Robert J. Faris, United States Bankruptcy Judge.
The United States Trustee's Motion To Compel Disgorgement Of Fees Under 11 U.S.C. § 329 And To Sanction Attorneys For Violations Of 11 U.S.C. § 526 ("Motion") came on for hearing on September 18, 2017. Curtis Ching appeared for the United States Trustee; William Bullard appeared for the Hanawahines, who were also present. No other appearances were made.
1. The United States Trustee has demonstrated the following facts by clear and convincing evidence.
2. In the fall of 2015, Clifford and Maria Hanawahine ("the Hanawahines") decided to file for bankruptcy.
3. Ms. Hanawahine searched on the internet and found the online site of Volks Anwalt Law ("Volks"). On September 8, 2015, she contacted Volks, spoke to a Volks representative, agreed to hire the firm, received the Volks' Retainer Agreement ("Retainer Agreement"), signed it, and returned it all on the same day. On September 22, 2015, the Hanawahines wired $1,615 to Volks, which was the amount Volks required to cover attorney's fees for the Chapter 7 filing, the Court's filing fee, and a credit check.
4. The Retainer Agreement promises the following to the Hanawahines:
5. The Retainer Agreement also promised to hold retainer fees paid to Volks in a trust account that "shall only be withdrawn from the Trust account when they are earned by [Volks]." The Retainer Agreement further promised that Volks would send invoices to the Hanawahines by email. The Retainer Agreement included a term that, "All fees are earned when paid" but also stated that "Client may be eligible for a refund of the filing fee if bankruptcy is stopped prior to the filing date."
6. Volks informed the Hanawahines that it would appoint a Volks attorney in Hawaii to represent them and further advised the Hanawahines to take a credit counseling course. The Hanawahines promptly took the credit counseling course on October 5, 2015.
8. The Hanawahines contacted Woo in April and May 2016 to find out about the status of their filing. Woo gave them assurances about preparations for their case and asked for their patience. But after May 2016, Woo stopped returning the Hanawahines' calls and texts. The Hanawahines were also unable to reach anyone at Volks. At some point after May 2016, the Hanawahines were able to get in touch with Woo, who informed them, by phone, that he could not help the Hanawahines and that they would have to proceed without him. By this time, the Hanawahines' credit counseling certificate, good for 180 days, had long since expired.
9. In December 2016, a collection agency, AR Recovery Solutions, commenced wage garnishment against Ms. Hanawahine in the amount of $82 per week. This continued until their bankruptcy was filed on April 30, 2017. From the start of the garnishment to the date of the bankruptcy filing, the Hanawahines lost approximately $1,437.
10. In 2017, the Hanawahines persisted in their attempts to contact Volks to request a refund. They managed to speak with someone at Volks in January or February 2017 and asked for a refund. Ms. Hanawahine faxed a letter to Volks on or about February 28, 2017. Ms. Hanawahine also spoke by phone to another Volks representative on May 22, 2017, and asked for a refund. Volks did not respond to the requests for a refund.
11. The Hanawahines did not receive the advice, the documents, or other services promised by Volks in the Retainer Agreement. Volks did not send any invoices by email, as promised in the Retainer Agreement.
12. By early 2017, the Hanawahines had largely given up on Volks fulfilling its obligations, the Hanawahines consulted with bankruptcy attorney William Bullard. They hired Mr. Bullard and paid him $1,734 for attorney's fees plus the filing fee. Mr. Bullard filed the current case on April 30, 2017.
13. On June 21, 2017, the United States Trustee emailed Lauren NeSmith, a Volks representative with whom the Hanawahines had communicated, asking her to contact the United States Trustee about this case. The United States Trustee received no response.
14. In the Motion, the United States Trustee has cited other bankruptcy cases throughout the country in which the work performed by Volks' was subject to criticism and sanctions. This Court takes judicial notice of the following court orders:
15. In one other case,
16. On June 21, 2017, the United States Trustee contacted Woo about the Hanawahines. Woo admitted that he had agreed to be a Volks attorney in Hawaii and met once with the Hanawahines but subsequently had a "falling out" with Volks and was never paid. After that conversation, the United States Trustee sent three additional emails to Woo to obtain further information and cooperation but received no response.
17. The United States Trustee filed the Motion and a Notice of Hearing on August 2, 2017. As shown on the Certificate of Service filed on August 3, the Motion and Notice of Hearing was served on Woo by regular mail and email and to Volks at five different mailing addresses.
18. Neither Volks nor Woo filed any opposition to the Motion.
19. The United States Trustee informed the Court that approximately 15 minutes prior to the hearing on September 18, 2017, Woo contacted the United States Trustee by phone. He indicated that he had attempted to file a late opposition to the Motion but that he was unable to upload the pleading into the Court's ecf filing system. He requested that the United States Trustee agree to a continuance and indicated that he did not have sufficient time to appear personally to make this request. The United States Trustee conveyed Woo's request and did not oppose it but noted that a continuance would be unfair to the Hanawahines, who had appeared at the hearing in support of the Motion. While the Hanawahines also did not oppose the continuance, the Court denied the request due to the lack of a timely filed opposition.
20. This Court has jurisdiction pursuant to 28 U.S.C. §§ 157 and 1334. Venue is proper pursuant to 28 U.S.C. §§ 1408 and 1409. The Motion is brought pursuant to 11 U.S.C. §§ 105, 329, and 526; and Federal Rules of Bankruptcy Procedure Rule 2017.
21. Rule 2017(a), Fed. R. Bankr. P., authorizes the Court to determine "whether any payment of money ... made... in contemplation of the filing of a petition under the Code by ... the debtor... to an attorney for services rendered... is excessive."
22. The Hanawahines' payment of $1,615 to Volks was clearly "in contemplation of" a bankruptcy filing. Fed. R. Bankr. P. 2017. Thus, under rule 2017, the Court has authority to rule on whether the amounts paid were excessive.
23. Section 329(a) of the Bankruptcy Code states,
11 U.S.C. § 329(a).
24. Section 329(b) of the Bankruptcy Code states,
11 U.S.C. § 329(b).
The burden is upon the attorney to demonstrate that the fees are reasonable.
25. Although Volks is not the firm representing the Hanawahines' in this bankruptcy case, this does not remove the firm from the court's review of fees paid. Even an attorney who is not counsel of record may be subject to disgorgement under section 329.
26. While 11 U.S.C. § 329(a) requires that an attorney report compensation paid within one year prior to petition date, it contains no time limitation period for disgorgement.
27. Although the Hanawahines paid Volks over a year prior to their bankruptcy filing, this does not bar this Court from ordering disgorgement. Congress intended bankruptcy courts to monitor overreaching by debtor's attorneys. Neither 11 U.S.C. § 329 nor rule 2017(a), Fed. R. Bankr. P., limits the court's ability to determine that excessive attorney's fees were paid and to order a refund.
28. The reasonable value of Volks' services rendered to the Hanawahines is less than zero. The Hanawahines paid $1,615 for fees and costs and received nothing that was promised (i.e., assistance and representation in filing a Chapter 7 bankruptcy case). Although Volks may have drafted some documents, this means little since the Hanawahines never received the completed work, and Volks never filed their case. Moreover, $335 of the $1,615 retainer paid to Volks was for the Chapter 7 filing fee. Retention of this amount actually resulted in Volks receiving more than the amount necessary to cover its fees because it kept funds that were meant to be paid to a third party. Finally, Volks made promises it did not keep. The Hanawahines relied on these promises, which delayed their bankruptcy filing. The delay harmed the Hanawahines
29. Section 526(a)(1) states,
11 U.S.C. § 526(a)(1).
30. Section 526 governs restrictions on debt relief agencies and was enacted as part of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, "to correct perceived abuses of the bankruptcy system."
31. The Hanawahines are "assisted persons" as defined in § 101(3). As shown on their bankruptcy schedules, they have "primarily consumer debts," and the value of their non-exempt assets is less than $192,450. 11 U.S.C. § 101(3).
32. A "debt relief agency" is "any person who provides any bankruptcy assistance to an assisted person in return for the payment of money or other valuable consideration." 11 U.S.C. § 101(12A).
33. Volks and Woo are "debt relief agencies." They provided bankruptcy assistance
34. Section 526(a)(1) provides that a debt relief agency "shall not fail to perform any service that such agency informed
35. Volks and Woo violated 11 U.S.C. § 526(a)(1) because they failed to perform services that they promised. Volks had an agreement promising a host of services that included advising the Hanawahines, preparing bankruptcy documents for filing, appearing with them at a meeting of creditors, negotiating with creditors, and invoicing them for fees. Woo, as Volks' agent, undertook the same promises. The Hanawahines received none of the promised services.
36. The violation of section 526(a) voids the agreement between the debt relief agent and the debtor. 11 U.S.C. § 526(c)(1). Therefore, the Volks' Retainer Agreement with the Hanawahines is void, and the $1,615 in attorney's fees (and costs) paid by the Hanawahines to Volks is to be returned to them. Volks and Woo shall be jointly and severally liable for this refund.
37. Section 526(c)(5) authorizes the Court to impose a civil penalty against any firm that "intentionally violated [§ 526], or engaged in a clear and consistent pattern or practice of violating this section[.]" 11 U.S.C. § 526(c)(5).
38. Volks engaged in a clear and consistent pattern or practice of violating section 526. Bankruptcy Courts in North Carolina, Virginia, and Maryland have sanctioned Volks and/or its principal for abandoning debtors. The U.S. Trustee has brought another motion against Volks in the Bankruptcy Court for the District of Oregon for similar problems. The violation of 11 U.S.C. § 526(a), by Volks, in this district, appears to be the latest example of neglect. Accordingly, under 11 U.S.C. § 526(c)(5), this Court possesses authority to impose a civil penalty against Volks.
39. Woo also triggered the application of 11 U.S.C. § 526(c)(5) because his actions "intentionally violated" section 526 by his promises to represent the Hanawahines and then his subsequent abandonment of them. The nonpayment by his law partner, Volks, does not vitiate Woo's responsibility to his clients or justify his abandonment of them.
40. Accordingly, under 11 U.S.C. § 526(c)(5)(B), the Court has ample cause to order a civil penalty against Volks and Woo for their inexcusable abandonment of the Hanawahines. While § 526(c)(5)(B) prescribes no range or formula for determining the amount, the penalty should be designed to deter the offending parties and others from future, similar misconduct.
41. In Hawaii, treble damages are awarded as a form of deterrence.
SO ORDERED.
