Case: 12-41125 Document: 00512472573 Page: 1 Date Filed: 12/16/2013
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT United States Court of Appeals
Fifth Circuit
FILED
December 16, 2013
No. 12-41125
Lyle W. Cayce
Clerk
In the Matter of: JAMES GLEN WHITLEY, doing business as Whitley
Properties, doing business as Edna Housing, doing business as Whitley
Ranch & Seed Company,
Debtor
------------------------------
REESE W. BAKER; BAKER & ASSOCIATES,
Appellants
v.
TRUSTEE LOWELL T. CAGE,
Appellee
Appeal from the United States District Court
for the Southern District of Texas
Before HIGGINBOTHAM, OWEN, and HIGGINSON, Circuit Judges.
HIGGINSON, Circuit Judge:
A bankruptcy judge may regulate attorney compensation by ordering
debtor’s counsel to return to the estate excessive compensation. 11 U.S.C.
§ 329(b). 1 Separately, a bankruptcy judge has authority to discipline attorneys
1 Section 329 provides:
(a) 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
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who violate the disclosure requirements of the Bankruptcy Code and Rules.
Arens v. Boughton (In re Prudhomme), 43 F.3d 1000, 1003 (5th Cir. 1995).
Because a bankruptcy judge’s reach under the plain language of § 329(b) is
limited to attorney compensation, however, we REVERSE and REMAND the
bankruptcy court order before us.
FACTS AND PROCEEDINGS
In 2008 and again in 2009, James Whitley made failed endeavors to
reorganize his debts under Chapter 13 of the Bankruptcy Code. Appellants
Reese Baker and Baker & Associates (“Baker”) served as Whitley’s counsel in
both proceedings. On March 4, 2009, the bankruptcy court dismissed Whitley’s
2008 petition without prejudice and on July 20, 2009, the bankruptcy court
dismissed Whitley’s 2009 petition with prejudice. On October 8, 2009, the
bankruptcy court vacated its order dismissing Whitley’s 2009 petition and
converted Whitley’s case to Chapter 7.
Between July 20, 2009, when the bankruptcy court dismissed Whitley’s
2009 case with prejudice, and October 8, 2009, when the bankruptcy court
vacated its order and converted Whitley’s case to Chapter 7, Whitley and Baker
engaged in the transactions giving rise to this appeal. Whitley was convicted
of sexual assault of a minor and on August 27, 2009 he was sentenced to life in
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.
(b) If such compensation exceeds the reasonable value of any such services, the
court may cancel any such agreement, or order the return of any such payment,
to the extent excessive, to--
(1) the estate, if the property transferred--
(A) would have been property of the estate; or
(B) was to be paid by or on behalf of the debtor under a plan
under chapter 11, 12, or 13 of this title; or
(2) the entity that made such payment.
2
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prison. Also on August 27, 2009, Whitley transferred two properties—the
Church Street property and the Highway 111 property—to Baker’s wholly
owned entity BK/HSH, LLC. 2 William and Miriam Ackley held liens on the two
properties, and after Whitley transferred them to Baker, the Ackleys
foreclosed. The Ackleys noticed the properties for foreclosure sales on
September 1, 2009. Baker attended and won both foreclosure sales, bidding
$60,040 for the Highway 111 property and $38,735 for the Church Street
property. Baker never disclosed these transactions to the bankruptcy court. 3
On June 4, 2010, Appellee-Trustee Lowell T. Cage (“Trustee”) filed an
adversary proceeding against Baker claiming that Whitley’s various transfers
to Baker, including Whitley’s transfer of the two properties, were voidable
under 11 U.S.C. §§ 548, 549, and 550. The Trustee’s complaint alleges that
“[a]lthough the case had been dismissed at [the time of the transfers],” the
transfers were without court authority, were for less than reasonably
equivalent value, and were executed in breach of Baker’s fiduciary relationship
with Whitley.
The bankruptcy judge, Judge Steen, denied the Trustee’s motion for
summary judgment on these claims, reasoning that “although some very
limited issues might be appropriate for summary judgment, the best procedure
is to decide, first, under Bankruptcy Code § 329 whether Baker must disgorge
compensation. There are material issues of fact with respect to that question.
2 Baker stipulates that BK/HSH, LLC is his alter ego. Accordingly, we also refer to
Baker’s wholly owned entity as “Baker.”
3 In the 2008 proceeding, Baker received a $1,800 retainer fee and requested an
additional $16,474.62. The Chapter 13 Trustee objected to Baker’s fee application as
“unreasonable for the work performed” and Baker withdrew his application in open court. In
the 2009 proceeding, Baker filed another fee application disclosing that Whitley had paid him
$12,074 and requested an additional $9,859.75. The Chapter 13 Trustee and multiple
creditors objected to Baker’s fee application and Baker withdrew his fee application. On
October 8, 2009, in the same order reopening Whitley’s 2009 petition and converting it to
Chapter 7, the bankruptcy court granted Baker’s motion to withdraw his fee application.
3
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Determination of that question may make other issues moot.” Specifically, the
court noted that § 329 may be the most efficient way to recover the money
Baker had already received as fees. If the court could recover the money under
§ 329 then it would not need to “address the preference issue[s]” under § 547.
As to the Trustee’s action to recover the properties, the court did not refer
to § 329, but noted the following remaining material issues of fact and law:
(1) “[W]hat was the value of [Baker’s] legal services and was the
transfer [of the real properties] for less than reasonably
equivalent value, potentially making the property (or the
value in excess of liens) recoverable under Bankruptcy Code
§ 548 as well as § 549?”
(2) “What was the value of the real property when it was
transferred and what did Baker pay for it?”
(3) “On the date of the transfer of the real property, did Debtor
and Baker intend to transfer the property with the intent to
hinder . . . creditors” as to make the transfer avoidable “(or
is the value of the equity thereby transferred on that date
recoverable by the Trustee)” avoidable under § 548?
(4) “Did the transfer of the real property constitute a breach of
fiduciary duty and legal ethics” and “is Baker liable for the
value (if any) removed from the estate by the transfer?”
After denying summary judgment, Judge Steen transferred the case to
Judge Bohm. Judge Bohm, in turn, issued a show cause order pursuant to
§ 329(b) instructing Baker to “provide evidence of the reasonable value of
services rendered to the Debtor” in connection with Baker’s representation of
Whitley and to “show cause why any compensation previously paid should not
be disgorged to the extent in excess of the reasonable value of such services
pursuant to 11 U.S.C. § 329(b).” After an evidentiary hearing spanning
multiple days, the bankruptcy court denied Baker all of his requested fees and
also ordered Baker to return all of the “consideration” that he had received. In
total, the court ordered Baker to return $12,074 plus the two properties to the
estate.
4
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The bankruptcy court found that Baker’s services provided Whitley “no
reasonable value” and also that Baker violated his duty of disclosure. Noting
that it “polices the disclosure requirements of the Bankruptcy Code and Rules
with its sanction powers, including the discretion to order the disgorgement of
all sums received by counsel and the forfeiture of all compensation paid to
counsel in a particular case,” the bankruptcy court admonished Baker for
failing to disclose his property transactions with Whitley. “Disgorgement of the
fees already paid,” the court held, “includes unwinding the transfers of the Hwy
11 [sic] Property and the Church Street Property.”
Baker filed an emergency motion to alter or amend the bankruptcy
court’s order, arguing that the court failed to consider the $98,775 Baker
himself paid to purchase the properties at the foreclosure sales as well as
money Baker had spent to maintain and repair the properties after his
purchase of them. The bankruptcy court denied Baker’s motion, reasoning that
the amount Baker paid at the foreclosure sales would not change the result
because these “were payments to retain ill-gotten gains” and that Baker’s
payments had “no relevance to the analysis on whether the Properties were
properly acquired.”
Baker appealed the bankruptcy court’s disgorgement order and denial of
his motion to alter to the district court. After a hearing, the district court
affirmed the bankruptcy court. The district court rejected Baker’s attempts to
justify his nondisclosures. The district court also held that the foreclosure sales
did not “insulate the properties from disgorgement.” That Baker would forfeit
his foreclosure purchases of $98,775 to the estate, the district court explained,
was “irrelevant” and “the price Baker must pay for concealing his
5
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compensation and relevant business dealings from the bankruptcy court and
for failing to provide valuable services to his client.” 4 This appeal followed.
STANDARDS OF REVIEW
“This court reviews the decision of a district court, sitting as an appellate
court, by applying the same standards of review to the bankruptcy court’s
findings of fact and conclusions of law as applied by the district court.” Waldron
v. Adams & Reese, L.L.P. (In re Am. Int’l Refinery, Inc.), 676 F.3d 455, 461 (5th
Cir. 2012). This court reviews a bankruptcy court’s findings of fact under the
clearly erroneous standard and decides conclusions of law de novo. Barron v.
Countryman, 432 F.3d 590, 594 (5th Cir. 2005). “A bankruptcy court’s decision
to disgorge fees or impose a sanction is reviewed for abuse of discretion.” In re
Am. Int’l Refinery, 676 F.3d at 461.
ANALYSIS
Baker does not appeal the portion of the bankruptcy court’s order
obliging him to return $12,074 he received as fees, nor does he dispute the
bankruptcy court’s finding that his services were not worth any reasonable
value, which finding earlier had the effect of disallowing Baker’s two fee
requests. Instead, Baker appeals only the bankruptcy court’s order obliging
him to return the two properties outright.
A.
The bankruptcy court rested its order obliging Baker to return the
properties on two grounds. It first held that Baker violated his duty of
4 Subsequent to the bankruptcy court’s order obliging Baker to return the properties,
the bankruptcy court granted the Trustee authority to sell the Church Street property for
$32,400. The Trustee also requested court authority to sell the Highway 111 property and
appraised its value as $33,000. The Trustee also requested an additional $5,000 to settle
disputes between the buyers and the estate. The court, however, did not approve the
Trustee’s proposed resolution of a dispute with the tenant residing on the Highway 111
property.
6
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disclosure. Specifically, the court ordered Baker to disgorge compensation he
received in the 2008 case because he failed to make a timely disclosure under
§ 329(a) and Rule 2016. Also, the court found that Baker failed to make a timely
Rule 2016 disclosure in the 2009 proceeding and ordered him to disgorge all
compensation in connection with the 2009 case. Further, with regard to
Baker’s property transactions with Whitley, the court faulted Baker for failing
to disclose his connections with the debtor. Noting that it “must protect the
integrity of the bankruptcy system by ensuring that these disclosure
requirements are satisfied,” and that it “polices the disclosure requirements of
the Bankruptcy Code and Rules with its sanction powers,” the court held that
the “forfeiture of all fees paid to Baker is both proper and necessary to protect
the integrity of the bankruptcy system.” “Disgorgement of the fees already
paid,” the court held, includes “unwinding” the transfers of the two properties.
Second, the bankruptcy court held that even assuming that Baker
complied with his disclosure requirements, “his fees were nevertheless
unreasonable—which provides still another basis for disgorging all monies
paid to him and denying all fees that he requests.” After determining that
“Baker’s services did not provide a benefit” to Whitley, the court held “the fees
should be denied and any compensation already paid should be disgorged.”
B.
“Without doubt, the Bankruptcy Code seeks to protect both debtors and
their estates from excessive or unnecessary legal fees.” Barron, 432 F.3d at
595. “While these provisions are potent, they are not limitless,” id., and the
plain language of § 329(b) tethers the bankruptcy court’s reach to attorney
compensation. Section 329(b) provides that if “such compensation exceeds the
reasonable value of any such services, the court may cancel any such
agreement, or order the return of any such payment, to the extent excessive, to
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. . . the estate, if the property transferred . . . would have been property of the
estate.” Id. (emphasis added). Under § 329(b), then, it is the value Baker
received as compensation that concerns the bankruptcy court. See Pope v.
Knostman (In re Lee), 884 F.2d 897, 889 (5th Cir. 1989) (“The bankruptcy court
is empowered . . . to order the return of any unreasonable or excessive portion
of an attorney’s fee . . . .”); see also Brown v. Luker (In re Zepecki), 258 B.R. 719,
725 (B.A.P. 8th Cir. 2001) (“A disgorgement is allowed only to the extent that
the fees are excessive.”).
Because the record gives no details about any express agreement
between Whitley and Baker and because Baker was paid, in part, in real
property encumbered by liens that he later purchased at a foreclosure sale, the
value of his compensation for services rendered in these bankruptcy cases, on
the existing record, cannot be ascertained. 5 The parties have not cited any
authority applying § 329(b) to recover real property paid as compensation, but
Wootton v. Ravkind (In re Dixon), 143 B.R. 671 (Bankr. N.D. Tex. 1992),
provides a comprehensive and helpful framework. In Dixon, the debtor paid
his attorney $200,000 in cash and $100,000 worth of artwork without court
approval and without making the proper disclosures. Id. at 674–75. The
bankruptcy court ordered all but $35,000 of the fee returned to the estate. Id.
at 680. The attorney had sold some of the artwork, but the court found that the
present value of the remaining art was $10,000 and it ordered that the attorney
additionally return “$90,000 representing the value of the art disposed of.” Id.
at 674, 679. The court also noted that the attorney “is to advise whether he
wishes to offer more definitive testimony with respect to the credit for the value
of the art ordered turned over.” Id. at 680.
5At best, we have testimony from Whitley suggesting that Baker’s account for services
was credited $20,000 after the transfer of the properties. The bankruptcy court, however, did
not make any findings as to the value of the properties.
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Unlike the bankruptcy court in Dixon—which used the $100,000 value
of the artwork paid as compensation as a basis for the funds and property it
ordered returned under § 329(b)—the bankruptcy court here did not value the
property at the time Whitley transferred it to Baker, nor did it value the
property at the time it ordered Baker to return it to the estate. 6 Accordingly,
the § 329(b) remedy the bankruptcy court imposed was not indexed to the
compensation Whitley actually paid to Baker. See generally Palmer & Palmer,
P.C. v. U.S. Trustee (In re Hargis), 895 F.2d 1025, 1026 (5th Cir. 1990); see also
Schroeder v. Rouse (In re Redding), 247 B.R. 474, 478 (B.A.P. 8th Cir. 2000)
(“Because § 329 is aimed solely at preventing overreaching by a debtor’s
attorney . . . a court’s consideration of whether to order disgorgement of fees
under § 329(b) is limited to the comparison of the amount of compensation
received by the attorney with the reasonable value of the services performed.”).
In fact, the remedy imposed went beyond what Whitley paid to Baker as
compensation because Baker did not use estate funds to buy the properties at
the foreclosure sales. It is undisputed that Baker paid the $98,775 foreclosure
purchase from his account. As the district court recognized, “the foreclosure
sale purchase and property maintenance costs were losses for Baker”
(emphasis added), not the estate. Had the Ackleys kept the properties or sold
them to a third party at the foreclosure sales, the bankruptcy court could not
have obliged Baker to pay $98,775 to the estate under § 329(b). In that
circumstance, the bankruptcy court’s § 329(b) remedy against Baker would
have been limited to the value of the properties that Baker received at the time
Whitley transferred them as compensation. See In re Redding, 247 B.R. at 478–
6 We observe that this step did not occur, in part, because this case was transferred
between bankruptcy judges. Judge Steen had highlighted that “material issues of fact”
existed relevant to § 329 disgorgement, and also highlighted various valuation
determinations needed to be made.
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79 (“The plain language of § 329 provides that there must first be a
determination that the fees are excessive. Only after that determination, and
only to the extent excessive, would there be a disgorgement.”). There is no
reason to treat Baker differently in this case, as the $98,775 value he was
obliged to return to the estate was not paid to him as compensation.
Accordingly, the bankruptcy court improperly relied on § 329(b) in
ordering Baker to return the two properties outright.
C.
Section 329(a) requires a debtor’s attorney to disclose “a statement of the
compensation paid or agreed to be paid,” and we have said that the bankruptcy
court’s “broad discretion in awarding and denying fees paid in connection with
bankruptcy proceedings empowers the bankruptcy court to order disgorgement
as a sanction to debtors’ counsel for nondisclosure.” In re Prudhomme, 43 F.3d
at 1003; see also Anderson v. Anderson (In re Anderson), 936 F.2d 199, 204 (5th
Cir. 1991) (“[T]he bankruptcy court is one of equity and thus has broad
equitable—and hence discretionary—powers to award attorney’s fees.”). We
have been clear that “[t]he bankruptcy court has inherent power to guard the
practice of attorneys who appear in that court.” Suffness v. Petros (In re Avante
Real Estate, Inc.), No. 95-10442, 1995 WL 625456, *8 (5th Cir. Oct. 11, 1995)
(citing 11 U.S.C. § 105). “These powers are discretionary and the bankruptcy
court has broad authority to discipline attorneys and to award or disgorge fees
paid in connection with bankruptcy proceedings.” Id. While its authority is
broad, when a bankruptcy court imposes a disciplinary sanction it “must use
the least restrictive sanction necessary to deter the inappropriate behavior,”
Harris v. First City Bancorporation of Tex., Inc. (In re First City
Bancorporation of Tex., Inc.), 282 F.3d 864, 867 (5th Cir. 2002), and “[t]he
sanction levied must thus be commensurate with the egregiousness of the
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conduct.” Mapother & Mapother, P.S.C. v. Cooper (In re Downs), 103 F.3d 472,
478 (6th Cir. 1996).
In this case, the bankruptcy court ordered Baker only to “show cause
why any compensation previously paid should not be disgorged to the extent
in excess of the reasonable value of such services pursuant to 11 U.S.C.
§ 329(b),” yet the court then ordered Baker to “disgorge all of the consideration
that [Baker] has already received from the Debtor” (emphasis added). As
described above, however, the bankruptcy court’s order obliging Baker to
transfer the properties outright, now free of the Ackleys’ liens, imposed a
sanction beyond the amount of compensation Baker received. The bankruptcy
court did not address Baker’s $98,775 foreclosure purchase in its order, did not
value the properties at the time that Whitley transferred them to Baker, and
did not value the properties at the time it ordered Baker to return them to the
estate. Further, when it denied Baker’s motion to amend, it held that Baker’s
payments had “no relevance to the analysis on whether the Properties were
properly acquired.” Accordingly, the bankruptcy court did not assess the extent
of the disciplinary sanction it imposed, nor assess that amount in connection
with Baker’s conduct in this case.
Both lower courts relied on SEC v. Huffman, 996 F.2d 800, 802 (5th Cir.
1993), for the proposition that disgorgement is not “restitution” but an
equitable remedy aimed at “‘wrest[ing] ill-gotten gains from the hands of the
wrongdoer.’” The bankruptcy court, in denying Baker’s motion to amend, relied
on Huffman’s definition of disgorgement, and also elaborated that “if Baker
and the Baker-Owned LLC paid money to keep and repair the Properties, then
those payments were made to retain ill-gotten gains. The[se] facts have no
relevance to the analysis on whether the Properties were properly acquired.”
The bankruptcy court has authority to impose disciplinary sanctions on
attorneys beyond the return of compensation, but the amount of the sanction
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imposed is essential to a bankruptcy court’s sanction analysis because “[w]hen
a court metes out a sanction, it must exercise such power with restraint and
discretion.” In re Downs, 103 F.3d at 478. Although a $98,775 sanction may
have been appropriate considering Baker’s conduct as adverted to in these
proceedings (e.g. Baker’s “ill-gotten gains” and his “nasty habit of non-
disclosure”), in order to ensure that a sanction is “chosen to employ the least
possible power to the end proposed,” the bankruptcy court must in the first
instance compare the sanction amount to the sanctioned party’s conduct. In re
First City Bancorporation of Tex., 282 F.3d at 867 (internal quotation marks
omitted).
CONCLUSION
The bankruptcy court ordered Baker to return all consideration he
received, but in so doing it imposed an additional sanction beyond return of
compensation. Because such an order cannot rest on § 329(b), and because the
bankruptcy court did not develop the basis for and extent of any further
sanction it imposed, we REVERSE and REMAND for further proceedings
consistent with this decision.
12