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hiring appearance counsel for 341 meeting was fee-sharing
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Case Nos. 04-01469, 04-01577, 04-01748, 04-01851.
August 25, 2004
MEMORANDUM OF DECISION
INTRODUCTION
These four chapter 13 cases have an issue in common. In each, the attorney of record for the consumer debtors, Martin Martelle ("Martelle"), did not attend the debtors' § 341(a) meeting of creditors and their examination at that meeting. He, instead, sent a different attorney in his place, and paid that attorney.
While § 341(a) requires a meeting of creditors, the examination of the debtors at that meeting is mandated by § 343.
At a recent hearing in one of these cases, the Court questioned Martelle about the particulars of this practice. While no ruling was then made, the Office of the United States Trustee ("UST") soon thereafter filed motions in each of these cases seeking the Court's review and reduction of Martelle's attorneys' fees, and disallowance and disgorgement of fees to the substitute attorney.
Chapter 13 trustee, Bernie Rakozy, brought the matter to the Court's attention in his "Trustee's Findings and Recommendations" filed prior to the chapter 13 confirmation hearing in one of the cases. The § 341(a) minutes in each case reflected the substitute counsel's appearance.
Following the filing of briefs, affidavits and other materials, the UST's motions were argued and submitted on August 16, 2004. The Court finds the motions well taken, and they will be granted. This Decision constitutes the Court's factual findings and legal conclusions. Fed.R.Bankr.P. 7052, 9014.
BACKGROUND AND FACTS
The facts are in almost all regards undisputed. They are established by Martelle's affidavit, outlining his practices in these four cases and in general, and by the Court's own record in each case.
The Court takes judicial notice of its files and records. Fed.R.Evid. 201.
Martelle agreed to represent the debtors in these four chapter 13 cases. Nothing submitted establishes that there was ever any written fee agreement between Martelle and his clients, and the terms of the engagement appear to be documented solely by the statement he filed with the Court under Fed.R.Bankr.P. 2016(b).
In brief, Rule 2016(b) obligates a debtor's attorney to file and to transmit to the UST, within 15 days of the petition's filing, the statement regarding compensation paid or to be paid that is required under § 329 of the Code. The Rule requires that the statement also indicate whether any part of the compensation has been or is to be shared with any other entity, and the particulars of any such agreement, unless that agreement is "with a member or regular associate of the attorney's law firm." A supplemental statement is required within 15 days after any payment or agreement not previously disclosed.
With slight variances, each of the four Rule 2016(b) statements here discloses that Martelle would represent the debtors and charge a "flat fee" of $1,000.00 for the chapter 13. However, he also indicates in these disclosures that he would keep track of his time, at a rate of $175.00 per hour, and charge the debtors any amounts exceeding that $1,000.00 fee.
This would keep Martelle under the presumptively allowable fee amount for each case, eliminating the need to file a detailed affidavit of services in support of his requested compensation. See, e.g., In re Gebert, 99.4 I.B.C.R. 137, 138 (Bankr. D. Idaho 1999) (discussing use and operation in this District of such presumptively allowable attorneys' fees in chapter 13).
In essence, the flat fee is nothing of the kind. It is a minimum fee.
In three of the four cases, partial payments toward the $1,000.00 amount were made, and the parties contemplated that the balance of any allowable fees would be paid through the chapter 13 plan. In the fourth, only costs were advanced prepetition, and all fees were to be funded by debtors' plan.
In Peterson, the debtors paid a retainer of $606.00 plus $194.00 in costs, to be applied against the minimum fee of $1,000.00, with debtors agreeing to pay $175.00 per hour for services exceeding the retainer amount. Case No. 04-01469, Doc. No. 2. In Whittle, the debtor paid a retainer of $506.00 toward fees and $194.00 in costs, on the same basis. Case No. 04-01577, Doc. No. 2. In House, debtors paid $600.00 toward fees and $194.00 toward costs. Case No. 04-01748, Doc. No. 2. And in Craft, debtors advanced and paid only $194.00 in costs, and agreed to pay all fees through the plan calculated at $175.00 per hour, again with a $1,000.00 minimum. Case No. 04-01851, Doc. No. 2.
There is nothing in any of the Rule 2016(b) statements to indicate any attorney other than Martelle would have a role in representing the debtors; in fact, Martelle affirmatively states: "I have not agreed to share the [disclosed] compensation with any other person."
In these four cases, another attorney, Gregory Swanson ("Swanson"), appeared and represented the debtors at the § 341(a) meeting of creditors and their examination under § 343. Swanson did not file any Rule 2016(b) statement or disclosure.
Swanson also did not file any responsive pleadings, or appear at the hearing on August 16, even though he was an adverse party under the UST's motions.
Martelle explained the relationship between himself — and his professional corporation Martelle Law Offices — and Swanson. Martelle indicated that he and Swanson have "separate law practices" (with Swanson doing business as Swanson Law Offices). Swanson and Martelle are separately listed in the directory of the Idaho State Bar, in local legal services directories ( e.g., "Tucker Legal Directory") and in telephone directories. None of these resources indicate Swanson is an associate, a member or "of counsel" in, with or to Martelle or Martelle Law Offices. Swanson is not shown on Martelle's stationary or business cards, nor is Martelle on Swanson's.
The Court was advised that Martelle incorporated Martelle Law Offices as a professional corporation, and he provides his legal services to the public through that entity. See generally Idaho Code § 30-1301, et seq. Martelle is its only shareholder.
The Court was not told if Swanson had also formed a professional corporation.
Swanson conducts his practice out of an office that he rents from Martelle, in the same building where Martelle practices. Swanson "pays" for that office by performing ten hours of legal work for Martelle each month.
The only financial aspects of this relationship that were specifically discussed were the office "rent" payment through Swanson's services, Martelle's payment to Swanson for other legal work at a rate of $30.00 per hour, and the fact that each lawyer paid for and maintained his own personal malpractice insurance.
Martelle hires Swanson on an as needed basis to assist with legal research, drafting pleadings, meeting with clients, conducting discovery, making court appearances, and attending § 341(a) meetings. Martelle first engaged Swanson on this sort of basis in November, 2003. Martelle indicates Swanson's work is, in the bankruptcy context, essentially limited to research and appearing for debtors at § 341(a) meetings. It does not appear that Swanson has signed any pleadings for the debtors in these four cases, and Martelle indicated that he felt personally responsible to make all appearances in his bankruptcy debtors' cases other than at the § 341(a) meetings.
In nonbankruptcy matters, Martelle allows Swanson to sign pleadings bearing the Martelle Law Offices caption as well as correspondence on Martelle's firm letterhead, even though Swanson's name does not appear on that letterhead. Martelle indicates this process is "routine" and evidences that Swanson "is held out to parties that he deals with as being an attorney with Martelle Law Offices." See Case No. 04-01469, Doc. No. 22 at 2. Martelle's bankruptcy clients are told that "there are two attorneys at Martelle Law Offices" and that either of them may appear at the § 341 meetings. Id. at 3.
The Court was provided with several examples of pleadings and correspondence. See, e.g., Case No. 04-01469, Doc. No. 22 (Affidavit of Martin J. Martelle) (attached exhibits). Some of these pleadings show, in the captions, the names of both Martelle and Swanson immediately above the name "Martelle Law Offices" and certain of the pleadings are signed "Martelle Law Offices, by: Gregory N. Swanson."
The Court is today concerned with matters of bankruptcy law and practice. It is beyond the scope of this Decision to address other matters that may be implicated, such as Idaho Rule of Professional Conduct 7.5(d), which provides: "Lawyers may state or imply that they practice in a partnership or other organization only when that is the fact." The Commentary to this Rule states that "lawyers sharing office facilities, but who are not in fact associated with each other in a law firm, may not denominate themselves [in a way that] suggests that they are practicing law together in a firm."
Martelle pays Swanson for his work "on a contract basis" at a rate of $30.00 per hour. This is the rate that applies, for purposes of Martelle's payment to Swanson, when Swanson attends a debtor's § 341(a) meeting. However, Martelle admitted during hearing that the debtors would be charged at his $175.00 per hour rate for the time spent at the first meeting even if Swanson attended. Martelle ultimately conceded that this rate, which he admits is at the top end of the scale for Boise bankruptcy attorneys and which he argues is justified for his work on the basis of his experience and expertise in bankruptcy, commercial litigation and tax law, is not an appropriate rate for Swanson. DISCUSSION AND DISPOSITION
Martelle indicates that this means no withholding is taken from Swanson's pay. See Case No. 04-01469, Doc. No. 21 at 2. While this calls to mind distinctions between employees and independent contractors, Martelle also indicates that [c]lients are advised that Mr. Swanson is employed by Martelle Law Offices." See Case No. 04-01469, Doc. No. 22 at 3 (emphasis added).
The Court was provided with little information about Swanson, other than an indication from the chapter 13 trustees that he seemed prepared at the § 341(a) meetings in these cases and handled them competently. The Idaho State Bar website indicates he was admitted to practice in 1988. See http://www2.state.id.us/isb/mem/attorney roster.asp (last visited Aug. 19, 2004). Court records do not show that he has filed any bankruptcy petitions for debtors as counsel of record. Martelle supplied no information about Swanson or his practice other than as indicated in this Decision. And, as noted, Swanson did not appear at hearing on the UST's motions, nor did he respond to those motions.
That the described conduct would likely come under scrutiny should come as no surprise. In re Castorena, 270 B.R. 504, 529-31, 01.4 I.B.C.R. 153 (Bankr. D. Idaho 2001), stressed the importance of an attorney's attention to the duties of advising and representing debtor clients at their § 341(a) meetings and § 343 examinations, and this was reemphasized in In re Lish, 04.1 I.B.C.R. 34, 35 (Bankr. D. Idaho 2004). Moreover, Bankruptcy Judge Jim D. Pappas has discussed, in a clear and easily understood manner, many of the issues that can arise when "substitute" counsel appear for debtors' attorneys at creditors' meetings. See Hon Jim D. Pappas, Simple Solution = Big Problem, 46 THE ADVOCATE 31 (Oct. 2003) (official publication of the Idaho State Bar).
A. The UST's motions
The UST first argues that Martelle's and Swanson's conduct violates § 504 of the Code. That section provides:
(a) Except as provided in subsection (b) of this section, a person receiving compensation or reimbursement of expenses under section 503(b)(2) or 503(b)(4) of this title may not share or agree to share —
(1) any such compensation or reimbursement with another person; or
(2) any compensation or reimbursement received by another person under such sections.
(b)(1) A member, partner, or regular associate in a professional association, corporation, or partnership may share compensation or reimbursement received under section 503(b)(2) or 503(b)(4) of this title with another member, partner, or regular associate in such association, corporation, or partnership, and may share in any compensation or reimbursement received under such sections by another member, partner, or regular associate in such association, corporation, or partnership.
(2) An attorney for a creditor that files a petition under section 303 of this title may share compensation and reimbursement received under section 503(b)(4) of this title with any other attorney contributing to the services rendered or expenses incurred by such creditor's attorney. See 11 U.S.C. § 504(a), (b). The UST contends that, under the evidence, Martelle shared compensation with Swanson, a separate attorney not a member, partner or regular associate in Martelle's firm. It submits that the consequences for violation of the proscription on fee splitting should be denial of compensation and disgorgement of payment by Swanson, and a reduction in any fees allowed Martelle. See, e.g., Case No. 04-01469, Doc. No. 18 at 2; Doc. No. 23 at 4-6.
Sections 504(a) and (b) reference compensation or reimbursement received under § 503(b)(2). That section, in turn, refers to compensation and reimbursement allowed under § 330(a). Section 330(a)(4)(B) specifically provides that the Court may award reasonable compensation to chapter 13 debtors' attorneys. Section 504 thus applies to these four cases.
Second, the UST argues that Martelle's Rule 2016(b) statements are incomplete and inadequate, as they do not explain that he will be delegating a part of his duties or responsibilities to another attorney, or that he will be sharing compensation with such attorney. The UST argues that Martelle therefore has failed to disclose adequately the nature and details of his representation. For these failures, the UST argues a further reduction should be made to any compensation allowed Martelle.
The UST correctly notes that Martelle uses a form of disclosure that does not provide the detail that is contained in Procedural Form B 203. Martelle defended his failure to use the recommended form by reason of inertia ( i.e., his form had not been questioned over several years of use and he saw no need to reconsider or change it) and accuracy ( i.e., once made aware of Form B 203's additional language, Martelle concluded it was designed for those lawyers who wanted to exclude certain services from the scope of their engagement and, since he excludes no services, the additional language and explanation in B 203 was not necessary). Neither explanation was particularly persuasive. And neither accounted for the fact that use of Procedural Forms, though not strictly required, is highly encouraged. See, e.g., In re Dearborn Constr. Co., 2002 WL 31941458, at *11 n. 30, 03.1 I.B.C.R. 17, 24 n. 30 (Bankr. D. Idaho 2003) (noting use of "Official Forms" is required under Fed.R.Bankr.P. 9009, but use of Procedural Form B 203 is "encouraged"); accord LBR 4008.1, at Advisory Committee Notes (indicating use of Procedural Form B 240 is "strongly recommended").
Third, the UST argues that Swanson's failure to file any Rule 2016(b) statement at all in connection with his agreement to provide services to these four debtors supports disgorgement of any payment received and disallowance of any compensation.
B. Sharing fees and § 504 violation
The prohibition in § 504(a) seems clear enough. "[A] person receiving compensation under § 503(b)(2)," which is, here, Martelle, "may not share or agree to share . . . such compensation with another person." 11 U.S.C. § 504(a)(1).
But Martelle argues that the prohibition should not apply to the present situation. In addition to arguing that he and Swanson find shelter in the "safe harbor" of § 504(b)(1), a contention discussed infra, Martelle submits that the abuses this Code prohibition was designed to prevent are not present here.
The reason for the proscription in § 504(a) of the Code was explained in a respected treatise as follows:
Whenever fees or other compensation are shared among two or more professionals, there is incentive to adjust upward the compensation sought in order to offset any diminution to one's own share. Consequently, sharing of compensation can inflate the cost of a bankruptcy case to the debtor, and therefore to the creditors. . . . The potential for harm makes such arrangements reprehensible as a matter of public policy as well as a violation of the attorney's ethical obligations. 4 Resnick Sommer, COLLIER ON BANKRUPTCY ¶ 504.01 at 504-3 (15th ed. rev. 2004). It is thus a "potential for harm" that supports an absolute prohibition. "[T]here can be do doubt that section 504(a) is intended to be mandatory and preemptory [ sic]." Id. at ¶ 504.02[1], 504-4. So, arguments about whether harm exists or occurs in a particular case, or whether the fee splitting actually increased the cost to the debtor, are immaterial.
It has also been observed that § 504 "manifests Congress' purpose to preserve the integrity of the bankruptcy process to the end that, among others, lawyers attend to their duty as officers of the bankruptcy court, which they clearly are, rather than to treat their interest in bankruptcy matters as matters of traffic." In re Matis, 73 B.R. 228, 231 (Bankr. N.D.N.Y. 1987) (citing COLLIER).
Violation of § 504(a) is dependent only upon a finding that the prohibited conduct occurred. It does not also require a finding that such conduct actually defeated or compromised the policies underpinning the prohibition. The Court finds the argument not well taken. 1. The exception of § 504(b)(1)
Even if Martelle's argument were better founded or expressed, it is not for the Court to determine whether the approach taken in the statute is the best, or even an apt, vehicle for achieving the goals Congress has identified. Rather, the Code must be enforced according to its terms. Accord Lamie v. United States Trustee, ___ U.S. ___, 124 S.Ct. 1023, 1034 (2004) ("If Congress enacted into law something different from what it intended, then it should amend the statute to conform it to its intent. `It is beyond our province to rescue Congress from its drafting errors, and to provide for what we might think . . . is the preferred result.'") (citation omitted).
Martelle next, and primarily, argues that he and Swanson qualify under the exception in § 504(b)(1). The contention is that Swanson, generally and in the context of these four cases, is a "regular associate" employed by Martelle and Martelle Law Offices.
The evidence establishes that Swanson and Martelle are not members of the same law firm. Rather, they are attorneys with separate firms and practices, even though they often work together.
Subsection (b) of section 504 provides for limited exceptions applicable to professional partnerships and attorneys who contribute professional services in filing an involuntary petition under section 303. Although section 504(b) permits a professional firm to apply as a single entity for a single fee that may be divided among firm members, the Code specifically prohibits arrangements for the sharing of fees between two professional firms.
COLLIER ¶ 504.01[1] at 504-4 (emphasis supplied); see also ¶ 504.03[1][a] at 504-18 (the § 504(b)(1) exception for sharing of compensation with members, partners or associates is "narrowly construed" and "courts should look closely at the facts to determine whether an attorney is of counsel generally or has claimed that moniker solely to avoid the prohibition of section 504.").
In the face of these indications that the conduct here is not protected by the exception, Martelle directs the Court to Fed.R.Bankr.P. 9001(9), which defines "regular associate" as "any attorney regularly employed by, associated with, or counsel to an individual or firm." He argues that Swanson is an "attorney regularly employed by [or] associated with" Martelle Law Offices.
However, the contention advanced by Martelle founders by virtue of an incomplete reading of the statutory exception. Section 504(b)(1) provides that "[a] member [ i.e., Martelle], partner, or regular associate in a professional association, corporation or partnership [ i.e., Martelle Law Offices] may share compensation with another member, partner, or regular associate in such professional association, corporation, or partnership." 11 U.S.C. § 504(b)(1) (emphasis supplied). Notwithstanding whatever "regularity" exists in the "contract employment" of Swanson by Martelle, there is no showing that Swanson and Martelle are jointly engaged in practice in a professional association, corporation or partnership, or that Swanson is a regular associate "in such professional . . . corporation."
To the extent Martelle relies on the language of Rule 9001(9) to the exclusion of the additional qualifying language of § 504(b)(1), the reliance is misplaced as it would give impermissible effect to the Rule. See 28 U.S.C. § 2075 ("[The Bankruptcy Rules] shall not abridge, enlarge, or modify any substantive right.").
This interpretation of § 504(b)(1) is supported by the legislative history:
Section 504 prohibits the sharing of compensation, or fee splitting, among attorneys, other professionals, or trustees. The section provides only two exceptions: partners or associates in the same professional association, partnership, or corporation may share compensation inter se and attorneys for petitioning creditors that join in a petition commencing an involuntary case may share compensation.
H.R. Rep. No. 95-595, at 356 (1977), reprinted in U.S.C.C.A.N. 5963, 6311-12; S. Rep. No. 95-989, at 67 (1978), reprinted in U.S.C.C.A.N. 5787, 5853 (emphasis supplied). As the court stated in Matis.
[W]hen Congress enacted Code § 504 to permit sharing of compensation, it intended that the term "professional association" refer to a recognized legal entity, under applicable state law, the members or employees of which have some identifiable legal relationship to one another, a relationship which would prevent the abuse inherent in fee splitting between unrelated professionals which Code § 504 is intended to prevent.
73 B.R. at 232. See also COLLIER ¶ 504.03[1][b] at 504-20 n. 6 and accompanying text (discussing Matis).
This conclusion is also supported by the analysis in In re Greer, 271 B.R. 426 (Bankr. D. Mass. 2002), one of the more recent of the few reported cases addressing the issue. In that case, the court concluded that improper fee splitting occurred between two lawyers, Soforenko and Fullwood, who shared office space but were not members of the same firm. Soforenko paid Fullwood $50.00 for every § 341(a) meeting at which she represented Soforenko's clients. After the question of violation of § 504 was raised, Soforenko placed Fullwood on the Soforenko firm letterhead and, perhaps, added Fullwood to her malpractice insurance. Soforenko then sought to amend the Rule 2016(b) disclosure to assert that Fullwood was "of counsel" to the firm. The court was unpersuaded that Fullwood was a member of, or of counsel to, Soforenko's firm either before or after these curative attempts. 271 B.R. at 431-433. Fullwood was instead found to be "an independent attorney contracting to represent Soforenko's clients at 341 meetings." Id. at 432. The two lawyers were found to be "independent co-counsel." Id.
This Court found no decisions from within the Ninth Circuit of assistance. However, Bankruptcy Judge Randall J. Newsome of the Northern District of California, sitting by designation, found in In re ACandS, Inc., 297 B.R. 395 (Bankr. D. Del. 2003), that the exception of § 504(b)(1) allowed "a member, partner or regular associate of a professional association, corporation or partnership may share compensation with such persons in the same firm, and the members of that person's firm may share in that compensation." Id. at 405 (emphasis supplied). In that case, the "attempts to downplay the separate existence" of the sharing entity were rejected, and the court held that "a separate entity . . . requires a separate retention application in order to avoid `any illegal fee sharing in this case.'" Id. In ACandS, the § 327(a) approved professional had "subcontracted" certain claim processing functions to a subsidiary limited liability company, which the court found prohibited. Id. (citing In re United Cos. Fin. Corp., 241 B.R. 521, 528 (Bankr. D. Del. 1999). For that reason, and because both the approved professional and the subsidiary had agreed to share fees, and drew on the debtor's prepetition retainer, the court ordered disgorgement of $2.4 million in fees. 297 B.R. at 405.
"Office sharing" seems to be a common thread, not only appearing here but also presented in Matis. See 73 B.R. at 232-33. See also COLLIER ¶ 504.03[1][b] ("Sharing Office Space Does Not Create Partnership for Compensation Sharing Purposes."), at 504-19 (discussing Matis).
The Court finds Greer to be directly applicable to the instant situation. Martelle attempts to distinguish Greer on the basis that the court was there concerned with whether Fullwood was "of counsel" to or a member in Soforenko's firm, and not whether she was a "regular associate" employed by Soforenko. The attempt is not persuasive. Under the Code and prevailing analysis, the sharing person must be a member (or of counsel) " in such association, corporation or partnership." There is no basis to conclude that regular associates sharing compensation escape this same condition or limitation. The Court rejects the suggestion that under Rule 9001(9) or the case law, an associated attorney outside such firm can qualify if employed by the firm on a sufficiently regular or recurring basis.
Accord Matis, 73 B.R. at 232 ("Thus, it is to be assumed that when Congress enacted Code § 504 . . . it intended that the term `professional association' refer to a recognized legal entity, under applicable state law, the members or employees of which have some identifiable legal relationship to one another, a relationship which would prevent the abuse inherent in fee splitting between unrelated professionals[.]")
Martelle at oral argument conceded that a firm employing an attorney on a "contract" basis to cover a single § 341(a) meeting would not qualify for protection even under his reading of the § 504(b)(1) and Rule 9001(9). But he could not identify when the number of covered meetings or their frequency would evidence enough "regularity" of engagement for the exception to apply, other than to assert that, whatever the benchmark, he and Swanson cleared it. This illustrates the difficulty with Martelle's suggested interpretation of the exception.
The requirements of the § 504(b)(1) exception are not met in the instant cases. Therefore, the sharing of compensation by Martelle and Swanson was and is improper and prohibited. 11 U.S.C. § 504(a). The UST requests that, as a consequence of this violation, Swanson be denied any compensation and be ordered to disgorge to the chapter 13 trustees all payments he received, and that Martelle's fees be reduced in each case by $250.00. See, e.g., Case No. 04-01469, Doc. No. 23 at 4-5. The requested relief will be granted. C. Martelle's inadequate disclosure, and the reasonableness of his fees
Today's Decision addresses only the bankruptcy consequences of the violation of § 504 and the lack of compliance with Rule 2016(b). However, the Court notes that the Idaho Rules of Professional Conduct also appear to be implicated. IRPC 1.5(e) provides that a division of fees between lawyers not in the same firm will be proper only if (1) the division is in proportion to the services performed, (2) the client agrees to the arrangement, including the share each lawyer is to receive, and the agreement is confirmed in writing, and (3) the total fee is reasonable. As there was no proof here that the debtors ever had a written agreement at all, and given the Court's conclusion that the total fee charged could not be reasonable if Swanson's services were billed to the debtors at an effective $175.00 per hour rate, there appear to be issues under IRPC 1.5(e). These questions are in addition to those under IRPC 7.5 that were noted earlier.
Martelle did not disclose in the Rule 2016(b) statements he filed in these cases that he would be sharing his compensation with Swanson. In fact, Martelle therein affirmatively indicated that he had not agreed to share compensation with any person. This was not accurate.
Martelle's disclosure also made no mention of the fact that he would not be providing all the necessary services to the debtors. That someone else would provide the debtors with representation at their § 341(a) examinations is a material matter, and one directly related to the reasonableness of Martelle's requested compensation. See Lish, 04.1 I.B.C.R. at 35. The anticipated delegation of this fundamental duty of debtor's representation needed to be disclosed if known at the time of the filing of the Rule 2016(b) statement. Lack of disclosure under Rule 2016(b) has consequences independent of § 504. See, e.g., Dearborn Constr., 03.1 I.B.C.R. at 23 (citing Neben Starrett, Inc. v. Chartwell Fin. Corp. (In re Park-Helena Corp.), 63 F.3d 877, 882 (9th Cir. 1995) (other citations omitted).
Recall that Martelle justified his lack of use of Procedural Form B 203 in part on the idea that he would not exclude or contract away any of the required services in the bankruptcy case. See note 17 supra.
The Court acknowledges that Martelle indicated his debtor clients are advised that Swanson may appear at § 341(a) meetings. This is essential. See, e.g., IRPC 1.2(c); IRPC 1.4(a)(1), (a)(2), (a)(3), and (b). But disclosure to the client, however salutary, does not eliminate the need for the disclosures to the Court and parties in interest mandated by the Bankruptcy Code and Bankruptcy Rules.
Moreover, Martelle's compensation under § 330(a)(4)(B) is premised on services he actually performs in the chapter 13 case. He cannot be allowed compensation for services he does not perform, and this certainly includes charges for creditors' meetings he does not attend.
The Court was surprised to learn at hearing that Martelle would charge his clients $175.00 per hour for services related to the creditors' meeting even if Swanson were the lawyer attending. The charge cannot be justified. Even if Swanson were a member of Martelle's firm and his services could properly be billed, the amount by which this charge would be prima facie unreasonable is the difference between $175.00 per hour and whatever a reasonable hourly rate would be for services performed by someone with Swanson's experience and abilities. The evidence herein would not allow the Court to determine such an appropriate rate for Swanson's services.
In exercising its discretion regarding the allowance of reasonable compensation to Martelle under § 330(a)(4)(B) and the balance of § 330 incorporated thereby, the Court considers the totality of the facts. Here, Martelle did not attend the creditors' meetings. His use of a substitute was not properly disclosed, and his payment of the substitute violated § 504. And this was not a situation where Martelle made candid disclosures to the Court or interested parties under § 329(a) or Rule 2016(b) about what he was doing or why he thought it proper. Instead, it was the trustee's identification of the issue in filings related to a confirmation hearing that alerted the Court, led to the Court's questioning regarding the practice and, it appears, generated the UST's motions. But considered, too, is the fact that the Court has already concluded a reduction in compensation will be made for the violation of § 504.
The UST requested at hearing that an additional 10% reduction in compensation be made. Such a reduction is determined by the Court to be appropriate and proportional. Therefore, in addition to the reduction imposed for violation of § 504, supra, the Court will further reduce Martelle's allowed compensation in each case by $100.00, representing 10% of the minimum fee charged. Of course, Martelle will not be allowed to charge these debtors for the creditors' meeting, nor for any of the time he spent relative to the UST's motions. D. Swanson's lack of disclosure
See In re Combe Farms, Inc., 257 B.R. 48, 53-54, 01.1 I.B.C.R. 7 (Bankr. D. Idaho 2001) (finding it essential that the Court not simply excuse counsel when Code and Rule compliance falls short, and reducing compensation based upon such failure).
This results in a $350.00 reduction in compensation for Martelle, imposed in each of the four cases. Some of these cases are ready for confirmation. The Court will enter confirmation orders that indicate, by interlineation, counsel's fees will be set by separate order. Martelle will be required to file a fee affidavit in each case, specifying the time he spent in rendering services (excluding the creditors' meeting and time spent responding to the UST). The total will then be reduced in accord with the instant Decision. The balance remaining will be allowed under a separate order, which the UST and the chapter 13 trustee shall endorse. If there is compensation left owing to Martelle, it may be paid by the trustee under the confirmed plan. If a credit balance is due debtor(s), it shall be paid to them by Martelle. Any subsequent fees in these cases will be paid through the plans after allowance on application, notice and hearing.
Swanson faces his own problems. He participated in an improper and prohibited sharing of compensation previously received by Martelle. See 11 U.S.C. § 504(a)(2). For that reason, the Court has above denied his compensation and granted the UST's request that Swanson disgorge to the appropriate chapter 13 trustee all payments he received.
Additionally, Swanson, once he agreed to represent these bankruptcy debtors in connection with their cases, was affirmatively obligated to file his own Rule 2016(b) statement in each case. Swanson's failure to file a proper Rule 2016(b) disclosure within fifteen days of payment or agreement presents a problem independent of his and Martelle's violation of § 504.
Liability for inadequate or incomplete disclosure under Code and Rule requirements includes the loss of the right to compensation and disgorgement of fees paid, even if the failure was inadvertent. See Lish, 04.1 I.B.C.R. at 35; Dearborn Constr., 03.1 I.B.C.R. at 23. But, since Swanson has already been denied any compensation in these four cases and required to disgorge the payments of $30.00 per case he received, further sanction is not imposed. CONCLUSION
Since Swanson neglected to respond at all to the UST's motions or to appear at hearing, one might wonder if he takes the issues seriously. Still, no additional penalties are deemed necessary at this time. If the conduct is not remedied or if other violations of the Bankruptcy Code or Rules occur, the consequences may be stiffer than the $120.00 forfeited in these cases.
The UST's motions are granted as above set forth. Orders shall be prepared and submitted by the UST for the Court's entry