Bethea, Albert v. Robert J. Adams & ( 2003 )

In the
United States Court of Appeals
For the Seventh Circuit
____________
No. 03-1303
ALBERT BETHEA, et al.,
Plaintiffs-Appellants,
v.
ROBERT J. ADAMS & ASSOCIATES; LAW OFFICES
OF MELVIN JAMES KAPLAN; and ZALUTSKY &
PINSKI, LTD.,
Defendants-Appellees.
____________
Appeal from the United States District Court for the
Northern District of Illinois, Eastern Division.
No. 02 C 3557—James B. Zagel, Judge.
____________
ARGUED SEPTEMBER 9, 2003—DECIDED DECEMBER 17, 2003
____________
Before CUDAHY, EASTERBROOK, and RIPPLE, Circuit
Judges.
EASTERBROOK, Circuit Judge. Three debtors in bank-
ruptcy hired lawyers before filing their petitions. Each
agreed to a retainer that would cover the legal services
entailed in preparing and prosecuting the proceedings.
Unlike most retainers, however, these were to be paid over
time—some installments before the petition was filed,
others thereafter. The lawyers performed as promised: all
three debtors received their discharges, and the cases were
closed. When the lawyers continued to collect the unpaid
installments, the three debtors (with the assistance of new
2 No. 03-1303
counsel) commenced adversary proceedings in which they
asked the bankruptcy court to hold their former lawyers in
contempt for violating the injunctions implementing the
discharges. See 11 U.S.C. §524.
Bankruptcy Judge Barliant concluded that attorneys’ fees
“reasonable” under 11 U.S.C. §329(b) are not discharged.
275 B.R. 284 (Bankr. N.D. Ill. 2002). Section 329, which
deals directly with attorneys’ compensation, supersedes the
more general reach of 11 U.S.C. §727, the discharge provi-
sion, the judge held, reasoning that any other conclusion
would leave no work for §329(b) to do. Because statutes
should not be read to make any section ineffectual, the
bankruptcy court thought that §329(b) must be the only
device for controlling debtors’ legal fees. The debtors
concede that the fees they had promised to pay their
ex-attorneys are reasonable, so Judge Barliant dismissed
the adversary proceedings. The district judge affirmed,
substantially for the bankruptcy judge’s reasons. 287 B.R.
906 (N.D. Ill. 2003).
Section 727(b) reads: “Except as provided in section 523
of this title, a discharge under subsection (a) of this section
discharges the debtor from all debts that arose before the
date of the order for relief under this chapter, and any
liability on a claim that is determined under section 502 of
this title as if such claim had arisen before the commence-
ment of the case, whether or not a proof of claim based on
any such debt or liability is filed under section 501 of this
title, and whether or not a claim based on any such debt or
liability is allowed under section 502 of this title.” Attor-
neys’ fees are not among the debts excepted from discharge
by §523. The retainer is a pre-petition, liquidated debt; but
even if it were an unliquidated “claim” for purposes of §502,
that claim also would be covered. Unless §329 creates an
unenumerated exception to §727(b), the debts to these
attorneys were discharged.
No. 03-1303 3
Section 329(a) requires every attorney representing a
debtor in bankruptcy to file with the court a statement of
all compensation received during the preceding year, or to
be received, in connection with the bankruptcy. This state-
ment enables the court to determine whether the lawyer
has received a preferential transfer. Debtors may not care
who gets what money remains (if the attorney gets more,
other creditors get less), and, when clients do not haggle
over price, some attorneys will be tempted to divert the
funds to themselves by charging excessive fees. Section
329(b) requires bankruptcy judges to use the information
supplied under §329(a) to determine whether “such com-
pensation exceeds the reasonable value of any such ser-
vices”. If it does, then “the court may cancel any such
agreement, or order the return of any such payment, to the
extent excessive”. The bankruptcy and district judges
believed that this power is exclusive of discharge under
§727; otherwise, they stated, §329(b) would play no role in
Chapter 7 cases even though 11 U.S.C. §103(a) declares
that it (like the rest of Chapter 3) applies to Chapter 7
proceedings.
Our difficulty with this approach is that §329 has plenty
to do in Chapter 7 cases, even if debts for legal fees are
subject to discharge. First, prepaid fees exceeding the “rea-
sonable” value of the legal services must be recouped for the
benefit of other creditors. Second, the judge must ensure
the reasonableness of any fees incurred during the proceed-
ing itself, once more to protect other creditors. Third, if the
debt is reaffirmed during the proceeding, yet again the
judge must ensure reasonableness. Finally, if the debtor
repudiates the executory portion of the agreement with
counsel, and the estate rehires the same lawyer (an ap-
proach that gives administrative priority to ongoing legal
fees), once again §329(b) requires the judge to review the
fee agreement for reasonableness. Because grouping legal
fees with other debts subject to discharge does not gut
4 No. 03-1303
§329(b) for Chapter 7 cases, the structure of the Bankruptcy
Code does not support treating §329 as an implicit excep-
tion to §727. We therefore agree with In re Biggar, 110 F.3d
685 (9th Cir. 1997), that pre-petition debts for legal fees are
subject to discharge under §727. See also In re Sanchez, 241
F.3d 1148, 1150 (9th Cir. 2001). Although Biggar is the only
appellate decision squarely in point, almost every bank-
ruptcy judge and district judge who has considered the
question has come to the same conclusion—essentially
everyone other than the judges in this litigation.
The three lawyers contend that reading §727 this way
would force the most destitute of debtors to forego legal
assistance, because counsel neither could be paid in ad-
vance (the norm for Chapter 7 cases) nor could collect after
the case ends. The bar therefore would shun these debtors,
depriving them of the Code’s benefits. That argument about
what makes for good public policy should be directed to
Congress; the judiciary’s job is to enforce the law Congress
enacted, not write a different one that judges think supe-
rior. See Barnhart v. Sigmon Coal Co., 534 U.S. 438, 460-62
(2002). Cf. United States v. Kras, 409 U.S. 434 (1973) (filing
fee that makes it possible to be “too poor to go bankrupt”
must be implemented). For what it may be worth, however,
we do not share the view that taking §727(b) at face value
necessarily injures deserving debtors. Those who cannot
prepay in full can tender a smaller retainer for prepetition
work and later hire and pay counsel once the proceeding
begins—for a lawyer’s aid is helpful in prosecuting the case
as well as in filing it. Legal fees incurred after filing in such
situations receive administrative priority; that prospect
(plus some pre-filing retainer) should be enough to summon
legal assistance. And debtors retain the ability to represent
themselves, when legal aid cannot be found.
Bankruptcy Judge Barliant considered whether an inter-
mediate position is possible, under which the portion of the
No. 03-1303 5
retainer reflecting work done during the bankruptcy is
immune from discharge, even if the portion of the retainer
reflecting pre-filing work is discharged. In re Hines, 147
F.3d 1185 (9th Cir. 1998), adopted that position, limiting
Biggar to fees for pre-filing work. The Hines majority wrote
that it thought the Code as written (and as implemented in
Biggar) is unsatisfactory as a matter of public policy, and it
decided to do a little surgery under what it called a “doc-
trine of necessity.” See 147 F.3d at 1190-91. Like Judge
Barliant, who concluded that Hines is wrongly decided, we
do not conceive revision of the Code as a proper part of the
judicial job. The Bankruptcy Code is a complex compromise
among debtors and different kinds of creditors; tilting it to
help one of these interests is unwarranted. Attorneys
compete with other creditors, such as banks, credit card
issuers, supermarkets, auto dealers, colleges, spouses, and
children; some of these have obtained protection under §523
and others have not. Judges are not entitled to override the
legislative approach with a lawyer-centric public policy that
puts members of their own social class higher in the priority
list at the expense of other creditors, or of the debtors
themselves.
Thus even though the debtors in this appeal have ex-
pressed willingness to accept the conclusion of Hines, we
must determine whether that is a legally open middle
ground. (Even when a litigant confesses error on a district
court’s conclusion, as these litigants effectively have done
with respect to Judge Barliant’s treatment of Hines, an
appellate court must decide the issue independently. See
Lawrence v. Chater, 516 U.S. 163, 170-71 (1996); Rinaldi v.
United States, 434 U.S 22 (1977). Failure to do so might
lead to a remand with instructions to proceed in an un-
lawful manner.) Deciding whether to follow Hines is
essential to the resolution of the appeal. Because both the
bankruptcy judge and the district judge concluded that
6 No. 03-1303
attorneys’ fees are never discharged, the sums owed under
the retainer have never been partitioned between pre- and
post-filing work. We must either reverse outright (holding
that the distinction is not legally material) or remand for
apportionment; there is no way to duck.
Hines conceded that it was going against the Code’s
language. What is discharged is a claim to payment. One
contract (the retainer) gives rise to one claim, meaning a
“right to payment, whether or not such right is . . . fixed,
contingent, matured [or] unmatured”. 11 U.S.C. §101(5).
See Pennsylvania Department of Public Welfare v.
Davenport, 495 U.S. 552, 559 (1990). Hines shattered each
retained agreement into multiple claims by holding that a
“claim” does not accrue until the legal services are per-
formed. Each month (potentially each day or hour) that the
lawyer performs services for the estate then becomes a
separate claim. That contradicts both the Code and the
retainer agreement, which says that the fee is due whether
or not the client uses the services. (That’s the difference
between a retainer and an hourly fee. Judge Tashima’s
concurrence in Hines, 147 F.3d at 1192-93, which rejected
the majority’s legislative approach but accepted the out-
come, depends on dividing the retainer into hourly units—
a step that avoids rewriting the Code by rewriting the
contract instead.)
What is more, even the transformation of one retainer
into many claims (using either the approach of the Hines
majority or that of Judge Tashima) is not enough to support
that decision’s holding, which is that fees for postpetition
work are not discharged. The most a court could do is give
administrative priority to post-petition fees for work in the
action’s prosecution. Yet if the debtor’s estate is insufficient
to pay administrative claims, even those are discharged.
Nothing in the Code permits a categorical exception for any
kind of debt other than one listed in §523—and legal fees
No. 03-1303 7
are not on that list. Because this opinion creates a conflict
with the ninth circuit’s holding in Hines (though it follows
the ninth circuit’s original holding in Biggar), it was
circulated before release to all active judges. See Circuit
Rule 40(e). No judge favored a hearing en banc.
Counsel must repay the debtors any sums collected after
the discharges were entered. If any sums were collected on
account of the retainers during the bankruptcies in vio-
lation of the automatic stay, see 11 U.S.C. §362, these too
must be refunded to the estates. Whether additional steps
may be warranted is a question for the bankruptcy and
district judges to consider in the first instance, and the
cases are remanded for that purpose.
VACATED AND REMANDED.
CUDAHY, Circuit Judge, concurring in part and dissenting
in part.
I agree with the majority that the painstaking procedure
provided in § 329 of the Bankruptcy Code to conform
lawyers’ charges to reasonable levels is not in “conflict” with
the discharge provisions of §§ 727 and 524 or the automatic
stay provision of § 362. The relationship of these sections
may be awkward, and this awkwardness raises some
questions about Congress’s understanding and intent with
respect to the discharge of attorneys’ fees. It does seem
implausible that Congress provided a procedure in § 329 to
impose reasonableness on attorneys’ fees only to simulta-
neously decree them discharged under § 727. But, as the
8 No. 03-1303
majority holds, there is no conflict clear enough to defeat
discharge, when attorneys’ charges are not among the items
specifically excepted from discharge by § 523. This conclu-
sion knocks the props out from the main argument made by
the courts below to justify an exception from discharge.
There are, however, other incongruities in the application
of the Code that lead one to wonder whether Congress
really did anticipate that attorneys’ fee claims would be
discharged. For example, Bankruptcy Rule 1006, imple-
menting 28 U.S.C. § 1930, provides for payment of bank-
ruptcy filing fees in installments within 120 days after the
filing of a bankruptcy petition, but Rule 1006(b)(3) prohibits
any payment to the debtor’s attorney before the filing fee is
paid in full. See Fed. R. Bankr. P. 1006(b)(3). Rule 1006
codifies the longstanding practice under the former Bank-
ruptcy Act and rules. See, e.g., In re Latham, 271 F. 538(N.D.N.Y. 1921). Thus, the rules at least implicitly recog-
nize that attorneys representing debtors in connection with
their bankruptcies may be paid, and may agree to be paid,
post-petition. Although the Bankruptcy Rules may not
contradict substantive provisions of the Code, rules pro-
pounded by the Supreme Court are presumed not to do so.
See In re Moralez, 618 F.2d 76, 78 (9th Cir. 1980) (resolving
doubt about prior substantive law in favor of the under-
standing expressed by the rule); Matter of Decker, 595 F.2d
185, 189 (3d Cir. 1979) (“strong presumption” in favor of
consistency of rules with Code); but see In re Jastrem, 253
F.3d 438, 441-42 (9th Cir. 2001) (resolving inconsistency in
favor of Bankruptcy Code and discharging pre-petition
fees).
There is also evidence in the history of § 60(d) of the
Bankruptcy Act of 1898, as amended (the predecessor of
§ 329 of the Code), that Congress did not intend that pre-
petition attorneys’ fees be discharged. The Supreme Court
characterized § 60(d) as “recogniz[ing] the right of . . . a
No. 03-1303 9
debtor to have the aid and advice of counsel, and, in con-
templation of bankruptcy proceedings which shall strip him
of his property, to make provisions for reasonable compen-
sation to his counsel.” In re Wood, 210 U.S. 246, 253 (1908);
see also In re Falk, 30 F.2d 607, 609 (2d Cir. 1929) (“The
object of § 60(d) was to afford the bankrupt representation
by counsel, who would not have to take his chances as a
general creditor, but might know that a reasonable fee was
assured . . . .”). I do not see this, as the majority suggests,
as a species of “social-class preference.” It seems to me an
arrangement that might enable debtors to obtain counsel in
bankruptcy when counsel might be sorely needed. The
elementary demands of fairness are offended when a
necessitous debtor retains a lawyer to help him unburden
himself of his debts and then hoists the unsuspecting
attorney on his own petard by not only refusing to pay what
is due under the retainer but asking that the lawyer be held
in contempt.
Bankruptcy Judge Barliant began his opinion in this case
with a plea for an appropriate regard for context in the
construction of statutes. In that respect, he quoted from our
decision in In re Handy Andy Home Improvement Centers,
Inc., 144 F.3d 1125, 1128 (7th Cir. 1998) (Posner, C.J.),
“when context is disregarded, silliness results.” So in taking
account of the context here, there may be some grounds for
viewing the discharge of pre-petition attorneys’ fees as
“silly,” but that is a description we must lay at the feet of
Congress, which, I think dispositively, failed to include pre-
petition lawyers’ fees as an exception to discharge.
I do not, however, agree with the majority that there is
anything in the case before us that requires the rejection of
In re Hines, 147 F.3d 1185 (9th Cir. 1998) (Shadur, J.), and
thereby the creation of a split with the Ninth Circuit. In
this appeal, the debtors claim only that “Defendants
violated the automatic stay . . . and the discharge injunction
. . . of the Bankruptcy Code by collecting debts from Plain-
10 No. 03-1303
tiffs for attorneys’ fees earned pre-petition after Plaintiffs’
bankruptcy petitions were filed.” Appellants’ Br. at 3
(emphasis added). The status of payments for post-petition
services is not in issue on this appeal, and the majority
seems to agree that the parties have not raised this issue
here. Under ordinary principles of the adversary system, we
do not reach out to decide questions not before us. See, e.g.,
Adam A. Milani & Michael R. Smith, “Playing God: A
Critical Look at Sua Sponte Decisions by Appellate Courts,”
69 Tenn. L. Rev. 245, 273 (2002) (“Party identification of
the issues is at the core of th[e adversary] system and ‘[t]he
adversary process is no more starkly challenged than when
a court decides an issue not raised, for it actually decides
something other than what the parties asked it to decide.’ ”)
(footnotes and citations omitted). The fact that, in passing,
Judge Barliant disagreed with the Ninth Circuit’s analysis
in Hines in support of his refusal to jump on the Biggar
bandwagon is certainly not a sufficient reason for us to
address an issue that is unnecessary to our disposition of
this appeal. After all, the bankruptcy judge was rejecting
Hines’s reaffirmation of Biggar’s discharge of pre-petition
fees, not its non-discharge of post-petition fees. Moreover,
neither party has “confessed error,” either explicitly or
otherwise, as to Judge Barliant’s analysis of Hines, because
the outcome has not (until now) hinged on Hines’s validity.
The majority argues that because it might be appropriate to
remand for apportionment, we must instruct the lower
courts on how to do that or they may “proceed in an un-
lawful manner.” Slip op. at 5. But we have decided only
the disposition of pre-petition fees—the only issue pre-
sented on this appeal. What sort of issues may arise on
remand and how the parties will frame them is presently
unknown, and it is premature to instruct anyone how to
deal with an unlitigated issue. The question before us is
what issues are raised by the litigants, not, as in Lawrence
v. Chater (cited by the majority), whether a lower court
would change its opinion in light of a significant change in
No. 03-1303 11
circumstances, such as a confession of error by one of the
parties to the litigation or a failure to consider an important
precedent, if given the opportunity to do so on remand.1 See
Lawrence v. Chater, 516 U.S. 163, 167-68 (1996).
The issue that the majority seeks to decide prematurely
is whether fees for work performed after the filing of the
petition are to be discharged, not whether the particular
rationales provided by the Hines majority or by Judge
Tashima’s special concurrence are valid. The underlying
principle is that only debts owed at the time of filing the
petition are subject to discharge under Section 727. See 11
U.S.C. § 301 (the commencement of a voluntary case under
Chapter 7 by filing a petition constitutes an order for relief);
11 U.S.C. § 727(b) (operating to discharge “all debts that
arose before the date of the order for relief”). As the major-
ity recognizes, fees arising from professional services
rendered during bankruptcy are treated entirely differently
by the Code. See slip op. at 4. Nonetheless, the majority
seems to be saying that because it might be difficult to
allocate fees between pre-petition and post-petition work,
both must be discharged. These concerns about problems of
allocation are, as I have indicated, also premature. Whether
the bankruptcy lawyers’ fees for post-petition legal services
1
In fact, the majority is arguing not that a simple vacatur and
remand is appropriate in this case as it was in Lawrence v.
Chater, but that the parties (despite all indications to the con-
trary) have actually appealed the validity of Hines with respect to
the discharge of post-petition fees, and that we must therefore
pass judgment on that issue. Moreover, what the majority char-
acterizes as an “effective” “confess[ion of] error” by the litigants is,
if anything, merely argumentation on appeal that the lower court
(not the parties themselves) has made an error of law. Lawrence
v. Chater is thus inapposite, and neither it nor Rinaldi v. United
States, 434 U.S. 22 (1977) (also cited by the majority), requires
this court to “decide the issue independently.” Slip op. at 5.
12 No. 03-1303
are dischargeable is an issue that may be raised and dealt
with on remand in the bankruptcy court, and, as I have
pointed out, we have no idea what positions will be taken by
the parties with respect to that issue or what rationales
they will advance in support of their positions (or whether
they will settle the case without further litigation).2 The
validity of Hines may become an issue at that time, al-
though that is by no means certain, and there will then be
a record upon which to evaluate the holding of that opinion.
The issue whether all lawyers’ fees in the course of a
bankruptcy will be discharged, or only the fees incurred
prior to filing the petition, is much too important to decide
before it is litigated.
Although, as I have argued, the validity of the Ninth
Circuit’s holding in Hines should not be reached at this
time, it should be borne in mind that Hines—incidentally,
an opinion authored by an able jurist from the Seventh
Circuit, sitting by designation—is not only the law of the
Ninth Circuit, see In re Sanchez, 241 F.3d 1148, 1150 (9th
Cir. 2001), but has been followed elsewhere, see, e.g., In re
McNickle, 274 B.R. 477, 480 n.5 (S.D. Ohio 2002).3 And the
2
It should be kept in mind that the debtors have argued vocif-
erously that “legal fees only become a ‘claim’ as the legal services
are performed,” Appellants’ Br. at 14, and would be judicially
estopped from arguing the opposite on remand if the majority did
not insist on prematurely invalidating the holding of Hines. And
the bankruptcy lawyers have argued Hines is wrong only in that
it discharges pre-petition fees; they have obviously never argued
that post-petition fees should also be discharged. See Appellee’s
Br. at 17-18.
3
Even though the majority disparages the idea of dividing a
retainer agreement into multiple “claims” accruing when legal
services are performed, “Illinois law entitles a client to discharge
his lawyer (without liability) at any time, with or without cause.”
(continued...)
No. 03-1303 13
principle that fees applicable to post-petition activities are
not discharged, even if based on a pre-petition contract, has
been broadly recognized. See, e.g., Siegel v. Federal Home
Loan Mortgage Corp., 143 F.3d 525, 532 (9th Cir. 1998); In
re Sure-Snap Corp., 983 F.2d 1015, 1018 (11th Cir. 1993);
3
(...continued)
Maksym v. Loesch, 937 F.2d 1237, 1245 (7th Cir. 1991), citing
Rhoades v. Norfolk & Western Ry., 399 N.E.2d 969, 974 (Ill. 1979).
(For the record, the Illinois Supreme Court followed California’s
lead in deciding this issue. See Fracasse v. Brent, 494 P.2d 9 (Cal.
1972) (allowing attorney discharged with or without cause to
receive a reasonable fee for services rendered). Judge Tashima’s
rationale for allowing post-petition fees therefore does not actually
involve “rewriting the contract” at all, because, just as in Illinois,
California law does not create a right to payment until services
have been performed.) Thus, particularly in this case, there is no
support for the majority’s argument that bifurcating an agree-
ment for legal fees in the way advocated in Hines “contradicts
both the Code and the retainer agreement, which says that the fee
is due whether or not the client uses the services.” Slip op. at 6.
For this reason, it is also arguable whether installment fee
agreements entered into by Illinois bankruptcy lawyers would
actually give rise to any “right to payment” until they have
performed the agreed-upon legal services.
Rather, both Illinois law governing lawyer-client fee agreements
and the Code support Hines’s holding that post-petition fees are
not discharged. Under Illinois law, a bankruptcy lawyer is entitled
to the value of services rendered under a theory of quantum
meruit. This is entirely in keeping with § 329(b) of the Code,
which requires bankruptcy courts to make exactly that determina-
tion. Although the majority’s holding today is arguably correct in
finding that the Bankruptcy Code trumps the law of restitution in
denying a reasonable fee for pre-petition services rendered by
“lawyers . . . in circumstances in which they can reasonably be
expected to be compensated,” Gaskill v. Gordon, 160 F.3d 361, 363
(7th Cir. 1998), neither the Code nor Illinois contract law supports
the majority’s gratuitous determination that these lawyers are not
entitled to their post-petition fees.
14 No. 03-1303
In re Hadden, 57 B.R. 187 (Bankr. W.D. Wis. 1986). But,
more immediately relevant, the status of Hines in this
circuit is an issue we may not properly reach in this appeal,
and I see no merit to doing so. As Judge Easterbrook
observed in another bankruptcy case, “[w]e do not create
conflicts among the circuits without strong cause. A conflict
here would be gratuitous.” Mayer v. Spanel Int’l Ltd., 51
F.3d 670, 675 (7th Cir. 1995).
I therefore respectfully dissent to the extent I have
indicated.
A true Copy:
Teste:
________________________________
Clerk of the United States Court of
Appeals for the Seventh Circuit
USCA-02-C-0072—12-17-03