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.
2
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
3
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.
28
-8-
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
27
28
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1 received.8
2 VI. CONCLUSION
3 For the foregoing reasons, we AFFIRM.
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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.
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