MEMORANDUM OF DECISION

BILL PARKER, Bankruptcy Judge.

This matter is before the Court upon hearing of the Motion to Examine Transactions with Debtor's Counsel (the "Motion") filed by Edwin N. Healey (the "Movant"), a creditor and party-in-interest in the above-referenced bankruptcy case. The Motion challenges the propriety of a retainer paid by the Debtor, Edwin Peter Healey (the "Debtor") to his state court attorneys in the days immediately prior to the filing of the Debtor's Chapter 7 petition for the purpose of funding a post-petition appeal of a pre-petition state court judgment in favor of the Movant. Upon conclusion of the hearing and the submission of post-hearing briefing by the parties, the Court took the matter under advisement. This memorandum of decision disposes of all issues pending before the Court.1

Background

Prior to the filing of his bankruptcy petition, the Debtor, Edwin Peter Healey, was a defendant in a lawsuit pending before the 3rd Judicial District Court in and for Henderson County, Texas under Case No. 2014C-0638 and Edwin N. Healey v. E. Peter Healey and Paul C. Healey (the "Lawsuit"). The Debtor was represented in the Lawsuit by Steve Stark of the law firm of Stark & Groom, L.L.P. ("S&G") in Athens. Based upon jury findings issued on June 18, 2015, after a multi-day trial, the state court entered a Final Judgment on June 30, 2015, against the Debtor for actual damages in the amount of $243,615.42, statutory damages of $1,000 under the Texas Theft Liability Act, exemplary damages in the amount of $50,000, attorney's fees in the aggregate amount of $107,084.30, contingent attorney's fees in the event of appellate review, and post-judgment interest at 5% per annum (the "State Court Judgment").2

Between the time of the jury verdict and the entry of the State Court Judgment, the Debtor was consulting with the Tyler law firm of McNally & Patrick, L.L.P. regarding the advisability of a possible bankruptcy filing. As Mr. Stark dealt with the state court in the post-verdict period prior to the entry of judgment, he was aware that his client was considering his bankruptcy options. In the weeks prior to the bankruptcy filing, Mr. Stark directly communicated with the bankruptcy lawyers several times regarding the nature of the state court suit, the specific jury findings, and the timing of the bankruptcy filing and its impact upon the Debtor's appellate remedies.3

On July 16, 2015, after the firm had performed significant preparatory work on his behalf, the Debtor formally retained McNally & Patrick to file a Chapter 7 liquidation case on his behalf.4 One day later, on July 17, 2015, the Debtor took two commission checks payable to him from Horizon Business Group, LLC totaling $27,000 and endorsed them to the benefit of S&G.5 Mr. Stark placed the $27,000 in S&G's IOLTA account for use in post-judgment activities as prerequisites to an appeal of the State Court Judgment or, in Mr. Stark's words, as a "deposit against the costs of appeal."6 No written retention agreement was executed between the Debtor and S&G regarding these post-judgment services. However, in order to separate these post-judgment services from the unpaid amounts for S&G's pre-petition services that would constitute a claim in the bankruptcy case, the parties understood that S&G would separately bill attorney services at $250/hour and paralegal services at $125/hour against the paid retainer for the post-judgment appellate services to be rendered for the benefit of the Debtor.

Less than a week after the new retainer was paid to S&G, the Debtor filed his Chapter 7 petition on July 23, 2015.7 Jason R. Searcy was appointed as the Chapter 7 Trustee in the case.

The Debtor filed his original schedules and statements with the petition and filed significant amendments to most of them one month later. Although the transfer of the $27,000 retainer to S&G on the eve of the bankruptcy filing was referenced in response to Question 10 of the Debtor's Statement of Financial Affairs, no Rule 2016(b) Statement has been filed by S&G in the bankruptcy case.8

Since the deposit of the retainer into S&G's IOLTA account, it has made four disbursements from the account, primarily for transcription costs relating to the Debtor's appeal of the State Court Judgment. Two payments totaling $7,005 were made from the retainer at or near the date of the bankruptcy filing.9 Two more payments totaling $735 were tendered for appellate costs in 2016.10 Thus, $7,740 has been expended from the account, leaving a balance of $19,260.11 The record preparation has yet to be completed and no briefing schedule has been issued pertaining to the appeal.

The Movant seeks an examination of the transactions between the Debtor and S&G and a resulting order compelling S&G to disgorge the $27,000 for its failure to disclose the tendered retainer and for the excessive nature of the compensation tendered pursuant to 11 U.S.C. §329 and Fed. R. Bankr. P. 2016(b). Though it admits that it failed to file any 2016(b) statement, S&G contends that the retainer was adequately disclosed by the Debtor in his Statement of Financial Affairs and that, in light of such disclosure, disgorgement is not required. It further asserts that the payment is protected from disgorgement, despite any lack of compliance with Rule 2016(b), because it constituted an advance payment retainer.

Discussion.

A complete disclosure of the amounts paid to an attorney for a debtor within one year before the filing of a bankruptcy petition is mandated by 11 U.S.C. §329(a)12 and Fed. R. Bankr. P. 2016(b)13 if the amounts paid are in contemplation of . . . or . . . . in connection with . . . the bankruptcy case. (emphasis added). If a compensation payment is subject to disclosure under either test, §329(b) of the Bankruptcy Code14 and Fed. R. Bankr. P. 201715 authorize the Court to act upon that disclosure by determining whether such payments were excessive and by ordering the return of all or any part of such payments. These disclosure and enforcement provisions are "part of a regulatory scheme put in place to combat overreaching by debtor's counsel, . . . enacted in response to the concern that payments to a debtor's attorney provide serious potential for evasion of creditor protection provisions of the bankruptcy laws, and serious potential for overreaching by the debtor's attorney, and should be subject to careful scrutiny." In re Wegesend, 2014 WL 3051218, at *4 (Bankr. D. Haw., July 3, 2014), citing In re 268 Ltd., 789 F.2d 674, 677 (9th Cir.1986) (internal quotations and certain citations omitted). The purpose of these interacting provisions "is to create transparency as to how much debtor's counsel is being paid and by whom — so that both reasonableness and conflicts of interest can be considered." In re Ward, 546 B.R. 667, 680 (Bankr. N.D. Tex. 2016).

These disclosures are mandatory. In re Scott, 531 B.R. 640, 645-46 (Bankr. N.D. Miss. 2015). As one court concisely described the duty to disclose:

In re Jackson, 401 B.R. 333, 339-40 (Bankr. N.D. Ill. 2009) (citations and internal quotations omitted).

Though usually applied to an attorney rendering bankruptcy services to a debtor, the applicability of these disclosure requirements is not so narrowly drawn. "These provisions apply to every attorney employed by every debtor in Ievery chapter, regardless of the purpose for which the attorney is retained, and notwithstanding the fact that an attorney will not be seeking formal employment by, nor compensation from, the bankruptcy estate." In re Fair, 2016 WL 3027264, at *13 (Bankr. N.D. Tex., May 18, 2016) (emphasis added). As one court has stated

In re Pawlak, 483 B.R. 169, 180 (Bankr. W.D. Wis. 2012). Both the Debtor and S&G challenge whether the amounts paid to S&G were in contemplation of or in connection with the Debtor's bankruptcy case such as would subject the firm to the duty of disclosure under §329 and Rule 2016(b).

As this Court previously examined in In re Mayeaux, 269 B.R. 614 (Bankr. E.D. Tex. 2001),

Id. at 622. There is no serious doubt under these facts that the delivery of the retainer to S&G was made by the Debtor in contemplation of a bankruptcy case. With the entry of an adverse state court judgment against him, the Debtor was clearly contemplating the benefits and burdens of a bankruptcy filing. Mr. Stark had several conversations with McNally & Patrick in the days leading up to the bankruptcy filing and the Debtor undoubtedly had a motivation to retain his state court counsel in order to pursue an appeal of the adverse judgment. With Mr. Stark expressing legitimate concerns about the impact of the bankruptcy case and the means by which he would be compensated for the post-petition appellate work, the Debtor sought to allay those concerns by tendering $15,000 toward pre-petition fees within the preference period16 and tendering the $27,000 retainer only six days prior to the filing of the bankruptcy petition. Having tendered the retainer to S&G at a time when his bankruptcy filing was imminent, the Debtor made that fee payment in contemplation of his bankruptcy case and it is therefore subject to examination by this Court.

The fee payment to S&G is also subject to examination under §329 because it was made by the Debtor "in connection with" his bankruptcy case. This prong is not limited to the rendition of professional services within the bankruptcy case. Again, as outlined in Mayeaux,

Mayeaux, 269 B.R. at 623.

Applying this objective standard, the evidence clearly demonstrates that the services proposed to be rendered by S&G in the post-petition period would have an impact on the bankruptcy case. The Court's claims registry reveals that the claims of the Movant and the other state court plaintiffs constitute approximately 98% of the timely-filed claims in this case.17 If the claims arising from the entry of the final judgment in the state court case could be reversed on appeal, it would have a significant impact on the administration of this bankruptcy case.

Therefore, under the evidence presented and in light of the broad interpretation which has historically been applied under §329(a), this Court concludes that the retainer paid by the Debtor to S&G in the pre-petition period was made "in contemplation of or in connection with" this bankruptcy case which imposed upon S&G a duty to disclose the payment pursuant to §329(a) and Fed. R. Bankr. P. 2016(b) and now renders the propriety of such payment subject to examination. Yet S&G contends that, even if a Rule 2016(b) statement should have been filed, the payment is protected from possible disgorgement because it constitutes an advance payment retainer.

Such a contention is clearly erroneous. Any payment falling within the scope of §329(a) must be disclosed in a timely and comprehensive fashion regardless of its characterization, Barron v. Countryman, 432 F.3d 590, 595-96 (5th Cir. 2005), and a bankruptcy court is fully authorized "to order disgorgement as a sanction to debtors' counsel for nondisclosure," Arens v. Boughton (In re Prudhomme), 43 F.3d 1000, 1003 (5th Cir. 1995), regardless of the characterization of the payment or its source. Anderson v. Anderson (In re Anderson), 936 F.2d 199, 204 (5th Cir. 1991) [noting that attorney has no absolute right to compensation absent compliance with the Bankruptcy Code and Bankruptcy Rules); In re Sandpoint Cattle Co., LLC, 2016 WL 4072898, at *8 (Bankr. D. Neb. July 28, 2016) (citing Henderson v. Kisseberth (In re Kisseberth), 273 F.3d 714, 721 (6th Cir. 2001)) [confirming that "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"]. Thus, regardless of its characterization or category,18 the retainer paid to S&G remains "subject to disclosure and reasonableness review under §329 of the Code." Barron, 432 F.3d at 595-96.

Though S&G has clearly violated the disclosure requirements imposed by §329, the Court possesses a broad discretion in designing an appropriate sanction for that violation. In re Miller Auto. Group, Inc., 521 B.R. 323, 332 (Bankr. W.D. Mo. 2014); Mayeaux, 269 B.R. at 621; and cases cited therein. The payment of the retainer was referenced in the Debtor's Statement of Financial Affairs and there is no evidence that there was any intentional effort to conceal the payment. While this mode of disclosure undoubtedly fails to comply with the requirements of the Bankruptcy Code, the evidence suggests that, as a state court attorney generally unfamiliar with bankruptcy requirements, Mr. Stark was relying upon the guidance of the Debtor's bankruptcy attorneys and that his firm's failure to comply with the disclosure requirements was inadvertent rather than a willful disregard of the requirements. Thus, the Court does not believe that a fee forfeiture is warranted solely as a sanction for nondisclosure.

However, that belief does not warrant the retention of the security retainer by S&G. "The court has the authority to disregard a fee agreement between a debtor and counsel in determining the reasonableness of counsel's fees under section 329(a)," Brown v. Luker (In re Zepecki), 277 F.3d 1041, 1046 (8th Cir. 2002), and §329 mandates the return of any portion of a covered payment to the extent that it exceeds the reasonable value of any services to be performed in exchange for that fee. "The standard applied under §329(b) to determine the reasonable value of fees is set forth in §330 [and] . . . the burden is upon the applicant to demonstrate that the fees are reasonable." Shalaby v. U.S. Trustee (In re Nakhuda), 544 B.R. 886, 902 (B.A.P. 9th Cir. 2016); 3 COLLIER ON BANKRUPTCY ¶ 329.04[1] at p.329-18 (16th ed. 2016). "[T]he remedy for excessiveness is return of any payment to the extent it exceeds the reasonable value of services rendered." Prudhomme, 43 F.3d at 1003.

Because the security retainer was paid to S&G on the eve of the bankruptcy "in contemplation of or in connection with" this bankruptcy case and because the retained funds became property of the bankruptcy estate upon the Petition Date, the retainer exceeds the reasonable value of any services to be rendered by S&G in the post-petition period because the firm has not been authorized to act on behalf of the estate and, thus, S&G is not authorized to be paid compensation from estate funds for any post-petition services. "If [an] attorney is to be paid from estate funds under §330(a)(1) in a Chapter 7 case, he must be employed by the trustee and approved by the Court." Lamie v. US. Trustee, 540 U.S. 526, 538-39 (2004). See also, In re Glimcher, 469 B.R. 835, 842 (Bankr. D. Ariz. 2012) ["Lamie leaves no room for debate that a Chapter 7 debtor's attorneys cannot be paid from the estate unless they are employed by the Trustee and such employment is approved by the Court."]. That has not occurred in this case. In the absence of proper professional retention under the employment standards of §327 and the subsequent submission of requests for compensation under either §330 or §331, S&G is not entitled to any compensation from the estate and any agreement to provide the firm with such compensation in the post-petition period in violation of the Bankruptcy Code and Rules19 must be canceled under §329(b) and the funds returned to the estate.20 Zepecki, 277 F.3d at 1046.

Based upon the foregoing, the Motion to Examine Transactions with Debtor's Counsel filed by Edwin N. Healey is granted in part and denied in part and, excluding the $2,400 payment which was utilized and had cleared prior to the filing of the bankruptcy petition,21 the remaining $24,600 of the security retainer paid to S&G must be disgorged and returned to the estate within thirty (30) days.

This memorandum of decision constitutes the Court's findings of fact and conclusions of law22 pursuant to Fed. R. Civ. P. 52, as incorporated into contested matters in bankruptcy cases by Fed. R. Bankr. P. 7052 and 9014. An appropriate order shall be entered which is consistent with this opinion.