UNITED STATES BANKRUPTCY COURT NORTHERN DISTRICT OF CALIFORNIA
In re No. 96-32188- WDM PAUL R. and MYRNA A. PEARSON, Debtor(s) ___________________________________/
MEMORANDUM DECISIONOn 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.
* * *
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 Pleadings and October, 1996 Order $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.
September, 1996 Pleadings and October, 1996 OrderOn 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.
$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.
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