Elias v. Lisowski Law Firm, Chtd. (In Re Elias)

OPINION

MARLAR, Bankruptcy Judge:

After the debtor’s chapter 112 case was dismissed, her bankruptcy attorney filed a state-court lawsuit against her for $10,000.00 of unpaid chapter 11 attorneys’ fees. The debtor filed a motion for summary judgment in the state-court action, arguing that her former attorney was not entitled to any fees because he had secured his employment in the bankruptcy case fraudulently by failing to disclose his prior connection with the debt- or, the fee he received for the bankruptcy retainer, or his receipt of a potential $3,000.00 preference from the debtor on the eve of filing.

Prior to ruling on the motion for summary judgment, the state court requested that the bankruptcy court rule upon the viability of the attorney’s lien, the status of the attorney’s employment in the bankruptcy case, and whether a preference claim against the attorney could affect his ability to collect a fee.

Pursuant to the state court’s request, the debtor filed a motion in the bankruptcy court seeking to vacate the order authorizing counsel’s employment, cancel the attorney’s hen, and determine that counsel was not entitled to any fees.

Exercising its discretion, the bankruptcy court denied the debtor’s motion. The bankruptcy court also found that it had no jurisdiction to enter further orders concerning the disputed fees. The debtor appealed. We AFFIRM.

7.FACTS

Shelly Elias (“the Debtor”) filed a voluntary chapter 11 proceeding on February 18, 1994. Her attorney, James F. Lisowski of the Lisowski Law Firm, Chtd., applied for *602retention as her attorney on February 28, 1994. The application stated that the Debtor had paid nothing as a retainer, and, further, that neither LisowsM nor Ms firm “have any connection with the Debtor, her creditors or any other party in interest ... and represent rio interest adverse to the Estate in the matters upon which [they are] to be retained.” The application was supported by LisowsM’s affidavit, wherein he repeated the statement that he did not represent or hold an adverse interest. An order appointing the firm was signed by the bankruptcy court on March 8,1994.

In fact, for some time before the bankruptcy, LisowsM and his firm had represented the Debtor in connection with her cocktail lounge. Just prior to the bankruptcy filing, the Debtor owed the LisowsM firm $8,000.00. Knowing that he could not represent the Debtor in her chapter 11 proceeding while his firm was a creditor, LisowsM and the Debtor agreed that the debtor would pay $8,000.00 toward the $8,000.00 outstanding legal bill, and the $5,000.00 balance would be forgiven. The Debtor then paid an additional $4,200.00 for a bankruptcy fee, together with $800.00 to cover the cost of filing the chapter 11. It is unclear from the record, and immaterial to this opinion, whether the Debtor also paid an additional $500.00.

The payment of a $4,200.00 (or $4,700.00) attorneys’ fee was inconsistent with Lisow-sM’s representation that the firm was paid “- 0 — ” for its services in filing the chapter 11. On March 22, 1994, the Debtor executed her Statement of Financial Affairs and noted, in question 9, that LisowsM had indeed been paid $4,200.00 on February 17,1994.

The § 341 meeting of creditors was held on March 23, 1994, and the $3,000.00 preferential payment was raised and discussed by the U.S. Trustee’s attorney. According to LisowsM, the U.S. Trustee’s attorney indicated by a “shake of the head” that it was unnecessary for the Debtor to amend the Statement of Affairs and note that item in writing. The existence of this head nod is unsupported by the record, and counsel’s reference to it is suspicious because the Statement of Affairs, question 3, requires disclosure of “all payments” aggregating more than $600.00 made within 90 days prior to commencement of the case. The Debtor never disclosed the $3,000.00 pre-petition payment to the LisowsM firm in writing, and the U.S. Trustee had no authority to waive the answer to that question.

The case proceeded through various stages for almost a year. In December 1994, the Debtor, through counsel, filed a motion to dismiss her case. Thereafter, the Debtor apparently had a falling out with the Lisow-sM firm and filed the actual order of dismissal herself, without consulting her attorneys. The case was dismissed on January 11,1995. The LisowsM firm, up to and through dismissal, never moved to withdraw as counsel, and now maintains that the order dismissing the case was entered before its attorneys knew of the entry of the order dismissing the case.

All parties agree that, during the course of the chapter 11 proceeding and to the current date, LisowsM never applied for, nor was he awarded, fees by the bankruptcy court.

On April 14,1995, LisowsM sued the Debt- or in state court for Ms fees. In that proceeding, the state-court judge declined to rule unless and until the parties obtained a ruling from the bankruptcy . court, in the dismissed chapter 11, concerning the propriety and amount of fees. Specifically, the state court requested that the parties refer the matter to the bankruptcy court “for consideration of the following issues in order to avoid conflicting results:

1. The viability of the attorney’s lien held by LisowsM Law Firm, Chtd.

2. The status of Mr. LisowsM as an employee of Ms client, Shelly Elias, in the Bankruptcy action.

3. Could a preference claim against Mr. LisowsM affect Ms ability to collect his attorney’s fees?”

Thereafter, new motions were filed in the bankruptcy court, seeking to disqualify the LisowsM firm and rescind the order of employment. On November 14, 1995, the trial court exercised its discretion and refused to act on the request, and, in addition, found that the bankruptcy court was without jurisdiction to resolve the state court’s concerns. *603The court then returned the parties to the state court, noting that it was “fully capable of adjusting the fees requested based upon the nature and extent of services rendered.”

This appeal of the bankruptcy court’s Order followed.

II. STANDARD OF REVIEW

A bankruptcy court’s decision regarding an application for the employment of a professional is reviewed for abuse of discretion. First Interstate Bank of Nevada v. CIC Investment Corp. (In re CIC Investment Corp.), 175 B.R. 52 53 (9th Cir. BAP 1994). Similarly, a bankruptcy court’s decision as to the proper amount of attorneys’ fees to be awarded is reviewed for an abuse of discretion. Neben & Starrett, Inc. v. Chartwell Financial Corp. (In re Park-Helena Corp.), 68 F.3d 877, 880 (9th Cir.1995) cert. den. — U.S. -, 116 S.Ct. 712, 133 L.Ed.2d 667 (1996). Finally, “[a] bankruptcy court’s decision to decline to exercise jurisdiction over related proceedings following dismissal of the underlying bankruptcy case is set aside only for abuse of discretion.” Davis v. C.G. Courington (In re Davis), 177 B.R. 907, 910-11 (9th Cir. BAP 1995) (citation omitted).

III. DISCUSSION

A. Jurisdiction'

The first issue on appeal, is whether the bankruptcy court was correct in deciding that it was without jurisdiction to resolve post-dismissal disputes regarding the Debt- or’s bankruptcy attorneys’ fees.

Once a case has been dismissed, property of the debtor’s estate3 re-vests in the debtor, and, unless the court orders otherwise, certain, types of transfers which might have been avoided in the bankruptcy are reinstated as if no bankruptcy had intervened. 11 U.S.C. § 349(b). See also H.R.Rep. No. 95-595, at 338 (1977) (“The basic purpose of § 349(b) is to undo the bankruptcy ease, as far as practicable.”) In finding that it had no jurisdiction, the trial court also is supported by Ninth Circuit decisions which hold that a trial court retains subject-matter jurisdiction to interpret orders entered prior to dismissal of the underlying case, but that it does not retain jurisdiction to grant new relief in a case that has been dismissed. See Tsafaroff v. Taylor (In re Taylor), 884 F.2d 478, 481 (9th Cir.1989); Beneficial Trust Deeds v. Franklin (In re Franklin), 802 F.2d 324, 327 (9th Cir.1986). In Taylor,. the Ninth Circuit observed, that, in addition to interpreting orders entered prior to dismissal of the underlying bankruptcy case, a bankruptcy court has power to dispose of ancillary matters such as an application for an award of attorneys’ fees for services rendered in connection with the underlying action. 884 F.2d at 481 (citing U.S.A. Motel Corp. v. Danning (Matter of U.S.A. Motel Corp.), 521 F.2d 117 (9th Cir.1975)). Thus, while it is possible that, under the right set of facts, a bankruptcy court has inherent power to determine compensation questions presented even after the case has been dismissed, such power does not extend to the granting of “new relief.” In this case, the trial court correctly determined that the relief requested by the Debtor would have constituted “new relief’ and was, therefore, beyond the bankruptcy court’s jurisdiction.

Here, the Debtor’s position that the bankruptcy court should invalidate her contract with LisowsM is based not upon the argument that Lisowski did not earn his fees during her bankruptcy case, but, rather, upon the assertion that he acted unethically in the representation. The bankruptcy court does have an interest in ensuring that attorneys appearing before it conduct themselves properly, and that, interest can be vindicated through the initiation of disciplinary proceedings concerning an attorney’s conduct and fitness to practice before the court. However, that interest does not extend so far as to grant the bankruptcy court jurisdiction to involve itself in a state-court dispute by launching an independent inquiry into an attorney’s conduct during a now-dismissed bankruptcy case. Such an inquiry would not have any connection to the issues presented in the bankruptcy, would not affect: the rights of any creditor, and would not serve any of the purposes underlying the bankruptcy code. In short, the bankruptcy court *604would be granting the Debtor new relief that would serve no purpose in advancing the dismissed case.4

Furthermore, subsequent to the Ninth Circuit’s rulings in Taylor and Franklin, the United States Supreme Court has determined that the scope of a federal court’s residual jurisdiction in a dismissed case is quite limited. In Kokkonen v. Guardian Life Insurance Co. of America, the court held that “[i]t is to be presumed that a cause lies outside [a federal court’s] limited jurisdiction.” 511 U.S. 375, 377, 114 S.Ct. 1673, 1675, 128 L.Ed.2d 391 (1994) (citation omitted). This presumption operates to deny a federal court jurisdiction even to enforce a court-approved agreement whereby a case in that same court was settled, unless the order approving the settlement agreement adopts the agreement’s terms, the court expressly maintains jurisdiction over the agreement, or “there is some independent basis for federal jurisdiction.” Id. at 381-82, 114 S.Ct. at 1677. In this case, there is no independent constitutional or statutory basis for the bankruptcy court to decide the ethical issues presented in this matter, or the impact of those issues upon the validity of the employment contract between the Debtor and Lisowski. Moreover, that matter currently is pending in a state court with full jurisdiction to resolve the contract issues before it.

Thus, even if the bankruptcy court were to have set aside the order of employment, it had no jurisdiction to order the additional relief requested. Accordingly, the bankruptcy court was jurisdictionally unable to decide the questions posed by the state court.

B. Advisory Opinion

In addition to the jurisdictional grounds stated above, federal courts also are prohibited from rendering advisory opinions. Muskrat v. United States, 219 U.S. 346, 31 S.Ct. 250, 55 L.Ed. 246 (1911); Flast v. Cohen, 392 U.S. 83, 88 S.Ct. 1942, 20 L.Ed.2d 947 (1968); American State Bank v. Marks (In re MacNeil), 907 F.2d 903, 904 (9th Cir.1990). In essence, because the issues upon which the state court requested guidance are immaterial to any matter in the dismissed bankruptcy ease, an order of the bankruptcy court would merely be advice to the state court. For this reason, also, the bankruptcy court was correct in refusing to issue further orders in this matter.

C. Discretion

Even if the bankruptcy court had the jurisdiction to consider the new motions, it properly exercised its discretion not to do so. Section 350(b) of the Bankruptcy Code provides that “[a] ease may be reopened in the court in which such case was closed ... to accord relief to the debtor, or for other cause.” The court’s decision to reopen is entirely within its sound discretion, based upon the circumstances of each case. Rosinski v. Boyd (In re Rosinski), 759 F.2d 539, 540-41 (6th Cir.1985); Citizens Bank & Trust Co. v. Case (Matter of Case), 937 F.2d 1014, 1018 (5th Cir.1991); In re Rediker, 25 B.R. 71, 73 (Bankr.M.D.Tenn.1982). Procedure requires that a motion be filed, something that was lacking in the instant case. Rule 5010, Federal Rules of Bankruptcy Procedure. One circuit has held that a bankruptcy court may reopen a case sua sponte if prima facie evidence discloses that an estate has not been administered fully. See Mullendore v. United States (In re Mullendore), 741 F.2d 306, 308-09 (10th Cir.1984). However, this exception is narrow, and is not present here.

Thus, one must look to the known facts of this case, as disclosed by the record chosen by the parties, to consider whether the bankruptcy court abused its discretion in refusing to reopen the ease and answer the questions posed by the state-court trial judge. As this court noted in Kashani v. Fulton (In re Kashani),

[u]nder the abuse of discretion standard, the Ninth Circuit has clearly stated that *605the trial court’s exercise of its discretion will not be disturbed unless there is “‘a definite and firm conviction that the court below committed a clear error of judgment in the conclusion it reached upon a weighing of the relevant factors.’ ”

190 B.R. 875 (9th Cir. BAP 1995) (citing Moneymaker v. Cohen (In re Eisen), 31 F.3d 1447, 1451 (9th Cir.1994) (internal citations omitted)).

Here, numerous factors supported the bankruptcy court’s decision not to consider the fee issues further. They included that the case had been dismissed for over eight months; that there were no assets to administer; that all property had re-vested in the Debtor; that any potential preferences had been' reinstated by the dismissal; that the Debtor herself had signed, under oath, the very Statement of Affairs which she contended was erroneous and fraudulent; that the state court was “fully capable of adjusting the fees requested based upon the nature and extent of services rendered;” and that “the state court may determine what sanctions are appropriate in determining the total fees, if any, which may be paid.” •

In effect, if we determine that the state court’s request for advice requires the bankruptcy court to act, we are opening the door for any number of requests by parties who find themselves still fighting long after the bankruptcy case has been laid to rest. Because there no longer exists a bankruptcy ease, no federal purpose is served by a retroactive, post-dismissal review of-a state-court attorney-fee dispute. Had this matter been brought to the bankruptcy court’s attention during the pendency of the bankruptcy case, it could have been decided, at the proper time and in the proper context, in that forum. Now, however, the matter properly is pending in another court which may decide issues that are clearly and fully within its jurisdiction, to wit, the propriety and amount of an attorney’s fee, and the extent of an attorney’s lien.

IV. CONCLUSION

We are not satisfied either that the bankruptcy court had jurisdiction to grant the relief requested by the Debtor, or that there has been a showing that the bankruptcy court abused its discretion in refusing to reopen the dismissed case in order to review pending state-court issues concerning disputed attorneys’ fees. We therefore AFFIRM the decision of the bankruptcy court.

. Unless otherwise indicated, all chapter, section and rule references are to the Bankruptcy Code, 11 U.S.C. § 101 et seq. and to the Federal Rules of Bankruptcy Procedure.

. An "estate” is created by the commencement of a bankruptcy case. 11 U.S.C. § 541(a).

. Moreover, the bankruptcy court is not the best forum in which to complain about the professional conduct of an attorney outside the context of any pending bankruptcy case; the state courts, and the appropriate state bar association, are better able to deal with such issues. Also, it should be noted that the Debtor herself signed, under oath, the very Statement of Affairs which she now contends was erroneous and fraudulent, presumably because she, also, wanted to ensure that her attorney was appointed to represent her in the bankruptcy. See Part III(C), infra.