United States Court of Appeals
FOR THE EIGHTH CIRCUIT
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No. 01-1554
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In re: Robert G. Zepecki, *
*
Debtor. *
___________________________ *
* Appeal from the United States
Steven C.R. Brown, * Bankruptcy Appellate Panel
* for the Eighth Circuit.
Appellant, *
*
v. *
*
James C. Luker, *
*
Appellee. *
*
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Submitted: September 10, 2001
Filed: January 25, 2002
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Before McMILLIAN, BEAM, and HANSEN, Circuit Judges.
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PER CURIAM.
After denying Robert Zepecki's bankruptcy discharge for failure to disclose
prepetition transfers, the bankruptcy court sua sponte ordered attorney Steven C.R.
Brown to account for funds he received from Zepecki or from B & B Diversified
Resources, Inc. (B & B Diversified), Zepecki's closely-held corporation. Following
a hearing, the court1 ordered Brown to return to the bankruptcy estate $32,840 of the
$40,000 paid to him as attorney's fees. The United States Bankruptcy Appellate Panel
for the Eighth Circuit (BAP) affirmed, and Brown appeals. We affirm.
I.
The bankruptcy court ruled, in an adversary proceeding initiated by Zepecki's
former wife Bonnie Kania, that Zepecki had failed to disclose the sale of Illinois real
estate on his Chapter 7 schedules. Zepecki and Kania were granted a decree of
divorce on September 28, 1995, which awarded Kania a $46,500 judgment against
Zepecki for Kania's contribution toward paying off the mortgage on the Illinois real
estate. Zepecki sold the real estate and executed a warranty deed to effect its transfer
on October 20, 1995. He filed his Chapter 7 petition on February 7, 1996. The
bankruptcy court concluded that Zepecki's failure to disclose his interest in and
transfer of the Illinois real estate and other property supported denial of his
bankruptcy discharge for making a false oath under 11 U.S.C. § 727(a)(4)(A).
During the proceedings in the adversary case, the bankruptcy court became
aware that the proceeds from the sale of the Illinois property were transferred to
Steven C.R. Brown, who received $40,000 of the funds as attorney's fees. The court
ordered Brown to appear and account for the funds he received from Zepecki or B &
B Diversified and to be examined as to the reasonableness of his attorney's fees.
The bankruptcy court found that Brown received compensation of $20,000
postpetition and ordered that these funds be reimbursed to the estate. Furthermore,
of the $20,000 Brown received prepetition, the court found that he was entitled to
1
The Honorable James G. Mixon, United States Bankruptcy Judge for the
Eastern District of Arkansas.
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fees of $7,160 and ordered him to reimburse the remaining $12,840 to the estate. The
court found that the funds Brown received were proceeds from property owned by
Zepecki as an individual, and essentially Zepecki's only valuable asset.
With the Illinois land sale, Zepecki was attempting to perform a tax-free
exchange of property under § 1031 of the Internal Revenue Code, which avoids
capital gains on the sale of property exchanged for property of a like kind. See 26
U.S.C. § 1031. In November 1995, Brown received the entire sale proceeds of
$102,989 to hold in escrow, pursuant to a "1031 Exchange of Property Escrow
Agreement" (1031 Exchange Agreement) dated October 20, 1995, wherein Brown
was identified as the Escrow Holder, Zepecki was identified as the Exchanger and
owner of the real estate, and James Burch was identified as the Purchaser of the real
estate. Brown, Zepecki, and B & B Diversified entered into a "Subordinate
Addendum to 1031 Exchange of Property Escrow Agreement" (Subordinate
Addendum) dated November 15, 1995, which provided that Brown would be paid
$40,000 from the real estate proceeds for services related to the section 1031
transaction. Brown disbursed $65,000 of the escrow funds to Ted Holder in Atlanta,
Georgia, prior to Zepecki's February 7, 1996, bankruptcy filing, and disbursed the
remaining $62,989 to Holder shortly after Zepecki filed the bankruptcy petition.
Brown describes Holder as a financial agent handling payments to third parties.
Holder transferred Brown's fees under the Subordinate Addendum back to Brown in
multiple transfers. Brown received $20,000 prior to Zepecki's bankruptcy filing and
$20,000 following the filing. The bankruptcy court described the manner in which
Brown allegedly received his attorney's fees as “convoluted” and found that his
testimony “is so improbable that it casts serious doubt on his credibility.” In re
Zepecki, No. 96-30125M, slip op. at 8 (Bankr. E.D. Ark. June 22, 2000).
The issues on appeal to the BAP were: (1) whether the bankruptcy court had
jurisdiction to order disgorgement of the fees, (2) whether the court abused its
discretion in ordering disgorgement, and (3) whether the disgorged fees should be
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returned to the estate as a matter of law. The BAP concluded that sections 105 and
329 of the Bankruptcy Code and Federal Rule of Bankruptcy Procedure 2017
provided jurisdiction for the bankruptcy court's order. Further, it found that the court
acted within its discretion in ordering disgorgement of the fees, which was
appropriate as a matter of law.
On appeal to this court, Brown asserts: (1) that the bankruptcy court lacked
jurisdiction to order Brown to disgorge the fees, (2) that his fee was fully earned
prepetition and was not a part of Zepecki's bankruptcy estate, (3) that the bankruptcy
court cannot use section 105 to override other sections of the Bankruptcy Code, and
(4) that the BAP compounded the bankruptcy court's errors with additional factual
and legal errors. We conclude that the bankruptcy court had jurisdiction and acted
within its discretion when it ordered disgorgement of Brown's fees. Further, any
factual inaccuracies in the lower courts' rulings, which Brown variously describes as
false, misapprehensions or misstatements of fact, slanderous innuendos, and
irrelevant slanderous innuendos, do not undermine the conclusion that the record
contains abundant, competent evidence to support the bankruptcy court's decision to
order disgorgement of fees from Brown.
II.
We review the bankruptcy court's findings of fact for clear error and its
conclusions of law de novo. Papio Keno Club, Inc. v. City of Papillion (In re Papio
Keno Club, Inc.), 262 F.3d 725, 728-29 (8th Cir. 2001). As the second court to
review the bankruptcy court's factual findings, our independent review gives
deference to the BAP's conclusions. Id. at 729 (stating that to be clearly erroneous,
a decision must "'strike us as wrong with the force of a five-week-old, unrefrigerated
dead fish,'" quoting Parts & Elec. Motors, Inc. v. Sterling Elec., Inc., 866 F.2d 228,
233 (7th Cir. 1988), cert. denied, 493 U.S. 848 (1989)). We review a decision
regarding attorney's fees for an abuse of discretion. Walton v. LaBarge (In re Clark),
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223 F.3d 859, 862 (8th Cir. 2000). The bankruptcy court has broad power and
discretion to award or deny attorney's fees or to order disgorgement of fees already
paid. Id.
To the extent prepetition attorney's fees exceed the reasonable value of the
legal services provided, the bankruptcy court may order the return of attorney's fees
paid within one year prior to the date that a debtor files a bankruptcy petition for fees
related to legal services performed in connection with or in contemplation of
bankruptcy proceedings. See 11 U.S.C. § 329(a), (b); see also Snyder v. Dewoskin
(In re Mahendra), 131 F.3d 750, 757 (8th Cir. 1997), cert. denied, 523 U.S. 1107
(1998). '''In contemplation of' generally denotes that the impelling cause of the
transaction is influenced by the possibility or imminence of a bankruptcy
proceeding." In re Telemaintenance, Inc., 157 B.R. 352, 354 (Bankr. N.D. Ohio
1993) (citing Tripp v. Mitschrich, 211 F. 424 (8th Cir. 1914)). For postpetition legal
services provided to the debtor, an attorney may be compensated from property of the
estate only if he follows the notice and approval process delineated in the Bankruptcy
Code. See 11 U.S.C. §§ 327, 330; Mahendra, 131 F.3d at 756.
III.
We agree with the BAP that the bankruptcy court had jurisdiction to review the
reasonableness of the attorney's fees paid to Brown prepetition pursuant to section
329 of the Bankruptcy Code. The record supports a finding that Brown represented
Zepecki in the Illinois land transaction in connection with or in contemplation of the
possibility or imminence of a bankruptcy proceeding. Although Brown argues that
he represented B & B Diversified rather than Zepecki, the Subordinate Addendum,
under which Brown's services were contracted, identified both Zepecki and B & B
Diversified as the client. Further, the Illinois real estate was titled in Zepecki
individually, and the warranty deed conveyed the real estate accordingly. The 1031
Exchange Agreement identified Zepecki as the owner of the real estate and Brown as
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the Escrow Holder. B & B Diversified was not even a party to the 1031 Exchange
Agreement. Finally, Brown's fees were to be paid from proceeds of the real estate
sale. The bankruptcy court's finding that Brown represented Zepecki in the
transaction and was paid from funds which would have been property of the
bankruptcy estate was not clearly erroneous.
We also find no clear error in the bankruptcy court's finding that Brown's
representation was in connection with or in contemplation of the possibility or
imminence of a bankruptcy proceeding. The Illinois land transaction occurred within
one month after Zepecki's divorce from Ms. Kania, who was Zepecki's largest
creditor, and within four months prior to the bankruptcy filing. The proceeds of the
land sale constituted Zepecki's largest asset with which to satisfy Ms. Kania's
judgment. The bankruptcy court found that the land transaction was a sham and was
performed in an effort to prevent the asset from becoming property of Zepecki's
bankruptcy estate and prevent his ex-wife from recovering on her judgment. Zepecki
lost his right to a bankruptcy discharge because he failed to identify the transaction
or its proceeds on his bankruptcy schedules, which further supports the court's
conclusion that Zepecki was trying to keep the asset from his wife. These facts
support the bankruptcy court's conclusion that Zepecki was contemplating bankruptcy
when he transferred the Illinois property and when Brown assisted in the attempted
section 1031 transfer of that same property. See In re Keller Fin. Servs. of Fla., Inc.,
248 B.R. 859, 878 (Bankr. M.D. Fla. 2000) (holding that the phrase "in contemplation
of" requires a subjective inquiry and allows a court to review fees paid for services
"performed at a time when the debtor was contemplating bankruptcy," regardless of
the nature of the services (internal quotations omitted)). On these facts, we cannot
say that the bankruptcy court clearly erred in finding that Brown's representation of
Zepecki relating to the Illinois land transaction was in contemplation of the filing of
a bankruptcy proceeding.
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The bankruptcy court also acted within its broad discretion to order
disgorgement of the fees Brown received. The court has the authority to disregard
a fee agreement between a debtor and counsel in determining the reasonableness of
counsel's fees under section 329(a). Mahendra, 131 F.3d at 757. Section 329
requires the attorney to show that agreed upon compensation for legal services is
reasonable. Id. Approving Brown's fees of $7,160 was within the bankruptcy court's
discretion. Brown documented entitlement to these fees from invoices showing he
had performed prepetition services for 35.8 hours at $200 per hour. On the record
presented, a finding that additional prepetition fees are unreasonable or excessive is
not clearly erroneous. Brown has failed to prove he is entitled to retain any fees for
postpetition services because he did not seek court approval to be paid from assets of
the estate. Id. at 756-57. Having reviewed the entire record, we conclude that the
bankruptcy court acted within its sound discretion in ordering Brown to return to the
bankruptcy estate $32,840 paid to him as attorney's fees.
IV.
In his opening brief, Brown includes six pages of comments on the accuracy
of the BAP's opinion, describing certain portions of the opinion as false or
slanderous. Many of Brown's claims of errors amount to contentions of fact. These
comments are irrelevant to this court, as they contradict findings of fact made by the
bankruptcy court which we have found sufficient to overcome the “clearly erroneous”
standard of review. Other assertions made by Brown pertain to irrelevant or
insignificant inaccuracies which have no impact in this appeal.
Comments made by Brown which we find most troublesome are directed to the
bankruptcy court's and the BAP's discussions regarding Zepecki's ability to access the
proceeds from the land transaction after they were transferred by Brown to Holder.
At page 15 of his opening brief, Brown states that a quotation by the bankruptcy court
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of Brown's testimony is fictional. The bankruptcy court quoted Brown as testifying,
in regard to a section 1031exchange, as follows: “[T]he seller at any time can appoint
that money to himself or pledge it for some – use it for his own benefit.” In re
Zepecki, No. 96-30125M, slip op. at 9 (Bankr. E.D. Ark. June 22, 2000). In his brief,
Brown states: “The quote attributed to Brown is a pure fabrication of unknown origin.
No such testimony appears anywhere in the transcript.” (Appellant's Br. at 15.)
The entire record from the adversary proceeding in which the bankruptcy court
denied Zepecki's discharge was made a part of the record herein. (Hr'g Tr. at 64.)
Included in the adversary proceeding record is Brown's deposition taken on June 3,
1999. Brown testified in the deposition exactly as quoted by the bankruptcy court.
(Brown Dep. at 24.) Although the bankruptcy court cited the hearing transcript rather
than the deposition transcript as the source, the quotation was not “pure fabrication”
and was far from being of "unknown origin;" the quotation came from Mr. Brown's
own mouth. Furthermore, Brown repeated the same belief regarding Zepecki's ability
to access the funds after the sale in response to questions from the court at the
hearing. (Hr'g Tr. at 78-79.) 2
Brown labels as “false” the BAP's conclusion that, “[a]t any time the Debtor
could have appointed the money for himself or used it for his own benefit.”
(Appellant's Add. at A-17.) In support of his contradiction of the BAP's statement,
2
Q (by court) All right. After you transferred that money over to Mr.
Holder, why would you say that it was no longer Doctor Zepecki's money to get back
if he wanted to?
....
A (by Brown) . . . But to get back to your question, could he have gotten
it back? I think they could have said, “We're going to stop what we're working on.
We've decided we're going to quit, liquidate the corporation, and take whatever's
left.” I think they could have done that, but nobody did.
(Hr'g Tr. at 78-79.)
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Brown cites testimony from the adversary proceeding by Zepecki and Trustee James
Luker, as well as a statement by the bankruptcy court. Zepecki actually testified that
“Up until the loan commitment, I could have withdrawn the 1031, but after the loan
commitment and the money was spent I couldn't recall it.” (Adversary Tr. at 127.)
This testimony, instead of supporting Brown's position, contradicts it. Ted Holder's
deposition testimony also contradicts Brown's assertion that Zepecki could not access
the funds. Holder testified that he transferred the funds at Zepecki's authorization,
(Holder Dep. at 10, 15), and paid Zepecki's personal expenses on various trips made
to locate investment properties, (Holder Dep. at 16, 17, 19-20).
We have reviewed the entire record in this case, including the record from the
adversary proceeding and the deposition transcripts. We conclude Brown's assertions
of error are unavailing. Having considered all of Brown's arguments, we find nothing
in the record that would require us to overturn the findings and conclusions of the
bankruptcy court or the BAP.
V.
Accordingly, we affirm the judgment of the Bankruptcy Appellate Panel.
A true copy.
Attest:
CLERK, U.S. COURT OF APPEALS, EIGHTH CIRCUIT.
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