Opinion
CASE NO. 05-13794-H11.
October 4, 2006
MEMORANDUM DECISION
The United States Trustee ("UST") moved for disgorgement of fees and costs paid to T. Edward Malpass ("Malpass") for representation of James Cecil Harlan III and Joann Lynn Harlan ("debtors") and requested an accounting.
At the July 18, 2006, hearing, the Court heard oral argument, authorized additional briefing, and took the matter under submission unless grounds were shown that an evidentiary hearing was needed.
The Court gave Malpass until August 18, 2006, to file final declaration and final points and authorities. [see docket #143]. Instead, Malpass filed the pleadings with the Court on the September 27, 2006. The Court has discretion to consider late filed pleadings and will do so in this case. Agate Holdings, Inc. v. Ceresota Mill Ltd. P'ship (In re Ceresota Mill Ltd. P'ship), 211 B.R. 315, 318 (B.A.P. 8th Cir. 1997) ("[W]hile a trial court may have the discretion to consider a late-filed document where no party objects, a party filing an untimely document without an accompanying 9006(b) motion does so at its peril.")
At issue is whether this Court should order Malpass to disgorge all fees and costs that he has received to date, and deny his fees in total.
This Court has jurisdiction to determine this matter pursuant to 28 U.S.C. §§ 1334 and 157(b)(1) and General Order No. 312-D of the United States District Court for the Southern District of California. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A).
I. FACTS
Debtors filed their voluntary Chapter 11 petition on October 14, 2005.
A. THE SCHEDULES AND STATEMENT OF AFFAIRS
The debtors' Schedule F shows that Ian and Anita Waddell (the "Waddells") are creditors of this estate. The nature of the Waddells' claim is described as "[a]ny claims from various LLC matters, co-debtor claims, co-ownership" and is set forth as "contingent, unliquidated and disputed." On Schedule H, debtors listed Ian Waddell as a co-debtor with regard to "La Quinta Mortgage."
The Statement of Financial Affairs ("SFA") shows at Question No. 9, that Malpass received $5,000 from debtors on September 15, 2005. In addition, SFA question no. 9 shows that the debtors made another payment to Malpass of $20,843 on October 10, 2005, just four days before the case was filed.
B. MALPASS' ATTEMPTS TO GET EMPLOYED
Malpass represents the Wadells in their Chapter 11 bankruptcy case that was filed in the Central District. When the UST discovered that Malpass represented the Wadells, the UST "requested that Malpass address the issue in his employment application and include supporting case law. This issue was initially addressed at the first § 341(a) Meeting of Creditors held on November 15, 2005." [See docket #97 at 3:18-25]. The UST also requested that Malpass file a noticed motion for his employment pursuant to the United States Trustee's Guideline No. 3 and the case of In re Mahoney, Trocki Assoc., Inc., 54 B.R. 823, 826 (Bankr. S. D. Cal. 1985), since he failed to obtain employment within thirty days of the filing.
On December 20, 2005, almost two months after the filing, Malpass filed a Notice of Intended Action re: Authorizing Debtors to Employ the Law Offices of T. Edward Malpass (the "NOIA"). Malpass failed to file either an application or a declaration with the NOIA. On January 17, 2006, the UST filed an objection to the NOIA and a hearing was set for March 7, 2006. The UST expressed concern about Mr. Harlan's testimony at the 341a held on January 10, 2006, that he paid Malpass $10,000 from non-estate assets since the case was filed. [See docket #23 at 2:21-23]. The UST argued that Malpass "has shown a disregard of the Bankruptcy Code by his failure to obtain employment at the outset and by his acceptance of $10,000 on a postpetition basis from the Harlans without court authorization of his employment and/or payment." [Id. 3:8-12].
On February 21, 2006, Malpass filed a Motion for Employment of Counsel. The UST opposed the Motion for Employment of Counsel on several grounds. The UST argued that Malpass had a conflict of interest that would prohibit his employment. In addition, the UST argued that even if no conflict existed, this Court should not approve any employment on a nunc pro tunc basis due to Malpass' delay in submitting the motion for employment.
Malpass also filed an Ex Parte Motion to Set Expedited Hearing and Restrict Notice of Debtor's Motion for Approval of Employment of Counsel (the "ex parte motion"). On February 21, 2006, the Court denied the ex parte motion.
U.S. Bank also objected to Malpass' employment. U.S. Bank noted that Mr. Harlan and Mr. Waddell were guarantors of a $4,150,000 secured loan made by Morgan Guaranty Trust Co. of New York (the predecessor in interest to U.S.Bank) to Market Square Housing LLC, a Wisconsin LLC, which was not in bankruptcy. U.S. Bank argued that to the extent its claim was undersecured, then debtors and the Waddells would have serious issues between them concerning suretyship and indemnity. U.S. Bank also pointed out that the creditors and assets for each Chapter 11 were not the same.
On April 7, 2006, the Court continued the hearing regarding Malpass' employment to May 12, 2006, and directed Malpass to file a fee application by April 21, 2006. Malpass failed to file his fee application by that date.
C. THE COURT'S OSC AND UST'S MOTION TO DISMISS OR CONVERT
On February 6, 2006, this Court issued an Order to Show Cause Why Case Should Not have a Chapter 11 Trustee Appointed, Be Dismissed or Converted to a Chapter 7 Proceeding (the "OSC"). On March 8, 2006, the UST filed a Motion to Dismiss or Convert the case to Chapter 7. On April 11, 2006, the Court entered an order directing the appointment of a Chapter 11 trustee. Richard M. Kipperman was subsequently appointed Chapter 11 trustee (the "Chapter 11 trustee").
Subsequent to the appointment of the Chapter 11 trustee, Malpass filed a declaration on May 9, 2006, voluntarily withdrawing the noticed motion regarding his employment "because it was superceded by the appointment of the trustee." [See docket #80 at 2:11-20].
D. POST-PETITION PAYMENTS TO MALPASS
The January and March 2006 Operating Reports show $10,000 payments were made to Malpass from the "personal portion" of the DIP account. Malpass never filed supplemental 2016(b) statements for these payments.
Malpass has been paid $80,843 from Mr. Harlan. [See docket #100 at 3:15-16].
II. DISCUSSION
It is undisputed that Malpass never obtained Court authorization for his employment even though he acted as the attorney for the debtors in their capacity as Chapter 11 debtors in possession from October 14, 2005 until April 11, 2006, when the Chapter 11 trustee was appointed. It is also undisputed that Malpass has voluntarily withdrawn his application for employment contending it is now moot since the Chapter 11 trustee was appointed. Nonetheless, Malpass seeks to retain fees paid to him both pre and postpetition since he has been paid by Mr. Harlan's postpetition income.
On February 22, 2006, the UST's Office entered into a stipulation with the debtors acknowledging, among other things, that Mr. Harlan's postpetition earnings were to be treated as personal services income.
Malpass argues that neither § 327 nor Federal Rule Bankruptcy Procedure ("FRBP") 2014 requires court approval for an attorney to appear and represent debtors in a Chapter 11 case. [See docket #109 at 1:21-22]. According to Malpass, "attorneys can perform services and receive payment without the debtor having obtained an employment authorization under § 327, which may occur between the filing of the case and entry of an employment authorization order, and in other instances, including where the employment authorization process is not completed when a Chapter 11 trustee is appointed in the case, as occurred here." [Id. 1:27-28; 2:1-2]. Thus, Malpass argues that "lack of an employment order is not a per se bar to representation or receipt and retention of payments made by a debtor from non-estate property." [Id. 2:2-3]. Malpass further argues that §§ 327 and 330 govern employment and payment of professionals paid from the estate, but "[t]hey are not properly applied to review of payments made from non-estate property." [Id. 5:19-21]. Malpass maintains that the case of In re Boh! Ristorante, Inc., 99 B.R. 971 (B.A.P. 9th Cir. 1989) does not stand for the proposition that employment is required under § 327 when fees are received from non-estate funds. [See generally docket #150 — Supplemental Memorandum of Points and Authorities of T. Edward Malpass In Opposition to United States Trustee's Motion for Disgorgement of Attorney Fees and Costs filed on September 27, 2006].
A. NECESSITY OF EMPLOYMENT
Section 327(a) provides that "[t]he trustee . . . with the court's approval, may employ one or more attorneys . . . that do not hold or present an interest adverse to the estate, and that are disinterested persons. . . ." Section 327(a) is made applicable to debtors, as debtors in possession, through §§ 1101(1) and 1107(a).
The procedure for obtaining employment is set forth in FRBP 2014(a). Section 327(a) and FRBP 2014 are designed to make certain that an attorney does not have interests adverse to those of the estate. "The bankruptcy court must ensure that attorneys who represent the debtor do so in the best interests of the bankruptcy estate." In re Park-Helena Corp., 63 F.3d 877, 880 (9th Cir. 1995) (finding that Rule 2014(a) "assists the court in ensuring that the attorney has no conflicts of interest and is disinterested, as required by 11 U.S.C. § 327(a).").
It is well-settled that employment of a professional for a debtor in possession is a prerequisite to the payment of fees.Atkins v. Wain, Samuel Co. (In re Atkins), 69 F.3d 970, 973 (9th Cir. 1995) ("[P]rofessionals who perform services for a debtor in possession cannot recover fees for services rendered to the estate unless those services have been previously authorized by a court order.") (citations omitted); Okamoto v. THC Finc. Corp. (In re THC Fin. Corp.), 837 F.3d 389, 391-92 (9th Cir. 1988); DeRonde v. Shirley (In re Shirley), 134 B.R. 940, 943-44 (B.A.P. 9th Cir. 1992); McCutchen, Doyle, Brown Enersen v. Official Comm. of Unsecured Creditors (In re Weibel, Inc.), 176 B.R. 209 (B.A.P. 9th Cir. 1994). The obligation to obtain court approval for employment as the attorney for a debtor in possession remains even though the attorney may receive payment from non-estate funds. In re Boh! Ristorante, Inc., 99 B.R. 971, 972-73 (B.A.P. 9th Cir. 1989).
Malpass argues that the case of Boh! Ristorante confirms that "§ 327 employment authorization is not required with regard to representation and payments which are not made from the bankruptcy estate under section 330." [See docket #109 at 2:22-27]. The Court has studied Boh! Ristorante at length and cannot find any language that stands for the proposition that an attorney who receives payment from non-estate funds may circumvent the requirements of § 327(a). The BAP addressed two limited issues on appeal in Boh! Ristorante: "1 — whether an attorney who receives compensation from a third-party, must obtain authorization for employment under § 327; and 2 — whether the bankruptcy court abused its discretion in denying all fees to the appellant." Id. at 972. Thus, the issue of employment under § 327 when an attorney will receive payment from non-estate funds was squarely before the appellate court. The Panel ultimately decided that employment was necessary even when the attorney received payment from non-estate funds. Nonetheless, the Panel decided even though the attorney's nunc pro tunc employment request was denied by the bankruptcy court, the "harsh penalty" of denying all fees "was not justified under these limited circumstances." Id. at 972-73 (emphasis added).
In affirming the bankruptcy court's finding that § 327(a) was applicable to an attorney who receives compensation from a third party, the Bankruptcy Appellate Panel noted:
In support of the bankruptcy court's application of section 327(a), Bankruptcy Rule 2014(a) requires that the application set forth `any proposed arrangement for compensation.' Additionally, an important purpose of an application for employment pursuant to section 327 is to make certain that the person sought to be employed does not hold an interest adverse to the estate.
Id. at 972-973.
Numerous other courts have also held that the "requirements of § 327(a) are not conditioned on the attorney's seeking compensation from the estate under § 330(a)." In re Peterson, 163 B.R. 665, 669 (Bankr. D. Conn. 1994).
While employment under § 327(a) is a condition precedent to compensation from the estate under § 330(a), the requirements of § 327(a) are not conditioned on the attorney's seeking compensation from the estate under § 330(a). In re Hargis, 148 B.R. 19, 22 (Bankr. N.D. Tex. 1991); In re Rheuban, 121 B.R. 368, 385 (Bankr. C.D. Cal. 1990); Land v. First Nat'l Bank in Alamosa (In re Land), 116 B.R. 798, 805 (D. Colo. 1990) (approval must be obtained under § 327(a) even where fees are paid by a third party and not by the estate), aff'd, 943 F.2d 1265 (10th Cir. 1991); In re Martin, 102 B.R. 653, 658 (Bankr. W. D. Tenn. 1989) ("[T]he mere fact that a professional receives a retainer cannot be utilized by the professional as a circumvention of the Bankruptcy Code's requirement of an approval of employment. . . ."); In re Boh! Ristorante, Inc., 99 B.R. 971, 973 (9th Cir. BAP 1989).
The Peterson court explained the rationale for the employment requirement in situations where payment is received from non-estate funds:
A contrary rule would permit attorneys for the trustee or debtor in possession to avoid the strictures of § 327(a) and Rule 2014(a) by demanding a large prepetition retainer and never applying to the court for compensation post-petition.
Id.; 3 Collier on Bankruptcy ¶ 327.03, at 327-16 (15th ed. rev. 2006) ("Prior approval also gives the court an opportunity to review any conflicts, the professional's competency and the necessity for the services to be performed."); see also Taylor v. CSX Transp., Inc. (In re CSX Transp., Inc., 2005 WL 1705636 at *4 n. 2 (M.D. Ala. 2005) (noting that "Section 327(a) requires prior approval of the employment of an attorney representing the debtor even if payment of attorneys fees is not sought as an administrative expense, but is sought from a third party.") citing In re Land, 116 B.R. 798, 805 (D. Co. 1990, aff'd 943 F.2d 1265 (10th Cir. 1991) and In re Boh! Ristorante, Inc., 99 B.R. 971, 972-73 (B.A.P. 9th Cir. 1989); In re W.T. Mavfield Sons Trucking Co., Inc., 225 B.R. 818, 823 (Bankr. N.D. Ga. 1998) ("That the attorney may be looking to a third party for payment is irrelevant to the obligation to obtain court approval.");Ferrara Hantman v. Alvarez (In re Engel), 124 F.3d 567, 571 (3rd Cir. 1997) (noting that "any debtor-in-possession must receive court approval in order to employ an attorney. . . . Otherwise he is not permitted or authorized to retain counsel. This is true regardless of the source of compensation for the attorney so engaged."); 3 Collier on Bankruptcy ¶ 327.03, at 327-15-327-16 (15th ed. rev. 2006) ("Approval is required even if the professional is not be compensated from estate funds.").
The Court concludes therefore that Malpass was required to seek and obtain an order from this Court authorizing his employment prior to receiving fees, regardless of their source, for services rendered to the estate. "Since professionals are charged with knowledge of the law, there is no unjust hardship in requiring them to observe the requirements of section 327." In re McKinney Ranch Assoc., 62 B.R. 249, 252 (Bankr. C.D. Cal. 1986) (citation omitted).
An attorney's failure to obtain court authorization for employment is a sufficient basis for the denial of fees. Atkins, 69 F.3d at 973 ("[P]rofessionals who perform services for a debtor in possession cannot recover fees for services rendered to the estate unless those services have been previously authorized by a court order.") (citations omitted). Because Malpass has voluntarily withdrawn his employment application, this Court cannot authorize his employment at this late date. See Shapiro Buchman LLP v. Gore Brothers (In re Monument Auto Detail, Inc.), 226 B.R. 219, 224 (B.A.P. 9th Cir. 1998) (law firm sought to retain legal fees even though it voluntarily withdrew its employment application).
To the extent Malpass relies on Boh! Ristorante for the proposition that disgorgement or denial of fees is too harsh a penalty on an attorney who is receiving payment from non-estate funds and who has not been employed, the Court finds the reliance misplaced. Even though the attorney in Boh! Ristorante had not been employed, the BAP found that the harsh penalty of the complete denial of fees was "not justified" under the "limited circumstances." Boh! Ristorante, 99 B.R. at 973. The Panel's holding was therefore quite narrow. See In re Famous Restaurants, Inc., 205 B.R. 922, 934 (Bankr. D. Az. 1996) ("[T]he effect of [Boh! Ristorante] has also been limited."). The Court can find none of the "limited circumstances" that were present in Boh! Ristorante applicable to this case, especially in light of the fact that Malpass is an experienced bankruptcy attorney who failed to file his motion for employment in a timely manner, and who also failed to make the appropriate disclosures under FRBP 2016(b) as discussed below.
The Court concludes that Malpass' failure to obtain employment is grounds to order disgorgement. As discussed below, even if Malpass had not voluntarily withdrawn his motion for employment, he could not have been employed in any event.
1. NUNC PRO TUNC
The Court cannot find any exceptional circumstances that would warrant nunc pro tunc approval. Atkins, 69 F.3d at 973.
Given that employment is a prerequisite to the receipt of fees in the Ninth Circuit, it behooves an attorney for a debtor in possession to seek approval of employment as early as possible in a bankruptcy case. "While there is no explicit requirement under section 327(a) or Rule 2014, courts routinely require that an application for employment be filed with the court prior to performance of services by the professional sought to be employed." 3 Collier on Bankruptcy ¶ 327.01[1], at 327-6 (15th ed. rev. 2006) (emphasis in original). In this district, an application for employment should be submitted within thirty-days of the petition date, otherwise an attorney will need to seek employment with a retroactive effect. See In re Mahoney, Trocki Associates, Inc., 54 B.R. 823, 826 (Bankr. S. D. Cal. 1985); see also United States Trustee Guidelines, Guideline No. 3(B) (stating that when a professional is seeking employment with a retroactive effect more than thirty days after the commencement of services, the application shall be noticed to all creditors). Other courts also "recognize that circumstances may require a professional to render services before obtaining court approval" and, therefore, permit the thirty-day grace period. 3 Collier on Bankruptcy ¶ 327.03[3], at 327-26 n. 55 (15th ed. rev. 2006).
The guidelines are available on the United States Trustee's website and are available upon request. Guideline No. 3(B) clearly states that "If an application to employ a professional by the debtor-in-possession . . . is made more than thirty (30) days after the date of commencement of postpetition services by that professional, an explanation of the delay in form of an affidavit must accompany the Application." The guideline also states that the application seeking an order for nunc pro tunc approval must be "noticed to all creditors. . . ."
Malpass failed to file an employment application within the thirty-day period. [See Transcript dated July 18, 2006 (hereinafter Transcript) 6:14-25; 7:1-25]. The UST informed Malpass that he because he missed the thirty-day deadline, had a potential conflict of interest, and was requesting nunc pro tunc employment, he would have to do a noticed motion for his employment. [Transcript at 7:19-25]. Nonetheless, Malpass failed to file a noticed motion, instead filing the NOIA on December 20, 2005, when this case was over two months old. Further, Malpass failed to file an application or declaration in support of the NOIA. It was not until four months after the filing of the petition that Malpass finally filed a motion to be employed.
Nunc pro tunc approval of employment is limited to exceptional circumstances where an applicant can show both a satisfactory explanation for the failure to receive prior judicial approval and that he or she has benefitted the bankruptcy estate in some significant manner. Atkins, 69 F.3d at 973. The Court notes that Malpass has sufficient experience to know of the Bankruptcy Code's application requirements for his employment, as well as the existence of the United States Trustee Guidelines.
Malpass declared that he was admitted to practice law in 1977 and has concentrated his practice in bankruptcy law since he completed his clerkship with the Honorable David H. Patton, Bankruptcy Judge, in the Eastern District of Michigan in 1979. Malpass also declared that he is "board certified" in business bankruptcy law by the American Bankruptcy Board of Certification and am a member of its Board of Directors. Malpass is also certified as a specialist in bankruptcy law by the California.
A. SATISFACTORY EXPLANATION
Malpass fails to provide a satisfactory explanation for the almost two-month delay in seeking employment despite his experience. His only explanation for the delay is that the UST initially requested that debtors file an application for employment and subsequently requested that debtors file a noticed motion. Further, Malpass failed to file his application or a declaration with the NOIA and it wasn't until the UST objected to the NOIA that he finally filed a noticed motion. In addition, the fact that Malpass is a sole practitioner or that the work load required after the filing required all his attention, are likewise unsatisfactory excuses for his delay. Malpass seems to blame the UST for not informing of the deadline to file his application under Mahoney, Trocki, but it is not the UST's duty to inform attorneys of the law. [See Decl. of T. Edward Malpass in Support of Supplemental Memorandum 2:7-10]. In short, Malpass has failed to provide any satisfactory explanation for his failure to file an employment application within the initial thirty-day period.
B. BENEFIT TO THE ESTATE
In addition, the Court cannot find that Malpass' efforts benefitted the estate in any significant manner. If anything, his repeated delay in getting employed was an important factor this Court considered when issuing the OSC re the appointment of a Chapter 11 trustee. Now, the Chapter 11 trustee has hired counsel and debtors have been forced to hire new counsel thereby causing more delay and administrative fees to increase, all to the detriment of the creditors of this estate.
C. OTHER FACTORS: CONFLICT OF INTEREST
Besides the lack of a satisfactory explanation for the delay in seeking employment and lack of benefit to the estate, Malpass must have been qualified for employment pursuant to § 327 during the period for which services were provided. The Court finds that Malpass was not qualified for employment since he had a conflict of interest.
Section 327(a) authorizes employment of professionals who 1) do not hold an interest adverse to the estate and 2) are disinterested persons. In re Wheatfield Business Parks LLC, 286 B.R. 412, 418 (Bankr. C. D. Cal. 2002). "This standard is high: `If there is any doubt as to the existence of a conflict, that doubt should be resolved in favor of disqualification.'"Wheatfield, 286 B.R. at 418 (citation omitted). "Where a bankruptcy debtor is a creditor of a related debtor, it is presumptively improper for the same attorney (or law firm) to be general counsel for the related debtors." Id. (citations omitted). The burden of proof was on Malpass to establish that he was both disinterested and did not represent an interest adverse to the estate. See Interwest Bus. Equip., Inc. v. United States Trustee (In re Interwest Bus. Equip., Inc.), 23 F.3d 311, 318 (10th Cir. 1994).
While § 327(c) cautions that the mere representation of a creditor in a case is not per se disqualifying, in this case both the UST and U.S. Bank objected to Malpass' employment on the grounds that he had an actual conflict by virtue of his representation of the Waddells who were listed as creditors of this estate. The UST argues that the conflict is actual because the Waddells are unliquidated disputed creditors. Also, the debtors and the Waddells are jointly liable for the same debts, yet they have different assets. According to the UST, it would be in the interest of the debtors to have these debts paid by the Waddells and conversely it would be in the interests of the Waddells to hold the debtors responsible for these debtors. The UST also contends that even if there is no actual conflict, the Court should disapprove Malpass' employment since the conflict is sufficiently important and there is a strong likelihood that it will ripen into an actual conflict. Finally, the UST notes that representation of a potential conflict requires the written consent of all the creditors in this case as per the directive set forth in Wheatfield, 285 B.R. at 424.
In response to the UST's objections, Malpass argues that the conflict is "only potential" and that the "mere existence of joint liability" is not disqualifying. Malpass maintains that "[t]here is no explanation for why the potential conflict in this case is significantly different from the conflicts present in other cases where employment has been authorized" but he fails to cite any of those cases. Malpass also argues that the notice provided by the motion to employment is sufficient evidence of consent of other creditors since none have objected.
The Court notes that the alleged conflict of interest is now actual since the Chapter 11 trustee has abandoned the real property secured by a lien that was guaranteed by both the Waddells and Harlans. The real property has since been foreclosed upon and has resulted in a significant deficiency for which both the Waddells and the Harlans are liable. Even so, going back to the petition date, the Wheatfield court held that where a "bankruptcy debtor is a creditor of a related debtor, it is presumptively improper for the same attorney (or law firm) to be general counsel for the related debtors." Wheatfield, 286 B.R. at 418 (citations omitted) (emphasis added). The Waddells were listed on the debtors' schedules as a creditor and, as the UST pointed out, the interests of the Harlans' and the Waddells' were not parallel, but conflicting (it would be in the interest of the debtors to have these debts paid by the Waddells and conversely it would be in the interests of the Waddells to hold the debtors responsible for these debtors). Further, both a major secured creditor and the UST objected to Malpass' employment based on the conflict. The Court finds therefore that Malpass has not overcome the presumption that it would be improper for him to represent the debtors in this case. Finally, consent of all the creditors, and not just the clients, is necessary under Wheatfield, which was not obtained.
In sum, the Court finds that Malpass is not eligible for nunc pro tunc employment because he has failed to provide a satisfactory explanation for the delay, has failed to articulate or demonstrate any benefit to the estate, and has a conflict of interest that makes him disqualified for employment even if his application had been timely filed.
Because Malpass cannot under any circumstances be employed, the fees he received must be disgorged and his fees denied in total.
B. MALPASS FAILED TO MEET THE DISCLOSURE REQUIREMENTS
Besides failing to comply with § 327, Malpass has also failed to comply with FRBP 2016 for multiple payments made by the Harlans during his representation. Federal Rule Bankruptcy Procedure 2016(b) provides:
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 section 327 of the Code. . . .
The UST points out that Mr. Harlan made five postpetition payments to Malpass in the amount of $10,000 each for a total of $50,000 in postpetition payments. These payments were not disclosed in separate 2016(b) statements.
Malpass argues that his 2016(b) statement was completed in the required form and filed at the time the petition was filed. Postpetition payments were also disclosed in "reports filed in the case" and disclosures were made to the U.S. Trustee's representatives and to the Court on the record at status hearings. [See docket #109 at 13: 11-28].
Even if Malpass relies on § 329 for his fees, he still had a duty to disclose any and all payments he received from Mr. Harlan. Those disclosures cannot be buried in reports or pleadings relating to different matters. Rather, payment and each agreement must be separately disclosed. "A supplemental statement shall be filed and transmitted to the United States trustee within fifteen days after payment or agreement not previously disclosed." FRBP 2016(b). "A bankruptcy court must be certain that an attorney who has filed a Rule 2016(b) statement will supplement that statement if further compensation is received."Law Offices of Nicholas A. Franke v. Tiffany (In re Lewis), 113 F.3d 1040, 1045 (9th Cir. 1997). According to Malpass' May 9, 2006, declaration, he is an experienced bankruptcy attorney. Malpass has failed to offer any explanation as to why he failed to comply. "An attorney's failure to obey the disclosure and reporting requirements of the Bankruptcy Code and Rules gives the bankruptcy court the discretion to order disgorgement of attorney's fees." Id. at 1045. The bankruptcy court "has broad and inherent authority to deny any and all compensation when an attorney fails to meet the requirements of these provisions." Id. "[D]isgorgement for nondisclosure is appropriate "irrespective of the payment's source." Id. at 1046 (citation omitted).
The Court finds that Malpass' failures to disclose are additional grounds for disgorgement.
The UST also argues that Malpass' initial 2016(b) statement shows he received $20,839 from the debtors. The 2016(b) statement also showed that $839.00 was used as a filing fee. The UST points out that contrary to Malpass' disclosure regarding prepetition fees, Mr. Harlan paid a total of $30,843 prior to the filing of this bankruptcy case. There is a difference of approximately $5,000 in what was paid and what was disclosed to the Court. The UST argues that this money received by Malpass prior to the filing date is clearly property of the estate to the extent that it is not offset by services rendered to the estate. Because the time sheets show $5,703.75 in services rendered to the Harlans and Waddells, the UST argues that at least $27,148.13 was held by Malpass when the case was filed for which services were not provided. According to the UST, at minimum, this amount should be turned over to the Chapter 11 trustee. The Court finds it unnecessary to differentiate whether certain funds are or are not property of the estate since the Court is finding that all fees received should be disgorged and is denying all compensation. The Court also notes that apparently the debtor has entered into an agreement with the Chapter 11 trustee that any funds disgorged would be used pursuant to the terms of the Chapter 11 plan. [See docket #143].
C. EVIDENTIARY HEARING
Malpass has argued that if the Court takes "further action on the issues raised" in the UST's motion, he would like an evidentiary hearing. He also contends that certain issues turn on facts which should be the subject of an evidentiary presentation.
The Court has throughly reviewed the record and the pleadings in this matter. Several hearings were held regarding Malpass' employment and the UST's motion, and the issues relating to both have been fully briefed. Malpass has not proffered any facts which demonstrate why an evidentiary hearing would be necessary and the Court cannot find any.
III. CONCLUSION
For the reasons stated above, the Court grants the UST's motion to disgorge. No further payment of fees is authorized. The disgorged funds should be turned over to the Chapter 11 trustee.
This Memorandum Decision constitutes findings of fact and conclusions of law pursuant to Federal Rule of Bankruptcy Procedure 7052. The UST is directed to file with this Court an order in conformance with this Memorandum Decision within ten (10) days from the date of entry hereof.