Court Opinion

ID: 2654757
Source: CourtListenerOpinion
Date Created: 2014-02-27 01:02:08.345991+00
Date Added: 2024-06-11T12:58:50.821740
License: Public Domain

FILED
                                                              2/26/2014
 1
                                                        SUSAN M. SPRAUL, CLERK
                                                          U.S. BKCY. APP. PANEL
 2                                                        OF THE NINTH CIRCUIT

 3                  UNITED STATES BANKRUPTCY APPELLATE PANEL
 4                            OF THE NINTH CIRCUIT
 5   In re:                        )      BAP No.      AZ-13-1118-KuDPa
                                   )
 6   WADE SMITH and                )      Bk. No.      12-02509
     HAZEL CAMPBELL-SMITH,         )
 7                                 )
                     Debtors.      )
 8   ______________________________)
                                   )
 9   FRUTKIN LAW FIRM, PLC,        )
                                   )
10                   Appellant,    )
                                   )
11   v.                            )      MEMORANDUM*
                                   )
12   RUSSELL A. BROWN, Chapter 13 )
     Trustee; WADE SMITH; HAZEL    )
13   CAMPBELL-SMITH,               )
                                   )
14                   Appellees.**  )
     ______________________________)
15
                    Argued and Submitted on January 23, 2014
16                              at Tempe, Arizona
17                         Filed – February 26, 2014
18             Appeal from the United States Bankruptcy Court
                         for the District of Arizona
19
        Honorable Sarah Sharer Curley, Bankruptcy Judge, Presiding
20
     Appearances:     Carolyn R. Tatkin of the Frutkin Law Firm, PLC
21                    argued for Appellant the Frutkin Law Firm, PLC.
22
     Before: KURTZ, DUNN and PAPPAS, Bankruptcy Judges.
23
24        *
           This disposition is not appropriate for publication.
25   Although it may be cited for whatever persuasive value it may
     have (see Fed. R. App. P. 32.1), it has no precedential value.
26   See 9th Cir. BAP Rule 8013-1.
27        **
           While each of the above-captioned appellees was listed in
28   the notice of appeal as a party to the order on appeal, none of
     them have actively participated in this matter either in the
     bankruptcy court or on appeal.
 1                              INTRODUCTION
 2        Appellant the Frutkin Law Firm, PLC (“Frutkin”) filed an
 3   application in the debtors’ chapter 131 bankruptcy case seeking
 4   interim compensation on an hourly fee basis.   The bankruptcy
 5   court granted the application in part and denied it in part, and
 6   Frutkin filed a motion for reconsideration.    The bankruptcy
 7   court, upon reconsideration, vacated its interim fee order and
 8   granted Frutkin even less fees, limiting its fee award to $2,500,
 9   the flat fee stated in Frutkin’s initial compensation disclosure
10   filed pursuant to § 349(a) and Rule 2016(b).   Frutkin appealed.
11        The bankruptcy court did not abuse its discretion in
12   limiting Frutkin’s fees based on the contents of the initial
13   disclosure.   Therefore, we AFFIRM.
14                                   FACTS
15        On February 13, 2012, Frutkin filed a chapter 13 petition
16   and plan on behalf of debtors Wade Smith and Hazel
17   Campbell-Smith.   On that same date, Frutkin filed a disclosure
18   pursuant to § 349(a) and Rule 2016(b) regarding its compensation
19   for representing the Smiths in their bankruptcy case.   Frutkin
20   represented in its Rule 2016 disclosure that, prior to the
21   bankruptcy filing, it had received from the Smiths a $2,500 flat
22   fee in exchange for its legal services covering “all aspects” of
23   the Smiths’ bankruptcy case.2   One of the attorneys employed by
24
          1
           Unless specified otherwise, all chapter and section
25   references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532, and
26   all "Rule" references are to the Federal Rules of Bankruptcy
     Procedure, Rules 1001-9037.
27
          2
           The disclosure stated that adversary proceedings and relief
28                                                      (continued...)

                                       2
 1   Frutkin signed the Rule 2016 disclosure, in the process
 2   certifying that the disclosure constituted “a complete statement
 3   of any agreement or arrangement” regarding Frutkin’s compensation
 4   for representing the Smiths in the bankruptcy case.
 5        Apparently, the Rule 2016 disclosure was inaccurate.     As
 6   Frutkin later disclosed, instead of a $2,500 flat fee for its
 7   bankruptcy services, Frutkin had agreed with the Smiths to an
 8   hourly fee arrangement, with the $2,500 paid prepetition to be
 9   applied against any fees approved by the bankruptcy court, and
10   any approved fees in excess of the $2,500 to be paid pursuant to
11   the Smiths' confirmed chapter 13 plan.
12        Notwithstanding the inaccuracy of the initial disclosure,
13   Frutkin did not file an amended Rule 2016 disclosure until
14   October 30, 2012, over eight months after the commencement of the
15   bankruptcy case.   According to Frutkin, it did not review its
16   initial disclosure and discover that it was inaccurate until
17   sometime in late September or early October 2012, as it worked on
18   its response to the chapter 13 trustee’s September 28, 2012
19   recommendations concerning the Smiths’ amended chapter 13 plan.
20        Frutkin filed its interim fee application in November 2012.
21   The fee application sought approval of roughly $10,300 in fees
22   and costs in aggregate.   Frutkin sought to retain the $2,500 the
23   Smiths had paid prepetition, plus it sought payment from the
24   bankruptcy estate of roughly $7,800 as an administrative expense
25
26        2
           (...continued)
27   from stay proceedings were excepted from coverage. These
     coverage exceptions are not relevant to our resolution of this
28   appeal.

                                      3
 1   pursuant to §§ 330(a)(4)(B), 331 and 503(b)(2).
 2        The bankruptcy court granted the fee application in part and
 3   denied it in part.   The bankruptcy court expressed concern that
 4   the $2,500 paid prepetition might amount to a preference under
 5   § 547 to the extent the cash was paid on account of services
 6   previously rendered.   The court also was concerned that, to the
 7   extent there were fees owed to Frutkin but unpaid as of the
 8   petition date, Frutkin would have qualified as a creditor and
 9   hence would not have been disinterested.   Based on these
10   concerns, the bankruptcy court directed Frutkin to turn over the
11   $2,500 to the chapter 13 trustee but at the same time directed
12   the trustee to pay roughly $7,800 to Frutkin.
13        Frutkin then filed a motion for reconsideration of the
14   interim fee order.   In its reconsideration motion, Frutkin
15   asserted that the disinterestedness standard does not apply in
16   chapter 13 cases.    Frutkin further asserted that all of the
17   services it provided were rendered “in connection with the
18   bankruptcy case” and thus were entitled to administrative expense
19   priority status under §§ 330(a)(4)(B) and 503(b)(2).   As a result
20   of this status, Frutkin contended, the $2,500 was not recoverable
21   as a preference.
22        The bankruptcy court held a hearing on the reconsideration
23   motion on February 27, 2013.   At the hearing, the court granted
24   reconsideration of its interim fee order in the sense that it
25   vacated the order and replaced it with a new and different ruling
26   regarding Frutkin’s fees.   But the court’s reconsideration did
27   not lead to an increase in Frutkin’s fee award as Frutkin had
28   sought.   Rather, the court’s ruling effectively reduced the fees

                                       4
 1   awarded from $7,800 to $2,500.
 2        The bankruptcy court acknowledged and considered Frutkin’s
 3   point that, generally speaking, §§ 330(a)(4)(B) and 503(b)(2)
 4   provide counsel for chapter 12 and 13 debtors with a first-
 5   priority administrative claim for fees incurred in connection
 6   with the case.   However, according to the court, it was subject
 7   to debate what scope of prepetition services was sufficiently
 8   connected to the case to qualify for administrative expense
 9   status.   And any connection here, the court reasoned, was
10   attenuated by the prolonged period of time (roughly six months)
11   during which the prepetition services were performed before the
12   bankruptcy case was filed.
13        In any event, the bankruptcy court identified a different
14   and overriding concern: the court was troubled by Frutkin’s lack
15   of timely efforts to accurately disclose its compensation
16   agreement with the Smiths.   The court found: (1) that the initial
17   disclosure inaccurately represented that the parties had agreed
18   to a $2,500 flat fee, when in fact they actually had agreed to an
19   hourly fee arrangement; (2) that Frutkin did not amend its
20   disclosure to correct this inaccuracy until roughly eight months
21   later, shortly before it filed its interim fee application;
22   (3) that the amended disclosure left unanswered a number of
23   questions, such as why the initial disclosure was inaccurate, why
24   it took so long to correct it, and precisely when the $2,500 was
25   paid; and (4) that, in sum, the amended disclosure was too little
26   and too late to meaningfully cure the deficiencies associated
27   with the initial disclosure.
28        Based on its concerns regarding Frutkin’s disclosure

                                      5
 1   efforts, the bankruptcy court held that it only would award
 2   Frutkin fees and costs in the fixed amount of $2,500, the flat
 3   fee Frutkin had represented was agreed to in its initial
 4   disclosure.   On March 4, 2013, the bankruptcy court entered a
 5   minute order reflecting the new fee award, and on March 13, 2013,
 6   Frutkin timely appealed.
 7                              JURISDICTION
 8        The bankruptcy court had jurisdiction pursuant to 28 U.S.C.
 9   §§ 1334 and 157(b)(2)(A) and (B).    We have jurisdiction under
10   28 U.S.C. § 158.3
11                                  ISSUE
12        Did the bankruptcy court abuse its discretion when it
13   limited Frutkin’s compensation to the $2,500 disclosed as a flat
14   fee in Frutkin’s initial Rule 2016 disclosure?
15                           STANDARDS OF REVIEW
16        We review the bankruptcy court’s fee award for an abuse of
17   discretion.   See Law Offices of Nicholas A. Franke v. Tiffany
18   (In re Lewis), 113 F.3d 1040, 1043 (9th Cir. 1997).    We similarly
19   review the bankruptcy court’s decision on a reconsideration
20   motion.   See First Ave. W. Bldg. LLC v. James (In re OneCast
21
22        3
           The record in this appeal reflects that the order on
23   Frutkin’s reconsideration motion was the bankruptcy court’s final
     determination of Frutkin’s entitlement to fees. The court made
24   it clear at the reconsideration hearing that there would be no
     additional fees granted. See Hr’g Tr. (Feb. 27, 2013) at
25   19:1-20:19. Moreover, shortly after the reconsideration hearing,
26   new counsel for the Smiths substituted into the case in place of
     Frutkin, and then the Smiths voluntarily dismissed their case.
27   Under these circumstances, the order appealed qualifies as a
     final and appealable order. See Yermakov v. Fitzsimmons
28   (In re Yermakov), 718 F.2d 1465, 1469 (9th Cir. 1983).

                                      6
 1   Media, Inc.), 439 F.3d 558, 561 (9th Cir. 2006).
 2        The bankruptcy court abuses its discretion if it identifies
 3   and applies the wrong legal rule or if its findings of fact are
 4   illogical, implausible or without adequate support in the record.
 5   See United States v. Hinkson, 585 F.3d 1247, 1261–62 (9th Cir.
 6   2009) (en banc); see also Ferrette & Slater v. U.S. Trustee
 7   (In re Garcia), 335 B.R. 717, 723 (9th Cir. BAP 2005) (“We do not
 8   disturb a bankruptcy court's award of attorneys' fees, unless the
 9   court abused its discretion or erroneously applied the law.”).
10                                    DISCUSSION
11        Section 329(a) and Rule 2016(b) are part of a regulatory
12   scheme put in place to combat overreaching by debtor’s counsel in
13   the process of negotiating and seeking compensation.             See Hale v.
14   U.S. Trustee (In re Basham), 208 B.R. 926, 933 & n.11 (9th Cir.
15   BAP 1997); 3 COLLIER   ON   BANKRUPTCY ¶ 329.01 (Alan N. Resnick & Henry
16   J. Sommer, eds., 16th ed. 2013).          They require a debtor's counsel
17   to disclose any compensation the debtor has paid or agreed to pay
18   within one year before the bankruptcy filing, regardless of
19   whether counsel will be seeking employment by or compensation
20   from the bankruptcy estate.        See In re Mayeaux, 269 B.R. 614, 622
21   n.14 (Bankr. E.D. Tex. 2001); 3 COLLIER       ON   BANKRUPTCY, supra, at
22   ¶ 329.01; Keith M. Lundin & William H. Brown, CHAPTER 13 BANKRUPTCY
23   § 294.1, at ¶¶ 2, 3 (4th ed., Sec. Rev. June 17, 2004,
24   www.Ch13online.com).
25        The requisite disclosure must be filed within 14 days of the
26   order for relief.      See Rule 2016(b).      Further, it must be
27   supplemented in writing within 14 days if additional or different
28   compensation is paid or agreed to.         See id.     These disclosure

                                           7
 1   requirements are mandatory and not permissive.   In re Basham,
 2   208 B.R. at 931.   If counsel fails to properly disclose
 3   compensation paid or agreed to, the bankruptcy court has
 4   discretion to reduce or completely deny fees, even if the error
 5   or omission in disclosure was inadvertent.   In re Lewis, 113 F.3d
 6   at 1045 (citing Nebben & Starrett, Inc. v. Chartwell Fin. Corp.
 7   (In re Park–Helena Corp.), 63 F.3d 877, 882 (9th Cir. 1995)).
 8        Frutkin argues that the bankruptcy court erred as a matter
 9   of law in reducing its fee award because the court improperly
10   considered concepts not relevant to Frutkin’s representation of
11   chapter 13 debtors, such as the concept of disinterestedness.4
12   Frutkin further argues that many of the cases on which the
13   bankruptcy court relied are distinguishable because they were
14   chapter 11 cases in which counsel’s employment as an estate
15   professional under § 327 and Rule 2014 was at issue.
16        While the bankruptcy court did initially express some
17   concern regarding Frutkin’s disinterestedness and did cite to
18   several chapter 11 cases concerning employment under § 327,
19   Frutkin’s emphasis on these points is unwarranted.   A fair
20   reading of the bankruptcy court’s decision in its entirety
21   reflects that the court’s ruling hinged on § 329(a), Rule
22   2016(b), and Frutkin’s defective initial disclosure.   And it is
23   beyond dispute that the disclosures required by § 329(a) and
24
          4
           For purposes of considering Frutkin’s arguments, we assume
25   without deciding that the Bankruptcy Code does not require
26   disinterestedness in order to employ and compensate chapter 13
     debtor’s counsel. See In re Gutierrez, 309 B.R. 488, 500-01
27   (Bankr. W.D. Tex. 2004); In re Busetta-Silvia, 300 B.R. 543,
     549-50 & n.11 (Bankr. D.N.M. 2003), rev’d on other grounds,
28   314 B.R. 218 (10th Cir. BAP 2004).

                                      8
 1   Rule 2016(b) apply to chapter 13 debtor’s counsel.         See CHAPTER 13
 2   BANKRUPTCY, supra, § 294.1, at ¶ 2.       Indeed, these disclosure
 3   requirements are especially important in chapter 13 cases because
 4   the bankruptcy court typically has little or no opportunity in
 5   such cases to formally consider attorney employment and
 6   compensation.   See In re Berg, 356 B.R. 378, 381 (Bankr. E.D. Pa.
 7   2006) (citing In re Fricker, 131 B.R. 932, 940-41 (Bankr. E.D.
 8   Pa. 1991)); see also 9 COLLIER   ON   BANKRUPTCY, supra, at ¶ 2016.18.
 9        Frutkin alternately contends that the bankruptcy court erred
10   in reducing its fees because its hourly fee arrangement was duly
11   referenced in other documents, namely in the Smiths’ chapter 13
12   plans, in its amended Rule 2016 disclosure, and ultimately in its
13   interim fee application.   But this panel previously has held
14   that, even when the correct information is supplied in one or
15   more other documents filed in the bankruptcy court, the
16   bankruptcy court is not obliged to excuse counsel’s defective
17   compliance with § 329(a) and Rule 2016(b).        See In re Basham,
18   208 B.R. at 931.   Moreover, the presence of correct information
19   in other documents is of dubious assistance to the bankruptcy
20   court when, as here, the court is confronted with incorrect
21   information in the initial Rule 2016 disclosure.
22        This is not to say that a mistake in the initial Rule 2016
23   disclosure necessarily is irrevocable.        Under certain
24   circumstances, a debtor’s counsel may be able to cure the
25   disclosure defect by expeditiously amending the disclosure.          But
26   the bankruptcy court here found that Frutkin’s amended disclosure
27   – filed roughly eight months after the bankruptcy case was
28   commenced – was not sufficiently expeditious or complete to

                                           9
 1   meaningfully rectify Frutkin’s disclosure error.        We cannot say
 2   that this finding was illogical, implausible or without support
 3   in the record.
 4        Frutkin counters that no one was harmed or prejudiced by its
 5   inaccurate disclosure.        Therefore, Frutkin asserts, the
 6   bankruptcy court should not have reduced its fee award based on
 7   the inaccurate disclosure.         But the Ninth Circuit has stated that
 8   the bankruptcy court may reduce or deny a fee award to debtor’s
 9   counsel based on an inaccurate disclosure even when there is no
10   actual harm to the estate.         See In re Park–Helena Corp., 63 F.3d
11   at 881.     Put another way, § 329(a) and Rule 2016(b) require
12   complete, precise and accurate disclosure and are strictly
13   enforced.        See id.; see also In re Fricker, 131 B.R. at 939;
14   9 COLLIER   ON   BANKRUPTCY, supra, at ¶ 2016.20.5
15        We acknowledge that Frutkin’s forfeiture of $7,800 in fees
16   may seem like a harsh result, especially given that its hourly
17   fee arrangement was disclosed in other court documents, its
18   disclosure error appeared inadvertent, and there was no apparent
19   harm to the estate resulting from the disclosure error.         We
20   further acknowledge that other bankruptcy courts under similar
21   circumstances may have chosen to exercise their discretion
22
23
          5
           In its appeal brief, Frutkin pointed out several times that
24   neither the Smiths nor any other interested party objected to its
     fees. This fact is of little significance, because the
25   bankruptcy court had an independent duty to review the
26   compensation Frutkin requested “notwithstanding the absence of
     objections by the trustee, debtor or creditors.” Lobel & Opera
27   v. U.S. Trustee (In re Auto Parts Club, Inc.), 211 B.R. 29, 33
     (9th Cir. BAP 1997) (citing In re Busy Beaver Building Ctrs.,
28   Inc., 19 F.3d 833, 841 (3d Cir. 1994)).

                                           10
 1   differently.   Even so, there simply is nothing in the record
 2   indicating that the bankruptcy court here abused its discretion.
 3   Moreover, Frutkin easily could have avoided this harsh result by
 4   taking simple steps to ensure that its initial Rule 2016
 5   disclosure was accurate and complete and, failing that, by
 6   expeditiously correcting its disclosure error.
 7                               CONCLUSION
 8        For the reasons set forth above, we AFFIRM the bankruptcy
 9   court’s order on Frutkin’s reconsideration motion.
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