In re Combe Farms, Inc.

• Decision Date: 03 January 2001
• Docket Number: No. 00-00801.,00-00801.
• Citation: 257 BR 48
• Parties: In re COMBE FARMS, INC., Debtor.
• Court: U.S. Bankruptcy Court — District of Idaho

257 B.R. 48 (2001)

In re COMBE FARMS, INC., Debtor.

No. 00-00801.

United States Bankruptcy Court, D. Idaho.

January 3, 2001.

COPYRIGHT MATERIAL OMITTED

Richard D. Himberger, Boise, Idaho, for debtor.

Gary L. McClendon, Boise, Idaho, Office of the U.S. Trustee.

Ronald D. Schoen, Payette, Idaho, Chapter 12 Trustee.

MEMORANDUM OF DECISION

JIM D. PAPPAS, Chief Judge.

Attorney Richard Himberger ("Applicant") urges the Court to grant his Application for Allowance of Compensation for Attorney for Debtor (Docket No. 110) in this Chapter 12 case. Applicant seeks the Court's approval of attorney fees totaling $25,696.85 for representing Debtor Combe Farms, Inc. from March 31 through October 16, 2000. This is Applicant's first fee application filed in the case.

Notice was given to all interested parties and no objections were filed concerning the Application. The Court conducted two separate hearings on this Application at which Applicant, Chapter 12 Trustee Ronald Schoen, and counsel for the U.S. Trustee appeared. At the first hearing, held on November 11, 2000, the Court posed questions to Applicant concerning details of his representation and fee agreement with Debtor, and various transactions with Debtor and others. Applicant was not prepared to answer some of those questions. Therefore, the Court allowed Applicant to supplement the written record,¹ and continued the hearing until December 22, 2000 to allow Applicant time to research responses to the questions. At the second hearing, after considering comments from Applicant about the details surrounding his work in this case, counsel for the U.S. Trustee expressed reservations concerning allowance of the requested compensation. After hearing Applicant's response to the U.S. Trustee's remarks, the Court took the issues raised by the Application under advisement.

After due consideration of the record and the arguments of the parties, the Court now concludes that Applicant is entitled to some, but not all, the requested fees. This Memorandum constitutes the Court's findings of fact and conclusions of law. Fed. R. Bankr.P. 7052; 9014.

Background.

This is Debtor's second Chapter 12 case. Applicant also served as Debtor's attorney in a prior case (No. 99-02327) filed on September 10, 1999. That case was dismissed without confirmation of a plan on January 20, 2000 after it became apparent that Debtor exceeded the statutory debt limitations for eligibility for Chapter 12 relief. Applicant contends that at the time of the dismissal, Debtor owed him $23,869.50 for his services. Applicant represents that Debtor's principals, the Combes, wanted to attempt another reorganization, and they wanted Applicant to again act as the company's attorney. However, the parties realized that because Applicant held a large unsatisfied claim against Debtor, he could not qualify as "disinterested" as mandated by 11 U.S.C. § 327(a) and could not serve as counsel. See 11 U.S.C. § 101(14) (defining "disinterested person" as a person that is not a creditor). Applicant also had a more pragmatic concern in that he was worried about not getting paid for the fees already "on the books." Given time, the parties collectively hatched a plan to serve their needs.

First, Combes personally paid Applicant $2,000 to apply to his outstanding bill. Next, Applicant agreed to "write off" about $11,600 from the balance due on that account. Applicant further agreed to release the company from any further liability for the outstanding fees. In return, Combes executed a personal promissory note for that balance, and secured it with a deed of trust on their personal residence.² Finally, Combes also gave Applicant $5,000 as a retainer for services he would render prior to commencement of the second Chapter 12 case.³

In this fashion, as the parties designed, the company owed Applicant no fees when the second Chapter 12 case was filed on March 31, 2000. Applicant applied for approval of his employment as Debtor's attorney on April 5, 2000 (Docket No. 5). The Court approved this application by order entered on April 28 (Docket No. 28).

Applicant and his client⁴ worked very hard over the next months to overcome strong creditor resistance and, with the help of the Chapter 12 Trustee, were able to obtain confirmation of Debtor's Chapter 12 plan.⁵ While the ultimate success of this reorganization hinges on Debtor's ability to make the significant payments promised to creditors over the next several years, Applicant deserves considerable credit for meeting the contentions of the various creditors and for keeping Debtor in business.

Applicant filed his fee application on October 30. No objection has been raised by the Chapter 12 Trustee or the U.S. Trustee as to the "reasonableness" of the amount of fees sought in this case. Looking just at the services performed in this case, and the results obtained, the Court concurs the amounts sought by Applicant are appropriate.⁶ Unfortunately, other problems have surfaced which renders the decision whether to approve Applicant's requested fees complicated.

Discussion and Disposition of the Issues.

The Court has identified at least three areas meriting specific attention in making this decision. They are examined separately.

Section 329(a) and Rule 2016(b) Disclosure.

The first problem presented by the Application is a recurring one in the District, about which this Court has commented on prior occasions, apparently with only limited remedial impact⁷. While, as a general proposition, the lawyers representing debtors in this District display a high degree of professionalism and skill, and religiously adhere to the procedural requirements of the Code and Rules, the Court has observed one area where compliance remains somewhat lacking.

Section 329(a) requires that any attorney representing a debtor in a bankruptcy case file a disclosure form with the Court detailing several aspects of the attorney's representation and fee agreement with the debtor. Rule 2016(b) implements this provision of the Code. That Rule mandates the written disclosure form be filed within 15 days after commencement of a voluntary case⁸. The message the Court has attempted to impart in the past is that the requirements of these provisions of the Code and Rules are not merely aspirations or goals; timely and strict compliance by counsel is mandatory. No more forceful manner of emphasizing the importance of these rules to attorneys should be needed than to remind them that a failure to timely file an adequate disclosure form alone constitutes a sufficient reason for the Court to reduce, or even completely deny, compensation to the debtor's attorney.⁹

Applicant failed to timely file his disclosure form. While Applicant acknowledged he was aware of the disclosure rules, he explained that an "administrative error" occurred in his office.¹⁰ Though the case was commenced in March, Applicant's disclosure form was not filed until October 3, 2000 (Docket No. 104), just a few days before the last confirmation hearing.

As unpleasant as the task is, this Court is responsible to ensure proper disclosure is made by attorneys representing debtors in bankruptcy cases.¹¹ Because the integrity of the bankruptcy system is at stake, it is absolutely essential that the Court not simply "excuse" counsel when compliance falls short of that required by the Code and Rules. No good justification for the delay in filing the disclosure exists in this case and such constitutes one reason the Court will not approve the full amount requested in the Application. In the exercise of the Court's discretion,¹² and in another effort to give substance to the requirements of the rules, the Court concludes Applicant's fee request should be reduced by ten percent as a sanction for the tardy filing of the Rule 2016(b) disclosure form.¹³

Disclosures under Rule 2014(a).

Another important rule has been breached in this case.

A debtor's application for approval of the employment of an attorney in a bankruptcy case must state, among other things, "the specific facts showing . . . all of the attorney's connections with the debtor, creditors, and any other party in interest. . . ." Fed. R. Bankr.P. 2014(a). The Rule also requires the proposed attorney to submit a "verified statement" containing a similar disclosure. Id. These requirements allow the Court, in acting on the application, to determine whether the proposed attorney has complied with the statutory condition that he or she be disinterested and hold no adverse interest to the bankruptcy estate. 11 U.S.C. § 327(a). As one commentator explains:

The purpose of the application for authority to employ a professional is to provide the court (and the United States Trustee) with information necessary to determine whether the professional\'s employment meets the broad tests of being in the best interests of the estate and, in the language of Rule 2014, necessary. To that end, a failure to disclose any fact which may influence the court\'s decision may result in a later determination that disclosure was inadequate and sanctions should be imposed on the professional. . . . The better practice is to approach an application under Rule 2014 as a pleading which merits careful preparation and review and to err on the side of over-disclosure.

9 Collier on Bankruptcy, ¶ 2014.03, 2014-5-6 (15th ed.1997) (footnotes omitted; emphasis added). And while this Rule requires only that the debtor and professional disclose "connections" or a possible conflict of interest, another provision of the Code allows the Court to deny compensation to any attorney who does not maintain "disinterestedness" or who holds an adverse interest during the pendency of the bankruptcy case. 11 U.S.C. § 328(c).

In this case, neither the Debtor's application to employ Applicant, nor Applicant's declaration contained within that application, disclose the fact that Debtor's principals, the Combes, had agreed to personally pay...