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IN RE LAWSON
PER CURIAM.
AND NOW, this 31st day of August, 2010, the Petition for Allowance of Appeal is DENIED.
The Voluntary Petition commencing Ms. Knight's Chapter 7 bankruptcy case was filed on February 5, 2010. Filed contemporaneously with the Voluntary Petition was Ms. Knight's Statement of Financial Affairs, reflecting in response to question 9 concerning payments related to debt counseling or bankruptcy that her $1,250.00 attorneys' fee was paid by the third party payor, Catrina Woods, through post-dated payments. COLL. TRIAL EX. 44. This information is likewise reflected on the Compensation Disclosure Statement executed by Mr. Burroughs on January 29, 2010, and filed on February 5, 2010, which disclosed total compensation of $1,250.00, with $0.00 paid and a balance due of $1,250.00 to be paid "by third party, Catrina Woods, via post-dated checks in the amount of $250.00 each on 2/26/10, 3/26/10, 4/23/10, 5/21/10, 6/18/10." COLL. TRIAL EX. 44. The Compensation Disclosure Statement also reflected the following in paragraph 7:
See supra n. 8. Ms. Knight executed her documents on January 16, 2010, but the Voluntary Petition is dated February 5, 2010, the date upon which her case was filed. See COLL. TRIAL EX. 44.
7. By agreement with the debtor(s), the above-disclosed fee does not include the following service:
a. These fees do not include certain costs associated with this case. Client will be responsible for all court costs, credit counseling costs, and the costs to obtain Client's credit report.
b. The contract between the parties does not include fees for representing Client in adversary proceedings. If Client is served with an adversary proceeding complaint, Attorney shall take appropriate steps to protect and represent Client's best interests until such time as either Client informs Attorney that Client does not wish to litigate the matter, Client affirmatively declines Attorney's representation, Client obtains other counsel, or Attorney is allowed to withdraw by the Court.
COLL. TRIAL EX. 44.
Ms. Knight attended her meeting of creditors on March 9, 2010, at which time, the attorney for the U.S. Trustee questioned her concerning her fee arrangement with Clark Washington. In response to the U.S. Trustee's questions, Ms. Knight testified to the following:
Q. Okay. So when you signed this contract, did you read this contract to know what it said?
A. She explained it to me then, yeah.
Q. Okay. Did she explain to you that you had to pay $150 before your case was filed, for your — for your attorney fees, not for the $349?
A. [Ms. Woods ] She said that was in with, that's what the fees was to file the case, file the bankruptcy.
Q. That $349?
A. Yes.
Q. Okay. But after that, did you understand that you had an attorney fee of $1250 to pay?
A. [Ms. Woods] Yes. And that's what they did, that — she said that they can divide it up into monthly payments.
Q. Right. But when this contract that you signed, Ms. Knight, says that you paid $150, where you were to pay that pre-petition, you didn't do that, did you? Now, we're not talking about the $349, we're talking about the $1,250. None of that was paid prior to the case being filed, is that correct?
[Mr. Burroughs] The $1,250 was in five post-dated checks, right?
A. [Ms. Woods] Yeah. And they took one post-dated check out of my account.
Q. And that would be in February?
A. [Ms. Woods] Yes.
Q. Right. And so they've not given you back $150?
A. [Ms. Woods] No, ma'am.
. . . .
Q. Right. And then there's four more to go. Is that correct? But when you talked to them, did you understand that the fee for the bankruptcy was going to be billed separately for the — for after it was filed at $165 an hour, or did you think that your fee was, for the whole bankruptcy $1,250?
A. [Ms. Woods] $1,250. She didn't say nothing about no hourly wages pay, I mean.
Q. Okay. So the woman you talked to didn't tell you that?
A. She explained it and then she said, "Sign here for me."
A. [Ms. Woods] Yeah, but she did not state —
A. She didn't hand me them to read, Mama, she just read it to me.
A. [Ms. Woods] She did, but I'm going to tell you, I know — now, I can't — it's her word against mine, but I know she did not state that any hourly of $165 whatever that is you said, she did not say that.
Q. Okay.
A. [Ms. Woods] All she said was the fees that was left after the $349 was $1,200 or whatever.
Q. $1,250.
A. $1,250, whatever these five post-dated checks would add up to.
Q. Okay.
A. [Ms. Woods] $1,250, right, correct.
Q. And that was to do the whole bankruptcy.
A. [Ms. Woods] Right.
TRIAL EX. 47 [Tr. Knight 341 mtg] at pg. 158, line 8-pg. 161, line 5.
Ms. Knight received a discharge on May 17, 2010. Based upon the estimated time records prepared by Clark Washington and attached to Mr. Burroughs's Affidavit, the firm devoted a total of 5.2 hours to Ms. Knight's bankruptcy case, of which 3.4 hours were attributed to pre-petition work and 1.8 hours were attributed to post-petition work. COLL. TRIAL EX. 97. Of the post-petition hours, Mr. Burroughs testified at trial that 1.0 hour was actual attorney time. Of the total $1,250.00 fee, two post-dated checks, each in the amount of $250.00, were deposited by Clark Washington post-discharge, and the receipt entered into evidence reflects a balance due of $0.00. JT. STIPS. ¶ 6; TRIAL EX. 46.
Ms. Knight paid the entire $1,250.00 fee post-petition which, based upon the estimated time records, translates to an hourly rate of $694.44 for the 1.8 post-petition hours, including the 1.0 hour of actual attorney time estimated by Mr. Burroughs to have been spent on her case. That estimation not withstanding, at trial, Mr. Burroughs also identified the "KB" referenced in the estimated time records as having spent the one hour of attorney time meeting with Ms. Knight and her mother as Katherine Brown, who was a non-licensed attorney. See supra n. 22.
II
The Pretrial Order sets forth a number of issues which, for the purposes of this memorandum, can be divided into two distinct categories: the appropriateness of Clark Washington's fee arrangements and the accuracy of the firm's filings with the court, to be followed by a third subsection addressing the imposition of sanctions.
AThe first set of issues focuses upon Clark Washington's practices concerning its engagement and fee arrangement with its clients. Specifically, whether the post- Waldo engagement contracts and fee arrangements employed by Clark Washington and implemented by Mr. Burroughs as managing attorney for its Knoxville office constitute true "straddle" arrangements for the division of pre — and post-petition fees and services in compliance with the directives of Waldo.
The parties have stipulated that the contract used in the Soles case was a pre- Waldo contract and in violation of the court's directives therein. JT. STIPS. ¶ 7. At trial, Mr. Burroughs testified that the pre- Waldo engagement contract was mistakenly used; however, the Soleses' Engagement Contract was executed on October 22, 2009, prior to entry of the Waldo decision, but the case itself was filed post- Waldo, on December 14, 2009. See TRIAL EX. 41.
One of the primary issues in Waldo was whether or not the engagement contract and fee arrangement between Clark Washington and the respective debtors under the terms of which the firm collected, pre-petition, post-dated checks drawn on debtor accounts for deposit post-petition constituted pre-petition debts, subject to discharge. After analyzing case law from this jurisdiction, as well as others, this court concluded that "the attorneys' fees in each case [were] flat fees which arose pre-petition, irrespective of when services were to be rendered." Waldo, 417 B.R. at 883; see also In re Griffin, 313 B.R. 757, 762-63 (Bankr. N.D. Ill. 2004) ("Under the Bankruptcy Code, a contract-based claim is a pre-petition claim if prior to filing[,] the relationship between the debtors and the creditor contained all the necessary elements to create a right to payment under the relevant contract."). This court went on to then state the following:
[A]cceptance of post-dated checks for payment of "flat-fee" or "no-look" attorney's fees is not an acceptable practice and runs afoul of the Bankruptcy Code and Federal Rules of Bankruptcy Procedure, [and finds] the division of a flat fee arrangement into pre-petition and post-petition parts to be conceptually inconsistent and therefore untenable. The Court therefore joins those other courts which hold that when a flat or fixed fee pre-petition agreement is at issue, the fee must be paid in full prior to the commencement of the debtor's case or the fee is discharged under § 727(b).Waldo, 417 B.R. at 882, 885 (quoting In re Mansfield, 394 B.R. 783, 791 (Bankr. E.D. Pa. 2008)). In summary, this court held that "because `flat fee' or `no-look' attorney's fees contracted for pre-petition are dischargeable, it is unacceptable for attorneys to ask for and receive post-dated checks from Debtors to be cashed post-petition as payment of those fees." Waldo, 417 B.R. at 886.
Recognizing, however, that attorneys should be compensated for the services they provide, this court, at the conclusion of the Waldo opinion, gave the following three examples of potentially allowable methods for payment of attorneys' fees in Chapter 7 cases: "(1) requiring Chapter 7 debtors to pay `flat' or `no-look' attorney's fees in full prior to filing; (2) revising retainer agreements and expressly designating pre-petition services, which are paid pre-petition, and post-petition services, which shall be paid post-petition; or (3) accepting payments by third parties." Waldo, 417 B.R. at 895.
Immediately following entry of the Waldo decision, Mr. Thomson drafted the initial post- Waldo contract, and Mr. Crawford, the managing attorney of the Knoxville office at that time, instructed the Knoxville office to stop taking post-dated debtor checks. That practice was resumed, however, after Mr. Crawford left the firm in November 2009, and Mr. Burroughs was instructed by the Atlanta office to begin taking post-dated debtor checks once again under the post- Waldo "straddle" contract, continuing until January 2010, when Mr. Clark instructed the Knoxville office to only take post-dated third party checks. Additionally, Mr. Burroughs testified that although the Knoxville office ceased collecting post-dated checks written on debtor accounts, it continued depositing post-dated checks received prior to entry of the Waldo decision and it has continued depositing post-dated checks written on debtor accounts in its possession.
Amanda Stofan, managing attorney for Clark Washington's Chattanooga office, testified that the "straddle" contract was used in Chattanooga from November 2009 through the end of April 2010, at which time that office stopped taking debtor post-dated checks as payment for its attorneys' fees.
In support of Clark Washington's post- Waldo "straddle" contract, Mr. Thomson testified that in the immediate aftermath of the Waldo opinion, he instructed all of the Knoxville offices not to take post-dated debtor checks for a few days and began drafting a revised engagement contract that provided for receipt of post-dated checks pre-petition in contemplation of post-petition services while correcting the major three problems pointed out by the court. To that end, the initial and second post- Waldo engagement contracts both remove a statement that attorneys' fees are non-refundable, remove all carve-outs other than for adversary proceedings and amendments, segregate pre-petition and post-petition services, add language advising that pre-petition debts are subject to discharge, and add language that debtors may consult other counsel concerning the acceptability of post-dated checks. See TRIAL EX. 100; TRIAL EX. 101. These contracts also provided for debtors to pay a minimal flat fee, usually $150.00, when the contract was signed, with that amount designated for pre-petition services, and to pay the remaining balance of the fees due via post-dated checks, with that amount designated for post-petition services. See TRIAL EX. 100; TRIAL EX. 101. These are the engagement contracts executed by all of the Debtors in these contested matters with the exception of the Soleses, who executed the pre- Waldo contract.
In spite of the assertions by Mr. Thomson, Mr. Clark, Mr. Burroughs, and Ms. Stofan to the contrary, neither of the post- Waldo engagement contracts is a true "straddle" agreement and neither complies with Waldo. Regardless of Clark Washington's purported attempt to bifurcate the attorneys' fees into pre — and post-petition services, the fact remains that each of the Engagement Contracts in these fifteen cases was entered into pre-petition, as was the obligation for payment. Each Engagement Contract is prefaced with the phrase, "Client agrees to pay the following fees" and then fixes the liability of the respective Debtors at the full amount of the pre — and post-petition figures inserted into the respective Engagement Contracts. As stated in Waldo, "[i]f these arrangements were true `saddle obligations' as argued by Clark Washington and Mr. Crawford, they would not collect post-dated checks pre-petition in anticipation of post-petition services but would, instead, seek payment for post-petition services as rendered post-petition." Waldo, 417 B.R. at 883-84. The engagement contracts themselves, as well as the testimony at trial can lead to no other conclusion — these are "flat fee" contracts.
The post- Waldo engagement contracts attempt to bifurcate fees, advising clients that they have paid their "minimal flat fee" for pre-petition fees and that they, "[a]s a condition of representation," have agreed to pay "a retainer for services to be rendered post-petition" to consist of post-dated checks totaling the remaining amount. See COLL. TRIAL EX. 4; TRIAL EX. 9; TRIAL EX. 15; TRIAL EX. 22; COLL. TRIAL EX. 29; TRIAL EX. 35; TRIAL EX. 45; COLL. TRIAL EX. 51; TRIAL EX. 55; TRIAL EX. 61; TRIAL EX. 67; TRIAL EX. 73; COLL. TRIAL EX. 77; COLL. TRIAL EX. 83; TRIAL EX. 100; TRIAL EX. 101. The engagement contracts then go on to provide that the retainer will be applied to post-petition services and "is based upon a blended hourly rate of $165" with the fees "capped at the amount of the retainer listed above, regardless of the amount of services expended in excess thereof" and that "[t]he parties contemplate that the value of the post-petition services rendered . . . shall meet or exceed the total amount of the quoted retainer." See COLL. TRIAL EX. 4; TRIAL EX. 9; TRIAL EX. 15; TRIAL EX. 22; COLL. TRIAL EX. 29; TRIAL EX. 35; TRIAL EX. 45; COLL. TRIAL EX. 51; TRIAL EX. 55; TRIAL EX. 61; TRIAL EX. 67; TRIAL EX. 73; COLL. TRIAL EX. 77; COLL. TRIAL EX. 83; TRIAL EX. 100; TRIAL EX. 101. Clients are then advised that they are "entitled to request a final accounting of the fees charged by Attorney in this case and thereafter receive a refund of any amount of the retainer paid in excess of the post-petition services rendered." See COLL. TRIAL EX. 4; TRIAL EX. 9; TRIAL EX. 15; TRIAL EX. 22; COLL. TRIAL EX. 29; TRIAL EX. 35; TRIAL EX. 45; COLL. TRIAL EX. 51; TRIAL EX. 55; TRIAL EX. 61; TRIAL EX. 67; TRIAL EX. 73; COLL. TRIAL EX. 77; COLL. TRIAL EX. 83; TRIAL EX. 100; TRIAL EX. 101.
With the exception of the Lawsons, for whom the entire $800.00 paid was stated to be their "flat fee," and the Harts, for whom the "flat fee" was stated to be $201.00, the "flat fee" for the remaining Debtors executing post- Waldo engagement contracts was stated to be $150.00.
Despite the foregoing language in the engagement contracts, although attorneys and staff in the Knoxville office are required to keep track of the services performed by logging their activities in a database as or soon after services are rendered, neither the attorneys nor the paralegals contemporaneously record incremental time allotments with those logged entries. JT. STIPS. ¶ 5. Additionally, Clark Washington does not routinely provide itemized statements or accountings of post-petition services to debtors. In fact, Mr. Burroughs testified that only one debtor has asked for an accounting and only after an inquiry by the U.S. Trustee's office. Ms. Stofan testified that noneof the firm's Chattanooga clients has requested an accounting, nor has that office ever provided a client with an itemized statement of services rendered. JT. STIPS. ¶ 9.
As for what each of the Debtors understood, their testimony clearly evidences that each of them thought that they were paying a flat fee for their bankruptcy case. When asked how much Clark Washington was going to charge for doing the pre-petition work and how much would be charged for the post-petition work, Ms. Lawson testified that it wasn't specified that a certain amount would be designated for either, but that "[t]hey just said everything would be in that $800.00. Everything would be included in that." COLL. TRIAL EX. 11 [K. Lawson] at pg. 15, ln. 11-22; pg. 18, ln. 15-pg. 19, ln. 6. Similarly, Ms. Newman testified that she did not realize she would be charged different amounts for the work performed by Clark Washington pre-petition and post-petition, that she understood the entire fee to cover everything. TRIAL EX. 30 pg. 213, ln. 4-11. Ms. Dickerson testified that she understood that the attorney fee would cover their whole bankruptcy. TRIAL EX. 17 pg. 187, ln. 17-pg. 188, ln. 10. Ms. Zick testified that she simply thought the cost of her bankruptcy was a thousand or so dollars. TRIAL EX. 25 pg. 13, ln. 1-8. Ms. Woods' mother testified that she and her daughter understood the fee to be $1,250.00 for the entire bankruptcy case. TRIAL EX. 47 pg. 160, ln. 22-pg. 161, ln. 5. Ms. Sanchez testified that she and Mr. Sanchez were actually quoted $1,250.00 as the entire fee for filing their case by the person they met with at Clark Washington, as did Mr. Cox, Mr. Hoffman, Ms. Vittetoe, the McGees, and Ms. Womble, TRIAL EX. 37 pg. 11, ln. 6-19; TRIAL EX. 69 pg. 220, ln. 5-20; COLL. TRIAL EX. 51 pg.9, ln. 9-11; TRIAL EX. 75 pg. 106, ln. 1-8; TRIAL EX. 82 pg. 5, ln. 8-18; TRIAL EX. 57 pg. 32, ln. 5-14. Additionally, Mr. Aaron testified at his meeting ofcreditors that all he remembered was that he had to pay $350.00 in advance plus provide post-dated checks totaling $1,250.00. TRIAL EX. 79 pg. 163, ln. 14-pg. 164, ln. 14.
When questioned about the retainer at trial, Mr. Burroughs testified that, pursuant to the terms of the engagement contracts, any unused portions should be refunded. He then stated, however, that Clark Washington attorneys and paralegals do not keep track of their time and do not bill at an hourly rate and that the firm has not returned any unused retainers to debtors. Additionally, Mr. Burroughs testified that the Debtors were aware, on the dates they signed their contracts, the total amount of attorneys' fee to be charged, inclusive of both the $150.00 pre-petition fee and the agreed upon post-petition "retainer" in the form of post-dated checks, and that receipt of payment in full of that retainer, through post-dated debtor or third-party checks, was a condition of and prerequisite to Clark Washington filing any debtor's case. Similarly, Mr. Thomson testified that each Debtors' obligation to pay the entire amount of fees arose at the time the contract was executed and if not paid, the non-paying debtors would have been in breach of contract.
With respect to his Affidavit introduced into evidence as Trial Exhibit 97, Mr. Burroughs testified that he did not personally compile the time records attached thereto, but that paralegals in his firm estimated the time amounts based upon notes contained in a database kept by Clark Washington, after which Mr. Burroughs reviewed the records and made revisions. No time records were kept within the database, and all time entries were based on estimates assigned by the paralegals who prepared the attachments. His testimony was corroborated by Ms. Stofan, who testified that although the "straddle" contract provides for a blended hourly rate of $165.00 for attorneys and paralegals, she has never established an hourly rate and does not keep time records. Significantly, the time estimates were prepared pursuant to the court's directives set forth in the Pretrial Order entered on May 14, 2010, and not periodically as each case progressed. The $165.00 "blended hourly rate" allegedly charged by Clark Washington for post-petition services appears to be nothing more than a convenient figure to be utilized in estimating the post-petition fees in the unlikely event a debtor should request an accounting. However, as evidenced by the court's calculations set forth earlier in each Debtors' factual section, the $165.00 "blended hourly rate" is merely a fiction. Clearly, Clark Washington never intended to account to these Debtors for the unused portion of any attorneys' fee.
Mr. Thomson's and Mr. Burroughs's testimony that the "straddle" contract provides a true breakdown between pre — and post-petition fees is also contradicted by the receipts issued to the respective debtors in each case which contains a blocked-off section providing the following information:
PERSONAL CHECK POLICY:
1. Checks are verified prior to filing your case
2. Your case will not be filed until the full amount due is paid in advance
3. No personal checks if you have NSF Debts
4. There will be a $25.00 charge for each returned check
5. No out of state or starter checks
6. All fees paid are not refundable
COLL. TRIAL EX. 4; TRIAL EX. 10; TRIAL EX. 16; TRIAL EX. 23; COLL. TRIAL EX. 29; TRIAL EX. 36; TRIAL EX. 42; TRIAL EX. 46; TRIAL EX. 52; TRIAL EX. 56; TRIAL EX. 62; TRIAL EX. 68; TRIAL EX. 74; TRIAL EX. 78; COLL. TRIAL EX. 83. The receipts, with the exception of the Harts' and McGees', contradicts Mr. Burroughs's testimony that Clark Washington's Knoxville office does not pursue itsclients for payment on post-dated checks returned for insufficient funds. Also, with the exception of the Hart and McGee cases, item 6 contravenes the provision in each Engagement Contract that "Client is entitled to . . . receive a refund of any amount of the retainer paid in excess of the value of the post-Petition services rendered." See TRIAL EX. 9; TRIAL EX. 15; TRIAL EX. 22; COLL. TRIAL EX. 29; TRIAL EX. 35; TRIAL EX. 45; COLL. TRIAL EX. 51; TRIAL EX. 55; TRIAL EX. 61; TRIAL EX. 67; TRIAL EX. 73; COLL. TRIAL EX. 77; TRIAL EX. 100; TRIAL EX. 101.
Items 4 and 6 are not a part of the PERSONAL CHECK POLICY contents set forth in the receipts issued by Clark Washington to the Harts and the McGees. COLL. TRIAL EX. 4; COLL. TRIAL EX. 83.
With respect to post-dated checks received from debtors and written on debtor accounts, the message in Waldo is clear: "It is not proper for a bankruptcy attorney to accept post-dated checks from a Chapter 7 debtor client, and the use of [this] method of fee payment has been consistently rejected by bankruptcy courts." Waldo, 417 B.R. at 886 (citations omitted). Under no type of contract will the court condone acceptance of post-dated checks from debtors written on their accounts, to be cashed post-petition, as payment of attorneys' fees. As discussed in detail, "there are serious ethical implications in such a practice," raising "the question and the appearance" of a conflict of interest between Clark Washington and the affected debtors. Waldo, 417 B.R. at 886-87. Clark Washington's attempts to camouflage its flat fee by bifurcating it into a minimal pre-petition amountand a much larger post-petition amount is disingenuous at best, especially in light of the evidence that in none of the cases presently before the court did the assigned time for services rendered come anywhere close to equaling the "retainer" amount multiplied by the $165.00 "blended hourly rate."
Specifically, Waldo states the following:
As raised by many of the courts examining the issue of post-dated checks, there are serious ethical implications in such a practice, and the same is true here — that by accepting post-dated checks for dischargeable debts and not advising their clients that the debts were at least potentially dischargeable, Clark Washington and Mr. Crawford created a conflict of interest with the Debtors under Tennessee's disciplinary rules. Rule 1.8(a) of the Rules of Professional Conduct states, in material part, as follows:
Rule 1.8 Conflict of Interest; Prohibited Transactions.
(a) A lawyer shall not . . . knowingly acquire an ownership, possessory, security or other pecuniary interest adverse to a client unless:
(1) The transaction and terms on which the lawyer acquires the interest are fair and reasonable to the client and are fully disclosed and transmitted in writing to the client in a manner that can be reasonably understood by the client; and
(2) The client is given a reasonable opportunity to seek the advice of independent counsel in the transaction; and
(3) The client consents thereto in a writing signed by the client.
TENN. SUP. CT. R. 8, Rule 1.8(a). As stated in the official comments to Rule 1.8, "[a]s a general principle, all transactions between client and lawyer should be fair and reasonable to the client. In such transactions, a review by independent counsel on behalf of the client is advisable. Furthermore, a lawyer may not exploit information relating to the representation to the client's disadvantage." OFF. CMTS., TENN. SUP. CT. R. 8, Rule 1.8(a). Accordingly, "[t]he existence of a conflict of interest does not require bad motive or intent. Most often it arises where the attorney's duty to one client conflicts with his/her duty to another or with the attorney's self-interest." In re Martin, 197 B.R. 120, 128 (Bankr. D. Colo. 1996).Waldo, 417 B.R. 886.
The court also finds the practice of accepting post-dated checks from third parties to be suspect and borderline violative of the Bankruptcy Code's prohibition on advising debtors to incur debt in anticipation of filing for bankruptcy. Section 526(a) states that debt relief agencies — including attorneys — shall not do any of the following:
(1) fail to perform any service that such agency informed an assisted person or prospective assisted person it would provide in connection with a case or proceeding under this title;
(2) make any statement, or counsel or advise any assisted person or prospective assisted person to make a statement in a document filed in a case or proceeding under this title, that is untrue and misleading, or that upon the exercise of reasonable care, should have been known by such agency to be untrue or misleading;
(3) misrepresent to any assisted person or prospective assisted person, directly or indirectly, affirmatively or by material omission, with respect to —
(A) the services that such agency will provide to such person; or
(B) the benefits and risks that may result if such person becomes a debtor in a case under this title; or
(4) advise an assisted person or prospective assisted person to incur more debt in contemplation of such person filing a case under this title or to pay an attorney or bankruptcy petition preparer fee or charge for services performed as part of preparing for or representing a debtor in a case under this title.11 U.S.C. § 526(a); see 11. U.S.C. § 101(12A) (2006) (defining "debt relief agency" in material part as "any person who provides any bankruptcy assistance to an assisted person in return for the payment of money or other valuable consideration[.]"); Milavetz, Gallop Milavetz, P.A. v. United States, 130 s.CT. 1324, 1332 (2010). In Milavetz, the Supreme Court held that "§ 526(a)(4)[, which is best understood to provide an additional safeguard against the practice of loading up on debt prior to filing,] prohibits a debt relief agency only from advising a debtor to incur more debt because the debtor is filing for bankruptcy, rather than for a valid purpose." Milavetz, 130 s.CT. at 1336.
Without finding conclusively that Clark Washington has violated § 526(a)(4), the court is nevertheless troubled by the acceptance of third-party post-dated checks. With respect to the firm's procedure concerning third party checks, Mr. Burroughs testified that debtors are advised that they can ask a family member or neighbor to "gift" them the attorneys' fee, with the understanding that there is no requirement for the debtors to repay them, but that he never advised clients to take out a pre-petition loan from any source to fund the attorneys' fees. He also testified that there is no pre-petition, dischargeable debt owed to the third parties because the fee is earned and paid post-petition. Likewise, Mr. Thomson argued that acceptance of third-party post-dated checks, as well as any attempts to collect upon them, does not violate Waldo because §§ 362(a) and 524(a) do not apply to such payments made by third parties.
Messrs. Burroughs and Thomson's testimony, however, contradicts testimony offered by the various Debtors with respect to what was intended when they were advised by Clark Washington to tender third-party post-dated checks. For example, Ms. Lawson testified that she and her husband are reimbursing Mr. Perlioni, the family friend who wrote the post-dated checks for their bankruptcy case, with cash and that he never intended to `gift' them the money or to pay for their attorneys' fees. COLL. TRIAL EX. 11 [K. Lawson] pg. 8, ln. 10-pg. 10, ln. 9. Similarly, Mr. Cox testified that his girlfriend provided the post-dated checks but it was never intended that she would pay for his bankruptcy case. TRIAL EX. 69 pg. 223, ln. 13-22; pg. 230, ln. 18-pg. 231, ln. 9. Likewise, Ms. Vittetoe testified that her mother-in-law had provided the post-dated checks, but she and Mr. Vittetoe were repaying her the $223.80 prior to each check clearing the bank, TRIAL EX. 75 pg. 108, ln. 22-pg. 109, ln. 5; pg. 110, ln. 7-pg. 111, ln. 6, and Ms. Womble testified that she had agreed to repay her mother, from whom she had received the post-dated checks, when each one cleared the bank. Trial Ex. 57, pg. 33, ln. 14-21.
Even more telling as to the true nature of these third-party payments, the Luttrells testified to the following:
Q. So your attorneys told you you couldn't write your own post-dated checks?
A. [Ms. Luttrell] At first, when we met with them in December, they said that we could do our own post-dated checks, but when we met with them again in January they said that that was not going to work anymore, that we could either, I guess, I don't know if they said we could pay it all up front —
A. [Mr. Luttrell] Yeah, we could pay it up front —
A. [Ms. Luttrell] — or we could do third-party.
A. [Mr. Luttrell] — or we could do third-party.
A. [Ms. Luttrell] And that's what we chose.
A. [Mr. Luttrell] And they would hold the checks and we could bring the money in and they would, you know, get the check — we could get the checks back or whatever.
A. [Ms. Luttrell] Or they would shred them through.
. . . .
A. [Mr. Luttrell] So we just let them run them through and we pay her sister.
Q. And have you paid her sister any payments yet?
A. [Mr. Luttrell] Yes.
A. [Ms. Luttrell] Yes. One check's went through and we paid for it.
TRIAL EX. 63, pg. 49, ln. 10-pg. 50, ln. 9. Similarly, Mr. Aaron testified to the following:
Q. And so when you met with them did they talk to you about how you could pay your fees?
A. Yes.
Q. Okay. And what were — what did they tell you about that?
A. They told me I could pay it third-party by having, you know, one of my relatives give them five checks, they can put it through the bank or I could come up there and pay them off as — as they come due, three days before they come due.
Q. Okay. They told you — did you — did you — did the third — was the third party named James Carey?
A. Yes, ma'am.
Q. And did Mr. Carey give you the money or did he loan you the money?
A. He loaned me the checks.
Q. He loaned you the checks?
A. Yes.
Q. Did — what was your intent about the checks?
A. I'd pay them off before — you know, go ahead and pay them off as I — you know.
Q. Did Clark Washington tell you that you could arrange it that way, where you'd come up and pick up the checks before they were cashed?
A. Yeah.
Q. Okay. They told you. Were they aware that you were just borrowing these checks —
A. Yeah.
Q. — from Mr. Carey?
A. Yeah.
TRIAL EX. 79 pg. 164, ln. 4-pg. 165, ln. 9. In fact, as can be gleaned from the Debtors' testimony, it appears that not only did Clark Washington know that many — if not a majority — of debtors using third-party checks were, in fact, repaying those third parties, but Clark Washington, through its attorneys and staff, were instructing debtors to bring in post-dated checks from third-parties while advising them that, if they so desired, the debtors themselves could come in and replace the post-dated checks with cash prior to the dates upon which the checks were to be deposited.
To state it plainly, the court finds that a pre-petition contract which fixes or predetermines the total amount of the fee a debtor is required to pay for both pre — and post-petition services establishes a "flat fee" under the authority of Waldo, and the collecting of post-dated checks is prohibited, irrespective of the source. As discussed, a true "saddle" contract contemplates a billing relationship, wherein services are rendered post-petition and the client is billed an hourly rate post-petition based upon the time spent, after the services have actually been performed. None of the Engagement Contracts in these contested matters complies with this basic concept and none complies with the court's decision in Waldo.
Moreover, because the fee arrangements in each of the Debtors' cases constitutes a pre-petition "flat fee" obligation, as the court has previously held, by depositing and/or cashing after discharge any payments — whether by cash or post-dated check — received from or on behalf of any of the Debtors for satisfaction of that fee, Clark Washington and Mr. Burroughs may have violated the discharge injunction of 11 U.S.C. § 524(a) (2006). Waldo, 417 B.R. at 890.
BWith respect to the second category, the inaccurate Compensation Disclosure Statements and unsigned Amended Statements of Financial Affairs filed by Clark Washington, the court finds that although Clark Washington has acknowledged its mistakes, the fact remains that it did not take the care and attention necessary to ensure that the documents it filed with the court were accurate and properly filed. The statutory authority and procedural rules relating to the disclosure of compensation were fully addressed in Waldo. The court examined the combined role played by § 329(a) and Rule 2016(b) of the Federal Rules of Bankruptcy Procedure in providing a system for monitoring of attorneys' fees, allowing courts to "carefully scrutinize" compensation paid by debtors and stressed that full and accurate disclosure was "mandatory" and "`[a]nything less than the full measureof disclosure' is unacceptable." Waldo, 417 B.R. 893 (citations omitted). As such, it is not necessary for the court to revisit these issues again in great detail other than to reiterate that "[t]he failure to comply with the disclosure rules is a sanctionable violation, even if proper disclosure would have shown that the attorney had not actually violated any Bankruptcy Rules, and sanctions may also be imposed for negligent or inadvertent failures to disclose." Waldo, 417 B.R. at 893 (citations omitted).
Clark Washington and Mr. Burroughs do not deny that they filed inaccurate Rule 2016(b) compensation disclosure statements in the Lawson, Hart, Newman, Soles, Sanchez, Dickerson, Zick, Cox, Hoffman, Luttrell, Vittetoe, McGee, and Womble cases. Mr. Burroughs testified that following entry of the Hart show cause order, he discovered errors on several of the Rule 2016(b) Compensation Disclosure Statements, and he filed amended disclosures for all Chapter 7 cases filed by Clark Washington post- Waldo to remove the straddle contract language, which had been inserted on the firm-wide template by its main office in Atlanta. The court's review of the Compensation Disclosure Statements in these contested matters not only confirms that the original disclosures made by Clark Washington and Mr. Burroughs in each case were incomplete, but also that, notwithstanding Mr. Burroughs's attempts to correct them, the Amended Compensation Disclosure Statements he filed still do not reflect the true nature of the respective Debtors' Engagement Contracts. In fact, as of the date of this Memorandum, Clark Washington and Mr. Burroughs still have not provided full and accurate disclosure of the firm's fee arrangements with some of these Debtors.
Mr. Burroughs also testified that he had a conversation with the attorney for the U.S. Trustee, who brought it to his attention that the original Statements of Financial Affairs in many of the cases were inaccurate with respect to question 9, and that following that conversation, he prepared and filed Amended Statements of Financial Affairs on behalf of the Lawsons, the Harts, Ms. Newman, the Soleses, the Sanchezes, the Dickersons, Ms. Zick, the Luttrells, Ms. Vittetoe, and Ms. Womble in an attempt to more accurately reflect the payment arrangements, but in his haste to revise and file the Amended Statements of Financial Affairs, he did not send them to the respective Debtors for execution. Accordingly, he and Clark Washington do not deny that they filed the Amended Statement of Financial Affairs on behalf of the Debtors in the Lawson, Newman, Soles, Sanchez, Dickerson, Zick, Cox, Hoffman, Luttrell, Vittetoe, and Womble cases without first obtaining the Debtors' permission and handwritten signatures as required by section III.A.3 of the Administrative Procedures for Electronic Case Filing, effective May 17, 2005, as amended, which states in material part:
III. Electronic Filing
A. Signatures
. . . .
3. Signature of Debtor on Petition, Lists, Schedules, Statements, and Other Documents
Notwithstanding paragraph 2 immediately above, any petition, list, schedule, statement, and amendment thereto that requires the debtor's signature may be filed electronically by a Registered User with the debtor's signature indicated as "/s/" followed by the typed name of the debtor, provided the debtor has actually signed a copy of the document and the filing attorney retains the signed document as required by paragraph 5 below.
4. Attorney Representation
Electronic filing of a verified document by an attorney is a representation for the purposes of Fed.R.Bankr.P. 9011 that the person or persons required to sign and verify the document did in fact sign and verify it before it was filed.
E.D. Tenn. Admin. Procs. at ¶ III.A. See JT. STIPS. ¶ 4. In explanation, Mr. Burroughs testified that he was merely wanting to fix the errors in Clark Washington's earlier filings and that it was never his intention to misled the court or the U.S. Trustee by filing the Amended Statements of Financial Affairs without first obtaining the Debtors' handwritten signatures.
Because there is no dispute that Clark Washington and Mr. Burroughs filed inaccurate Rule 2016 Compensation Disclosure Statements and improperly and in violation of the Administrative Procedures for Electronic Case Filing, incorporating Rule 9011, the question becomes whether disgorgement is the appropriate sanction or if, as the U.S. Trustee asserts, something harsher is required to deter future noncompliance by Clark Washington and Mr. Burroughs with respect to all of their filings.
The U.S. Trustee has requested, as additional sanctions, the following: the disallowance of fees in their entirety, termination of Clark Washington and Zachary Burroughs' status as Registered Users of the court's electronic case filing system, requiring all attorneys with Clark Washington to attend continuing legal education courses supplemental to those required by the State of Tennessee, and/or the suspension of Clark Washington and its attorneys to practice law in the United States Bankruptcy Court for the Eastern District of Tennessee.
Section 105 outlines certain powers of the court and imposes upon the court a duty to uphold the provisions of the Bankruptcy Code in subsection (a) by authorizing the court to "issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title." 11 U.S.C. § 105(a) (2005). The court may use its § 105(a) equitable powers "in furtherance of the goals of the [Bankruptcy] Code," Childress v. Middleton Arms, L.P. (In re Middleton Arms, L.P.), 934 F.2d 723, 725 (6th Cir. 1991), and included within the court's § 105(a) powers is the authority to find a party in contempt. Pertuso v. Ford Motor Credit Co., 233 F.3d 417, 423 n. 1 (6th Cir. 2000). Civil contempt is generally used by courts to coerce an individual into performing or obeying an order of the court and to compensate the party injured by the contemptuous actions. United States v. Bayshore Assocs., Inc., 934 F.2d 1391, 1400 (6th Cir. 1983); In re Walker, 257 B.R. 493, 497 (Bankr. N.D. Ohio 2001) ("Compensatory contempt orders compensate the party harmed by the other party's contemptuous actions; coercive orders seek to cajole the party in contempt to act in the manner desired by the court.") (quoting Consol. Rail Corp. v. Yashinsky, 170 F.3d 591, 595 (6th Cir. 1999)). "Contempt must be shown by clear and convincing evidence that the alleged contemnor violated a definite and specific court order which required the performance or the nonperformance of an act with knowing of that court order." In re Ashley, 2007 Bankr. LEXIS 3639, at *2, 2007 WL 3125128, at *1 (Bankr. N.D. Ohio Oct. 24, 2007) (citing Walker, 257 B.R. at 497). Nevertheless, "[w]illfulness is not an essential element of civil contempt." In re Crabtree, 39 B.R. 702, 710 (Bankr. E.D. Tenn. 1984).
Courts are "afforded wide discretion in fashioning an equitable remedy for civil contempt[,]" McGregor v. Chierico, 206 F.3d 1378, 1385 n. 5 (11th Cir. 2000), and the failure to comply with the disclosure requirements is a sanctionable violation, in itself grounds for disgorgement of fees. Waldo, 417 B.R. at 893 (citing cases). As a result of their inaccurate disclosures in Waldo, Clark Washington was required to disgorge all fees received from the Debtors in those seven cases, making the decision to voluntarily return $123,742.00 in numerous other cases. And yet, within days after the Waldo opinion was entered, Clark Washington once again began filing inaccurate Rule 2016 Compensation Disclosure Statements which were followed by inaccurate Amended Compensation Disclosure Statements and subsequently by unverified and unauthorized Amended Statements of Financial Affairs.
In 2009, Clark Washington's Knoxville office filed approximately 1,900 Chapter 7 cases in this court's Northern Division, and from January 1 through the date of this Memorandum, Mr. Burroughs and the Knoxville office of Clark Washington have filed approximately 1,000 Chapter 7 cases in the Northern Division.
IIIAlthough the majority of these issues were addressed and, in the court's mind, decided in Waldo, in order to avoid any further litigation as to what is and what is not allowed concerning fee arrangements in Chapter 7 cases and the disclosure of compensation requirements in all cases filed in the Bankruptcy Court for the Eastern District of Tennessee, Northern Division, the court will summarize, reiterating much of what it has held previously.
First, the Engagement Contracts entered into between Clark Washington and each of the fifteen Debtors creates a pre-petition obligation for payment of a lump sum or flat fee, and any portion of that lump sum or flat fee not paid to the firm pre-petition has been discharged in fourteen of these cases. The purported bifurcation of fees for pre- and post-petition services is a fiction, as is the concept that the Debtors paid a retainer to be applied against services rendered based upon the $165.00 "blended hourly rate." It has been established that Clark Washington does not maintain time records for its clients and that it only created the estimated time records attached to Mr. Burroughs's Affidavit entered into evidence as Collective Trial Exhibit 97 after being directed to do so by the court. Additionally, it has been established that the amount of fees charged greatly exceeds the $165.00 "blended hourly rate." Furthermore, as was evident from the testimony of the respective Debtors, none of them understood that they were to be paying under a bifurcated contract, but instead, each of them understood that the attorneys' fee charged by Clark Washington was a lump sum they were required to pay for the entire bankruptcy, to be tendered prior to filing.
Second, in order to be a true "straddle" fee arrangement bifurcating pre — and post-petition services, the contract must clearly identify the services to be included within the pre-petition fee and the services to be included within the post-petition fee. It must also unambiguously disclose, at a minimum, that all pre-petition fees must be paid prior to filing and any unpaid pre-petition fee will be discharged and that all post-petition fees, which are not subject to the discharge, will be billed only when services are rendered and only for the specific amount of time for each activity at an agreed upon hourly rate for attorneys and a considerably lesser agreed upon hourly rate for para-professionals. Attorneys may accept a pre-petition retainer to be billed against as long as the retainer is held in trust and drawn against as services are rendered, subject to time records being kept and debtors being periodically sent an itemized statement of the work performed and the retainer applied, without having to request the statement. Additionally, debtors must be made aware that they will receive any unused portion of the retainer once their case is concluded, again, without having to request it themselves.
Based upon the court's independent review of compensation disclosure statements in other matters, the average approved hourly rate for para-professionals in this area is $75.00.
Third, it is unacceptable for attorneys to ask for and receive post-dated checks from debtors, irrespective of whether the checks are to be drawn on the debtors' personal accounts or a third party's account, and the payment of attorneys' fees through post-dated checks creates a conflict of interest under Rule 1.8(a) of the Tennessee Rules of Professional Responsibility. Additionally, the post-discharge deposit of any payments received from debtors or on their behalf for pre-petition fees may be, to the extent it could be considered an action to collect on a discharged debt, violative of the discharge injunction of 11 U.S.C. § 524(a).
Fourth, Clark Washington and its Knoxville attorneys must file Compensation Disclosure Statements that accurately and fully reflect the fee arrangements with their clients. In the event the fee contract includes post-petition services, the nature of the anticipated services, hourly billing rate, and billing period should be disclosed. Additionally, each time an attorney receives post-petition compensation of any kind from or on behalf of a debtor, a supplemental Rule 2016(b) Compensation Disclosure Statement must be filed.
Fifth, before filing any documents signed electronically by debtors, attorneys must have, in their possession, the original document containing the debtors' handwritten signature.
IV
The court finds that Clark Washington and Mr. Burroughs have either chosen to ignore the Waldo decision or to utilize less than creative methods to circumvent the court's ruling in Waldo, not only in these fifteen cases but in other Chapter 7 cases filed in behalf of their debtor-clients since October 27, 2009. Because the sanction of disgorgement has proved an insufficient deterrent, the court will enhance the sanctions as follows:
1. Clark Washington and Mr. Burroughs will, with the exception of the McGee case, No. 09-30353, be required to disgorge to the respective Debtors all attorney fees received pre — and post-petition and to return to the Debtors all post-dated checks, whether the Debtor or a third-party was the maker.
2. Clark Washington and Mr. Burroughs will be required to disgorge $300.00 to Joseph and April McGee in Case No. 10-30353 for their failure to file an accurate Compensation Disclosure Statement.
3. Clark Washington and Mr. Burroughs will be sanctioned the sum of $750.00 in all of these cases, with the exception of McGee, which sum is to be paid to the Clerk of the court for deposit to the United States Treasury.
The court wants to make it clear that this form of sanctions extends only to the cases presently before the court. Should the U.S. Trustee file disgorgement motions in other Chapter 7 cases filed by Clark Washington and Mr. Burroughs pending in the court's Northern Division to the date of this memorandum, the court would not, in the absence of egregious facts differing from those presently at issue, anticipate enhancing the sanctions beyond disgorgement.
4. Clark Washington and Mr. Burroughs shall be required to certify their compliance with paragraphs 1, 2, and 3 herein within 30 days.
5. Clark Washington and its attorneys representing debtors in Chapter 7 cases hereafter filed in the court's Northern Division, shall, commencing 10 days after the entry of the Orders accompanying this Memorandum, be required to append the following declaration under penalty of perjury as an attachment to the Compensation Disclosure Statement:
I certify under penalty of perjury that prior to the signing of the employment contract by myself and the debtor[s] I was personally present while the debtor[s] read the contract; that I explained the agreed upon fee arrangement to the debtor[s]; that I inquired of the debtor[s] whether there were questions regarding the contract and fee arrangement, and answered those questions to the satisfaction of the debtor[s]; and that the compensation disclosure statement filed in this case correctly and accurately sets forth the fee agreement contained in the employment contract.
I also certify that the debtor[s], as required by Section III.A.3. of the Administrative Procedures for Electronic Case Filing, effective May 17, 2005, have actually signed a copy of all documents filed in this case containing an electronic signature.
The Compensation Disclosure Statement and Declaration shall both be dated and shall contain the signing attorney's handwritten signature.
6. Clark Washington and Mr. Burroughs shall, pursuant to Rules 9014(c) and 7054(b) of the Federal Rules of Bankruptcy Procedure, be directed to pay all costs associated with the prosecution of these contested matters with the exception of Hart.
7. The obligations imposed on Clark Washington and Mr. Burroughs in paragraph 5 above will remain in place for six (6) months unless, on motion of the United States Trustee filed prior to the expiration of the six (6) months, the court, for cause, extends this expiration date.
Orders consistent with this memorandum will be entered in each case.
FILED: August 31, 2010
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