Shon Hastings, Judge, United States Bankruptcy Court, Sitting By Designation.
Robert F. Craig, P.C., d/b/a Craig/Bednar Law, P.C. ("Craig/Bednar Law")
Sandpoint and Alger Cattle Company, LLC and Raymond and Mary D. Alger, as Trustees of the R. and M. Alger Family Trust (collectively, "Alger"), each filed an objection to the final application for fees and expenses. Doc. 640; Doc. 642. Compher and George Londos joined in Sandpoint's objection. Doc. 641. The Court consolidated trial of the final application for compensation and reimbursement of expenses with trial of Sandpoint's malpractice action against Robert Craig, Craig/Bednar Law and Anna Bednar in adversary proceeding 14-4052. Compher and Londos did not offer evidence or argue in support of their objection or joinder in Sandpoint's objection at the trial. Alger withdrew his objection on February 4, 2015. Doc. 764. The Court incorporates by reference the findings of fact and conclusions of law in its Memorandum and Order filed July 22, 2016 in adversary proceeding 14-4052. See Doc. 697.
Craig/Bednar Law filed a Disclosure of Compensation of Attorney for Debtor on February 13, 2013. Doc. 13. In the disclosure, Craig/Bednar Law certified that it accepted $25,000 for services rendered on behalf of Sandpoint in contemplation of or in connection with the bankruptcy case, checking boxes indicating that the source of compensation was both "Debtor" and "Other (specify) — Unknown at this time." Id. At the January 2016 trial, Compher testified that he paid the retainer.
Sandpoint filed an application to employ Craig/Bednar Law on February 15, 2013. Doc. 21. In its application, Craig/Bednar Law represented: "Debtor has agreed to pay the actual fees and expenses incurred by the Firm from property of the estate as allowed by the Court and, potentially, from
Also on February 15, 2013, Sandpoint filed a Motion to Approve Procedures for Interim Compensation and Reimbursement of Professional Fees. Doc. 23. It sought entry of an administrative order establishing procedures for interim compensation and reimbursement of expenses on the following basis and subject to the following restrictions:
Id. The Court granted the motion on March 26, 2013. Doc. 90.
Pursuant to the procedures for interim compensation and reimbursement of expenses, Craig/Bednar Law filed a Declaration of Robert F. Craig in Support of March Legal Fees on April 19, 2013. Doc. 101. The next day Craig/Bednar Law filed statements of fees and expenses for February 2013 in the sum of $32,186 (Doc. 102)
Alger objected to Craig/Bednar Law's attorney's fees and expenses, claiming that Sandpoint failed to serve "Debtor's Attorneys' Fees and Expenses for March 2013" on Alger's counsel in accordance with the Procedure for Interim Compensation and Reimbursement of Professional Fees approved by the Court. Doc. 100. Alger also complained that these procedures did not allow sufficient time for proper review of the fees or for comparison of the requested amount to the projections in the cash collateral plan. Doc. 95. In addition, Alger argued that the proposed legal fees and expenses Sandpoint requested for March 2013 exceeded Sandpoint's cash flow projections (Doc. 77-1) offered in support of its Second Motion for Use of Cash Collateral (Doc. 63) by 174 percent. Doc. 100. Alger explained that Sandpoint projected $25,500 in legal fees and expenses for March, but Craig/Bednar Law's fees and expenses totaled $44,335.51. Sandpoint did not amend its projections.
On April 24, 2013, the Court ordered:
Doc. 104.
On May 3, 2013, Craig/Bednar Law filed a statement of fees and expenses for April 2013 in the sum of $11,072.98 ($10,835 for legal services and $237.98 for expenses). Doc. 110. Pursuant to procedures approved by the Court, 80 percent of fees ($8,668) and 100 percent of expenses ($237.98) became payable to Craig/Bednar Law absent any objection. No one filed an objection.
On June 3, 2013, Craig/Bednar Law filed a statement of fees and expenses for May 2013 in the sum of $30,704.78 ($30,484 for legal services and $220.78 for expenses). Doc. 117. Pursuant to procedures approved by the Court, 80 percent of fees ($24,387.20) and 100 percent of expenses ($220.78) became payable to Craig/Bednar Law absent any objection. No one filed an objection.
On July 2, 2013, Craig/Bednar Law filed a statement of fees and expenses for June 2013 in the sum of $29,493.67 ($28,208 for legal services and $1,285.67 for expenses). Doc. 163. Pursuant to procedures approved by the Court, 80 percent of fees ($22,566.40) and 100 percent of expenses ($1,285.67) became payable to Craig/Bednar Law absent any objection. No one filed an objection.
On August 2, 2013, Craig/Bednar Law filed a statement of fees and expenses for July 2013 in the sum of $40,744.32 ($39,515.60 for legal services and $1,228,72 for expenses). Doc. 201. Pursuant to procedures approved by the Court, 80 percent of fees ($31,612.48) and 100 percent of expenses ($1,228.72) became payable to Craig/Bednar Law absent any objection. Alger objected to the July 2013 fees because Sandpoint's budgeted cash flow projections did not support the expenditures. Doc. 204. The Court did not rule on this objection.
Craig/Bednar Law did not seek a ruling on its July fees and expenses. It did not file a statement of fees and expenses for August 2013 or any other monthly statements of fees and expenses.
Doc. 569.
Craig/Bednar Law did not file its "periodic Motion for allowance of fees and expenses." See id. It did not file an application for interim compensation or an amended disclosure of compensation referencing the periodic payments the Sandpoint principal made to Craig/Bednar Law. It did not identify the Sandpoint principal until it filed its final application for compensation and expenses.
Craig/Bednar Law argues, without citing authority, that Sandpoint does not have standing to object to fees because third parties paid a portion of the fees and Sandpoint offered no evidence regarding who paid the fees. Case No. 14-2052 Doc. 686.
"Standing is a threshold inquiry and jurisdictional prerequisite that must be resolved before reaching the merits of a suit." City of Kan. City, Mo. v. Yarco Co., Inc., 625 F.3d 1038, 1040 (8th Cir.2010) (citation omitted) (internal quotation marks omitted). "The constitutional minimum of standing requires an `injury in fact,' `a causal connection between the injury and the conduct complained of,' and a likelihood `the injury will be redressed by a favorable decision.'" Medalie v. Bayer Corp., 510 F.3d 828, 829 (8th Cir.2007) (quoting Lujan v. Defenders of Wildlife, 504 U.S. 555, 560-61, 112 S.Ct. 2130, 119 L.Ed.2d 351 (1992)).
In this case, Sandpoint alleges it was injured by Craig/Bednar Law's malpractice and nondisclosures. Sandpoint also claims Craig/Bednar Law's fees are unreasonable and argues it should not have to pay the fees and expenses it allegedly
In addition, section 1109(b) provides:
11 U.S.C. § 1109(b). "Section 1109(b) is to be construed broadly, in order to allow parties affected by a chapter 11 case to appear and be heard." In re Alpha Nat. Res. Inc., 544 B.R. 848, 854 (Bankr. E.D.Va.2016) (citations omitted) (internal quotation marks omitted). Generally, "party in interest" under section 1109(b) means "a person who holds a pecuniary interest that could be adversely affected by the outcome of the proceeding."
Although third parties paid a portion of Craig/Bednar Law's fees, Sandpoint also paid a portion of the fees, and it will be liable for payment of any remaining balance approved by the Court. It may also be obligated to repay the third parties that paid fees to Craig/Bednar Law on its behalf. Sandpoint is an interested party because it holds a pecuniary interest that could be adversely affected by the outcome of the proceeding.
Even if Sandpoint and Compher did not have standing, the Court has an independent duty to review fee applications. In re Premier Healthcare Servs., Inc., 2015 WL 1221975, at *4 (Bankr. D.Minn. Mar. 17, 2015) (citations omitted); In re Nat. Pork Prod. II, LLP, 2013 WL 8351979, at *3 (Bankr.S.D.Iowa Mar. 12, 2013); In re Griffin, 302 B.R. 1, 4 (Bankr. W.D.Ark.2003); see also Schroeder v. Rouse (In re Redding), 247 B.R. 474, 477 (8th Cir. BAP 2000) ("Section 329 ... allows the court to examine the fees paid or payable to a debtor's attorney no matter what the source."). Consequently, analysis of Craig/Bednar Law's application for compensation and expenses is necessary and appropriate.
The court next considers whether the fees charged by Craig/Bednar Law exceeded the reasonable value of the services provided, requiring cancellation of the agreement and return of the payments made as provided in section 329(b). It will also consider whether Craig/Bednar Law's fees and expenses are reasonable and necessary under section 330.
Sandpoint argues that Craig/Bednar Law's charges, which exceed $500,000 including $12,000 for travel expenses, are unreasonable in this case. Case No. 14-4052 Doc. 687. Craig/Bednar Law moved
Sandpoint also asserts that the Court should order disgorgement because Craig and Craig/Bednar Law breached the standard of care resulting in injury to Sandpoint. Id. at 51-52 (citing Belmar v. Garza (In re Belmar), 319 B.R. 748, 759 (Bankr.D.D.C.2004); In re Henderson, 360 B.R. 477, 488 (Bankr.D.S.C.2006)). It argues that, because Craig/Bednar Law's fees were excessive and Sandpoint received no benefit from them, the fees paid to Craig/Bednar Law should be disgorged in their entirety. Id.
Craig/Bednar Law argues that, even if the Court found Craig negligent, this legal conclusion does not justify or compel disgorgement of all Craig/Bednar Law's fees. Case No. 14-4052 Doc. 686. It argues that it is not enough for Sandpoint to point to negligence, but rather that it must establish that the fees were unnecessary and excessive — by comparing the amount of compensation to the reasonable value of the services provided. Id. Craig/Bednar Law asserts Sandpoint failed to offer any evidence on the issues of excessiveness and necessity. Id. Specifically, it offered no expert testimony that Craig/Bednar Law's rates were excessive, that it overbilled or that the work performed (aside from the work related to abandonment) was deficient or excessive. Further, Craig/Bednar Law asserts it is undisputed that both Craig and Bednar provided significant legal services during the case and that a large portion of the fees incurred by Sandpoint related to motions that did not involve abandonment. Craig/Bednar Law's representation resulted in the Court reducing Alger's claims from a demand of $19 million to claims totaling $9,073,662.77.
"The bankruptcy court has the broad power and discretion to award or deny attorney fees, and, indeed, a duty to examine them for reasonableness." Tri-State Fin., LLC v. Lovald, 525 F.3d 649, 655 (8th Cir.2008) (citation omitted) (internal quotation marks omitted). Absent compliance with the Bankruptcy Code and Federal Rules of Bankruptcy Procedure, an attorney has no absolute right to an award of compensation. Id. (citation omitted) (internal quotation marks omitted).
Section 329(b):
In re Pigg, 2015 WL 7424886, at *5 (Bankr.W.D.Mo. Nov. 20, 2015).
The preferred method of determining whether attorney's fees are reasonable is the lodestar calculation, unless this calculation is inappropriate under the circumstances. Id. at 737.
To the extent not already included in the lodestar analysis and section 330 factors, the Court may also consider the guidelines applied in Johnson v. Georgia Highway Express, Inc., 488 F.2d 714, 717-19 (5th Cir.1974) and the cost of comparable services in non-bankruptcy cases. Bachman v. Pelofsky (In re Peterson), 251 B.R. 359, 364 (8th Cir. BAP 2000); In re Kula, 213 B.R. at 739.
The applicant bears the burden of proving that it is entitled to compensation under sections 329 and 330 and Federal Rule of Bankruptcy Procedure 2016(a). In re Kula, 213 B.R. at 736; Walton v. LaBarge (In re Clark), 223 F.3d 859, 863 (8th Cir.2000) (citation omitted); In re Home Loan Serv. Corp., 533 B.R. 302, 310 n. 8 (Bankr.N.D.Cal.2015) (citation omitted); In re Burnett, 450 B.R. 116, 131 (Bankr.E.D.Ark.2011) (citation omitted).
On July 22, 2016, the Court entered a Memorandum and Order finding Craig and Craig/Bednar Law breached the standard of care by: (1) failing to advise Sandpoint about the risk that its debt to Alger would be offset by the sum received at a commercially reasonable sale of its abandoned cattle rather than appraised value of the cattle and (2) failing to advise Sandpoint about the risks and benefits of abandonment alternatives. The Court awarded damages to Sandpoint totaling $1,831,827.63. Sandpoint's malpractice allegations pertain only to work related to abandonment of cattle; it did not allege that Craig or Craig/Bednar Law violated the standard of care by providing advice and representation related to other work. Neither Sandpoint's nor Craig/Bednar Law's expert witnesses opined about Craig's representation other than as it related to the abandonment issue.
Upon review of Craig/Bednar Law's billing statements, the Court concludes that, aside from the services related to abandonment, the time spent and rates charged by Craig/Bednar Law were reasonable. Its services were necessary to the administration of the case and beneficial to Sandpoint. Craig/Bednar Law performed services unrelated to abandonment within a reasonable amount of time commensurate
According to Craig/Bednar Law's application for compensation (Case No. 14-4052 Doc. 629-7), its fees and expenses related to abandonment total approximately $40,000. These fees and expenses associated with its breach of the standard of care were not beneficial to the Sandpoint bankruptcy estate and are unreasonable. Therefore, fees and costs totaling $40,000 are disapproved under section 330.
For the reasons listed above, the Court also finds that Craig/Bednar Law's fees and costs related to abandonment of the Sandpoint cattle are excessive and exceed the reasonable value of services performed in the sum of $40,000 under section 329(b).
Sandpoint asserts that it is the affirmative duty of any attorney in a bankruptcy case to fully and completely disclose all fee arrangements and payments and that Craig/Bednar Law's false statement in its initial disclosure and failure to make supplemental disclosures when it received payments from third parties should result in denial of its fee request and disgorgement. Case No. 14-4052 Doc. 687. Craig/Bednar Law asserts Sandpoint did not present any evidence to support its assertion that it failed to timely disclose payments to the Court. See Case No. 14-4052 Doc. 688 at 19.
"The provisions of the Bankruptcy Code and the Bankruptcy Rules that regulate attorney fees are designed to protect both creditors and the debtor against overreaching attorneys.... To ensure such protection, bankruptcy courts have broad and inherent authority to deny any and all compensation where an attorney fails to satisfy the requirements of the Code and Rules." Henderson v. Kisseberth (In re Kisseberth), 273 F.3d 714, 721 (6th Cir. 2001) (citations omitted).
The Bankruptcy Code generally gives a debtor in possession the same rights as a trustee. 11 U.S.C. § 1107(a). Section 327(a) therefore gives a debtor in possession, with court approval, the right to employ counsel to represent it in carrying out its duties under the Bankruptcy Code. 11 U.S.C. § 327(a). Section 327(a) requires, however, that counsel for debtor in possession be "disinterested persons"
The selected attorney has the burden of establishing he or she is qualified under section 327(a) to represent the debtor in possession through its disclosure under Rule 2014(a) and accompanying affidavits. In re Huntco Inc., 288 B.R. 229, 232 (Bankr.E.D.Mo.2002). Rule 2014(a) requires the application for employment to include any proposed arrangement for compensation and any connection the attorney has with the debtor, creditors and
Section 329 provides:
11 U.S.C. § 329. The disclosure requirements imposed by section 329 are mandatory, not permissive. In re Miller Auto. Grp., Inc., 521 B.R. 323, 331 (Bankr. W.D.Mo.2014). "`Debtor's counsel must lay bare all its dealings ... regarding compensation.... Counsel's fee revelations must be direct and comprehensive. Coy, or incomplete disclosures ... are not sufficient.'" In re Rio Valley Motors Co., LLC, 2007 WL 2492685, at *2 (Bankr. D.N.M. Aug. 29, 2007) (quoting Jensen v. U.S. Trustee (In re Smitty's Truck Stop, Inc.), 210 B.R. 844, 848 (10th Cir. BAP 1997)). "A corollary of that requirement is that an application for employment is not complete until the requisite disclosure has been made." Id.
"The purpose of the disclosure is to allow any party in interest to make an independent judgment about the effect on the estate of any given payment." In re Miller Auto. Grp., 521 B.R. at 331 (citing In re Rio Valley Motors Co., LLC, 2007 WL 2492685, at *2). When an attorney or other professional employed under the bankruptcy rules fails to file a sufficiently detailed disclosure, the court and the parties are not provided the information they need to judge whether the Bankruptcy Code's standards are met. Id. at 331 (citation omitted); In re Rio Valley Motors Co., LLC, 2007 WL 2492685, at *2 (citations omitted); see also Interwest Bus. Equip., Inc. v. United States Trustee (In re Interwest Bus. Equip., Inc.), 23 F.3d 311, 317 (10th Cir.1994) ("The applications and accompanying affidavits in this case do not contain specific facts that would have enabled the court to rule out the conflicts[.]").
In re Redding, 263 B.R. at 878 (footnotes omitted) (emphasis added).
The procedure for filing the disclosure required by section 329 is specified in Rule 2016, which states in relevant part:
Fed. R. Bankr.P.2016 (emphasis added). Accordingly, whenever an attorney's fee arrangement with a debtor changes or whenever he or she receives a retainer or other form of compensation not previously disclosed, the attorney must file a supplemental disclosure of compensation.
In this case, Craig/Bednar Law received a $25,000 retainer from a third party. Sandpoint's application to employ Craig/Bednar Law represented that Sandpoint paid Craig/Bednar Law's retainer and that Sandpoint may pay fees from the estate or from third parties. Craig/Bednar Law's disclosure of compensation listed a retainer of $25,000 from the debtor and "Other (specify) — Unknown at this time." Doc. 13. Craig/Bednar Law received the retainer days before it filed the application to employ and its disclosure of compensation. Doc. 21 at 4 (noting that Craig/Bednar Law received a wire transfer on January 31, 2013, seven days before Sandpoint filed its petition); Doc. 629 at 2 (noting that Craig/Bednar Law received a check for $25,000 from Sandpoint Trucking Company on January 31, 2013). Therefore, it knew the retainer was not from Sandpoint and knew (or should have known) who paid it before it filed its disclosure. Yet Craig/Bednar Law did not
The first time Craig/Bednar Law revealed that third parties paid some of its fees and expenses was in its motion to withdraw filed in June 2014. In this motion, Craig/Bednar Law acknowledged that it requested and accepted funds from Sandpoint's principals to pay its fees and expenses because Sandpoint's assets were encumbered by liens filed by Alger and the Farm Credit Association. Doc. 569. It did not list the total sum paid by third parties or identify the Sandpoint principals. In its motion to withdraw, Craig/Bednar Law falsely represented that Debtor paid its retainer. Doc. 569 at 2.
It was not until its final application for allowance of compensation and reimbursement of expenses that the Court learned Craig/Bednar Law received the $25,000 retainer from Sandpoint Trucking Company and accepted $109,498.14 from Sandpoint, $309,680.00 from Compher and $65,000 from Sandpoint Trucking Company for payment of legal fees and costs. Doc. 629. This information was particularly surprising because Craig/Bednar Law stopped filing monthly fee and expense statements pursuant to the approved procedures for interim compensation and reimbursement of professional fees in August 2013. Due to the limited number of monthly fee and expense statements it filed and disputes regarding Craig/Bednar Law's fees, the Court approved only $83,680.94 of the fees and expenses paid to Craig/Bednar Law by order or by default through the interim procedures.
Craig/Bednar Law carries the burden of proving it is qualified under section 327, it is entitled to compensation under section 330 and its fees are reasonable. It did not offer evidence showing when specific payments were received and who paid them. Craig/Bednar Law did not offer evidence regarding the "commitment" it received from "one of Debtor's principals to pay the Firm's fees and expenses on an ongoing basis." Doc. 569. Likewise, it did not offer evidence regarding its compensation arrangement with Sandpoint, Compher or Sandpoint Trucking Company. It did not ensure that Sandpoint filed a motion to obtain credit from third parties to pay fees and expenses yet it characterized the payments from Compher and Sandpoint Trucking as "advances" in the application for compensation. Doc. 629. Most importantly, Craig/Bednar Law did not disclose or offer any evidence showing that it remained disinterested or that no conflicts of interest arose during its representation of Sandpoint.
In re Fair, 2016 WL 3027264, at *13-*15 (Bankr.N.D.Tex. May 18, 2016) (footnotes omitted) (emphasis in original).
Compher testified that he paid Craig/Bednar Law's $25,000 retainer. He also paid more than half of Craig/Bednar Law's expenses and fees. Compher's payments to Craig/Bednar Law to represent Sandpoint raise significant concerns regarding whether Craig/Bednar Law and its attorneys were disinterested and whether they were representing a person with adverse interests to Sandpoint.
116 B.R. 208, 219 (Bankr.C.D.Cal.1990).
In re Metro. Envtl., 293 B.R. 871, 883 (Bankr.N.D.Ohio 2003); see also Sickler v. Kirby, 19 Neb.App. 286, 805 N.W.2d 675, 689 (2011).
Compher is a voting member of Sandpoint who held a significant interest in Sandpoint that grew throughout Craig/Bednar Law's representation of Sandpoint. It was apparent at trial that Compher exercised substantial influence over Widdowson and other investors. At the January 2016 trial, Craig testified that
The evidence received at the January 2016 trial shows that Compher received a $201,667 payment from Sandpoint less than 60 days before it petitioned for bankruptcy relief. The Court received no evidence regarding whether Sandpoint pursued this potential preferential payment.
At the very minimum, this evidence regarding Compher's influence on Sandpoint's decision-making suggests that Craig's and Bednar's loyalties to Sandpoint were strained and possibly compromised. "[A]ny `interest or relationship that would even faintly color the independence and impartial attitude required by the Code and Bankruptcy Rules' needs to be disclosed." In re Rio Valley Motors Co., LLC, 2007 WL 2492685, at *3 (quoting In re Cook, 223 B.R. at 789).
The Court did not receive sufficient information to thoroughly explore the conflict of interest or disinterestedness issues, which is precisely why the Bankruptcy Code and rules impose a duty to disclose: "to allow any party in interest to make an independent judgment about the effect on the estate of any given payment." Id. at *2. Craig/Bednar Law's disclosure did not allow a party in interest to make at least an initial determination about the identity of the payor or the relationship of the payor to the debtor, the estate or the professional. See id. (stating that identifying a payor as "Third Party" and "a person not a Creditor" is insufficient). Craig/Bednar Law's disclosure did not make clear whether any portion of the retainer paid by "Unknown at this time" meant a person that made a gift to Sandpoint by advancing the funds without expecting repayment or a person who became a creditor by advancing the funds with an expectation of repayment from Sandpoint as the application for compensation suggests. The disclosure, which Craig/Bednar Law neglected to amend even after it withdrew as counsel, did not reveal that it received the majority of its compensation from third parties. Craig/Bednar Law failed to comply with section 329 and Rules 2014 and 2016.
Craig/Bednar Law also failed to comply with the interim compensation and reimbursement of expenses procedures. Although the Court approved these procedures, only a portion of the fees and expenses Craig/Bednar Law collected were consistent with these procedures. The payments that were not consistent with the established procedures were in violation of section 329 and Rule 2016. See In re Jeanes, 2004 WL 1718093, at *3 (Bankr.N.D. Iowa June 17, 2004) ("Whenever an attorney's fee arrangement with a debtor changes, Rule 2016(b) requires that the attorney file a supplemental disclosure statement.") (citation omitted).
"It is well settled that disgorgement of fees is an appropriate sanction for failure to comply with the disclosure requirements of section 329 and Rule 2016. Indeed, the Courts of Appeal which have addressed this and similar disclosure issues are emphatic in affirming the grant of sanctions." In re Redding, 263 B.R. at 880 (citing In re Indep. Eng'g Co., 197 F.3d 13 (1st Cir.1999)) (upholding a lower court's denial of all fees upon failure to disclose draws on retainer despite the assertion that the retainer was not estate property).
In re Redding, 251 B.R. 547, 552-53 (Bankr.W.D.Mo.2000) (footnote omitted). Filing incomplete or inaccurate disclosures also may be grounds for sanctions, including disgorgement. In re Pigg, 2015 WL 7424886, at *2 n. 7 (citing In re Clark, 223 F.3d 859, 863 (8th Cir.2000); In re Redding, 265 B.R. 601).
Although bankruptcy courts may exercise discretion to award or deny fees for failure to disclose, they should deny them when an attorney fails to comply with the Bankruptcy Code and rules.
In re Redding, 251 B.R. at 552.
It is also well settled that a bankruptcy court may order disgorgement of a retainer paid by a third party if an attorney violates rules requiring disclosure of
Craig/Bednar Law argues that the Court may deny fees or order disgorgement only to the extent fees are excessive. Case No. 14-4052 Doc. 686 at 66. This argument is persuasive if the Court is considering the reasonableness of fees under section 329(b). Craig/Bednar Law's failure to disclose is a violation of section 329(a) as well. Its failure to file a complete and accurate disclosure justifies disgorgement regardless whether its fees were excessive. See In re Woodcraft Studios, Inc., 464 B.R. 1, 10 (Bankr.N.D.Cal. 2011) (stating that "a finding of excessiveness under section 329 is not a necessary predicate to disgorgement or denial of fees"); In re Jackson, 401 B.R. 333, 341 (Bankr.N.D.Ill.2009) (holding that a finding of excessiveness under section 329(b) is unnecessary when a debtor's improper disclosure requires disgorgement); In re Kisseberth, 273 F.3d at 720 (finding that an attorney's "failure to disclose his fees justifies the amount of disgorgement regardless of the degree to which his fees were excessive"); In re Lewis, 113 F.3d at 1046 (holding that a bankruptcy court is not required to determine whether fees are reasonable before ordering disgorgement of postpetition fees and that all postpetition fees were properly required to be disgorged upon failure to supplement initial disclosure). Under section 329(a), even a negligent or inadvertent failure to disclose as required by section 329 and Rules 2016 and 2017 may result in denial of fees or an order of disgorgement. In re Kisseberth, 273 F.3d at 721 (citing In re Park-Helena Corp., 63 F.3d at 882); In re Miller Auto. Grp., 521 B.R. at 331; In re Rio Valley Motors Co., LLC, 2007 WL 2492685, at *2.
The circumstances of this case raise difficult issues that trouble the Court. On one hand, Craig/Bednar Law ignored the disclosure requirements and complied with the interim compensation and reimbursement of professional expenses procedures only until August 2013. This conduct shows an utter disregard for these requirements.
On the other hand, except for legal serves related to abandonment of Sandpoint cattle, Craig/Bednar Law provided legal services that proved valuable to the estate. Craig/Bednar Law was successful in offering legal advice and litigation services that resulted in a reduction of Alger's claims from an alleged $19 million to $9,073,662.77. Case No. 14-4052 Doc. 610. It also successfully represented Sandpoint in cash collateral motions. The Court granted five out of six motions filed. Id. The docket and fee application show numerous motions and tasks unrelated to abandonment. Sandpoint did not argue that this work was deficient or unnecessary. The fee rate charged appears reasonable based on the customary compensation charged by comparably skilled practitioners in Nebraska. Craig/Bednar Law's services unrelated to abandonment were reasonable and beneficial to the estate.
Although there is ample support for disapproving and ordering disgorgement of all compensation paid to Craig/Bednar Law during its representation of Sandpoint, disapproval of fees and costs in excess of $540,000 and disgorgement in excess of $484,000 when the majority of these fees were beneficial to the estate is inequitable. Consequently, the Court will
Craig/Bednar Law's failure to disclose the identity of, its compensation arrangements with and its payments from third parties until its final application for compensation and reimbursement of expenses is its most egregious violation. Based on Craig/Bednar Law's misrepresentations regarding the source of the retainer that it failed to clarify or correct until its final application for compensation and expenses, Craig/Bednar Law is ordered to refund and disgorge the $25,000 retainer. Craig/Bednar Law is also ordered to disgorge all payments it received from third parties. Finally, the Court disapproves all Craig/Bednar Law's fees and costs related to abandonment of Sandpoint cattle, which total approximately $40,000.
The Court recognizes that this sanction is harsh, but finds that a lesser penalty would require the Court to overlook Craig/Bednar Law's blatant disregard of the Bankruptcy Code and the rules and implicitly authorize this conduct. Craig/Bednar Law's failure to properly disclose and amend its disclosures when necessary compel severe sanctions.
Accordingly, for the reasons stated, IT IS ORDERED that:
The Court considered all other arguments and concludes they are without merit.
Craig graduated from the University of Notre Dame in 1970 with a bachelor's degree in business and earned a law degree from Creighton University in 1973. After graduating, Craig worked for the Kennedy Holland law firm. He began working on bankruptcy cases in his first year of practice. In addition to the clients he served in private practice, Craig worked as a trustee for a number of years. Since the early 1980s, he has focused his practice on representing debtors in Chapter 11 bankruptcy cases.
In addition to Craig/Bednar Law's retainer, Compher paid trade creditors in full before Sandpoint filed its bankruptcy petition. On December 21, 2012 (less than sixty days before it petitioned for bankruptcy relief), Sandpoint issued a payment to Compher in the sum of $201,667 to "payback feed note."
At the January 2016 trial, Craig testified that his "most frequent contact" was with Compher. He recalled discussing various business plan options with Sandpoint principals, including John Widdowson and Compher. Although Widdowson was Sandpoint's sole managing member and one of only two people on its Board of Managers, Compher apparently exercised the power to reject his suggestions regarding the operation of the business. During discussions about Sandpoint's business plan options and bankruptcy exit strategy, Widdowson suggested Sandpoint "bring in" another rancher from Oklahoma or find an investor who would agree to a sale and leaseback. Compher rejected both of these ideas. Craig testified that Sandpoint representatives also spoke about a large cattle sale, but this idea was rejected as well. Craig recalled Compher complaining that Widdowson suggested reorganization ideas but did not consider costs such as moving cattle or renting land.
11 U.S.C. § 101(14).
