Ethics and Professional Compensation

American Bankruptcy Institute Law Review Staff

Recently, in Jonak v. McDermott,[i] a federal district court in Minnesota affirmed a bankruptcy court’s ruling that an individual and his companies functioned as bankruptcy petition preparers, regardless of what they actually called themselves.[ii] In particular, the district court affirmed the bankruptcy courts order enjoining the individual and his companies from “providing any bankruptcy assistance within the meaning of section 101(4A) to an assisted person for compensation, without giving all disclosures required by sections 527 and 528(a).”[iii] The district court also held that the bankruptcy court’s order disgorging the fees paid to the individual and his companies was proper.[iv] In Jonak, Edward Jonak was sole shareholder, president, and operating principal of Affordable Legal Services (“ALC”). [v] He advertised ALC as providing “low cost legal aid,” including services by “program attorneys.”[vi] Acting through ALC, he provided forms for clients to complete, assisted in preparing bankruptcy petitions on their behalf, answered questions about how to complete forms, and provided completed firms to a service to type into completed bankruptcy petitions and schedules.[vii] After investigating Mr. Jonak’s conduct in the underlying bankruptcy cases the United States Trustee (the “UST”) filed a complaint against Jonak and his companies, alleging that Mr. Jonak violated five provisions of section 110 of the bankruptcy code, all of which are applicable to petition preparers.[viii] The complaint also alleged that Mr. Jonak violated section 527 by failing to provide required notices and section 528 by failing to identify his company as a debt relief agency.[ix] In response, Mr. Jonak denied that section 110 applied, asserting that he did not physically prepare the bankruptcy documents and therefore was not a bankruptcy petition preparer.[x] He further contended that sections 526 to 528 did not apply, arguing that his company, ALC, was not a debt relief agency.[xi] After the UST moved for summary judgment, the bankrupty court found that Jonak and ALC functioned as bankruptcy petition preparers and that ALC qualified as a debt relief agency.[xii] Therefore, the bankruptcy court enjoined him from committing any future violations of section 110, ordered forfeiture and turnover of fees received, and awarded the UST liquidated damages.[xiii] On appeal, the district court affirmed.[xiv]

They’re Rare and They’re Exceptional: Fee Enhancement Authorization by Bankruptcy Courts

By: Adrianna R. Grancio

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

Recently, in In re Asarco,[i] the Fifth Circuit held that a bankruptcy court did not abuse its discretion in authorizing fee enhancements to two law firms representing a chapter 11 debtor in connection with their remarkably successful fraudulent transfer litigation.[ii] The Fifth Circuit also agreed with the lower court decision in rejecting compensation for the defense of fee applications[iii]. In In re Asarco, Baker Botts L.L.P. (“Baker Botts”) and Jordan, Hyden, Womble, Culbreth & Holzer, P.C. (“Jordan Hyden”) served as debtor’s counsel to the chapter 11 debtor and helped the debtor confirm a plan that paid creditors in full[iv]. In connection with that representation, Baker Botts and Jorden Hyden successfully prosecuted complex fraudulent transfer claims against the debtor’s parent corporation resulting in an unprecedented judgment valued at between $7 and $10 billion.[v] While Baker Botts and Jordan Hyden were compensated pursuant to section 330(a) of the Bankruptcy Code, the bankruptcy court authorized a twenty percent fee enhancement for Baker Botts and a ten percent fee enhancement for Jordan Hyden.[vi] The bankruptcy court based the authorization of the fee enhancements on the “rare and exceptional” performance of the firms in successfully prosecuting a multi-billion dollar fraudulent conveyance action and the fact that the rates charged by Baker Botts were roughly twenty percent below market rate.[vii] On appeal to the district court, the fee enhancements were affirmed.[viii] After the parent corporation appealed again, the Fifth Circuit affirmed the lower court’s authorization of the fee enhancements.[ix] Further, the Fifth Circuit, ruling in line with the Eleventh Circuit[x] held that based on the plain meaning reading of Section 330(a) compensation for the cost counsel or professionals incur in defending fee applications is not permissible.

Bankruptcy Attorneys Potentially Face Sanctions for Failure to Reasonably Investigate the Accuracy of Bankruptcy Petitions Prior to Filing

By: Nancy Bello

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

Recently, in In re Parikh,[i] a bankruptcy court imposed sanctions pursuant to Rule 9011 of the Federal Rules of Bankruptcy Procedure against a debtor’s attorney who signed a chapter 7 petition that contained incomplete and incorrect information that was clearly refuted by the debtor’s previous chapter 13 petition.[ii] In Parikh, the debtor initially filed under chapter 13 of the Bankruptcy Code.[iii] Subsequently, the debtor’s chapter 13 case was dismissed for the debtor’s failure to produce documents.[iv] The debtor then filed a second bankruptcy case under chapter 7 of the Bankruptcy Code in order to stop a judgment creditor’s enforcement action in state court.[v] Although the debtor’s chapter 7 attorney could access the chapter 13 petition and schedules on PACER, there were several discrepancies between the information provided in the petition and schedules in the chapter 13 case in comparison to the information contained in the petition and schedules in the chapter 7 case.[vi] For example, the Schedule H to the chapter 13 petition indicated there were co-debtors, while the Schedule H to the chapter 7 petition did not.[vii] Further, the chapter 13 petition reflected monthly payments on the debtor’s first mortgage of $823.73, while the chapter 7 petition reflected a monthly first mortgage payment of $1,700.[viii] In addition, the chapter 7 petition failed to reveal a Citibank bank account, which the debtor disclosed in the chapter 13 petition.[ix] Subsequently, the judgment creditor commenced an adversary proceeding seeking to dismiss the chapter 7 petition as a bad faith filing, or alternatively, to deny the debtor’s discharge.[x] While the bankruptcy court refused to dismiss the case, the court did enter an order denying the debtor’s discharge.[xi] Shortly after the court entered that order, the judgment creditor moved for sanctions against the debtor and the debtor’s attorney pursuant to Rule 9011, § 707(b)(4)(C) and (D), 11 U.S.C. § 105, 28 U.S.C. § 1920, 28 U.S.C. § 1927, and the court’s inherent powers.[xii] The bankruptcy court initially denied the sanctions motion.[xiii] On appeal, however, the district court remanded the matter for further findings.[xiv] On remand, the bankruptcy court found that the debtor’s chapter 7 attorney’s conduct was sanctionable pursuant to Rule 9011(b)(3) as to the attorney and his firm.[xv] The bankruptcy court declined to impose monetary sanction; instead, the court determined that publication of its decision was an appropriate sanction against the chapter 7 attorney and his firm.[xvi]