MEMORANDUM OPINION AND ORDER
JEFF KAPLAN, Magistrate Judge
Plaintiff Tracie Beckett seeks judicial review of a final adverse decision of the Commissioner of Social Security pursuant to 42 U.S.C. § 405(g). For the reasons stated herein, the hearing decision is affirmed.
I.
Plaintiff alleges that she is disabled due to a variety of ailments, including chronic pain throughout her body, hepatitis, asthma, internal inflamation, and psychiatric problems. After her application for supplemental security income ("SSI") benefits was denied initially and on reconsideration, plaintiff requested a hearing before an administrative law judge. That hearing was held on July 24, 2007. At the time of the hearing, plaintiff was 44 years old. She has a high school equivalency diploma and no past relevant work experience. Plaintiff has not engaged in substantial gainful activity since August 10, 2005.
The ALJ found that plaintiff was not disabled and therefore not entitled to SSI benefits. Although the medical evidence established that plaintiff suffered from asthma, degenerative disc disease, a personality disorder, an anxiety disorder, depression, and substance abuse, the judge concluded that the severity of those impairments met the requirements of the applicable listings only because of her substance abuse. If plaintiff stopped using drugs, the ALJ determined that the severity of her impairments did not meet or equal any impairment listed in the social security regulations. The judge also found that plaintiff had the residual functional capacity to perform a limited range of light work. Relying on the testimony of a vocational expert, the ALJ determined that plaintiff was capable of working as a toll collector, a sorter, and a cutter — jobs that exist in significant numbers in the national economy. Plaintiff appealed that decision to the Appeals Council. The Council affirmed. Plaintiff then filed this action in federal district court.
II.
In three grounds for relief, plaintiff contends that: (1) the ALJ erroneously found that her substance abuse was a contributing factor material to the determination of disability; (2) the ALJ improperly rejected the opinions of her treating physician; and (3) the assessment of her residual functional capacity is not supported by substantial evidence.
A.
Judicial review in social security cases is limited to determining whether the Commissioner's decision is supported by substantial evidence and whether the proper legal standards were used to evaluate the evidence. See 42 U.S.C. § 405(g); Ripley v. Chater, 67 F.3d 552, 555 (5th Cir. 1995). Substantial evidence is defined as "such relevant evidence as a reasonable mind might accept as adequate to support a conclusion." Richardson v. Perales, 402 U.S. 389, 401, 91 S.Ct. 1420, 1427, 28 L.Ed.2d 842 (1971); Austin v. Shalala, 994 F.2d 1170, 1174 (5th Cir. 1993). It is more than a scintilla but less than a preponderance. Richardson, 91 S.Ct. at 1427. The district court may not reweigh the evidence or substitute its judgment for that of the Commissioner, but must scrutinize the entire record to ascertain whether substantial evidence supports the hearing decision. Hollis v. Bowen, 837 F.2d 1378, 1383 (5th Cir. 1988).
A disabled worker is entitled to monthly social security benefits if certain conditions are met. 42 U.S.C. § 423(a). The Act defines "disability" as the inability to engage in substantial gainful activity by reason of any medically determinable physical or mental impairment that can be expected to result in death or last for a continued period of 12 months. Id. § 423(d)(1)(A); Cook v. Heckler, 750 F.2d 391, 393 (5th Cir. 1985). The Commissioner has promulgated a five-step sequential evaluation process that must be followed in making a disability determination:
1. The hearing officer must first ascertain whether the claimant is engaged in substantial gainful activity. A claimant who is working is not disabled regardless of the medical findings.
2. The hearing officer must then determine whether the claimed impairment is "severe." A "severe impairment" must significantly limit the claimant's physical or mental ability to do basic work activities. This determination must be made solely on the basis of the medical evidence.
3. The hearing officer must then determine if the impairment meets or equals in severity certain impairments described in Appendix 1 of the regulations. This determination is made using only medical evidence.
4. If the claimant has a "severe impairment" covered by the regulations, the hearing officer must determine whether the claimant can perform his past work despite any limitations.
5. If the claimant does not have the residual functional capacity to perform past work, the hearing officer must decide whether the claimant can perform any other gainful and substantial work in the economy. This determination is made on the basis of the claimant's age, education, work experience, and residual functional capacity.
See generally, 20 C.F.R. § 404.1520(b)-(f). The claimant has the initial burden of establishing a disability in the first four steps of this analysis.
Bowen v. Yuckert, 482 U.S. 137, 146 n. 5,
107 S.Ct. 2287, 2294 n. 5,
96 L.Ed.2d 119 (1987). The burden then shifts to the Commissioner to show that the claimant is capable of performing work in the national economy.
Id. A finding that the claimant is disabled or not disabled at any point in the five-step review is conclusive and terminates the analysis.
Lovelace v. Bowen, 813 F.2d 55, 58 (5th Cir. 1987).
In reviewing the propriety of a decision that a claimant is not disabled, the court's function is to ascertain whether the record as a whole contains substantial evidence to support the Commissioner's final decision. The court weighs four elements to determine whether there is substantial evidence of disability: (1) objective medical facts; (2) diagnoses and opinions of treating and examining physicians; (3) subjective evidence of pain and disability; and (4) the claimant's age, education, and work history. Martinez v. Chater, 64 F.3d 172, 174 (5th Cir. 1995), citing Wren v. Sullivan, 925 F.2d 123, 126 (5th Cir. 1991). The ALJ has a duty to fully and fairly develop the facts relating to a claim for disability benefits. Ripley, 67 F.3d at 557. If the ALJ does not satisfy this duty, the resulting decision is not substantially justified. Id. However, procedural perfection is not required. The court will reverse an administrative ruling only if the claimant shows that her substantive rights were prejudiced. Smith v. Chater, 962 F.Supp. 980, 984 (N.D. Tex. 1997).
B.
The court first considers whether plaintiff's substance abuse was a contributing factor material to her disability. In 1996, Congress passed the Contract with America Advancement Act ("CAAA"), Pub.L. No. 104-121, 110 Stat. 847 (1996), which provides, in pertinent part:
[A]n individual shall not be considered to be disabled for purposes of this subchapter if alcoholism or drug addiction would (but for this subparagraph) be a contributing factor material to the Commissioner's determination that the individual is disabled.
42 U.S.C. § 1382c(a)(3)(J). Under regulations implementing this legislation, the Commissioner must ascertain whether drug or alcohol addiction is "a contributing factor material to the determination of disability."
20 C.F.R. § 404.1535(a). The key factor in making this determination "is whether we would still find you disabled if you stopped using drugs or alcohol."
Id. § 404.1535(b)(1). If a claimant's remaining limitations would not be disabling, drug addiction or alcoholism is considered to be "a contributing factor material to the determination of disability."
Id. § 404.1535(b)(2)(i). The claimant bears the burden of proving that his or her remaining limitations are disabling independent of drug or alcohol abuse.
See Brown v. Apfel, 192 F.3d 492, 498 (5th Cir. 1999).
The CAAA regulations apply only if there is medical evidence of current drug or alcohol abuse. See id. at 499 (analysis under CAAA regulations is appropriate "assuming that [plaintiff] is still addicted to drugs and alcohol at the time of [the] hearing"). Such is the case here. In August 2005, plaintiff was released from prison after serving four years on a parole violation for a drug-related offense. ( See id. at 269). Following her release, plaintiff participated in an intensive out-patient substance abuse treatment program that lasted approximately six months. ( Id.). She remained sober through May 2006. ( Id.). However, in November 2006, plaintiff attempted to obtain early refills on prescriptions for Clonazepam and Tanazapam which, according to the testifying medical expert, is indicative of substance abuse. ( Id. at 522, 523, 794). On July 23, 2007 — the day before the administrative hearing — plaintiff tested positive for cocaine. ( Id. at 651). Plaintiff also smoked "crack" twice in August 2007. ( Id. at 725, 748). This constitutes substantial evidence that plaintiff abused drugs during the time period relevant to her disability determination.
Clonazepam and Tanazapam are prescription medications used to treat anxiety.
Although the medical evidence established that plaintiff suffered from a variety of mental impairments, the ALJ found that the severity of those impairments met the requirements of the applicable listings only when plaintiff used drugs. ( See id. at 18-20). According to the ALJ:
[P]rison records reflect no active mental health symptomology. As the claimant exhibited no active mental health symptomology during a period of presumed abstinence, and often exhibited only mild to moderate symptomology following her release from prison, the undersigned is convinced with sustained sobriety the claimant could be expected to meet the demands of competitive simple work, as long as she was not required to interact with others on more than an incidental basis. This determination is consistent with treatment notes that show during the time period relevant to this decision the claimant has been assessed with social, occupational, and psychological [sic] (Global Assessment of Functioning or GAF) as high as 60, which is indicative of mild to moderate limitations. It is also consistent with the claimant's reported symptomology, which on a scale of zero to ten with zero being no symptoms and ten being extreme symptoms has quite frequently been rated as five or less.
( Id. at 23-24) (internal citations omitted). Those findings are also supported by substantial evidence. The record shows that plaintiff was not diagnosed with depression until September 2005. ( Id. at 248). It was later determined that plaintiff suffered from post-traumatic stress syndrome and antisocial personality disorder. ( Id. at 272, 526, 530, 534, 597, 598). In a mental impairment questionnaire dated July 31, 2007, Dr. Scott Kemp opined that plaintiff's mental limitations caused her to have "no useful ability" to deal with stress, interact appropriately with the general public, maintain socially acceptable behavior, or adhere to basic standards of neatness and cleanliness. ( See id. at 638). Dr. Kemp found that plaintiff lacked the mental ability to meet competitive standards with respect to a variety of work-related tasks, including: (1) carrying out very short and simple instructions; (2) maintaining attention for longer than two hours; (3) sustaining an ordinary routine without special supervision; (4) working in coordination with or proximity to others without being unduly distracted; (5) making simple work-related decisions; (6) asking simple questions or requesting assistance; (7) responding appropriately to criticism from a supervisor; and (8) getting along with co-workers or peers. ( Id. at 637-38). However, as previously discussed, plaintiff tested positive for cocaine on July 23, 2007 — just eight days before Dr. Kemp completed the mental impairment questionnaire. Plaintiff also admitted to smoking "crack" twice in August 2007. When plaintiff was incarcerated and unable to obtain drugs, she had no diagnosis of any mental impairments. ( See id. at 178, 182, 184, 186, 195, 199, 201, 205, 207, 372, 373). Nor is there anything in the record to suggest that plaintiff suffered any work-related limitations or was disabled during this period of forced sobriety. In view of the evidence that plaintiff had no disabling mental impairments when she was not using drugs, the ALJ did not err in making such a finding.
Notwithstanding these serious limitations, Dr. Kemp determined that plaintiff was not precluded from understanding and remembering very short and simple instructions, maintaining regular attendance and being punctual within customary tolerances, and completing a normal workday and workweek without interruption from psychologically based symptoms. ( See Tr. at 637).
Plaintiff also faults the ALJ for not asking Dr. Kemp to clarify the record regarding any chronic substance abuse and for not inquiring about the results of drug testing while she was on parole. ( See Plf. MSJ Br. at 18-19). Both arguments are without merit. An ALJ is required to recontact a medical source "[w]hen the evidence . . . from [the] treating physician or psychologist or other medical source is inadequate for [the Commissioner] to determine whether [the claimant is] disabled." Cornett v. Astrue, 261 Fed.Appx. 644, 648, 2008 WL 58822 at *3 (5th Cir. Jan. 3, 2008), quoting 20 C.F.R. § 416.912(e). In this case, there is no indication that the ALJ found the evidence inconclusive or inadequate to render a decision. Nor is there any evidence that Dr. Kemp would have provided additional information helpful to plaintiff. Similarly, plaintiff does not proffer the results of any parole drug testing or otherwise show that these test results would have changed the outcome of her disability determination. Without such evidence, there is no basis for a remand. See Newton v. Apfel, 209 F.3d 448, 458 (5th Cir. 2000) (remand required only if claimant shows prejudice resulting from ALJ's failure to request additional information).
C.
Next, plaintiff argues that the ALJ improperly rejected Dr. Kemp's opinion that her mental impairments caused "marked" limitations in the ability to maintain social functioning, concentration, persistence, and pace, and "moderate" restrictions in activities of daily living. ( See Tr. at 636). The opinion of a treating source is generally entitled to controlling weight so long as it is "well-supported by medically acceptable clinical and laboratory diagnostic techniques and is not inconsistent with the other substantial evidence in [the] case record." 20 C.F.R. § 404.1527(d)(2); see also Spellman v. Shalala, 1 F.3d 357, 364 (5th Cir. 1993). Even if a treating source opinion is not given controlling weight, it still is entitled to deference "and must be weighed using all of the factors provided in 20 C.F.R. 404.1527 and 416.927." SSR 96-2p, 1996 WL 374188 at *4 (SSA Jul. 2, 1996); see also Newton, 209 F.3d at 456. These factors require consideration of:
1. the physician's length of treatment of the claimant;
2. the physician's frequency of examination;
3. the nature and extent of the treatment relationship;
4. the support of the physician's opinion afforded by the medical evidence of record;
5. the consistency of the opinion with the record as a whole; and
6. the specialization of the treating physician.
20 C.F.R. § 404.1527(d)(2). A treating source opinion cannot be rejected absent good cause for reasons clearly articulated in the hearing decision.
See Myers v. Apfel, 238 F.3d 617, 621 (5th Cir.
2001). More specifically, the ALJ must clearly articulate the weight given to the treating source opinion:
[T]he notice of the determination or decision must contain specific reasons for the weight given to the treating source's medical opinion, supported by the evidence in the case record, and must be sufficiently specific to make clear to any subsequent reviewers the weight the adjudicator gave to the treating source's medical opinion and the reasons for that weight.
SSR 96-2p, 1996 WL 374188 at *4-5.
The ALJ found that if plaintiff stopped using drugs, she would be able to perform simple work, so long as her interaction with supervisors, coworkers and the public was limited to no more than an occasional basis. ( See Tr. at 21, 23). In a well-reasoned decision, the judge explained that she rejected Dr. Kemp's assessment because it "does not address the impact of substance abuse." ( Id. at 23). Indeed, it appears that Dr. Kemp was unaware of plaintiff's ongoing drug use, as evidenced by his notation on the mental health questionnaire that plaintiff "has been sober for four years." ( See id. at 639). As previously discussed, plaintiff tested positive for cocaine just eight days before Dr. Kemp completed the questionnaire, and admitted to smoking "crack" at least two times in the following weeks. Dr. Kemp's failure to address the impact of plaintiff's substance abuse on her mental impairments constitutes "good cause" for giving his opinions limited or no credence. See Smith v. Astrue, No. 07-51161, 2008 WL 2325637 at *3 (5th Cir. Jun. 6, 2008) (where record established that plaintiff's drug use continued even after she filed for disability benefits, ALJ did not err in discounting contrary statements by treating doctors).
D.
Finally, plaintiff argues that substantial evidence does not support the finding that she has the residual functional capacity to perform simple work and interact with supervisors, coworkers, and the public on no more than an occasional basis. ( See Tr. at 21). According to plaintiff, this finding is inconsistent with the testimony of Dr. Ann C. Turbeville, a medical expert, which formed the basis of a hypothetical posed to a vocational expert. ( See Plf. MSJ Br. at 14-15).
A careful examination of the record reveals that the ALJ mischaracterized Dr. Turbeville's testimony regarding plaintiff's ability to interact with the public. At the administrative hearing, Dr. Turbeville opined:
This is a lady who is not going to be able to work with the public, and only have incidental [contact] with her co-workers. No team work. And I would keep it fairly simple instructions so she's not required to make a lot of independent decision-making, and have supervisors come and tell her she made the wrong decision . . . She wouldn't like that.
( Id. at 797). In other words, Dr. Turbeville said that plaintiff was limited to performing simple work that required no interaction with the public and only incidental contact with her co-workers and supervisors. Apparently, the ALJ misunderstood this testimony because the hearing decision incorrectly states that "Dr. Turbeville [] opined the claimant would be unable to interact with the public/coworkers/supervisors on more than an incidental basis." ( Id. at 22). Noting her agreement with the non-exertional mental health limitations proposed by Dr. Turbeville, the ALJ concluded that plaintiff could perform simple work, provided she was not required to interact with supervisors, coworkers, or the public on more than an occasional basis. ( Id. at 21). The ALJ then determined that plaintiff could perform the jobs of toll collector, sorter, and cutter and paster which, according to the vocational expert, require at least "incidental" interaction with the public. ( See id. at 24-25, 800-01, 804).
Notwithstanding the ALJ's flawed characterization of Dr. Turbeville's testimony, other medical evidence in the record supports the finding that plaintiff has the residual functional capacity to perform simple work and interact with supervisors, coworkers, and the public on no more than an occasional basis. A residual functional capacity assessment prepared by Dr. Leela Reddy, a state agency medical consultant, rated plaintiff with only "moderate" difficulties in her ability to interact appropriately with the general public. ( See id. at 303). In all other aspects of social functioning, Dr. Reddy found that plaintiff was "not significantly limited." ( Id.). The restriction adopted by the ALJ is consistent with this residual functional capacity assessment and, thus, is supported by substantial evidence. See Brown v. Astrue, No. 3-08-CV-0255-D, 2009 WL 64117 at *4 (N.D. Tex. Jan. 12, 2009) (function-by-function RFC assessment prepared by state agency medical consultant constitutes substantial evidence); Zeno v. Barnhart, No. 1-03-CV-649, 2005 WL 588223 at *9 (E.D. Tex. Feb. 4, 2005) (same). Because plaintiff has not shown that the disability determination would have been different had the ALJ properly understood Dr. Turbeville's testimony, there is no prejudice. See Dzuik v. Barnhart, 67 Fed.Appx. 248, 2003 WL 21145745 at *1 (5th Cir. May 1, 2003) (affirming ALJ decision notwithstanding mischaracterization of medical evidence because plaintiff failed to demonstrate prejudice).
CONCLUSION
The hearing decision is affirmed in all respects.
DATED: December 1, 2010.
source for those types of tenants dried up in 2007. The steep decline in tourism and gambling revenue in Las Vegas has led to widely reported troubles
for some major casino owners. All of these events created a cascading effect on the uncertainty of the local Las Vegas economy. Tempest International Group, USA and Royal Nails informed Debtor in the latter part of 2007 that they were terminating their leases.
In January 2008, Payless Shoe Source informed Rosenberg that it was terminating its lease because Debtor had failed to timely deliver the Leased Premises. According to Debtor, Debtor's failure to deliver the space in this case was due not to the problems it was having with its contractor, but with Payless Shoe Source's failure to timely comply with its obligations to furnish to Debtor plans for its finish out. Debtor believes that Payless deliberately attempted to "run the clock" on Debtor's time to complete its finish out so it could terminate the lease without a penalty.
In February 2008, one week after Roche provided Boulder Crossroads with Unconditional Occupancy Permits for the retail buildings, Rosenberg began contacting the tenants who had pre-leased to deliver their spaces to them. Grab `N Go Pizza took delivery and opened for business for approximately three months but vacated shortly thereafter without having paid any rent and asserting that they had the right to terminate the lease because Debtor's delivery of the premises was late.
BACKGROUND OF CREDITOR CREDITOR'S RELATIONSHIP WITH DEBTOR
Lionel Sawyer Collins is the largest Nevada based law firm with offices in Las Vegas and Reno. LS C's creditor's claim arises out of representation of Boulder Crossroads between May 31, 2007, and June of 2008. LS C's invoices to Boulder reflect a total of $253,170.85 in costs and fees billed to Boulder (including prepetition interest on five separate files) and $161,664.75 paid. The difference is LS C's claim — $91,506.10.
As discussed above, Boulder Crossroads engaged Roche as the general contractor to build the shopping center. Rosenberg contacted Mr. Rodney Jean of LS C to represent Boulder Crossroads in late May 2007. At this time, construction had been ongoing for several months, and numerous disputes had arisen between Boulder Crosswoards and Roche. There had already been more than a dozen change order requests ("CORs") and over 50 requests for information ("RFIs) from Roche, and a great many of those were unresolved at the time of LS C's engagement. LS C was engaged to assist Boulder Crossroads in resolving its dispute with Roche.
The engagement letter between Boulder Crossroads and LS C, entered into evidence at trial, succinctly described the scope of representation of Boulder Crossroads on page 1 as follows: "Representation of the Client with respect to a dispute with Roche Constructors, Inc. regarding the Boulder Crossroads Shopping Center." Specifics of the engagement letter as well as more details of the disputes between LS C and Boulder Crossroads will be discussed below.
According to LS C's Trial Brief, when Boulder Crossroads engaged LS C, Rosenberg neither advised LS C of any disputes with Wal-Mart nor asked LS C to evaluate any claims against Wal-Mart. The initial problems, as described by Rosenberg, were the extensive number of RFI's and COR's submitted by Roche, and delays which made it clear the project would not be completed on schedule. Under the agreements between Boulder Crossroads and Roche, either party could assert claims against the other for delay damages or General Conditions charges, and Rosenberg said he felt he was being "set up" for a General Conditions charge by correspondence he was receiving from Roche. The first goal of the representation by LS C was to find a way to resolve the disputes over the COR's, give direction to Roche, resolve the potential disputes over delay damages, and get the project rolling again.
SUMMARY OF TESTIMONY FROM AUGUST 25, 2010
On August 25, 2010, a hearing was held to consider Boulder Crossroad's Objection to Claim LS C's Response. At trial, representatives for Debtor appeared as did Mr. Rodney Jean of LS C. Below is a summary of the testimony presented that day.
Debtor objected to LS C's claims on several bases — that Boulder Crossroads did not receive adequate value in exchange for LS C's legal services, that LS C failed to disclose a conflict which prevented LS C from providing Boulder with unbiased legal advisement, and that LS C impermissibly applied a retainer paid by Boulder. During the hearing, Rosenberg testified on behalf of the Debtor and Jean testified on behalf of the Creditor.
During his testimony, Jean testified as to his representation of Boulder Crossroads in the time leading up to Boulder's bankruptcy. Jean first discussed the engagement letter entered into between LS C and Boulder. The engagement letter defines the scope of engagement as "a dispute with Roche Constructors, Inc. regarding the Boulder Crossroads Shopping Center" (Creditor's Ex. 1). The engagement letter also discussed the general responsibilities of the Client (Boulder Crossroads) and potential conflicts. Id. Additionally, the engagement letter states that LS C's services shall be governed by the Rules of Professional Conduct as adopted by the Nevada Supreme Court. Id.
Jean then testified as to several emails between himself and Rosenberg discussing the scope of the various issues Jean was working on for Boulder. According to Jean, Rosenberg frequently questioned the validity of the information Roche was providing. Jean presented other emails between himself and Rosenberg documenting the issues LS C was working on for Boulder. (Creditor's Exs. 5-11). Jean also presented an email he sent to Roche documenting some of the problems which were developing at the time. (Creditor's Ex. 50). Jean produced emails between himself and Rosenberg to demonstrate the level of background knowledge Jean was required to attain on the contract between Boulder Crossroads and the contractors, the specifications, and the general conditions. (Creditor's Ex. 13-16). The emails also show the issues between Boulder Crossroads and Roche and what Jean was doing on behalf of Boulder Crossroads.
Jean presented an email from Rosenberg containing a string that discusses a dust control issue related to the construction at the site. (Creditor's Ex. 17). Wal-Mart had been raising concerns about the level of dust coming from the construction at Boulder Crossroads. Jean raised this because of the conflict of interest issue raised by Boulder Crossroads. Additionally, Jean presented an email from Rosenberg to Jean discussing Rosenberg's concern that Wal-Mart was attempting to position Boulder Crossroads to be in default by not managing contractors to comply with the conditions in the deed of purchase. (Creditor's Ex. 19). Jean testified that this was the first mention of any potential issues with Wal-Mart. He testified that this information was provided to him in order to assist him in understanding the priorities regarding how Rosenberg wanted the sequencing of the construction project to go.
Jean then discussed the work that went into negotiating the second amended construction contract. He stated that it was at this time that he first consulted with his partner, Mr. Paul Larsen, regarding timing issues and how long it would take to complete the project. After his discussion with Larsen, Jean wrote to Rosenberg saying that Larsen had done the zoning work for Wal-Mart and that it could take four to five months due to a significant backlog in the permitting office. (Creditor's Ex. 21). Rosenberg's response to this email was to ask if LS C now represented Wal-Mart. (Creditor's Ex. 22). Jean responded "Interesting question. I'll check." (Creditor's Ex. 23). Jean testified that a few minutes later he wrote Rosenberg back acknowledging the existence of some open files with Wal-Mart and told Rosenberg that "Wal-Mart would not have been listed or checked as part of our new matter intake process because there did not appear to be anything adverse to Wal Mart in this matter . . . Rest assured nothing you have said has or will ever be passed on to Wal Mart." (Creditor's Ex. 24). Jean testified that LS C did not actually do the zoning work for Wal-Mart, but did the zoning work for the party that sold the property to Wal-Mart. Jean stated that he never discussed Boulder Crossroads again with Larsen, until he was asked to respond to discovery in this claims objection.
Jean then discussed an email sent a month after Rosenberg's questions about LS C's representation of Wal-Mart. In that email, Rosenberg raised an issue about a problem where the subcontractor cut the cart perimeter around the Wal-Mart parking lot. (Creditor's Ex. 25). Rosenberg asked Jean if Boulder Crossroads needed to put the contractors on notice of the issue, to which Jean responded that they should absolutely put them on notice. (Creditor's Ex. 26). Jean testified at trial that he presented this issue because it was something that concerned Wal-Mart and that Boulder Crossroads and LS C went forward with their representation. Jean also testified that Boulder Crossroads paid for the work LS C did at this point and that all of the work that Boulder Crossroads disputed occurred much later. Jean pointed to the fact that instead of requesting that LS C cease their representation of Boulder Crossroads, Rosenberg had LS C continue doing work for Boulder Crossroads.
Jean testified regarding an issue concerning Mr. Chuck Perkins, an employee of Rosenberg's. Perkins claimed that he had left another job to come work for Boulder Crossroads and had not been paid. Jean discussed this issue, and presented an email between himself and Rosenberg concerning the matter, in order to show the other work that LS C did for Boulder Crossroads.
Jean then testified about the issues with Boulder Crossroads' tenant, Royal Nails, who had wanted to back out of its lease. In response to Debtor's claim that LS C had impermissibly settled a claim without Boulder Crossroads' permission, Jean entered exhibits detailing the lease, the conflicts check that LS C ran, and LS C's work on the matter. (Creditor's Exs. 29-45). These exhibits present Jean's work in trying to settle the matter between Boulder and Royal Nails. The emails show communications between Jean, Rosenberg, and Royal Nails. Jean testified that responses from Royal Nails were forwarded to Rosenberg. The emails span a five-month period from February 7, 2008, to June 13, 2008. Jean included in his exhibits a complaint he received on October 13, 2008 from an attorney representing Royal Nails. (Creditor's Ex. 46). Jean testified that at this time he was no longer representing Boulder Crossroads, and emailed the attorney for Royal Nails that he had parted company with Boulder at the beginning of the summer, when Boulder stopped paying LS C's bills. (Creditor's Ex. 47).
Jean testified as to another issue which Boulder Crossroads asserted was a conflict of interest. Jean testified that Rosenberg had mentioned an issue with Java Detour, a tenant of Boulder Crossroads. Jean stated that Rosenberg promised to send Jean information concerning the guarantors of the lease. On February 7, 2010, Rosenberg sent Jean an email identifying the guarantors of Java Detour, including a Mr. J. Dapper. (Creditor's Ex. 53). The email from Rosenberg stated in a parenthetical after Dapper's name that "Your firm is the registered agent for at least one of J's other businesses." Id. Jean testified that before he could even run the conflicts check, Rosenberg stated that Boulder was not having LS C represent them on that matter. Jean stated that he did not believe it would be a per se conflict that LS C was the registered agent for any entity that Dapper had an interest in, but that it would have been a situation that Jean would have been concerned enough about that he would have requested a conflict waiver if LS C had gone forward with the matter.
Jean next testified about the issue between LS C and Boulder Crossroads concerning late attorneys' fees. Jean entered into evidence a letter from himself to Rosenberg, dated April 24, 2008, which stated that Boulder Crossroads owed LS C over $83,000 plus some unbilled work in process and that Boulder Crossroads had made no payment to LS C since February 26, 2008. (Creditor's Ex. 55). The letter also stated that Jean was particularly concerned by Boulder Crossroads' failure to pay because Boulder had previously not acknowledged billings by the architect for the project, Nadel, to which Boulder objected. Id. Jean stated in the letter that he was concerned that Boulder was not paying its bills due to "some objection to the payment of Lionel Sawyer Collins' bill of which I am not aware." Id. After presenting this letter into evidence, Jean testified that Rosenberg had previously expressed that Rosenberg had tremendous problems with Nadel and that Rosenberg did not intend to pay those bills. Rosenberg had deliberately withheld his concerns from Nadel because he needed to get some information to have Nadel, as the architects for the project, deal with Roche on some matters. Jean testified that he was concerned that Boulder was repeating the same pattern in choosing to ignore LS C's bills. Jean stated that while there were phone calls between the parties on the issue of the bills, he never received any written response to the letter.
Jean entered several additional emails from Jean to Rosenberg, detailing the issues between Boulder Crossroads and LS C with regards to attorneys' fees. (Creditor's Exs. 56-59). The first, dated May 9, 2008, stated that Jean was reluctant to enter into any new matters with Boulder when there was $100,000 in outstanding bills that were over 120 days past due. (Creditor's Ex. 56). Jean testified that he communicated with Rosenberg after this email, but still received no payment. The next email, dated May 21, 2008, stated that Rosenberg had told Jean that he would bring the account more current, but that LS C had yet to receive any payments, and that Jean "must decline to do any further legal work for Boulder Crossroads on any matters until all fees and costs are brought current." (Creditor's Ex. 57). Jean testified that as of May 21, 2008, Rosenberg had not objected to the amount of the fees or to any sort of conflict of interest with regards to Java Detour or Wal-Mart.
Jean next testified as to the issue of the $15,000 retainer. Jean entered an exhibit showing the retainer was applied to the balance of the fees on April 10, 2009. (Creditor's Ex 60). Jean stated that according to Ex. 57, the outstanding fees were $105,173.89, but that it is after the application of the retainer to the balance (plus some prepetition interest) that brings the final claim of LS C to $91,506.10.
Jean then testified that his billing rate was $475/hour in 2007 and $500/hour in 2008. He testified that he believes that to be within the range of reasonable and customary billing rates for lawyers with his level of experience.
During Jean's cross examination, Jean testified that the retainer was applied to the balance on April 10, 2009, after Boulder Crossroads filed for bankruptcy. Jean acknowledged that no relief from stay was filed prior to taking the retainer.
Jean testified that there were five matters LS C worked on for Boulder Crossroads — Roche, Payless Shoes, Perkins, Royal Nails, and Quizno's. Jean additionally acknowledged that the total bill entered into evidence included interest at 12% per year, but that this accumulation of interest was cut off as of January 2009, when Boulder Crossroads filed its bankruptcy case.
Jean next submitted the depositions of Ms. Sandra Olsen, the vice-president and general counsel for Roche, and Mr. Marvin D. Nathan, an attorney in Houston, Texas that had done work for Rosenberg and Rosenberg's father. (Creditor's Exs. 3-4). Jean testified that he entered these depositions in response to the claim that Jean did not provide Boulder Crossroads with adequate counsel. Jean testified that he had worked with both attorneys — Nathan as co-counsel for Boulder Crossroads, and Olsen as opposing counsel in the matter between Roche and Boulder. Jean pointed to excerpts from the depositions to show that both attorneys felt that Jean was knowledgeable about the facts and law of the case and that Jean represented Boulder Crossroads fairly and zealously within the bounds of the law.
Jean then called his second witness, Mr. Eric Rosenberg. Rosenberg testified that he read and signed the engagement letter between Boulder Crossroads and LS C in May 2007. Rosenberg testified that the Boulder Crossroads center was not the first shopping center he was involved with and that he had been involved in roughly 30 to 40 projects of various sizes. Several of these projects, Rosenberg testified, had also been anchored by a Wal-Mart; however the Boulder Crossroads project was the first project Rosenberg had worked on where he purchased the property directly from a Wal-Mart. Rosenberg stated that he has 12-15 years experience developing shopping centers and had retained lawyers in connection with the other projects he worked on.
Rosenberg testified that he was familiar with legal documents and that the engagement letter, under "scope of engagement", stated that Boulder Crossroads engaged LS C to provide legal services with respect to a dispute with Roche and that there was no mention of any dispute with Wal-Mart. Rosenberg went on to testify that there was a dispute with Wal-Mart at the time he signed the engagement letter, but that another firm was handling the matter. Rosenberg then stated that he was not aware of any document, prior to the email exchange between Rosenberg and Jean on June 27, 2007, that indicated there was a dispute going on with Wal-Mart.
Rosenberg testified that there was no litigation or arbitration going on between Boulder and Wal-Mart at the time the engagement letter was signed. Rosenberg additionally acknowledged that the engagement letter included language that stated "[i]n the event the Client perceives any actual or possible disagreement with the Firm or the Firm's handling of the Matter, the Client shall promptly and candidly discuss the problem with the Firm." (Creditor's Ex. 1).
Rosenberg then testified about the letter Jean sent Rosenberg in regard to unpaid legal fees. (Creditor's Ex. 55). Jean asked Rosenberg about the paragraph in the letter which said ". . . in light of your having not acknowledged billings by Nadel to which you object, I am concerned that you have some objection to the payment of Lionel Sawyer Collins' bills of which I am not aware." Rosenberg testified that Nadel had been the architect of record for the shopping center and that as of April 24, 2008, Rosenberg did not intend to pay Nadel's bills. Rosenberg testified that Nadel filed a proof of claim in the Boulder Crossroads bankruptcy case and Boulder has filed an objection to Nadel's claim. Rosenberg testified that he had told Nadel about his issues with Nadel's bills and that Jean made a false statement in the letter sent from LS C to Boulder Crossroads. Rosenberg testified that he never disputed in writing the statement made in the letter. Rosenberg also testified that he never sent a letter or knew of an email he had sent responding to Jean's question in the letter asking if there were any reasons LS C had not been paid. Rosenberg testified that he could not recall ever having sent an email or letter disputing the statements about the fees made in the other emails sent by Jean.
Rosenberg next testified about the issues with Wal-Mart. Rosenberg testified that leading up to a conference call between Jean, Rosenberg, and representatives from Roche, that Rosenberg and Jean discussed the issue of dust settling on the Wal-Mart property and Rosenberg wanted to make sure that it would not become a bigger issue.
Rosenberg testified that he was concerned when he learned that LS C had represented Wal-Mart with regard to Wal-Mart's zoning work. Debtor's Exhibit 7 contains a copy of an email sent from Jean to Rosenberg dated July 16, 2007 (see also Creditor's Ex. 24), discussing LS C's representation of Wal-Mart. Rosenberg testified that it is his handwriting on Debtor's Exhibit 7 which says "[t]he only collaboration and filesharing was between Rod [Jean] and his partner Paul [Larsen] to sabotage Boulder Crossroads." Rosenberg testified that he had not seen any document which would indicate that Jean had provided any information to Larsen that was intended to sabotage Boulder Crossroads. Rosenberg went on to state that after this email exchange, where Rosenberg learned of LS C's representation of Wal-Mart, Rosenberg and Jean continued to speak frequently and that Rosenberg never indicated he wanted to change counsel or wrote a letter objecting to LS C's representation of Wal-Mart. Rosenberg testified that he was unaware of LS C ever opening a file for Boulder Crossroads with regard to any matters involving Wal-Mart and that LS C never appeared in any meeting or proceeding adverse to Boulder Crossroads on behalf of Wal-Mart. Rosenberg stated that he had no evidence indicating that anything he had said to Jean was ever passed onto Wal-Mart.
Rosenberg testified that LS C represented Boulder Crossroads for eleven months after learning that LS C had some open files for Wal-Mart, and that during that time, Rosenberg never indicated that he did not intend to pay LS C's bills, nor that he ever wrote a letter or email objecting to the continued representation by LS C.
Rosenberg testified that he never intended LS C to become involved in any dispute between Boulder Crossroads and Java Detour. Rosenberg testified that he sent the email listing the guarantors of Java Detour to Jean (Creditor's Ex. 53) in order to confirm what he had learned from looking at the Secretary of State's website, specifically that LS C was the registered agent for several businesses in which J. Dapper was the principal. Rosenberg testified that LS C never billed Boulder for any matters related to Java Detour.
Leonard Simon, Boulder Crossroad's counsel, next presented portions of Olsen's deposition taken August 5, 2010. Olsen stated that she became involved in the disputes between Roche and Boulder Crossroads in May of 2007, at about the same time as Jean became involved. Olsen stated that the level of antagonism between Boulder Crossroads and Roche seemed extensive, and there was a lack of ability to communicate and cooperate at the time she became involved. Olsen stated that she had been involved in numerous projects for Roche where the other side had legal representation. Olsen testified that it would be of great concern if someone were to call her a liar and accuse her of bad faith. Olsen then testified that she remembered an email dated July 2, 2007, sent from Jean to herself where Jean wrote "[h]ow stupid do you think I am? I'm not going to have my client sign an agreement which pushes out the date of completion and have you hit Boulder Crossroads the next day with another 30 days of alleged delay damages for everything else which previously occurred on the job . . . These proposed changes are in bad faith, and I will be recommending that Boulder Crossroads find an honest general contractor to complete this job." (Debtor's Ex. 3). Olsen stated that she appeared at the deposition willingly and without a subpoena after being contacted by Jean and told of the issues between LS C and Boulder Crossroads.
Following the presentation of Olsen's deposition, Jean proceeded to cross-examine Rosenberg. Rosenberg testified that when he purchased the property from Wal-Mart, he was under the impression that there was power available to the site. Rosenberg went on to state that he quickly came to the understanding that it would cost upwards of $1 million to bring power to the site. Rosenberg testified that Boulder Crossroads ultimately resolved the problem with the power company, Nevada Power, by paying just under $250,000 and signing a change order with Roche. Rosenberg testified that the initial contract between Roche and Boulder Crossroads called for a $25,000 charge in connection with the underground conduit in regards to the on-site portion of the power, but as a result of the problems with the off-site power, the change order with Roche went up approximately $360,000. Rosenberg testified that at the time Jean was first engaged, Rosenberg explained all these issues and made clear to Jean that Boulder Crossroads was negotiating with Wal-Mart about some reimbursement for the issues related to Nevada Power. Rosenberg testified that the issues related to Nevada Power and the other issues related to bringing power to the site were the biggest issues encountered in the development of Boulder Crossroads. Rosenberg then testified that he would not have hired Jean had he known that LS C represented Wal-Mart and Nevada Power in the past. Rosenberg testified that he first became aware of LS C's representation of Wal-Mart in July 2007, after spending a substantial amount of money with LS C. Rosenberg stated that at this point in the construction of the shopping center, Boulder Crossroads was on a tight budget and did not have the resources to drop LS C and find a new lawyer. Rosenberg testified that he had put a substantial amount of his personal resources into this project and was facing the prospect of personal bankruptcy as well as the bankruptcy of Boulder Crossroads.
Rosenberg stated that he considered replacing Roche as general contractors as a result of all the change order requests, but was concerned that if he did that, the bank would have put the project into default and that Rosenberg would have been sued on the personal guarantee he had put up for the loan and would have been sued by note holders, tenants, and subcontractors. It was under this backdrop, Rosenberg testified, that Boulder Crossroads hired LS C to work out the issues with Roche. Rosenberg testified that he hired Jean to create a dialogue with Roche and to make it clear that Rosenberg's only intention was to get the project completed as quickly as possible. Rosenberg testified that the approach taken by Jean, with the hostile email discussed above, was not the approach he was looking for when he hired Jean. Rosenberg testified that he believed that Jean's representation actually made the situation between Boulder Crossroads and Roche worse. Rosenberg stated that he did not fire Jean because Jean was in the process of renegotiating the construction contract with Roche, which changed the delivery dates for several different buildings. Rosenberg testified that the new delivery schedule impacted Boulder Crossroads negatively because of the concern that some tenants would use these multiple delivery dates as an excuse to not take possession. Rosenberg testified that Jean removed the liquidated damages in the contract between Boulder Crossroads and Roche, and made the new contract unnecessarily complicated.
Rosenberg then testified that he felt that he did not receive a benefit from the services of Jean and LS C. Rosenberg testified that Jean was able to reduce the amount of a change order from $135,000 down to $50,000, saving Boulder Crossroads $85,000, but received no other monetary benefit as a result of LS C's $220,000 representation with regards to the Roche matter.
Simon pointed to the Requests for Admission, where LS C admitted to having represented Wal-Mart, Nevada Power, Mr. Dapper, and a Mr. Hank Gordon. Rosenberg testified that Gordon was close with Perkins, the gentleman discussed above, and was also a partner with Roche in an office building they owned together from some time in the 1990s to the mid 2000s.
PARTIES' CONTENTIONS
After the hearing, several issues were taken under advisement: (1) whether LS C's fees should be disallowed for failure to provide Boulder Crossroads with reasonable value; (2) whether LS C's fees should be disallowed due to the alleged conflicts of interest; and (3) whether the application of the deposit was a violation of the automatic stay. The Court will discuss each issue in turn.
A. Reasonable Value
1. Sec. 502(b)(4)
Jean and LS C contend that they are entitled to their fees as a matter of contract based on the engagement letter. Rosenberg and Boulder Crossroads contend that this claim should not be allowed because Boulder Crossroads did not receive a benefit commensurate with the price of LS C's services.
11 U.S.C. § 502(b)(4) states that if there is an objection to a validly filed claim, "the court, after notice and a hearing, shall determine the amount of such claim in lawful currency of the United States as of the date of the filing of the petition, and shall allow such claim in such amount, except to the extent that if such claim is for services of an insider or attorney of the debtor, such claim exceeds the reasonable value of such services." This section applies to all claims for attorneys' fees owed by a debtor for services provided pre-petition, and can be used to disallow a pre-petition claim for fees if those fees are found to be unreasonable. In re Gutierrez, 309 B.R. 488, 492-93 (Bankr. W.D.Tex. 2004). The Bankruptcy Court for the Western District of Texas, in analyzing this issue for attorneys' services performed in Texas, determined that the contract rate agreed to by the debtor and attorney is not determinative in this context, and the fees "can be evaluated in light of the overall standards that would be applied to any attorney's fee, regardless of how it is calculated — namely the reasonableness standards imposed by the Disciplinary Rules of Professional Conduct applicable to lawyers who practice in Texas." Id. at 494. In sum, the contract rate billed does not determine the value of the claim once the debtor is in bankruptcy; at that point, the claim is disallowed to the extent it exceeds the reasonable value for those services. In re Siller, 427 B.R. 872, 879 (Bankr. E.D.Calif. 2010); Sticka v. Geller (In re Stratton), 299 B.R. 616, 623 (Bankr. E.D.Oregon 2003). The reasonable value should be analyzed under both the state's rules of professional conduct (if applicable) and a federal reasonableness scrutiny. In re Siller, 427 B.R. 880.
2. Burden Of Proof
The Bankruptcy Court for the Eastern District of California recently discussed which party should bear the burden of proof in a § 502(b)(4) case. In re Siller, 427 B.R. at 880-81. That court determined that the burden of proof should rest on the attorney or insider who filed the claim for three reasons: (1) that all applicants for awards of professional compensation under 11 U.S.C. § 330 bear the burden of proof on the elements of "reasonable compensation" and there appears to be no reason to suggest the standard under § 502(b)(4) should be different; (2) that creditors filing proofs of claim usually bear the ultimate burden of proof on the validity of their claims, and as § 502(b)(4) involves only the allowance of a claim, there is no reason why the burden should be any different; and (3) that the disallowance under § 502(b)(4) is an expansion of the rules of Pepper v. Litton, that insider dealings with a debtor are subjected to rigorous scrutiny and that the burden is on the insider. Id. at 881 (citing Pepper v. Litton, 308 U.S. 295, 306 (1939)). This court agrees with that analysis and holds that LS C bears the burden of establishing the reasonableness of their fees in this case.
3. Determination of "Reasonable Value"
As discussed above, the claim for pre-petition fees should be subject to two tiers of reasonableness scrutiny. In re Siller, 427 B.R. at 880. Under the first tier, the claim must meet the reasonableness standard set under applicable state law, otherwise it will be disallowed under § 502(b)(1) as being "unenforceable" as not being "reasonable" under "applicable law." Id. If the claim meets the state standard, it then must also meet the second tier — federal reasonableness scrutiny. Id. (citing Travelers Cas. Sur. Co. v. Pac. Gas Elec. Co., 549 U.S. 443, 450-53 (2007)).
B. State Standard
The Bankruptcy Court for the Western District of Texas, in determining reasonableness under § 502(b)(4), used the reasonableness standards imposed by the Texas Disciplinary Rules of Professional Conduct. In re Gutierrez, 309 B.R. at 494. In that case, the debtor was objecting to the claim of an attorney for work done on the debtor's prior bankruptcy which ultimately failed. In holding that the fees must be reasonable under the Texas Disciplinary Rules of Professional Conduct, that Court stated that fees that at one time appeared reasonable, may, in retrospect, appear unreasonable in a case that does not ultimately succeed. Id. at 494. As that court also noted, this would be the exception, not the rule. Few courts would make the determination that a fee was not earned simply because the case failed, but if the case's failure was due to the attorney's failure, then a court may find that the fee in question was not reasonable. Id. at 494-95.
Debtor has argued here that it was in fact Jean's conduct that caused Boulder Crossroads to receive no value from LS C's services. The Court does not find this argument credible or pursuasive, and finds that Jean has carried the burden to show that his fees were reasonable. In further support of the reasonableness of LS C's fees, the Court turns its attention to the Nevada Rules of Professional Conduct, Rule 1.5, entitled "Fees." That rule lays down eight nonexclusive factors for determining the reasonableness of a fee:
(1) The time and labor required, the novelty and difficulty of the questions involved, and the skill requisite to perform the legal service properly; (2) the
likelihood, if apparent to the client, that the acceptance of the particular employment will preclude other employment by the lawyer; (3) the fee customarily charged in the locality for similar legal services; (4) the amount involved and the results obtained; (5) the time limitations imposed by the client or by the circumstances; (6) the nature and length of the professional relationship with the client; (7) the experience, reputation, and ability of the lawyer or lawyers performing the services; and (8) whether the fee is fixed or contingent.
NEV. RULES OF PROF'L CONDUCT R. 1.5 (2006).
Of these eight factors, factors 1, 3, 4, 5, 6, and 7 are relevant in this case. Jean credibly represented to this Court the level of skill and background work required to represent Boulder Crossroads in the various disputes LS C worked on for Boulder Crossroads. Jean also discussed at trial his fees, testifying they were in line with fees charged by partners in other big firms in Las Vegas and nationally. According to Rosenberg, the results obtained by LS C were not worth the price LS C charged for their services. Taking Factor 5 into account, this Court believes that the results obtained by Jean were reasonable under the circumstances. Factor 6 provides one of the best reasons to find Jean's fees reasonable — Rosenberg continued having LS C represent Boulder Crossroads for several months after failing to receive the results he felt Boulder Crossroads deserved, and any objections Rosenberg may have had about LS C's level of representation were kept to himself. Additionally, Jean has represented that LS C is a highly respected firm in Nevada. This Court finds the testimony of Jean both credible and persuasive and holds that Jean has met his burden to prove that LS C's fees are reasonable under Nevada standards.
1. Federal Reasonableness Standard
There is no case law definitively defining "reasonableness" under § 502(b)(4). It is unclear if the definition is any different than the definition under state law. See In re Siller, 427 B.R. at 885. The Fifth Circuit, however, in discussing reasonable attorneys' fees under § 506(b), articulated several standards the court should consider: the time and labor devoted to the matter, its difficulty, whether the fee is fixed or contingent, the amount involved, the results obtained, and other awards in similar cases. Blackburn-Bliss Trust v. Hudson Shipbuilders, Inc. (In re Hudson Shipbuilders, Inc.), 794 F.2d 1051, 1058 (5th Cir. 1986). These factors bear strong resemblance to the factors addressed in determining reasonableness under the Nevada Rules of Professional Conduct. Additionally, it bears noting that Jean presented the Court with detailed accounts of his time spent working for Boulder Crossroads. For these reasons, the Court finds that LS C has met its burden under the federal standard for reasonableness.
C. Conflict of Interest
Boulder Crossroads has argued that LS C's fees should be disallowed due to a conflict of interest which prevented LS C from adequately representing the needs of Boulder Crossroads. Rosenberg alleged that Jean's and LS C's prior representation of Wal-Mart, Nevada Power, and a principal of one of Boulder Crossroads prospective tenants presented a conflict of interest. While perhaps Jean should have been more diligent in running conflict checks with anyone Boulder Crossroads may potentially be adverse, this Court believes, based on the testimony presented at Court, that any conflict of interest was de minimis and is no reason to either disallow LS C's fees or require a disgorgement of those fees.
D. The Application of the Retainer
It is unclear exactly what Boulder Crossroads is alleging LS C did improperly with respect to the $15,000 retainer paid by Boulder Crossroads to LS C. However, at trial an issue was raised as to the timing of the application of the retainer to the outstanding fees of LS C; so in order to be thorough, the Court will discuss whether the application of the retainer was an impermissible violation of the automatic stay.
The majority of cases discussing the status of a retainer paid by a debtor to an attorney deal with the situation where the debtor has paid the attorney for services to be rendered in the debtor's bankruptcy case. The Bankruptcy Code expressly contemplates the payment of retainers to attorneys in this situation. 11 U.S.C. § 328(a). Section 329 requires "[a]ny attorney representing a debtor in a case under this title, or in connection with such a case, whether or not such attorney applies for compensation under this title, shall file with the court a statement of the compensation under this title, shall file with the court a statement of the compensation paid or agreed to be paid, if such payment or agreement was made after one year before the date of the filing of the petition, for services rendered or to be rendered in contemplation of or in connection with the case by such attorney, and the source of such compensation." As the retainer in this case was not for services rendered or to be rendered in contemplation of Boulder Crossroads' present bankruptcy case, and the retainer was paid before one year before the date of the filing of Boulder's petition, § 329 is inapplicable.
The issue then becomes whether the retainer is considered property of the estate. In In re McDonald Bros. Const., Inc., the court distinguished between three types of retainer agreements. 114 B.R. 989, 997-1001 (Bankr. N.D.Ill. 1990). A "classic retainer" is paid by the client in order to secure the attorney's services and preclude the attorney from taking another case. Id. at 997-98. This type of retainer is earned by the attorney upon receipt, regardless of whether any legal services are ultimately performed and is not considered property of the debtor's estate. Id. at 998.
The second type of retainer is a "security retainer," which is paid by the debtor and held by the attorney to secure payment of fees for future services that the attorneys are expected to render. Id. at 999. This type of retainer is not considered present payment for future services, but remains the property of the debtor until the attorney applies it to charges for services actually rendered. Id. The case goes on to discuss how this type of retainer involves "the attorney holding the client's money as a pledge — a possessory security interest and the Uniform Commercial Code expressly allows for a possessory security interest in money." Id. In the McDonald Bros. case, the security retainer being contemplated was for services to be rendered in a bankruptcy proceeding, and the court stated that the funds continued to be owned by the client. Id. In that case, no services had yet been rendered by the attorney.
The third type of retainer is an "advance payment retainer," which is where the debtor pays, in advance, for some or all of the services that the attorney is expected to perform on the debtor's behalf. Id. at 1000. In this type of retainer arrangement, ownership of the retainer is meant to pass to the attorney at the time of payment, in exchange for the commitment to provide the legal services. Id.
Additionally, it must be noted that bankruptcy courts generally do not consider portions of a retainer earned prepetition as property of the estate under § 541(a)(1). See Stewart v. Law Offices of Dennis Olsen, 93 B.R. 91 (N.D. Tex. 1988), aff'd, 878 F.2d 1432 (5th Cir. 1989); In re Mondi Forge Co., 154 B.R. 232, 237-38 (Bankr. N.D. Ohio 1993).
The Engagement Letter between LS C and Boulder Crossroads contains a paragraph discussing the retainer. (Creditor's Ex. 1). That paragraph states:
The Client agrees to immediately pay to the Firm for deposit to the Firm's general accounts an initial retainer of $15,000 as an advance against fees, costs and expenses. The amount of the retainer will be applied against the last bill rendered for this engagement. An amount equal to the unapplied portion of the retainer, if any, after satisfaction of the last bill, will be promptly paid to the Client by the Firm.
This appears to be an "advance payment retainer," and therefore the retainer is not property of the estate, regardless of when the fees were earned. However, this is almost a moot point because the fees were earned well before the filing of Boulder Crossroads' bankruptcy. As stated above, portions of a retainer earned prepetition are not property of the estate. Therefore, there can be no violation of the automatic stay as a result of LS C's application of the balance of the retainer to the outstanding fees owed by Boulder Crossroads, since at the time of the application, the retainer was not property of Boulder Crossroads' estate.
CONCLUSION
Having gone through the facts of the case and considered the evidence submitted by the parties, this Court finds that (1) LS C's fees are reasonable under § 502(b)(4) and should therefore be an allowed claim; (2) there was no conflict of interest to warrant a disgorgement or disallowance of LS C's fees; and (3) the application of the retainer was not a violation of the automatic stay. For these reasons, Debtor's Objection to Claim of Lionel Sawyer Collins (docket #252) is DENIED.
SIGNED this 30th day of November, 2010.