In re Redding

• Decision Date: 21 June 2001
• Docket Number: No. 00-6092 WM.,00-6092 WM.
• Parties: In re William Henry REDDING and Patricia Redding, Debtors. David E. Schroeder, Appellant, v. Norman E. Rouse, Appellee.
• Court: Bankruptcy Appellate Panels. U.S. Bankruptcy Appellate Panel, Eighth Circuit

263 B.R. 874 (2001)

In re William Henry REDDING and Patricia Redding, Debtors.

David E. Schroeder, Appellant, v. Norman E. Rouse, Appellee.

No. 00-6092 WM.

United States Bankruptcy Appellate Panel for the Eighth Circuit.

Submitted: April 27, 2001.

Filed: June 21, 2001.

Corrected on July 25, 2001.

COPYRIGHT MATERIAL OMITTED

David E. Schroeder, David Schroeder Law Offices, P.C., Springfield, MO, pro se.

Norman E. Rouse, Collins & Webster, Joplin, MO, pro se.

Before KRESSEL, SCOTT, and KISHEL,¹ Bankruptcy Judges.

SCOTT, Bankruptcy Judge.

I

The attorney for the debtors appeals an order directing him to disgorge $10,011.40 of the $11011.40 fees he received for his costs and services in the bankruptcy case. For the reasons set forth below, we affirm the order of the bankruptcy court.²

The debtors filed a chapter 13 petition to prevent a state court foreclosure of their real property. At that time, Schroeder, as counsel for the debtors, filed a statement under Rule 2016(b) disclosing that the debtors paid him $3,000 for services relating to the chapter 13 case, but did not as required by Local Rule 2016-1, seek approval for payment of fees in excess of $1000. Within three months, the debtors converted their case to chapter 11. Schroeder's application on behalf of the debtors in possession for his employment was approved by the court. However, during the pendency of the case he billed the debtors and received in three separate payments the additional sum of $8,011.40, thereby obtaining a total of $11,011.40 in costs and fees during the pendency of the case.

Although the debtors apparently represented to Schroeder that the fees were being paid by one of their children, the source of the funds was not finally determined by the bankruptcy court. The chapter 7 trustee's subsequent investigation revealed that the funds may have been obtained when the debtors cashed a certificate of deposit prior to the filing of the chapter 13 case. In any event, there is no evidence in the record that Schroeder was aware of their true source. The debtors represented to him, and he apparently believed, that the funds were paid by the son and not derived from any asset of the estate.

Later, when confronted with the mortgagee's request for relief from stay, the debtors converted the case to chapter 7. The chapter 7 trustee discovered that the debtors had paid the additional $8,000 to Schroeder, and, since Schroeder had failed to disclose these payments, the trustee sought an order directing disgorgement of the fees. One month later, Schroeder finally filed the disclosure required by Rule 2016, Federal Rules of Bankruptcy Procedure, and application for approval and payment of his fees, as required by Local Rule 2016-1, in the sum of $14,715 in fees and $1001.96 in expenses, for a total of $15,716.96. The bankruptcy court disapproved the fees and directed disgorgement. We reversed and remanded, directing the bankruptcy court to analyze the fees under section 329 of the Bankruptcy Code and to issue further findings of fact regarding the reasons for the imposition of sanctions. On remand, the bankruptcy court found the fees to be reasonable in amount, but, based upon the failure to disclose the fee payments, ordered that Schroeder disgorge $10,011.40 to the trustee. The court did not disallow the fees in their entirety, however, but provided for payment of the fees on a subordinated, nonpriority basis. The court noted that, since there was substantial property in the estate, there was some probability that the general unsecured creditors would be paid in full, after which Schroeder could be paid from any remaining funds.

Schroeder appeals from that order, asserting that the bankruptcy court abused its discretion in imposing disgorgement because the sanction was excessively harsh and severe in light of all of the circumstances. Secondly, Schroeder argues that the bankruptcy court erred in subordinating his fees to the claims of the unsecured creditors. Schroeder does not contest that he violated the Code, the Rules, and the Local Rules. Rather, he asserts that the sanction was too severe.

II.

We review the bankruptcy court's findings of fact for clear error and its findings of law de novo. Fed. R. Bankr.P. 8013. We review the award of sanctions for abuse of discretion. In re Clark, 223 F.3d 859 (8th Cir.2000); In re Kujawa, 256 B.R. 598, 608 (8th Cir. BAP 2000).

III.

When an attorney files a bankruptcy case on behalf of a debtor, section 329³ requires the attorney to submit a specific statement of the compensation paid or agreed to be paid for the services already rendered or to be rendered in connection with the case or, for that matter, merely in "contemplation" of the case. The statement, filed pursuant to the guidelines established by Rule 2016⁴ and, in this instance, further delineated by local rule,⁵ must be filed whether or not the attorney applies for the compensation to be paid from property of the estate and whether or not the attorney is in fact paid from property of the estate. The Code and Rules require, without exception, that the amount and source of the compensation be disclosed.

This provision is derived in large part from the Bankruptcy Act and reflects Congress' concern that payments to attorneys in the bankruptcy context might be the result of evasion of creditor protections and provide the opportunity for overreaching by attorneys. Thus, Congress provided not only for extensive Court, trustee, and creditor scrutiny of the compensation to be paid to attorneys and professionals in general, but also for broad discretion in imposing sanctions for violations of these strictures. See generally H. Rep. 95-595, 95th Cong., 1st Sess. 329 (1977), U.S.Code Cong. & Admin.News 1978, p. 5963; Sen. Rep. No. 95-989, 95th Cong., 2d Sess. 39-40 (1978), U.S.Code Cong. & Admin.News 1978, p. 5787.

In this case, the bankruptcy court held an evidentiary hearing on the issues and noted that Schroeder was knowledgeable and experienced in bankruptcy. Not only did Schroeder solicit the fees paid to him, i.e., he sent bills to obtain the funds, he did this over the course of a year without regard to the reporting requirements of the Code and Rules.⁶ Only when the trustee sought disgorgement of the fees did Schroeder belatedly file the required disclosure and application for compensation. Indeed, the bankruptcy court's characterization of Schroeder's compliance as "grudging" appears, from this record, apt. Schroeder argues that there were other circumstance to be taken into account, including his ignorance of the true source of the funds, that he was working only to protect his clients, and complying with their directive that he guard the attorney client privilege.⁷ However, the record reflects that those facts were presented to the bankruptcy court. While it is true that not each and every fact asserted by Schroeder is stated in the court's findings, it is not required that a finder of fact address each and every fact placed before it. It is sufficient if the reviewing court may discern that the fact finder has reviewed all of the evidence and made a reasonable determination based upon those facts. See In re Leavitt, 171 F.3d 1219, 1223 (9th Cir.1999)(findings are sufficient if they are "explicit enough on the ultimate issues to give the appellate court a clear understanding of the basis of the decision to . . . enable it to determine the grounds on which the trial court reached its decision."); In re Fordu, 201 F.3d 693 (6th Cir.1999). The bankruptcy court's findings in this case were made in a non-conclusory fashion and sufficient to permit meaningful appellate review. Taking all of the facts and circumstances into account, we do not find that the bankruptcy court abused its discretion.

Reviewing the record and the findings by the Court we cannot discern that the bankruptcy court clearly erred in its findings. While the sanction may be harsh, it is not without foundation and, therefore, not an abuse of discretion. Indeed, it could have been much worse, for, unlike the vast majority of similar situations in the case authority, the bankruptcy court permitted Schroeder to retain his claim, albeit subordinated to the unsecured creditors. Moreover, since there are assets in the estate, there is some prospect of remuneration.

The sanction was in keeping with that imposed by other courts and consistent with the important policies underlying the disclosure provisions and the attendant discretion the bankruptcy court has in fashioning sanctions for violations of these provisions. It is well settled that disgorgement of fees is an appropriate sanction for failure to comply with the disclosure requirements of section 329 and Rule 2016. Indeed, the Courts of Appeal which have addressed this and similar disclosure issues are emphatic in affirming the grant of sanctions. See, e.g., In re Independent Engineering Co., 197 F.3d 13 (1st Cir. 1999)(no error in denying all fees upon failure to disclose draws on retainer despite the assertion that the retainer was not estate property); In re Crivello, 134 F.3d 831, 839 (7th Cir.1998)("We believe a bankruptcy court should punish a willful failure to disclose the connections required by Fed.R.Bankr.P.2014 as severely as an attempt to put forth a fraud upon the court."); In re Lewis, 113 F.3d 1040 (9th Cir.1997)(bankruptcy court is not required to determine whether fees are reasonable before ordering disgorgement of postpetition fees, and all postpetition fees were properly required to be disgorged upon failure to supplement initial disclosure); In re Downs, 103 F.3d 472, 477-78 (6th Cir.1996)(disgorgement and denial of fees affirmed: "In cases involving an attorney's failure to disclose his fee arrangement under § 329 or Rule 2016, however, the courts have consistently denied all fees." (emphasis added)); In re Prudhomme, 43 F.3d 1000 (5th Cir.1995)(entire $75,000 prepetition retainer properly...