K. Lounge LLC

UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF COLUMBIA
In re
K. LOUNGE LLC,
Debtor.
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Case No. 05-01041
(Chapter 7)
OPINION REGARDING APPLICATION TO EMPLOY SPECIAL COUNSEL
The court will deny the application filed by the debtor as a
debtor-in-possession to employ Izal Saddler as special counsel.
I
On July 12, 2005, the debtor, K. Lounge LLC, filed a
voluntary petition commencing this case as a case under chapter
11 of the Bankruptcy Code (11 U.S.C.). On November 14, 2005, the
debtor, as a debtor-in-possession exercising the powers of a
trustee, filed an application to employ Izal Saddler as special
counsel. The debtor's application represented that:
10. Mr. Saddler will be employed on a general
retainer, with billed fees ranging from $180-$300.00
per hour depending upon the nature of the tasks, which
vary from office time to in court litigation
proceedings. Costs are separately billed. Although Mr.
Saddler is listed as a creditor holding an unsecured
claim, he has agreed to waive his claim and payment
thereon in order to participate in the L&T cases as
The opinion below is hereby signed. Dated: January
3, 2006.
_____________________________
S. Martin Teel, Jr.
United States Bankruptcy Judge
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special counsel, without an adverse interest.
11. Mr. Saddler understands that no post-petition
fees or costs may be paid to him or his firm from
property of the estate without prior approval or and
Order of the Bankruptcy Court.
Saddler's accompanying affidavit disclosed no receipt of
compensation. He failed to file by the deadline set by F.R.
Bankr. P. 2016(b) (and even at this late date he has failed to
file) the statement required by 11 U.S.C. § 329(a) of “the
compensation paid or agreed to be paid . . . for services
rendered or to be rendered in . . . connection with the case by
such attorney, and the source of such compensation.”
On November 15, 2005 (one day after the debtor filed the
application to employ Saddler), the court held a hearing on the
United States Trustee's motion to convert the case to chapter 7,
and signed an order granting that motion. On November 16, 2005,
the clerk entered the order that was signed on November 15, 2005,
converting the case to a case under chapter 7.
The United States Trustee has objected to the application to
employ Saddler on three grounds:
(1) according to statements of the debtor's counsel,
John Burns, at the hearing on the motion to convert, Saddler
received payments of fees that have not been disclosed and
that were not authorized by court order;
(2) the application was filed well after the
commencement of the case; and
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(3) the case is no longer pending in chapter 11.
The debtor has replied that Burns made no statement that Saddler
had been paid any fees (asserting that there was confusion as to
whether the debtor's monthly operating reports–-which are
supposed to be on a cash basis--included items that the debtor's
accountant had included on an accrual versus a cash basis). The
debtor urges that the United States Trustee could have sought to
examine the debtor's accountant to determine whether there were
in fact postpetition payments to Saddler. In any event, argues
the debtor, any such payments could have been payments of a
retainer, which is not proscribed by the Bankruptcy Code, and the
application disclosed that Saddler was being employed on the
basis of a general retainer. Finally, the debtor urges that
Saddler’s employment by the debtor as debtor-in-possession during
the period this case was in chapter 11 should be approved
notwithstanding the conversion of the case to chapter 7.
II
Saddler has filed no Rule 2016(b) statement. This has left
the court in the dark regarding what payments Saddler has
received in the case, and thus has deprived the court of
information that would be necessary before permitting Saddler to
be employed. The court rejects the debtor's implicit contention
that the burden was on the United States Trustee to examine the
debtor's accountant to determine what payments were made to
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1 Even if Saddler had filed a Rule 2016(b) statement when
the application to employ was filed, a delay in applying for
employment of counsel until a series of postpetition retainer
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Saddler. The court further rejects the debtor's disingenuous
contention that the application adequately disclosed that a
postpetition retainer was being paid to Saddler (if one was
indeed paid, a fact the debtor declines to admit even though it
ought to be in a position to verify that fact). Representation
“on a general retainer” does not disclose that a cash retainer
has been paid, and generally is understood to mean that the
attorney is being generally retained in the case with no special
arrangement for payment of compensation. In any event, a
disclosure of a “general retainer” would not constitute adequate
disclosure of the amount of any cash retainer paid. If there was
a retainer paid, the application to employ is deficient under
F.R. Bankr. P. 2014(a). Moreover, § 329(a) and Rule 2016(b)
require the attorney, not the debtor, to make the disclosures
required by those provisions independent of Rule 2014(a).
Although payment of an amount intended to be used as only a
postpetition retainer (with payment from the retainer to require
later court order) is not necessarily proscribed, such a payment
ought to be timely disclosed under § 329(a) and Rule 2016(b) and
should be held as the debtor's property until authority to hold
it as a retainer has been approved by the court incident to an
order approving the employment of counsel.1 If the employment is
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payments had been completed would have weighed against
authorizing employment of counsel. When the debtor applies to
employ counsel, parties in interest may object to the terms of
employment including a provision for payment of a retainer after
the employment has commenced.
2 See also Henderson v. Kisseberth (In re Kisseberth), 273
F.3d 714 (6th Cir. 2001), opinion clarified on point of no
relevance here by 24 Fed. Appx. 539, 2002 WL 59617 (6th Cir.
2002) (unpublished opinion); In re Downs, 103 F.3d 472, 479 (6th
Cir. 1996) (“[T]he bankruptcy court should deny all compensation
to an attorney who exhibits a willful disregard of his fiduciary
obligations to fully disclose the nature and circumstances of his
fee arrangement under § 329 and Rule 2016. The authority to do
so is inherent, and in the face of such infractions should be
wielded forcefully.”); Turner v. Davis, Gillenwater & Lynch (In
re Investment Bankers, Inc.), 4 F.3d 1556, 1565 (10th Cir. 1993)
(“an attorney who fails to comply with the requirements of § 329
forfeits any right to receive compensation for services rendered
on behalf of the debtor” (citations omitted)), cert. denied, 510
U.S. 1114 (1994); Jensen v. United States Trustee (In re Smitty's
Truck Stop, Inc.), 210 B.R. 844, 849 (B.A.P. 10th Cir. 1997)
(“even a negligent or inadvertent failure to disclose the
retainer is sufficient to deny fees”); Hale v. United States
Trustee (In re Basham), 208 B.R. 926, 931 (B.A.P. 9th Cir. 1997).
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not approved, there is no basis for retention of the retainer.
Failure to make the required disclosures under § 329(a) and
Rule 2016(b) justifies denying the application to employ Saddler.
“Even a negligent or inadvertent failure to disclose fully
relevant information may result in a denial of all requested
fees.” Neben & Starrett, Inc. v. Chartwell Fin. Corp. (In re
Park-Helena Corp.), 63 F.3d 877, 882 (9th Cir. 1995), cert.
denied, 516 U.S. 1049 (1996).2 The failure to make the required
disclosures is also a ground for disqualifying the attorney from
employment and to order a disgorgement of fees. Law Offices of
Nicholas A. Franke v. Tiffany (In re Lewis), 113 F.3d 1040, 1045
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3 Even at this late date Saddler has not filed a motion for
leave to file a statement under § 329(a) and Rule 2016(b) out of
time, and it is doubtful that his delay in so doing would be
excusable under Rule 9006.
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(9th Cir. 1997); Arens v. Boughton (In re Prudhomme), 43 F.3d
1000, 1003-04 (5th Cir. 1995) (bankruptcy court’s “broad
discretion in awarding and denying fees paid in connection with
bankruptcy proceedings empowers the bankruptcy court to order
disgorgement as a sanction to debtors’ counsel for
nondisclosure”); Miller v. United States Trustee (In re
Independent Engineering Co.), 197 F.3d 13 (1st Cir. 1999), aff’g
232 B.R. 529, 532 (B.A.P. 1st Cir. 1999) (failure to disclose
postpetition draws on prepetition retainer justified
disqualification of attorney for debtor in possession and order
of disgorgement of all fees). Based on the failure to file a
statement under § 329(a) and Rule 2016(b),3 the court will deny
the debtor-in-possession’s application to employ Saddler.
III
Moreover, the application to employ Saddler was filed only
one day before the court signed the order converting the case to
chapter 7 (and only two days before the clerk entered that
order). The chapter 7 trustee has not sought to employ Saddler.
Even if Saddler had timely filed a statement under § 329(a) and
Rule 2016(b), the debtor has offered no justification for the
delay in filing the application that would warrant the
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extraordinary relief of making any employment order retroactive
to a date significantly preceding the filing of the employment
application.
IV
The United States Trustee has requested that Saddler be
ordered to disgorge any retainer or fees received. At least to
the extent of estate funds used to pay any retainer or fees to
Saddler, there is no basis for him to retain such funds now that
his employment is being denied. The court will require him to
disgorge to the chapter 7 trustee all retainers or fees received
postpetition from estate funds (or pay an amount equal to such
funds to the chapter 7 trustee to the extent that they cannot be
traced). The court will further require Saddler to file an
affidavit disclosing:
(1) all payments received for services rendered or to
be rendered by Saddler in contemplation of or in connection
with this bankruptcy case:
(a) that were received within the year preceding
the filing of the bankruptcy case; or
(b) that were received after the filing of the
case;
(2) the source of each such payment; and
(3) any disposition of each such payment.
The court reserves for later disposition the issue of
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8	O:\JUDGEFIL\CODESEC\329\K Lounge Decsn re Failure to File Section 329(a) - Rule 2016(b) statement.wpd
disgorgement of any funds received that were not estate funds.
The court is further authorizing the United States Trustee and
the chapter 7 trustee to take Rule 2004 examinations of Saddler,
the debtor's officers and employees, and the debtor's accountant
to the extent that they desire to investigate any payments
received by Saddler from the debtor (or from other sources in
connection with representation of the debtor).
An order follows.
[Signed and dated above.]
Copies to: Debtor's Attorney; Dennis J. Early, Assistant U.S.
Trustee; chapter 7 trustee; Izal Saddler.
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