Hargis, Matter of, 89-1155
| Decision Date | 27 October 1989 |
| Docket Number | No. 89-1155,89-1155 |
| Citation | 887 F.2d 77 |
| Parties | In the Matter of Bill K. HARGIS and Marilyn E. Hargis, Debtors. PALMER & PALMER, P.C., Appellant, v. UNITED STATES TRUSTEE, Appellee. |
| Court | U.S. Court of Appeals — Fifth Circuit |
P. Michael Jung, Royal H. Brin, Jr., Jeffrey R. Fine, Strasburger & Price, Dallas, Tex., for appellant.
William S. Parkinson, Dallas, Tex., for appellee.
Appeal from the United States District Court for the Northern District of Texas.
Before CLARK, Chief Judge, GEE, and SMITH, Circuit Judges.
Today we decide whether the district court properly upheld an order of a United States Bankruptcy Court requiring a law firm to disgorge and pay into the registry of the court money paid by the debtor to the law firm for services rendered.
Palmer & Palmer, P.C. began representing Mr. and Mrs. Hargis in 1981, continuing to represent them in various matters for the next six years. Mr. and Mrs. Hargis fell behind on their payments to Palmer, and in 1983 Palmer secured a lien on certain of Mr. and Mrs. Hargis' art work for payment of the outstanding bill. Thereafter, Mr. and Mrs. Hargis filed a Chapter 11 bankruptcy proceeding.
Mr. Hargis died in 1984; his life was insured for $700,000; and Mrs. Hargis was the beneficiary under the policy. Mrs. Hargis used a portion of the insurance proceeds to pay past due statements for services by Palmer, rendered in connection with the bankruptcy proceeding and in other matters. Palmer was paid a total of $56,322.69, and the lien held by it was released.
In 1987, the bankruptcy court held a hearing on certain motions filed by the United States Trustee relative to Mr. and Mrs. Hargis' pre-petition relationship with Palmer. At the hearing, the evidence showed the payments that Palmer had received from Mrs. Hargis after the bankruptcy filing. The court also determined that no application to employ Palmer & Palmer had been filed and that no disclosure of the payments made them had been made of record in the case. As a result of these findings, the court entered orders which, among other things, (1) disqualified Palmer from representing Mrs. Hargis in any bankruptcy proceeding; (2) directed Palmer to pay into the registry of the court all monies received from Mrs. Hargis while a debtor-in-possession; (3) assessed a $25,000 sanction against Palmer; and (4) dismissed the bankruptcy proceeding. 73 B.R. 622.
Palmer appealed to the district court, which upheld the disgorgement order but reversed the imposition of sanctions. Palmer now appeals the district court's order upholding the disgorgement order and, thereby, denying it attorneys' fees.
There can be no doubt that, as counsel for Mr. and Mrs. Hargis in the bankruptcy proceeding, Palmer & Palmer subjected itself to the power of the bankruptcy court. Nevertheless, because Mrs. Hargis did not become entitled to the $700,000 in life insurance proceeds until more than 180 days after the filing of the bankruptcy petition, the proceeds were not a part of the bankruptcy estate. 11 U.S.C. Section 541(a)(5)(C). That being so, the bankruptcy court had no authority to order disgorgement of the funds received by Palmer, which consisted wholly of non-estate assets. 1 Even the bankruptcy trustee concedes that there exists no statute or rule proscribing the payment of pre-petition debts with non-estate assets. From his perspective, and estate assets not being involved, the situation is precisely as though Palmer & Palmer had rendered its services gratis.
Section 549(a), which authorizes the trustee to avoid post-petition transfers, speaks only to property "of the estate." 11 U.S.C. Section 549(a). There is ample authority indicating that transfers made to pre-petition creditors out of non-estate assets may not be avoided. In re Vickery, 63 B.R. 222, 224 (Bankr.E.D.Tenn.1986) (); In re DeLeonard, 44 B.R. 922, 923-24 (Bankr.E.D.Pa.1984) (same); In re Whisenton, 40 B.R. 468, 469 (Bankr.D.D.C.1984) (same); see In re Coco, 67 B.R. 365, 373 n. 11 (Bankr.S.D.N.Y.1986) (); In re M.J. Sales & Distributing Co., 25 B.R. 608, 612-13 (Bankr.S.D.N.Y.1982) (). The cases cited by the trustee to the contrary are all patently distinguishable, either because they involved payment from the estate or because they concerned situations in which section 329 was found specifically applicable. 2
Nor is there any general bankruptcy policy that is disserved by permitting such payments....
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