In re Martin

• Decision Date: 24 April 1996
• Docket Number: Bankruptcy No. 95-23080 MSK.
• Citation: 197 BR 120
• Parties: In re Connie L. MARTIN, SSN XXX-XX-XXXX, Debtor.
• Court: U.S. Bankruptcy Court — District of Colorado

197 B.R. 120 (1996)

In re Connie L. MARTIN, SSN XXX-XX-XXXX, Debtor.

Bankruptcy No. 95-23080 MSK.

United States Bankruptcy Court, D. Colorado.

April 24, 1996.

COPYRIGHT MATERIAL OMITTED

Mark E. Henze, Denver, CO, for Sharon W. Grossenbach.

Joanne Speirs, Denver, CO, for U.S. Trustee.

MEMORANDUM OPINION AND ORDER REGARDING UNITED STATES TRUSTEE'S APPLICATION FOR AN EXAMINATION OF ATTORNEY'S FEES AND FEE AGREEMENT

MARCIA S. KRIEGER, Bankruptcy Judge.

THIS MATTER comes before the Court on the United States Trustee's Application for an Examination of Attorney's Fees and Fee Agreement pursuant to 11 U.S.C. § 329 and Fed.R.Bankr.P. 2017 (§ 329 Motion) and the Response of Debtor's former counsel, Sharon W. Grossenbach. This matter was set for evidentiary hearing on March 28, 1996. Appearing on behalf of Sharon W. Grossenbach was Mark E. Henze. Appearing on behalf of the U.S. Trustee was Joanne Speirs. Having reviewed the Motion, briefs filed by both parties and considered the evidence and argument presented at hearing, the Court makes findings of fact and conclusions of law.

I. JURISDICTION

This Court has jurisdiction in this matter pursuant to 28 U.S.C. § 1334(a). It is a core matter under 28 U.S.C. § 157(b)(2)(A) and (I), and venue is proper.

II. FACTS

1. The above-captioned case was initiated by voluntary petition filed under Chapter 7 of the United States Bankruptcy Code on December 13, 1995.

2. At all times relevant hereto the Debtor was represented in this case by Monty Hogue (Hogue), an attorney employed as an associate by Sharon W. Grossenbach (Grossenbach).¹

3. The Debtor initially consulted with Hogue for the purposes of obtaining information with regard to a potential bankruptcy filing. The Debtor inquired about bankruptcy because she was being vigorously pursued by a collection company holding a judgment against her. At the initial consultation, Hogue advised the Debtor of alternatives under Chapter 7 and Chapter 13 and offered two fee arrangements for a Chapter 7 case. The fee options were either a flat fee of $500, plus the filing fee of $175, payable prior to the bankruptcy filing or a flat fee of $600 plus the $175 filing fee, with the filing fee payable prior to the filing and the flat fee payable in monthly installments of $75 beginning approximately one month after the bankruptcy was filed.

4. The Debtor decided to file a Chapter 7 bankruptcy case and chose the second fee arrangement. On or about December 7, 1995, she executed a written fee agreement (Fee Agreement) which provides in pertinent part:

a. Grossenbach would provide legal representation to the Debtor in a Chapter 7 "including all required preparation and filing of the petition and other supporting documents and appearance at the first meeting of creditors."

b. For such services the Debtor would pay the sum of $775 comprised of $600 in attorney fees and a court filing fee of $175. The filing fee was paid as a retainer on December 7, 1995. The attorney fees were payable in installments of $75 per month beginning on January 13, 1996 and due on the 13th day of each month thereafter until paid in full.

c. Additional charges would be made for identified post-petition services such as "defending any objection in a Chapter 7 case sic," a "2004 examination," and "appearing at a reaffirmation hearing," billed at an hourly rate of $175. For other post-petition services an additional flat fee would be charged. These include conversion from one chapter to another, adding a creditor to the case, and $100 for any unattended § 341 meeting.

d. In addition to the court filing fee, the Debtor agreed to pay for all costs incurred in connection with the case e. In the event that the Debtor failed to timely pay the required monthly amounts, she would be assessed a $25 late charge. Grossenbach was entitled to accelerate the entire obligation if it became more than ten days overdue and cease post-petition representation until the sum was paid. If the matter was referred to collection, the Debtor was obligated for attorney fees incurred.

f. In the event the case was dismissed through no fault of Grossenbach or at the request of the Debtor, the Fee Agreement converted to an hourly arrangement with all time "invested in the case" billed against the fees paid at the rate of $175 per hour.

5. Neither Grossenbach nor Hogue discussed the dischargeability of the pre-petition fees which were unpaid at the time of the bankruptcy filing with the Debtor or advised her that collection of the pre-petition fee was stayed during the pendency of the bankruptcy. Grossenbach and Hogue believed that the pre-petition fee obligation was not dischargeable and therefore no legal advice was required.

6. The Debtor paid the $175 retainer, but has paid none of the required installments. Grossenbach has not initiated any collection proceeding, assessed a late charge, or accelerated the obligation.

7. Grossenbach filed an initial disclosure pursuant to Fed.R.Bankr.P. 2016 which stated that the fee charged in the case would be $600, none of the fee had been paid as of the date of the filing of the bankruptcy, and that the entirety of the fee would be collected from the Debtor.

8. Neither the Debtor nor the United States Trustee complains about the competency of Grossenbach's representation. Other than failing to advise the Debtor as to the dischargeability of the attorney fee obligation, there is no evidence that Grossenbach or Hogue has represented the Debtor in other than a competent and professional manner.

III. ANALYSIS

The United States Trustee requests that the Court cancel the fee arrangement between Grossenbach and the Debtor pursuant to 11 U.S.C. § 329(b) on the grounds that: (1) Grossenbach's fee disclosure is inadequate; (2) the Debtor's obligation under the Fee Agreement is dischargeable; and (3) the Fee Agreement created an impermissible conflict of interest between the Debtor and Grossenbach. Grossenbach responds that: (1) her fee disclosure complies with Fed. R.Bankr.P. 2016; (2) the Debtor's obligation under the Fee Agreement is nondischargeable; (3) the Fee Agreement constitutes an executory contract which has been assumed by the Debtor; and (4) under § 329 the Court is limited to reducing the fee charged to the extent that it is excessive. The arguments have been well presented by both parties.

Section 329 regulates an attorney's transactions with a debtor. It requires the attorney to disclose the terms of compensation and empowers a court to cancel the agreement for compensation or order the return of payments made if the compensation exceeds the reasonable value of the attorney's services.

§ 329. Debtor\'s transactions with attorneys.

(a) Any attorney representing a debtor in a case under this title, or in connection with such a case, whether or not such attorney applies for compensation under this title, shall 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 by such attorney, and the source of such compensation.

(b) If such compensation exceeds the reasonable value of any such services, the court may cancel any such agreement, or order the return of any such payment, to the extent excessive, to —

(1) the estate, if the property transferred—

(A) would have been property of the estate; or

(B) was to be paid by or on behalf of the debtor under a plan under chapter 11, 12, or 13 of this title; or

(2) the entity that made such payment.

Two rules of bankruptcy procedure implement § 329. Rule 2016 governs applications by professionals, including a debtor's attorney, for interim and final compensation from the estate and details the information required on the application. Fed.R.Bankr.P. 2016(a). In addition, it requires the attorney for every debtor to file a disclosure statement identifying any fee arrangements and compensations paid or promised to the attorney. Fed.R.Bankr.P. 2016(b). It also contains a requirement that the disclosure be supplemented should any additional fee arrangements or payments be made. Id. Rule 2017 specifies the procedure by which payments to a debtor's attorney, both before and after commencement of the case, are reviewed under § 329. In both situations, a court is required to determine whether the fees charged or to be charged are excessive.

The purpose of § 329 is to regulate an attorney's transactions with a debtor, regardless of the chapter under which the bankruptcy is filed. It was enacted in response to the concern that "payments to a debtor's attorney provide serious potential for evasion of creditor protection provisions of the bankruptcy laws, and serious potential for overreaching by the debtor's attorney, and therefore should be subject to careful scrutiny". Land v. First National Bank of Alamosa (In re Land), 116 B.R. 798, 804 (D.Colo.1990), aff'd 943 F.2d 1265 (10th Cir. 1991) (quoting H.R.Rep. No. 595, 95th Cong., 1st Sess. 329 (1977), S.Rep. No. 989, 95th Cong., 2nd Sess. 39-40 (1978)). Section 329 empowers the bankruptcy courts to protect debtors from overreaching by their counsel under circumstances where debtors are vulnerable and in need of prompt legal services. As a consequence, a court's review of the reasonableness of compensation under § 329 is a holistic review of the entire attorney/debtor relationship. Compensation to a debtor's counsel may be considered excessive for a number of reasons including the size of the fee, the nature of the services provided, failure to disclose the information required by Rule 2016(b), unethical conduct or other causes. See e.g., Quiat v. Berger (In re Vann), 136 B.R. 863 (D.Colo.1992); In re Land, 943 F.2d 1265 (10th Cir.1991).

A. Adequacy of Disclosure

The United States Trustee argues that Grossenbach's disclosure with regard to the Fee...