Bethea v. Robert J. Adams & Associates, 03-1303.

CourtUnited States Courts of Appeals. United States Court of Appeals (7th Circuit)
Citation352 F.3d 1125
Decision Date17 December 2003
Docket NumberNo. 03-1303.,03-1303.
PartiesAlbert BETHEA, et al., Plaintiffs Appellants, v. ROBERT J. ADAMS & ASSOCIATES; Law Offices of Melvin James Kaplan; and Zalutsky & Pinski, Ltd., Defendants-Appellees.
352 F.3d 1125
Albert BETHEA, et al., Plaintiffs Appellants,
v.
ROBERT J. ADAMS & ASSOCIATES; Law Offices of Melvin James Kaplan; and Zalutsky & Pinski, Ltd., Defendants-Appellees.
No. 03-1303.
United States Court of Appeals, Seventh Circuit.
Argued September 9, 2003.
Decided December 17, 2003.

Page 1126

Timothy M. Kelly (argued), Beerman, Swerdlove, Woloshin, Barezky, Becker, Genin & Londo, Chicago, IL, for Appellees.

Phillip A. Bock (argued), Macey, Chern & Diab, Chicago, IL, for Debtor-Appellant.

Before CUDAHY, EASTERBROOK, and RIPPLE, Circuit Judges.

EASTERBROOK, Circuit Judge.


Three debtors in bankruptcy hired lawyers before filing their petitions. Each agreed to a retainer that would cover the legal services entailed in preparing and prosecuting the proceedings. Unlike most retainers, however, these were to be paid over time — some installments before the petition was filed, others thereafter. The lawyers performed as promised: all three debtors received their discharges, and the cases were closed. When the lawyers continued to collect the unpaid installments, the three debtors (with the assistance of new counsel) commenced adversary proceedings in which they asked the bankruptcy court to hold their former lawyers in contempt for violating the injunctions implementing the discharges. See 11 U.S.C. § 524.

Bankruptcy Judge Barliant concluded that attorneys' fees "reasonable" under 11 U.S.C. § 329(b) are not discharged. 275 B.R. 284 (Bankr.N.D.Ill.2002). Section 329, which deals directly with attorneys' compensation, supersedes the more general reach of 11 U.S.C. § 727, the discharge provision, the judge held, reasoning that any other conclusion would leave no work for § 329(b) to do. Because statutes should not be read to make any section ineffectual, the bankruptcy court thought that § 329(b) must be the only device for controlling debtors' legal fees. The debtors concede that the fees they had promised to pay their ex-attorneys are reasonable, so Judge Barliant dismissed the adversary proceedings. The district judge affirmed, substantially for the bankruptcy judge's reasons. 287 B.R. 906 (N.D.Ill.2003).

Section 727(b) reads: "Except as provided in section 523 of this title, a discharge under subsection (a) of this section discharges the debtor from all debts that arose before the date of the order for

Page 1127

relief under this chapter, and any liability on a claim that is determined under section 502 of this title as if such claim had arisen before the commencement of the case, whether or not a proof of claim based on any such debt or liability is filed under section 501 of this title, and whether or not a claim based on any such debt or liability is allowed under section 502 of this title." Attorneys' fees are not among the debts excepted from discharge by § 523. The retainer is a pre-petition, liquidated debt; but even if it were an unliquidated "claim" for purposes of § 502, that claim also would be covered. Unless § 329 creates an unenumerated exception to § 727(b), the debts to these attorneys were discharged.

Section 329(a) requires every attorney representing a debtor in bankruptcy to file with the court a statement of all compensation received during the preceding year, or to be received, in connection with the bankruptcy. This statement enables the court to determine whether the lawyer has received a preferential transfer. Debtors may not care who gets what money remains (if the attorney gets more, other creditors get less), and, when clients do not haggle over price, some attorneys will be tempted to divert the funds to themselves by charging excessive fees. Section 329(b) requires bankruptcy judges to use the information supplied under § 329(a) to determine whether "such compensation exceeds the reasonable value of any such services". If it does, then "the court may cancel any such agreement, or order the return of any such payment, to the extent excessive". The bankruptcy and district judges believed that this power is exclusive of discharge under § 727; otherwise, they stated, § 329(b) would play no role in Chapter 7 cases even though 11 U.S.C. § 103(a) declares that it (like the rest of Chapter 3) applies to Chapter 7 proceedings.

Our difficulty with this approach is that § 329 has plenty to do in Chapter 7 cases, even if debts for legal fees are subject to discharge. First, prepaid fees exceeding the "reasonable" value of the legal services must be recouped for the benefit of other creditors. Second, the judge must ensure the reasonableness of any fees incurred during the proceeding itself, once more to protect other creditors. Third, if the debt is reaffirmed during the proceeding, yet again the judge must ensure reasonableness. Finally, if the debtor repudiates the executory portion of the agreement with counsel, and the estate rehires the same lawyer (an approach that gives administrative priority to ongoing legal fees), once again § 329(b) requires the judge to review the fee agreement for reasonableness. Because grouping legal fees with other debts subject to discharge does not gut § 329(b) for Chapter 7 cases, the structure of the Bankruptcy Code does not support treating § 329 as an implicit exception to § 727. We therefore agree with In re Biggar, 110 F.3d 685 (9th Cir.1997), that pre-petition debts for legal fees are subject to discharge under § 727. See also In re Sanchez, 241 F.3d 1148, 1150 (9th Cir.2001). Although Biggar is the only appellate decision squarely in point, almost every bankruptcy judge and district judge who has considered the question has come to the same conclusion — essentially everyone other than the judges in this litigation.

The three lawyers contend that reading § 727 this way would force the most destitute of debtors to forego legal assistance, because counsel neither could be paid in advance (the norm for Chapter 7 cases) nor could collect after the case ends. The bar therefore would shun these debtors, depriving them of the Code's benefits. That argument about what makes for good public policy should be directed to

Page 1128

Congress; the judiciary's job is to enforce the law Congress enacted, not write a different one that judges think superior. See Barnhart v. Sigmon Coal Co., 534 U.S. 438, 460-62, 122 S.Ct. 941, 151 L.Ed.2d 908 (2002). Cf. United States v. Kras, 409 U.S. 434, 93 S.Ct. 631, 34 L.Ed.2d 626 (1973) (filing fee that makes it possible to be "too poor to go bankrupt" must be implemented). For what it may be worth, however, we do not share the view that taking § 727(b) at face value necessarily injures deserving debtors. Those who cannot prepay in full can tender a smaller retainer for prepetition work and later hire and pay counsel once the proceeding begins — for a lawyer's aid is helpful in prosecuting the case as well as in filing it. Legal fees incurred after filing in such situations receive administrative priority; that prospect (plus some pre-filing retainer) should be enough to summon legal assistance. And debtors retain the ability to represent themselves, when legal aid cannot be found.

Bankruptcy Judge Barliant considered whether an intermediate position is possible, under which the portion of the retainer reflecting work done during the bankruptcy is immune from discharge, even if the portion of the retainer reflecting pre-filing work is discharged. In re Hines, 147 F.3d 1185 (9th Cir.1998), adopted that position, limiting Biggar to fees for pre-filing work. The Hines majority wrote that it thought the Code as written (and as implemented in Biggar) is unsatisfactory as a matter of public policy, and it decided to do a little surgery under what it called a "doctrine of necessity." See 147 F.3d at 1190-91. Like Judge Barliant, who concluded that Hines is wrongly decided, we do not conceive revision of the Code as a proper part of the judicial job. The Bankruptcy Code is a complex compromise among debtors and different kinds of creditors; tilting it to help one of these interests is unwarranted. Attorneys compete with other creditors, such as banks, credit card issuers, supermarkets, auto dealers, colleges, spouses, and children; some of these have obtained protection under § 523 and others have not. Judges are not entitled to override the legislative approach with a lawyer-centric public policy that puts members of their own social class higher in the priority list at the expense of other creditors, or of the debtors themselves.

Thus even though the debtors in this appeal have expressed willingness to accept the conclusion of Hines, we must determine whether that is a legally open middle ground. (Even when a litigant confesses error on a district court's conclusion, as these litigants effectively have done with respect to Judge Barliant's treatment of Hines, an appellate court must decide the issue independently. See Lawrence v. Chater, 516 U.S. 163, 170-71, 116 S.Ct. 604, 133 L.Ed.2d 545 (1996); Rinaldi v. United States, 434 U.S. 22, 98 S.Ct. 81, 54 L.Ed.2d 207 (1977). Failure to do so might lead to a remand with instructions to proceed in an unlawful manner.) Deciding whether to follow Hines is essential to the resolution of the appeal. Because both the bankruptcy judge and the district judge concluded that attorneys' fees are never discharged, the sums owed under the retainer have never been partitioned between pre- and post-filing work. We must either reverse outright (holding that the distinction is not legally material) or remand for apportionment; there is no way to duck.

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