FILED
2/26/2014
1
SUSAN M. SPRAUL, CLERK
U.S. BKCY. APP. PANEL
2 OF THE NINTH CIRCUIT
3 UNITED STATES BANKRUPTCY APPELLATE PANEL
4 OF THE NINTH CIRCUIT
5 In re: ) BAP No. AZ-13-1118-KuDPa
)
6 WADE SMITH and ) Bk. No. 12-02509
HAZEL CAMPBELL-SMITH, )
7 )
Debtors. )
8 ______________________________)
)
9 FRUTKIN LAW FIRM, PLC, )
)
10 Appellant, )
)
11 v. ) MEMORANDUM*
)
12 RUSSELL A. BROWN, Chapter 13 )
Trustee; WADE SMITH; HAZEL )
13 CAMPBELL-SMITH, )
)
14 Appellees.** )
______________________________)
15
Argued and Submitted on January 23, 2014
16 at Tempe, Arizona
17 Filed – February 26, 2014
18 Appeal from the United States Bankruptcy Court
for the District of Arizona
19
Honorable Sarah Sharer Curley, Bankruptcy Judge, Presiding
20
Appearances: Carolyn R. Tatkin of the Frutkin Law Firm, PLC
21 argued for Appellant the Frutkin Law Firm, PLC.
22
Before: KURTZ, DUNN and PAPPAS, Bankruptcy Judges.
23
24 *
This disposition is not appropriate for publication.
25 Although it may be cited for whatever persuasive value it may
have (see Fed. R. App. P. 32.1), it has no precedential value.
26 See 9th Cir. BAP Rule 8013-1.
27 **
While each of the above-captioned appellees was listed in
28 the notice of appeal as a party to the order on appeal, none of
them have actively participated in this matter either in the
bankruptcy court or on appeal.
1 INTRODUCTION
2 Appellant the Frutkin Law Firm, PLC (“Frutkin”) filed an
3 application in the debtors’ chapter 131 bankruptcy case seeking
4 interim compensation on an hourly fee basis. The bankruptcy
5 court granted the application in part and denied it in part, and
6 Frutkin filed a motion for reconsideration. The bankruptcy
7 court, upon reconsideration, vacated its interim fee order and
8 granted Frutkin even less fees, limiting its fee award to $2,500,
9 the flat fee stated in Frutkin’s initial compensation disclosure
10 filed pursuant to § 349(a) and Rule 2016(b). Frutkin appealed.
11 The bankruptcy court did not abuse its discretion in
12 limiting Frutkin’s fees based on the contents of the initial
13 disclosure. Therefore, we AFFIRM.
14 FACTS
15 On February 13, 2012, Frutkin filed a chapter 13 petition
16 and plan on behalf of debtors Wade Smith and Hazel
17 Campbell-Smith. On that same date, Frutkin filed a disclosure
18 pursuant to § 349(a) and Rule 2016(b) regarding its compensation
19 for representing the Smiths in their bankruptcy case. Frutkin
20 represented in its Rule 2016 disclosure that, prior to the
21 bankruptcy filing, it had received from the Smiths a $2,500 flat
22 fee in exchange for its legal services covering “all aspects” of
23 the Smiths’ bankruptcy case.2 One of the attorneys employed by
24
1
Unless specified otherwise, all chapter and section
25 references are to the Bankruptcy Code,
11 U.S.C. §§ 101-1532, and
26 all "Rule" references are to the Federal Rules of Bankruptcy
Procedure, Rules 1001-9037.
27
2
The disclosure stated that adversary proceedings and relief
28 (continued...)
2
1 Frutkin signed the Rule 2016 disclosure, in the process
2 certifying that the disclosure constituted “a complete statement
3 of any agreement or arrangement” regarding Frutkin’s compensation
4 for representing the Smiths in the bankruptcy case.
5 Apparently, the Rule 2016 disclosure was inaccurate. As
6 Frutkin later disclosed, instead of a $2,500 flat fee for its
7 bankruptcy services, Frutkin had agreed with the Smiths to an
8 hourly fee arrangement, with the $2,500 paid prepetition to be
9 applied against any fees approved by the bankruptcy court, and
10 any approved fees in excess of the $2,500 to be paid pursuant to
11 the Smiths' confirmed chapter 13 plan.
12 Notwithstanding the inaccuracy of the initial disclosure,
13 Frutkin did not file an amended Rule 2016 disclosure until
14 October 30, 2012, over eight months after the commencement of the
15 bankruptcy case. According to Frutkin, it did not review its
16 initial disclosure and discover that it was inaccurate until
17 sometime in late September or early October 2012, as it worked on
18 its response to the chapter 13 trustee’s September 28, 2012
19 recommendations concerning the Smiths’ amended chapter 13 plan.
20 Frutkin filed its interim fee application in November 2012.
21 The fee application sought approval of roughly $10,300 in fees
22 and costs in aggregate. Frutkin sought to retain the $2,500 the
23 Smiths had paid prepetition, plus it sought payment from the
24 bankruptcy estate of roughly $7,800 as an administrative expense
25
26 2
(...continued)
27 from stay proceedings were excepted from coverage. These
coverage exceptions are not relevant to our resolution of this
28 appeal.
3
1 pursuant to §§ 330(a)(4)(B), 331 and 503(b)(2).
2 The bankruptcy court granted the fee application in part and
3 denied it in part. The bankruptcy court expressed concern that
4 the $2,500 paid prepetition might amount to a preference under
5 § 547 to the extent the cash was paid on account of services
6 previously rendered. The court also was concerned that, to the
7 extent there were fees owed to Frutkin but unpaid as of the
8 petition date, Frutkin would have qualified as a creditor and
9 hence would not have been disinterested. Based on these
10 concerns, the bankruptcy court directed Frutkin to turn over the
11 $2,500 to the chapter 13 trustee but at the same time directed
12 the trustee to pay roughly $7,800 to Frutkin.
13 Frutkin then filed a motion for reconsideration of the
14 interim fee order. In its reconsideration motion, Frutkin
15 asserted that the disinterestedness standard does not apply in
16 chapter 13 cases. Frutkin further asserted that all of the
17 services it provided were rendered “in connection with the
18 bankruptcy case” and thus were entitled to administrative expense
19 priority status under §§ 330(a)(4)(B) and 503(b)(2). As a result
20 of this status, Frutkin contended, the $2,500 was not recoverable
21 as a preference.
22 The bankruptcy court held a hearing on the reconsideration
23 motion on February 27, 2013. At the hearing, the court granted
24 reconsideration of its interim fee order in the sense that it
25 vacated the order and replaced it with a new and different ruling
26 regarding Frutkin’s fees. But the court’s reconsideration did
27 not lead to an increase in Frutkin’s fee award as Frutkin had
28 sought. Rather, the court’s ruling effectively reduced the fees
4
1 awarded from $7,800 to $2,500.
2 The bankruptcy court acknowledged and considered Frutkin’s
3 point that, generally speaking, §§ 330(a)(4)(B) and 503(b)(2)
4 provide counsel for chapter 12 and 13 debtors with a first-
5 priority administrative claim for fees incurred in connection
6 with the case. However, according to the court, it was subject
7 to debate what scope of prepetition services was sufficiently
8 connected to the case to qualify for administrative expense
9 status. And any connection here, the court reasoned, was
10 attenuated by the prolonged period of time (roughly six months)
11 during which the prepetition services were performed before the
12 bankruptcy case was filed.
13 In any event, the bankruptcy court identified a different
14 and overriding concern: the court was troubled by Frutkin’s lack
15 of timely efforts to accurately disclose its compensation
16 agreement with the Smiths. The court found: (1) that the initial
17 disclosure inaccurately represented that the parties had agreed
18 to a $2,500 flat fee, when in fact they actually had agreed to an
19 hourly fee arrangement; (2) that Frutkin did not amend its
20 disclosure to correct this inaccuracy until roughly eight months
21 later, shortly before it filed its interim fee application;
22 (3) that the amended disclosure left unanswered a number of
23 questions, such as why the initial disclosure was inaccurate, why
24 it took so long to correct it, and precisely when the $2,500 was
25 paid; and (4) that, in sum, the amended disclosure was too little
26 and too late to meaningfully cure the deficiencies associated
27 with the initial disclosure.
28 Based on its concerns regarding Frutkin’s disclosure
5
1 efforts, the bankruptcy court held that it only would award
2 Frutkin fees and costs in the fixed amount of $2,500, the flat
3 fee Frutkin had represented was agreed to in its initial
4 disclosure. On March 4, 2013, the bankruptcy court entered a
5 minute order reflecting the new fee award, and on March 13, 2013,
6 Frutkin timely appealed.
7 JURISDICTION
8 The bankruptcy court had jurisdiction pursuant to 28 U.S.C.
9 §§ 1334 and 157(b)(2)(A) and (B). We have jurisdiction under
10
28 U.S.C. § 158.3
11 ISSUE
12 Did the bankruptcy court abuse its discretion when it
13 limited Frutkin’s compensation to the $2,500 disclosed as a flat
14 fee in Frutkin’s initial Rule 2016 disclosure?
15 STANDARDS OF REVIEW
16 We review the bankruptcy court’s fee award for an abuse of
17 discretion. See Law Offices of Nicholas A. Franke v. Tiffany
18 (In re Lewis),
113 F.3d 1040, 1043 (9th Cir. 1997). We similarly
19 review the bankruptcy court’s decision on a reconsideration
20 motion. See First Ave. W. Bldg. LLC v. James (In re OneCast
21
22 3
The record in this appeal reflects that the order on
23 Frutkin’s reconsideration motion was the bankruptcy court’s final
determination of Frutkin’s entitlement to fees. The court made
24 it clear at the reconsideration hearing that there would be no
additional fees granted. See Hr’g Tr. (Feb. 27, 2013) at
25 19:1-20:19. Moreover, shortly after the reconsideration hearing,
26 new counsel for the Smiths substituted into the case in place of
Frutkin, and then the Smiths voluntarily dismissed their case.
27 Under these circumstances, the order appealed qualifies as a
final and appealable order. See Yermakov v. Fitzsimmons
28 (In re Yermakov),
718 F.2d 1465, 1469 (9th Cir. 1983).
6
1 Media, Inc.),
439 F.3d 558, 561 (9th Cir. 2006).
2 The bankruptcy court abuses its discretion if it identifies
3 and applies the wrong legal rule or if its findings of fact are
4 illogical, implausible or without adequate support in the record.
5 See United States v. Hinkson,
585 F.3d 1247, 1261–62 (9th Cir.
6 2009) (en banc); see also Ferrette & Slater v. U.S. Trustee
7 (In re Garcia),
335 B.R. 717, 723 (9th Cir. BAP 2005) (“We do not
8 disturb a bankruptcy court's award of attorneys' fees, unless the
9 court abused its discretion or erroneously applied the law.”).
10 DISCUSSION
11 Section 329(a) and Rule 2016(b) are part of a regulatory
12 scheme put in place to combat overreaching by debtor’s counsel in
13 the process of negotiating and seeking compensation. See Hale v.
14 U.S. Trustee (In re Basham),
208 B.R. 926, 933 & n.11 (9th Cir.
15 BAP 1997); 3 COLLIER ON BANKRUPTCY ¶ 329.01 (Alan N. Resnick & Henry
16 J. Sommer, eds., 16th ed. 2013). They require a debtor's counsel
17 to disclose any compensation the debtor has paid or agreed to pay
18 within one year before the bankruptcy filing, regardless of
19 whether counsel will be seeking employment by or compensation
20 from the bankruptcy estate. See In re Mayeaux,
269 B.R. 614, 622
21 n.14 (Bankr. E.D. Tex. 2001); 3 COLLIER ON BANKRUPTCY, supra, at
22 ¶ 329.01; Keith M. Lundin & William H. Brown, CHAPTER 13 BANKRUPTCY
23 § 294.1, at ¶¶ 2, 3 (4th ed., Sec. Rev. June 17, 2004,
24 www.Ch13online.com).
25 The requisite disclosure must be filed within 14 days of the
26 order for relief. See Rule 2016(b). Further, it must be
27 supplemented in writing within 14 days if additional or different
28 compensation is paid or agreed to. See id. These disclosure
7
1 requirements are mandatory and not permissive. In re Basham,
2
208 B.R. at 931. If counsel fails to properly disclose
3 compensation paid or agreed to, the bankruptcy court has
4 discretion to reduce or completely deny fees, even if the error
5 or omission in disclosure was inadvertent. In re Lewis,
113 F.3d
6 at 1045 (citing Nebben & Starrett, Inc. v. Chartwell Fin. Corp.
7 (In re Park–Helena Corp.),
63 F.3d 877, 882 (9th Cir. 1995)).
8 Frutkin argues that the bankruptcy court erred as a matter
9 of law in reducing its fee award because the court improperly
10 considered concepts not relevant to Frutkin’s representation of
11 chapter 13 debtors, such as the concept of disinterestedness.4
12 Frutkin further argues that many of the cases on which the
13 bankruptcy court relied are distinguishable because they were
14 chapter 11 cases in which counsel’s employment as an estate
15 professional under § 327 and Rule 2014 was at issue.
16 While the bankruptcy court did initially express some
17 concern regarding Frutkin’s disinterestedness and did cite to
18 several chapter 11 cases concerning employment under § 327,
19 Frutkin’s emphasis on these points is unwarranted. A fair
20 reading of the bankruptcy court’s decision in its entirety
21 reflects that the court’s ruling hinged on § 329(a), Rule
22 2016(b), and Frutkin’s defective initial disclosure. And it is
23 beyond dispute that the disclosures required by § 329(a) and
24
4
For purposes of considering Frutkin’s arguments, we assume
25 without deciding that the Bankruptcy Code does not require
26 disinterestedness in order to employ and compensate chapter 13
debtor’s counsel. See In re Gutierrez,
309 B.R. 488, 500-01
27 (Bankr. W.D. Tex. 2004); In re Busetta-Silvia,
300 B.R. 543,
549-50 & n.11 (Bankr. D.N.M. 2003), rev’d on other grounds,
28
314 B.R. 218 (10th Cir. BAP 2004).
8
1 Rule 2016(b) apply to chapter 13 debtor’s counsel. See CHAPTER 13
2 BANKRUPTCY, supra, § 294.1, at ¶ 2. Indeed, these disclosure
3 requirements are especially important in chapter 13 cases because
4 the bankruptcy court typically has little or no opportunity in
5 such cases to formally consider attorney employment and
6 compensation. See In re Berg,
356 B.R. 378, 381 (Bankr. E.D. Pa.
7 2006) (citing In re Fricker,
131 B.R. 932, 940-41 (Bankr. E.D.
8 Pa. 1991)); see also 9 COLLIER ON BANKRUPTCY, supra, at ¶ 2016.18.
9 Frutkin alternately contends that the bankruptcy court erred
10 in reducing its fees because its hourly fee arrangement was duly
11 referenced in other documents, namely in the Smiths’ chapter 13
12 plans, in its amended Rule 2016 disclosure, and ultimately in its
13 interim fee application. But this panel previously has held
14 that, even when the correct information is supplied in one or
15 more other documents filed in the bankruptcy court, the
16 bankruptcy court is not obliged to excuse counsel’s defective
17 compliance with § 329(a) and Rule 2016(b). See In re Basham,
18
208 B.R. at 931. Moreover, the presence of correct information
19 in other documents is of dubious assistance to the bankruptcy
20 court when, as here, the court is confronted with incorrect
21 information in the initial Rule 2016 disclosure.
22 This is not to say that a mistake in the initial Rule 2016
23 disclosure necessarily is irrevocable. Under certain
24 circumstances, a debtor’s counsel may be able to cure the
25 disclosure defect by expeditiously amending the disclosure. But
26 the bankruptcy court here found that Frutkin’s amended disclosure
27 – filed roughly eight months after the bankruptcy case was
28 commenced – was not sufficiently expeditious or complete to
9
1 meaningfully rectify Frutkin’s disclosure error. We cannot say
2 that this finding was illogical, implausible or without support
3 in the record.
4 Frutkin counters that no one was harmed or prejudiced by its
5 inaccurate disclosure. Therefore, Frutkin asserts, the
6 bankruptcy court should not have reduced its fee award based on
7 the inaccurate disclosure. But the Ninth Circuit has stated that
8 the bankruptcy court may reduce or deny a fee award to debtor’s
9 counsel based on an inaccurate disclosure even when there is no
10 actual harm to the estate. See In re Park–Helena Corp.,
63 F.3d
11 at 881. Put another way, § 329(a) and Rule 2016(b) require
12 complete, precise and accurate disclosure and are strictly
13 enforced. See id.; see also In re Fricker,
131 B.R. at 939;
14 9 COLLIER ON BANKRUPTCY, supra, at ¶ 2016.20.5
15 We acknowledge that Frutkin’s forfeiture of $7,800 in fees
16 may seem like a harsh result, especially given that its hourly
17 fee arrangement was disclosed in other court documents, its
18 disclosure error appeared inadvertent, and there was no apparent
19 harm to the estate resulting from the disclosure error. We
20 further acknowledge that other bankruptcy courts under similar
21 circumstances may have chosen to exercise their discretion
22
23
5
In its appeal brief, Frutkin pointed out several times that
24 neither the Smiths nor any other interested party objected to its
fees. This fact is of little significance, because the
25 bankruptcy court had an independent duty to review the
26 compensation Frutkin requested “notwithstanding the absence of
objections by the trustee, debtor or creditors.” Lobel & Opera
27 v. U.S. Trustee (In re Auto Parts Club, Inc.),
211 B.R. 29, 33
(9th Cir. BAP 1997) (citing In re Busy Beaver Building Ctrs.,
28 Inc.,
19 F.3d 833, 841 (3d Cir. 1994)).
10
1 differently. Even so, there simply is nothing in the record
2 indicating that the bankruptcy court here abused its discretion.
3 Moreover, Frutkin easily could have avoided this harsh result by
4 taking simple steps to ensure that its initial Rule 2016
5 disclosure was accurate and complete and, failing that, by
6 expeditiously correcting its disclosure error.
7 CONCLUSION
8 For the reasons set forth above, we AFFIRM the bankruptcy
9 court’s order on Frutkin’s reconsideration motion.
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