In re Nelson

• Decision Date: 30 October 2009
• Docket Number: No. 09 B 24042.,09 B 24042.
• Citation: 424 B.R. 361
• Parties: In re Brian NELSON, Debtor.
• Court: U.S. Bankruptcy Court — Northern District of Illinois

424 B.R. 361

In re Brian NELSON, Debtor.

No. 09 B 24042.

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

October 30, 2009.

COPYRIGHT MATERIAL OMITTED

Gerald Mylander, for Trustee.

Timothy K. Liou, Chicago, IL, for Debtor.

MEMORANDUM OPINION

BRUCE W. BLACK, Bankruptcy Judge.

In this chapter 13 case the Standing Trustee has questioned the reasonableness of the fee of the attorney for the debtor by filing a motion pursuant to sections 329 and 330 of the Bankruptcy Code¹ and Federal Rule of Bankruptcy Procedure 2017. The attorney, Timothy Liou, has filed a written response, and a hearing was held. Both sides waived the presentation of evidence and have submitted the issues on the basis of the record.

This opinion will constitute findings of fact and conclusions of law. For the reasons stated below, a separate order will be entered ordering Mr. Liou to disgorge a substantial portion of the fee he has received.

Jurisdiction

The court has jurisdiction over the parties and the subject matter of this case pursuant to 28 U.S.C. § 1334(a) and Internal Operating Procedure 15(a) of the United States District Court for the Northern District of Illinois. It is a core proceeding under 28 U.S.C. § 157(b)(2)(A).

Background

The facts have not been disputed. Mr. Liou filed a petition for relief under chapter 13 on behalf of the debtor on July 1, 2009. He and the debtor had entered into a fee agreement on June 24, 2009, and the debtor paid Mr. Liou $5,290 on June 29, 2009.

Accompanying the petition were the debtor's Statement of Financial Affairs and the attorney's disclosure under Fed. R.Bank.P.2016(b) on official Bankruptcy Form B203. Both revealed the payment to Mr. Liou. The fee agreement was attached to the disclosure statement. On September 5, 2009, Mr. Liou filed a fee application that also disclosed the payment of $5,290.

The trustee complains that (1) the fee agreement excludes "basic matters," including representation on a trustee's motion to dismiss, from the services to be provided; (2) the fee agreement conflicts with the 2016(b) statement; (3) the fee agreement is internally inconsistent; (4) the fee agreement violates Local Bankruptcy Rule 2090-5 governing appearances by attorneys; (5) the fee application is not supported by an itemization of services as required by Local Bankruptcy Rule 5082-2; and (6) the fee is excessive for the services provided.

The importance of these issues to the integrity of the bankruptcy process can not be overstated. Many opinions from judges in this district discuss attorneys fees in chapter 13 cases. See In re Mortakis, 405 B.R. 293, (Bkrtcy.N.D.Ill.2009); In re Kowalski, 402 B.R. 843, (Bkrtcy. N.D.Ill.2009); In re Gage, 394 B.R. 184, (Bkrtcy.N.D.Ill.2008); In re Andreas, 373 B.R. 864, (Bkrtcy.N.D.Ill.2007); In re Lasica, 294 B.R. 718, (Bkrtcy.N.D.Ill.2003). Indeed, Mr. Liou's fee practices were the subject of an opinion by Judge Goldgar of this court in In re Jackson, 401 B.R. 333 (Bkrtcy.N.D.Ill.2009). In Jackson, Liou was sanctioned for filing false 2016(b) disclosure statements and inaccurate statements of financial affairs. He was ordered to disgorge over $17,000 to his client.

The decision in Jackson was relatively easy because Mr. Liou had failed to attach his fee agreement to his disclosure statement even though the disclosure statement said the fee agreement was attached. Also, paragraph 9 of the statement of financial affairs said that no payments had been made to Mr. Liou when in fact they had. In the case now before the court, Mr. Liou has at least corrected those mistakes. But, as we will see, he persists in using an unacceptable fee agreement and again seeks an excessive fee. The legislative history behind section 329 discloses a Congressional concern that bankruptcy attorney fees present "a serious potential for overreaching by the debtor's attorney."² This case, like Jackson, proves that such concern was justified.

Statutory and Rule Framework

The framework for considering the reasonableness of a debtor's attorney fee in chapter 13 cases is found in sections 329 and 330 of the Code and Rules 2016 and 2017.

First, section 329(a) provides:

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 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.

11 U.S.C. § 329(a)

Rule 2016(b) requires that the statement mandated by section 329(a) be filed within fifteen days after the petition is filed, with supplements after additional payments or agreements.

Section 329(b) provides the remedy for excessive fees: "If such compensation exceeds the reasonable value of such services, the court may cancel any such agreement, or order the return of any such payment, to the extent excessive ..."

Fees for debtor's attorneys in chapter 13 cases are different from those in chapter 7 cases, in which the fees are best received by the attorney prior to filing the petition,³ and from those in chapter 11 cases, in which retention of attorneys for debtors in possession requires prior court approval.⁴ In chapter 13 cases debtor's attorneys are entitled to a reasonable fee without prior authorization by the court. Section 330(a)(4)(B) says:

In a chapter 12 or chapter 13 case in which the debtor is an individual, the court may allow reasonable compensation to the debtor's attorney for representing the interests of the debtor in connection with the bankruptcy case based on the consideration of the benefit and necessity of such services to the debtor and the other factors set forth in this section.⁵

11 U.S.C. § 330(a)(4)(B)

As section 329 makes clear, whether a fee is reasonable can only be determined in relation to what services are to be provided in return for the fee. It follows that analysis of the agreement between Mr. Liou and the debtor is necessary here.

The Fee Agreement⁶

The trustee attacks the fee agreement for excluding basic services, for conflicting with the 2016 statement, for being internally inconsistent, and for violating Local Rule 2090-5. All criticisms except the last are well-taken. As a whole the agreement does not support the reasonableness of the fee charged and is so unclear that it will be cancelled pursuant to section 329(b).

The structure of the agreement contributes to its lack of clarity. It is one paragraph containing twenty-two sentences. In general, the first two sentences state what the debtor will pay. The next four sentences describe what services will be provided for the fee stated. The agreement goes on to list services that are not covered by the fee and provides that other services will be provided for additional fees.

A close examination of the agreement discloses its flaws. The first sentence says the attorney will file the chapter 13 petition and the debtor agrees to pay "$5,290.00 as payment in full for all contemplated services to be rendered." In the second sentence (the only one in bold type), the debtor "further agrees" to pay the filing fee to the Clerk "and an amount equivalent to one plan payment to be used toward fees due pursuant to this agreement." Based on these two sentences, it is not clear what the debtor is agreeing to pay. Because the word "further" is used in the second sentence, it appears that the debtor is agreeing to pay $5,290, plus the filing fee, plus an amount equal to one plan payment under the proposed chapter 13 plan. But the $5,290 in the first sentence is "payment in full," so what is the meaning of the phrase "to be used toward fees due under this agreement"? This ambiguity is only heightened when one discovers that the amount of the plan payment turns out to be $5,290.

If the fee to be paid is unclear, the services to be provided are even less clear. The third sentence begins, "[t]he contemplated legal services to be rendered are ...", thus repeating the term in the first sentence, so presumably the $5,290 fee covers all of the services which follow in this sentence. The remainder of the sentence describes routine services through the filing of the petition. The next sentence says the attorney will represent the debtor at the meeting of creditors. The fifth sentence covers negotiating with secured creditors.

The sixth sentence appears to continue to describe services covered by the $5,290 fee. It says,

Attorney will notify Client and appear on Client's behalf pursuant to the trustee's or any creditor's motion to dismiss the case or requests for modification of the stay because of a default in payments, meet with Client over the term of the plan, if Client desires, to explain reports from the trustee as to receipts and disbursements, (emphasis added) Because motions to dismiss and motions to modify the automatic stay are by far the most common motions in a chapter 13 case, providing services regarding them is an essential part of representing debtors in chapter 13. Unfortunately, the unequivocal promise in sentence six to represent debtors on motions by the trustee and creditors is contradicted by the ninth sentence, which says,

Legal services not contemplated by the fees charged are: contested hearing on objections to claims, hearing on any adversary matter, extended litigation, filing memorandums of law or briefs, more than one pre-confirmation court appearance on a creditor's motion, representation related to a trustee's motion to dismiss the case, proceedings filed for turnover orders, amendments to add additional creditors, applications for hardship discharge, conversion to Chapter 7, application to sell real estate, etc. (emphasis added)

Many—perhaps most-motions to modify the automatic stay...