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In Re v. Lawrence J. Warfield

UNITED STATES BANKRUPTCY APPELLATE PANEL OF THE NINTH CIRCUIT


March 5, 2012

IN RE: IMG TRANSPORT, L.L.C., DEBTOR. IMG TRANSPORT, L.L.C., APPELLANT,
v.
LAWRENCE J. WARFIELD, CHAPTER TRUSTEE, APPELLEE.

Appeal from the United States Bankruptcy Court for the District of Arizona Honorable James M. Marlar, Chief Bankruptcy Judge, Presiding Bk. No. 09-28626

MEMORANDUM*fn1

Argued and Submitted on February 24, 2012 at Phoenix, Arizona

Filed - March 5, 2012

Before: PAPPAS, DUNN and JURY, Bankruptcy Judges.

Gibson, Nakamura & Green ("GNG"), the law firm that represents chapter 7*fn2 debtor IMG Transport, L.L.C. ("Debtor"), appeals the bankruptcy court's order requiring it to disgorge $8,794.62 in fees it received to appellee Lawrence Warfield, the trustee in Debtor's bankruptcy case ("Trustee"). We AFFIRM.

I. FACTS

Debtor was a Yuma trucking company. GNG, a Tucson law firm, was retained by Debtor on November 5, 2009, to represent the company in a case under chapter 7 of the Bankruptcy Code. For its services, Debtor agreed to pay GNG a flat fee of $12,000, plus expenses. Acting through GNG partner Scott D. Gibson ("Gibson"), Debtor's petition was filed on November 6, 2009. On November 23, 2009, GNG filed a Rule 2016(b) Disclosure of Compensation of Attorney for Debtor, stating that it had received $12,000 from Debtor prior to the filing of the bankruptcy case to represent Debtor.

Trustee was appointed to serve as chapter 7 trustee. On December 4, 2009, Debtor's schedules and Statement of Financial Affairs ("SOFA") were filed. The schedules disclose that Debtor owned only four assets and that it had no secured creditors and seven unsecured creditors, only one of which was listed as disputed. Debtor's responses to the relevant questions on the SOFA were brief and unremarkable. The § 341 meeting of creditors took place in Yuma on December 16, 2009. Gibson appeared representing Debtor at the meeting.

2 The bankruptcy case was otherwise uneventful until May 31, 3 2011, when Trustee filed a Motion to Compel Turnover (the 4 "Turnover Motion"). In it, Trustee requested that the bankruptcy 5 court review the $12,000 fee paid by Debtor to GNG under 6 § 329(b). Trustee argued that, under the circumstances, the 7 $12,000 flat fee paid to GNG was "patently unreasonable," and 8 that a fee of $3,000 was reasonable for an experienced bankruptcy 9 lawyer to represent a chapter 7 corporate debtor in an 10 uncomplicated case with few assets and creditors. To support his 11 view that the amount paid to GNG was excessive, Trustee cited 12 nine corporate chapter 7 cases filed in the Yuma division of the 13 Arizona bankruptcy court in the same year as the IMG case, in 14 which the attorney's fees ranged from $1,500 to $4,000. Trustee 15 therefore sought an order requiring that $9,000 of GNG's $12,000 16 fee be disgorged and paid over to Trustee.

17 GNG filed a response to the Turnover Motion on June 16, 18 2011. In it, GNG noted that Debtor had retained GNG pursuant to 19 a nonrefundable flat fee agreement. In setting the amount of the 20 fee in this case, GNG had been particularly concerned about the 21 risks associated with representing a client that had just lost in 22 "extremely extensive litigation for a personal injury matter"; 23 that the client's principal did not speak English; that there 24 would be significant costs for GNG lawyers to travel between 25 Tucson and Yuma; and that there was the potential for other 26 proceedings that might arise in the case. GNG argued that 27 Arizona state case law supported the reasonableness of a flat fee 28 arrangement even where, after the fact, the payment to counsel 1 exceeded usual billing rates. Attached to GNG's response was a 2 copy of the retainer letter and a statement detailing the time 3 and services provided by GNG to Debtor. 4 Trustee filed a reply on June 21, 2011, contending that 5 while Debtor had the right to engage its choice of attorney, it 6 could not do so at unreasonable cost to the bankruptcy estate. 7 Trustee challenged several of the entries in the GNG fee 8 statement. For example, Trustee pointed out that GNG's statement 9 allocated 10.5 hours at Gibson's $395 partner billing rate for 10 his preparation and travel to attend the fifteen-minute § 341 11 meeting in Yuma. Trustee questioned why a local attorney could 12 not have been engaged to appear at the meeting for considerably 13 less than $4,147.50. Trustee's other criticisms of GNG's billing 14 statement included its twice billing for paralegal time to make 15 photocopies and billing 2.5 hours of Gibson's time for preparing 16 a simple, three-page bankruptcy petition.

17 The bankruptcy court held a hearing on Trustee's motion on 18 June 24, 2011. After the parties made substantially the same 19 arguments as those in the motion, response and reply, the court 20 took the issues under advisement to, in its words, review the 21 pleadings and the fee statement with a "fine tooth comb." 22 The bankruptcy court entered an order disposing of the 23 Turnover Motion on July 19, 2011 (the "Disgorgement Order"). In 24 the Disgorgement Order, the court found that: (1) Debtor's 25 schedules listed only five non-insider creditors, very little 26 tangible personal property, and no real property; (2) Debtor was 27 required to respond to few of the twenty-five questions in the 28 form Statement of Financial Affairs; (3) other than the pleadings 1 regarding the Turnover Motion, the petition, and some minor 2 matters, "little else of substance performed by the Debtor's 3 attorneys appears in the file." The bankruptcy court determined 4 that $3,000 was a reasonable fee for the work done by GNG. After 5 also allowing GNG's costs, the balance of the $12,000 retainer, 6 $8,794.62, was ordered disgorged by GNG to Trustee. 7 Debtor filed a timely appeal on July 20, 2011.

8 JURISDICTION

9 The bankruptcy court had jurisdiction under 28 U.S.C. 10 § 1334(b) and § 157(b)(2)(A). We have jurisdiction under 28 11 U.S.C. § 158. 12 ISSUE 13 Whether the bankruptcy court abused its discretion in 14 ordering GNG to disgorge $8,794.00 to Trustee.

15 STANDARD OF REVIEW

16 An order reviewing fees and directing a debtor's attorney to 17 disgorge excessive amounts paid prior to the bankruptcy filing 18 under § 329(b) is reviewed for abuse of discretion. Hale v. 19 United States Tr., 509 F.3d 1139, 1147 (9th Cir. 2007). 20 In applying an abuse of discretion test, we first "determine 21 de novo whether the [bankruptcy] court identified the correct 22 legal rule to apply to the relief requested." United States v. 23 Hinkson, 585 F.3d 1247, 1262 (9th Cir. 2009) (en banc). If the 24 bankruptcy court identified the correct legal rule, we then 25 determine whether its "application of the correct legal standard 26 [to the facts] was (1) illogical, (2)implausible, or (3) without 27 support in inferences that may be drawn from the facts in the 28 record." Id. If the bankruptcy court did not identify the 1 correct legal rule, or its application of the correct legal 2 standard to the facts was illogical, implausible, or without 3 support in inferences that may be drawn from the facts in the 4 record, then the bankruptcy court has abused its discretion. Id.

5 DISCUSSION

6 Section 329(a) requires an attorney representing a debtor to 7 disclose the amount of all compensation "paid or agreed to be 8 paid, if such payment or agreement was made after one year before 9 the date of the filing of the petition, for services rendered or 10 to be rendered in contemplation of or in connection with the case 11 ." Section 329(b), in turn, provides that "[i]f such 12 compensation exceeds the reasonable value of any such services, 13 the [bankruptcy] court may cancel any such agreement, or order 14 the return of any such payment[.]" It is undisputed in this 15 appeal that, prior to the filing of its petition, Debtor paid 16 $12,000 to GNG to represent the company in its bankruptcy case. 17 The burden is upon the applicant to demonstrate that the 18 fees requested are reasonable. Law Offices of David A. Boone v. 19 Derham-Burk (In re Eliapo), 298 B.R. 392, 402 (9th Cir. BAP 20 2003), aff'd in part, rev'd in part on other grounds, 468 F.3d 21 592 (9th Cir. 2006); see also Hensley v. Eckerhart, 461 U.S. 424, 22 437 (1983) ("Fee applicant bears the burden of establishing 23 entitlement to an award and documenting the appropriate hours 24 expended and hourly rates."). The standard applied under § 25 329(b) to determine the reasonable value of the debtor's 26 attorney's fees is the same as that set forth in § 330(a) for 27 determining the amount of reasonable compensation for a 28 bankruptcy estate's professionals. Am. Law Ctr. PC v. Stanley 1 (In re Jastrem), 253 F.3d 438, 443 (9th Cir. 2001) (citing Hale 2 v. United States Tr. (In re Basham), 208 B.R. 926 (9th Cir. BAP 3 1997), aff'd 152 F.3d 924 (9th Cir. 1998)). Under § 330(a)(3), 4 to determine a reasonable fee, the bankruptcy court should 5 consider "the nature, the extent, and the value of such services, 6 taking into account all relevant factors . . . ." Included among 7 those factors are:

8 (A) the time spent on such services; 9 (B) the rates charged for such services; 10 (C) whether the services were necessary to the 11 administration of, or beneficial at the time at 12 which the service was rendered toward the 13 completion of, a case under this title; 14 (D) whether the services were performed within a 15 reasonable amount of time commensurate with the 16 complexity, importance, and nature of the problem, 17 issue, or task addressed; 18 (E) with respect to a professional person, whether the 19 person is board certified or otherwise has 20 demonstrated skill and experience in the 21 bankruptcy field; and 22 (F) whether the compensation is reasonable based on 23 the customary compensation charged by comparably 24 skilled practitioners in cases other than cases 25 under this title. 26 § 330(a)(3) (emphasis added); In re Basham, 208 B.R. at 931. 27 This Panel has analyzed §330(a) on numerous occasions and 28 has also identified factors for the bankruptcy court to consider 1 when determining reasonableness, including: 2 (a) Were the services authorized? (b) Were the services necessary or beneficial to the 3 administration of the estate at the time they were rendered? 4 (c) Are the services adequately documented? (d) Are the fees required reasonable, taking into 5 consideration the factors set forth in section 330(a)(3)?

6 (e) In making the determination, the court must consider whether the professional exercised reasonable 7 billing judgment. 8 Roberts, Sheridan & Kotel, P.C. v. Bergen Brunswig Drug Co. 9 (In re Mednet), 251 B.R. 103, 108 (9th Cir. BAP 2000). In 10 Leichty v. Neary (In re Strand), 375 F.3d 854, 880 (9th Cir. 11 2004), the Ninth Circuit confirmed that the In re Mednet factors 12 provided the "correct standard" for an appellate court to 13 evaluate a reasonableness determination regarding attorney's fees 14 in a bankruptcy case.

15 In addition, the Ninth Circuit recently ruled that a trial 16 court may rely on its own knowledge of reasonable and proper fees 17 in determining the reasonableness of attorney's fees. 18 This court has never addressed whether it is proper for a [trial] court to rely on its own familiarity with the 19 legal market. Other circuit courts have held that judges are justified in relying on their own knowledge 20 of customary rates and their experience concerning reasonable and proper fees. See, e.g., Norman v. Hous. 21 Auth. of City of Montgomery, 836 F.2d 1292, 1303 (11th Cir. 1988) (courts are experts as to the reasonableness 22 of attorney fees and award may be based on court's own experience); In re U.S. Golf Corp., 639 F.2d 1197, 1207 23 (5th Cir. 1981) (same). We agree. 24 Ingram v. Oroudjian, 647 F.3d 925, 928 (9th Cir. 2011). 25 At the hearing on June 24, 2011, GNG argued that the 26 bankruptcy court should not order disgorgement because flat fee 27 arrangements were reasonable under Arizona law. The bankruptcy 28 court disagreed, pointing out that prebankruptcy transfers from a 1 debtor to its counsel, even if proper under state law, were 2 unquestionably subject to review by the bankruptcy court under 3 §§ 329 and 330. To further explain its views, the court referred 4 the parties to its recent decision regarding the methodology and 5 analysis employed by the court in determining the reasonableness 6 of fees. In re AVC Villa Del Lago, 2010 WL 119830 (Bankr. D. 7 Ariz. 2010). The bankruptcy court summarized the decision in 8 these words:

9 [This] is not an easy job for a judge to do. I have to sit there and take apart [counsel's] fee app piece by 10 piece. I then look at what happened in the file. I then have to make an internal judgment as to each entry 11 as to whether or not I think the debtor's lawyer, whoever it is being challenged, spent too much time or 12 not. I adjust it. That's the process.

Hr'g Tr. 10:22-28, June 24, 2011. 14 In the Disgorgement Order, the bankruptcy court noted that 15 Debtor's schedules listed only a few creditors and assets and 16 that little information was required to respond to the questions 17 in the SOFA. It also noted that "[o]ther than these pleadings, 18 the petition, a motion and order to extend time to file 19 schedules, etc., little else of substance performed by the 20 debtor's attorneys, appears in the file." Id. In addition, the 21 bankruptcy court was cognizant of Trustee's contention that it 22 was unreasonable in this case for GNG to charge Debtor over 23 $4,000 for Gibson's travel to attend a brief § 341 meeting in 24 Yuma.

GNG had the burden of showing that its fees were reasonable. 26 In re Eliapo, 298 B.R. at 402. Because GNG submitted a copy of 27 both the retainer agreement with Debtor, and a detailed list of 28 the services it rendered in this case, we may assume that the 9 1 bankruptcy court considered the nature and extent of GNG's 2 services provided to Debtor. It appears that the bankruptcy 3 court applied the correct legal rules in evaluating the 4 reasonableness of GNG's fees, as discussed in its thoughtful 5 prior decision in In re AVC Villa Del Lago. Based upon the 6 record before it, as informed by the experience of the seasoned 7 bankruptcy judge, the bankruptcy court determined that $3,000 was 8 a reasonable fee for GNG's services under the facts of this case. 9 GNG disagrees with the bankruptcy court's decision. In the 10 bankruptcy court, and again in its opening brief on appeal, GNG 11 argued that the bankruptcy court erred because, under Arizona 12 law, a nonrefundable flat fee "is a reasonable fee arrangement 13 which should not be subject to critical review by the courts[.]" 14 GNG points out that "such flat fee arrangements are part of the 15 negotiation of arrangements between client and attorney, which 16 should be allowed to stand, even if ultimately the amount of the 17 services rendered is less than the hourly rate of fees." GNG Op. 18 Br. at 9. GNG cites In re Connolly, 55 P.3d 756 (Ariz. 2002), 19 for support.

20 Of course, on its surface, GNG's assertion that the 21 bankruptcy court may not examine the reasonableness of fee 22 agreements sanctioned under state law as "reasonable" would seem 23 to conflict directly with § 329(b), which expressly authorizes a 24 bankruptcy court to review a debtor's fee arrangement with its 25 counsel, to "cancel such agreement," and to order an attorney to 26 disgorge any payments received from a debtor "[i]f such 27 compensation exceeds the reasonable value of any such services 28 ." In the face of such conflict, state law must yield.

1 Motor Vehicle Cas. Co. v. Thorpe Insulation Co. (In re Thorpe 2 Insulation Co.), ___ F.3d. ____, 2012 WL 178998 *13 (9th Cir. 3 2012) ("It is a familiar and well-established principle that the 4 Supremacy Clause . . . invalidates state laws that 'interfere 5 with, or are contrary to,' federal law.) (quoting Hillsborough 6 Cnty. v. Automated Med. Laboratories, Inc., 471 U.S. 707, 712 7 (1985).

8 However, as Trustee points out, even if state law should 9 influence the bankruptcy court's determination of the 10 reasonableness of GNG's fees in this case, In re Connolly does 11 not support GNG's position. More precisely, the Connolly court 12 ruled that:

13 We have also explained that "regardless of how [a] fee is characterized . . . each [fee agreement] must be 14 carefully examined on its own facts for reasonableness." Id. Finally, like other fee 15 arrangements, non-refundable flat fees are subject to retrospective analysis. See In the Matter of Swartz, 16 141 Ariz. 266, 273, 686 P.2d 1236, 1243 (1984) ("We hold . . . that if at the conclusion of a lawyer's 17 services it appears that a fee, which seemed reasonable when agreed upon, has become excessive, the attorney 18 may not stand upon the contract; he must reduce the fee.").

20 In re Connolly, 55 P.3d at 762. In other words, the Arizona case 21 law on flat fee agreements appears consistent with § 329(b) in 22 that such an arrangement "must be carefully examined on its own 23 facts for reasonableness" and excessive fees reduced. Id. 24 GNG abandoned this argument in its reply brief: "Appellant 25 agrees that the Court has the ability to review fees of Debtor's 26 counsel for reasonableness even under a 'flat fee' arrangement 27 such as here." GNG Reply Br. at 5. Instead, GNG repeated its 28 earlier argument that "the determination of the facts still requires some modicum of evidence and an opportunity to provide competing evidence. . . . [T]hat opportunity was never provided in this case." GNG Reply Br. at 5. GNG also argues it should have had an opportunity to present evidence on the reasonableness of its fees. Id.

GNG's suggestion that it was not given a fair opportunity to prove up the value of its fees in this case is not supported by the record. Indeed, GNG explicitly waived the bankruptcy court's offer of a continuance to allow it to supplement the pleadings: THE COURT: Are you seeking a continuance to buff up the file? GIBSON: No, Your Honor. I'm asking you to rule -- THE COURT: Okay.

GIBSON: -- based upon the record before you. Hr'g Tr. 8:21-25, June 24, 2011.*fn3 Even if GNG had not waived the bankruptcy court's offer of a continuance, as noted above, in applying § 330(a)(3) to the facts of a case, the Ninth Circuit has ruled that a court may rely on its own knowledge of reasonable and proper fees in determining the reasonableness of attorney's fees. Oroudjian, 647 F.3d at 928. In other words, a bankruptcy court does not necessarily need expert testimony to properly evaluate the reasonableness of professional fees for the services rendered by the debtor's 1 attorney in a bankruptcy case. Boleman Law Firm, P.C. v. United 2 States, 355 B.R. 548, 552 (E.D. Va. 2006) (sitting as a 3 bankruptcy appeals court, ruling that expert testimony is not 4 necessary to establish the value of an attorney's services since 5 a bankruptcy judge is presumed knowledgeable as to fees charged 6 by attorneys in general and as to the quality of legal work 7 presented to him by particular attorneys); In re Monahan Ford 8 Corp. of Flushing, 390 B.R. 493, 504 (Bankr. E.D.N.Y. 2008) 9 (expert testimony relating to a fee application excluded because 10 the court was itself an expert and the expert testimony would not 11 assist the trier of fact); In re Terex Corp., 70 B.R. 996, 1001 12 (Bankr. N.D. Ohio 1987)(expert testimony as to the reasonableness 13 of fees excluded).

14 In sum, we conclude that the bankruptcy court, in 15 determining that $12,000 was excessive and that a reasonable fee 16 for GNG's services in this case was $3,000, applied the correct 17 law, §§ 329(b) and 330(a), and that its findings were not 18 illogical, implausible, or without support in inferences that may 19 be drawn from the facts in the record. As a result, the 20 bankruptcy court did not abuse its discretion in ordering GNG to 21 disgorge to Trustee the amount it received from Debtor for fees 22 in excess of $3,000 plus costs.

CONCLUSION

24 The bankruptcy court's Disgorgement Order is AFFIRMED.


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