In re Jackson, 07 B 18515.

• Decision Date: 27 February 2009
• Docket Number: No. 07 B 18515.,No. 08 B 20776.,07 B 18515.,08 B 20776.
• Citation: 401 B.R. 333
• Parties: In re Joe C. JACKSON, Debtor. In re Joe C. Jackson, Debtor.
• Court: U.S. Bankruptcy Court — Northern District of Illinois

401 B.R. 333

In re Joe C. JACKSON, Debtor In re Joe C. Jackson, Debtor.

No. 07 B 18515.

No. 08 B 20776.

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

February 27, 2009.

COPYRIGHT MATERIAL OMITTED

Roland Schlosser, Law Office of Timothy K. Liou, Chicago, IL, Attorney for Timothy K. Liou.

Glenn B. Stearns, Lisle, IL, Attorney for Chapter 13 Trustee Glenn B. Stearns.

MEMORANDUM OPINION

A. BENJAMIN GOLDGAR, Bankruptcy Judge.

Two chapter 13 cases filed by debtor Joe C. Jackson are before the court for ruling following an evidentiary hearing under section 329(b) of the Bankruptcy Code to examine the fees of Jackson's lawyer, Timothy K. Liou. The court now 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 ordered to disgorge all of the fees Jackson paid him in the two cases.

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).

2. Facts

Jackson is a general contractor who does business in Lake County, Illinois, with his two sons. (Tr. at 35-36). Liou is an Illinois lawyer who has been practicing since 1995. (Id. at 10). Liou has been representing debtors in chapter 13 bankruptcy cases since 1997 and does so as a regular part of his practice. (Id. at 10-11). He professes to be familiar with the Bankruptcy Code, the Bankruptcy Rules, and the local rules of this court. (Id. at 11).

On August 9, 2007, Jackson retained Liou to file a chapter 13 bankruptcy case for him. (See L. Ex. 1).¹ Jackson and Liou entered into a fee agreement covering Liou's services in the case. (Id.). The agreement was one Liou prepared rather than the court's Model Retention Agreement. (Tr. at 4).² Under it, Jackson would pay Liou $4,995 for "all contemplated legal services to be rendered." (L.Ex.1). "Contemplated legal services" were the bare minimum to commence the case: counseling on chapter 13 versus chapter 7, preparing the petition, schedules, plan, and other papers, filing the petition, and notifying creditors of the stay. (Id.). Excluded were almost all post-petition legal services: amending schedules, objecting to claims, filing motions to sell real estate, appearing in court more than once on a creditor's motion before confirmation, appearing in court at all on a trustee's motion to dismiss, and so on. (Id.).

On October 8, 2007, Jackson paid Liou $4,700 of the amount called for under the agreement; the remaining $295 was paid the next day. (Tr. at 5-6; L. Ex. 2). It was Liou's understanding that the $4,995 was simply a retainer, and more fees would be owed if he performed more services for Jackson. (Tr. at 5, 8; see also L. Ex. 5). Jackson apparently had the same understanding. (Tr. at 22-23, 33-34).

On October 9, 2007, Liou filed a chapter 13 case, No. 07 B 18515, for Jackson. (First Case Dkt. No. 1). Along with the petition and schedules, Liou filed the "Disclosure of Compensation of Attorney for Debtor" required under Bankruptcy Rule 2016(b). (T. Ex. 1). The disclosure statement said that "[f]or legal services" Liou had agreed to accept $4,995, that he had been paid $4,995, and that the "balance due" him was "$0.00." (Id.). It also recited that in return for "the above-disclosed fee" Liou had "agreed to render legal service for all aspects of the bankruptcy case," except for "representation of the debtor in adversary proceedings and other contested bankruptcy matters." (Id.). Following that recitation, Liou added: "Services as provided in attached Attorney Fee Agreement." (Id.). No agreement was attached. (T. Ex. 1; see generally First Case Dkt. No. 1).

Liou also filed the required Statement of Financial Affairs ("SOFA") for Jackson. (T. Ex. 2). Item No. 9 of the SOFA asked about "payments related to debt counseling or bankruptcy" and required Jackson to "[l]ist all payments made ... on behalf of the debtor to any persons, including attorneys, for consultation concerning ... relief under bankruptcy law" in the year before the case was filed. (Id.). Jackson did not list the $4,995 paid to Liou but checked the box next to the word "None." (Id.; Tr. at 15).

Jackson's case was short-lived. He proposed a plan in which the monthly payment was $4,995.96—the same amount as Liou's retainer. (First Case Dkt. No. 7). He later proposed amended plans increasing the plan payment to $5,391.96 (id., No.28) and $6,056.96 (id., No.48). But Jackson must have been unable to make his plan payments, because in February 2008 the trustee moved to dismiss the case for failure to make payments and failure to provide tax returns. (Id., No. 38). Several creditors also moved to modify the stay or to dismiss. (Id., Nos. 34, 36, 67). On June 27, 2008, the court granted the motions to modify the stay and dismissed the case on the trustee's motion. (Id., No. 7073). No plan was ever confirmed.

In early July, just days after the first case was dismissed, Liou met with Jackson again. (Tr. at 6). Jackson arranged to return at the end of the month and bring with him $12,185.37. Of that sum, $5,859.50 would be applied to fees for the dismissed case; the remainder, $6,325.87, would serve as the retainer for a new chapter 13 case Liou would file. (Tr. at 6, 23; L. Exs. 3, 5). Jackson paid Liou the $12,185.67. (Tr. at 9). Liou never supplemented his disclosure statement in the first case, however, because that case "was dismissed and disposed of." (Tr. at 10).

On August 8, 2008, Liou filed a second chapter 13 case, No. 08 B 20776, for Jackson. Liou again filed the required Rule 2016(b) disclosure statement. (T. Ex. 3). The disclosure statement said that "[f]or legal services" Liou had agreed to accept $6,325.87, that he had been paid $6,325.87, and that the "balance due" him was "$0.00." (Id.). It recited that in return for "the above-disclosed fee" Liou had "agreed to render legal service for all aspects of the bankruptcy case," except for "representation of the debtor in adversary proceedings and other contested bankruptcy matters." (Id.). Following that recitation, Liou added: "Services as provided in attached Attorney Fee Agreement." (Id.). Again, no agreement was attached. (T. Ex. 3; see generally Second Case Dkt. No. 1). There was no evidence of a fee agreement between Liou and Jackson for the second case.

Liou also filed the required SOFA for Jackson in the second case. (T. Ex. 4). As in the first case, Jackson checked the box for "None" in answer to the question about payments to attorneys for consultation concerning bankruptcy relief in the year before the commencement of the case. (Id.; Tr. at 17-18). Jackson checked "None" although he had paid Liou $6,325.87 for the second case and paid him more than $17,000 for bankruptcy work in the year before the second case was filed.

In both cases, the decision to check "None" was Liou's. (Tr. at 12). He testified that in his view Item No. 9 on the SOFA duplicates the Rule 2016(b) disclosure statement, and "[f]or that reason, we rarely fill out the answer to question 9." (Id.). In fact, Liou said, "many practitioners either forget or don't bother" (id.), and he claimed "it has never been an issue" with the standing chapter 13 trustees or with the interim trustees in chapter 7 cases (id. at 13).

Jackson's second case did not last even as long his first. Liou neglected to move under section 362(c)(3)(B) of the Code to extend the stay (Tr. at 16), and as a result the stay terminated on September 7.³ Apparently recognizing Jackson no longer had the protection of the stay, on September 9 Liou filed a motion seeking voluntary dismissal of the case. (Second Case Dkt. No. 18). But that motion was later withdrawn (id., No.33), apparently because Liou had managed to negotiate agreed orders imposing the stay (see id., Nos. 38-40; Tr. at 16).

Jackson proposed a plan in the second case in which the monthly payment was $6,325.20—again the same amount as Liou's retainer. (Id., No.7). He later proposed a modified plan lowering the payment to $5,080.20 (id., No.19), and in late October the modified plan was confirmed (id., No.46). After confirmation, however, Jackson missed three plan payments, and by January 2009 he was more than $17,000 in default. (See id., No. 54). The trustee moved to dismiss the case. (Id.). On January 30, 2009, the trustee's motion was granted and the case dismissed. (Id., No.55).

Meanwhile, the trustee had learned about Jackson's fee payments to Liou at the creditors meeting in the second case (see Second Case Dkt. No. 27, ¶ 10), and the trustee moved in both cases to have Liou's fees examined (see First Case Dkt. No. 79; Second Case Dkt. No. 27). The motions were granted, and a hearing was held on January 22, 2009, just before the second case was dismissed.

3. Discussion

Liou will be required to disgorge the $17,180.37 he charged Jackson for the two chapter 13 cases. Disgorgement is necessary as a sanction for Liou having filed false Rule 2016(b) disclosure statements in both cases. Even if the disclosure statements had been accurate, moreover, disgorgement of most of the fees would be required because the work Liou performed in the two cases did not remotely justify fees exceeding $17,000.⁴

a. False Rule 2016(b) Disclosure Statements

Section 329(a) of the Code requires every attorney representing a debtor in a bankruptcy case to "file with the court a statement of the compensation paid or agreed to be paid, if such payment or agreement was made after one year before the date of the filing of the petition, for services rendered or to be rendered in contemplation of or in connection with the case." 11 U.S.C. § 329(a). Bankruptcy Rule 2016(b) establishes when the disclosure statement must be filed: (1) within 15 days after the order for relief; (2) at any other time the court directs; and (3) after...