United States Court of Appeals,
Fifth Circuit.
No. 93-5467.
In the Matter of Daisy M. PRUDHOMME and John and Kathleen Batten,
Debtors.
John F. ARENS, Appellant,
v.
Al BOUGHTON, Trustee, et al., Appellees.
Feb. 7, 1995.
Appeal from the United States District Court for the Western
District of Louisiana.
Before DAVIS, JONES and DUHÉ, Circuit Judges.
DUHÉ, Circuit Judge:
The bankruptcy court required Appellant John Arens to disgorge
a $75,000 retainer he received for legal services and to pay that
amount to the plan trustee in these two Chapter 11 cases. Appellee
Farm Credit Bank had moved for disgorgement of the fee, and the
United States Trustee moved for examination of debtors'
transactions with their attorneys. After an evidentiary hearing,
the bankruptcy court ordered disgorgement of the full retainer.
The court found that the fee was paid in contemplation of
bankruptcy, that it was excessive, and that the Arens firm (a sole
proprietorship owned by Arens) consciously breached its duty to
disclose the retainer fee as well as a contingency interest in the
debtor's cause of action 152 B.R. 91. The district court affirmed,
and we too affirm.
At issue in Arens's appeal are 1) the court's power to reach
a fee paid or agreed to be paid more than one year before the
bankruptcy petitions were filed and 2) whether the fee was paid in
contemplation of or in connection with the bankruptcy cases.
I.
The Bankruptcy Code requires a debtor's attorney to report to
the court compensation paid or agreed to be paid for services
rendered "in contemplation of or in connection with" the case, "if
such payment or agreement was made after one year before the date
of the filing of the petition." 11 U.S.C. § 329(a). The Code
further provides, "If such compensation exceeds the reasonable
value of any such services, the court may ... order the return of
any such payment, to the extent excessive." Id. § 329(b). Arens
first complains that the court erred in reaching back more than a
year prepetition because of the one-year period in § 329(a).
The debtors paid $50,000 as a first installment of Arens'
retainer charge in February 1990; a year later they paid the
$25,000 balance. The retainer agreement also allowed the firm a 40
per cent contingency fee if the firm were successful in pursuing a
lender liability action against the debtors' major creditor, Farm
Credit Bank. In July 1991 the firm filed Prudhomme's Chapter 11
petition, and in October 1991, the Battens'. Because payment of
the $25,000 was made within a year of the filing of the petitions,
that part of the compensation plainly falls within § 329(a),
regardless of when the agreement was made. Arens's one-year
argument fails with respect to disgorgement of that.
With respect to the remaining $50,000 ordered disgorged, we
find the bankruptcy court's decision supportable on a number of
alternative grounds. First, we agree with Appellees that § 329(a)
and related provisions do not provide a limitations period beyond
which the court cannot reach. The reporting requirement of §
329(a) does not expressly provide a limitations period for
disgorgement. Compare 11 U.S.C. § 329 (requiring reporting of
payments made within the year) with id. §§ 550(e), 549(d)(1)
(specifically providing that an action "may not be commenced after"
the respective time periods). Nor does § 329(b) authorizing
disgorgement of excessive fees specify a limitations period. See
In re Bennett, 133 B.R. 374, 380 (Bankr.N.D.Tex.1991) (no statute
of limitations on motion for recovery of attorney fees).
Additionally, a bankruptcy rule allows the court to determine
"whether any payment of money ... by the debtor, made directly or
indirectly and in contemplation of the filing of a petition under
the Code ... to an attorney for services rendered or to be rendered
is excessive." Bankr.R.Proc. 2017(a) (emphasis added). The rule
plainly contains no one-year limitation period. The court
determined under this rule that the fee was excessive,1 and the
remedy for excessiveness is return of any payment to the extent it
exceeds the reasonable value of services rendered. 11 U.S.C. §
329(b); 8 Collier on Bankruptcy, para. 2017.06[1] at 2017-11 (15th
ed. 1994); In re Porter, 253 F. 552, 553 (7th Cir.1918), cert.
denied, 248 U.S. 585, 39 S.Ct. 182, 63 L.Ed. 433 (1919).
Further support for the bankruptcy court's ruling lies in a
1
Ample evidence showed that the Arens firm did not render
any services that benefited any of the debtors or their estates,
that the firm's services were unsatisfactory, and that counsel
hurt the debtors more than helped them. (Arens's belatedly
offered time sheets suggesting how the fees were earned
pre-petition were appropriately stricken.) Accordingly, the
court did not clearly err in finding the fee unreasonable.
renowned treatise which recognizes that the one-year period
mentioned in § 329(a) is based on the "apparent presumption" that
any compensation paid before the year prepetition was not for
services rendered in contemplation of bankruptcy. 2 Collier, para.
329.03 at 329-12. To recognize that the one-year period is based
on a presumption is to suggest that the presumption can be
rebutted, as the bankruptcy court reasoned. See 2 R. 309 (finding
presumption rebutted by fraud or concealment). The court's
treatment of the one-year period in § 329(a) as a presumption
rebutted by fraud or concealment is consonant with the principle
that, in a court of equity, a statute of limitations may be tolled
by the inequitable conduct of the parties. See Bennett, 133 B.R.
at 380-81 (quoting Bailey v. Glover, 88 U.S. (21 Wall.) 342, 348,
22 L.Ed. 636 (1875)). The court found a pattern of nondisclosure
in both cases.2 We hold that such concealment was misconduct
2
This finding is also amply supported by the record.
Bankruptcy Rule 2014(a) requires an attorney applying for
employment to disclose the compensation arrangements and "all
connections" with the debtor. Local Rule 4.0(9) requires a
lawyer applying for appointment to disclose any compensation
received in the 18-month period prepetition. If the firm had
filed the scheduled required by Local Rule 4.0, it would have
disclosed the $50,000 payment as well as the $25,000 in Ms.
Prudhomme's case (because both were paid within 18 months of her
petition).
The firm divulged in the statements of financial
affairs in the bankruptcy cases the $25,000 payment to Arens
but never disclosed the earlier $50,000 payment. The
debtors testified that Arens requested payment of the
$25,000 balance so that he could advise the bankruptcy court
that nothing was owed.
When seeking to enroll as counsel in these cases,
various lawyers from the Arens firm swore that they were
disinterested, despite the firm's 40 per cent interest in
the debtor's cause of action. Their applications for
appointment did not disclose the retainer or contingency
justifying the disgorgement even if § 329(a) would otherwise
preclude recovery of fees paid earlier than one year prepetition.
Additionally, the 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. See 11 U.S.C. §§ 327,
1107(a) (requiring court approval before debtor-in-possession may
employ counsel); id. § 330(a) (requiring court approval of
professional fees); Woods v. City Nat'l Bank & Trust Co., 312 U.S.
262, 268, 61 S.Ct. 493, 497, 85 L.Ed. 820 (1941) (using denial of
compensation as tool for strict enforcement of conflict-of-interest
rules); Anderson v. Anderson (In re Anderson), 936 F.2d 199, 204
(5th Cir.1991) (recognizing bankruptcy court's broad discretion as
court of equity to grant or deny fees and noting that attorney has
no absolute right to fee award absent compliance with Code and
rules); In re Key Largo Land, Inc., 158 B.R. 883, 884
(Bankr.S.D.Fla.1993) (recognizing that any payment to debtor's
attorney, regardless of the source, is reviewable by the bankruptcy
court); see also Futuronics Corp. v. Arutt, Nachamie, & Benjamin
(In re Futuronics Corp.), 655 F.2d 463, 469-71 (2d Cir.1981)
(holding that total denial of compensation is the only appropriate
sanction for nondisclosure of all facts bearing upon counsel's
fee. The contingency arrangement was disclosed belatedly in
the Battens' second amended disclosure statement six months
after the Battens' petition was filed—never in the Prudhomme
case. One affiant swore that he advised the debtor of the
firm's willingness to serve as counsel upon the debtor's
agreement to pay the firm's hourly fees, but the debtors
testified that they made no agreement regarding hourly fees.
eligibility and all connections with debtor, including counsel's
retainer agreement), cert. denied, 455 U.S. 941, 102 S.Ct. 1435, 71
L.Ed.2d 653 (1982); In re Arlan's Dept. Stores, Inc., 615 F.2d
925, 937-38 (2d Cir.1979) (finding no abuse of discretion in
court's order of disgorgement of all fees where counsel failed to
divulge all connections with debtor and to disclose all fees); In
re Crimson Investments, N.V., 109 B.R. 397, 401 (Bankr.D.Az.1989)
(redressing counsel's lack of candor in failing to disclose
retainers with the "only remedy"—immediate turnover of entire
retainer to the estate).
A final ground to support disgorgement of the $50,000 is
discussed in part III of this opinion.
II.
Arens also argues that the retainer was not paid "in
contemplation of bankruptcy" as is required for disgorgement. See
11 U.S.C. § 329(a) (requiring disclosure of fees paid or agreed
within one year prepetition for services "in contemplation of or in
connection with the case"). The court was faced with evidence
suggesting that the debtors were in desperate financial straits
when they first consulted Arens, that they sought representation in
resolving their disputes with their largest creditor, and that they
had been unsuccessful in restructuring debt. This evidence
supports the court's finding that the fee was paid in contemplation
of or in connection with the case. Arens fails to show that the
court's finding was clearly erroneous.
III.
Regardless of Arens's limitations argument and regardless of
whether fees were paid in contemplation of bankruptcy, one final
theory of recovery supports the court's order of disgorgement. If
a debtor retains an equitable interest in an unearned prepetition
retainer, the unearned portion becomes property of the estate upon
the filing of the petition for bankruptcy. See 11 U.S.C. §
541(a)(1) (equitable interests of the debtor become property of
estate); In re Mondie Forge Co., 154 B.R. 232, 238 (Bankr.N.D.Ohio
1993) (if debtor has legal or equitable interest in unearned
retainer under applicable state law, then unearned retainer becomes
estate property). Under Louisiana law the unearned portion of
retainer fees are client funds and must be held by the lawyer in
trust for the client. Louisiana State Bar Ass'n v. Kilgarlin, 550
So.2d 600, 605 n. 10 (La.1989). An unearned retainer cannot be
used by the attorney until a fee request is first allowed by the
bankruptcy court. See In re Chapel Gate Apts., Ltd., 64 B.R. 569,
574-75 (Bankr.N.D.Tex.1986) (drawing on prepetition retainer
without approval of bankruptcy court preempts court's power to
determine reasonableness and legality of fees; violations of § 329
and Rule 2016 subject counsel to order of disgorgement); see also
Crimson, 109 B.R. at 402 (ordering surrender of unearned retainer
because of counsel's failure to disclose source of compensation).
Attorneys must prove their entitlement to compensation before
the bankruptcy court will order a fee award. See Neville v.
Eufaula Bank & Trust Co. (In re U.S. Golf Corp.), 639 F.2d 1197,
1207 (5th Cir.1981) (burden is on person seeking compensation to
establish value of his services). Because the entire retainer was
unearned and Arens did not prove entitlement to be paid therefrom,
the court properly ordered the entire retainer disgorged.
IV.
In view of the alternative grounds supporting the order of
disgorgement, the district court order affirming the bankruptcy
court is
AFFIRMED.