Independent v. Miller

• Court: Court of Appeals for the First Circuit
• Decided: December 7, 1999
• Docket: 99-9004
• Status: Published

Opinion

USCA1 Opinion

                 United States Court of Appeals

                     For the First Circuit


No. 99-9004



          IN RE: INDEPENDENT ENGINEERING COMPANY, INC.,



                             Debtor,



                     _____________________

                                

                      THOMAS MILLER, ESQ.,

                                

                           Appellant,

                                

                               v.

                                

       U.S. TRUSTEE, ALFRED J. PETERSON, AMERICAN ELGIN,

      INDEPENDENT ENGINEERING COMPANY, INC., U.S. TRUSTEE,

                                

                           Appellees.


APPEAL FROM THE BANKRUPTCY APPELLATE PANEL

                                

                      OF THE FIRST CIRCUIT


Before

                                

                     Boudin, Circuit Judge,

                 Bownes, Senior Circuit Judge,

                   and Stahl, Circuit Judge.


Thomas Miller, with whom Miller Law Office was on brief, for

appellant.

     John P. Fitzgerald, III, Assistant United States Trustee, with

whom Gary L. Donahue, Attorney Advisor, United States Department of

Justice, was on brief, for appellee.


November 30, 1999


Stahl, Circuit Judge.  Thomas Miller appeals from a

decision of the Bankruptcy Appellate Panel ("BAP") for the First

Circuit.  That decision affirmed an order of the United States

Bankruptcy Court for the District of Massachusetts (the "bankruptcy

court"),  disqualifying Miller from serving as counsel for

Independent Engineering Company, Inc. (the "Debtor"), and requiring

him to return all fees and retainers to the Debtor.  For the

reasons set forth below, we affirm.

                               I.

                           Background

  We draw the facts of this case, which are not in dispute,

from the opinion of the BAP:

      On September 29, 1993, the Debtor,

  Independent Engineering Company, Inc., filed a

  voluntary petition for relief under Chapter 11

  of the Bankruptcy Code, 11 U.S.C. 101, et.

  seq.  On that same date, the Debtor filed a

  Motion to Employ Thomas Miller as counsel, a

  supporting affidavit and a "Statement pursuant

  to Rule 2016(b)."  At that time, Miller's

  affidavit and rule 2016 Statement reflected

  that the source of the $10,000 retainer [for

  Miller's services] was the company's

  president, Al Peterson.  The initial

  application, affidavit and rule 2016 statement

  did not set forth the terms of the engagement

  or the fee agreement between the Debtor and

  Miller.

             . . . .

 

      On October 27, 1993, the Debtor filed

  an amended motion to employ counsel that

  incorporated a copy of a fee agreement by and

  between the Debtor, Miller, and Peterson.

  (footnote omitted.)  Paragraph 2 of the fee

  agreement stated that "[Miller's] Firm will be

  paid $10,000 as a security deposit retainer." 

  Paragraph 6 provided for monthly billing

  against the retainer, with the retainer to be

  replenished by the Debtor.  [Paragraph 4

  provided for any balance remaining in the

  retainer to be "refunded to the Client,"

  designated by Paragraph 1 as Independent

  Engineering Company, Inc.  The fee agreement

  also indicated that the source of the

  retainer, Alfred Peterson, was designated as a

  third party guarantor and "not [a] client[] of

  the Firm."]



             . . . .



      On October 29, 1993, the [Bankruptcy]

  Court endorsed the amended motion to employ as

  follows: "Application approved.

  Notwithstanding paragraph 6 of the attached

  agreement, all compensation shall be subject

  to approval by the court upon appropriate

  application. /s/Joan N. Feeney."



             . . . .



      On December 2, 1993, Miller filed his

  First Amendment to the Rule 2016(b) Statement

  wherein he disclosed for the first time that

  he had taken draws against the retainer and

  had received post-petition payments from the

  Debtor as follows:



      Oct. 9, 1993: $3,007.80 (billed against

  retainer)



      Oct. 29, 1993: $3,007.80 (post-petition

  payment by the Debtor)



      Nov. 30, 1993: $4,612.80 ($3,088.68

  billed against retainer)



      As of December 2, 1993, Miller had

  filed no fee applications.  The Court had

  approved no fees; it had authorized no

  payments.  In response to Miller's December 2

  disclosure, the Court ordered him to file an

  interim fee application[, which Miller did on

  January 7, 1994]. . . .   The United States

  Trustee objected [on February 3, 1994 to

  Miller's First Interim Fee Application and

  filed a Motion to Vacate Miller's employment,

  based on Miller's lack of disinterestedness]. 

  After a hearing [on February 15, 1994], the

  bankruptcy court entered its order vacating

  the October 29, 1993 endorsed order approving

  Miller as counsel and further ordered Miller

  to disgorge all retainers and fees.



  The bankruptcy court instructed the Debtor to obtain new

counsel by March 2, 1994.  Miller, who did not request

reinstatement, appeals the bankruptcy court's ruling insofar as it

required him to disgorge his fees and retainer.

                              II.

                       Standard of Review

  We review a bankruptcy court's findings of fact for clear

error and examine its conclusions of law de novo.  See Winthrop Old

Farm Nurseries, Inc. v. New Bedford Inst. for Sav. (In re Winthrop),

50 F.3d 72, 73 (1st Cir. 1995).  The bankruptcy court's

interpretation of the Bankruptcy Code presents a question of law. 

See id.  The application of the code to a particular case poses a

mixed question of law and fact, which is subject to review for clear

error unless the bankruptcy court's analysis was infected by legal

error or based on a mistaken impression of applicable legal

principles.  See Williams v. Poulos, 11 F.3d 271, 278 (1st Cir.

1993); see also Inwood Labs., Inc. v. Ives Labs., Inc., 456 U.S.

844, 855 n.15 (1982); In re Winthrop, 50 F.3d at 73.  

                              III.

                           Discussion

  Miller contends that the BAP erred in upholding the order

of the bankruptcy judge because, when he drew against his client's

retainer, the lawfulness of his conduct was unclear.  On appeal,

Miller claims that:  he was disinterested, he was not required to

obtain prior judicial approval for withdrawals from the retainer

because it was not property of the estate, his fee agreement

permitted replenishment of the retainer by the Debtor, and the

bankruptcy court's order was ambiguous.

  Relying upon In re Printcrafters, Inc., 233 B.R. 113, 120

(D. Colo. 1999), a case in which counsel who had drawn on a retainer

prior to the filing of a bankruptcy petition was nevertheless found

to be "disinterested," Miller argues that his draws were not

necessarily proscribed as a matter of law.  Unlike the attorney in

Printcrafters, however, Miller not only drew on a pre-petition

retainer but also failed to disclose that fact in his amended motion

for employment or in any accompanying statements to the bankruptcy

court.  

  Miller also attempts to justify his failure to submit a

timely fee application for either of his first two withdrawals by

citing cases suggesting that prior judicial approval is not required

for draws on retainers not the property of the estate.  See In re

McDonald Bros. Constr., Inc., 114 B.R. 989, 994 (Bankr. N.D. Ill.

1990); Indian Motocycle Assocs. III Ltd. Partnership v.

Massachusetts Hous. Auth., 66 F.3d 1246, 1254 (1st Cir. 1995).  We

need not reach this question because the fee agreement itself

provided for any balance of the retainer to be "refunded to the

client," in this case, the Debtor.

  But even if the cases permitting certain withdrawals from

retainers without prior judicial approval were on all fours with

this case, notice to parties in interest, a hearing, and judicial

approval are required when counsel seeks compensation from the

debtor's estate.  See 11 U.S.C.  330(a), 331; In re Chapel Gate

Apartments, Ltd., 64 B.R. 569, 575 (Bankr. N.D. Tex. 1986) (holding

that "fees in bankruptcy cases . . . are subject to review,

modification, and outright cancellation by the Court").   Moreover,

the fact remains that Miller ignored an order of the bankruptcy

court requiring him to obtain prior judicial approval for any

compensation he was to receive notwithstanding that paragraph 6 of

the fee agreement purported to allow him to bill and collect

additional reimbursement directly from the debtor.  This order was,

of course, entirely lawful, see 11 U.S.C.  328(c), 329(a),

330(a)(1)(A) & (B), 331; In re Martin, 817 F.2d at 180; In re Chapel

Gate Apartments, Ltd., 64 B.R. at 575, and Miller's violation of it

properly subjected him to sanctions, see 11 U.S.C.  328(c),

329(b); In re Martin, 817 F.2d at 182-183 (observing that the

failure to disclose a fee arrangement can provide grounds for the

disqualification of debtor's counsel and the disgorgement of fees);

see also Rome v. Braunstein, 19 F.3d 54, 58, 62 (1st Cir. 1994);

Smith v. Marshall (In re Hot Tin Roof, Inc.), 205 B.R. 1000, 1003-04

(B.A.P. 1st Cir. 1997); In re Saturley, 131 B.R. 509, 517 (Bankr.

D. Me. 1991).

  Miller also argues that even if he properly was subject

to sanctions, the total disgorgement of his retainer and fees

constituted an abuse of the bankruptcy court's discretion.  We

disagree.  Bankruptcy courts historically have been accorded wide

discretion to oversee the terms and conditions of a debtor's

engagement of professionals because "[t]he bankruptcy judge is on

the front line, in the best position to gauge the ongoing interplay

of factors and to make the delicate judgment calls which such a

decision entails."  In re Martin, 817 F.2d at 182.  Section 327(a)

authorizes an estate trustee or a debtor in possession to employ

"disinterested" professionals who "do not hold or represent an

interest adverse to the estate."  11 U.S.C.  327(a); see also id.

 328(c) (allowing courts to deny compensation and reimbursement to

such professionals).  

  Section 329 requires debtor's counsel to disclose to the

court the amount and the source of any compensation that counsel has

received, or expects to receive, from the client for the year that

preceded the bankruptcy petition.  See 11 U.S.C.  329. 

Professionals employed in bankruptcy cases are subject to

"particularly rigorous conflict-of-interest restraints," Rome, 19

F.3d at 57, whereby they must not evidence "even [an] appearance of

impropriety," id. at 58 (internal quotation marks and citation

omitted).  The bankruptcy court has continuing authority to revisit

an order employing a particular attorney to represent a debtor.  See

11 U.S.C.  328(c); see also Rome, 19 F.3d at 58; In re Hot Tin

Roof, Inc., 205 B.R. at 1003.  Every potential conflict must be

disclosed, and upon finding that counsel has failed to comply, the

bankruptcy judge can impose various remedies, including

disqualification of counsel and the denial of fees.  See In re

Martin, 817 F.2d at 182-83; see also In re Chapel Gate Apartments,

Ltd., 64 B.R. at 575 (holding that fees can be denied even where the

failure to disclose results from negligence rather than from

design).

  By failing to timely disclose and secure prior judicial

approval of withdrawals from the pre-petition retainer and

subsequent replenishment by the Debtor, Miller flouted a lawful

order of the bankruptcy court and thereby frustrated its ability to

oversee the bankruptcy proceedings.  On these facts, we cannot say

that the bankruptcy court's decision was clearly erroneous. 

  Affirmed. Costs to appellees.