In re Griffin

• Decision Date: 26 August 2004
• Docket Number: No. 04 B 19670.,04 B 19670.
• Citation: 313 B.R. 757
• Parties: In re Kenneth L. GRIFFIN and Rhonda R. Griffin, Debtors.
• Court: U.S. Bankruptcy Court — Northern District of Illinois

313 B.R. 757

In re Kenneth L. GRIFFIN and Rhonda R. Griffin, Debtors.

No. 04 B 19670.

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

August 26, 2004.

COPYRIGHT MATERIAL OMITTED

Kelly Johnson, Chicago, IL, for applicant.

AMENDED MEMORANDUM OPINION

JACQUELINE P. COX, Bankruptcy Judge.

Before this Court is a Supplement to Application for Compensation of Debtor's Attorney ("Compensation Supplement") from Macey Chern & Diab, attorneys for the debtors, Kenneth L. and Rhonda R. Griffin. The Compensation Supplement summarizes the professional services rendered on behalf of the clients in connection with a vehicle redemption in their Chapter 7 bankruptcy case.

For the reasons stated herein, the application is DENIED.

The Court has jurisdiction over this matter, a core proceeding, pursuant to 28 U.S.C. § 157(b)(1)-(2)(A) and § 1334.

Background

Debtors Kenneth L. and Rhonda R. Griffin engaged Macey Chern & Diab ("counsel") on February 7, 2004 to file and prosecute a Chapter 7 liquidation case. On that same day, the debtors paid a $100 retainer fee and signed an agreement to pay the balance of $1,050.00 in four installments before May 30, 2004. The debtors' counsel filed the voluntary Chapter 7 petition on May 20, 2004, containing a May 2, 2004 statement of intention indicating the debtors' intent to redeem a 2000 Toyota Camry. Vol. Pet. at Official Form 8. It later brought a motion to redeem the debtors' vehicle for $5,525, which this Court granted on June 17, 2004.¹ Counsel did not file any papers indicating whether or not it had received compensation for this motion or the source of such compensation, if any. The only compensation disclosed was the $1150 indicated in the original filing. At the hearing on the motion, the Court requested more detail on the fee arrangement underlying the redemption motion. The Court also requested a copy of the contract between the debtors and counsel for the prosecution of the Chapter 7 be submitted along with the Compensation Supplement.

On June 18, 2004, the Court received the "Supplement to Rule 2016(b) Attorney Compensation Statement" ("2016 Supplement") from counsel, showing a third party, 722 Redemption Financing, Inc., as the source of the funds. On June 30, 2004, the Court received the Compensation Supplement from counsel, detailing the time spent working on the redemption motion and stating a total compensation of $600. The Compensation Supplement indicates that 3 hours total were spent on the unopposed redemption motion; 0.5 hours were spent pre-petition, and 2.5 hours were spent post-petition. This filing also indicated the source of the compensation was 722 Redemption Funding, Inc., which extended a post-petition loan to the debtors to redeem their vehicle from Capital One Auto Finance's lien as well as to pay counsel the additional money the debtors owed them under the pre-petition contract for the instant Chapter 7 case. The February 7, 2004 retention contract indicates the clients will be charged additional fees for certain additional work, including $600 for redemptions on vehicles. Contract at item 7c.

Conclusions of Law and Analysis

The Court must determine whether counsel can collect these requested fees from either 1) the estate or 2) the debtors. It will also address additional disclosure and professional responsibility concerns.

I. Can counsel collect these requested fees from the estate?

In Lamie v. U.S. Trustee, 540 U.S. 526, 124 S.Ct. 1023, 157 L.Ed.2d 1024 (2004), the debtor (as a debtor-in-possession) retained an attorney to prosecute a Chapter 11 case on its behalf with the court's approval under § 327. Three months into the Chapter 11 case, the U.S. trustee in the case filed a motion to convert the case to a Chapter 7; the court granted the motion and appointed a case trustee pursuant to 11 U.S.C. § 701. This order terminated the debtor's status as a debtor-in-possession and its attorney's services under § 327, since the debtor-in-possession functions as a trustee only in the Chapter 11 context. 11 U.S.C. § 1107(a). The attorney continued to provide legal services to the debtor, however, without the trustee's authorization and then sought compensation under 11 U.S.C. § 330(a)(1) for legal services he provided to the debtor after the proceeding had been converted to a Chapter 7 bankruptcy.

The U.S. Supreme Court held that this attorney could not recover fees for this postconversion work because of the "plain language" of 11 U.S.C. § 330(a)(1), which states:

After notice to the parties in interest and the United States Trustee and a hearing, and subject to sections 326, 328, and 329, the court may award to a trustee, an examiner, [sic] a professional person employed under section 327 or 1103 —

(A) reasonable compensation for actual, necessary services rendered by the trustee, examiner, professional person, or attorney and by any paraprofessional

person employed by any such person; and

(B) reimbursement for actual, necessary expenses.

11 U.S.C. § 330(a)(1) (emphasis added). Under the Supreme Court's ruling, debtors' attorneys can only be compensated under § 330(a)(1) if the attorneys are employed by the trustee pursuant to § 327 (or by the debtor-in-possession in a Chapter 11).

Congress amended the Bankruptcy Code in 1994, prior to which § 330(a) permitted a court to "award to a trustee, to an examiner, to a professional person employed under section 327 ..., or to the debtor's attorney" compensation from the estate. After this amendment, the language of § 330(a)(1) permitted a court to "award [compensation] to a trustee, an examiner, a professional person employed under section 327 or 1103." Apparently, the post-amendment language is missing an "or," which "infects its grammar." Id., 124 S.Ct. at 1028. The post-amendment language has also deleted the phrase "or to the debtor's attorney." The Supreme Court acknowledged that the current grammatical structure is probably an error and not an intentional change, but it further determined that the statute can be read in a "straightforward" manner, id., 124 S.Ct. at 1030, showing deference to the supremacy of the legislature and an unwillingness to rescue Congress from its drafting errors. Id., 124 S.Ct. at 1034 (quoting United States v. Granderson, 511 U.S. 39, 68, 114 S.Ct. 1259, 127 L.Ed.2d 611 (1994)).

In the instant case, the debtors filed a Chapter 7 and never held the powers of a trustee. Further, the trustee did not retain or otherwise authorize counsel to perform work related to the redemption motion. Therefore, counsel is not eligible for compensation from the estate under § 330. The Compensation Supplement does contain boilerplate language declaring that the "[a]pplicant has rendered substantial and valuable professional services on behalf of client and the estate." Redemption allows an individual debtor to remove a lien from tangible personal property intended primarily for personal, family, or household use by paying the lesser of the balance due or the value of the collateral. 11 U.S.C. § 722. Section 722 is clearly intended for the benefit of the individual debtor and not the estate because the debtor can successfully pursue such a motion only if the trustee has abandoned any potential equity in the property or the debtor has exempted the same. Thus, the trustee would have no reason to hire the debtor's counsel for this motion because redemption is valueless to the estate; the motion only has value to the debtor.²

II. Can counsel collect these requested fees from the debtors?

Counsel has a pre-petition contract with the debtors for the above-mentioned installment payments and for other fees for additional services. When the debtors voluntarily filed for Chapter 7 on May 20, 2004, the pre-petition contract became a pre-petition claim against the estate. Simultaneously, an automatic stay prevented any creditors' attempts to "collect assess, or recover" from the debtors on pre-petition claims. 11 U.S.C. § 362(a)(6). This stay will remain in effect until the case is closed or dismissed or a discharge is granted or denied. 11 U.S.C. § 362(c). Counsel is unable to pursue collection on this claim from the debtors individually while the stay is in effect. Similarly, if the debtors receive a § 727(b) discharge, pre-petition debts for legal fees, even for their own bankruptcy case, are subject to the discharge injunction of § 524. Bethea v. Robert J. Adams & Assocs., 352 F.3d 1125 (7th Cir.2003), cert. denied, ___ U.S. ___, 124 S.Ct. 2176, 158 L.Ed.2d 733 (2004).

In Bethea, the Chapter 7 debtors hired lawyers on retainer to prepare and prosecute their bankruptcy cases. The retainer was to be paid in installments over time, with some payments made pre-petition and some collected post-petition. The debtors ultimately received discharges. Later, the debtors found new counsel to challenge the bankruptcy attorneys' post-discharge collection of the agreed installment payments. The Seventh Circuit found that the retainer contract created a pre-petition, liquidated debt, that attorneys' fees are not among the debts excepted from discharge by § 523, and that § 329 does not create an unenumerated exception to the § 727(b) discharge.³ Id. at 1127. The Seventh Circuit ordered the bankruptcy attorneys to repay the debtors any money collected after the discharge and any money collected while the automatic stay was in effect. Id. at 1129.

The Ninth Circuit had previously advanced the notion that the portion of the retainer reflecting work done during the bankruptcy is immune from discharge, while the portion reflecting pre-filing work would be discharged because a "claim" does not accrue upon agreement but upon performance; therefore, each retainer agreement can be shattered into multiple claims depending on when performance took place. In re Hines, 147 F.3d 1185 (9th Cir.1998).

Particularly relevant to the present Compensation Supplement is the fact that Judge Easterbrook...