Robert A House and Mary Ann House

OCR transcription for search; preserved printed pages are authoritative

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AUTHENTICATED
U.S. GOVERNMENT

INFORMATION 7]
GPO

U.S. Bankruptcy Court
District of Idaho

Filed: August 25, 2004
at 10:00 a.m.

By: JC q

IN THE UNITED STATES BANKRUPTCY COURT

FOR THE DISTRICT OF IDAHO

IN RE

GARY PETERSON and
LISA PETERSON,

Debtors.
IN RE
ROBERT WHITTLE,

Debtor.
IN RE
ROBERT HOUSE and
MARY HOUSE,

Debtors.

MEMORANDUM OF DECISION - 1

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Case No. 04-01469

MEMORANDUM OF DECISION

Case No. 04-01577

Case No. 04-01748 “

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IN RE }
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ANTHONY CRAFT and ) Case No. 04-01851
STELLA CRAFT, )
)
Debtors. )
)
)
INTRODUCTION

These four chapter 13 cases have an issue in common. In each, the attorney
of record for the consumer debtors, Martin Martelle (“Martelle”), did not attend the
debtors’ § 341(a) meeting of creditors and their examination at that meeting.’ He,
instead, sent a different attorney in his place, and paid that attorney.

Ata recent hearing in one of these cases, the Court questioned Martelle
about the particulars of this practice.” While no ruling was then made, the Office
of the United States Trustee (“UST”) soon thereafter filed motions in each of these
cases seeking the Court’s review and reduction of Martelle’s attorneys’ fees, and
disallowance and disgorgement of fees to the substitute attorney.

Following the filing of briefs, affidavits and other materials, the UST’s

motions were argued and submitted on August 16, 2004. The Court finds the

1 While § 341(a) requires a meeting of creditors, the examination of the debtors at
that meeting is mandated by § 342.

2 Chapter 13 trustee, Bernie Rakozy, brought the matter to the Court's attention in
his “Trustee’s Findings and Recommendations” filed prior to the chapter 13 confirmation
hearing in one of the cases. The § 341(a) minutes in each case reflected the substitute
counsel’s appearance.

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motions well taken, and they will be granted. This Decision constitutes the Court’s
factual findings and legal conclusions. Fed. R. Bankr. P. 7052, 9014.
BACKGROUND AND FACTS

The facts are in almost all regards undisputed. They are established by
Martelle’s affidavit, outlining his practices in these four cases and in general, and by
the Court’s own record in each case.’

Martelle agreed to represent the debtors in these four chapter 13 cases.
Nothing submitted establishes that there was ever any written fee agreement
between Martelle and his clients, and the terms of the engagement appear to be
documented solely by the statement he filed with the Court under Fed. R. Bankr. P.
2016(b).*

With slight variances, each of the four Rule 201 6(b) statements here
discloses that Martelle would represent the debtors and charge a “flat fee” of

$1,000.00 for the chapter 13.° However, he also indicates in these disclosures that

? The Court takes judicial notice of its files and records. Fed. R. Evid. 201.

4 In brief, Rule 2016(b) obligates a debtor's attorney to file and to transmit to the
UST, within 15 days of the petition’s filing, the statement regarding compensation paid or
to be paid that is required under § 329 of the Cade. The Rule requires that the statement
also indicate whether any part of the compensation has been or is to be shared with any
other entity, and the particulars of any such agreement, unless that agreement is “with a
member or regular associate of the attorney's law firm.” A supplemental statement is
required within 15 days after any payment or agreement not previously disclosed.

= This would keep Martelle under the presumptively allowable fee ammount for each
case, eliminating the need to file a detailed affidavit of services in support of his requested
compensation. See, eg., in re Gebert, 99.4 |.B.C.R. 137, 138 (Bankr. D. Idaho 1999}
(discussing use and operation in this District of such presumptively allowable attorneys’
fees in chapter 13).

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he would keep track of his time, at a rate of $175.00 per hour, and charge the
debtors any amounts exceeding that $1,000.00 fee.®

In three of the four cases, partial payments toward the $1,000.00 amount
were made, and the parties contemplated that the balance of any allowable fees
would be paid through the chapter 13 plan. In the fourth, only costs were
advanced prepetition, and all fees were to be funded by debtors’ plan.’

There is nothing in any of the Rule 2016(b) statements to indicate any
attorney other than Martelle would have a role in representing the debtors; in fact,
Martelle affirmatively states: “| have not agreed to share the [disclosed]
compensation with any other person.”

In these four cases, another attorney, Gregory Swanson (“Swanson”),
appeared and represented the debtors at the § 341 (a) meeting of creditors and their
examination under § 343. Swanson did not file any Rule 2016(b) statement or

disclosure.”

® In essence, the flat fee is nothing of the kind. It isa minimum fee.

7 In Peterson, the debtors paid a retainer of $606.00 plus $194.00 in costs, to be
applied against the minimum fee of $1,000.00, with debtors agreeing to pay $175.00 per
hour for services exceeding the retainer amount. Case No. 04-01469, Doc. No. 2. In
Whittle, the debtor paid a retainer of $506.00 toward fees and $194.00 in costs, on the
same basis, Case No. 04-01577, Doc. No. 2. In House, debtors paid $600.00 toward fees
and $194.00 toward costs. Case No, 04-01748, Dac. No. 2. And in Craft, debtors
advanced and paid only $194.00 in costs, and agreed to pay all fees through the plan
calculated at $175.00 per hour, again with a $1,000.00 minimum. Case No. 04-01851,
Dac. No. 2.

§ Swanson also did not file any responsive pleadings, or appear at the hearing on
August 16, even though he was an adverse party under the UST’s motions,

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Martelle explained the relationship between himself —- and his professional
corporation Martelle Law Offices? —- and Swanson. Martelle indicated that he and
Swanson have “separate law practices” (with Swanson doing business as Swanson
Law Offices).° Swanson and Martelle are separately listed in the directory of the
Idaho State Bar, in local legal services directories (e.g., “Tucker Legal Directory”)
and in telephone directories. None of these resources indicate Swanson Is an
associate, a member or “of counsel” in, with or to Martelle or Martelle Law Offices.
Swanson is not shown on Martelle’s stationary or business cards, nor is Martelle on
Swanso’s,

Swanson conducts his practice out of an office that he rents from Martelle, in
the same building where Martelle practices. Swanson “pays” for that office by
performing ten hours of legal work for Martelle each month,"

Martelle hires Swanson on an as needed basis to assist with legal research,
drafting pleadings, meeting with clients, conducting discovery, making court
appearances, and attending § 341 (a) meetings. Martelle first engaged Swanson on

this sort of basis in November, 2003, Martelle indicates Swanson’s work is, in the

§ The Court was advised that Martclle incorporated Martelle Law Offices as a
professional corporation, and he provides his legal services to the public through that
entity. See generally Idaho Code § 30-1301, ef seq. Martelle is its only shareholder.

The Court was not told if Swanson had also formed a professional corporation.

" The only financial aspects of this relationship that were specifically discussed
were the office “rent” payment through Swanson’s services, Martelle’s payment to Swanson

~ for other legal work at a rate of $30.00 per hour, and the fact that each lawyer paid for and

maintained his own personal malpractice insurance.

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bankruptcy context, essentially limited to research and appearing for debtors at

§ 341(a) meetings. It does not appear that Swanson has signed any pleadings for
the debtors in these four cases, and Martelle indicated that he felt personally
responsible to make all appearances in his bankruptcy debtors’ cases other than at
the § 341{a} meetings.

In nonbankruptcy matters, Martelle allows Swanson to sign pleadings
bearing the Martelle Law Offices caption as well as correspondence on Martelle’s
firm letterhead, even though Swanson’s name does not appear on that letterhead. '°
Martelle indicates this process is “routine” and evidences that Swanson “is held out
to parties that he deals with as being an attorney with Martelle Law Offices.” See
Case No. 04-01469, Doc. No. 22 at 2.2 Martelle’s bankruptcy clients are told that
“there are two attorneys al Martelle Law Offices” and that either of them may

appear at the § 341 meetings. /d. at 3.

2 The Court was provided with several examples of pleadings and correspondence.
See, e.g., Case No, 04-01469, Doc. No. 22 (Affidavit of Martin J. Martelle) (attached
exhibits). Some of these pleadings show, in the captions, the names of both Martelle and
Swanson immediately above the name “Martelle Law Offices” and certain of the pleadings
are signed “Martelle Law Offices, by: Gregory N. Swanson,”

13 The Court is today concerned with matters of bankruptcy law and practice. lt is
beyond the scope of this Decision to address other matters that may be implicated, such as
idaho Rule of Professional Conduct 7.5(d), which provides: “Lawyers may state or imply
that they practice in a partnership or other organization only when that is the fact.” The
Commentary to this Rule states that “lawyers sharing office facilities, but who are not in fact
associated with each other in a law firm, may not denominate themselves [in a way that]
suggests that they are practicing law together in a firm.”

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4 ot a rate of

Martelle pays Swanson for his work “on a contract basis
$30.00 per hour. This is the rate that applies, for purposes of Martelle’s payment to
Swanson, when Swanson attends a debtor's § 341 (a) meeting. However, Martelle
admitted during hearing that the debtors would be charged at his $175.00 per hour
rate for the time spent at the first meeting even if Swanson attended. Martelle
ultimately conceded that this rate, which he admits is at the top end of the scale for
Boise bankruptcy attorneys and which he argues ts justified for his work on the
basis of his experience and expertise in bankruptcy, commercial litigation and tax
law, is not an appropriate rate for Swanson."

DISCUSSION AND DISPOSITION

That the described conduct would likely come under scrutiny should come
as no surprise. /7 re Castorena, 270 B.R. 504, 529-31, 01.4 |.B.C.R. 153 (Bankr. D.
Idaho 2001), stressed the importance of an attorney’s attention to the duties of

advising and representing debtor clients at their § 341(a) meetings and § 343

examinations, and this was reemphasized in én re Lish, 04.1 1.B.C.R. 34, 35 (Bankr.

14 Martelle indicates that this means no withholding is taken from Swanson’s pay.
See Case No. 04-01469, Doc. No. 21 at 2, While this calls to mind distinctions between
employees and independent contractors, Martelle also indicates that “[clients are advised
that Mr. Swanson /s employed by Martelle Law Offices.” See Case No. 04-01469, Doc.
No. 22 at 3 (emphasis added).

'5 The Court was provided with little information about Swanson, other than an
indication from the chapter 13 trustees that he seemed prepared at the § 341(a) meetings in
these cases and handled them competently. The Idaho State Bar website indicates he was
admitted to practice in 1988. See http://www2.state.id.us/isb/mem/attorney rosterasp (last
visited Aug. 19, 2004), Court records do not show that he has filed any bankruptcy
petitions for debtors as counsel of record. Martelle supplied no information about Swanson
or his practice other than as indicated in this Decision. And, as noted, Swanson did not
appear at hearing on the UST’s motions, nor did he respond to those motions.

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1D. Idaho 2004). Moreover, Bankruptcy Judge Jim D. Pappas has discussed, ina
clear and easily understood manner, many of the issues that can arise when
“substitute” counsel appear for debtors’ attorneys at creditors’ meetings. See Hon
jim D. Pappas, Simple Solution = Big Problem, 46 THE ADVOCATE 31 (Oct. 2003)
(official publication of the Idaho State Bar).

A, The UST’s motions

The UST first argues that Martelle’s and Swanson’s conduct violates § 504 of
the Code. That section provides:

(a) Except as provided in subsection (b) of this section, a
person receiving compensation or reimbursement of expenses under
section 503 (b)}(2) or 503(b)(4) of this title may not share or agree to
share —

(1) any such compensation or reimbursement with another
person; or

(2) any compensation or reimbursement received by
another person under such sections.

(b)\(1) A member, partner, or regular associate in a
professional association, corporation, or partnership may share
compensation or reimbursement received under section 503(b}(2) or
503 (b)(4) of this title with another member, partner, or regular
associate in such association, corporation, or partnership, and may
share in any compensation or reimbursement received under such
sections by another member, partner, or regular associate in such
association, corporation, or partnership.

(2) An attorney for a creditor that files a petition under
section 303 of this title may share compensation and reimbursement
received under section 503(b)(4) of this title with any other attorney
contributing to the services rendered or expenses incurred by such
creditor’s attorney.

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See 11 U.S.C. § 504(a}, (b)."" The UST contends that, under the evidence, Martelle
shared compensation with Swanson, a separate attorney not a member, partner or
regular associate in Martelle’s firm. It submits that the consequences for violation
of the proscription on fee splitting should be denial of compensation and
disgorgement of payment by Swanson, and a reduction in any fees allowed
Martelle. See, eg., Case No. 04-01469, Dac. No. 18 at 2; Doc. No. 23 at 4-6.
Second, the UST argues that Martelle’s Rule 2016(b) statements are
incomplete and inadequate, as they do not explain that he will be delegating a part
of his duties or responsibilities to another attorney, or that he will be sharing
compensation with such attorney. The UST argues that Martelle therefore has

failed to disclose adequately the nature and details of his representation.'” For

'® Sactions 504la) and (b) reference compensation or reimbursement received
under § 503(b)(2). That section, in turn, refers to compensation and reimbursement
allowed under § 330(a). Section 330({a)(4)(B) specifically provides that the Court may
award reasonable compensation to chapter 13 debtors’ attorneys. Section 504 thus applies
to these four cases.

7 The UST correctly notes that Martelle uses a form of disclosure that does not

provide the detail that is contained in Procedural Form B 203. Martelle defended his
failure to use the recommended form by reason of inertia (4.¢., his form had not been
questioned over several years of use and he saw no need to reconsider or change it) and
accuracy (4e.,, once made aware of Form B 203's additional language, Martelle concluded
it was designed for those lawyers who wanted to exclude certain services from the scope of
their engagement and, since he excludes no services, the additional language and
explanation in B 203 was not necessary). Neither explanation was particularly persuasive.
And neither accounted for the fact that use of Procedural Forms, though not strictly
required, is highly encouraged. See, e.g., /n re Dearborn Constr. Co., 2002 WL 31941458,
at *11 1.30, 03.1 |.B-C.R. 17, 24 .30 (Bankr. D. Idaho 2003) {noting use of “Official
Forms” is required under Fed. R. Bankr. P. 9009, but use of Procedural Form B 203 ts
“encouraged”); accord LBR 4008.1, at Advisory Committee Notes (indicating use of
Procedural Form B 240 is “strongly recommended”).

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these failures, the UST argues a further reduction should be made to any
compensation allowed Martelle.

Third, the UST argues that Swanson’s failure to file any Rule 2016(b)
statement at all in connection with his agreement to provide services to these four
debtors supports disgorgement of any payment received and disallowance of any
compensation.

B. Sharing fees and § 504 violation

The prohibition in § 504(a) seems clear enough. “[A] person receiving
compensation under § 503(b)(2),” which is, here, Martelle, “may not share or agree
to share... such compensation with another person.” 11 U.S.C. § 504(a)(1}.

But Martelle argues that the prohibition should not apply to the present
situation. {n addition to arguing that he and Swanson find shelter in the “sate
harbor” of § 504(b)(1), a contention discussed /néra, Martelle submits that the
abuses this Code prohibition was designed to prevent are not present here.

The reason for the proscription in § 504(a) of the Code was explained in a
respected treatise as follows:

Whenever fees or other compensation are shared among two

or more professionals, there is incentive to adjust upward the

compensation sought in order to offset any diminution to one’s own

share. Consequently, sharing of compensation can inflate the cost of

a bankruptcy case to the debtor, and therefore to the creditors. ...

The potential for harm makes such arrangements reprehensible as a

matter of public policy as well as a violation of the attorney’s ethical
obligations.

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4 Resnick & Sommer, COLLIER ON BANKRUPTCY $ 504.01 at 504-3 (15th ed, rev.
3004}.'" It is thus a “potential for harm” that supports an absolute prohibition.
“There can be do doubt that section 504(a) is intended to be mandatory and
preemptory [s/d.” /d. at | 504.02[1], 504-4. So, arguments about whether harm
exists or occurs in a particular case, or whether the fee splitting actually increased
the cost to the debtor, are immaierial.

Violation of § 504(a) is dependent only upon a finding that the prohibited
conduct occurred. It does not also require a finding that such conduct actually
defeated or compromised the policies underpinning the prohibition. The Court
finds the argument not well taken."°

1. The exception of § 504(b)(1)

Martelle next, and primarily, argues that he and Swanson qualify under the
exception in § 504(b)(1). The contention is that swanson, generally and in the
context of these four cases, is a “regular associate” employed by Martelle and

Martelle Law Offices.

18 1+ has also been observed that § 504 “manifests Congress’ purpose to preserve
the integrity of the bankruptcy process to the end that, among others, lawyers attend to
their duty as officers of the bankruptcy court, which they clearly are, rather than to treat
their interest in bankruptcy matters as matters of traffic.” /a re Matis, 73 BR. 228, 231
(Bankr. N.D.N.Y. 1987) (citing COLLIER).

' Even if Martelle’s argument were better founded or expressed, it is not for the
Court to determine whether the approach taken in the statute is the best, or even an apt,
vehicle for achieving the goals Congress has identified. Rather, the Code must be enforced
according to its terms. Accord Lamie v. United States Trustee,__U.5.__, 124 5.Ct.
1023, 1034 (2004) (“If Congress enacted into law something different fromm what it
intended, then it should amend the statute to conform it to its intent. ‘It is beyond our
province to rescue Congress from its drafting errors, and to provide for what we might think

_. is the preferred result.’"} (citation omitted).

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The evidence establishes that Swanson and Martelle are not members of the
same law firm. Rather, they are attorneys with separate firms and practices, even
though they often work together.

Subsection (b) of section 504 provides for limited exceptions

applicable to professional partnerships and attorneys who contribute

professional services in filing an involuntary petition under section

303. Although section 504(b) permits a professional firm to apply as

a single entity tor a single fee that may be divided among firm

members, the Code specifically prohibits arrangements tor the sharing

of fees between two professional firms.

COLLIER § 504.01[1] at 504-4 (emphasis supplied), see a/so { 504.03[1][a] at 304-

18 (the § 504(b)(1) exception for sharing of compensation with members, partners

or associates is “narrowly construed” and “courts should look closely at the facts to
determine whether an attorney is of counsel generally or has claimed that moniker
solely to avoid the prohibition of section 504.").

In the face of these indications that the conduct here is not protected by the
exception, Martelle directs the Court to Fed. R. Bankr. P. 9001(9), which defines
“regular associate” as “any attorney regularly employed by, associated wilh, or
counsel to an individual or firm.” He argues that Swanson is an “attorney regularly
employed by for] associated with” Martelle Law Offices.

However, the contention advanced by Martelle founders by virtue of an

incomplete reading of the statutory exception.”” Section 504(b)(1) provides that “[al

28 To the extent Martelle relies on the language of Rule 9001(9) fa the exclusion of
the additional qualifying language of § 504(b)}(1), the reliance is misplaced as it would give
impermissible effect to the Rule. See 28 U.S.C. § 2075 (“The Bankruptcy Rules] shall not
abridge, enlarge, or modify any substantive right.”).

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member [Ze., Martelle], partner, or regular associate ina professional association,
corporation or partnership [4.e., Martelle Law Offices] may share compensation
with another member, partner, or regular associate /n such professional association,
corporation, or partnership.” 11 U.S.C. § 504(b)(1) (emphasis supplied).
Notwithstanding whatever “regularity” exists in the “contract employment” of
Swanson by Martelle, there is no showing that Swanson and Martelle are jointly
engaged in practice in a professional association, corporation or partnership, or that
Swanson is a regular associate “in such professional . . . corporation.”

This interpretation of § 504(b)(1) is supported by the legislative history:

Section 504 prohibits the sharing of compensation, or fee

splitting, among attorneys, other professionals, or trustees. The

section provides only two exceptions: pariners or associates {n the

same professional association, partnership, or corporation may share

compensation inter se. and attorneys for petitioning creditors that join

in a petition commencing an involuntary case May share

compensation.
H.R. Rep. No. 95-595, at 356 (1977), reprinted in U.S.C.C.A.N, 5963, 6311-12;
5. Rep. No. 95-989, at 67 (1978), reprinted in U.S.C.C.A.N. 5787, 5853 {emphasis
supplied). As the court stated in Matis

[When Congress enacted Code § 504 to permit sharing of

compensation, it intended that the term “orofessional association”

refer to a recognized legal entity, under applicable state law, the

members or employees of which have some identifiable legal

relationship to one another, a relationship which would prevent the

abuse inherent in fee splitting between unrelated professionals which

Code § 504 js intended to prevent.
73 BR. at 232. See a/soCOLLIER { 504,03[1][b] at 504-20 n.6 and accompanying

text (discussing Afatys).

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This conclusion is also supported by the analysis in /7 re Greer, 271 B.R.
426 (Bankr. D. Mass. 2002}, one of the more recent of the few reported cases
addressing the issue.*' In that case, the court concluded that improper fee splitting
occurred between two lawyers, 5oforenko and Fullwood, who shared office space
but were not members of the same firm.2? Soforenko paid Fullwood $50.00 for
every § 341(a) meeting at which she represented Soforenko’s clients. After the
question of violation of § 504 was raised, Soforenko placed Fullwood on the
Soforenko firm letterhead and, perhaps, added Fullwood to her malpractice
insurance. Soforenko then sought to amend the Rule 2016(b) disclosure to assert
that Fullwood was “of counsel” to the firm. The court was unpersuaded that
Fullwood was a member of, or of counsel to, Soforenko’s firm either before or after

these curative attempts. 271 8.R. at 431-433, Fullwood was instead found to be

21 This Court found no decisions from within the Ninth Circuit of assistance.
However, Bankruptcy Judge Randall J. Newsome of the Northern District of California,
sitting by designation, found in /n re ACandS, fnc., 297 B.R. 395 (Bankr. D. Del. 2003), that
the exception of § 504(b){1) allowed “a member, partner or regular associate of a
professional association, corporation or partnership may share compensation with such
persons in the same firm, and the members of that person’s firm may share in that
compensation.” /d, at 405 (emphasis supplied). In that case, the “attempts to dawnplay the
separate existence” of the sharing entity were rejected, and the court held that “a separate
entity .. . requires a separate retention application in order to avoid ‘any illegal fee sharing
inthis case.” fal In ACandS, the § 327(a) approved professional had “subcontracted”
certain claim processing functions to a subsidiary limited liability company, which the
court found prohibited. /d- (citing fa re United Cos, Fin. Corp., 241 B.R. 521, 528 (Bankr.
D. Del. 1999). For that reason, and because both the approved professional and the
subsidiary had agreed to share fees, and drew on the debtor’s prepetition retainer, the
court ordered disgargement of $2.4 million in fees, 297 B.R, at 405.

2 “Office sharing” seems to be a common thread, not only appearing here but also
presented in Matis. See 73 B.R. at 232-33. See also COLLIER § 504.03[1][b] (“Sharing
Office Space Does Not Create Partnership for Compensation Sharing Purposes.”}, at 304-19
(discussing Adatis).

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“an independent attorney contracting to represent Soforenko’s clients at 341
meetings.” /d, at 432. The two lawyers were found to be “independent co-
counsel.” /a

The Court finds Greerto be directly applicable to the instant situation.
Martelle attempts to distinguish Greer on the basis that the court was there
concerned with whether Fullwood was “of counsel” to or a member in Soforenko’s
firm, and not whether she was a “regular associate” employed by Soforenko. The
attempt is not persuasive. Under the Code and prevailing analysis, the sharing
person must be a member (or of counsel) “/n such association, corporation or
partnership.”“’ There is no basis to conclude that regular associates sharing
compensation escape this same condition or limitation. The Court rejects the
suggestion that under Rule 9001(9) or the case law, an associated attorney outside
such firm can qualify if employed by the firm on a sufficiently regular or recurring

basis.”*

2 Accord Matis, 73 B.R. at 232 (“Thus, it is to be assumed that when Congress
enacted Code § 504... it intended that the term ‘professional association’ refer to a
recognized legal entity, under applicable state law, the members or employees of which
have some identifiable legal relationship to one another, a relationship which would
prevent the abuse inherent in fee splitting between unrelated professionals[.]”)

74 Martelle at oral argument conceded that a firm employing an attorney ona
“contract” basis to cover a single § 341(a) meeting would not qualify for protection even
under his reading of the § 504(b)(1) and Rule 9001(9). But he could not identify when the
number of covered meetings or their frequency would evidence enough “regularity” of
engagement for the exception to apply, other than to assert that, whatever the benchmark,
he and Swanson cleared it, This illustrates the difficulty with Martelle’s suggested
interpretation of the exception.

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The requirements of the § 504(b)(1) exception are not met in the instant
cases, Therefore, the sharing of compensation by Martelle and Swanson was and is
improper and prohibited. 11 U.S.C. § 504/a). The UST requests that, as a
consequence of this violation, Swanson be denied any compensation and be
ordered to disgorge to the chapter 13 trustees all payments he received, and that
Martelle’s fees be reduced in each case by $250.00. See, e.g., Case No. 04-01469,
Doc. No. 23 at 4-5. The requested relief will be granted.”

C. Martelle’s inadequate disclosure, and the reasonableness of his fees

Martelle did not disclose in the Rule 2016(b) statements he filed in these
cases that he would be sharing his compensation with Swanson. In fact, Martelle
therein affirmatively indicated that he had not agreed to share compensation with
any person. This was not accurate.

Martelle’s disclosure also made no mention of the fact that he would not be

providing all the necessary services to the debtors.2* That someone else would

5 Today’s Decision addresses only the bankruptcy consequences of the violation of
§ 504 and the lack of compliance with Rule 2016(b). However, the Court notes that the
idaho Rules of Professional Conduct also appear to be implicated. IRPC 1.5(e) provides
that a division of fees between lawyers not in the same firm will be proper only if (1) the
division is in proportion to the services performed, (2) the client agrees to the arrangement,
including the share each lawyer is to receive, and the agreement is confirmed in writing,
and (3) the total fee is reasonable. As there was no proof here that the debtors ever had a
written agreement at all, and given the Court’s conclusion that the total fee charged could
not be reasonable if Swanson’s services were billed to the debtors at an effective $175.00
per hour rate, there appear to be issues under IRPC 1.5(e). These questions are in addition
to those under IRPC 7.5 that were noted earlier.

28 Recall that Martelle justified his lack of use of Procedural Form B 203 in part on
the idea that he would not exclude or contract away any of the required services in the
bankruptcy case. See note 17 supra.

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provide the debtors with representation at their § 341(a) examinations Is a material
matter, and one directly related to the reasonableness of Martelle’s requested
compensation. See ish, 04.1 1.B.C.R. at 35, The anticipated delegation of this
fundamental duty of debtor’s representation needed to be disclosed if known at the
time of the filing of the Rule 2016(b) statement... Lack of disclosure under Rule
2016(b) has consequences independent of § 504. See, 6g, Dearborn Constr, 03.1
I.B.C.R. at 23 (citing Neben & Starrett, inc. v. Chartwell Fin. Corp. (in re Park-
Helena Corp.), 63 F.3d 877, 882 (9th Cir. 1995) (other citations omitted).

Moreover, Martelle’s compensation under § 330(a)(4)(B) is premised on
services he actually performs in the chapter 13 case. He cannot be allowed
compensation for services he does not perform, and this certainly includes charges
for creditors’ meetings he does not attend.”

In exercising its discretion regarding the allowance of reasonable
compensation to Martelle under § 330(a)(4)(B) and the balance of § 330

incorporated thereby, the Court considers the totality of the facts. Here, Martelle

2? The Court acknowledges that Martelle indicated his debtor clients are advised
that Swanson may appear at § 341(a) meetings. This is essential. See, ag, IRPC 1.2(ch;
IRPC 1.4{a){1), (a}(2), (a)(3), and (b). But disclosure to the client, however salutary, does not
eliminate the need for the disclosures to the Court and parties in interest mandated by the
Bankruptcy Code and Bankruptcy Rules.

28 The Court was surprised to learn at hearing that Martelle would charge his clients
$175.00 per hour for services related to the creditors’ meeting even if Swanson were the
lawyer attending. The charge cannot be justified. Even if Swanson were a member of
Martelle’s firm and his services could properly be billed, the amount by which this charge
would be prima facie unreasonable is the difference between $175.00 per hour and
whatever a reasonable hourly rate would be for services performed by someone with
Swanson’s experience and abilities. The evidence herein would not allow the Court to
determine such an appropriate rate for Swanson’s services.

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did not attend the creditors’ meetings. His use of a substitute was not properly
disclosed, and his payment of the substitute violated § 504. And this was not a
situation where Martelle made candid disclosures to the Court or interested parties
under § 329(a) or Rule 2016(b) about what he was doing or why he thought it
proper. Instead, it was the trustee’s identification of the issue in filings related to a
confirmation hearing that alerted the Court, led to the Court's questioning regarding
the practice and, it appears, generated the UST’s motions. But considered, toa, is
the fact that the Court has already concluded a reduction in compensation will be
made for the violation of § 504.

The UST requested at hearing that an additional 10% reduction in
compensation be made, Such a reduction is determined by the Court to be
appropriate and proportional.”? Therefore, in addition to the reduction imposed for
violation of § 504, supra, the Court will further reduce Martelle’s allowed
compensation in each case by $100.00, representing 10% of the minimum fee
charged. Of course, Martelle will not be allowed to charge these debtors for the

creditors’ meeting, nor for any of the time he spent relative to the UST’s motions.*°

29 See In re Combe Farms, Inc., 257 B.R. 48, 53-54, 01.1 1.B.C.R, 7 (Bankr. D.
Idaho 2001) (finding it essential that the Court not simply excuse counsel when Code and
Rule compliance falls short, and reducing compensation based upon such failure),

29 This results in a $350.00 reduction in compensation for Martelle, imposed in
each of the four cases. Some of these cases are ready for confirmation. The Court will
enter confirmation orders that indicate, by interlineation, counsel's fees will be set by
separate order. Martelle will be required to file a fee affidavit in each case, specifying the
time he spent in rendering services (excluding the creditors’ meeting and time spent
responding to the UST). The total will then be reduced in accord with the instant Decision.
The balance remaining will be allowed under a separate order, which the UST and the

(continued...)

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D. Swanson’s lack of disclosure

Swanson faces his own problems. He participated in an improper and
prohibited sharing of compensation previously received by Martelle. See 11 U.S.C.
§ 504(a)(2). For that reason, the Court has above denied his compensation and
granted the UST’s request that Swanson disgorge to the appropriate chapter 13
trustee all payments he received,

Additionally, Swanson, once he agreed to represent these bankruptcy
debtors in connection with their cases, was affirmatively obligated to file his own
Rule 2016(b) statement in each case. Swanson’s failure to file a proper Rule
2016(b) disclosure within fifteen days of payment or agreement presents a problem
independent of his and Martelle’s violation of § 504.

Liability for inadequate or incomplete disclosure under Code and Rule
requirements includes the loss of the right to compensation and disgorgement of
fees paid, even if the failure was inadvertent. See Lish, 04.1 1.B.C.R. at 35;
Dearborn Constr., 03.1 1.B.C.R. at 23. But, since Swanson has already been denied
any compensation in these four cases and required to disgorge the payments of

$30.00 per case he received, further sanction is not imposed.”

30, continued)

chapter 13 trustee shall endorse. If there is compensation left owing to Martelle, it may be
paid by the trustee under the confirmed plan. If a credit balance is due debtor(s), it shall be
paid to them by Martelle. Any subsequent fees in these cases will be paid through the
plans after allowance on application, notice and hearing.

* Since Swanson neglected to respond at all to the UST’s motions or to appear at
hearing, one might wonder if he takes the issues seriously. Still, no additional penalties are
(continued...)

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CONCLUSION
The UST’s motions are granted as above set forth. Orders shall be prepared
and submitted by the UST for the Court’s entry

DATED this 25th day of August, 2004,

TERRY L. RS
CHIEF U.S. BANKRUPTCY JUDGE

(continued)
deemed necessary at this time. If the conduct is not remedied or if other violations of the
Bankruptcy Code or Rules occur, the consequences may be stiffer than the $120.00
forfeited in these cases.

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CERTIFICATE OF SERVICE

|, the undersigned, hereby certify that | served by the method indicated below, a true copy of the
document to which this certificate is attached, to the following named person(s) at the following address(es),
on the date shown below:

DATED: August 25, 2004

Case Nos. 04-01469 (Gary |, Peterson); 04-01577 (Robert W. Whittle); 04-01748 (Robert A. House) and 04-
01851 (Anthony L. Craft)

Office of the U.S. Trustee
MK Central Plaza

720 Park Blvd., Suite 220
Boise, ID 83712

jeff). zhowe @usdol gov

gary. moclendongisdo) pov
U.S, Mail 0 Facsimile ¥ Email

Martin Martelle
Attarney at Law
82 East State Street, Suite E
Eagle, ID 83616
¥ U.S. Mail N Facsimile O Email

Grevory Swanson
Attorney at Law
8? East State Street, Suite F
Eagle, ID 63616
¥ US, Mail 0 Facsimile O Email

Bernie R. Rakozy
P,Q. Box 17368
Boise, (0 83701

brrakozyginindspring.com
O U.S. Mail O Facsimile of Email

John H. Krommenhoek
P.O, Box 8358
Baise, 1D 83707
jhk? 1abk@spro.net
O U.S. Mail O Facsimile ef Email

Ch hon ®. Cpndbecse

Jojnn B, Canderan
Judicial Assistant to Judge Myers

Note te Email service: A PDF version of the above decision/order was electronically transmitted to the
parties indicated above, Email service is provided as a courtesy only upon request of a party. To review an
electronic image of the original of this document, or to subscribe for email service of future
decisians‘orders from the Bankruptcy Judge, please access the Court's Internet web site,

WAWAW. ic UsCoUrtS Bry,

MEMORANDUM OF DECISION - 21

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