Rivers v. Aufrecht

IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT

No. 19-30910

In the Matter of: Larry Galloway, Et Al

Debtors

NELSON RIVERS,

Appellant

v.

WAYNE AUFRECHT,

Appellee

Appeal from the United States District Court
for the Eastern District of Louisiana
USDC No. 2:18-CV-2288

Before JONES, ELROD, and HIGGINSON, Circuit Judges.
EDITH H. JONES, Circuit Judge:*
Nelson Rivers, a retired attorney, appeals the district court’s imposition
of a sanction in the amount of $3,500 and a fee disgorgement order exceeding
$16,000 levied in connection with the winding up of his bankruptcy practice.
For the following reasons, we vacate a portion of the awards, albeit with a

*
Pursuant to 5TH CIR. R. 47.5, the court has determined that this opinion should not
be published and is not precedent except under the limited circumstances set forth in 5
TH
CIR. R. 47.5.4.
United States Court of Appeals
Fifth Circuit
FILED
May 8, 2020

Lyle W. Cayce
Clerk
Case: 19-30910 Document: 00515410221 Page: 1 Date Filed: 05/08/2020

No. 19-30910
2
caution to other attorneys handling consumer bankruptcy cases in the Eastern
District of Louisiana. Our standard of review in this bankruptcy appeal
mirrors that of the district court and entails clear error for factual findings and
de novo review of the bankruptcy court’s legal conclusions. In re Morrison,
555 F.3d 473, 480 (5th Cir. 2009).
Complete details of the proceedings before the bankruptcy court are
unnecessary to recount. Rivers left the practice of law abruptly in the summer
of 2017 and transferred some of his practice’s assets to another practitioner
while apparently delegating to other practitioners, who accepted, as a matter
of professional courtesy, various responsibilities in connection with his still-
pending cases.
A difficulty arose when the United States Trustee filed a motion to
dismiss the Chapter 13 case of a couple whom Rivers represented, In re
Galloway, No. 15-12646 (Bankr. E.D. La.), because the couple had stopped
making their monthly Chapter 13 payments while in the hospital. A hearing
was scheduled, but before that hearing, the couple cured their arrearages.
When Rivers failed to appear for the hearing, the court convened a show-cause
hearing to determine what had happened.
Eventually, the court rendered an opinion that found Rivers guilty of
violating numerous provisions of the Louisiana Rules of Professional Conduct
as well as local rules and procedures. The judge assessed a $3,500 sanction
against Rivers and in favor of Aufrecht, the attorney who had acceded to much
of the practice. As the basis of that sanction, the court found that Rivers
knowingly made a false statement about the nature of their agreement,
unnecessarily forcing Aufrecht to appear in court to explain. Based on
11 U.S.C. § 329(b)(1), the judge required Rivers to disgorge $6,300 in
“unearned” fees (at $350 each) for eighteen Section 341 meetings, in sixteen of
Case: 19-30910 Document: 00515410221 Page: 2 Date Filed: 05/08/2020

No. 19-30910
3
which he had allowed other counsel, without compensation, to be present with
his clients.
1
Finally, the judge also required disgorgement of other fees,
totaling $10,065 and mostly consisting of the no-look fees usually authorized
in the Eastern District.
On appeal, the district court affirmed the sanction award, issued under
the court’s inherent authority, while acknowledging both some ambiguity in
the statements and surrounding circumstances and, more important, that the
bankruptcy court failed to find expressly that Rivers acted in bad faith. The
court reversed all other findings of ethical lapses. The court affirmed the
bankruptcy court’s $6,300 disgorgement award for “violat[ing]” local rules
governing counsel’s duties in no-look fee cases by not appearing in person at
Section 341 meetings.
2
The district court did not, however, question, and so
affirmed, the bankruptcy court’s findings relating to the disgorgement of other
unearned bankruptcy fees because Rivers had not challenged them on appeal.
Rivers has now appealed to this court. During the course of the appeal,
Rivers himself reported to the Louisiana Office of Disciplinary Counsel, was
investigated for matters that have arisen here, and was cleared of any ethical
wrongdoing. This court has carefully reviewed the briefs, court opinions, and
the underlying record in this case. Having done so, we vacate the sanction
order and the disgorgement order for his failure to attend Section 341
meetings.
First, in the absence of a finding of bad faith by clear and convincing
evidence, a federal court is not empowered to impose sanctions for attorney

1
At two meetings, no attorney appeared.

2
No-look fee rules permit attorneys in routine consumer bankruptcy cases to charge
a base fee for their services without the necessity of holding specific fee-approval hearings so
long as they comply with basic duties to their clients.
Case: 19-30910 Document: 00515410221 Page: 3 Date Filed: 05/08/2020

No. 19-30910
4
misconduct under its inherent authority. In re Moore, 739 F.3d 724, 729–30
(5th Cir. 2014). The bankruptcy court’s finding, affirmed by the district court,
that Rivers made a “knowing” misstatement of fact concerning the disposition
of his practice to Aufrecht, passes muster under the clear error standard. But
it was incorrect to infer, as the district court did, that the misstatement was
tantamount to clear and convincing evidence of bad faith. The standards of
proof are not the same. The misstatement, as even the district court noted,
was somewhat ambiguous. Viewed in totality, including all of Rivers’s
explanations about how he handled ongoing cases post-retirement, the record
does not support the higher standard of proof. We also note that Aufrecht, who
intervened in this court only for a reaffirmation that he did nothing wrong,
makes no claim to recover the $3,500 sanction.
As for the disgorgement orders, issued pursuant to 11 U.S.C. § 329(b),
we do not commend any “local practice” whereby counsel substitute for each
other at bankruptcy clients’ Section 341 meetings. The lower courts correctly
noted that these hearings are critical to the accuracy and integrity of
bankruptcy law. The hearings offer the first and often only opportunity for
creditors or the United States Trustee to question debtors under oath about
matters relevant to their cases. A lawyer is presumed to know the particulars
of each client’s case and owes the client the obligation of being personally
present at the hearing (or present through others in his office) to protect the
client’s interests. The judge was not wrong to criticize Rivers’s conduct in
availing himself of the professional courtesy of lawyers who had no pre-existing
relationship to the clients.
That said, the disgorgement order relating to the Section 341 meetings
here was unnecessarily ex post facto. The local rules specify the duties of
“counsel” toward a client in no-look fee cases; the local rules do not say that the
Case: 19-30910 Document: 00515410221 Page: 4 Date Filed: 05/08/2020

No. 19-30910
5
duty is personal and non-delegable in order to justify the no-look fee. See
Bankr. E.D. La. R. 4002-1(D); Bankr. E.D. La. Gen. Order No. 2011-1. Rivers
took a chance that no adversities would befall his clients in the Section 341
meetings, and he apparently was fortunate. In light of the ambiguity of the
local rules, the lack of unforeseen consequences from his use of substitute
counsel, and not a word from the volunteer counsel about compensation, we
hold no harm/no foul. Notwithstanding our vacatur of the disgorgement of fees
for Rivers’s failure to attend 341 meetings, consumer bankruptcy attorneys
should take note that the courts may reasonably impose personal, non-
delegable duties on counsel who seek no-look fees, and indeed they may
interpret, for the future, the rules of the Eastern District of Louisiana, to so
require.
Rivers’s argument against the disgorgement of other fees “was not
presented to the district court and is waived,” Kirschbaum v. Reliant Energy,
Inc., 526 F.3d 243, 257 (5th Cir. 2008).
The judgment of the district court, affirming the bankruptcy court, is
REVERSED IN PART and AFFIRMED IN PART; the sanction of $3,500
and the disgorgement order of $6,300 are VACATED.
Case: 19-30910 Document: 00515410221 Page: 5 Date Filed: 05/08/2020