Memorandum of Decision Re: Failure to Disclose

IN THE UNITED STATES BANKRUPTCY COURT FOR THE NORTHERN DISTRICT OF CALIFORNIA
In re R. C. and BARBEL ROBERTS,                                                 No. 93-12490      Debtors. ___________________________/
Memorandum of Decision
     I. Introduction      For almost two years before debtors R.C. and Barbel Roberts filed their Chapter 11 petition, the law firm of Pascoe & Rafton was their counsel. On the eve of their bankruptcy filing, at Pascoe's instruction, the debtors gave Pascoe two cashier's checks of $20,000.00 each. Pascoe treated these check as payment in full for the outstanding balance owed of $24,777.78 and a Chapter 11 retainer of $15,222.22.      Pascoe applied for permission to be employed by the estate soon after the petition was filed. In the application, Pascoe said only that the debtors had "consulted from time to time" with him and that he had accepted a prepetition retainer of $15,241.28. The application was patently false, in that Pascoe had done extensive legal work for the debtors and the $15,241.28 was Pascoe's treatment of a $40,000.00 payment on the eve of bankruptcy.      Pascoe's declaration was even more false. There, William Pascoe declared under oath that he had no connection with the debtors and held no interest adverse to their estate. Pascoe did in fact have an extensive connection with the debtors due to his prebankruptcy representation, and had a potential adverse interest because the estate might well have been able to recover a large portion of the $40,000.00 payment as a preference.      Based on the application and declaration, the court approved Pascoe's employment. Pascoe represented the debtors for only about two more months before he had a falling out with the debtors and they obtained new counsel. During those few months, Pascoe ran up fees totalling some $65,000.00.      After lengthy and strongly opposed confirmation proceedings in which the debtors were represented by the new counsel, the debtors obtained confirmation of their plan of reorganization. Now before the court is Pascoe's fee application. The debtors have objected, bringing to the court's attention the fraudulent employment application. The U.S. Trustee has objected, arguing that the amount of fees sought by Pascoe is unreasonable and unjustifiable. Both objections are well taken.      II. Failure to Disclose      Section 327(a) of the Bankruptcy Code provides that with the court's approval a debtor in possession may employ an attorney who is disinterested and does not hold an interest adverse to the estate. Rule 2014(a) of the Federal Rules of Bankruptcy Procedure requires that the application for approval of employment and the accompanying declaration disclose all of the attorney's connections with the debtor. Pascoe violated this rule when he concealed the extent of his prepetition relations with the debtors and did not disclose the two $20,000.00 cashier's checks he took from the debtors on the day of filing.      The court does not believe for a second Pascoe's blaming of his lapse on personal problems. Pascoe has been practicing bankruptcy law for many years, and knew exactly what he was doing. In this district, the "disinterestedness" test of section 327(a) is strictly construed so as to disqualify any attorney from representing a debtor if the attorney is a prepetition creditor. In re Siliconix, Inc., 135 B.R. 378 (N.D.Cal.1991). Not wanting to waive his prepetition claim and knowing the court would not approve his employment if he did not, Pascoe insisted on a large payment which he allocated first to the outstanding balance owed on account by the debtors. By failing to mention this payment and not disclosing the extent of his prepetition involvement with the debtors, Pascoe expected to have his cake and eat it too.      As Pascoe himself concedes, the failure to fully disclose all of the information required by FRBP 2014(a) justifies a forfeiture of all fees. See In re American Thrift & Loan Assn., 137 B.R. 381, 388-390 (Bkrtcy.S.D.Cal.1992), and cases therein cited. This is a harsh penalty which the court rarely imposes, but feels that it is required in this case. The court does not believe Pascoe's assertions that his failures were accidental and that he did not know the law. He is an experienced bankruptcy practitioner who knew better and intended to deceive (and did deceive) the court. Accordingly, Pascoe & Rafton shall forfeit all fees in this case and shall be ordered to return the sum of $15,222.22 to the debtors forthwith.      III. Value of Services      Because the court has ordered the forfeiture of all fees, there is no need for the court to deal at length with the objections raised by the U.S. Trustee as to the value of Pascoe's services. However, the court does note that those objections have merit. Pascoe charged $65,000.00 for only a few weeks' work which consisted largely of filing the petition. He fought few if any battles, and spent an inordinate amount of time on routine matters such as obtaining employment of professionals. He also duplicated the efforts of special counsel. The real work of the case was done by the debtor's new counsel, who charged only $99,000.00 despite laboring for many months and achieving confirmation of a plan. A very large reduction in Pascoe's fees would be in order even if Pascoe had not forfeited his right to fees by misleading the court.      IV. Conclusion      By manipulating the treatment of a large payment from the debtors on the eve of bankruptcy and failing to disclose this payment, and by misrepresenting the extent of its prepetition relationship with the debtors, the law firm of Pascoe & Rafton has forfeited its right to any compensation whatsoever in this case. It shall therefore be ordered to return to the debtors the $15,222.22 it took as a retainer for postpetition work. The order shall also recite that the order of the court approving the employment of Pascoe & Rafton is vacated as having been made in error, and that the order is without prejudice to the estate's right to recover other sums as preferences or otherwise in the event the case is subsequently converted to Chapter 7.      Counsel for the debtors shall submit an appropriate form of order forthwith.
Dated: September 18, 1994                                                                                                   _______________________                                                                                                                                                    Alan Jaroslovsky                                                                                                                                                    U.S. Bankruptcy