In re Brent

• Decision Date: 29 September 2011
• Docket Number: No. 06 B 6197.,06 B 6197.
• Parties: In re Lorenzo J. BRENT, Debtor.
• Court: United States Bankruptcy Courts. Seventh Circuit. U.S. Bankruptcy Court — Northern District of Illinois

458 B.R. 444

In re Lorenzo J. BRENT, Debtor.

No. 06 B 6197.

United States Bankruptcy Court, N.D. Illinois, Eastern Division.

Sept. 29, 2011.

Steven M. Shebar, Shebar Law Firm, Oak Park, IL, for respondent Timothy K. Liou.Kathryn M. Gleason, Jeffrey S. Snell, Office of the U.S. Trustee, Chicago, IL, for Patrick S. Layng, U.S. Trustee.A. Stewart Chapman, Office of Chapter 13 Trustee Marilyn O. Marshall, Chicago, IL, for Standing Chapter 13 Trustee Marilyn O. Marshall.Janice Newport, Office of Chapter 13 Trustee Tom Vaughn, Chicago, IL, for Standing Chapter 13 Trustee Tom Vaughn.Glenn B. Stearns, Office of Chapter 13 Trustee Glenn B. Stearns, Lisle, IL, for Standing Chapter 13 Trustee Glenn B. Stearns.

MEMORANDUM OPINION

A. BENJAMIN GOLDGAR, Bankruptcy Judge.

Timothy K. Liou is one of the most active consumer bankruptcy attorneys in this district, filing nearly 8,000 cases from mid–1996 to the present. More than once, though, Liou's efforts to get paid have drawn the court's attention and resulted in sanctions. Now he faces sanctions again. Earlier this year, seven bankruptcy judges issued orders asserting that Liou had filed false applications for compensation as counsel for the debtors in 317 pending chapter 13 cases. The applications were false, the orders said, because in them Liou represented that he had entered into the court's form retention agreement with the debtor, entitling him to receive a fixed fee of $3,500 (a “flat” or “no look” fee), when in fact he had modified the agreement to charge additional fees. The orders required him to show cause why he should not be sanctioned for violating Bankruptcy Rule 9011(b).

The Rule 9011 proceedings were consolidated for hearing before the undersigned judge. Based on the evidence adduced at the hearing and on the court's own records in the 317 chapter 13 cases, the court makes the following findings of fact and conclusions of law pursuant to Bankruptcy Rules 7052 and 9014(c). For the reasons discussed below, Liou will be sanctioned for his multiple misrepresentations to the court in violation of Rule 9011(b).

1. Jurisdiction

The court has subject matter jurisdiction over these cases pursuant to 28 U.S.C. § 1334(a) and the district court's Internal Operating Procedure 15(a). This is a core proceeding under 28 U.S.C. § 157(b)(2)(A). See In re Tbyrd Enters. LLC, 354 Fed.Appx. 837, 839 (5th Cir.2009), cert. denied, ––– U.S. ––––, 131 S.Ct. 323, 178 L.Ed.2d 146 (2010); In re Letourneau, 422 B.R. 132, 135 (Bankr.N.D.Ill.2010).

2. Background

a. Attorney Compensation in Chapter 13

Compensation of debtors' attorneys is a matter critical to “the integrity of the bankruptcy process.” In re Nelson, 424 B.R. 361, 363 (Bankr.N.D.Ill.2009); see also In re Kindhart, 160 F.3d 1176, 1177 (7th Cir.1998) (calling the question of attorney's fees “an important matter not only to attorneys, but also to the courts and the public”). Because of its importance, the subject is treated extensively in both the Bankruptcy Code and Rules. Section 329(a) of the Code requires every attorney for a debtor to file “a statement of the compensation paid or agreed to be paid ... for services rendered ... in contemplation of or in connection with the case....” 11 U.S.C. § 329(a). Rule 2016(b) establishes when a statement disclosing the compensation—often called a “Rule 2016(b) statement”—must be filed. Fed. R. Bankr.P. 2016(b). All compensation must be disclosed, whether the attorney will be compensated from the estate or from some other source. In re Redding, 263 B.R. 874, 878 (8th Cir. BAP 2001); In re Jackson, 401 B.R. 333, 339 (Bankr.N.D.Ill.2009).

Section 330 of the Code requires court approval of any compensation of a chapter 13 debtor's attorney from the debtor's estate. 11 U.S.C. § 330(a)(4)(B); In re Robinson, 368 B.R. 492, 498 (Bankr.E.D.Va.2007). To receive approval, Rule 2016(a) requires an attorney to file “an application setting forth a detailed statement of (1) the services rendered, time expended and expenses incurred, and (2) the amounts requested.” Fed. R. Bankr.P. 2016(a). In chapter 13 cases, the court may then award “reasonable compensation to the debtor's attorney for representing the interests of the debtor in connection with the bankruptcy case....” 11 U.S.C. § 330(a)(4)(B). Typically, attorneys are compensated under section 330(a) using the “lodestar method,” under which a reasonable number of hours is multiplied by a reasonable hourly rate. In re Eliapo, 468 F.3d 592, 598 (9th Cir.2006).

But the lodestar method is not required, id., and bankruptcy courts have increasingly adopted systems under which attorneys for chapter 13 debtors can be awarded a presumptively reasonable standard fee for each case. See In re Williams, 357 B.R. 434, 439 n. 3 (6th Cir. BAP 2007) (noting that “[a] growing number of bankruptcy courts” have implemented these fees); In re Debtor's Attorney Fees in Chapter 13 Cases, 374 B.R. 903, 904–05 (Bankr.M.D.Fla.2007) (same). These flat fees are sometimes called “no look” fees because they are awarded without the kind of detailed application and itemization of services that Rule 2016(a) would otherwise demand. Williams, 357 B.R. at 439 n. 3. Often the flat fee is contingent on the execution of a “Rights and Responsibilities” agreement between the attorney and the debtor detailing the obligations of each. In re Smith, 331 B.R. 622, 629–30 (Bankr.M.D.Pa.2005). As such, the flat fee represents a kind of agreement not only with the debtor but with the court: in exchange for the attorney's commitment to perform specified legal services for the debtor, the court awards a flat fee and dispenses with the usual application. Id. at 629.

By simplifying the compensation process in a large number of fairly routine cases, the adoption of flat or “no look” fees has proven immensely advantageous to both the courts and bar. Flat fees benefit the bar in two ways: they save attorney time otherwise devoted to maintaining extensive records and preparing elaborate fee applications in small cases, and they encourage the efficient practice of law. Eliapo, 468 F.3d at 599. Flat fees benefit courts because they save judicial time “that a busy bankruptcy court would otherwise be required to spend dealing with detailed fee applications.” Id.; see also In re Cahill, 428 F.3d 536, 540–41 (5th Cir.2005). Indeed, the large volume of chapter 13 cases makes full judicial review of a detailed fee application in each case not only “administratively burdensome,” Eliapo, 468 F.3d at 599 (internal quotation omitted), but, as one noted authority has suggested, “almost inconceivable,” Keith M. Lundin & William H. Brown, Chapter 13 Bankruptcy, 4th ed., § 294.1 at ¶ 27, sec. rev. June 17, 2004, www. Ch 13 online. com.

Flat fee systems are flexible enough, however, to take into account that unusual animal, the complex or involved chapter 13 case. When fees above the flat fee are warranted, either for services beyond those spelled out in the Rights and Responsibilities agreement or for extraordinary work, attorneys are generally permitted to petition for additional compensation. See, e.g., Robinson, 368 B.R. at 499 (permitting additional compensation for services “not reasonably anticipated”). And, of course, no attorney is ever required to participate in the flat fee system; a traditional fee application with a detailed itemization of services can always be filed. Eliapo, 468 F.3d at 600; In re Wesseldine, 434 B.R. 31, 37–38 (Bankr.N.D.N.Y.2010); Robinson, 368 B.R. at 499.

b. Flat Fees in the Northern District of Illinois

In 1998, the Seventh Circuit approved the use of a presumptively reasonable flat fee in chapter 7 consumer cases. See In re Geraci, 138 F.3d 314, 321 (7th Cir.1998). Later that year, the Seventh Circuit reached the same conclusion about flat fees in chapter 13 cases. See Kindhart, 160 F.3d at 1178; see also Lundin & Brown, supra, § 294.1 at ¶ 41 (noting that flat fees are permissible in this circuit). In the wake of Geraci and Kindhart, judges from this court met with the standing chapter 13 trustees, the U.S. Trustee, and members of the bar to discuss the development of a flat fee arrangement for the Northern District of Illinois. See In re Andreas, 373 B.R. 864, 871 (Bankr.N.D.Ill.2007) (describing the process).

In November 2002, the bankruptcy court issued a standing order establishing a flat fee arrangement in chapter 13 cases. See Standing Order dated Nov. 26, 2002. The order recited that the court had adopted a “Rights and Responsibilities Agreement between Chapter 13 Debtors and Their Attorneys,” called the “Model Retention Agreement” (“MRA”) for short, along with a form application for compensation. The MRA set forth in detail the specific responsibilities of the debtor and attorney both before and after a case is filed. See Local Form 23c. Nor were the responsibilities of the attorney limited to those specified. Paragraph 16 contained a catch-all obligating the attorney to “[p]rovide any other legal services necessary for the administration of the case.” Id.

The MRA also addressed attorney compensation and offered two options. One was a flat fee through confirmation, with post-confirmation work compensated through a separate application accompanied by an itemization of services. Id. The other was a flat fee through case closing. Both options allowed the attorney to apply for compensation in an amount greater than the flat fee “in extraordinary circumstances,” but before a higher fee could be awarded the attorney had to submit an application with an itemization of services. Id. The MRA added that “[t]he attorney may receive a retainer or other payment before filing the case, but may not receive fees directly from the debtor after the filing of the case.” Id.

The standing order provided that requests for compensation under section 330(a)(4)(B) would be allowed “without submission of an itemization of services rendered” if the attorney met two conditions....