his clients. But a conclusory statement does not suffice. Particularly

given the court’s observation about the lack of candor and honesty of his clients, we

should note that it would not be enough to fight tooth and nail in defense of indefensible

improprieties of a client. On the other hand, credit should be given to an attorney who

manages to convince the client of the need for full disclosure and candor in the

proceedings.

       Most importantly, however, the bankruptcy court failed to examine the source of

the payments to Mr. Welch. The court seems to have inferred from Mr. Welch’s talent

and experience that his failures to disclose must have been inadvertent. But an

alternative hypothesis is that he surely knew of his duty and must have had some very

                                             23
strong reason to keep the payments secret. If, for example, he had thought that disclosure

would lead to substantial challenges to the payments (as indeed occurred), he would have

had a motive not to disclose. The lure of an uncontested $350,000 might induce some

people to violate the disclosure requirements, particularly if the downside risk was

limited to a $25,000 penalty and criticism in a bankruptcy-court opinion.

       We would therefore expect the court to examine those payments before deciding

not to require complete disgorgement. Consider the contingency-fee payment of

$144,591.85. The only document entitling him to that fee is dated shortly before the BP

settlement and about a month after he had informed the Trustee that there was movement

in the BP litigation. That is pretty late in the litigation to be adding a recipient of a

contingency fee, yet there is no evidence that he had been promised any contingency fee

before the document was executed. Also, there is a question about the value of the work

he purportedly performed to earn that fee —“advis[ing] and assist[ing] the non-debtor

claimants in providing substantiating documents to support [the chief attorney] in the

settlement process and negotiat[ing] specific language to the settlement agreements.”

Aplt. App., Vol. 13 at 3305. Mr. Welch would not be entitled to the fee if it were merely

a device to divert to him money that would otherwise be available for creditors of the

Stewarts’ companies.

       The other payment was $203,812.56 out of Neverve’s net share of the BP

proceeds. SEPH makes two plausible arguments why that payment was improper. First,

it contends that it had a security interest in BP payments to any of the Stewarts’

companies. Second, as we understand the point, it argues that any disbursement by

                                              24
Neverve for the Stewarts’ benefit was a dividend to them and therefore property of the

estate.

          We make no judgment on the validity of the challenges to these payments to Mr.

Welch. The challenges may lack merit. But Mr. Welch’s burden on the disgorgement

issue requires more than simply prevailing on the challenges. Even if they fail, they may

have caused sufficient concern to induce him to avoid the challenges by keeping the

payments secret. As we said before about a debtor’s failure to disclose a cause of action

as an asset of the estate, allowing the debtor “to back up and benefit from the reopening

of his bankruptcy only after his admission had been exposed would suggest that a debtor

should consider disclosing potential assets only if he is caught concealing them.”

Eastman, 493 F.3d at 1160 (brackets and internal quotation marks omitted). If the sole

penalty for not disclosing is that the debtor’s attorney has to face the challenges that

would have presented themselves had he disclosed the matter as required, then there is no

incentive to comply with disclosure requirements.

          For the above reasons, we must reverse the bankruptcy court’s disgorgement order

and remand for further proceedings. 3

3
  We realize that if further disgorgement seems proper, a question may arise regarding
where the disgorged funds should go. We leave that possibility for the bankruptcy court
to resolve in the first instance, because what is determined on remand may moot the
issue. There may be no further disgorgement; or it may be determined that all the funds
paid to Mr. Welch were property of the estate or subject to liens of creditors.
                                             25
       VI.    CONCLUSION

       We REVERSE the bankruptcy court’s order requiring Mr. Welch to pay to the

Trustee $25,000 for the benefit of the estate and REMAND for further proceedings

consistent with this opinion.

                                         26