Hines, In re, 96-55735

• Decision Date: 16 July 1998
• Docket Number: No. 96-55735,96-55735
• Citation: 147 F.3d 1185
• Parties: 40 Collier Bankr.Cas.2d 684, 32 Bankr.Ct.Dec. 1132, Bankr. L. Rep. P 77,743, 98 Cal. Daily Op. Serv. 5569, 98 Daily Journal D.A.R. 7787, 2 Cal. Bankr. Ct. Rep. 45 In re: Brenda F. HINES, Debtor. Robert L. GORDON, Appellant, v. Brenda F. HINES, Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 1185

147 F.3d 1185

40 Collier Bankr.Cas.2d 684, 32 Bankr.Ct.Dec. 1132,

Bankr. L. Rep. P 77,743,

98 Cal. Daily Op. Serv. 5569,

98 Daily Journal D.A.R. 7787,

2 Cal. Bankr. Ct. Rep. 45

In re: Brenda F. HINES, Debtor Robert L. GORDON, Appellant, v. Brenda F. HINES, Appellee.

No. 96-55735.

United States Court of Appeals Ninth Circuit.

Argued and Submitted Oct. 7, 1997.

Decided July 16, 1998.

Don E. Bokovoy, Weintraub & Bokovoy, San Diego, California, for appellant.

Nathan Shilberg, Harold Shilberg, San Diego, California, for appellee.

Appeal from the Ninth Circuit Bankruptcy Appellate Panel; Ashland, Ollason, and Hagan, Judges, Presiding. BAP No. SC-94-1893AsOH.

Before: REINHARDT and TASHIMA, Circuit Judges, and SHADUR, District Judge. ^*

SHADUR, District Judge:

This small-dollars but large-issue litigation poses a problem that pervades each of the many thousands of no-asset or low-asset personal bankruptcies in the federal court system: the legal posture of the attorneys' fees paid or payable by Chapter 7 debtors. Whether the debtor is required by his or her attorney to pay all of the fees up front--even before the filing in bankruptcy--or, as here, enters into a prefiling arrangement for payment of the fees (or a material portion of the fees) after filing, the legal status of the fees attributable to postpetition services does not fit comfortably within the provisions of the Bankruptcy Code.

Bankruptcy judges are of course well aware of those problems on a day-to-day basis. But because the question is rarely encountered in an adversarial context, the conceptual difficulties that it presents are commonly swept under the rug. And because the stakes in any individual case tend to be so low in relation to the cost of litigating such a dispute, any such controversy that does arise in adversarial terms rarely finds its way to the district court level--and even more rarely to a Court of Appeals. This case presents a unique exception, because it seems to stem from bad blood between two lawyers competing for the high volume business that personal bankruptcies represent. We are thus required to deal here with the consequences of Congress' delinquency in failing to set out express ground rules to be followed by lawyers--and hence by the courts--on the issue before us.

In this instance Robert L. Gordon ("Gordon"), former attorney for Chapter 7 debtor Brenda F. Hines ("Hines"), appeals the reversal by the Ninth Circuit Bankruptcy Appellate Panel ("BAP") of a bankruptcy court order that had denied Hines' motion for contempt against Gordon for willful violation of one of the paragraphs of the automatic stay provision of the Bankruptcy Code ("Code"), 11 U.S.C. § 362(a)(6). ¹ Hines' motion was a response to Gordon's postpetition cashing of two postdated personal checks and other actions to collect some previously-agreed-upon attorneys' fees. We have jurisdiction over this appeal under 28 U.S.C. § 158(d). For the reasons stated here, we reverse the BAP decision and remand the case for a limited return to the bankruptcy court.

Standards of Review

We review BAP decisions de novo (Hughes v. Lawson (In re Lawson ), 122 F.3d 1237, 1240 (9th Cir.1997)). We review a bankruptcy court's legal conclusions de novo and its factual findings for clear error (Feder v. Lazar (In re Lazar ), 83 F.3d 306, 308 (9th Cir.1996)). In this case the absence of any factual disputes means that de novo review applies throughout.

Facts ²

On November 24, 1992 attorney Harold Shilberg ("Shilberg") began a Chapter 13 bankruptcy proceeding on Hines' behalf. Almost exactly a year later Hines changed counsel by retaining Gordon (who had explained to her the apparent advantages of Chapter 7 over Chapter 13 in her situation) to convert her Chapter 13 case to one under Chapter 7. Because Hines could not pay Gordon's $875 fee in advance, ³ they entered into a written fee agreement for payment in seven monthly installments of $125 each, supported by a promissory note and seven postdated checks, the first to be cashed pre-petition and the remainder to be cashed postpetition.

On December 29, 1993 Gordon formally replaced Shilberg as Hines' attorney of record. Shortly thereafter, on Gordon's application the bankruptcy court issued an order converting Hines' case from Chapter 13 to Chapter 7. In conjunction with the conversion petition, Gordon properly disclosed his fee arrangement to the bankruptcy court pursuant to Section 329 and Federal Rule of Bankruptcy Procedure ("Bankruptcy Rule") 2016(b). In accordance with the fee agreement and related promissory note, Gordon proceeded to act on Hines' behalf postpetition, and he cashed two postdated checks, one on January 10, 1994 and the other on February 7 of that year (so that Gordon's total receipts for his services rendered aggregated $375).

Though the record does not disclose the dynamics that led to her further change of heart, Hines then became dissatisfied with Gordon and decided to revert to her former attorney Shilberg. First Shilberg advised Hines that any attorneys' fees incurred to Gordon before the commencement of Hines' Chapter 7 bankruptcy case were dischargeable. And on Shilberg's advice Hines stopped payment on the remaining uncashed postdated checks in Gordon's hands.

In response to that stop payment order, Gordon's law firm sent Hines a "past due" notice asking that she communicate with the firm's accounting department to establish a new payment arrangement. On April 12, 1994 a firm attorney followed up on that notice by leaving a message on Hines' answering machine. Hines returned that call and claims that she was ordered to settle her account by the end of the month.

On April 18, 1994 Hines, now represented by Shilberg, filed a motion for contempt against Gordon for willful violation of the Section 362(a)(6) automatic stay, seeking compensatory damages of $250, punitive damages of $50,000 ⁴ and attorneys' fees. On July 14, 1994 the bankruptcy court denied Hines' contempt motion, at the same time reducing Gordon's fee from the originally agreed amount of $875 to the $375 already paid. Hines timely appealed that order to the BAP, which reversed the bankruptcy court's order and remanded for a determination of damages under Section 362(h). Gordon then timely filed a notice of appeal to this Court.

Attorneys' Fees and the Code

Before we turn to the analytical and practical aspects of the problem before us, it is useful to summarize the parties' positions. They agree that Gordon's conversion of Hines' case to one under Chapter 7, an action taken pursuant to Section 1307(a), triggered the operation of Section 362(a)(6). That provision automatically stays "any act to collect, assess, or recover a claim against the debtor that arose before" the filing of the petition. ⁵ Hines contends that Gordon's presentment of the post-dated checks and delivery of the notice of dishonor constituted an impermissible attempt to collect a prepetition claim against Hines in violation of Section 362(a)(6). In response Gordon presents two principal arguments. First he argues that the postdated checks represent a post-petition claim against Hines and are thus not subject to the automatic stay. Alternatively he contends that he did not violate the automatic stay because his conduct fell within the protective ambit of Section 362(b)(11)'s exception for the presentment of negotiable instruments.

In an important sense, limiting the focus of attention to the interplay between Section 362(a)(6)'s automatic stay and the presentment exception cannot provide a total answer here. It must be remembered that Gordon is not seeking to recover fees for his prepetition legal services (he has already collected $375 in fees, which appear to cover all prepetition services plus some postpetition services). As we have recently observed in Hessinger & Assocs. v. U.S. Trustee (In re Biggar), 110 F.3d 685, 688 (9th Cir.1997):

Thus we hold that the debts at issue in this case--debts arising from the provision of pre-petition legal services--are dischargeable in a bankruptcy proceeding [under Section 727]. ⁶

And any attempt to collect unpaid fees for such prepetition services would be an "act to collect ... a claim against the debtor that arose before" the petition was filed, and hence would violate Section 362(a)(6)'s automatic stay.

Although the fee agreement between Hines and Gordon did not contain an allocation of expenses in that regard, the $875 figure expressly covered not only Gordon's initial work in preparing and filing the petition but also all of the work to be entailed in handling the bankruptcy proceedings thereafter. So the scenario before us presents a different question: whether the postpetition rendition of legal services bargained for pursuant to a prefiling fee agreement entitles Gordon to recover the fees for those later services, not from the bankruptcy estate (which in a no-asset case would amount to tapping an empty barrel) but directly from Hines herself.

As we have said at the outset, Congress has been delinquent in failing to deal expressly with the always-present problem of arranging in advance for the payment of services to be rendered after the filing in bankruptcy. ⁷ In the absence of any express statutory treatment of attorneys' fees for postpetition services, Chapter 7 debtors' attorneys have normally resorted to working under one of two fee arrangements, both of which are potentially subject to disruption by the operation of the Code.

Under the first approach, the attorney receives full payment from the Chapter 7 debtor, in advance of the bankruptcy filing, for all of the work anticipated to be required in the case. As a legal matter that prepaid right to future legal services--because it exists at the outset of the bankruptcy case--becomes property of the debtor's estate, for subject to a few enumerated exceptions (none of which applies here) Section 541(a) provides that estate property...