In re Peterson, Bankruptcy No. 91-50868. No. 34.

CourtUnited States Bankruptcy Courts. Second Circuit. U.S. Bankruptcy Court — District of Connecticut
Writing for the CourtALAN H.W. SHIFF
Citation163 BR 665
PartiesIn re James and Clara PETERSON, Debtors.
Decision Date17 February 1994
Docket NumberBankruptcy No. 91-50868. No. 34.

163 B.R. 665 (1994)

In re James and Clara PETERSON, Debtors.

Bankruptcy No. 91-50868. No. 34.

United States Bankruptcy Court, D. Connecticut.

February 17, 1994.

163 BR 666
163 BR 667
Andrew F. Fink, Mark S. Carron, Carron, Grace, Weinstein & Fink, Westport, CT, for debtors

Peter J. Betsos, pro se.


ALAN H.W. SHIFF, Bankruptcy Judge.

The debtors move to recover the fees paid to Peter Betsos ("Betsos"), who no longer represents them, and Earl Glancy ("Glancy") d/b/a New England Marketing ("NEM"). For the reasons that follow, the motion is granted as to Betsos and denied as to Glancy.


In December 1990, Glancy contacted the debtors and offered his financial services to assist them in forestalling impending foreclosures on their property. On December 28, 1990, the debtors made the first of eight weekly payments of $937.50, so that by February 16, 1991, they had paid Glancy $7,500.00.

In January 1991, Glancy asked Betsos to represent the debtors and endorsed to his order one of the checks they had written to Glancy/NEM. Betsos also received $500.00 on February 6, 1991, and several subsequent payments from Northeastern Marketing, Inc., a bank account established by Glancy/NEM to segregate client funds for the purpose of paying attorneys when their services were required. Two of the payments to Betsos were post-petition: $300.00 on June 5, 1991, and $500.00 on June 19, 1991. In all, Betsos received $2,756.50 from the debtors through Glancy/NEM and Northeastern Marketing, Inc. They paid no money directly to Betsos. They were aware that Glancy was paying Betsos with some of the money they sent to Glancy, but they did not know the amount of the fees. The debtors signed a waiver of attorney-client privilege, permitting Betsos to speak with Glancy about their bankruptcy case. There was no other written agreement between Betsos and the debtors.

Betsos is not licensed to practice law in Connecticut. He is licensed in New York, and is admitted to practice in the federal district courts for the district of Connecticut and the southern and eastern districts of New York. He has had no office in New York since approximately 1983. Betsos has a law office in Stamford, Connecticut where he has provided legal services by telephone in bankruptcy matters. Moreover, he has prepared pleadings in that office for filing in bankruptcy court. He has not met with clients at his office, but he has met with them at other locations in Connecticut. His stationery lists his Stamford office address and states that he is an attorney-at-law. He has represented debtors in five other cases before this court. See Statement, filed March 18, 1993.

On February 9, 1991, Betsos met with the debtors at their home in Norwalk, Connecticut, to discuss their legal options and advised them to commence a chapter 11 proceeding. On April 9, 1991, the debtors commenced this case. The legal services Betsos has provided include telephone calls from his office on bankruptcy and state court foreclosure matters; preparation and filing of the debtors' bankruptcy petition, schedules, and statements; review and preparation of bankruptcy documents; settlement negotiations with creditors' attorneys; correspondence with a receiver of rents appointed by the Connecticut

163 BR 668
superior court regarding that receiver's duties under Connecticut law; appearances in this court; and attendance at § 341(a) meetings

Betsos performed six hours of prepetition and fifty hours of postpetition services.1 On June 14, 1991, Betsos filed a statement pursuant to Rule 2016(b), Fed.R.Bankr.P., which disclosed that he received $3,000.00 prior to the filing of the statement. In fact, Betsos had received $2,256.50, and he received an additional $500.00 payment four days after that statement was filed. The statement indicated that the $3,000.00 was paid by the debtors from their earnings. It did not disclose any relationship with Glancy, NEM, or Northeastern Marketing, Inc., and did not indicate whether the $3,000.00 was held as a security retainer or otherwise. Neither Betsos nor the debtors moved to have Betsos appointed as attorney, and an order has not entered under § 327 and Rule 2014 F.R.Bankr.P. approving his employment. On June 26, 1992, the debtors filed an application to employ new counsel which was granted. On November 3, 1992, the new counsel filed the instant motion seeking the disgorgement of all fees paid to Glancy/NEM and Betsos.




11 U.S.C.A. § 327(a) (West 1993) provides:

Except as otherwise provided in this section, the trustee, with the court\'s approval, may employ one or more attorneys, accountants, appraisers, auctioneers, or other professional persons, that do not hold or represent an interest adverse to the estate, and that are disinterested persons, to represent or assist the trustee in carrying out the trustee\'s duties under this title.

Section 327(a) applies to attorneys for debtors in possession in chapter 11 cases. See § 1107(a).

11 U.S.C.A. § 329 (West 1993) provides:

(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.
11 U.S.C.A. § 330(a) provides in relevant part:
After notice to any parties in interest and to the United States trustee and a hearing, and subject to sections 327, 328, and 329 of this title, the court may award to a trustee, to an examiner, to a professional person employed under section 327 or 1103 of this title, or to the debtor\'s attorney —
(1) reasonable compensation for actual, necessary services rendered by such trustee, examiner, professional person, or attorney . . .

Rule 2014(a), Fed.R.Bankr.P., states the procedure for obtaining approval of employment and provides in relevant part:

An order approving the employment of attorneys . . . or other professionals pursuant to § 327 . . . shall be made only on application of the trustee . . . stating the specific facts showing the necessity for the
163 BR 669
employment, the name of the person to be employed, the reasons for the selection, the professional services to be rendered, any proposed arrangement for compensation, and, to the best of the applicant\'s knowledge, all of the person\'s connections with the debtor, creditors, or any other party in interest. . . . The application shall be accompanied by a verified statement of the person to be employed setting forth the person\'s connections with the debtor, creditors, or any other party in interest. . . .

Betsos argues that notwithstanding his failure to obtain court authorization under § 327(a), he may nevertheless keep the money paid to him because he did not seek compensation from the estate and therefore was not required to obtain court authorization. I disagree.

At the outset, it is observed that the mere fact that most of Betsos's fee was paid prepetition does not justify the conclusion that the debtors lost an interest in that money or that it could not be properly considered property of their bankruptcy estate. Neither Glancy/NEM nor Northeastern Marketing, Inc., ever claimed an interest in those fees. They were merely a conduit for passing the fees from the debtors to Betsos. Applicable ethical rules generally require Betsos to hold client funds in a separate account and to return any unearned fees at the conclusion of the representation. See Connecticut Rules of Professional Conduct (West 1993), Comment to Rule 1.5 ("A lawyer may require advance payment of a fee, but is obliged to return any unearned portion."); Rule 1.15(a) (a lawyer must segregate client property in his possession); Rule 1.16(d) (upon termination of representation, a lawyer must refund unearned fees paid in advance); Local Rules of Civil Procedure for the United States District Court for the District of Connecticut (West 1993), Rule 3(a) (Connecticut Rules of Professional Conduct generally govern attorneys practicing before the District Court for the District of Connecticut). The thrust of those rules is that prepetition retainers are generally considered property of the bankruptcy estate and are reviewed by the court at the conclusion of the case under § 330(a). See In re Mondie Forge Co., 154 B.R. 232, 238 (Bankr.N.D.Ohio 1993).

While Betsos characterizes the payments to him as a "flat fee," the post-petition payment of a large percentage of that fee belies that characterization. Moreover, he offered no evidence of any agreement with the debtors that his fee was earned in full prepetition irrespective of the amount and quality of his work. See In re Dees Logging, Inc., 158 B.R. 302, 306 (Bankr.S.D.Ga.1993); In re Mondie Forge Co., supra, 154 B.R. at 237-38 (in the absence of evidence that counsel was paid a nonrefundable flat fee retainer, the court would review post-petition services under § 330(a) standard); In re Printing Dimensions, Inc., 153 B.R. 715, 722-24 (Bankr. D.Md.1993).2 Although the debtors were unaware of the amount of Betsos's fee at the inception of the case, they clearly expected that it would cover not only the commencement of...

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