In re Smitty's Truck Stop, Inc.

• Decision Date: 06 August 1997
• Docket Number: BAP No. WY-96-023,Bankruptcy No. 93-20358.
• Parties: In re SMITTY'S TRUCK STOP, INC., a Wyoming corporation, doing business as Stateline Service, Debtor. Georg JENSEN, Appellant, v. UNITED STATES TRUSTEE, Appellee.
• Court: Bankruptcy Appellate Panels. U.S. Bankruptcy Appellate Panel, Tenth Circuit

210 B.R. 844 (1997)

In re SMITTY'S TRUCK STOP, INC., a Wyoming corporation, doing business as Stateline Service, Debtor.

Georg JENSEN, Appellant, v. UNITED STATES TRUSTEE, Appellee.

BAP No. WY-96-023, Bankruptcy No. 93-20358.

United States Bankruptcy Appellate Panel of the Tenth Circuit.

August 6, 1997.

COPYRIGHT MATERIAL OMITTED

Georg Jensen, pro se.

Paul Hunter, Assistant U.S. Trustee, Cheyenne, WY, for Appellee.

Before McFEELEY, Chief Judge, PEARSON, and CORNISH, Bankruptcy Judges.

OPINION

McFEELEY, Chief Judge.

Appellant Georg Jensen appeals the Order on Request for Payment of Attorney's Fees of the United States Bankruptcy Court for the District of Wyoming ("the Order"). In its Order, the Bankruptcy Court required the Appellant, attorney for the debtor, to disgorge all previously paid compensation and denied further compensation from the debtor's bankruptcy estate. This Court has jurisdiction pursuant to 28 U.S.C. § 158(c). We review the Bankruptcy Court's denial of compensation for abuse of discretion. Interwest Bus. Equip., Inc. v. United States Trustee (In re Interwest Bus. Equip., Inc.), 23 F.3d 311, 315 (10th Cir.1994). The issue on appeal is whether the Bankruptcy Court abused its discretion in denying all fees and ordering disgorgement of fees received due to Appellant's lack of investigation and disclosure of the receipt and the source of a retainer paid to him by the debtor in possession. Because we conclude that the Bankruptcy Court acted within its discretion, we affirm.

BACKGROUND

Appellant filed this bankruptcy case on behalf of the debtor, Smitty's Truck Stop, Inc. ("Smitty's"), under Chapter 11 on May 13, 1993. Appellant filed a Rule 2016(b)¹ disclosure statement with the petition, in which he stated that he had received no funds as compensation except the filing fee. In its statement of affairs, filed eleven days later, Smitty's listed a payment to Appellant of $5,000 as a retainer. Appellant's 2016(b) statement was never amended.

On May 9, 1993, Smitty's filed an application to retain Appellant as attorney for the debtor. Appellant attached an affidavit to the application stating that he had no significant prior connection with Smitty's or its creditors. He stated further that prior contacts, if any, with Smitty's did not create an interest adverse to the estate nor were they disqualifying. The court appointed Appellant to represent Smitty's on May 18, 1993. Shortly thereafter, the court converted the case to one under Chapter 7.

On January 19, 1996, Appellant filed an Application for Professional Compensation (the "first fee application"). On the required cover sheet, Appellant stated for the first time that he had been paid $5,000 for services rendered and expenses incurred. He stated that the source of the retainer funds was from Paul and Darlene Smith, personally. The Smiths are the sole shareholders of Smitty's. The first fee application requested a total of $4,996.99 in fees and expenses. The U.S. Trustee ("UST") objected, stating, inter alia, that Appellant provided inconsistent information about his retainer. Appellee's Appendix at 16. At the hearing held on February 29, 1996, the Appellant did not know whether the Smiths paid him from their own funds or from corporate funds.² The court denied the application without prejudice and ordered the Appellant to submit an amended application to provide a complete explanation of the discrepancies surrounding the retainer and the source of the funds. Order on the Request for Payment of Attorney Fees Filed by Debtor's Counsel, No. 93-20358 (filed Mar. 13, 1996), Appellee's Appendix at 20.

On March 11, 1996, Appellant submitted an amended fee application seeking a total of $7,051.54 for the same time frame of representation (the "amended fee application"). The amended fee application contained no information concerning the source of the retainer. On the cover sheet, Appellant stated that the retainer was $5,000, but the source of the funds was undisclosed. The UST filed another objection stating that since the amended fee application contained no information about the retainer, it should be denied in its entirety. Appellant's Appendix at 35. In response to the objection, Appellant filed a Traverse to Objection to Application for Compensation (the "Traverse") in which he finally stated that the retainer was paid from corporate funds with a cashier's check purchased by Smitty's. The Traverse further described the retainer as being "the proceeds from the sale of a piece of equipment owned by the corporation, immediately prior to filing, which was included in the security of the Farmers State Bank." Appellant's Appendix at 38. At the hearing on the amended fee application, the Appellant stated to the court that the retainer came "from the sale of a piece of equipment, a piece of equipment that was, in fact, corporate property. . . . That is something that I did not know at the time the first application was filed and, in fact, had surmised that the debtors sic, stockholders had had to advance those funds themselves." Transcript of Hearing held on April 18, 1996, Appellee's Appendix at 58.

The court in its Order made the following findings of fact and conclusions of law: First, Appellant did not disclose the receipt of a $5,000 retainer in his Rule 2016 statement, which was never amended. This failure alone is sufficient to deny all fees. Second, Appellant failed to inform the court of the source of the retainer funds. He had a duty to inquire from the debtor as to the source of the funds paid to him from a cashier's check purchased by the corporation. Third, because Appellant did not disclose the source of the retainer until after the UST's objection to his amended fee application, Appellant failed in his duty to discover and disclose this information to the court. Fourth, whether or not he was aware of it, Appellant received cash collateral as a retainer. This created an unacceptable conflict of interest between Appellant and the lien-holding creditor and between the debtor and this creditor. The Court, therefore, concluded that "the failure to investigate and disclose the amount and source of the retainer funds from the inception of the case, and the failure to investigate and disclose the conflicting claims to the funds, requires the denial of compensation." Order at p. 7, Appellee's Appendix at 46.

DISCUSSION

I. Appellant's failure to comply with the disclosure requirements of 11 U.S.C. § 329 and Fed. R. Bankr.P.2016(b).

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 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.

Rule 2016(b) provides:

DISCLOSURE OF COMPENSATION PAID OR PROMISED TO ATTORNEY FOR DEBTOR. Every attorney for a debtor, whether or not the attorney applies for compensation, shall file and transmit to the United States trustee within 15 days after the order for relief, or at another time as the court may direct, the statement required by § 329 of the Code including whether the attorney has shared or agreed to share the compensation with any other entity. . . . A supplemental statement shall be filed and transmitted to the United States trustee within 15 days after any payment or agreement not previously disclosed.

These provisions require an attorney to disclose all fee payments and agreements made after one year before the bankruptcy filing, for services in contemplation of, or in connection with, the bankruptcy filing. In re Florence Tanners, Inc., 209 B.R. 439, 442 (Bankr. E.D.Mich.1997). They enable the Bankruptcy Court to carry out its traditional role of scrutinizing carefully the compensation paid to the debtor's attorney. Courts have long recognized that the debtor is in a vulnerable position and is highly dependent on its attorney and therefore will be reluctant to object to the fees of the attorney. The purpose of this process is to prevent overreaching by an attorney and provide protection for creditors. 3 Collier on Bankruptcy ¶ 329.01 (Lawrence P. King ed., 15th ed. rev.1997); see also In re Busy Beaver Bldg. Ctrs., Inc., 19 F.3d 833, 844 (3rd Cir.1994) ("Disagreeable as the chore may be, the bankruptcy court must protect the estate, lest overreaching attorneys or other professionals drain it of wealth which by right should inure to the benefit of unsecured creditors."); Burd v. Walters (In re Walters), 868 F.2d 665, 668 (4th Cir.1989) (noting that legislative history states that the purpose of § 329 is to protect creditors and debtor from overreaching by attorneys); Land v. First Nat'l Bank (In re Land), 116 B.R. 798, 804 (D.Colo.1990) (citing legislative history and noting that serious potential for overreaching by debtor's attorney should be subject to careful scrutiny), aff'd & remanded, 943 F.2d 1265 (10th Cir.1991).

The disclosure requirements of § 329 are "`mandatory, not permissive.'" Turner v. Davis, Gillenwater & Lynch (In re Investment Bankers, Inc.), 4 F.3d 1556, 1565 (10th Cir.1993) (citing In re Bennett, 133 B.R. 374, 378 (Bankr.N.D.Tex.1991)). "`Debtor's counsel must lay bare all its dealings . . . regarding compensation. . . . Counsel's fee revelations must be direct and comprehensive. Coy, or incomplete disclosures . . . are not sufficient.'" Neben & Starrett, Inc. v. Chartwell Fin. Corp. (In re Park-Helena Corp.), 63 F.3d 877, 881 (9th Cir.1995) (alterations in original) (quoting In re Saturley, 131 B.R. 509, 516-17 (Bankr. D.Me.1991)); see also In re Plaza Hotel Corp., 111 B.R. 882, 883 (Bankr.E.D.Cal. 1990) (attorney's duty is to completely disclose...