Attorney James M. LaGanke and his law firm (collectively referred to as "LaGanke") appeal the decision of the bankruptcy court ordering them to disgorge a prepetition payment of $17,000 in fees from a client, chapter 7
Acting through its counsel LaGanke, Debtor, a general contractor, filed its chapter 7 petition on August 4, 2009. Anthony H. Mason ("Trustee") was appointed the chapter 7 trustee. In its Statement of Financial Affairs, filed on September 2, 2009, Debtor reported that it had paid LaGanke $7,500 on July 31, 2009. However, a canceled check in the record reveals that Debtor had actually paid LaGanke $17,000 on July 31, 2009.
On August 12, 2009, LaGanke filed a disclosure of compensation pursuant to Rule 2016(b), in which he represented that Debtor paid him $7,500 on July 31, 2009.
In reviewing the reasonableness of a $7,500 fee in a chapter 7 bankruptcy, Trustee made requests to LaGanke on October 2, October 16 and October 24, 2009 for copies of his billing records. Not receiving them, on October 31, 2009, Trustee filed a Motion to Compel asking the bankruptcy court to direct LaGanke to produce his billing records and evidence of all payments for legal services provided to Debtor. A hearing was held on the Motion to Compel on December 2, 2009, at which the court granted the motion requiring that LaGanke provide the requested materials within ten days.
Nineteen days later, LaGanke sent the billing records to Trustee. However, he provided no copies of any payment records. Trustee made several more demands on LaGanke to produce the payment records. When LaGanke failed to comply, Trustee filed a Motion to Show Cause on January 5, 2010. The bankruptcy court ordered LaGanke to appear on February 3, 2010, to show cause why he should not be held in contempt for failing to comply with the order to produce the documents.
On January 29, 2010, LaGanke sent a copy of Debtor's check for $17,000 that LaGanke had received on July 31, 2009, a few days before Debtor filed its chapter 7 petition. That same day, Trustee emailed LaGanke, asking for an explanation of the discrepancy between the $17,000 actually paid to him by Debtor, and the $7,500 disclosed in Debtor's SOFA and LaGanke's Rule 2016(b) disclosure. LaGanke responded that the $17,000 payment was "for a number of different matters."
Trustee and LaGanke agreed to continue the February 3 show cause hearing in reliance on LaGanke's promise to submit billing statements for the "different matters" by February 5, 2010. When LaGanke missed that deadline on February 18, 2010, Trustee filed a Motion to Compel Disgorgement of the $17,000. In the Disgorgement Motion, Trustee suggested that, based upon information given to him to date, it appeared that LaGanke was apparently representing Debtor's officers in certain state court matters at the expense of Debtor.
LaGanke responded to the motion on February 23, 2010. He admitted receiving the $17,000 payment which he "allocated for this [bankruptcy] case and prior and future work on certain state court litigation titled
On February 24, 2010, Trustee replied. Trustee noted that the state court litigation had been automatically stayed as to Debtor by the bankruptcy filing, and consequently, any services provided by LaGanke after that time solely benefitted Debtor's insiders. Moreover, he pointed out, the indemnification agreement LaGanke referred to was proof that a conflict of interest existed between the officer represented by LaGanke in state court and Debtor.
The bankruptcy court continued the show cause hearing to March 16, 2010; a hearing transcript is in the record. In response to the court's question, LaGanke conceded that his Rule 2016(b) statement was inaccurate and had not been amended. Hr'g Tr. 7:17-18:6 (March 16, 2010). LaGanke stated that the amount he listed in his disclosure was merely a "guesstimate" of what his fees for his services in the bankruptcy case would be, and he offered to amend the statement. After taking a recess to consider the matter, and after the parties left the courtroom, the bankruptcy court entered its rulings on the record. In pertinent part, the bankruptcy judge stated:
Hr'g Tr. 16:12-17:1.
Hr'g Tr. 17:10-21.
Hr'g Tr. 21:25-22:1.
Hr'g Tr. 20:18-21:1.
An Order implementing the bankruptcy court's decision and directing LaGanke to disgorge the $17,000 payment was entered on March 25, 2010. LaGanke filed a timely appeal on April 4, 2010.
The bankruptcy court had jurisdiction under 28 U.S.C. §§ 1334 and 157(b)(2)(A). We have jurisdiction under 28 U.S.C. § 158.
Did the bankruptcy court abuse its discretion in ordering LaGanke to disgorge the $17,000 received from Debtor?
An order directing counsel to disgorge fees is reviewed for abuse of discretion.
LaGanke argues that the bankruptcy court abused its discretion under these facts when it ordered him to disgorge the entire $17,000 he received from Debtor. We disagree.
The bankruptcy court determined that LaGanke had executed and filed an inaccurate Rule 2016(b) disclosure concerning the amounts he received from Debtor prepetition, that those funds were not used for the benefit of the bankruptcy estate and were not authorized by Trustee, and that LaGanke's conduct amounted to a lack of candor with the bankruptcy court. The court therefore ordered full disgorgement of funds paid by Debtor to LaGanke. We find no error in this approach.
Attorneys for the debtor under all chapters of the Bankruptcy Code are required by § 329 and Rule 2016(b) to disclose all funds paid by their debtor client within one year of the filing of the bankruptcy:
§ 329(a).
Rule 2016(b).
The Ninth Circuit has, in several decisions, highlighted the critical importance of an accurate Rule 2016(b) statement by debtor's attorneys and the power of a bankruptcy court to enforce compliance with the Rule by ordering denial or disgorgement of funds paid to attorneys.
In
The Ninth Circuit expanded on its
The
The BAP has also expressed its commitment to assuring the accuracy of Rule 2016(b) disclosures. Quoting the court's opinion in
In this case, the bankruptcy court found that LaGanke had reported that he had received $7,500 from the debtor within one year of filing the bankruptcy in his Rule 2016(b) statement; that Debtor also reported only a $7,500 payment prepetition in its SOFA; that the true amount paid by Debtor to LaGanke was $17,000; that, as he acknowledged, LaGanke was aware when he filed it that his Rule 2016(b) statement was inaccurate; and that LaGanke only revealed the true amount paid to him and provided the cancelled check after repeated requests over many months from Trustee and the threat of contempt. Further, the bankruptcy court determined that LaGanke had actually used the funds to pay for services he provided in defense of Debtor's principals in the state court litigation that was stayed as to Debtor and bankruptcy estate when the bankruptcy case was commenced, and that LaGanke's services in that action had not been authorized by Trustee.
We measure these facts against the strong statements in Ninth Circuit case law that inaccuracies in disclosure statements may subject an offending attorney to disgorgement even if the errors in the Rule 2016(b) disclosure are inadvertent, and that in appropriate cases, disgorgement may be for the full amount of fees received by a debtor's attorney. When viewed in this context, it is obvious that the bankruptcy court did not abuse its discretion when it ordered LaGanke to disgorge the $17,000 paid to him prepetition by Debtor.
LaGanke challenges the conclusion of the bankruptcy court on legal and procedural grounds.
LaGanke asserts that the bankruptcy court relied on questionable case law to support its decision. He argues:
LaGanke Op. Br. at 3;
LaGanke is incorrect. Contrary to his argument,
LaGanke's statement that the bankruptcy court relied exclusively on
Moreover, LaGanke's argument misses the point. At bottom, whether the bankruptcy court cited to the correct case law is not critical; whether it applied the correct legal rule is the focus of our inquiry. In other words, even had it failed in this instance to cite to
LaGanke's other objection is that the bankruptcy court did not provide him an opportunity for an evidentiary hearing. But, on this record, the lack of an evidentiary hearing is of no consequence.
First, as near as we can tell, LaGanke never requested that the bankruptcy court conduct an evidentiary hearing on the show cause or disgorgement motion.
LaGanke asserts that there were disputed issues of fact regarding whether he had a conflict of interest in representing both Debtor and its principals in state court, whether the "entire amount" paid to him by Debtor was used solely for the benefit of the Debtor's principal, and whether Trustee's email of October 2 was considered by the bankruptcy court in its decision. We have examined the record carefully and conclude that, if these are indeed disputed issues of fact, they are not material.
Whether LaGanke had a conflict of interest in his dual status as counsel for both Debtor and its principals in state court is immaterial. A chapter 7 debtor's attorney is not required by the Code to be disinterested. Although the bankruptcy court did observe a possible conflict of interest, as we construe its oral ruling, it was mainly concerned that LaGanke was, if anything, providing services for representing Debtor after the bankruptcy case was filed without Trustee's approval, even though the state court action against Debtor was stayed by the bankruptcy filing. In other words, even if LaGanke could ethically represent both Debtor and its principals, his services in a stayed action did not benefit the bankruptcy estate. The bankruptcy court's focus, then, was on improper use of potential bankruptcy estate funds, not on LaGanke's possible conflict of interest.
LaGanke argues that the bankruptcy court found that the $17,000 was "solely" [LaGanke's term] used for the benefit of debtor's principal. LaGanke's Reply Br. at 3. However, we have examined the record and can locate no such finding.
Finally, LaGanke contends that Trustee's October 2 email "was not considered by the bankruptcy court in its decision." LaGanke's Reply Br. at 3-4. The bankruptcy court did, in fact, consider that email:
THE COURT: I note that Debtor's counsel at the hearing today set up his opinion that he believed that Trustee and Trustee's counsel had basically provided an open-ended consent to whatever fees and costs were incurred by Debtor's counsel to this October 2nd email. I want to emphasize on the record that I have reviewed that email. That email was not an open-ended consent to whatever attorney's fees and costs Mr. LaGanke or his firm might receive. That particular email was simply a recognition that although the particular compensation disclosed in this case of $7,500 was on the high side, there was at least an initial recognition that Trustee and Trustee's counsel would not come back and request that any of those funds be turned over.
Tr. Hr'g 21:2-14. The bankruptcy court did consider Trustee's email to LaGanke, but decided that disgorgement was proper in spite of it. We find no error in this conclusion.
The bankruptcy court employed the correct legal standard and its application of that standard to the facts was not illogical, implausible, or without support in inferences that may be drawn from the facts in the record. At bottom, it appears LaGanke filed an inaccurate disclosure of payments received from Debtor, and that fact and others lead the bankruptcy court to decide disgorgement was proper. The bankruptcy court did not abuse its discretion in its decision. We therefore AFFIRM the order of the bankruptcy court.
