Opinion
Case No. 02-26185REF.
October 14, 2008
I. INTRODUCTION
The relatively small monetary amount at issue in this matter belies the copious efforts and orders that led to the September 19, 2008 Order from which Eric L. Leinbach, Esquire ("Mr. Leinbach") has filed his appeal. To provide the reviewing court with the full context and background of the September 19, 2008 Statement and Order, I will support and supplement the Statement with this Opinion. Fundamentally, I have determined that Mr. Leinbach failed to disclose that he had demanded and received from his clients payment of certain fees in the amount of $1,600. 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. Given Mr. Leinbach's history with fees, a more significant sanction might have been appropriate in this case. But I limited the sanction to the disgorgement and return of the $1,600 fee to his former clients, the Debtors, who are proceeding pro se in this case.
I have written a number of opinions and entered many orders dealing with Mr. Leinbach's 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 Waltenberg, 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 issued an order requiring the disgorgement and return of an entire retainer paid to Mr. Leinbach his former clients in In re Papp, No. 06-20973, order (Bankr. E.D. Pa. Oct. 26, 2006).
Debtors, who completed their Chapter 13 bankruptcy on a pro se basis, are former clients of Mr. Leinbach because he withdrew as their counsel in July 2007. See Consent Order dated July 12, 2007, in In re Leinbach, Misc. No. 07-4002 (Bankr. E.D. Pa.). Through the Consent Order, Mr. Leinbach consensually subjected himself to being enjoined from further representation of all clients in all bankruptcy cases pending in the Eastern District of Pennsylvania. Mr. Leinbach has questioned my references to this consensual injunction as a "voluntary" withdrawal of his representation (see e.g., In re Wismer, Docket No. 06-21329, andIn re Premus, Docket No. 06-21932). He posits a distinction without a difference. Mr. Leinbach 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, which was very near completion when Mr. Leinbach abandoned his clients, Debtors have represented themselves.
The procedural background of the September 19, 2008 Order is lengthy and includes one clear error on the part of the Court in the failure to provide notice to Mr. Leinbach about one of the relevant orders. As a result of that failure to serve Mr. Leinbach, he claimed that a hearing had been held and an order had been entered improperly and he moved for reconsideration of the order that arose from that hearing. I granted his request for reconsideration from that order and an entirely new hearing was held, with full and appropriate notice to him. On September 19, 2008, following that hearing arising from my grant of reconsideration, I issued an Order with a supporting Statement, agreeing with Debtors and ordering Mr. Leinbach's disgorgement and return of the $1,600 fee. On September 29, 2008, Mr. Leinbach filed his appeal of the September 19, 2008 Order. I am filing this Opinion supporting and supplementing the September 19, 2008 Order and supporting Statement pursuant to Local Rule 8001-1(b) of the Eastern District of Pennsylvania Bankruptcy Court. This Opinion represents my findings of fact and conclusions of law.
A bankruptcy court may take judicial notice, under Fed.R.Evid. 201 (incorporated into bankruptcy cases by Fed.R.Bankr.P. 9017), of the docket entries and the bankruptcy petition, schedules, and statement of financial affairs filed in a case.See Maritime Elec. Co., Inc. v. United Jersey Bank, 959 F.2d 1194, 1200 n. 3 (3d Cir. 1991); Levine v. Egidi, 1993 WL 69146, at *2 (N.D. Ill. 1993); In re Paolini, 1991 WL 284107, at * 12 n. 19 (Bankr. E.D. Pa. 1991); see generally In re Indian Palms Assoc., Ltd., 61 F.3d 197 (3d Cir. 1995). Prior orders may also be considered. Although a court may not take judicial notice sua sponte of the facts contained in the debtors' files that are in dispute, In re Augenbaugh, 125 F.2d 887 (3d Cir. 1942), it may take judicial notice of adjudicative facts "not subject to reasonable dispute . . . [and] so long as it is not unfair to a party to do so and does not undermine the trial court's factfinding authority." In re Indian Palms Assoc., Ltd., 61 F.3d at 205 (3d Cir. 1995) (citing Fed.R.Evid. 201(f) advisory committee note (1972 proposed rules)).
See text at page 7, infra.
Local Rule 8001-1(b) provides: "(b) Opinion in Support of Order. The bankruptcy judge whose order is the subject of an appeal may, within 15 days of the filing of the notice of appeal, file a written opinion in support of the order or a written supplemental opinion that amplifies any earlier written opinion or recorded oral bench ruling or opinion."
The SOURCE note for Local Rule 8001-1 explains: "This rule is derived from L.A.R. 3.1 of the Third Circuit's Local Rules. Under subdivision (b) of this rule, a bankruptcy judge has the same opportunity as a district judge to file an opinion after an appeal has been taken."
II. PROCEDURAL BACKGROUND
In September 2007, Mr. Leinbach filed a supplemental and final application for payment of fees from Debtors in this case (No. 111 on the docket). In October 2007, both the Chapter 13 Trustee and the Debtors filed their opposition to his fee application on many grounds (Nos. 112 and 114 on the docket). Debtors' pro se objection to the fee application (the "Objection") went far beyond simply opposing the fee request. The Objection included a number of affirmative claims that Mr. Leinbach had overcharged Debtors and had improperly retained funds that should have been paid to them. The Objection set forth certain claims arising in the present case and in two prior cases. At the initial hearing on Mr. Leinbach's request for compensation, held on December 3, 2007, I heard evidence limited to his fee request. I expressly noted during the hearing that I would not then consider the claims in Debtors' Objection about the overcharged fee and improperly retained funds. I announced that I would sever Debtors' affirmative claims from the Objection and consider them in an independent hearing at a time and date to be announced later. Upon the completion of the December 3, 2007 hearing, I took the matter of Mr. Leinbach's fee application under advisement (No. 118 on the docket).
Mr. Leinbach had already received fees in the amount of $8,120 and he sought an additional $725 for certain alleged unpaid representation of Debtors.
In my order dated December 5, 2007, I reemphasized that I had severed Debtors' claims against Mr. Leinbach from their opposition to his fee application (No. 119 on the docket). I also re-opened Debtors' prior bankruptcy cases, as follows:
[U]pon my review of the Objection and the discussion about the Objection among Debtors, Mr. Leinbach, counsel for the Chapter 13 Trustee, and myself at the hearing on the Application [for attorneys' fees] in open court on December 3, 2007, and upon the statements and allegations in the Objection going beyond the scope of the Application and pertaining to actions of Mr. Leinbach early in this case as well as in at least one of two prior cases of Debtors, in which they were represented by Mr. Leinbach, specifically In re Ramelah, No. 01-20786 (a Chapter 7 case) and In re Ramelah, No. 01-25023 (a Chapter 13 case), both of which are now closed, and upon the interests of justice and equity requiring further review of the representation of Debtors by Mr. Leinbach in all three cases, IT IS HEREBY ORDERED that both closed cases, In re Ramelah, No. 01-20786, and In re Ramelah, No. 01-25023, are hereby opened.
Debtors' claims in the Objection about Mr. Leinbach's improper retention of funds arose from his representation of Debtors in their two prior bankruptcy cases. Because I did not know at the time of the December 5, 2007 Order how either of the prior cases might be at issue, I opened both of them.
Through the December 5, 2007 Order, I also scheduled a hearing on the Objection to be held on January 24, 2008. The December 5, 2007 Order was served on Mr. Leinbach by first-class U.S. mail.
Mr. Leinbach, as part of the July 12, 2007 Consent Order, also lost his privilege to utilize the Court's electronic CM/ECF system to file documents, to receive service of documents, and to review documents on the dockets of any cases. See In re Leinbach, Misc. No. 07-4002 (Bankr. E.D. Pa.). Service by mail was and is the only remaining means of service on him.
On December 19, 2007, I issued my decision in the matter of Mr. Leinbach's request for $725 of additional attorneys' fees (No. 121 on the docket). My December 19, 2007 Order denied his request on two grounds. First, I determined that the $8,120 that he had already received was sufficient, without more, to cover Mr. Leinbach's minimal efforts for which he sought additional compensation. Second, I reviewed the specific details of his fee request as follows:
11. I will adjust the requested fee amount based upon the following: (a) Deduction of one-half of the time billed by Mr. Leinbach for preparation of two prior fee applications ($135); (b) deduction of the time for Mr. Leinbach's paralegal JG ($200); (c) deduction for the increase of attorneys' fees that resulted from increased rates that were charged without the clients' knowledge or consent ($78.75);
Mr. Leinbach has claimed, as part of his rationale for entering into the July 12, 2007 Consent Order, see footnote 2, supra, that his former paralegal, referred to by her initials JG, falsified and fabricated time entries and documents filed with this Court.
[This footnote is footnote 3 in the December 19, 2007 Order.] The deduction for all time for which the attorneys' rate increase was applied is $112.50. A portion of that increase, however, is eliminated when Mr. Leinbach's time for preparing the two prior fee applications is cut in half.
12. I will deny the request for reimbursement of all expenses because calculating the number of copies made through the copy charge results in 344 copies, which would mean that Mr. Leinbach served his one-page amended Chapter 13 plan on 344 creditors and parties in interest — but his matrix reflects only 50 creditors and parties in interest;
[This footnote is footnote 4 in the December 19, 2007 Order.] Mr. Leinbach charges $0.25 per copy page. A copying charge of $86.00 therefore would result from producing 344 copies at $0.25/page. Mr. Leinbach's postage charge of $19.09 was more reasonable but would result from serving 75 parties. I will deny the postage charge in its own right and as a partial sanction for his over-charged copy expense. Although I requested in the December 3, 2007 hearings, as well as in prior hearings, that Mr. Leinbach have data supporting his copying and postage charges, he was unable or unwilling to produce any.
13. I will further reduce the fee as a sanction for attempting to over-charge his copy and postage expenses ($250);
[This footnote is footnote 5 in the December 19, 2007 Order.] As a result of the clear over-charge for copying and postage expenses, I will sanction Mr. Leinbach by this further reduction [of] his fee. For discussions of former over-charges perpetrated by Mr. Leinbach, see the cases referred to in footnote 1 [footnote 2 in this Opinion], above, particularly In re Wise, 365 B.R. 516 (Bankr. E.D. Pa. 2007), supra, and In re Waltenberg, supra, 2007 WL 1740274, No. 05-25084 (Bankr. E.D. Pa. Jun. 15, 2007), in both of which I reduced Mr. Leinbach's fee as sanctions for over-charging fees.
14. The resulting fee would be $61.25, which I will reduce to $0.00 because I believe Mr. Leinbach has been more than adequately compensated for all of his work in this case.
[This footnote is footnote 6 in the December 19, 2007 Order.] This further, minimal reduction is also consistent with my prior reductions of Mr. Leinbach's fees for leaving his clients stranded without counsel upon his withdrawal from representing them. * * *
The December 19, 2007 Order was inadvertently not served on Mr. Leinbach. On December 13, 2007, I had entered a further order inIn re Leinbach, No. 07-4002, in which I ordered that the dockets of Mr. Leinbach's former cases should reflect the withdrawal of his representation of his former clients. Mr. Leinbach's withdrawal of appearance in all cases as counsel for his debtor-clients resulted in his name being removed from the Court's mailing matrices as well. This occurred after the December 5 Order had been served on Mr. Leinbach. Unfortunately, however, Mr. Leinbach's name was deleted from the mail service list in this case despite his appearance on his own behalf in the matter of his fee and the Objection. Mr. Leinbach was therefore not served with the December 19, 2007 Order.
The Clerk's Office believes that this case is the only one in which this error occurred. Certainly it is the only case in which the issue of missed service has arisen.
On January 24, 2008, upon the request of Mr. Leinbach, the hearing on the Objection that had been scheduled for that day was continued to March 3, 2008 at 9:30 a.m. (No. 123 on the docket). On February 14, 2008, the time of the hearing was changed to 11:00 a.m. (No. 125 on the docket). On Friday, February 29, 2008, Mr. Leinbach had informed the Clerk's Office by telephone that he would not appear at the March 3, 2008 hearing. On March 3, 2008, Mr. Leinbach, who still had not been served with the December 19, 2007 Order, filed a praecipe dated February 28, 2008, to withdraw his fee application (No. 128 on the docket). The Court's records showed that the fee application had been resolved through the December 19, 2007 Order. I therefore regarded the praecipe as a nullity and proceeded with the March 3, 2008 hearing on the Objection, which had been noticed to Mr. Leinbach through the December 5, 2007 Order and the subsequent continuances. Mr. Leinbach did not appear. Upon the conclusion of the March 3, 2008 hearing, I took the matter of Debtors' severed affirmative claims against Mr. Leinbach under advisement (No. 129 on the docket).
On March 4, 2008, I issued my order reviewing the background leading to the March 3, 2008 hearing as well as the testimony and evidence from the hearing (No. 131 on the docket). Through the March 4, 2008 Order, I imposed two sanctions on Mr. Leinbach. First, I ordered that $1,600 that he had received as a fee for one of Debtors' prior cases should be disgorged and paid to Debtors. Second, I ordered that $2,000 that he had apparently retained improperly from funds of the Debtors should also be disgorged and paid to Debtors. On March 14, 2008, Mr. Leinbach filed a motion to reconsider the March 4, 2008 Order and scheduled a hearing on reconsideration on April 10, 2008 (Nos. 133 and 134 on the docket). Debtors filed their pro se opposition to reconsideration on April 4, 2008 (No. 137 on the docket).
In the March 4, 2008 Order, I also resolved or reserved other aspects of Debtors' Objection that are not the subject of the September 19, 2008 Order or the appeal.
During the course of the April 10, 2008 hearing on reconsideration, Mr. Leinbach learned about the December 19, 2007 Order. At the conclusion of the April 10, 2008 hearing, I allowed Mr. Leinbach the opportunity to file a brief in support of his request for reconsideration. He filed his brief on May 2, 2008 (No. 143 on the docket). Ignoring the insulting and derogatory tone in Mr. Leinbach's brief, I recognized that the December 19, 2007 Order had not been mailed to Mr. Leinbach and that it was possible that he might have believed that his withdrawal of his fee application would cancel the March 3, 2008 hearing. In spite of my substantial doubt about Mr. Leinbach's professed ignorance about the subject matter of the March 3, 2008 hearing, I granted his motion for reconsideration on May 6, 2008 (No. 144 on the docket). I scheduled a new hearing on the Objection on May 23, 2008. That hearing date was continued twice — first to June 16, 2008, and then to June 27, 2008.
I gave Mr. Leinbach the benefit of all doubt on this issue. At the December 3, 2007 hearing, I expressly severed the affirmative claims in the Objection against Mr. Leinbach from his request for additional fees. In the December 5, 2007 Order, which was served on Mr. Leinbach, I expressly set the January 24, 2008 hearing solely for the affirmative claims in Debtors' Objection. The continued date of March 3, 2008 was continued directly from that January 24, 2008 hearing date. Even if I had not yet ruled on Mr. Leinbach's fee request, the only matters to be heard at the March 3, 2008 hearing were Debtors' claims against Mr. Leinbach.
Any prejudice that might have been suffered by Mr. Leinbach as a result of the inadvertent failure to mail the December 19, 2007 Order to him was cured by entry of my May 6, 2008 Order granting Mr. Leinbach's Motion To Reconsider my March 4, 2008 Order.
At the June 27, 2008 hearing, Debtors withdrew their claim that Mr. Leinbach had misappropriated the $2,000 and pressed only the $1,600 undisclosed fee payment. At the conclusion of the June 27, 2008 hearing, I allowed the parties to file briefs by August 11, 2008 (No. 154 on the docket). Mr. Leinbach and the Chapter 13 Trustee filed briefs (Nos. 161 and 162 on the docket). Following my consideration of the testimony and exhibits from the June 27, 2008 hearing and the briefs filed by the parties, I entered my decision on the Objection through the September 19, 2008 Order (No. 163 on the docket) and supporting Statement (No. 164 on the docket). Mr. Leinbach filed his appeal from the September 19, 2008 Order on September 29, 2008 (No. 167 on the docket).
III. FACTUAL BACKGROUND
I found that Debtors, in all proceedings in which they appeared before me, were sincere, credible witnesses who conveyed their position satisfactorily for me to accept all of their statements and testimony as true and correct. Specifically, at the time of and upon reviewing the record of the June 27, 2008 hearing, I found and I now find that both Debtors' testimony is entirely sincere and credible. On the other hand and particularly as weighed against Debtors, Mr. Leinbach's testimony was vague and lacked credibility. My determination of Mr. Leinbach's lack of credibility is derived specifically and solely from his testimony and statements in the June 27, 2008 hearing, although I received it through the prism of experience that I have had with his testimony and evidence over the past two years.
My determination of Debtors' credibility is based solely upon my observations of them in the hearings in this matter on December 3, 2007, and on June 27, 2008. I consider none of Debtors' testimony or evidence from the March 3, 2008 hearing and I disregard any impression that I might have of them from the March 3, 2008 hearing.
For my past experiences with Mr. Leinbach, I refer to the numerous opinions in which I reviewed his requests for attorneys' fees and found that he often overcharged his clients. My opinion in In re Waltenberg, 2007 WL 1740274, No. 05-25084 (E.D. Pa. June 15, 2007), summarizes many of my prior determinations of his overcharging, inflated rates, double-billing, and other abuses. I hasten to add that I have not determined that Mr. Leinbach's testimony and statements in this case were not credible because of his prior actions or testimony or my prior findings. To the contrary, my determination of his lack of credibility is based solely upon my observations of him in the June 27, 2008 hearing. I am simply noting my past experiences with him for the record.
Debtors had filed two prior bankruptcy cases before filing the present case; Mr. Leinbach had served as Debtors' counsel in both of them. The first case, filed on February 26, 2001, and docketed to Case No. 01-20786 ("Ramelah I"), was initially filed under Chapter 13 of the Bankruptcy Code, but was promptly converted to Chapter 7 on April 12, 2001. Debtors received their Chapter 7 discharge on October 3, 2001, and Ramelah I was closed on October 9, 2001.
On November 1, 2001, Mr. Leinbach filed Debtors' second bankruptcy petition under Chapter 13 of the Bankruptcy Code, which was docketed to Case No. 01-25023 ("Ramelah II"). On November 14, 2002, an Order was entered granting the Chapter 13 Trustee's Motion to Dismiss Ramelah II.
Following a Chapter 7 case in which a discharge was received with a Chapter 13 case (sometimes referred to colloquially as a Chapter 20) is not uncommon. No new discharge will be permitted in the Chapter 13 case, 11 U.S.C. § 1328(f)(1), but all dischargeable debt would have been eliminated in the Chapter 7 case. The remaining debt, particularly priority claims and other secured loan arrearages can be spread over the life of the Chapter 13 plan.
Mr. Leinbach filed the present Chapter 13 case on behalf of Debtors (docketed to Case No. 02-26185) ("Ramelah III"), on December 23, 2002. Meanwhile, however, on December 16, 2002, the Chapter 13 Trustee disbursed $15,877.86 to Mr. Leinbach as counsel for Debtors in Ramelah II. $15,877.86 was the amount remaining in Debtors' account with the Chapter 13 Trustee inRamelah II when it was dismissed. The $15,877.86 constituted funds paid by Debtors to the Chapter 13 Trustee as plan payments during the pendency of their unsuccessful Chapter 13 case inRamelah II. The record is ambiguous regarding the exact date that Mr. Leinbach received and deposited these funds because Mr. Leinbach's testimony on this issue was confusing.
Mr. Leinbach first testified that he received the $15,877.86 check a few days after the Chapter 13 Trustee mailed it on December 16, 2002, and that he deposited the check a few days after he received it. See CD of June 27, 2008 hearing at 4:30:37 — 4:30:44. Mr. Leinbach later changed his testimony and testified that he did not think that he had received the $15,877.86 check before he filed the petition in Ramelah III on behalf of Debtors on December 23, 2002. See CD of June 27, 2008 hearing at 4:32:07 — 4:32:12. Most of Mr. Leinbach's arguments are apparently based on his having the funds in his possession and control at the time he filed the petition in Ramelah III. I believe, and I find therefore, that he received the check for $15,877.86 a few days before December 23, 2002, the date he filed Ramelah III because he did not want to start Ramelah III until after he had received the funds from Ramelah II.
Mr. Leinbach thereafter disbursed the $15,877.86 as follows. On March 28, 2003, Mr. Leinbach disbursed $2,000 to Debtors. See Check No. 1787 drawn on Mr. Leinbach's Attorney Trust Account attached to Exhibit L-4. On July 23, 2004, Mr. Leinbach, with Debtors' permission, disbursed $10,000 to one of Debtors' mortgage creditors, PNC Bank. See Check No. 1790 drawn on Mr. Leinbach's Pennsylvania Lawyer Trust Board account attached to Exhibit L-4. On June 8, 2005, Mr. Leinbach disbursed $2,227.86 to Debtor, Mr. Ramelah. See Check No. 1791 drawn on Mr. Leinbach's Pennsylvania Lawyer Trust Board account attached to Exhibit L-4.
Of the amount remaining, Mr. Leinbach took $1,600 from his IOLTA account and paid himself the fee allegedly owed to him by Debtors in connection with his representation of them in Ramelah II. See Exhibit L-2, Payment and Disbursement Authorization signed by Debtors on December 9, 2001; see also Mr. Leinbach's Motion to Reconsider Order Entered on March 4, 2008, ¶¶ 9, 11, and Exhibit C attached to Mr. Leinbach's Motion To Reconsider, all of which are attached to Exhibit L-4. The record is ambiguous regarding the date on which Mr. Leinbach took the $1,600 to pay himself.
Mr. Leinbach produced no bank documents as exhibits to show the date he took the funds and his testimony on this issue is confusing again. The evidence in the June 27, 2008 hearing, however, reveals that Mr. Leinbach took the $1,600 (see CD of hearing held on June 27, 2008 at 3:45:06 — 3:46:48) sometime between February 6, 2003, the date that Debtors' Statement of Financial Affairs was filed in Ramelah III (see CD of June 27, 2008 hearing at 4:25:37 — 4:26:08), and March 28, 2003, the date that Mr. Leinbach met with Debtors to review Exhibits L-1 and L-4. Exhibits L-1 and L-4 contained the worksheets that explained how Mr. Leinbach proposed to disburse the $15,877.86 that he had received from the Chapter 13 Trustee. March 28, 2003, was also the date on which Mr. Leinbach disbursed $2,000 to Debtors. See CD of June 27, 2008 hearing at 4:11:39-4:18:19; 4:23:13 — 4:23:50. I believe, and so find, that Mr. Leinbach took the $1,600 to pay himself on March 28, 2003.
An arithmetical error by Mr. Leinbach in making these disbursements left $50 of Debtors' money remaining in his IOLTA account. In a later brief, Mr. Leinbach acknowledged that he had failed to disburse that balance of the funds to Debtors until after the June 27, 2008 hearing. He finally returned the total amount owed to Debtors, therefore, some time after the June 27, 2008 hearing and before filing his August 11, 2008 brief. See Brief filed by Mr. Leinbach, August 11, 2008 (Number 161 on the docket) at p. 3, footnote 1.
IV. DISCUSSION AND LEGAL CONCLUSIONS
I reiterate the legal analysis from my September 19, 2008 Statement supporting the September 19, 2008 Order, which is simple and straight-forward. The Bankruptcy Code and Rules mandate that "an attorney [representing a debtor] in a bankruptcy case has an affirmative duty to disclose fully and completely all fee arrangements and payments," see 11 U.S.C. § 329(a); Fed.R.Bankr.P. 2016(b); Henderson v. Kisseberth (In re Kisseberth), 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 Jensen, No. 04-34567ELF, 2008 WL 2405023, at *4 (Bankr. E.D. Pa. June 13, 2008).
These provisions of the Bankruptcy Code and Rules are intended to protect both debtors and creditors from overreaching attorneys. To ensure that any such overreaching does not occur, bankruptcy courts are given broad and inherent authority to deny and disgorge compensation of attorneys who fail to satisfy the disclosure requirements of the Code and Rules. This is so even when the failure to disclose might have resulted from inadvertence or negligence. Kisseberth, 273 F.3d at 721; Lewis, 113 F.3d at 1045.
I concluded at page 2 in the September 19, 2008 Statement and I conclude again that I have broad and inherent authority to direct that fees paid to an attorney representing a debtor be disgorged if the attorney failed to disclose fully and completely that the 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"); Jensen, 2008 WL 2405023, at *7-8.
I found before at page 2 in the September 19, 2008 Statement and I find again that Mr. Leinbach never disclosed to the Court that he received $15,877.86 from the Chapter 13 Trustee a few days before December 23, 2003, the date he filed the petition inRamelah III. He also failed to disclose that, during the pendency of Ramelah III, he took and applied $1,600 to a fee allegedly owed to him by Debtors in connection with his representation of them in Ramelah II.
I also concluded before at page 2 in the September 19, 2008 Statement and I conclude again that Mr. Leinbach violated 11 U.S.C. § 329(a) and Fed.R.Bankr.P. 2016(b) when he failed to disclose that he had received the $1,600 and kept it as payment of fees owed to him by Debtors in connection with Ramelah II. See Kisseberth, 273 F.3d at 720; Lewis, 113 F.3d at 1044; Jensen, 2008 WL 2405023, at *7.
I concluded at page 2 in the September 19, 2008 Statement and I conclude again that Mr. Leinbach should be sanctioned in this case for his violation of 11 U.S.C. § 329(a) and Fed.R.Bankr.P. 2016(b). The appropriate sanction to be imposed on Mr. Leinbach for his violations is disgorgement and payment of $1,600 to Debtors, which I had ordered in the September 19, 2008 Order.
Although the earlier Ramelah II case had been opened and although the $1,600 fee grew out of Ramelah II, I believe it is appropriate for the disgorgement to be ordered against Mr. Leinbach in this Ramelah III case because his infraction of taking the fee without disclosure occurred during the pendency ofRamelah III.
Going beyond the September 18, 2008 Statement, I will supplement the grounds that support my September 19, 2008 disgorgement Order. The following determinations are separate and apart from Mr. Leinbach's clear breach of his obligation to disclose his demanding and taking the $1,600 fee during Ramelah III.
During the June 27, 2008 hearing, Mr. Leinbach argued that he was entitled to retain the $1,600 because he held a security interest in the funds received from the Chapter 13 Trustee to secure payment of the fee he was owed by Debtors in Ramelah II. Mr. Leinbach based this argument on paragraph 7 of the Agreement To Provide Legal Services executed by Debtors on October 27, 2001. See Exhibit L-3. I specifically directed Mr. Leinbach, during the June 27, 2008 hearing, to provide me with legal authority to support this argument in the bankruptcy context. Notwithstanding this direction, Mr. Leinbach refused or failed to provide any legal authority, in his brief or otherwise, to support his argument that he held an enforceable security interest in the $1,600. I therefore reject Mr. Leinbach's argument as having been abandoned.
The purported legal services agreement is signed only by Debtors. The line for Mr. Leinbach's signature remains blank. See Exhibit L-3.
In addition, Debtor, Mrs. Ramelah, testified credibly during the June 27, 2008 hearing that Mr. Leinbach never explained to Debtors that he would or could take or hold a security interest or lien against them that secured payment of fees he charged in connection with Ramelah II. See CD of June 27, 2008 hearing at 4:40:12-4:40:34. Based upon Mrs. Ramelah's credible testimony, I find incredible Mr. Leinbach's testimony that his retention of the $1,600 was supported by a security interest and I reject it.
Furthermore, even if I were to conclude that Mr. Leinbach held some enforceable security interest in the $1,600, Mr. Leinbach's argument must fall for a number of distinct reasons. Mr. Leinbach's retention of the $1,600 as the payment of fees owed to him in Ramelah II not only violated 11 U.S.C. § 329(a) and Fed.R.Bankr.P. 2016(b), but also violated the bankruptcy automatic stay, 11 U.S.C. § 362(a)(4) (6). By retaining the $1,600 and applying it to a pre-petition debt during the pendency of this bankruptcy case, Mr. Leinbach was enforcing his alleged security interest in property of the estate without first seeking and obtaining relief from the automatic stay. See 11 U.S.C. § 362(a)(4); Jensen, 2008 WL 2405023, at*4. Taking the $1,600 also constituted the collection and recovery of a claim against Debtors that arose before the commencement of Ramelah III. See 11 U.S.C. § 362(a)(6). Alternatively, Mr. Leinbach's conduct also violated 11 U.S.C. § 363(b)(1) and § 549(a) as an unauthorized post-petition use and transfer of property of the estate. See Jensen, 2008 WL 2405023, at *3-4.
Avoidance of the transfer of the $1,600 could only have been brought by Debtors under 11 U.S.C. § 549(a) within two years of the date of the post-petition transfer. See 11 U.S.C. § 549(d)(1). But for Debtors to have brought any such action for recovery of the funds, their counsel should have informed them about the opportunity to do so. This put Mr. Leinbach in the untenably conflicted position of being obliged to advise his clients that they could have forced him to give back the $1,600. Obviously, Mr. Leinbach failed to provide such advice. I am not avoiding the transfer under Section 549(a); nor am I relying on Section 549(a) as a standalone basis to justify my decision that Mr. Leinbach must disgorge the $1,600. I point out, specifically, that Mr. Leinbach's conduct conflicted with his legal and ethical obligations to his clients and violated Section 549(a) of the Bankruptcy Code.
Disclosure of taking the fee alone would not, of course, have been sufficient. Actual court approval of his taking the fee was required. Paraphrasing an excerpt from a June 2008 decision from our brother on this bench, Bankruptcy Judge Eric L. Frank: "Indeed, it is troubling that an attorney as experienced as [Mr. Leinbach] apparently fails to grasp this [requirement]." Jensen, 2008 WL 2405023, at *5.
Mr. Leinbach, when confronted with these arguments during the course of the June 27, 2008 hearing, attempted to justify his conduct by making the bald assertion that other attorneys had been practicing in a similar manner at the time. Mr. Leinbach, however, failed to offer any evidence to support the allegedly commonplace violation of the Bankruptcy Code and Rules by other attorneys. Once again paraphrasing Judge Frank: "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. Leinbach's] transgression." Jensen, 2008 WL 2405023, at *6.
Mr. Leinbach also argues that the Payment and Disbursement Authorization signed by Debtors on December 9, 2001, see Exhibit L-2, created an "absolute assignment" of the $15,877.86 proceeds to him to compensate him for fees that Debtors owed to him in connection with Ramelah II. See Brief filed by Eric Leinbach on August 11, 2008 (Number 161 on docket) at p. 5. He claims that this "absolute assignment" somehow divested Debtors of all their ownership interest in the proceeds. Once again, Mr. Leinbach failed to provide me with any legal authority to support this argument, although he advanced it in his brief. He also failed to point to any evidence of an "absolute assignment" in any testimony referring to such a concept. Mr. Leinbach refers only to the Payment and Disbursement Authorization (Exhibit L-2) for support. Neither the term "absolute assignment" nor the term "assignment" nor any derivation of either of those terms or concepts appears in the document. In addition, nothing is stated in the Payment and Disbursement Authorization to indicate that Debtors agreed to divest themselves of their ownership interest in the proceeds referred to therein. For all of these reasons, I reject Mr. Leinbach's argument that the Payment and Disbursement Authorization created an "absolute assignment" as unconvincing.
Mr. Leinbach also attempts to justify his conduct by arguing that the $1,600 at issue was his property rather than property of the estate. Mr. Leinbach supports this position by, once again, arguing that his alleged security interest in the $1,600 somehow rendered it his property rather than property of the estate. As I noted above, I reject this argument for numerous reasons, including my finding that Mr. Leinbach failed to establish that he held a valid security interest in the $1,600 at issue. I find no evidence whatsoever of any transferred or shifting property interest as he claims.
Mr. Leinbach took the $1,600 during the pendency of Ramelah III and applied it to a pre-petition debt allegedly owed to him by Debtors for legal services rendered in connection with Ramelah II, without disclosing this fact to the Court. This conduct violated 11 U.S.C. §§ 329, 362(a)(4) (6), 363(b)(1), and 549(a) and Fed.R.Bankr.P. 2016(b). I hereby conclude, once again, that the sanction imposed on Mr. Leinbach by the September 19, 2008 Order, that he disgorge and remit to Debtors the sum of $1,600, is the lightest of remedies I could justifiably have imposed.
V. CONCLUSION
As I concluded in Waltenberg and other opinions, Mr. Leinbach has a long history of imposing on the Court, his clients, and their bankrupt estates, fee applications that overcharge in numerous ways, including charging for work that was not actually performed, inflating his hourly rate, charging for hearings or meetings without properly allocating the time to other clients, and charging for exaggerated expenses. His past protests that his fee applications and his time-keeping practices were as good as possible fell far short because he remained apparently unconcerned about properly monitoring the accuracy of his fee applications. But this case introduced me to an additional infraction of Mr. Leinbach's obligations as an attorney for a debtor in bankruptcy. He held thousands of dollars of Debtors' funds and released it to Debtors only after he took his fee. They paid him, but he neither disclosed that fee to the Court nor sought court approval of the fee.
Furthermore, Mr. Leinbach took that fee for the Ramelah II case during the pendency of the Ramelah III case, violating numerous sections of the Bankruptcy Code and Rules in doing so. Sections 362(a)(4) and (6), 329, 363(b), and 549(a) of the Bankrutpcy Code and Rule 2016(b) of the Bankruptcy Rules clearly prohibited Mr. Leinbach from acting as he did.
The sanction imposed on Mr. Leinbach by the disgorgement of $1,600 as ordered in the September 19, 2008 Order is justified. This Opinion supplements and supports my September 19, 2008 Statement and Order and no further order is necessary.