Chief Judge Roger L. Efremsky • Clerk of Court Edward Emmons
UNITED STATES BANKRUPTCY COURT NORTHERN DISTRICT OF CALIFORNIA
In re No. 96-32188- WDM PAUL R. and MYRNA A. PEARSON, Debtor(s) ___________________________________/
On January 27, 1998, in the above-referenced converted Chapter 7 case, Richard G. Avila, Esq. ("Avila") filed a first and final Chapter 13 fee application for compensation ("Avila Application"). At the initial hearing on the Avila Application, the court noted numerous discrepancies and problems and set the matter for further hearing on April 17, 1998. On March 24, 1998, Avila filed his supplemental memorandum of points and authorities in support of the Avila Application. Edward M. Walsh ("Walsh"), the Chapter 7 trustee, filed a reply to the supplemental memorandum on April 6, 1998.(1) The United States Trustee ("UST") filed an objection to the Avila Application, as supplemented, on April 14, 1998. At the hearing on April 17, the court instructed the UST to file a response to issues raised at the hearing. On May 1, 1998, the UST filed an amended objection to the Avila Application, and the court took the Avila Application under submission. Upon reviewing the foregoing documents and other pleadings and evidence, the court hereby allows Avila $3200.00 in fees and costs (which amount he has already received), disallows and denies Avila's request for an additional $17,780.00 in fees and costs, orders Avila to disgorge $5,564.10 and expresses disapproval of certain practices apparently followed by some Chapter 13 practitioners in this district. These practices, discussed below, will not be tolerated by this court, and the UST and the Standing Chapter 13 Trustee for this Division are instructed to enforce this court's directives that follow.
Statement of Facts(2)
Avila filed a series of confusing and inconsistent documents regarding his fees and his employment; consequently, after spending much time attempting to reconcile these documents, the court will attempt to set forth the pertinent facts in chronological order.
On May 20, 1996, Paul and Myrna Pearson ("Debtors") filed their Chapter 13 bankruptcy case. At the time, they were represented by Avila. In his initial Disclosure of Compensation of Attorney for Debtors ("Statement of Compensation")(3) filed with Debtors' schedules and statement of financial affairs, Avila noted that prior to filing, he had received $3,880.00 "for services rendered or to be rendered on behalf of the debtors in contemplation of or in connection with the bankruptcy case." In response to Question 9 of their statement of financial affairs (also filed on May 20, 1996 and prepared by Avila), Debtors stated that they paid Avila $5,000 in April 1996 as "retainer for bankruptcy and for opposition to pending state court action." On May 20, 1996, Avila and Debtors also filed their executed Rights and Responsibilities of Chapter 13 Debtors and Their Attorneys ("Rights and Responsibilities Agreement"), a contractual form used in the San Francisco and San Jose divisions of this court.(4) The Rights and Responsibilities Agreement provides in relevant part (emphasis added): In order to assure that debtors and their attorney understand their rights and responsibilities in the bankruptcy process, the following guidelines provided by the court are hereby agreed to by the debtors and their attorneys. Unless the court orders otherwise,
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Initial fees charged in this case are $3,880.00 ($1,120 balance of $5,000 retainer for pre-petition state court representation). If the initial fees ordered by the court are not sufficient to compensate the attorney for the legal services rendered in the case, the attorney further agrees to apply to the court for any additional fees. Fees shall be paid through the plan unless otherwise ordered. The attorney may not receive fees directly from the debtor other than the initial retainer. September, 1996 Payments Notwithstanding the directives of paragraph 4 of the Guidelines (see, supra, footnote 4) and the covenants contained in the Rights and Responsibilities Agreement that counsel may not receive fees directly from Chapter 13 debtors other than the initial retainer, Avila received $1000 from Debtors, paid from Debtors' pre-petition cash savings, on September 16, 1996. On September 25, 1996, Avila received an additional $1500 payment from Debtors. These payments, totaling $2500, allegedly represented a retainer payment for the prosecution of an adversary proceeding relating to Debtor's residential lease. Both payments were made from funds that Debtors had identified as exempt in their schedules. These payments were first disclosed by Avila sixteen months after the fact, in a pleading filed on January 27, 1998.
September, 1996 Pleadings and October, 1996 Order
On September 18, 1996, Avila and Debtors filed - in one document(5) - amended schedules and statement of financial affairs, an Amended Statement of Compensation and an Amended Rights and Responsibilities Agreement. In an amended response to Question #9 of the statement of financial affairs, Debtors indicated that Avila received $5,000 on April 30, 1996; $1,800 of this payment was apportioned to the state court case ($370 filing fee and $1430 attorneys' fees) and $3,200 of this payment was apportioned to the Chapter 13 case ($160 filing fee and $3,040 in attorneys' fees). The Debtors did not mention the $1,000 post-petition retainer paid two days earlier or that they would be paying an additional $1500 as a post-petition retainer one week later. Similarly, the amended Statement of Compensation filed on September 18, 1996 shows that Avila had received $3,200 for the Chapter 13 case and $1,800 for the state court case. However, the September 16 post-petition retainer of $1,000 was not disclosed as a payment made and the September 25 post-petition retainer of $1500 was not disclosed as a payment to be made. Furthermore, in the amended Statement of Compensation, Avila misleadingly states that "$3,200 Chapter 13 basic case fee reduced $100 for 9/18/96 pre-hearing conference statement sanction to $3,040." This statement is inaccurate: Avila received $3,040 of the $3,200 Chapter 13 payment as fees and the $160 differential was the filing fee. No credit for the $100 sanction was actually given to debtors.(6) The Debtors also signed and filed an amended Rights and Responsibilities Agreement on September 18, 1996. This document showed that Avila had received $3,040 in fees on April 30, 1996, that "the balance owing of the $3,040 is $0 and is not to be paid through the Chapter 13 plan" and that "[f]ees re adversary proceeding re Shers to be approved by Fee Application." This amended document does not mention the post-petition retainer paid in September to cover the prosecution of the adversary proceeding. Significantly, this document does not mention the possibility that any funds remaining with the Chapter 13 trustee upon dismissal or conversion would be paid to Avila even if Avila had not received approval of such fees from the court. Instead, the document indicates that a zero balance was due and owing to Avila from the Chapter 13 trustee. On September 30, 1996, Avila filed an ex parte application for approval of attorneys' fees, requesting approval of the payment of $2,800, which purportedly represented the balance remaining on the $3,040 payment after deduction of $240 "to be held in attorney/client trust account pending fee application." This application notes that "Debtors' counsel will seek approval via Fee Application for additional costs and fees, including fees and costs for all work necessary to preserve Debtors' $80,000 below market Anza Street residence." Again, the application does not mention either one of the post-petition retainer payments (totalling $2,500) made on September 16 and September 25, 1996. In support of the ex parte application for approval of attorneys' fees, Avila also filed a declaration on September 30, 1996. In relevant part, the declaration states in paragraphs six and seven that Avila will seek permission in the future (emphasis in original) to exceed the applicable Guidelines and that he "merely seeks permission to accept and receive $2,800 of a $3,040 pre-petition retainer." Attached to the declaration are time records through September 27, 1996, showing work performed on the case but failing to show the September 16 and September 25 payments. On October 8, 1996, the court signed an order prepared by Avila allowing Avila to keep a portion of his pre-petition retainer.(7) The order provides that: "Debtors' counsel is authorized to receive $2,800 of his pre-petition retainer of $3,040, reflecting a $100 reduction from the $2,900 maximum Chapter 13 fee permitted under the Guidelines for this case for a $100 Pre-Hearing Conference sanction; and this order is without prejudice to Debtors' counsel petitioning this court for additional Chapter 13 fees beyond said $2,800 for all work related to preservation of the Debtors' allegedly highly valuable $80,000 below market residential lease." Even though initial fees were approved in the amount of only $2,800, there is no indication in the record that Avila ever remitted the excess $240 from the $3,040 in fees he actually received from Debtors.(8) In summary, none of the foregoing documents mentions any post-petition retainer of $2,500 paid to Avila for prosecuting an adversary proceeding; instead, most of these documents indicate that any payment with respect to this adversary proceeding would be made after Avila filed a fee application. In addition, none of the documents indicated that Avila claimed a lien or priority entitlement on funds paid to the Chapter 13 trustee in the event of dismissal or conversion; instead, the amended Rights and Responsibilities Agreement indicated that a zero balance was owed to Avila from the Chapter 13 trustee.
On November 14, 1996, Avila sent a letter signed by him and the Debtors to the Chapter 13 trustee stating that in the event of a dismissal or conversion, Debtors wanted the trustee to remit the net balance of their Chapter 13 account to Avila for "retirement of my bills for legal services." The second paragraph of this letter contains an incredible misrepresentation as to the status and contents of the court's order entered on October 8, 1996. As stated previously, the order allowed Avila to keep $2,800 of his pre-petition retainer, and allowed him to file fee applications for any amounts in excess of the $2,800. Remarkably, Avila told the Chapter 13 trustee and Debtors that the court had approved the unpaid balance of his $11,056.23 bill and any future supplementary bills: The unpaid balance of my $11,056.23 bill(9) for services through September 27, 1996 was approved for payment by Judge Montali by Fee Application as an administrative expense by Order of September 30, 1996(10) together with any supplementary bills I might submit for further work. Additional bills would have been submitted and paid post-confirmation by Fee Application if the Pearsons had proceeded to confirm and perform their proposed five (5) year Chapter 13 plan. This letter is patently untrue, clearly misrepresents the terms of the order, and is inconsistent with the representations made by Avila in the ex parte application and declaration which led to the order. (See, supra, discussion at pages 6-8.) The court is extremely disturbed that Avila would misstate and distort the contents of its order in such a manner and is even more concerned that this letter was not disclosed to the court until 1998, after the court requested that it be produced. The court discovered the existence of this letter after Avila referred to a "plan payments lien letter" in later pleadings.
On January 31, 1997, Debtors converted their case to Chapter 7. On February 27, 1997, the court entered an order approving the final account of the Chapter 13 trustee; this final account indicates that the Chapter 13 trustee had returned $3,064.10 to Debtors. Even though he had not filed any fee application seeking approval of fees over and beyond the $2,800 previously approved by the court, Avila (with Debtors' misinformed consent) deposited the check into his trust account on March 17, 1997. According to page 7 of Exhibit "A" to the Avila Application, Avila considered this sum as a "partial payment on invoice of September 28, 1996;" Avila noted that the "source of payment was lien of Debtor's counsel on Chapter 13 plan payments received from Chapter 13 trustee upon conversion of Debtors' Chapter 13 case to Chapter 7." Id. (emphasis added). This clearly violated paragraph 4 of the Guidelines as well as the covenants contained in the Rights and Responsibilities Agreement. On June 16, 1997, Avila filed a proof a claim stating that Debtors owed him $15,743.73 in post-petition, pre-conversion attorneys' fees and costs as a Chapter 13 administrative expense. Attached to this proof of claim are certain hand-written time entries which are contradicted by time records submitted later in support of the Avila Application.(11)
On January 27, 1998, Avila filed a "First Amended and Supplemental Disclosure of Compensation of Attorney for Debtor."(12) This document showed that Avila had received the following amounts: $3,200.00 - Chapter 13 pre-petition retainer; $2,500.00 - Adversary proceeding retainer "received 9/96 from Chapter 13 exempt cash funds per 348(f)(1)(A)"
$3,064.10 - Amount returned by Chapter 13 trustee to Debtors but received by Avila "per 11/96 plan payments lien letter" Avila mentions the payments totalling $2,500 made in September 1996 for the first time in this pleading. On January 27, 1998, Avila also filed the Avila Application, indicating that he had incurred $19,125 in post-petition, pre-conversion fees and $973.74 in post-petition and pre-conversion costs. This amount differs significantly from the amount shown on his post-conversion proof of claim. Moreover, some of his time entries contradict the handwritten time entries appended to the proof of claim.(13) The fee application contains work that is not beneficial to the estate (such as spending 2.1 hours to draft the ex parte application for approval of attorneys fees [i.e., approval of excess retainer], and the accompanying order and declaration). In addition, page 7 of Exhibit "A" of the Avila Application indicates that he was applying the full amount of the $3200 retainer against accrued fees, even though the court had approved only a $2800 retainer (exclusive of the filing fee). The $3200 amount includes the $240 which Avila was to hold in his trust account and was not offset by the $100 sanction which Avila previously purportedly deducted from the retainer. Finally and incredibly, he sent a letter to his former clients (Debtors) indicating that it would serve no purpose for them to object to his fee application, which is contrary to the intent and spirit of this court's local rules and the Rights and Responsibilities Agreement.
In his supplemental memorandum filed on March 25, 1998, in support of the Avila Application, Avila attempts to justify his receipt and application of undistributed Chapter 13 plan payments against his unapproved fees by arguing that such conduct is common among Chapter 13 practitioners. He sets forth as Exhibit "H" to his declaration several letters forwarded to the Chapter 13 trustee by various Chapter 13 specialists whereby Chapter 13 debtors granted their attorneys, for example, "a lien in any monies being held by the Chapter 13 Trustee's office or by any other entity for the balance of any attorney fees which are or may be owed to the attorney." Some so-called "lien letters" purport to assign to the attorney a portion of funds to be released by the Chapter 13 trustees upon dismissal of the case. To the extent these lien letters purport to grant an undisclosed security interest to the attorneys or create an assignment to them, they are hereby disapproved.(14) Moreover, to the extent these lien letters purport to allow an attorney to apply collected sums against unapproved attorneys fees, they are also disapproved.
Avila has engaged in a pattern of conduct in this case which is unethical, unprofessional and inexcusable. He has failed to disclose post-petition payments, even when such payments were made as little as two days prior to his filing an amended Statement of Compensation. He has failed to disclose an arrangement whereby he intercepted payments to be made to Debtors by the Chapter 13 trustee. He applied such payments against fees which had not been approved by the court. He misrepresented to the Chapter 13 trustee and Debtors the nature of an order of this court, informing those parties that the court had approved in excess of $11,000 in fees and had essentially carte blanche approved future fees - when the court had approved only $2,800 in fees. He apparently never paid a $100 sanction imposed by the court; he purportedly offset that sanction against his retainer, but calculations show that he instead kept all amounts paid as a retainer. His time records are misleading; the time records appended to his proof of claim are contradicted by the time records attached to the Avila Application. At a minimum, as noted by counsel for Walsh, Avila's actions "reflect a disturbing level of disorganization and neglect"; his affirmative misrepresentations, however, indicate even more culpable behavior: an attempt to acquire payment of fees by deceptive means. In this case, Avila failed to comply timely with the disclosure requirements of 11 U.S.C. § 329 and Federal Rule of Bankruptcy Procedure 2016(b). Moreover, by receiving several post-petition payments from Debtors directly, he violated the Guidelines and the Rights and Responsibilities Agreement. ("The attorney may not receive fees directly from the debtor other than the initial retainer."). By failing to obtain court approval of his fees before applying payments against the fees, he violated the Bankruptcy Code, the Guidelines and the Rights and Responsibilities Agreement; he also broke promises made in other pleadings. Requiring him to disgorge all undisclosed fees is an appropriate measure for such cavalier disregard of the Code and Local Rules and Guidelines. In re Park-Helena Corp., 63 F.3d 877, 881 (9th Cir. 1995). Avila attempts to justify his unauthorized post-petition receipt of $2,500 from Debtors by arguing that the payments came from "exempt" funds. Whether or not the funds were exempt, the unauthorized receipt violates the Guidelines and the Rights and Responsibilities Agreement, which prohibit any unauthorized payments to Chapter 13 counsel from debtors. In any event, the identification of the funds as exempt by Debtors does not mean that the funds were automatically exempt; in the event of conversion, a Chapter 7 trustee could have challenged the exemption. See Alderman v. Martinson (In re Alderman), 195 B.R. 106, 109-110 (9th Cir. BAP 1995) ("Because we look to the date of conversion to Chapter 7 when determining the debtors' exemptions, decisions made during the course of the Chapter 13 proceeding with respect to Chapter 13 exemptions have no bearing on the Chapter 7 case. . .Upon conversion, the exemptions are reconsidered and the trustee or other interested parties are free to make timely objections under Rule 4003(b)").(15) Even if the funds were exempt, they still constituted property of the bankruptcy estate and payment in contravention of the Rights and Responsibilities Agreement. Similarly, Avila attempts to justify his unauthorized receipt of Debtors' funds from the Chapter 13 trustee by arguing that such funds would not have become property of the Chapter 7 estate. This is irrelevant. Avila still received a payment by Debtors on fees that had not been approved. This violates the Guidelines and the Rights and Responsibilities Agreement. That such payment was not immediately disclosed to the court only magnifies the impropriety of the act. The court acknowledges that Avila did provide some valuable and extensive services to Debtors in an unusually complicated Chapter 13 case. Under normal circumstances, the court would allow most of his requested fees. Avila's conduct with respect to disclosing and obtaining payments, however, is so egregious that the court is compelled to deny a significant portion of the fees. See In re Park-Helena Corp., 63 F.3d 877, 881 (9th Cir. 1995).
For the reasons that the court is critical Avila, the court is also disturbed by the apparent practice of certain Chapter 13 counsel in this district in claiming or asserting a lien on or an assignment of the right to receive funds held by the Chapter 13 trustee at the time of dismissal or conversion.(16) While counsel may be entitled to such funds if they are owed a balance on fees approved by the court pursuant to 11 U.S.C. §§ 1326(a)(2) and 503(b), they cannot recover such excess funds if fees have not been approved. In any event, such an arrangement must be disclosed to the court. Therefore, the Chapter 13 Trustee and all Chapter 13 practitioners are hereby warned that any attempt to apply funds held by the Chapter 13 Trustee upon dismissal or conversion against fees that have not been approved is unacceptable. Accordingly, the Chapter 13 trustee is directed to disclose to this court and the United States Trustee any attempt by counsel in a Chapter 13 case to obtain payment of fees that have not been approved or to assert a lien against property for the purposes of satisfying fees that may not have been approved. Upon disclosure, the Chapter 13 trustee should wait for further instructions or orders from the court before distributing any excess funds upon dismissal or conversion.
For the foregoing reasons, the court is concurrently entering an order allowing Avila to retain $3200 in fees and costs, disallowing his request for an additional $17,780 in fees and costs, and directing him to disgorge to Walsh $5,564.10.(17) Through this memorandum decision, the court is also clarifying its position to the Chapter 13 bar that the application of funds received from the Chapter 13 trustee after conversion against fees that have not been approved is improper and possibly sanctionable, and is a practice that should be discontinued immediately.
Dated: July 17, 1998 ______________________________ Dennis Montali United States Bankruptcy Judge
1. On April 3, 1998, the Law Offices of Reidun Stromsheim, counsel for Walsh, filed a supplemental application for compensation, requesting fees and expenses associated with preparation of the reply to Avila's supplemental declaration. The court will dispose of that application in a separate order. 2. The following discussion constitutes the court's findings of fact and conclusions of law. Fed. R. Bankr. P. 7052(a). 3. The Statement of Compensation was filed pursuant to 11 U.S.C. § 329(a) and Fed. R. Bankr. P. 2016(b). Section 329 requires an attorney for a debtor to file a statement of the compensation paid or agreed to be paid, if such payment or agreement was made within one year of the petition date, 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) requires such a statement to be filed within fifteen days of the petition date or within fifteen days after any payment or agreement not previously disclosed. 4. Pursuant to Fed. R. Bankr. P. 9029 and B.L.R. 9029-1, the San Francisco and San Jose divisions of the court have adopted a form of Guidelines for Payment of Attorney's Fees in Chapter 13 Cases ("Guidelines"). These Guidelines have been effective since July 1, 1994. Paragraph 1 of these Guidelines require Chapter 13 counsel to enter into the Rights and Responsibilities Agreement with their clients, the Chapter 13 debtors, if they want to take advantage of certain simplified compensation procedures. The executed Rights and Responsibilities Agreement must be filed and served on the Chapter 13 trustee. More importantly, paragraph 4 of the Guidelines provides: If counsel elects to be paid other than pursuant to these Guidelines, all fees including the retainer shall be approved by the court whether or not the fees are payable through the Chapter 13 Trustee's Office and whether or not fees are paid for services in connection with the Chapter 13 case. Id. (emphasis added). The San Jose and Santa Rosa divisions of the court use slightly different forms of guidelines.
5. The title of the document is "(1) Amended Voluntary Petition Page; (2) Amended Question 9 of the Statement of Financial Affairs; (3) Amended Disclosure of Compensation of Attorney for Debtor; (4) Amended Statement of Rights and Responsibilities of Chapter 13 Debtors and Their Attorneys and (5) Proof of Service Thereon." 6. On September 18, 1996, this court ordered that Avila's fees be reduced by $100 because of his failure to file a pre-hearing statement. 7. In later correspondence, Avila refers to an order signed by the court on September 30, 1996. The court did not enter any order on that date. Rather, on October 8, 1996, the court entered the order accompanying the ex parte application for approval of attorneys' fees filed on September 30, 1996. 8. In a declaration filed in support of his ex parte application for approval of fees filed on September 30, 1996, Avila states in paragraph 7 that the $240 balance would remain in his trust account pending submission of a formal fee application in the future. To the court's knowledge, this amount remains with Avila and the Debtors have not received the benefit of the reduction of Avila's fees by the $100 sanction. 9. According to page 6 of Exhibit "5" of Avila's declaration filed on September 30, 1996, Avila had incurred $11,056.23 in fees and costs and had received $5,000 in payments. Even though these figures were inaccurate (Avila had received at least $7,500 by that date), the unpaid balance equalled $3,556.23 to $6,056. 10. No order was signed or entered by this court on September 30, 1996. Avila filed his application for payment of fees on September 30, and the resulting order was signed on October 8, 1996. 11. See, infra, at footnote 13. 12. This document should have been designated as the "second amended" disclosure, inasmuch as the initial Statement of Compensation had been amended by the pleading filed on September 18, 1996. 13. In comparing the time records appended to the proof of claim against the time records appended to the January 1998 fee application, the court found that many of Avila's time entries for identical days and projects varied. For example, the proof of claim shows that Avila spent two hours on September 28 drafting the ex parte application and declaration; the fee application shows that he spent 1.8 hours on this task. Conversely, the fee application shows that Avila spent 6.2 hours on September 29 drafting a 30 page complaint, while the proof of claim time entries show that he spent six hours on this task. 14. If Chapter 13 attorneys are attempting to obtain liens or security interests in funds held by the Chapter 13 trustee without advising their clients in writing that they may seek the advice of an independent lawyer or without fully disclosing terms of the lien in writing to their clients, the attorneys are violating Rule 3-300 of the Rules of Professional Conduct of the State Bar of California. If these liens and security interests are not disclosed to the court and the United States Trustee, the attorneys are violating section 329 and Rule 2016(b). 15. In any event, listing exemptions in a Chapter 13 case serves a limited purpose. As noted in Armstrong v. Lindberg (In re Lindberg), 735 F.2d 1087, 1089 (8th Cir. 1984): [D]ebtors list exemptions for a limited purpose in chapter 13 proceedings. Exemptions are listed in the chapter 13 statement only to permit creditors to determine whether the chapter 13 plan should be accepted, and for the court to determine in confirming the plan that the creditors would receive more under the plan than they would in a chapter 7 liquidation. 16. See discussion at pages 11-12 above. 17. Debtors may thereafter assert whatever rights they may have in the disgorged funds. Such rights should be asserted within sixty days of entry of the order requiring disgorge