THOMAS J. TUCKER, Bankruptcy Judge.
This case came before the Court for a hearing on the motion filed by the United States Trustee, entitled "Motion for an Order Requiring Debtors' Attorneys to Return Payment to Debtor Pursuant to § 329" (Docket # 20, the "Motion"). For the reasons stated in this opinion, the Motion will be granted.
The material facts regarding the Motion are not in dispute.
Pre-petition, Debtors entered into a contract with attorney Daniel J. Finwall ("Finwall"), in which Finwall agreed to represent Debtors in filing for relief under Chapter 7 of the Bankruptcy Code for a "
The Fee Agreement also lists what is not covered by the minimum engagement fee, including the $306 bankruptcy filing fee, "credit counseling fees, court filing fees, other fees assessed by the court, [and] any other reimbursable fees incurred by the law firm that are not included in the [covered] services enumerated[.]"
The Fee Agreement provides that "[i]t is a condition precedent to this agreement that all fees are paid in advance before the filing of the petition unless otherwise agreed upon between this office and client."
On April 18, 2012, Debtors, through Finwall, filed a voluntary petition for relief under Chapter 7, commencing this case, along with, among other things, Schedules A-J, a Statement of Financial Affairs ("SOFA"), and a "Statement of Attorney for Debtor(s) Pursuant to F.R.Bankr.P. 2016(b)" (the "2016(b) Statement").
The 2016(b) Statement states that "[t]he compensation paid or agreed to be paid by the Debtor(s) to [Finwall]," is a "flat fee" of $900.00 "[f]or legal services rendered in contemplation of and in connection with this case, exclusive of the filing fee paid;" that $450.00 of the flat fee was received prior to the filing of the 2016(b) Statement; and that $450.00 of the flat fee is "due and payable."
On May 24, 2012, the § 341 meeting of creditors was held and concluded and Debtors paid the $306.00 bankruptcy filing fee. The next day, on May 25, 2012, Debtors paid Finwall the $450.00 balance owing on his $900.00 flat fee.
On June 7, 2012, Finwall filed a new 2016(b) Statement (the "Amended 2016(b) Statement").
After Finwall filed the Amended 2016(b) Statement, the United States Trustee ("UST") filed the Motion, seeking an order
First, relying primarily on Rittenhouse v. Eisen, 404 F.3d 395 (6th Cir.2005), the UST argues that attorney fees incurred, but not paid, before the filing of a bankruptcy petition, and not subject to any exception to discharge under 11 U.S.C. § 523, are fully dischargeable under 11 U.S.C. § 727(b).
The UST's second argument, which is related to the first, is that the $450.00 Debtors paid to Finwall post-petition "exceeded the value of services rendered" under 11 U.S.C. § 329(b) because Finwall failed to disclose to Debtors any of the following: (1) that the $450.00 Debtors owed to Finwall was a dischargeable prepetition debt; (2) that as a holder of a prepetition claim against Debtors, Finwall had a conflict of interest; and (3) that Finwall's collection of such debt would violate the automatic stay or the discharge injunction.
For these reasons, the UST argues that under 11 U.S.C. § 329(b), the Court should order Finwall to disgorge the $450.00 post-petition
Finwall counters that the Rittenhouse case is not directly on point, because it dealt only with pre-petition debt; namely debt which undisputedly arose pre-petition based on an attorney's performance of legal services exclusively in the pre-petition period. By contrast, Finwall argues, Debtors' debt to him, and thus his claim against Debtors for $450.00 of the $900.00 flat fee, arose from his post-petition performance of legal services for Debtors, and thus was a nondischargeable post-petition debt.
Finwall points to nothing in his written fee agreement with the Debtors that supports this assertion. But he argues that under Rule 1.16(d) of the Michigan Rules of Professional Conduct, attorneys must refund any fees paid but not earned. According to Finwall, this supports his position that Debtors had no obligation to pay him any fee post-petition unless he first performed the post-petition services he had agreed to perform.
Finwall alleges that he and the Debtors orally agreed that $450.00 of the $900.00 flat fee could be paid by Debtors after the filing of the bankruptcy petition. And, Finwall asserts, "the Debtors and Mr. Finwall had an orally expressed agreement that the $450.00 payment was exclusively for pre-petition services. The balance of $450.00 (which was paid the day after the 341 Meeting) only became due subsequent to Mr. Finwall's performance of post-petition services, which totaled approximately 2.91 hours, including preparation and representation at the 341 Meeting."
It follows, according to Finwall, that because Debtors' debt to him for the additional $450.00 arose post-petition, it was not dischargeable, and Finwall's collecting that debt did not violate the automatic stay.
Finwall argues that his allegedly postpetition fee did not exceed the value of the post-petition services he provided. Finwall states that in addition to preparing Debtors for and representing Debtors at
Finwall alleges that he rendered approximately 2.91 hours of services post-petition, "including preparation and representation at the 341 Meeting" and that, as a result, he "held an unsatisfied post-petition claim from the time of the 341 Meeting on May 24th, 2012 and the time the debtors submitted their payment, which was on May 25, 2012."
Finwall also alleges that he "extensively counseled" Debtors about their rights under the Bankruptcy Code, including their right to have all of their pre-petition debt, except for the types of debt enumerated in § 523(a), discharged in their Chapter 7 case, and that Debtors understood that all pre-petition debts were discharged and that there was a permanent bar to collection of that debt.
Finwall argues, in the alternative, relying on the Mansfield case, that even if the Court determines that his claim for $450.00 of the $900.00 flat fee arose prepetition, the Court should not order disgorgement of this fee because (1) the Bankruptcy Code provides inadequate guidance on how a Chapter 7 debtor's attorney is to collect his fees; (2) § 329 reasonably can be construed as permitting collection of a portion of a Chapter 7 attorney's fee post-petition; (3) the law is unsettled on when a claim arises; (4) he acted with a good faith belief that he was complying with the Bankruptcy Code and Rules in structuring his Fee Agreement and collecting fees; (5) his fees were reasonable, especially given the time expended and the result obtained; and (6) Debtors are satisfied with his services.
This Court has subject matter jurisdiction over this contested matter under 28 U.S.C. §§ 1334(b), 157(a) and 157(b)(1), and Local Rule 83.50(a) (E.D.Mich.). This is a core proceeding under 28 U.S.C. § 157(b)(2)(O).
This proceeding also is "core" because it falls within the definition of a proceeding "arising under title 11" and of a proceeding "arising in" a case under title 11, within the meaning of 28 U.S.C. § 1334(b). Matters falling within either of these categories in § 1334(b) are deemed to be core proceedings. See Allard v. Coenen (In re Trans-Industries, Inc.), 419 B.R. 21, 27 (Bankr.E.D.Mich.2009). This is a proceeding "arising under title 11" because it is "created or determined by a statutory provision of title 11," see id., including the Bankruptcy Code provisions cited in this
The Court rejects Finwall's central argument, that the $450.00 that the Debtors paid to Finwall post-petition was payment of a post-petition debt, not subject to the automatic stay and the discharge. To the contrary, this was a pre-petition, dischargeable debt.
The one and only written, signed fee agreement between Finwall and the Debtors, signed pre-petition on April 10, 2012,
394 B.R. at 791 (emphasis added).
Under the written fee agreement in this case, the entire $900.00 was actually due to be paid before the filing of Debtors' petition. The agreement states:
Finwall alleges that he and the Debtors did "otherwise agree," that $450.00 of the $900.00 fee could be paid after the filing of the bankruptcy petition. And, Finwall asserts, "the Debtors and Mr. Finwall had an orally expressed agreement that the $450.00 payment was exclusively for prepetition services. The balance of $450.00 (which was paid the day after the 341 Meeting) only became due subsequent to Mr. Finwall's performance of post-petition services, which totaled approximately 2.91 hours, including preparation and representation at the 341 Meeting."
Finwall tries to distinguish cases like the Mansfield and Waldo cases cited above. He argues that the fee agreements in Mansfield and Waldo are distinguishable from the fee agreement in this case, because the fee agreements in those cases did not condition the postpetition installment payments of the flat fee on the debtors' attorneys' actual performance of postpetition services.
But contrary to Finwall's position, the written fee agreement in this case does not condition the post-petition installment payments of the flat fee on the debtors' attorneys' actual performance of post-petition services. And the alleged oral agreements between Finwall and the Debtors, described above, are void and unenforceable, because they do not comply with the material requirements of 11 U.S.C. § 528(a)(1). See 11 U.S.C. § 526(c)(1). As Debtors' attorney, Mr. Finwall is a "debt relief agency." See 11 U.S.C. § 101(12A); Milavetz, Gallop & Milavetz v. United States, 559 U.S. 229, 235-36, 130 S.Ct. 1324, 176 L.Ed.2d 79 (2010). As such, Finwall was required by § 528(a)(1), prior to the filing of Debtors' petition, to "execute a written contract [with the Debtors] that explains conspicuously — (A) the services such agency will provide to such assisted person; and (B) the fees or charges for such services and the terms of payment." This means that no later than the petition date in this case, Finwall was required to have executed a written contract with the Debtors that contained the terms of the alleged oral agreements described above. But Finwall did not meet this requirement. Rather, the only written agreement executed between Finwall and the Debtors is the fee agreement described above, which does not, in itself, allow for payment of any part of the $900.00 flat fee after the petition date, and which does not apportion the $900.00 "non-refundable minimum engagement fee" between pre-petition services and post-petition services. By its terms, the written fee agreement required that the entire fee be paid before the filing of the petition. Thus, the alleged oral fee agreements, or oral modifications to the written fee agreement,
It follows that on the petition date in this case, Debtors' attorney Finwall was a creditor of the Debtors, holding a prepetition $450.00 claim that he was prohibited from trying to collect from the Debtors, due to the automatic stay of 11 U.S.C. § 362(a). And Finwall's claim would have been discharged by the Debtors' Chapter 7 bankruptcy discharge, under Rittenhouse, if Debtors had not paid that fee before their discharge was entered.
It is undisputed that Finwall did not advise the Debtors that the $450.00 fee balance that they owed Finwall was a debt that they were not obligated to pay, that was subject to the automatic stay, and that would be discharged in their bankruptcy case. Rather, the Debtors were made to believe, by the written fee agreement and by their attorney Finwall, that they were obligated to pay the balance of the $450.00 flat fee after their bankruptcy case was filed. Under the circumstances, it is far from certain whether the Debtors would have chosen to pay that $450.00 balance of the flat fee, had they been properly advised by their attorney. The Debtors were free, of course, to voluntarily pay that fee, just as they could voluntarily pay any dischargeable or discharged debt that they wish to pay, for example, out of a sense of moral obligation. But here, there is no way to know if the Debtors would have chosen, on a truly voluntary basis, to pay this debt to Finwall.
The Court concludes that under the circumstances the appropriate remedy is to cancel the fee agreement between the Debtors and Finwall, to the extent of the Debtors' obligation to pay $450.00 of the $900.00 fee after the filing of this bankruptcy case. As a result, Mr. Finwall must repay the $450.00 to the Debtors.
The Court rejects Finwall's argument that disgorgement of the $450.00 should not be ordered because Finwall acted in a good faith belief that he was complying with the Bankruptcy Code and applicable rules, and because the law has been unsettled in this area. The Court does not question Finwall's good faith, or the sincerity of his belief at the time that he was complying with the Bankruptcy Code and applicable rules. But at the time this bankruptcy case was filed in 2012, the published case law was such that Finwall should have known that there was at least a serious question about the legality of his fee arrangement with the Debtors in this case. This is so because of the 2005 Sixth Circuit decision in Rittenhouse, and the fact that the decisions in the Bethea, Waldo, Lawson, and Mansfield cases were published in 2003, 2009, 2010, and 2008 respectively. And 11 U.S.C. §§ 526 and 528, discussed above, have been part of the Bankruptcy Code since 2005. Finally, the Supreme Court's decision in the Milavetz case, confirming that Debtors' attorney is a "debt relief agency," and therefore subject to the requirements of 11 U.S.C. §§ 526 and 528, was decided on March 8, 2010, more than two years before the petition was filed in this case on April 18, 2012.
Finwall's argument might have more appeal if the Court was now being asked to
For the reasons stated in this Opinion, the Court will enter an Order granting the UST's Motion, and ordering the relief described above.
