Honorable Jim D. Pappas, United States Bankruptcy Judge.
In the motion before the Court, chapter 12
Following an evidentiary hearing held on May 11, 2016, the Court took the issues under advisement. After due consideration of the evidence, testimony, and arguments presented, as well as the parties' briefs, and the applicable rules and law, this Memorandum sets forth the Court's findings of fact and conclusions of law, and resolves the Motion. Fed. R. Bankr.P. 7052; 9014.
Debtor operates a dairy in Buhl, Idaho. Its principal owners are brothers Maximaino ("Max"), Anthony ("Tony"), Alberto ("John"), and Heilo ("Eilo") Silva (collectively, "the Silvas"). Ex. 106. The dairy has been operated in Buhl by members of the Silva family for more than twenty-five years. Second Am. Ch. 12 Plan, Ex. 108. At all times relevant herein, Debtor's dairy herd was housed and milked at a leased facility. See First Am. Ch. 12 Plan, Dkt. No. 70, at p. 23.
The Silvas own land through another entity called Silva Land, LLC ("Silva Land"), in which they are the principals. On this approximately 440 acres, Silva Land raises corn, triticale, grain and hay. Id. Silva Land's finances have been collectively managed via Silva Dairy.
Debtor milks approximately 700 cows. Id. As of April 1, 2011, when its second amended chapter 12 plan was filed, approximately 250 of those cows belonged to JT Livestock, an entity owned, at least in part, by Jack McCall. Id. Beginning in May 2010, JT Livestock agreed to pay rent to Silva Land for use of its dairy facility
Over the years, the Silvas, Silva Land and the Debtor have all needed to borrow money to fund operations. For example, in October 2006, they, along with several other Silva-owned entities, executed a promissory note for $550,000 in favor of AgStar Financial Services, FLCA, acting as the agent for lender McFinney Agri-Finance, LLC ("McFinney"). Ex. 106. As the Court understands it, Jack McCall owned an interest in McFinney, although the nature and extent of that interest is unclear. In March 2009, the Silva borrowers again experienced cash flow issues and they executed another promissory note in favor of McFinney in the amount of $1,060,000. Id. As of the date of the bankruptcy filing in August 2010, the Silva borrowers, including Debtor, still owed substantial sums on these notes.
When it became apparent that borrowing more and more money was not the solution to the Silvas' collective financial problems, they discussed the possibility of filing for bankruptcy. Because they were housing and managing his herd, near the end of July 2010, Max talked to Jack McCall about the prospect of a bankruptcy filing. McCall inquired about who the Silvas were planning to use as their attorney, and when Max indicated he did not know any bankruptcy attorneys, McCall told him about DeHaan. McCall then placed an introductory call to DeHaan, and Max made an appointment to meet with him.
During their initial meeting, DeHaan discussed Debtor's options under chapter 12 with Max. He informed Max that, to pursue such a case, DeHaan would need a retainer of $10,000 to begin work. Not surprisingly, the Silvas were cash-strapped, behind on loan payments, and could not come up with such a retainer. Max testified that he and DeHaan discussed the possibility of asking McCall for the money, which is exactly what Max did. At a later meeting, McCall agreed to give Max the money for the retainer, and McCall's wife wrote Max a check payable to "Max Silva" for $10,000 on a JT Livestock bank account; she noted in the memo line of the check that the money was for "facility rent". Ex. 100. In his mind, though, Max considered the transaction to be more in the nature of a personal loan which the Silvas could "work off" through managing JT Livestock's dairy herd. In contrast, DeHaan testified that he understood that the $10,000 given to Max by Mrs. McCall was for rent owed for housing the JT Livestock herd. Indeed, it is undisputed that JT Livestock had not paid any facility rent to Debtor or Silva Land prior to this time, although the parties' arrangement had only been in place for one month. Thus, conceivably, as a rent payment, the $10,000 could have reflected some rent already owed, as well as
Max immediately delivered the check to DeHaan. While DeHaan testified it was his practice to accept payment for fees solely from the client, and never from a third party, Max testified that DeHaan advised him he should not deposit the funds in Debtor's bank because DeHaan was concerned that the bank, one of Debtors' creditors, might seize the funds to apply to its debts. DeHaan disputes he gave such advice to Max. Regardless, Max endorsed the check directly over to DeHaan, who took it for the retainer. DeHaan testified that he was comfortable accepting this money because he believed the $10,000 was owed to one of the Silva entities by JT Livestock, and that as their manager, Max was at liberty to use the funds however he wished.
Apparently, DeHaan was not at all concerned that the retainer funds originated with an entity owned at least in part by McCall, a potential creditor in Debtor's impending bankruptcy case. Though he was less than clear on the point, DeHaan testified that he understood that an entity called "Agri Access" had purchased McFinney's rights in the promissory notes executed by Debtor, Silva Land, and the Silvas, and therefore, Agri Access, not McCall, was the creditor. DeHaan also testified that he was unaware that Debtor was indebted to McCall at the time of the bankruptcy filing, and that if he had known, he would not have accepted the retainer check that he did, as it posed a possible conflict of interest. The record contains no information to support DeHaan's understanding on this point.
Debtor filed a chapter 12 petition on August 18, 2010. Dkt. No. 1. Along with other same-day filings, DeHaan filed an Application to Employ Attorney, in which he represented that "[t]he debtor has paid the DeHaan Law Office a retainer fee of $10.000,00 [sic] for services rendered or to be rendered in this case." Ex. 101. His supporting declaration provided that he had billed Debtor $3,944 for pre-petition services. Id. That same day, DeHaan filed a Rule 2016(b) disclosure stating that Debtor had paid him a $10,000 retainer. Ex. 102.
On November 28, 2011, DeHaan filed a second Application for Employment, Ex. 104, which the Court later approved, Dkt. No. 127. That application contained the same declaration found in the prior application regarding the source of DeHaan's retainer. Ex. 101.
On October 11, 2011, DeHaan filed an application for approval of interim compensation requesting an award of fees totaling $35,150.01. Ex. 110. According to the application, of the $10,000 retainer, $6,000 remained, which DeHaan sought to use to pay the approved fees and costs, while the balance of the fees, $29,150.01, were to be paid through payments under Debtor's chapter 12 plan. Id. After notice, and without objection from Debtor, the application was granted and compensation and expenses approved in the amount sought on January 13, 2012. Dkt. No. 135.
During the case, chapter 12 trustee Forrest P. Hymas ("Trustee") advised DeHaan that the various agreements existing between Debtor, Silva Land, and others should be memorialized in writing so the respective interests of Debtor and the other parties, and the terms of those contracts,
First, Max testified that he did not, nor would he ever, agree to a $1,000 per month fee for the Silvas' management of the JT Livestock animals, as that was a completely inadequate sum for the work involved in caring for a dairy herd. And second, though the Lease appears to have been signed by Max before a notary (DeHaan's paralegal) on December 2, 2010, Max provided convincing evidence to the Court showing that he departed for Mexico from the Boise airport at 7:00 a.m. on the morning of December 2, and thus, he did not sign the Lease as indicated. Exs. 111, 112. Instead, Max contends that the $1,000 figure for the management fee was inserted, and his signature on the Lease was forged, by DeHaan. Max testified that the first time he saw the Lease was in early 2013, when Trustee forwarded a copy to him. Max further alleges that his signature was forged on Debtor's original chapter 12 plan, Ex. 107, but he acknowledges that he did, in fact, sign the second amended chapter 12 plan, Ex. 108.
According to Max, and contrary to the Lease DeHaan drafted, no specific management fee was agreed to by the Silvas and McCall for JT Livestock. Instead, the Silvas intended to manage the JT Livestock herd, and that the value of their labor would be credited against the debt that Debtor owed to JT Livestock or Jack McCall. However, when that arrangement did not work out, in August 2012, McCall removed his herd from the Silva Land property, and state court litigation ensued. In 2013, Green River Ranches, LLC, another entity owned in part by Jack McCall, sued the Silvas and Silva Land for an unpaid promissory note executed in connection with the purchase of the Silva Land property.
The Motion alleges that the relief it seeks is authorized by § 105(a), § 329, § 330, Rules 2014(a), 2017, 9024
The Court will examine each issue in turn.
Debtor contends that DeHaan forged Max's signature on at least two documents in connection with this case, and that his conduct constitutes grounds for revocation of the Court's order authorizing payment of his fees. Specifically, Debtor alleges that Max's signature on the original chapter 12 plan filed with the Court, Ex. 107, as well as his signature on the Lease, Ex. 109 (which was thereafter appended to versions of Debtor's plan), were forged.
The Court accepts Max's version of the facts on this issue, at least in part. Max credibly testified that the signatures on the two documents (i.e. Debtor's original plan and the Lease) were not his.
A number of other signatures on documents filed with the Court that the parties seemingly agree contain Max's authentic signature were also admitted in evidence for comparison. Other circumstantial evidence supports Max as well. Though no handwriting expert was called to testify, the Court's admittedly untrained review of the undisputed documents strongly suggests that Max did not sign the original chapter 12 plan or the Lease.
On the other hand, while the Court can comfortably conclude that Max's signatures on the original plan and the Lease were not his, the evidence is insufficient to determine that it was DeHaan who forged them. Though the plan and the Lease were in DeHaan's control prior to being signed and filed with the Court, it is possible someone other than DeHaan signed Max's name to them, possibly a member of DeHaan's staff. But absent better evidence implicating DeHaan, the Court declines Debtor's invitation to sanction DeHaan through the loss of fees for the irregularities in these documents.
Attorneys who represent debtors in reorganization cases must be disinterested
§ 329(a) (emphasis added). Rule 2016(b) implements this Code provision. It requires that:
Moreover, the Code provides that the Court shall only approve the employment of an attorney under § 327 upon submission of an application which includes, inter alia, "any proposed arrangement for compensation, and, to the best of the applicant's knowledge, all of the person's connections with the debtor, creditors, any other party in interest...." Rule 2014(a).
Finally, the Rules require further disclosures when an attorney for a chapter 12 debtor applies for approval of his compensation:
Rule 2016(a) (emphasis added).
Under these rules, as Debtor's counsel, DeHaan was required to disclose, among other information, the source of his retainer. He failed to accurately and completely do so. In his employment applications he filed with the Court, as well as his Rule 2016(b) disclosure statement, DeHaan represented to the Court that he received a $10,000 retainer from Debtor. This statement was, at best, incorrect, and more likely a misrepresentation.
DeHaan knew the funds for his retainer originated with JT Livestock or McCall; indeed, the check endorsed and given to him by Max was written on a JT Livestock bank account. DeHaan testified that he believed that the money was for rent owed to Debtor by McCall, and that he believed the retainer funds were being given to him by Max Silva as an agent (i.e., the manager) for Debtor. However, this assertion stands in contrast to DeHaan's repeated testimony that he concluded, after doing his due diligence, that his client, Silva Dairy, was neither a creditor nor debtor to Jack McCall or his entities. As such, he could not have assumed the $10,000 was in any way Debtor's money.
The Ninth Circuit's decision in Neben & Starrett, Inc. v. Chartwell Fin. Corp. (In re Park-Helena Corp.), 63 F.3d 877, 880 (9th Cir.1995) was factually similar to this one. There, the debtor's counsel disclosed to the bankruptcy court that a retainer had been paid to him by the debtor, when in fact, it came via a check from debtor's president drawn on his personal checking account. In highlighting the deficiencies in counsel's disclosures in the bankruptcy case, the Ninth Circuit explained that, because the Code and Rules impose an independent disclosure responsibility upon attorneys, "failure to comply with the disclosure rules is a sanctionable violation, even if proper disclosure would have shown that the attorney had not actually violated any Bankruptcy Code provision or any Bankruptcy Rule" and that "[e]ven a negligent or inadvertent failure to disclose fully relevant information may result in a denial of all requested fees." Id. at 880, 882. As such, "[a lawyer] must at least disclose the facts of the transaction, as those facts were known to the firm." Id. at 882. When false, incorrect or incomplete disclosures are made in the bankruptcy case by counsel, the Ninth Circuit has held that the "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." Franke v. J.K. Tiffany, U.S. (In re Lewis), 113 F.3d 1040, 1045 (9th Cir.1997); In re Park — Helena Corp., 63 F.3d at 880 ("failure to comply with the disclosure rules is a sanctionable violation").
In this case, based upon the circumstances, the Court concludes that DeHaan's defective disclosures about the source of his retainer were at least inaccurate, and possibly just plain untrue, and that he clearly failed to comply with the disclosure requirements of the Code and Rules. To be true to the purpose and spirit of the disclosure rules, DeHaan's conduct is sanctionable. While under the case law, the Court could require DeHaan to disgorge all of the fees paid to him as Debtor's counsel in the bankruptcy case, because only DeHaan's disclosures about the source of the initial retainer were tainted, the Court concludes it should not disturb post-confirmation payments made to DeHaan through the plan. As such, the Court denies Debtor's motion to revoke prior approval of DeHaan's fee application and thereby to, effectively, deny DeHaan any payment for his services. However, in the exercise of its discretion, because he has violated the disclosure rules, the Court concludes DeHaan should disgorge the $10,000 paid to DeHaan as a retainer, as to which proper disclosure was not made.
There was inadequate evidence offered to show that DeHaan committed a forgery. While Max's signatures on the original plan and the Lease were not his, the record does not show who signed his name to those documents. However, the Court
A separate order will be entered.
