FILED DEC 17 2013
SUSAN M. SPRAUL, CLERK
1 U.S. BKCY. APP. PANEL OF THE NINTH CIRCUIT
2 3 UNITED STATES BANKRUPTCY APPELLATE PANEL 4 OF THE NINTH CIRCUIT 5 In re: ) BAP No. EC-12-1648-KiPaJu )
6 RAJ KAMAL CORPORATION, ) Bk. No. 11-36184 )
7 Debtor. )
)
8 )
RAJ KAMAL CORPORATION; )
9 C. ANTHONY HUGHES, )
)
10 Appellants, )
)
11 v. ) M E M O R A N D U M1 )
12 ALAN S. FUKUSHIMA, Chapter 7 )
Trustee; UNITED STATES )
13 TRUSTEE, )
)
14 Appellees. )
______________________________)
15 Argued and Submitted on October 18, 2013, 16 at Sacramento, California 17 Filed - December 17, 2013 18 Appeal from the United States Bankruptcy Court for the Eastern District of California 19 Honorable Robert S. Bardwil, Bankruptcy Judge, Presiding 20 Appearances: Appellant C. Anthony Hughes, Esq. argued for 21 himself; Appellees did not appear.2 22 Before: KIRSCHER, PAPPAS and JURY, Bankruptcy Judges.
23 24 1 This disposition is not appropriate for publication.
25 Although it may be cited for whatever persuasive value it may have (see Fed. R. App. P. 32.1), it has no precedential value. See 9th 26 Cir. BAP Rule 8013-1.
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27 On April 17, 2013, the Clerk entered a Conditional Order of Waiver directing that the appellees’ brief be filed by May 1, 28 2013. Appellees did not file a brief. Accordingly, they waived their right to file a brief and appear at oral argument.
1 Attorney C. Anthony Hughes (“Hughes”) appeals the bankruptcy 2 court’s order denying compensation for services rendered and 3 requiring disgorgement of all funds Hughes received in connection 4 with the debtor’s case. We AFFIRM. 5 I. FACTUAL BACKGROUND AND PROCEDURAL HISTORY 6 Raj Kamal Corporation (“RJC”) filed a chapter 11 bankruptcy 7 case on June 30, 2011.3 The case was later converted to 8 chapter 7. While in chapter 11, RJC filed an application to 9 employ Hughes as counsel on August 3, 2011. In his supporting 10 declaration, Hughes stated that he was a disinterested person in 11 accordance with § 101(14).4 Neither the application nor Hughes's 12 declaration contained disclosure required by Rule 2014 regarding 13 his connections to the respective attorneys or accountants for the 14 debtor, creditors, or any other party in interest. The bankruptcy 15 court approved the application to employ Hughes on August 15, 16 2011. 17 In conjunction with Hughes's application, RJC filed an 18 application to employ Donald Smith (“Smith”) as its accountant. 19 RJC required Smith’s services “to prepare tax returns, monthly 20 21
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Unless specified otherwise, all chapter and section 22 references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532, and all “Rule” references are to the Federal Rules of Bankruptcy 23 Procedure, Rules 1001-9037. 24 4 The term “disinterested person” means a person that —
(A) is not a creditor, an equity security holder, or an insider;
25 (B) is not and was not, within 2 years before the date of the filing of the petition, a director, officer, or employee of the 26 debtor; and (C) does not have an interest materially adverse to the interest of the estate or any class of creditors or equity 27 security holders, by reason of any direct or indirect relationship to, connection with, or interest in, the debtor, or for any other 28 reason. Section 101(14).
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1 operating reports, the disclosure statement, and to assist with 2 other business accounting as needed.” In the application, RJC 3 represented that Smith had no prior connections to the debtor or 4 its respective attorneys. However, in his supporting declaration, 5 Smith made no similar disclosures. The bankruptcy court approved 6 the application to employ Smith on August 15, 2011. 7 In the interim, Hughes filed several motions and stipulations 8 for the use of cash collateral to pay certain creditors as well as 9 a proposed chapter 11 plan. 10 On June 21, 2012, Smith filed his first and final application 11 for compensation for his accounting services during the chapter 11 12 case.5 The bankruptcy court continued the hearing on Smith's fee 13 application after independently learning of two other cases in 14 which both Hughes and Smith were employed by debtors in their 15 professional capacity.6 In response to the bankruptcy court’s 16 tentative ruling on July 25, 2012, Smith filed a supplemental 17 declaration on August 3, 2012, attempting to withdraw his fee 18 application after learning from the trustee it was unlikely funds 19 would be available to meet his request. On August 15, 2012, the 20 bankruptcy court did not treat Smith’s fee application as 21 withdrawn but, instead, again continued the fee application 22 23 5 Hughes did not include a number of documents in his excerpts of record relevant to this appeal. We therefore 24 exercised our discretion to review independently these imaged documents from the bankruptcy court’s electronic docket. See 25 O’Rourke v. Seaboard Sur. Co. (In re E.R. Fegert, Inc.), 887 F.2d 955, 957-58 (9th Cir. 1989); Atwood v. Chase Manhattan Mortg. Co.
26 (In re Atwood), 293 B.R. 227, 233 n.9 (9th Cir. BAP 2003). 27 6 The cases noted by the bankruptcy court at that time were In re Sundance Self Storage El Dorado LP (case no. 10-36676) and 28 In re W. Coast Real Estate & Mortg. Inc. (case no. 12-30686).
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1 hearing and requested that Smith file a declaration “setting forth 2 the nature and extent of any and all past and current connections” 3 with Hughes. Smith filed the required supplemental declaration on 4 August 24, 2012, in which he disclosed that Hughes was his 5 bankruptcy attorney in 2010 in his personal chapter 13 case (case 6 no. 10-38537). Smith also disclosed two additional instances, 7 previously unknown to the bankruptcy court, in which he and Hughes 8 had both been employed by the same debtor. The bankruptcy court 9 approved Smith’s first and final application for compensation on 10 September 27, 2012. 11 Hughes initially filed an application for compensation in the 12 RJC case on July 3, 2012. It was denied for procedural reasons on 13 July 25, 2012. On August 3, 2012, Hughes submitted another 14 application for compensation, which he later amended on August 28, 15 2012. The bankruptcy court denied that application on 16 September 12, 2012, again for procedural reasons. On October 24, 17 2012, Hughes submitted the instant application for compensation 18 (the “Final Fee Application”), requesting attorney’s fees of 19 $29,450 and expenses of $110.17. 20 On November 6, 2012, in another case where Hughes was 21 debtor's counsel, In re Sundance Self Storage-El Dorado LP, 22 482 B.R. 613 (Bankr. E.D. Cal. 2012)(the “Sundance case”), the 23 same bankruptcy court denied Hughes's fee application because of 24 his failure to disclose his connections with Smith. Prior to this 25 ruling, the bankruptcy court had held a hearing on August 29, 26 2012, during which the court informed Hughes that it had learned 27 of his representation of Smith in Smith’s chapter 13 case. During 28 that hearing, the court stressed to Hughes the importance for
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1 employed professionals to make full disclosure to the bankruptcy 2 court. 3 Two months after the August 29 hearing in the Sundance case, 4 Hughes filed the Final Fee Application on October 24, 2012. On 5 October 30, 2012, Hughes filed an “amended prayer” to the Final 6 Fee Application, stating that he was not requesting payment in 7 excess of funds available from the trustee. Notably, he did not 8 disclose any prior or ongoing relationship with Smith. 9 On November 9, 2012, after the bankruptcy court denied 10 Hughes's fee application in the Sundance case for failure to make 11 proper disclosures under Rule 2014, Hughes filed a motion to 12 continue the hearing on the Final Fee Application, which the 13 bankruptcy court granted. In the interim, Hughes filed no 14 additional documents related to the Final Fee Application. 15 A hearing on the Final Fee Application was held on 16 December 12, 2012, at which no appearances were made. The court 17 denied the Final Fee Application and ordered Hughes to disgorge to 18 the chapter 7 trustee all compensation he had received, including 19 a retainer of $10,736. In its related minute order, the 20 bankruptcy court explained that it denied the Final Fee 21 Application for two reasons: (1) because Hughes had failed to 22 provide sufficient disclosure of the nature, extent, and value of 23 the professional services provided by Hughes's legal assistants; 24 and (2) because Hughes had failed to disclose the nature and 25 extent of his connections with Smith as required by Rule 2014. 26 This timely appeal followed. 27 II. JURISDICTION 28 The bankruptcy court had jurisdiction under 28 U.S.C. §§ 1334
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1 and 157(b)(2)(A). We have jurisdiction under 28 U.S.C. § 158(b). 2 III. ISSUE 3 Did the bankruptcy court abuse its discretion when it denied 4 the Final Fee Application and ordered disgorgement? 5 IV. STANDARDS OF REVIEW 6 We review the bankruptcy court's award or denial of 7 attorney's fees for an abuse of discretion. Feder v. Lazar 8 (In re Lazar), 83 F.3d 306, 308 (9th Cir. 1996). A bankruptcy 9 court’s disgorgement order directed to a debtor’s attorney is 10 reviewed for abuse of discretion. Hale v. U.S. Tr. (In re Byrne), 11 208 B.R. 926, 930 (9th Cir. BAP 1997), aff’d, 152 F.3d 924 (9th 12 Cir. 1998). A bankruptcy court abuses its discretion if it 13 applies the wrong legal standard or its factual findings are 14 illogical, implausible or without support in the record. 15 TrafficSchool.com v. Edriver Inc., 653 F.3d 820, 832 (9th Cir. 16 2011). 17 V. DISCUSSION 18 Hughes contends that the bankruptcy court applied the wrong 19 legal standard by failing to consider attorney-client privilege 20 and privacy rights under California law in requiring disclosure of 21 his relationship to Smith. Further, Hughes argues the court erred 22 in determining that he was not a disinterested person under 23 § 101(14). Finally, Hughes argues the bankruptcy court erred by 24 denying all requested fees and costs and requiring disgorgement of 25 any funds received. 26 A. The bankruptcy court was not required to consider attorney-
client privilege and California privacy laws regarding the 27 Final Fee Application. 28 Hughes argues that the bankruptcy court did not conduct any
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1 inquiry into whether the attorney-client privilege or California 2 privacy laws precluded Hughes from disclosing his relationship 3 with Smith. Hughes further argues that the holder of the 4 privilege under California law is the client and not the attorney, 5 and Smith never waived that privilege. 6 We fail to see where Hughes raised this argument before the 7 bankruptcy court. Generally, the Panel cannot consider arguments 8 that were not raised or briefed before the bankruptcy court. Katz 9 v. Pike (In re Pike), 243 B.R. 66, 69 (9th Cir. BAP 1999)(citing 10 Whittaker Corp. V. Execuair Corp., 953 F.2d 510, 515 (9th Cir. 11 1992)). However, we have the discretion to consider an argument 12 raised for the first time on appeal if the “issue presented is 13 purely one of law and either does not depend on the factual record 14 developed below, or the pertinent record has been fully 15 developed.” Id. (quoting Boker v. C.I.R., 760 F.2d 1039, 1042 16 (9th Cir. 1985)). Because the issue Hughes presents is such a 17 matter, we exercise our discretion to consider it. 18 Privileges in California are created and governed by statute. 19 See CAL. EVID. CODE §§ 950-962. In California, the attorney-client 20 privilege applies to communications between client and counsel 21 that are presumed to have been made in confidence and are broadly 22 protected against discovery. Confidential communication includes 23 "a legal opinion formed and the advice given by the lawyer in the 24 course of that [attorney-client] relationship." CAL. EVID. CODE 25 § 952. The privilege applies not only to communications made in 26 anticipation of litigation but also to legal advice when no 27 litigation is threatened. The client holds the privilege in 28 accordance with the Evidence Code. See CAL. EVID. CODE § 954.
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1 Hughes has not cited, and we could not locate, any relevant 2 authority supporting his contention that the attorney-client 3 privilege or California privacy laws "trump" the disclosures 4 required by estate professionals under § 327 and Rule 2014. In 5 any event, we are not persuaded that either the attorney-client 6 privilege or California privacy laws are a means of excusing 7 disclosure under § 327 and Rule 2014. 8 Bankruptcy petitions are public documents and not subject to 9 the attorney-client privilege. See William E. Schrambling 10 Accountancy Corp. v. United States, 937 F.2d 1485, 1489 (9th Cir. 11 1991)(holding that information contained in Notice of Federal Tax 12 Lien and bankruptcy petition was no longer confidential so 13 disclosure did not violate I.R.C. § 6103). The filing of a 14 bankruptcy petition, which is a matter of public record, does not 15 qualify as a "confidential communication" to which the attorney- 16 client privilege would even apply. Further, as a matter of public 17 record, the information contained therein is no longer private. 18 Even if Hughes were correct and the attorney-client privilege 19 or California privacy laws were applicable to fee applications, 20 both were waived by Smith — first when he filed his chapter 13 21 petition on July 28, 2010, disclosing Hughes as his attorney, and 22 again when he filed his supplemental declaration in support of his 23 first and final fee application on August 24, 2012, which 24 disclosed his relationship with Hughes. As a result, Hughes was 25 free to disclose his relationship with Smith in his Final Fee 26 Application filed on October 24, 2012. Therefore, we see no basis 27 for why he could not do so.
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1 B. The bankruptcy court based its decision not on Hughes's disinterested status, but on his failure to disclose the 2 nature and extent of his connections with Smith. 3 Hughes argues that the bankruptcy court improperly determined 4 that he was not a "disinterested" person as defined in § 101(14) 5 in deciding to deny his Final Fee Application.7 Hughes contends 6 that any prior representation of, or relationship with, Smith had 7 no relation to Hughes's employment in this case. Therefore, 8 Hughes believes he had no connection to Smith that required 9 disclosure. Unfortunately for Hughes, this case is not about his 10 disinterested status as to RJC, but rather his failure to comply 11 with the disclosure requirements of Rule 2014. 12 Rule 2014(a) establishes the procedure for the employment of 13 attorneys and other professionals. It requires the professional 14 to file an application disclosing, “to the best of the applicant’s 15 knowledge, all of the person’s connections with the debtor, 16 creditors, any other party in interest, their respective attorneys 17 and accountants, the United States trustee, or any person employed 18 in the office of the United States trustee.” Rule 2014(a). “This 19 rule assists the court in ensuring that the attorney has no 20 conflicts of interest and is disinterested, as required by 21 11 U.S.C. § 327(a).” Neben & Starrett, Inc. v. Chartwell Fin. 22 Corp. (In re Park-Helena Corp.), 63 F.3d 877, 881 (9th Cir. 1995). 23 The disclosure requirements of Rule 2014 are strictly 24 applied. Id. "[T]he [professional] has the duty to disclose all 25 26 7 Hughes's brief is unclear with respect to whether he is arguing that the bankruptcy court improperly determined that he or 27 Smith was not disinterested. Because Hughes has no standing to raise an argument for Smith, and Smith’s fees were approved, we 28 only reviewed the issue as to Hughes.
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1 relevant information to the court, and may not exercise any 2 discretion to withhold information.” Kun v. Mansdorf 3 (In re Woodcraft Studios, Inc.), 464 B.R. 1, 8 (N.D. Cal. 4 2011)(citing In re Park–Helena, 63 F.3d at 880, 882; In re Coastal 5 Equities, Inc., 39 B.R. 304, 308 (Bankr. S.D. Cal. 1984)(“It is 6 the duty of the attorney to reveal all connections.”)(citing 7 In re Haldeman Pipe & Supply Co., 417 F.2d 1302, 1304 (9th Cir. 8 1969); In re Arlan's Dep't Stores, Inc., 615 F.2d 925, 932 (2d 9 Cir. 1979)); In re Plaza Hotel Corp., 111 B.R. 882, 883 (Bankr. 10 E.D. Cal. 1990)(“The duty is one of complete disclosure of all 11 facts.”), aff'd, 123 B.R. 466 (9th Cir. BAP 1990)). 12 The duty of professionals is to disclose all connections with the debtor, debtor-in-possession, 13 insiders, creditors, and parties in interest. . . .
They cannot pick and choose which connections are 14 irrelevant or trivial. . . . No matter how old the connection, no matter how trivial it appears, the 15 professional seeking employment must disclose it. 16 In re Park-Helena Corp., 63 F.3d at 882 (quoting In re EWC, Inc., 17 138 B.R. 276, 280-81)(Bankr. W.D. Okla. 1992)(other citations 18 omitted). “The duty to disclose is a continuing obligation as to 19 which the risk of defective disclosure always lies with the 20 discloser." In re Kobra Props., 406 B.R. 396, 402 (Bankr. E.D. 21 Cal. 2009)(citing In re Park–Helena Corp., 63 F.3d at 880–81; 22 cf Official Comm. of Unsecured Creditors v. Michelson 23 (In re Michelson), 141 B.R. 715, 719–20 (Bankr. E.D. Cal. 1992)). 24 Hughes clearly had a connection to Smith as his chapter 13 25 bankruptcy attorney, as well as through Smith’s employment as an 26 accountant for RJC and other debtors for which Hughes was counsel. 27 Hughes particularly knew disclosure was of great importance to the 28 bankruptcy court when he filed his Final Fee Application based on
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1 the court’s previous admonishment for his failure to disclose his 2 connections to Smith at the August 29, 2012 hearing in the 3 Sundance case. Hughes was further aware of the necessity of 4 disclosure under Rule 2014 when his fee application in the 5 Sundance case was denied on November 9, 2012, which was one month 6 before the hearing on the Final Fee Application. 7 Hughes's failure to disclose his connections to Smith did not 8 allow the bankruptcy court to ensure that no conflicts of interest 9 existed. Despite the ongoing duty to disclose and the bankruptcy 10 court’s previous denial of fees in the Sundance case for the same 11 violation, Hughes still failed to disclose his connections with 12 Smith to the bankruptcy court. Even after his initial failure to 13 disclose the nature and extent of his relationship to Smith in his 14 employment application, the better course of action for Hughes 15 would have been to file an amended declaration in support of his 16 Final Fee Application disclosing his connections with Smith. 17 C. The bankruptcy court did not abuse its discretion when it denied the Final Fee Application and ordered disgorgement.
18 19 Hughes contends that to deny all fees and expenses and to 20 require disgorgement of any funds received by him is too harsh a 21 result. Specifically, he contends that a balancing test should be 22 applied where the penalty for a disclosure failure is in 23 proportion to the gravity of the breach. Again, we fail to see 24 where Hughes raised this argument before the bankruptcy court. In 25 any event, what Hughes asserts is not the law of this circuit. 26 “Disclosure that later turns out to be incomplete can be 27 remedied by denial of fees.” In re Kobra Props., 406 B.R. at 402 28 (citing In re Park-Helena Corp., 63 F.3d at 880-81). “Even a
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1 negligent or inadvertent failure to disclose fully relevant 2 information may result in a denial of all requested fees." 3 In re Park-Helena Corp., 63 F.3d at 882 (citations omitted). 4 Although Hughes acknowledged at oral argument that negligent 5 or inadvertent disclosure may result in denial of all 6 compensation, he contends that when the nondisclosure was not 7 intentional, some fees should be allowed based on benefit to the 8 estate. While Hughes's argument is not completely without logic, 9 we are bound by Ninth Circuit law and are unable to entertain it. 10 See Barnes-Wallace v. City of San Diego, 704 F.3d 1067, 1077 (9th 11 Cir. 2012)(we are bound by the law of the Ninth Circuit). 12 Even if we could entertain Hughes's argument, however, it 13 would not help him in this case. As a bankruptcy attorney, Hughes 14 is aware of the requirements of Rule 2014. Further, Hughes was on 15 notice of the bankruptcy court’s need for disclosure regarding his 16 relationship with Smith based on its prior admonishment in the 17 Sundance case, and when Smith was ordered to file a supplemental 18 declaration in support of his fee application on August 15, 2012, 19 “setting forth the nature and extent of any and all past and 20 current connections” with Hughes. Yet, despite this, Hughes never 21 submitted a supplemental declaration in support of his Final Fee 22 Application making the proper disclosures. 23 Accordingly, while it may be a harsh result that we as 24 individual bankruptcy judges might have determined differently, 25 the bankruptcy court was within its discretion in denying the 26 Final Fee Application and ordering disgorgement of all fees
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1 received.8 2 VI. CONCLUSION 3 For the foregoing reasons, we AFFIRM. 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 8 We are also unable to grant Hughes's request at oral argument to award him at least RJC's filing fee, which he paid.
26 Based on our review of the record, he never asked the bankruptcy court for this relief, although he may still be able to do so.
27 Further, as an appellate court, we cannot play the role of "fact finder" and parse out those amounts of his requested fees and/or 28 expenses we think may be awardable.