Karen F. Jensen

UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF PENNSYLVANIA
IN RE: KAREN JENSEN : Chapter 13
:
Debtor : Bky. No. 04-34567ELF
:
M E M O R A N D U M
I.
Presently before me in this chapter 13 case is the Application for Compensation (“the
Application”) filed by the Debtor’s counsel, David A. Scholl, Esquire, (“Mr. Scholl”). The
Debtor’s plan was confirmed by Order of this court dated March 3, 2008. In the Application,
Mr. Scholl requests the allowance of compensation of $29,296.37.
Due to Mr. Scholl’s inexcusable breach of his obligations under the Bankruptcy Code and
the Federal Rules of Bankruptcy Procedure, I will disallow the Application in its entirety. This
harsh result may be ameliorated, however, because I will permit Mr. Scholl to take action to
“purge” his improper conduct. If he does so, he may again apply for compensation and, at that
time, I will determine the appropriate amount of compensation, if any, to be allowed after
consideration of all of the circumstances of this case.
II.
A.
This was a hotly contested chapter 13 case. There are more than two hundred (200)
docket entries in the main case. In addition, two (2) adversary proceedings emanated from the
case. See Adv. No. 05-530 and Adv. No. 05-445. Further complicating things, the Debtor’s
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disputes with certain of her creditors were interrelated to another bankruptcy case, one filed by
the Debtor’s mother, Anne C. Froio (“Mrs. Froio”). See Bky. No. 06-13498ELF. Mrs. Froio,
too, was represented by Mr. Scholl. Mrs. Froio’s bankruptcy case itself generated a separate
adversary proceeding. See Adv. No. 06-047.
The procedural history of the Jensen and Froio cases is well-known to Mr. Scholl, the
Debtor, the Chapter 13 Trustee and the participating creditors. Much of that history was
summarized in In re Jensen, 369 B.R. 210 (Bankr. E.D. Pa. 2007), a decision that: (1) resolved an
important dispute between the Debtor and her brother regarding the ownership of the residential
real property that serves as the Debtor’s residence (“the Property”) and (2) narrowed the issues
that needed to be resolved to determine the confirmability of the Debtor’s proposed chapter 13
plan (what was then the Debtor’s Seventh Amended Chapter 13 Plan). Therefore, I will not
review that history in detail. Suffice it to say, that even after the issuance of my decision on June
11, 2007, the interested parties continued to expend considerable time and effort in both the main
case and in adversary litigation. These efforts were rewarded, however, as they culminated in the
consensual “Revised Tenth Amended Chapter 13 Plan,” filed on February 12, 2008 and
confirmed on March 3, 2008.
Confirmation of the Debtor’s chapter 13 plan represented a notable achievement by Mr.
Scholl, accomplished after the expenditure of a substantial amount of time, in a case in which the
probability successful was uncertain. Nevertheless, in the course of guiding this case to
confirmation, Mr. Scholl took action that necessitates the unfavorable ruling on his Application
for allowance of his counsel fees. Next, I will explain how that issue came to the fore.
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1 On March 2, 2007, Mr. Scholl filed a supplemental disclosure of compensation
under Fed. R. Bankr. P. 2016(b). (See Docket Entry No. 137). This disclosure, which was
apparently made to put on the record that Mr. Scholl was owed approximately $20,000 in legal
fees at the time, makes no mention of any mortgage on the Property to secure payment of those
fees. I will assume that the disclosure was accurate and infer from the absence of any disclosure
regarding the existence of a mortgage on the Property that that the mortgage transaction
referenced in the Eighth Amended Plan occurred after the March 2, 2007 supplemental
disclosure was filed.
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B.
The proposed chapter 13 plan that was the subject of the pivotal June 11, 2007 decision
was the Debtor’s Seventh Amended Plan. Paragraph 4.A of that Plan, filed on February 12,
2007, see Docket Entry No. 136, provided for payment of administrative expenses, including Mr.
Scholl’s counsel fees, “from the proceeds of a sale or refinancing of [the Debtor’s] Home.”
There is nothing out of the ordinary about ¶4.A of the Seventh Amended Plan.
On June 15, 2007, a few days after the decision, the Debtor filed her Eighth Amended
Chapter 13 Plan. See Docket Entry No. 160. Paragraph 4.A of this Plan was revised to provide
for the payment of administrative expenses as follows:
These claims include all administrative expenses, which they believe will be the
Trustee's commissions and an estimated amount of $25,000 attorneys' fees
to counsel, which is secured by a mortgage in favor of counsel against the
Home. and which shall be paid from the proceeds of a sale or refinancing
of the Home.
(emphasis added).
Juxtaposing the Seventh Amended Plan and the Eighth Amended Plan, it appears that
some time after March 2, 2007 and before June 15, 2007, the Debtor executed a mortgage in1
favor of Mr. Scholl on the Property to secure payment of the legal fees incurred during this
bankruptcy case. In informal and formal communications with the court after the filing of the
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2 I read the reference to the mortgage in ¶4.A of the confirmed plan as merely
descriptive, i.e., it discloses the fact that the mortgage exists. It is not a plan provision that is
designed to validate the mortgage Mr. Scholl acquired postpetition, bind parties in interest and
override the customary procedures for the allowance of professional compensation in bankruptcy
cases. See Fed. R. Bankr. P. 2016(a) (requiring court allowance of professional fees upon
application); see generally In re Bonanno, 78 B.R. 52, 57 (Bankr. E.D. Pa. 1987) (“[I]f the Code
and Rules provide specific mechanisms to be employed . . . [a party in interest] may safely
assume that its rights will be unaffected unless the debtor invokes those procedures”).
3 Notwithstanding the absence of objections to the Application, a bankruptcy court
“has a duty to review fee applications . . . a duty which . . . derives from the court's inherent
obligation to monitor the debtor's estate and to serve the public interest.” In re Busy Beaver
Bldg. Centers, Inc., 19 F.3d 833, 841 (3d Cir. 1994) (emphasis in original).
4 The May 14, 2008 Order scheduling the hearing on the Application also alerted
Mr. Scholl to a second issue. A significant portion of the fees Mr. Scholl requests be allowed are
for services provided to Mrs. Froio in connection her bankruptcy case and the adversary
proceeding that arose in that case. The May 14, 2008 Order advised Mr. Scholl that he should be
prepared to address “the basis of his entitlement to the allowance of fees in this bankruptcy case
for services provided to another individual.” Because, at this time, I am disallowing all of the
fees requested in the Application, it is unnecessary for me to address this second issue.
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Eighth Amended Plan, Mr. Scholl has acknowledged that he obtained a mortgage position on the
Property during the postpetition/pre-confirmation phase of this bankruptcy case.
On April 16, 2008, after confirmation of the Revised Tenth Amended Plan, Mr. Scholl2
filed the Application. On May 9, 2008, he filed a Certification of No Response. On May 14,
2008, I scheduled a hearing on the Application through an Order that advised Mr. Scholl that he3
should be prepared to address whether the fees allowed in this case should be reduced due to his
“taking and recording a mortgage against the Debtor's real property prior to confirmation of the
Debtor's chapter 13 plan.” The hearing was held and concluded on May 27, 2008 and the matter4
is now ripe for disposition.
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5 Subject to certain exceptions, section 541 defines property of the estate as
including, inter alia, “all legal or equitable interests of the debtor in property as of the
commencement of the case.” 11 U.S.C. §541(a)(1). This already broad definition is to be read
expansively. E.g., In re O’Dowd, 233 F.3d 197, 202 (3d Cir. 2000) (citing Integrated Solutions,
Inc. v. Service Support Specialties, Inc., 124 F.3d 487, 490-91 (3d Cir. 1997)).
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III.
A.
Mr. Scholl’s Application requires me to address whether a debtor’s counsel may take
money or property from the debtor without bankruptcy court authorization during the
postpetition/pre-confirmation phase of a chapter 13 case in payment or as security for payment of
unpaid professional fees where the payment is derived from “property of the bankruptcy estate.”
While many bankruptcy issues require nuanced analyses and result in the answer, “It depends,”
this is not such an issue. The answer to this question is an unequivocal, “No.”
1.
As a starting point, it is indisputable in this case that the Property was property of the
Debtor’s bankruptcy estate. The Debtor as of the commencement of the case was the owner of
the Property and the Property falls squarely the general definition of property of the estate set
forth in 11 U.S.C. §541(a). The value of the Debtor’s interest in the Property far exceeds her5
available exemption. Indeed, under the confirmed Revised Tenth Amended Plan, the realization
of that value through sale of the property will provide the lion’s share of the plan funding. Thus,
there is no doubt that when Mr. Scholl took a mortgage on the Property prior to confirmation, the
property interest he obtained was property of the Debtor’s bankruptcy estate.
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6 I note that generally, money or property transferred by a chapter 13 debtor to
counsel postpetition/pre-confirmation usually will constitute the transfer of property of the
bankruptcy estate. This is so regardless whether the money or property is derived from the
debtor’s prepetition assets or assets acquired postpetition. If prepetition, the property is estate
property through 11 U.S.C. §541(a). If postpetition, the money or property is property of the
estate by virtue of 11 U.S.C. §1306(a). See In re Mayeaux, 269 B.R. 614, 626 (Bankr. E.D. Tex.
2001) (“It is elementary bankruptcy law that all post-petition earnings of a Chapter 13 debtor and
all property which a Chapter 13 debtor acquires in the post-petition period constitutes property of
the bankruptcy estate”); accord Barron v. Countryman, 432 F.3d 590-597-98 (5 Cir. 2005); In reth
Young, 285 B.R. 168, 174 n.11 (Bankr. D. Md. 2002). In some cases the source of money or
property transferred to counsel could be non-estate property, such as a funds from a retirement
account that is subject to 11 U.S.C. §541(c)(2). Or, the property may be property that was
exempted under 11 U.S.C. §522(b) (although it is not entirely clear when, in the course of a
bankruptcy case, claimed exemptions are “finalized”). As stated in the text, there is no plausible
argument in this case that the property interest Mr. Scholl received through the mortgage on the
Property was non-estate property.
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It is also indisputable that the execution of a mortgage by the Debtor and delivery of it to
Mr. Scholl was a transfer to him of property of the estate. It matters not that the purpose of the
transaction was to provide security to Mr. Scholl for payment of his counsel fees; the mortgage
itself transferred property to Mr. Scholl. Section 101 of the Bankruptcy Code expressly defines
the term “transfer” as including the creation of a lien. 11 U.S.C. §101(54); see also In re
Funches, 381 B.R. 471, 496 & n.39 (Bankr. E.D. Pa. 2008) (creation of a mortgage results in a
transfer of an interest in property) (citing cases).6
2.
Section 330(a) of the Bankruptcy Code authorizes the court to award compensation from
the bankruptcy estate to trustees, examiners, statutory ombudsmen and professionals employed
under 11 U.S.C. §327. Although counsel for a chapter 13 debtor is not appointed by the court
under §327, §330(a)(4)(B) expressly authorizes the allowance of reasonable compensation from
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the bankruptcy estate to the debtor’s counsel “for representing the interests of the debtor in
connection with the bankruptcy case” after consideration of certain specified factors.
The Federal Rules of Bankruptcy Procedure implement these statutory provisions. Rule
2016(a) provides, inter alia:
An entity seeking interim or final compensation for services, or reimbursement of
necessary expenses, from the estate shall file an application setting forth a detailed
statement of (1) the services rendered, time expended and expenses incurred, and
(2) the amounts requested.
(emphasis added).
Read together, 11 U.S.C. §330(a) and Fed. R. Bankr. P. 2016(a) require that, after the
commencement of a chapter 13 case, counsel for the debtor apply for and receive court
authorization before collecting any money or property from the debtor.
When viewed as parts of an integrated structure of fee regulation, these provisions
indicate a chapter 13 debtor's attorney may not collect fees from a debtor
postpetition without a court order. To hold otherwise would undermine the court's
authority and responsibility to monitor and control the fees of chapter 13 debtors'
attorneys, and would interfere with the court's exclusive jurisdiction over estate
property under 28 U.S.C. § 1334(e).
In re Berg, 356 B.R. 378, 383 (Bankr. E.D. Pa. 2006) (quoting In re Anderson, 253 B.R. 14, 20
(Bankr. E.D. Mich. 2000)); accord In re Taylor, 2004 WL 1746112, at *1 (Bankr. D.D.C. Aug. 4,
2004).
Unapproved transfers to the debtor’s counsel of property of the estate also run afoul of 11
U.S.C. §363(b):
even without any reference to § 329(a) and Rule 2016(b), a Chapter 13 debtor, in
possession of estate property under § 1306(b), has no authority to transfer estate
property to an attorney without proper notice and opportunity for hearing under §
363(b)(1), since such a transfer could not be properly characterized as a transfer in
the ordinary course of business . . . .
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7 These fundamental principles stated above may not be totally inflexible. In
Taylor, the court observed that, arguably, if certain conditions exist, an attorney “may accept a
deposit of estate funds to be held in trust for payment of fees that may be allowed at a future
date” provided that: (1) the arrangement is disclosed under Fed. R. Bankr. P. 2016(b); (2) the
terms of the arrangement are that the funds are not to be used to pay attorney's fees unless and
until allowed by the court; and (3) the funds are to be promptly refunded if the fees are not
allowed. 2004 WL 1746112, at *2. In context, the Taylor court may have been referring to
money accepted by an attorney as a prepetition bankruptcy retainer. Nevertheless, the same
principles would seem to apply to a postpetition/pre-confirmation payment from the debtor to
counsel for bankruptcy services already provided or to be provided. To receive such a payment
without running afoul of the bankruptcy regulatory scheme, the transaction would have to be
disclosed and counsel would have to maintain the funds in a trust account until the payment is
allowed by the bankruptcy court. In effect, for administrative convenience, the attorney would
simply be segregating funds that remained property of the debtor (and the bankruptcy estate);
upon demand by the debtor, the attorney would be obliged to transfer the money in the trust
account back to the debtor. Presumably, the reason an attorney would go to all of this trouble is
to reduce the temptation that the debtor may have to use the money available for payment of the
legal fee for other purposes.
The Taylor court also opined that, at least in some circumstances, the requirement
that payments to counsel be approved by the bankruptcy court applies to payments made after
confirmation of a chapter 13 plan. The instant case involves a transfer to the debtor’s counsel
that occurred pre-confirmation. Therefore, I need not consider whether counsel has any duties,
other than disclosure under Rule 2016(b), with respect to payment of legal fees by the debtor
after confirmation of a chapter 13 plan.
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Mayeux, 269 B.R. at 626.
Arguably, Mr. Scholl also violated 11 U.S.C. §362(a)(4), which stays “any act to create,
perfect, or enforce any lien against property of the estate.” Section 362(a) applies to “all
entities.” The term entity is defined in 11 U.S.C. §101(15) as including a “person,” and therefore
would encompass Mr. Scholl.7
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3.
Separate and apart from the requirement to apply for court approval of counsel fees to be
paid from the bankruptcy estate, Fed. R. Bankr. P. 2016(b) mandates that the debtor’s counsel
file a disclosure regarding compensation that the debtor has paid or promised to pay.
Specifically, Rule 2016(b) requires counsel to file “the statement required by § 329 of the Code.”
11 U.S.C. §329 mandates disclosure of “all compensation paid or agreed to be paid” for services
rendered in connection with the case.
In other words, whether or not the debtor’s counsel must file a §330/Rule 2016(a) fee
application to obtain court approval of compensation to be paid from the estate, counsel must file
a separate statement disclosing the compensation that the debtor has paid or has promised to pay.
Section 329 does limit the required disclosure to payments or agreements made “after one year
before the date of the filing of the petition.” Significantly, while this language limits the “reach
back” period for the required disclosure, it imposes no prospective limitation.
Thus, through its incorporation of the requirements of 11 U.S.C. §329, Rule 2016(b)
mandates that the debtor’s counsel disclose all compensation either received postpetition or
promised to be paid postpetition. Further, the Rule requires that “a supplemental statement . . .
be filed within 15 days after any payment or agreement not previously disclosed.”
4.
It is well established that bankruptcy courts have broad discretion to determine the
appropriate response to an attorney’s transgression of the compensation rules. Berg, 356 B.R. at
383-84.
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8 One court has suggested that the consequences of compensation misconduct may
go beyond disallowance of fees and include fines or even suspension from practice. In re Fricker,
131 B.R. 932, 941 (Bankr. E.D. Pa. 1991); see also In re Downs, 103 F.3d 472, 477 (6 Cir.th
1996) (affirming award of sanctions).
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Since the provisions of the Bankruptcy Code and Rules that regulate attorneys fees
are designed to protect creditors and the debtor from overreaching attorneys, it
follows that to ensure that protection, the bankruptcy court would have the
authority to deny any and all compensation where there has been a breach of the
law. [In re Kisseberth, 273 F.3d 714, 721 (6 Cir. 2001) (citing cases).] Thisth
sanction is often found to be the most appropriate remedy given “‘the importance
of the fee disclosure [and fee application and court approval] requirement, the
extent to which that requirement was almost totally disregarded by an experienced
bankruptcy practitioner, and the need to compel future compliance on his part and
on the part of all counsel appearing in the bankruptcy court.’ ” Id. (quoting district
court opinion). Accord In re Redding, 251 B.R. 547, 553 (Bankr. W.D. Mo. 2000),
[aff’d, 272 B.R. 874 (B.A.P. 8 Cir. 2001] (violations of responsibilities underth
Code and Rules by experienced bankruptcy attorney well aware of requirements
was knowing, deliberate and blatant so as to warrant disgorgement of fee he
received of $10,011.40 to the trustee). Indeed disgorgement of the entire payment
may be proper in certain instances even though the failure to comply resulted from
negligence or inadvertence. Kisseberth, 273 F.3d at 721; In re Park-Helena Corp.,
63 F.3d 877, 882 (9th Cir.1995).
Id. at 384 (footnote omitted); accord In re Larrieu, 2000 WL 36328, at *4 (E.D. Pa. Jan. 18,
2000); In re Larson, 2004 WL 4960378, at *3 (Bankr. D. Idaho Feb. 4, 2004).8
B.
Based on the principles discussed above, it requires no extended analysis to conclude that
Mr. Scholl acted improperly when, postpetition and prior to confirmation of the Debtor’s Revised
Tenth Amended Plan, he took a mortgage on the Property to secure payment of his unpaid legal
fees. Court approval was necessary under 11 U.S.C. §§330(a) and/or 363(b) before the Debtor
could transfer estate property to Mr. Scholl. Mr. Scholl did not seek court approval for at least
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ten (10) months and perhaps as long as fifteen (15) months after his receipt of a mortgage interest
in the Property. Further, disclosure of the transfer was required within fifteen (15) days. See Fed.
R. Bankr. P. 2016(b). Mr. Scholl did not disclose the transaction for as much as three (3) months
after it occurred.
At the hearing on the Application, Mr. Scholl offered two (2) justifications for his
conduct. First, he emphasized that there was nothing secretive about the mortgage transaction
because it was disclosed in ¶4.A of the Debtor’s Eighth Amended Plan. Second, he contends that
acceptance of postpetition compensation by debtors’ counsel without court approval is
commonplace in chapter 13 cases.
To be generous, these arguments are feeble.
1.
Initially, I observe that Mr. Scholl’s method of making the disclosure of the mortgage
transaction was inadequate. Fed. R. Bankr. P. 2016(b) requires counsel to file a supplemental
disclosure “within 15 days after any payment or agreement not previously disclosed.”
If my inference is correct that the mortgage transaction took place after March 2, 2007 and
before June 15, 2007, after consummating the transaction, Mr. Scholl never filed any
supplemental statement as required by Rule 2016(b). Instead, he casually made the disclosure
that a mortgage transaction had taken place in the body of an amended chapter 13 plan.
Disclosure of a debtor’s financial transaction with counsel by insertion of a phrase in the
middle of a chapter 13 plan is not consistent with the transparency of disclosure that the filing of
a supplemental Rule 2016(b) statement is meant to provide. In addition, because no details
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9 The creditor I refer to is James Froio, whose role in the case is explained in detail
in my prior Opinion. The chapter 13 Trustee was also aware of the mortgage transaction
following the filing of the Debtor’s Eighth Amended Plan.
10 E.g., In re Redding, 263 B.R. 874, 877 (B.A.P. 8 Cir.th 2001); In re Ladevereaux,
2006 WL 549239, at *2 -3 (Bankr. D. Mass. Mar. 6, 2006); In re Bartmann, 320 B.R. 725, 749 -
750 (Bankr. N.D. Okla. 2004) (collecting cases).
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regarding the mortgage transaction have ever been stated on the record, I cannot determine
whether the disclosure in the Eighth Amended Plan on June 15, 2007 was made within fifteen
(15) days of the transaction, as required by Rule 2016(b). Nonetheless, I acknowledge that the
transaction was not kept a secret indefinitely; it appears that disclosure was made within three (3)
months of the transaction; and the creditor who participated most actively in the bankruptcy case
was aware of the transaction after it was disclosed in the Eighth Amended Plan.9
The more fundamental problem with Mr. Scholl’s position is that mere disclosure of a
transaction by itself does not validate the transaction and is not a substitute for the court
authorization that is statutorily mandated. I acknowledge that reported cases involving
disgorgement of counsel fees frequently have involved attorneys who made inaccurate or
misleading disclosures or failed to make any disclosure at all. Without question, the failure to10
make the required Rule 2016(b) disclosure compounds and exacerbates the impropriety when an
attorney accepts payment of estate property without court authorization. But disclosure is not a
safe harbor. Sections 330 and 363 of the Bankruptcy Code impose the separate requirement of
court approval of the transaction. Indeed, it is troubling that an attorney as experienced as Mr.
Scholl apparently fails to grasp this simple distinction.
At the May 27, 2008 hearing, Mr. Scholl cited two (2) cases in support of his position that
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there was no impropriety because the mortgage transaction was disclosed: Matter of Leitner, 221
B.R. 502 (Bankr. D. Neb. 1998) and In re Automend, Inc., 85 B.R. 173 (Bankr. N.D. Ga. 1988).
Neither case is on point.
The primary issue in Leitner was whether a mortgage taken by the debtor’s counsel before
the commencement of a chapter 7 bankruptcy case to secure payment of fees was valid and
passed through the bankruptcy case unaffected. Leitner, 221 B.R. at 503-04. Leitner has no
applicability in this chapter 13 case in which Mr. Scholl obtained his mortgage after the
commencement of the bankruptcy case. The difference, of course, is that in Leitner, the transfer
did not involve property of a bankruptcy estate as no estate existed at the time of the transfer;
here, the mortgage transaction effected a transfer to Mr. Scholl of property of the Debtor’s
bankruptcy estate
In Automend, a chapter 11 case, the court rejected an application for appointment of
counsel for the debtor where counsel had taken a real estate mortgage, in lieu of a cash retainer,
on the day before the commencement of a chapter 11 case. Automend, 85 B.R. at 175. At the
hearing, Mr. Scholl acknowledged that the issue in Automend was the appointment of counsel
under 11 U.S.C. §327, not the allowance of counsel fees under 11 U.S.C. §330. Nonetheless, he
argued that the case was instructive because of the emphasis it placed on the attorney’s failure to
properly disclose the mortgage transaction. He contended that unlike the attorney in Automend,
he had disclosed his mortgage transaction with the Debtor. In citing Automend, Mr. Scholl
overlooks his failure to file the supplemental statement required by Rule 2016(b) and again
misses the distinction between the separate requirements of disclosure and court approval.
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11 The postpetition services necessary might involve, inter alia, objections to claims,
defense of motions for relief from stay, defense of motions to dismiss or adversary proceedings
that must succeed to render a debtor’s plan confirmable.
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2.
Mr. Scholl’s second justification for his conduct need not detain me long. Not only did
Mr. Scholl fail to offer any evidence of the alleged commonplace violations of the law by other
attorneys, but even if true, the fact that other unnamed attorneys, at unnamed times, in unnamed
transactions, may also be violating the statute and rules of court does not excuse Mr. Scholl’s
transgression.
Put in its best light, Mr. Scholl may be suggesting that the imperative of operating an
economically viable law practice and the exigencies of chapter 13 practice compel attorneys
representing chapter 13 debtors to “bend the rules.” Presumably, he means to suggest that
because chapter 13 debtor practices tend to be volume practices with small profit margins per
case, if a particular case involves a substantial amount of postpetition work (particularly if the11
work that was reasonably unanticipated when the attorney accepted the engagement), economic
survival requires that counsel press the debtor for payment of legal fees prior to plan
confirmation.
I reject these implicit contentions. An attorney must exercise business judgment in
deciding what cases to accept. If an attorney accepts a small prepetition retainer before
undertaking the representation of a chapter 13 debtor and subsequently finds himself or herself
providing services of a value much greater than the amount of the retainer (and perhaps even an
amount that exceeds the rehabilitating debtor’s ability to pay through the trustee’s distribution
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under the chapter 13 plan), the attorney’s problem is attributable primarily to the decision to
accept the case in the first place. That the case acceptance decision did not work out favorably or
as expected is not, by itself, a justification for ignoring and violating the statute and the rules of
court.
Moreover, there are other remedies available to counsel. In an appropriate case, counsel
may be able to obtain leave of court to withdraw his or her appearance. Or, as Mr. Scholl could
have done here, counsel can seek court authority to enhance the prepetition retainer from property
of the estate. I do not mean to suggest that counsel has any entitlement to these remedies if the
representation has adverse financial consequences for counsel. Whether relief is appropriate and
if so, what relief should be afforded, is a discretionary decision that bankruptcy courts must make
on a case by case basis.
In short, there is no “economic expediency” defense available to an attorney who violates
the rules governing attorney compensation in bankruptcy cases.
For these reasons, I conclude that Mr. Scholl failed to comply with 11 U.S.C. §330(a) and
Fed. R. Bankr. P. 2016(b) and there need be consequences attending his failure to satisfy his legal
obligations. I consider next what those consequences should be.
C.
This is not Mr. Scholl’s first offense. What I find especially troubling is that Mr. Scholl’s
actions came only a few months after the issuance of a decision by another judge in this district
identifying the impropriety of almost identical conduct by Mr. Scholl – the postpetition
acceptance of property of a chapter 13 bankruptcy estate on account of unpaid legal fees. See In
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re Berg, 356 B.R. 378 (Bankr. E.D. Pa. 2006).
In Berg, Mr. Scholl filed a chapter 13 petition on behalf of the debtor on November 29,
2005 after accepting a $500.00 prepetition retainer. Id. at 379. The debtor later moved to convert
the case to chapter 11. A hearing on the motion was held on June 26, 2006 and the motion was
granted on August 14, 2006. Id. at 379-80. Between those two dates, the debtor received an
unanticipated income distribution from his business and paid Mr. Scholl an additional $5,000.00
for the services previously rendered in the chapter 13 case. See id. Subsequently, the U.S.
Trustee filed a motion requesting that the court order Mr. Scholl to disgorge the $5,000.00
payment.
In her Memorandum Opinion, (then Chief) Judge Sigmund outlined, in detail, the same
fundamental principles regarding the disclosure of attorney compensation and the requirement of
court authorization for payment of professional compensation from the bankruptcy estate that I
summarized in Part III.A., above. See id. at 380-83. Judge Sigmund concluded her summation
of the applicable legal principles with the observation that the “duty to secure court approval of
post-petition compensation from the estate is . . . a fundamental principle of bankruptcy
practice.” Id. at 383. Judge Sigmund found, as I have here, that the property received by Mr.
Scholl postpetition ($5,000.00 in Berg) was property of the estate and that Mr. Scholl’s
acceptance of the money without court authorization was a “clear violation[] of the law.” Id.
Taking into account Mr. Scholl’s status as experienced bankruptcy practitioner and as a former
judge of this court, Judge Sigmund ordered him to disgorge the entire $5,000.00 that he had
received from the debtor postpetition. She left open the possibility, however, that after
disgorgement of the funds, Mr. Scholl might receive some compensation for his services during
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12 Subsequently, an order was entered allowing compensation of $2,000.00. See
Bky. No. 05-39380 (Docket Entry No. 177).
13 For this reason, Mr. Scholl’s conduct is not comparable to that of a party or
attorney continuing to take a position contrary to a reported decision of the bankruptcy court on
an unsettled issue that has not been decided by the Court of Appeals. There is no division of
authority regarding the question of an attorney’s obligation to seek and obtain court approval for
compensation from the bankruptcy estate and Mr. Scholl has made no serious argument that Berg
was incorrectly decided.
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the chapter 13 phase of the case, reserving a decision on that issue until after a scheduled hearing
on Mr. Scholl’s pending application for allowance of compensation.12
The Berg decision was issued on October 23, 2006. It appears that Mr. Scholl took a
mortgage on the Property in this case some time after March 2, 2007 and before June 15, 2007.
It is almost incomprehensible that only four (4) to seven (7) months after Berg, a decision
that, for all intents and purposes, sanctioned him, Mr. Scholl would again violate the rules
governing attorney compensation in a chapter 13 case in almost the exact same way. His conduct
is especially mystifying given the fact that the relevant rules that he is obliged to follow were set
out for him in detail in Berg and are not unsettled legal principles.13
Given this history, I have no difficulty in concluding that the estate property Mr. Scholl
received without court authorization must be disgorged. Further, like the court in Berg, I will not
allow any compensation to Mr. Scholl until that disgorgement has taken place. Therefore, I will
exercise my discretion to disallow the Application in its entirety and require that Mr. Scholl
promptly return the property of the estate that he took without court authorization. He may
accomplish this by marking the mortgage on the Property satisfied or by some equivalent action.
Further, in an effort to fashion a sanction that is commensurate with the nature and gravity
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of the offense, but which takes cognizance of the positive result Mr. Scholl achieved in his
representation of the Debtor in this case, I am willing to consider the allowance of compensation
after Mr. Scholl has restored the status quo ante with respect to the Property. Thus, after the
mortgage has been removed from the Property, Mr. Scholl may file a renewed application for
compensation. At that time, I will determine the amount of compensation, if any, to be allowed.
Mr. Scholl can expect that, at a minimum, his fees will be disallowed to a sufficient extent to
communicate to him again that his violation of the fundamental rules of professional
compensation in bankruptcy cases will not be tolerated in this court. In any renewed application,
I also will consider whether Mr. Scholl should suffer any other consequences as a result of his
unacceptable conduct.
An order consistent with this Memorandum will be entered.
Date: June 13, 2008
ERIC L. FRANK
U.S. BANKRUPTCY JUDGE
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UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF PENNSYLVANIA
IN RE: KAREN JENSEN : Chapter 13
:
Debtor : Bky. No. 04-34567ELF
O R D E R
AND NOW, upon consideration of the Application for Compensation (“the Application”)
filed by the Debtor’s counsel, David A. Scholl, Esquire, (“Mr. Scholl”), and after a hearing, and
for the reasons set forth in the accompanying Memorandum, it is hereby ORDERED that:
1. The Application is DENIED, subject to ¶4 below.
2. Mr. Scholl shall return forthwith the property of the estate that he received without
authorization from this court, by marking satisfied the mortgage he holds on the Debtor’s
residence (5 Booth Lane, No. 6, Haverford, PA 19041) or by some equivalent action that
terminates his interest in the property.
3. On or before, July 14, 2008, Mr. Scholl shall file a written certification of his compliance
with the requirements of ¶2 above.
4. Upon his compliance with the requirements of ¶¶2-3 above, Mr. Scholl may file a renewed
application for compensation.
Date: June 13, 2008
ERIC L. FRANK
U.S. BANKRUPTCY JUDGE
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