Gerald Gore and Francine Gore

UNITED STATES BANKRUPTCY COURT
FOR THE EASTERN DISTRICT OF PENNSYLVANIA
In re: GERALD GORE and : Chapter 7
FRANCINE GORE, : Case No. 07-21103REF
Debtors :
M E M O R A N D U M O P I N I O N
I. INTRODUCTION
Former counsel for Debtors, Eric L. Leinbach, Esquire ("Mr.
Leinbach"), filed his Motion To Reconsider Order On the U.S [sic] Trustee's Motion To
Disgorge Compensation of Attorney's Fees Entered on May 30, 2008 (the
"Reconsideration Motion").1 The United States Trustee filed an Objection to the
'Once again, I am writing about Mr. Leinbach's improprieties relating to his fees from his
clients. I have written a number of opinions and entered many orders dealing with Mr.
Leinbach's fees and fee applications, finding repeated instances of billing errors, overstated time,
and other overcharges. See, e.g.. In re Wise. 365 B.R. 516 (Bankr. E.D. Pa. 2007); In re
Waltenbere. 2007 WL 1740274, No. 05-25084 (Bankr. E.D. Pa. Jun. 15, 2007); In re Bechtold.
2007 WL 1451512, No. 06-20586 (Bankr. E.D. Pa. May 15, 2007); In re Heffner. 2007 WL
1074879, No. 05-26495 (Bankr. E.D. Pa. Apr. 9, 2007); In re Dick. No. 05-23971, Order (Bankr.
E.D. Pa. May 14, 2007); and In re Gray. No. 03-25573, Order (Bankr. E.D. Pa. Mar. 27, 2007). I
have also ordered the disgorgement and return of a retainer paid to Mr. Leinbach by his former
clients in In re Papp. No. 06-20973, Order (Bankr. E.D. Pa. Oct. 26, 2006), and the disgorgement
and return of a fee paid to Mr. Leinbach by his former clients in InreRamelah. No. 02-6185,
Memorandum Opinion (Bankr. E.D. Pa. Oct. 14, 2008), for his failure to disclose all of the fees
that he had received from them.
1
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Reconsideration Motion and I conducted a hearing on it on July 3, 2008. At the hearing, I
took the matter under advisement and directed that Mr. Leinbach and the United States
Trustee file briefs, which they did. The matter is now ready for disposition.
The issue before me is whether I should reconsider the Order I entered on
May 30, 2008, in which I had granted the United States Trustee's Motion for
Disgorgement and Return of Fees Paid by Debtors to Eric L. Leinbach, Esq. (the
"Disgorgement Motion") and had directed that Mr. Leinbach disgorge $3750 in fees to
Debtors. The basis of my May 30, 2008 Order was Mr. Leinbach's failure to disclose the
full amounts of the fees he had received from Debtors within the year prior to this
bankruptcy. For the reasons that follow, I find no error in my grant of the United States
Trustee's Disgorgement Motion. Although I will alter the sanctions granted through the
May 30, 2008 Order,21 will otherwise deny the Reconsideration Motion through the
accompanying Order. This Memorandum Opinion constitutes my findings of fact and
conclusions of law.
II. BACKGROUND
A. The First Case
2As I will discuss later in this Memorandum Opinion and in the accompanying Order, I
will impose upon Mr. Leinbach the additional sanction of paying interest on the disgorged fees,
dating back to the date the fees were paid to him.
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In 2007, Mr. Leinbach filed two Chapter 7 petitions on behalf of Debtors.
He filed the first Chapter 7 petition, a bare bones petition lacking substantially all of the
required supporting documents, on April 4, 2007 (Case No. 07-20574REF) (the "First
Case"). Mr. Leinbach filed a motion to extend the time to file the missing documents on
April 17, 2007. He had not informed Debtors (1) that he had not filed all of the necessary
documents as part of the initial filing of their petition and (2) that he had filed the motion
for an extension of time. Notes of Testimony of May 22, 2008 hearing (N.T.) at p. 13,
lines 22 - 25; p. 37, line 15 to p. 38, line 1; p. 51, line 24 to p. 53, line 4. In fact, Mr.
Leinbach had led Debtors to believe that he had filed all of the required documents with
the initial Chapter 7 petition. N.T. at p. 37, line 15 top. 38, line 51; p. 51, line 24 to p.
53, line 4, Of course, therefore, Mr. Leinbach had not obtained Debtors' consent to seek
the extension of time. N.T. at p. 13, lines 22 - 25. On April 24, 2007,1 granted Mr.
Leinbach's request for an extension of time, but he nonetheless failed to file the necessary
documents when required. I therefore dismissed the First Case on May 9, 2007, slightly
over a month after it was filed. Debtors were therefore surprised when they learned that
their case had been dismissed and they would be forced to file a new case to protect their
home and exemptible assets.
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B. The Second Case
Debtors commenced their second case (this above-captioned case) on June
29, 2007, by filing a second Chapter 7 petition. Mr. Leinbach signed the petition and
again entered his appearance as counsel for Debtors. Concurrent with the filing of the
second Chapter 7 petition, Mr. Leinbach filed his Disclosure of Compensation of
Attorney for Debtor (the "Disclosure Statement"), pursuant to Fed. R. Bankr. P. 2016(b)
("Rule 2016(b)"). He signed the Disclosure Statement,3 which certifies in its first
paragraph:
... I certify that . . . compensation paid to me within the one
year before the filing of the petition in bankruptcy . . . for
services rendered or to be rendered on behalf of the debtor(s) in
contemplation of or in connection with the bankruptcy case is as
follows:
For legal services, I have agreed to accept $1,500
Prior to the filing of this statement I have received $1,500
Balance due $0
The Disclosure Statement, certified by Mr. Leinbach, failed to disclose all of the fees that
Debtors had paid to Mr. Leinbach in the year preceding the filing of this second case.4
Mr. Leinbach also prepared and filed the Debtors' Schedules of Assets and
3Mr. Leinbach did not file a disclosure statement pursuant to Rule 2016(b) in the First
Case.
4The fees that Debtors paid to Mr. Leinbach are described at page 9 of this Memorandum
Opinion, below.
4
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Liabilities and their Statement of Financial Affairs, which includes the statement:
9. Payments related to debt counseling or bankruptcy.
List all payments made . . . by or on behalf of the debtor to
any person, including attorneys, for consultation concerning
debt consolidation, relief under the bankruptcy law or preparation
of a petition in bankruptcy within one year immediately preceding
the commencement of this case. (Emphasis in original.)
Name and Address of Payee Date of Payment Amount of Money
Eric L. Leinbach 5/2007 Amount includes
1603 Butler Street filing fee, credit
Easton, PA 18042 report, online credit
counseling, and full
attorney fees.
$1,500.00
Debtors' Statement of Financial Affairs, which was prepared by Mr. Leinbach, also failed
to disclose all of the fees that they had paid to Mr. Leinbach in the year preceding the
filing of this case. Debtors signed the Statement without having sufficient opportunity to
review its contents. N.T. at p.26, line 21 to p. 27, line 4.
On July 12, 2007, less than two weeks after filing this case for Debtors, Mr.
Leinbach withdrew as Debtors' counsel5 and provided no further services to Debtors.
Debtors thereafter retained new counsel, who realized that he was obliged to file
Amended Schedules and an Amended Statement of Financial Affairs to correct numerous
5See Consent Order dated July 12, 2007 in In re Leinbach. Misc. No. 07-4002 (Bankr.
E.D, Pa. July 12, 2007). Through this Consent Order, Mr. Leinbach consensually subjected
himself to being enjoined from further representation of all of his clients, including Debtors, in
all bankruptcy cases pending in the Eastern District of Pennsylvania.
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errors and omissions in the documents prepared and filed by Mr. Leinbach. Debtors
stated in paragraph 9 of their Amended Statement of Financial Affairs that they had paid
Mr. Leinbach $3750 in the year prior to the commencement of this case. They also
disclosed that they had paid their new counsel, Allan Goodman, Esquire, $1000 to
represent them in connection with the remainder of this case. I granted Debtors their
discharge in this case on November 6, 2007, and the case was closed that same day.
C. Reopening This Case
After I granted the discharge and this case was closed, the United States
Trustee became aware of the discrepancy between the amount of compensation that Mr.
Leinbach disclosed having received from Debtors on the Rule 2106(b) disclosure
statement he filed in this case ($1500) and the amount that Debtors disclosed that they
had paid to Mr. Leinbach on their Amended Statement of Financial Affairs ($3750). On
April 22, 2008, the United States Trustee filed both a motion to reopen this case and the
Disgorgement Motion. At the May 22, 2008 hearing on the motion to reopen, Mr.
Leinbach consented to reopening the case and I granted the request. Mr, Leinbach also
consented to proceed with the hearing on the Disgorgement Motion, which had also been
scheduled on that date. On May 30, 2008,1 entered an Order granting the United States
Trustee's Disgorgement Motion and directing Mr. Leinbach to disgorge and pay to
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Debtors all fees paid to him by Debtors for fees both in the First Case and in this case
(which totaled $3750). Mr. Leinbach thereafter filed his Reconsideration Motion.
III. DISCUSSION
A. Duty of Counsel To Disclose Compensation
The Bankruptcy Code and Rules impose upon an attorney representing a
debtor in a bankruptcy case an affirmative duty to disclose fully and completely all fee
arrangements and payments. See Section 329(a) of the Bankruptcy Code, 11 U.S.C.
§329(a) ("Section 329(a)"); Rule 2016(b); Henderson v. Kisseberth (In re KisseberthX
273 F.3d 714, 720 (6th Cir. 2001); Law Offices of Nicholas A. Franke v. Tiffany (In re
Lewis). 113 F.3d 1040, 1044 (9th Cir. 1997); In re Investment Bankers. Inc.. 4 F.3d 1556,
1565 (10th Cir. 1993). cert, denied 510 U.S. 114(1994). Section 329(a) provides, in
relevant part:
Any attorney representing a debtor in a case under this title, or
in connection with such a case, whether or not such attorney
applies for compensation under this title, shall file with the
court a statement of the compensation paid or agreed to be
paid, if such payment or agreement was made after one year
before the date of the filing of the petition, for services
rendered or to be rendered in contemplation of or in
connection with the case by such attorney, and the source of
such compensation.
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Rule 2016(b) implements this requirement and mandates that counsel for debtor file the
statement required under Section 329(a) within fifteen days after the order for relief is
entered. Rule 2016(b) further requires that counsel for debtor file a supplemental
statement within fifteen days after any additional payment or agreement to pay additional
fees not previously disclosed, These requirements are mandatory, not permissive,
Investment Bankers. 4 F.3d at 1565 quoting In re Bennett. 133 B.R. 374, 378 (Bankr.
N.D. Tex. 1991), and demand direct and comprehensive disclosure.
Coy or incomplete disclosures which leave the court to ferret out
pertinent information from other sources are not sufficient. (Citations
omitted.) Anything less than the full measure of disclosure leaves
counsel at risk that all compensation may be denied. (Citations omitted.)
In re Saturlev. 131 B.R. 509, 517 (Bankr. D. Me. 1991). See also In re McTveire. 357
B.R. 898, 904 (Bankr. M.D. Ga. 2006). An attorney who fails to comply with the
requirements of Section 329(a) or Rule 2016(b) is subject to "forfeiture of 'any right to
receive compensation for services rendered on behalf of the debtor,' and the
disgorgement of any funds already paid by the debtor." McTveire, 357 B.R. at 904
quoting In re Woodward. 229 B.R. 468, 473 (Bankr. N.D. Okla. 1999). See also
Kisseberth. 273 F.3d at 721: Lewis. 113 F.3d at 1045; Investment Bankers. 4 F.3d at
1565; and In re Fricker. 131 B.R. 932, 938-39 (Bankr. E.D. Pa. 1991).
I have broad and inherent authority to direct that fees paid to an attorney
representing a debtor be disgorged if the attorney failed to fully and completely disclose
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to me that a fee had been paid. See Kisseberth. 273 F.3d at 721: Lewis. 113 F.3d at 1045
("An attorney's failure to obey the disclosure and reporting requirements of the
Bankruptcy Code and Rules gives the bankruptcy court the discretion to order
disgorgement of attorney's fees"); and Investment Bankers. 4 F.3d at 1565.
During the May 22, 2008 hearing on the Disgorgement Motion, Mr. Gore
identified and provided receipts for three payments to Mr. Leinbach, establishing that
Debtors had paid Mr. Leinbach $3750 in fees within the one year preceding the filing of
this case. Debtors paid Mr. Leinbach $1500 on July 17, 2006. N.T. at p. 10, line 7 to p.
11, line 6; and Exhibit T-2. Debtors paid a second payment of $1500 to Mr. Leinbach on
May 11, 2007. N.T. at p. 16, lines 1-14; and Exhibit T-4. Debtors paid the third
payment, in the amount of $750, on June 29, 2007 (less than two weeks before Mr.
Leinbach voluntarily abandoned6 his clients in this case). N.T. at p. 16, line 15 to p. 17,
line 10; and Exhibit T-5. This is wholly consistent with Debtors' declaration in paragraph
9 of their Amended Statement of Financial Affairs that they had paid Mr. Leinbach $3750
6Mr. Leinbach has previously questioned my references to the July 12, 2007 consensual
injunction as a "voluntary" withdrawal of his representation of his clients. See e,g,. In re
Wismer. Docket No. 06-21329, and In re Premus. Docket No. 06-21932. He posits a distinction
without a difference. Mr. Leinbach voluntarily consented to his exit from this case (and all of his
other cases), which perforce left his clients to either (1) proceed on a pro se basis or (2) obtain
replacement counsel. The former is very difficult for lay persons, given the intricacies of
bankruptcy practice; and the latter will necessarily result in potentially duplicative, substantial
fees for replacement counsel to get up to speed with the background, history, and status of a case.
In this case, Debtors retained the services of replacement counsel and incurred the additional fee.
I leave it to the United States Trustee to decide whether a full review of all of Mr.
Leinbach's cases in July 2007 is warranted to determine if he had been paid unearned fees in the
days, weeks, and months before abandoning all of his clients on July 12, 2007. Perhaps in other
such cases, Mr. Leinbach voluntarily refunded his unearned fees. Perhaps not.
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for "consultation concerning debt consolidation, relief under the bankruptcy law or
preparation of a petition in bankruptcy within one year immediately preceding the
commencement of this case."
The Disclosure Statement that Mr. Leinbach filed, however, disclosed only
that he had received $1500 from Debtors.7 On June 2, 20085 after the May 22, 2008
hearing was held on the Disgorgement Motion, and in an apparent (and very late) attempt
to correct his failure to disclose all of his fees, Mr. Leinbach filed an amended disclosure
of compensation pursuant to Rule 2016(b). Even in his amended disclosure, however,
Mr. Leinbach certified that he had received only $1851 from Debtors within one year
before the filing of this case. His amended disclosure is belied by the clear testimony of
Debtors, recounted above, that they had paid him $3750 within the year before filing this
case for his bankruptcy services.
Notwithstanding Mr. Leinbach's assertions to the contrary, Debtors credibly
testified that they had paid Mr. Leinbach a total of $3750 within one year prior to the date
they filed this case and that they had retained Mr. Leinbach's services to represent them in
their bankruptcy case. See N.T. at p. 10, line 7 to p. 17, line 13; p. 29, lines 18 - 23; p.
48, line 14 to p. 49, line 12; and p. 50, line 25 to p. 51, line 9. Mr. Leinbach argues that
he was also retained by Debtors to assist them in the sale of their former business. The
7I point out again that Mr. Leinbach filed no disclosure of his compensation in the First
Case.
10
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evidence, however, does not support him.8 Although Debtors may have liked to have sold
their former business, they testified credibly that they did not hire Mr. Leinbach to
represent them in the negotiation or consummation of a sale.9 In fact, Debtors tried to
8Mr. Leinbach refers to certain testimony to support this argument, see Memorandum
filed by Mr. Leinbach on September 23, 2008 at p. 1, wherein he cites the testimony of Mr. Gore
during the May 22, 2008 hearing, at N.T. at p. 37, lines 3-25. Mr. Gore's testimony, contrary to
Mr. Leinbach's assertions, actually refutes his position. The following excerpt of Mr. Gore's
testimony, in answering questions posed by Mr. Leinbach, stands in clear opposition to Mr.
Leinbach's position:
Question: You're saying you objected to me - -
Answer: Yes.
Question: - - trying to negotiate the sale?
Answer: Absolutely and you insisted and assured me that you
could do this deal and that you wanted one week's period of time
and that was ultimately - - you - - basically, you browbeat me in
your office to the point that I finally conceded because you - - if
you - - you know, you're the attorney, I trusted you and you said
that you would conclude the sale and as a matter of fact, you even
wanted to be paid if the sale went forward.
Question: How much, Mr. Gore?
Answer: I don't remember the exact amount you wanted.
Question: Twenty-one hundred dollars, Mr. Gore?
Answer: You said something of that nature, yep, that if the sale
was concluded - - if you were able to successfully do it, that you
would - - that we would pay you and I said if we were able to get
out of bankruptcy at that point in time, which I said it won't
happen and these people will not go forward with this, my point
with you, sir, was your assurance that we would go immediately
and you would conclude the bankruptcy with the documentation
and stuff that we had been assured had been filed and when it came
through and we'd given you the week and we came back to your
office and we wanted to go forward with the bankruptcy and you
would not.
N.T. at p. 37, line 3 to p. 38, linel.
'Contrary again to Mr. Leinbach's argument, Debtors' testimony proves that Mr.
Leinbach would have been entitled to a fee for his services in connection with the attempted sale
of Debtors' former business only if the sale were concluded. But no sale was concluded and Mr.
11
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discourage Mr. Leinbach from intervening into their affairs and attempting to sell their
former business because they knew, from their past, unsuccessful dealings with the
potential purchasers, that a sale would never close. Debtors consented to wait an
additional week to file their second Chapter 7 petition, however, only because Mr.
Leinbach "browbeat" them into doing so. N.T. at p. 14, line 4 to p. 15, line 25; p. 35,
line 25 to p. 38, line 3; p. 42, line 22 to p. 43, line 4; p. 51, line 10 to p. 53, line 4; and p.
58, lines 9- 19.
Based on this evidence, I conclude and find that Mr. Leinbach never
disclosed that he had received $3750 from Debtors within one year of the date that this
case was filed for bankruptcy services rendered or to be rendered. As a result of his non-
disclosure, Mr. Leinbach violated Section 329(a) and Rule 2016(b) and disgorgement of
all fees paid to Mr. Leinbach by Debtors is appropriate. See Kisseberth. 273 F.3d at 720;
Lewis. 113 F.3d at 1044; Investments Bankers. 4 F.3d at 1565; McTyeire. 357 B.R. at
904; Saturley. 131 B.R. at 516-17; and Woodward. 229 B.R. at 474-76.
Leinbach was therefore entitled to no fee for the attempted sale. I conclude and find that the
Debtors' testimony supports the United States Trustee's position that Mr. Leinbach was paid by
Debtors only to represent them in connection with their bankruptcy filings, that Debtors did not
want Mr. Leinbach to represent them in connection with the sale of their former business, that
Debtors only consented to wait a week to file their second bankruptcy after Mr. Leinbach
"browbeat" them into doing so, and that only if a sale were successful would Mr. Leinbach have
received a fee for his efforts toward a sale.
See N.T. at p. 14, line 14 to p. 15, line 25; and p. 37, line 3 to p. 38, line 1.
12
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B. Reasonableness of Compensation
My decision to require that Mr. Leinbach disgorge his entire $3750 fee to
Debtors is also supported by the overall unreasonableness of the fee in light of what Mr.
Leinbach actually did for Debtors. See Section 329(b); and In re Williams, 384 B.R. 191,
194 (Bankr. N.D, Ohio 2007). Disgorgement is required if the compensation received by
an attorney representing a debtor exceeds the reasonable value of the services rendered.
Id.
Debtors paid Mr. Leinbach $1500 on July 17, 2006 to represent them in
connection with the First Case. Mr. Leinbach filed only a bare bones Chapter 7 petition.
He also prepared and filed, without Debtors' knowledge or consent, a motion requesting
more time within which to file all of the other required documents. N.T. at p. 13, lines 22
- 25. I granted his request for more time, but Mr. Leinbach failed to file the necessary
documents within that extended time. According to Debtors' testimony, which I accept as
entirely credible, Debtors had provided Mr. Leinbach with all of the documents and
information that he requested prior to the commencement of the First Case. N.T. at p. 12,
lines 16 - 24; p. 14, lines 4 - 9; p.54, line 15 to p.55, line 10. Debtors believed that Mr.
Leinbach had prepared and filed all of the required documents in their First Case. A little
over a month after Debtors' First Case was filed, however, I dismissed it because Mr.
Leinbach had failed to file all necessary documents when they were required.
13
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Debtors paid Mr. Leinbach an additional $2250'° in connection with this,
their second, Chapter 7 case, and Mr. Leinbach prepared and filed their petition and most
of the required documents. Debtors, however, did not have an opportunity to review the
Schedules and Statement of Financial Affairs before they were filed by Mr. Leinbach.
N.T. at p. 26, line 21 to p. 27, line 4. Debtors also testified that they were not given
copies of the filed documents. N.T. at p. 19, lines 10 - 13. The Schedules and Statement
of Financial Affairs prepared by Mr. Leinbach were not accurate. N.T. at p. 18, line 17 to
p. 19, line 9; p. 21, line 4 to p. 22, line 16; and p. 26, line 24 to p. 28, line 5. Less than
two weeks after he filed Debtors' second Chapter 7 petition, Mr. Leinbach withdrew as
their counsel and provided no further services to Debtors. See footnote 5 and
accompanying text, supra. Debtors were then required to pay $1000 to retain new
counsel, who was obliged to file numerous documents to correct the errors in and
omissions from the documents prepared and filed by Mr. Leinbach. See the text at pp. 5
& 6, supra.
Mr. Leinbach represented Debtors in the First Case, which was dismissed
after only a few weeks because the necessary documents had not been filed. Mr.
Leinbach represented Debtors in the second case and then abandoned them less than two
weeks later. The compensation received by Mr. Leinbach clearly exceeded the reasonable
value of the services he provided.
10Debtors paid Mr. Leinbach $1500 on May 11, 2007, and $750 on June 29, 2007.
14
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Based on this record, I find that the value of the services rendered to
Debtors by Mr. Leinbach was minimal, at best, I question whether these services had any
value whatsoever for Debtors. Had Mr. Leinbach adequately and accurately performed
the services for which he was retained by Debtors in their First Case, Debtors would not
have incurred the additional expenses of the second bankruptcy. Debtors would not have
had to file the second Chapter 7, they would not have had to retain new counsel, and they
would not have had to file amended documents to correct the errors in and omissions
from the documents prepared and filed by Mr. Leinbach. Under these circumstances,
disgorgement of the entire $3750 fee paid by Debtors to Mr. Leinbach is appropriate
under Section 329(b).n Williams. 384 B.R. at 194.
C. Failure To Reopen the First Case
Mr. Leinbach argues further in his brief that disgorgement of any fees paid
to him by Debtors in the First Case would be inappropriate because Debtors' First Case
was never reopened. It was not necessary, however, for me to reopen Debtors' First Case
for me to order Mr. Leinbach to disgorge the entire $3750 in fees that he had received
from Debtors. The court in In re Henderson. 360 B.R. 477 (Bankr. D.S.C. 2006),
"I am aware that Mr. Leinbach used a portion of the funds that he received to pay filing
fees and certain other expenses. This does not change my decision that the full $3750 amount
paid to him should be disgorged.
15
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analyzed and properly rejected a similar argument, stating:
The fact that [a case is] closed does not divest [the bankruptcy
court] of jurisdiction as jurisdiction is not dependent on the
technicality of a case being "open." (Citations omitted.)
Nothing in 28 U.S.C. §1334 suggests that jurisdiction is
extinguished upon the administrative closing of the case. To
hold otherwise would allow . . . attorneys to escape review
of their performance based upon their very failure to provide
adequate services to debtors which results in the dismissal of
the case.
360 B.R. at 484.
I agree with and adopt the reasoning of the Henderson court and I reject Mr.
Leinbach's argument. See also In re Quaker Distributors. Inc.. 189 B.R. 63, 68 (Bankr.
E.D. Pa. 1995)("The oversight of the bankruptcy court should and hence must not end
upon the mere dismissal of a case, lest overreaching counsel could frustrate the requisite
court review by the simple medium of encouraging the debtor to seek dismissal. (Citation
omitted.) In any event, there is no reason to conclude that dismissal of a case could or
should eliminate bankruptcy court review of a debtor's transactions with its
professionals."), aff din part. 207 B.R. 82 (E.D. Pa. 1997); and Fricker. 131 B.R. at 938.
I therefore conclude that reopening Debtors' first Chapter 7 bankruptcy case was not
necessary to enable me to direct that Mr. Leinbach disgorge the entire $3750 fee he
received from Debtors in the year prior to the filing date of this case.
Furthermore, his argument must fall because it was in Debtors' second
bankruptcy case that Mr. Leinbach failed to disclose his receipt of the full $3750 received
16
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in the preceding year. The offense occurred and was tried as his failure to disclose in this
second case. The opening or reopening of the First Case would have had little to do with
my consideration of Mr. Leinbach's failure to disclose in this case.
D. Recipient of the Sanction
Mr. Leinbach next argues that disgorgement of the $3750 fee should have
been awarded to the bankruptcy estate and Debtors' creditors rather than to Debtors.12
Mr. Leinbach's argument assumes, however, that Debtors' case was administered as an
asset case, which assumption is incorrect. The Chapter 7 Trustee had determined that she
had no assets to administer in this case and has shown no interest in participating in
matters relating to the Disgorgement Motion. Even assuming that the $3750 might
become available to the Chapter 7 Trustee to administer, the potential distribution to
creditors from the disgorged funds, after deducting the costs of administration, would be
12Mr. Leinbach's suggestion that Debtors should have exempted the $3750 in disgorged
fees in their Schedules is entirely inaccurate and without merit. Because debtors had no interest
in, or right to, the disgorged funds at the time they filed their Chapter 7 petitions, they had
nothing to exempt. In addition, I agree with the position of the United States Trustee: "Debtors
could not have known at the time their cases were filed [that] their lawyer was going to be
sanctioned for his failure to fulfill his statutory obligations, resulting in the forfeiture of his right
to retain the fees they paid to him," Memorandum filed by the United States Trustee on October
10, 2008 at p. 10, note 3.
Finally, the absurdity of this argument looms huge. The suggestion that Mr. Leinbach,
who prepared Debtors' exemption schedule, should have or would have identified the
disgorgement of his fees as exempt property really puts his argument over the top.
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deminimis and the Chapter 7 Trustee would likely abandon the funds to Debtors. Again,
the Trustee has evinced no intention of wanting to collect or administer the $3750 and I
therefore reject Mr, Leinbach's argument.
Regardless what the Chapter 7 Trustee would or would not have done, Mr.
Leinbach's argument also overlooks the reality that the remedy for a counsel's failure to
comply with the mandatory provisions of Section 329(a) and Rule 2016(b) is in the nature
of a sanction, not simply the recovery of funds to be reclaimed by a debtor. Kisseberth.
273 F.3d at 720-22; Matter of Prudhomme. 43 F.3d 1000, 1003 (5th Cir. 1995); and In re
Redding. 251 B.R. 547, 552-53 (Bankr. W.D. Mo. 2000), affd 263 B.R. 874 (B.A.P. 8th
Cir. 2001). I have broad and substantial discretion to fashion an appropriate sanction
when counsel for debtor violates the bankruptcy disclosure requirements. Kisseberth, 273
F.3d at 721: Lewis. 113 F.3d at 1045; Prudhomme. 43 F.3d at 1003; Redding. 251 B.R. at
552-53; and Woodward. 229 B.R. at 476. In fact, I may exercise this discretion and order
disgorgement of fees whether actual harm does or does not accrue to the bankruptcy
estate. Redding. 251 B.R. at 553: see also Investment Bankers. 4 F.3d at 1565; and
Woodward. 229 B.R. at 475. In addition, the language of Section 329(b) contemplates
that I may disgorge a fee and order that it be returned either to the estate or to the entity
that made such payment (which in this case was Debtors).
As a result of Mr. Leinbach's improvident handling of Debtors' cases,
Debtors were forced to (1) file two Chapter 7 bankruptcy cases, (2) pay and retain new
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counsel to complete their second case, (3) amend documents to correct Mr, Leinbach's
errors and omissions, and (4) endure the pendency of life in a Chapter 7 case longer than
they should have. Given the above discussion, I conclude and find that the appropriate
sanction to remedy Mr. Leinbach's transgressions and violations of Section 329(a) and (b)
and Rule 2016(b) is disgorgement of the entire $3750 of fees to Debtors.13
E. Argument that the Fee Was Entirely Earned
Finally, Mr. Leinbach argues that disgorgement is improper in this case
because the fees he received from Debtors were "entirely earned". See Memorandum
filed by Mr. Leinbach on September 23, 2008 at p. 2. I first note that I specifically found
at pages 13 through 15 of this Memorandum Opinion, supra, and I reiterate here, that
these fees were not "earned" because the compensation received by Mr. Leinbach from
Debtors far exceeded the reasonable value of the services he rendered to Debtors. I
13I had previously sanctioned Mr. Leinbach for violating Section 329(a) and Rule 2016(b)
in InreiRamelah. Case no. 02-26185REF Memorandum Opinion (Bankr. E.D. Pa. October 14,
2008 Memorandum Opinion). In Ramelah. I directed that Mr. Leinbach disgorge and pay to his
clients the entire fee he received from them for both the existing case and a prior case that was
closed.
As I stated in Ramelah:
Beyond the parameters of this case, I note that over the past nineteen months,
I have been obliged to write numerous opinions and orders in other cases,
both reducing Mr. Leinbach's requests for compensation and imposing
sanctions on him for overcharges, inflated rates, excessive time entries,
and exaggerated expense charges.
Memorandum at pp. 1 - 2.
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further found and I find again that the value of the services rendered to Debtors by Mr.
Leinbach was minimal, if his services had any value to Debtors at all.
Regardless of the value of his services, Mr. Leinbach's argument ignores
his affirmative duty under Section 329(a) and Rule 2106(b) to disclose fully and
completely all compensation he received from Debtors within the one year preceding the
filing of Debtors' bankruptcy petition as well as all fee agreements he had with Debtors.
Kisseberth. 273 F.3d at 720; Lewis. 113 F.3d at 1044; Investment Bankers. 4 F.3d at
1565; McTyeire 357 B.R. at 904; Bennett. 133 B.R. at 378; and Saturlev: 131 B.R. at 517.
"The fact that the fee may or may not have been reasonable or have been earned does not
justify a disregard for the rules of disclosure," Woodward. 229 B.R. at 475, and does not
grant Mr. Leinbach immunity from sanctions and disgorgement for violating Section
329(a)andRule2016(b).
F. Addition of the .Payment of Interest to the Sanction
Despite my denial of all grounds raised by Mr. Leinbach to support the
reconsideration of the May 30, 2008 Order, the review that he occasioned has called to
my attention an aspect of the May 30, 2008 Order that I had overlooked. Upon my further
review of this case, I note Mr. Leinbach's actions in improperly charging Debtors $3750,
holding and using the $3750 for the past year or two, and failing to disclose it. I believe
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that I am warranted, if not obliged, to revise the sanction against Mr. Leinbach to include
the obligation to pay interest at the annual rate of six percent (6%) on the fees he received
from Debtors. The interest (1) should accrue from the dates he received each of the three
payments of the fee to the date of this Opinion, (2) will be included in the accompanying
Order, and (3) shall be payable with the $3750.
IV. CONCLUSION
Mr. Leinbach failed to comply with his statutory duty to disclose his fee
arrangements and receipt of payments from Debtors in this case. By doing so, Mr.
Leinbach violated Section 329(a) and Rule 2016(b). In addition, Mr. Leinbach violated
Section 329(b) by receiving compensation from Debtors far in excess of the reasonable
value of the services he rendered for them. I find that the appropriate sanction to be
ordered is complete forfeiture and disgorgement of the $3750 fees that Mr. Leinbach
received from Debtors, plus interest as described above. I will therefore deny Mr.
Leinbach's Reconsideration Motion and direct that Mr. Leinbach disgorge and remit to
Debtors the sum of $3750, plus interest.
An appropriate Order follows.
Date: November 25, 2008
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UNITED STATES BANKRUPTCY COURT
FOR THE EASTERN DISTRICT OF PENNSYLVANIA
In re: GERALD GORE and : Chapter?
FRANCINE GORE, : Case No. 07-21103REF
Debtors :
O R D E R
AND NOW, this 25th day of November, 2008, upon my consideration of the
Reconsideration Motion1 filed by Eric L. Leinbach, Esquire, and in accordance with and
based upon the discussion, findings of fact, and conclusions of law stated in the
accompanying Memorandum Opinion,
IT IS HEREBY ORDERED that the Reconsideration Motion is DENIED,,
except to the extent that the May 30, 2008 Order is amended as set forth below.
IT IS FURTHER ORDERED that my May 30, 2008 Order granting the
Disgorgement Motion is HEREBY REAFFIRMED AS AMENDED HEREIN.
IT IS FURTHER ORDERED that Mr. Leinbach shall disgorge and pay to
the Debtors, within ten (10) days of the date of this Order, all monies paid ($3750) by
Debtors to him for fees in Case No. 07-20574 and in this Case No. 07-21103.
IT IS FURTHER ORDERED that Mr. Leinbach shall pay, within ten (10)
days of the date of this Order, interest at the legal rate of six percent (6%) on the
amounts that he is to disgorge, dating from the dates that the payments were made to him,
'Capitalized terms are defined in the accompanying Memorandum Opinion.
1
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to wit:
1. Interest at an annual rate of 6% shall accrue on the disgorged fee of
$1500 from July 17, 2006, to the date of this Order ($212.50).2
2. Interest at an annual rate of 6% shall accrue on the disgorged fee of
$1500 from May 11, 2007, to the date of this Order ($139.00).3
3. Interest at an annual rate of 6% shall accrue on the disgorged fee of $750
from June 29, 2007, to the date of this Order ($63.50).4
IT IS FURTHER ORDERED that, within ten (10) days of the date of this
Order, Mr. Leinbach shall prepare and file with the Court, with a copy to the United
States Trustee, a certification under penalty of perjury that the $3750 in fees plus $415 in
interest has been returned to Debtors, which certification shall include the date that he
made the payment, the amount of the payment, and a copy of the instrument that he used
to make the payment.
IT IS FURTHER ORDERED that the failure of Mr. Leinbach to comply
fully with the provisions of this Order may subject him to sanctions or other penalties
upon the request of Debtors or the United States Trustee, including, but not limited to, the
2Rounded based upon two years and 132 days, assuming that payment is made in
accordance with the terms of this Order.
3Rounded based upon one year and 199 days, assuming that payment is made in
accordance with the terms of this Order.
4Rounded based upon one year and 150 days, assuming that payment is made in
accordance with the terms of this Order.
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payment of all fees and costs incurred by any party to enforce compliance with this Order.
IT IS FURTHER ORDERED that this Court shall retain jurisdiction to
enforce the provisions of this Order, notwithstanding any dismissal of this case.
BY THE COURT
RICHARD E. FEHLING
United States Bankruptcy Judge
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