In re Gilda Alvarado

Filing 19

ORDER AFFIRMING ORDERS OF THE BANKRUPTCY COURT. Signed by Judge Phyllis J. Hamilton on 4/29/2013. (pjhlc3, COURT STAFF) (Filed on 4/29/2013) (Additional attachment(s) added on 4/29/2013: # 1 Certificate/Proof of Service) (vlk, COURT STAFF).

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UNITED STATES DISTRICT COURT

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NORTHERN DISTRICT OF CALIFORNIA

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IN RE REYNA ALVARADO,

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No. C 12-06190 PJH

Debtor.

Bankruptcy Case Nos. 12-32156 DM;
12-32049 DM

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For the Northern District of California

United States District Court

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_______________________________/

ORDER AFFIRMING ORDERS OF THE
BANKRUPTCY COURT

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In these consolidated appeals, Attorney Albert M. Kun (“Kun”) appeals from the

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orders of the bankruptcy court dismissing the bankruptcy cases and requiring disgorgement

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of attorney’s fees. The United States Trustee filed an answering brief and Kun filed a reply

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brief in each appeal. The court determines that the matter is suitable for decision without

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oral argument. For the reasons set forth below, the orders of the bankruptcy court are

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AFFIRMED.

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BACKGROUND
A.

Reyna Alvarado
On July 23, 2012, Kun filed a petition for relief under chapter 7 as counsel for debtor

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Reyna Alvarado. Debtor filed a certificate of credit counseling which stated that she

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completed a course in credit counseling on December 1, 2011, or 235 days prior to filing.

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In re Reyna Alvarado, C 12-6190 PJH, doc. no. 10-1 at 10 (appellant’s designation of

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record on appeal). This time between obtaining credit counseling and filing the petition was

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“slightly over the 180 days provided by law.” Id., doc. no. 15 at 2 (appellant brief). See 11

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U.S.C. § 109(h) (requiring debtor to receive credit counseling “during the 180-day period

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ending on the date of filing of the petition by such individual”).

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Kun entered a fee arrangement with debtor for a flat fee of $1,000, plus filing fees,

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and was paid in three installments prior to the filing of the petition. In re Reyna Alvarado,

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C 12-6190 PJH, doc. no. 10-1 at 32-33 (Kun declaration).

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The Acting United States Trustee moved to dismiss debtor’s case on the ground that

trustee also moved for disgorgement of fees paid to Kun in connection with debtor’s case

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on the ground that Kun did not properly advise debtor to obtain timely credit counseling and

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filed the case with a stale credit counseling certificate. Id. at 21. On November 14, 2012,

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the bankruptcy court entered orders dismissing the case and requiring Kun to disgorge fees

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in the amount of $1,000. The bankruptcy court ordered Kun to pay $1,000 to debtor within

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For the Northern District of California

debtor did not obtain credit counseling within the 180-day statutory period. Id. at 11. The

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United States District Court

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ten days of the entry of the order. Id. at 42.

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Kun timely filed a notice of appeal from the order to disgorge fees and the order
dismissing the case. Debtor did not appeal from the order of dismissal.

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On November 29, 2012, the bankruptcy court entered a docket text order stating that

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more than ten days have passed since the entry of the order to disgorge fees, and that “Mr.

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Kun is ordered to file a certificate of compliance or non-compliance no later than December

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7, 2012.” Id. at 46 (docket sheet).

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On December 4, 2012, Kun filed a motion to stay pending appeal, which the

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bankruptcy court denied by order dated December 6, 2012. Id., doc. no. 10-2 at 164-66

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(appellee’s designation of record on appeal). Kun subsequently filed a motion to stay in

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this court, which denied the motion to stay by order entered January 30, 2013.

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Kun filed his opening brief in the In re Reyna Alvarado appeal on February 7, 2013.

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The trustee filed an answering brief on March 19, 2013, and Kun filed a reply brief on April

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1, 2013.

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B.

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Gilda Alvarado
On July 10, 2012, Kun filed a petition for relief under chapter 7 as counsel for debtor

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Gilda Alvarado, Reyna Alvarado’s daughter. Debtor filed a certificate of credit counseling

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which stated that she completed a course in credit counseling on November 29, 2011, or
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224 days prior to filing. In re Gilda Alvarado, Case No. 12-6478 PJH, doc. no. 3-1 at 11

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(appellant’s designation of record on appeal). This time between obtaining credit

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counseling and filing the petition was “slightly over the 180 days provided by law.” Id., doc.

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no. 11 at 2 (appellant brief). See 11 U.S.C. § 109(h) (requiring debtor to receive credit

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counseling “during the 180-day period ending on the date of filing of the petition by such

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individual”).

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Kun entered a fee arrangement with debtor for a flat fee of $1,000, plus filing fees,

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and was paid in three installments prior to the filing of the petition. In re Gilda Alvarado,

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Case No. 12-6478 PJH, doc. no. 3-1 at 38-39 (Kun declaration).
The Acting United States Trustee moved to dismiss debtor’s case on the ground that

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United States District Court

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debtor did not obtain credit counseling within the 180-day statutory period. Id. at 12. The

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trustee also moved for disgorgement of fees paid to Kun in connection with debtor’s case

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on the ground that Kun did not properly advise debtor to obtain timely credit counseling and

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filed the case with a stale credit counseling certificate. Id. at 22. On October 10, 2012, the

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bankruptcy court entered an order requiring Kun to disgorge fees in the amount of $1,000

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and to pay debtor the amount of $1,000 within ten days of the entry of the order. Id. at 66.

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On October 11, 2012, the bankruptcy court entered an order dismissing the case. Id., doc.

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no. 3-2 at 49 (appellee’s designation of record on appeal).

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On October 24, 2012, Kun filed a notice of appeal from the order to disgorge fees

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and the order dismissing the In re Gilda Alvarado case. Debtor did not appeal from the

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order of dismissal. Kun filed a motion to stay in this court, which denied the motion to stay

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by order entered January 30, 2013.

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Kun filed an opening brief in In re Gilda Alvarado on January 29, 2013. The trustee

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filed an answering brief on March 19, 2013, and Kun filed a reply brief on April 1, 2013.

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The court consolidated the In re Gilda Alvarado appeal with the earlier-filed appeal in In re

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Reyna Alvarado.

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ISSUES PRESENTED

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Kun’s appeals from the orders of the bankruptcy court in the bankruptcy cases of
Gilda Alvarado and Reyna Alvarado (collectively, “debtors”) present the following issues:

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1.

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bankruptcy cases;

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2.

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3.

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Whether the bankruptcy court erred in ordering Kun to return his retainer fee
to each debtor pursuant to 11 U.S.C. § 362; and

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4.

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For the Northern District of California

Whether the bankruptcy court erred in dismissing debtors’ chapter 7 cases
pursuant to 11 U.S.C. § 707;

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United States District Court

Whether Kun has standing to appeal from the orders dismissing the

Whether the trustee had authority to ask the bankruptcy court to disgorge
fees.

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STANDARDS OF REVIEW

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The court reviews the bankruptcy court’s conclusions of law de novo, and its findings

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of fact for clear error. Citibank v. Eshai (In re Eshai), 87 F.3d 1082, 1086 (9th Cir. 1996). A

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bankruptcy court’s decision to grant or deny a motion to dismiss for misconduct that

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constitutes “cause” is reviewed for abuse of discretion; however, whether a particular type

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of misconduct can constitute “cause” under § 707(a) is a question of law that is reviewed de

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novo. In re Sherman, 491 F.3d 948, 969 (9th Cir. 2007). A bankruptcy court’s decision on

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attorney’s fees is reviewed for abuse of discretion. Hale v. United States Trustee, 509 F.3d

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1139, 1146 (9th Cir. 2007).

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DISCUSSION
A.

Legal Standards
A bankruptcy court may dismiss a case pursuant to section 707(a) “only after notice

and a hearing and only for cause.” The statute defines cause as “including” the following:
(1)

unreasonable delay by the debtor that is prejudicial to
creditors;

(2)

nonpayment of any fees or charges required under chapter
123 of title 28; and

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(3)

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failure of the debtor in a voluntary case to file, within fifteen
days or such additional time as the court may allow after the
filing of the petition commencing such case, the information
required by paragraph (1) of section 521(a) [i.e., a list of
creditors and various financial disclosures], but only on a
motion by the United States trustee.

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11 U.S.C. § 707(a)(1) - (3). The types of conduct enumerated in § 707(a) as cause are not

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exclusive. Neary v. Padilla (In re Padilla), 222 F.3d 1184, 1191 (9th Cir. 2000), partially

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superseded by statute on other grounds, 11 U.S.C. § 707(b)(3)(A).

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Under 11 U.S.C. § 329(b), “a bankruptcy court may examine the reasonableness of

such services, the court may cancel any such agreement, or order the return of any such

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For the Northern District of California

a debtor’s attorney fees and, ‘if such compensation exceeds the reasonable value of any

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United States District Court

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payment, to the extent excessive.’” Hale, 509 F.3d at 1147.

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B.

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Bankruptcy Court’s Ruling
Upon noticed motions of the trustee to dismiss and for disgorgement of all fees paid

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to Kun in connection with each debtor’s case, the court held a hearing on the motions in

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each case after briefing on the motions was complete.

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1.

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The bankruptcy court held a hearing on the motions to dismiss and for disgorgement

Gilda Alvarado

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in Gilda Alvarado’s case on October 5, 2012, at which Kun and debtor were present. Kun

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argued that there was no authority that the requirement to take credit counseling within 180

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days of filing the petition must be strictly enforced, and argued that there was no prejudice

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caused by the staleness of the counseling certificate, which he conceded was dated 45

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days beyond the 180-day period. The bankruptcy court held that under the plain meaning

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of section 109(h), “as I read the statute and I think as the U.S. Trustee reads the statute, if

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the credit counseling was 181 days before the petition, the Debtor is not eligible.” October

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5, 2012 Transcript at 7-8. The bankruptcy court advised debtor that under the statute, “you

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have to do this counseling within the 180-day window before your bankruptcy, and there

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are some exceptions, but you haven’t indicated any basis for an exception.” Id. at 10. The

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bankruptcy court informed debtor that the motion to dismiss would be granted, and that
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“you need to get relief from your creditors by filing another case, and oddly enough, this will

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sound crazy; you’‘ll have to take another credit counseling, because if you were to file a

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new case, obviously your credit counseling is stale.” Id. The bankruptcy court held that

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“under controlling authority, the credit counseling requirement is an eligibility issue; it is not

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jurisdictional, and if there is a defect in one form or the other, either no credit counseling

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taken or no available exemption, and no one does anything about it, then the debtor

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breezes through and there’s nothing - no harm no foul. But when a party in interest, and in

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particular the United States Trustee, moves, I don’t have any choice.” Id. at 15-16.

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The bankruptcy court also granted the trustee’s motion for disgorgement of fees,
ordering Kun to refund the $1,000 fee to Gilda Alvarado pursuant to section 329. Id. at 16-

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United States District Court

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17. The bankruptcy court reasoned that Kun’s error “in not getting the credit counseling

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within the proper time period is why Ms. Alvarado is not going to get the benefit of this

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bankruptcy, and she needs relief, and she needs to pay another lawyer, and you ought to

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pay that other lawyer by giving her back the thousand dollars.” Id. at 17. In other words,

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“She shouldn’t pay a thousand plus whatever the other lawyer charges to have one

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defective bankruptcy and one proper bankruptcy.” Id. The bankruptcy court entered an

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order to disgorge fees on October 10, 2012, and an order dismissing Gilda Alvarado’s case

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on October 11, 2012.

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2.

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At the November 9, 2012, hearing in Reyna Alvarado’s case, the bankruptcy court

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advised debtor that she did not obtain timely credit counseling as required by statute, and

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that the court would dismiss her case without prejudice. Nov. 9, 2012 Transcript at 4 (“So if

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you want the benefit of a bankruptcy discharge you can file again.”). The bankruptcy court

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also ordered that the $1,000 prepetition fee paid to Kun be disgorged. The bankruptcy

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court held that the disgorgement was governed by 11 U.S.C. § 329 and Federal Rule of

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Bankruptcy Procedure 2017, and found that “a lawyer who takes a thousand dollars to file a

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bankruptcy for a client for a case that is dismissed for failed - defect in the qualification,

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namely, an untimely credit counseling, has not provided any benefit and in my view is

Reyna Alvarado

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unreasonable to take any fees.” Id. at 7. The bankruptcy court rejected Kun’s argument

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that the fee was not part of the estate, and therefore not reviewable under sections 330 and

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327, because those provisions apply to counsel hired by the trustee and were not

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applicable to the fees paid to Kun. Id. The bankruptcy court further noted that Kun

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“provided nothing but a mess” for debtor, who “now has to get bankruptcy relief by filing

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another bankruptcy case with another attorney.” Id. at 8. In other words, “She got no

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value” for the fee paid to Kun. Id. On November 14, 2012, the bankruptcy court entered a

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written order dismissing the case, and a separate order requiring Kun to disgorge his fees

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and pay $1,000 to Reyna Alvarado.
C.

Analysis

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United States District Court

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1.

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As a threshold matter, Kun must demonstrate that he has standing to challenge the

Kun’s Standing to Appeal from Orders of Dismissal

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orders dismissing the bankruptcy cases, which were not appealed by either debtor. To

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have standing to appeal in bankruptcy cases, appellants must demonstrate constitutional

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standing and satisfy the prudential limitation on standing to appeal in bankruptcy cases. In

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re Veal, 450 B.R. 897, 906 (B.A.P. 9th Cir. 2011).

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a.

Article III Standing

To establish Article III standing, a party must demonstrate the following:
(1) it has suffered an ‘injury in fact’ that is (a) concrete and
particularized and (b) actual or imminent, not conjectural or
hypothetical; (2) the injury is fairly traceable to the challenged action
of the defendant; and (3) it is likely, as opposed to merely
speculative, that the injury will be redressed by a favorable decision.

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In re Sherman, 491 F.3d at 957 (quoting City of Sausalito v. O’Neill, 386 F.3d 1186, 1197

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(9th Cir. 2004)) (internal citations and quotation marks omitted).

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The trustee contends that Kun lacks standing to appeal from the dismissal orders

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because he has not satisfied the requirements of injury, causation and redressability.

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Kun’s briefs do not address the arguments challenging his Article III standing, but the court

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determines that Kun has shown a monetary loss that is fairly traceable to the bankruptcy

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court’s orders granting the trustee’s motions to dismiss, which served as the predicate for
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the orders to disgorge fees. Further, if Kun’s appeal is successful, reversal of the orders of

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dismissal would redress the disgorgement of fees. The court is thus satisfied that Kun has

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met the relatively minimal requirements for Article III standing.

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b.

Prudential Standing

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Under Ninth Circuit authority, the prudential standing doctrine, or the “person

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aggrieved” test, requires that “only those persons who are directly and adversely affected

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pecuniarily by an order of the bankruptcy court . . . have standing to appeal that order.” In

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re Palmdale Hills Prop., LLC, 654 F.3d 868, 874 (9th Cir. 2011) (quoting Fondiller v.

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Robertson (Matter of Fondiller), 707 F.2d 441, 442 (9th Cir. 1983)) (internal quotation

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marks omitted). As the Ninth Circuit articulated in Fondiller,
[The “person aggrieved” test] exists to fill the need for an explicit
limitation on standing to appeal in bankruptcy proceedings. This
need springs from the nature of bankruptcy litigation which almost
always involves the interests of persons who are not formally parties
to the litigation. In the course of administration of the bankruptcy
estate disputes arise in which numerous persons are to some degree
interested. Efficient judicial administration requires that appellate
review be limited to those persons whose interests are directly
affected.
Fondiller, 707 F.2d at 443 (citations omitted).
Here, Kun has demonstrated a direct pecuniary interest in the orders of dismissal

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which were based on debtors’ failure to comply with the credit counseling requirement and

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resulted in disgorgement of fees. The trustee argues that Kun lacks prudential standing to

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appeal from the dismissal orders because they did not directly and adversely affect Kun’s

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property, increase his financial burdens, or detrimentally affect his rights. Appellee Br. at

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15 (citing Fondiller, 707 F.2d at 442). The court determines, however, that the

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disgorgement of fees qualifies Kun as a person aggrieved so as to satisfy the prudential

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considerations of the heightened standing requirements in bankruptcy appeals. See In re

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Cooper Commons LLC, 512 F.3d 533, 536 (9th Cir. 2008) (“we believe that the Firm made

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a sufficient showing of potential injury to its interest for us, in this unusual case, not to apply

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the strict criteria for standing and to accept the appeal and adjudicate it.”).

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2.

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Kun disputes the grounds for dismissal of the debtors’ bankruptcy cases, and

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contends that § 109(h) does not have plain language requiring the debtor to receive credit

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counseling within the 180 days of filing the petition. Appellant Br. at 3-5.

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Cause for Dismissal

A court may dismiss a bankruptcy case under § 707(a) only after notice and hearing

(citing 11 U.S.C. § 707(a); Padilla, 222 F.3d at 1193). Here, as in Sherman, no party

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contends that any of the three enumerated causes listed in § 707(a) apply to the present

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case. There is no Ninth Circuit authority on the question whether noncompliance with the

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credit counseling requirement under section 109(h) establishes cause for dismissal under

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For the Northern District of California

and only for cause, including three enumerated causes. In re Sherman, 491 F.3d at 970

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United States District Court

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section 707(a).

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In Sherman, the party moving to dismiss a chapter 7 action for “cause” pursuant to

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§ 707(a) alleged that the opposing party had used the bankruptcy proceeding as a refuge

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from another court’s judgment, and that the bankruptcy filing was part of a “scorched earth

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policy” (transferring funds from one creditor to another to avoid payment to a third

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creditor.). The Sherman court followed the two-part test for cause articulated in Padilla:

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“First, we must consider whether the circumstances asserted to constitute ‘cause’ are

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‘contemplated by any specific Code provision applicable to Chapter 7 petitions.’ If the

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asserted ‘cause’ is contemplated by a specific Code provision, then it does not constitute

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‘cause’ under § 707(a).” In re Sherman, 491 F.3d at 970 (citing Padilla, 222 F.3d at 1193-

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94). Under the second step of the inquiry, if the asserted ‘cause’ is not contemplated by a

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specific Code provision, then we must further consider whether the circumstances asserted

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otherwise meet the criteria for ‘cause’ for discharge under § 707(a).” Id. The Ninth Circuit

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held that the alleged misconduct was covered by other Bankruptcy Code provisions,

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namely 11 U.S.C. § 362 and 11 U.S.C. § 547, and therefore, under the reasoning of

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Padilla, could not be considered as cause for dismissal pursuant to § 707(a). In re

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Sherman, 491 F.3d at 971-72.

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Unlike Sherman, where the conduct at issue was contemplated by specific code

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provisions, no other section of the Bankruptcy Code provides a remedy for a debtor’s

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failure to satisfy the credit counseling requirement. Subsection (b) of section 521 governing

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the debtor’s duties, which is not specifically contemplated by section 707(a), requires the

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debtor to file a certificate from the credit counseling agency but does not include an

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enforcement provision:

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In addition to the requirements under subsection (a), a debtor who is
an individual shall file with the court–

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(1)

a certificate from the approved nonprofit budget and
credit counseling agency that provided the debtor
services under section 109(h) describing the services
provided to the debtor; and

(2)

a copy of the debt repayment plan, if any, developed
under section 109(h) through the approved nonprofit
budget and credit counseling agency referred to in
paragraph (1).

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11 U.S.C. § 521(b). Applying the first prong of the Padilla test for cause, the parties have

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not identified a separate statutory provision that enforces the credit counseling requirement

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under section 109(h).

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Turning to the second prong of the Padilla test, the court finds that failure to satisfy

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the credit counseling requirement is sufficient cause to dismiss the bankruptcy case without

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prejudice pursuant to section 707(a). See In re Dunn, 2010 WL 6451888 (B.A.P. 9th Cir.

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Feb. 4, 2010) (failure to attend initial meeting of creditors, and a continuance thereof, was

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not contemplated by a specific code provision and constituted cause for dismissal under

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section 707(a)). In Dunn, an unpublished opinion, the bankruptcy appellate panel

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determined that Ҥ 343 requires a debtor to appear and submit to examination at the

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§ 341(a) meeting of creditors, but does not specify what happens when the debtor does not

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comply. In short, it is appropriate to apply § 707(a) to debtors who do not comply with their

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duties under § 343.” Id. at *5. Similarly, the court determines that the failure to obtain

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credit counseling within 180 days of filing the petition, where the statute provides that an

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individual “may not be a debtor” unless the individual has receiving credit counseling,

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establishes cause for dismissal.

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Kun concedes that debtors did not complete their credit counseling courses within

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180 days of filing their respective bankruptcy petitions. However, Kun contends that the

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language of section 109(h) is not plain and does not clearly require strict compliance within

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180 days. Kun argues that the debtor may waive the credit counseling requirement of

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section 109(h) pursuant to In re Mendez, 367 B.R. 109, 119 (B.A.P. 9th Cir. 2007). In

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Mendez, the debtor herself, rather than another interested party, sought dismissal of her

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chapter 7 bankruptcy case. There, the trustee filed an objection to the exemption claimed
by the debtor in her home, and the bankruptcy court sustained the objection, limiting the

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homestead exemption claim to $150,000. The debtor then filed a motion to dismiss,

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asserting that her bankruptcy papers were forged, that she never intended to file

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bankruptcy and that she failed to comply with the credit counseling requirements of

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§ 109(h). The bankruptcy court in Mendez denied the debtor’s motion to dismiss after

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determining that the record showed that the debtor intended to file for protection under

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chapter 7, despite evidence that some of the signatures on her bankruptcy papers were

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forged, and indicated that the debtor decided not to proceed when she realized that she

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may not be able to retain her assets, particularly her home. 367 B.R. at 119.

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The bankruptcy appellate panel in Mendez affirmed the decision denying the

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debtor’s motion to dismiss, holding as a matter of law that compliance with § 109(h) is an

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eligibility requirement, not a jurisdictional requirement. Id. at 117-18. The Mendez panel

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held that the debtor can waive strict compliance with the credit counseling requirements of

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section 109(h), and that a bankruptcy court has jurisdiction over a case commenced by an

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ineligible debtor. Id. at 118. In Mendez, the bankruptcy appellate panel cited the

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bankruptcy court’s reasoning that under section 707(a), “a bankruptcy court may dismiss a

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chapter 7 case for cause shown, but the Debtor does not have an absolute right to have

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her chapter 7 case dismissed.” Id. at 120. In other words, a debtor who attempts “to use

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the [§ 109(h)] credit counseling requirement offensively, as a ticket to get out of
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bankruptcy,” can be deemed to have waived that requirement as a basis for dismissal in

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order to prevent the debtor from abusing or manipulating the bankruptcy system. Id. at

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114. See In re Warren, 568 F.3d 1113, 1119 (9th Cir. 2009) (“where a bankruptcy court

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reasonably determines that there is no continuing need for the information or waiver of the

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[financial disclosure] requirement [under section 521] is necessary to prevent automatic

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dismissal from furthering a debtor’s abusive conduct, the court has discretion to take such

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an action.”) (citation and internal quotation marks omitted). Thus, Mendez does not stand

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for Kun’s proposition that a debtor’s failure to comply with section 109(h) amounts to waiver

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of that requirement which then prohibits the bankruptcy court from dismissing the case.
Kun cites bankruptcy court authority for the proposition that dismissal is not

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appropriate where debtors took credit counseling and thereby complied with the spirit of

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§ 109(h), even though debtors exceeded the 180-day statutory period. Appellant Br. at 31

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(citing In re Bricksin, 346 B.R. 497, 502 (Bankr. N.D. Cal. 2006)). In Bricksin, the

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bankruptcy court found that the debtors received initial credit counseling more than 180

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days prior to filing, and therefore did not satisfy the letter of the statutory requirements.

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The bankruptcy court declined to dismiss the case, however, upon determining that the

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debtors complied with the “spirit” of section 109(h) after they took credit counseling by

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performing under a debt repayment plan until July 2005, less than 180 days before filing

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the petition. In re Bricksin, 346 B.R. at 502 (“The Court finds that Debtors’ completion of

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credit counseling, and then ongoing performance under the debt repayment plan within the

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180-day period prior to filing, fulfills the spirit of the statutory requirement.”). The

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bankruptcy court in Bricksin denied the motion to dismiss based on the “unique set of facts”

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presented by the debtors and in view of the recent enactment of the Bankruptcy Abuse

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Prevention and Consumer Protection Act of 2005 (“BAPCPA”), which added the section

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109(h) requirement. Id. at 503 (“It would be inequitable for this Court to hold that these

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Debtors' technical non-compliance with the law, despite their very best efforts, warrants

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The briefs filed by the parties in both appeals present identical argument. The
court’s citations to the briefs refer to the papers filed in In re Reyna Alvarado, C 12-6190 PJH.
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dismissal of this case, which would require these Debtors to start all over, to pay another

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$299.00 filing fee, and potentially deprive them of the protection of the automatic stay.”).

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Kun relies on the bankruptcy court’s holding in Bricksin as authority for the

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proposition that the 180-day rule is flexible, and that the statutory language is not

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sufficiently plain to be enforceable. The court declines to apply Bricksin in light of the

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reasoning of In re Gibson, 2011 WL 7145612, *3 (B.A.P. 9th Cir. Dec. 1, 2011), an

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unpublished opinion. In Gibson, the bankruptcy appellate panel strictly applied the credit

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counseling requirement. Finding that “the command of § 109(h) is clear” in requiring credit

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counseling within 180 days before filing a petition, Gibson held that an individual “may not
be a debtor” unless she complies with § 109(h). 2011 WL 7145612 at *3-4. The

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bankruptcy appellate panel disapproved of the minority view expressed in Bricksin, finding

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that “there is no basis for that interpretation of § 109(h).” Id. at *3. The court agrees with

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Gibson that the plain language of section 109(h) requires strict application of the

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requirement to take credit counseling within 180 days before filing the petition. See Lamie

15

v. United States Trustee, 540 U.S. 526, 534 (“It is well established that ‘when the statute’s

16

language is plain, the sole function of the courts - at least where the disposition required by

17

the text is not absurd - is to enforce it according to its terms.”); Hellon & Associates, Inc. v.

18

Phoenix Resort Corp., 958 F.2d 295, 297 (9th Cir. 1992) (“if the statutory language is clear,

19

we need look no further than that language itself in determining the meaning of the

20

statute”).

21

Kun contends that Gibson was wrongly decided because the language of section

22

109(h) is not plain for purposes of strict compliance. Kun cites the Ninth Circuit’s ruling in

23

Warren, 568 F.3d at 1119, to suggest that section 109(h) is ambiguous and is not “carved

24

in stone.” Reply Br. at 2-3. However, the court in Warren did not analyze the language of

25

section 109(h), but considered the provision for automatic dismissal under section

26

521(a)(1) for failure to file the financial disclosures required by that statute. In Warren, the

27

debtor brought a motion to dismiss her chapter 7 case, after the trustee discovered

28

undisclosed assets, based on her failure to comply with the 45-day deadline to provide the
13

1

financial disclosure information required by § 521(a)(1). In Warren, the debtor sought

2

dismissal of her own bankruptcy case, arguing that § 521(i)(1) required that a case “shall

3

be automatically dismissed effective on the 46th day” if the debtor fails to file timely the

4

information required by § 521(a)(1). As the bankruptcy appellate panel held in Mendez,

5

367 B.R. at 119, the court of appeals held in Warren that the bankruptcy court properly

6

denied the debtor’s motion to dismiss, noting that a contrary construction of § 521(a)(1) and

7

521(i)(1) would be inconsistent with the legislative intent of § 521 to prevent debtor abuse.

8

In re Warren, 568 F.3d at 1118. The Ninth Circuit also noted that, in enacting § 521,

9

Congress never intended to strip the bankruptcy court of the flexibility it needs to “respond
intelligently to a debtor who is attempting to manipulate the system simply because the

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For the Northern District of California

United States District Court

10

forty-five day deadline has passed.” Id. at 1119 (internal citations omitted). The holding of

12

Warren does not support Kun’s contention that the language of section 109(h) is

13

ambiguous or does not clearly require strict compliance for debtor eligibility.

14

Kun also relies on Warren to support his contention that BAPCPA was intended to

15

prevent abusive bankruptcy filings, and that the bankruptcy court did not make any finding

16

that debtors’ bankruptcy filings were abusive. Reply Br. at 3 (citing In re Warren, 568 F.3d

17

at 1114). While section 707(b)(3)(A) provides that the court may consider bad faith as

18

grounds for dismissal pursuant to section 707(b) for an abuse of chapter 7, see In re

19

Mitchell, 357 B.R. 142, 150 (Bankr. C.D. Cal. 2006), the bankruptcy court did not order

20

dismissal pursuant to section 707(b) here. Rather, the court ordered dismissal for cause

21

pursuant to section 707(a), which does not require a finding of bad faith or abusive tactics.

22

The court finds Gibson to be well-reasoned, basing its interpretation of § 109(h) on

23

the plain language of the statute, “which includes that ‘an individual may not be a debtor

24

under this title unless such individual has’ complied with the credit counseling requirement.”

25

2011 WL 7145612 at *3 (quoting 11 U.S.C. § 109(h)). See also In re Ingram, 460 B.R. 904,

26

910 (B.A.P. 6th Cir. 2011) (“The requirements of § 109(h) are clear and unambiguous. As

27

such, the bankruptcy court, except in the limited circumstances set forth in § 109(h)(2), (3),

28

and (4) which were not present here, did not have discretion to ignore, modify, or defer the
14

1

requirements of § 109(h)(1).”). The court concludes as a matter of law that failure to

2

comply with the credit counseling requirement under section 109(h) establishes cause for

3

dismissal under section 707(a).

4

To the extent that Kun relies on Bricksin to show that the bankruptcy court abused

5

its discretion in dismissing the case for failure to comply with § 109(h), Bricksin is readily

6

distinguishable from this case because Kun has not demonstrated any efforts by debtors

7

here to participate in a debt repayment plan within 180 days of filing their petition, as the

8

bankruptcy court found significant in Bricksin. In re Bricksin, 346 B.R. at 502. Based on

9

the record, the court finds no abuse of discretion in the bankruptcy court’s decision to
dismiss the case.

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For the Northern District of California

United States District Court

10

3.

12

Kun contends that the flat fee advance retainer paid by debtors could not be

13

disgorged because the retainer fees were paid before filing the petitions, and are therefore

14

not part of the bankruptcy estate. The decision of the bankruptcy court to order an attorney

15

to disgorge fees is subject to review for abuse of discretion. Hale, 509 F.3d at 1146.

16

Disgorgement of Retainer Fee

The Bankruptcy Code grants bankruptcy courts the authority to monitor and regulate

17

compensation to a debtor’s attorney. See 11 U.S.C. § 329 (authorizing bankruptcy courts

18

to order the return of a debtor's attorney’s compensation when the compensation “exceeds

19

the reasonable value of any such services”); Fed. R. Bankr. P. 2016 (requiring a debtor’s

20

attorney to file statement required by section 329 concerning compensation paid or agreed

21

to be paid).

22

Section 329 governs a debtor’s transactions with attorneys and provides as follows:

23

(a) Any 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 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.

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25
26
27
28

15

1
2
3

(b) If such compensation exceeds the reasonable value of any such
services, the court may cancel any such agreement, or order the
return of any such payment, to the extent excessive, to-(1) the estate, if the property transferred--

4

(A) would have been property of the estate; or

5

(B) was to be paid by or on behalf of the debtor under
a plan under chapter 11, 12, or 13 of this title; or

6
(2) the entity that made such payment.
7
11 U.S.C. § 329. Furthermore, Federal Rule of Bankruptcy Procedure 2017 provides that
8
upon noticed motion and hearing, the court may determine whether any payment of fees by
9
the debtor is excessive:
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For the Northern District of California

United States District Court

10

12
13
14

On motion by the debtor, the United States trustee, or on the court's
own initiative, the court after notice and a hearing may determine
whether any payment of money or any transfer of property, or any
agreement therefor, by the debtor to an attorney after entry of an
order for relief in a case under the Code is excessive, whether the
payment or transfer is made or is to be made directly or indirectly, if
the payment, transfer, or agreement therefor is for services in any
way related to the case.

15

Fed. R. Bankr. P. 2017(b). Rule 2017 implements section 329. In re Biggar, 110 F.3d 685,

16

687 (9th Cir. 1997) (citing Fed. R. Bankr. P. 2017 advisory committee’s note (1983)).

17

Kun relies on Lamie v. United States Trustee to support his argument that a pre-

18

filing retainer fee, such as the $1,000 paid by debtor here, is an acknowledged practice of

19

the profession and is not part of the bankruptcy estate, and therefore not refundable.

20

Appellant Br. at 6. In Lamie, the Supreme Court construed sections 327 and 330 of the

21

Bankruptcy Code, and held that, according to the plain meaning of § 330(a), only attorneys

22

employed under § 327 and approved by the court are entitled to receive compensation from

23

the bankruptcy estate. 540 U.S. at 534-35. “Sections 327 and 330, taken together, allow

24

Chapter 7 trustees to engage attorneys, including debtors' counsel, and allow courts to

25

award them fees.” Id. at 537. The Supreme Court recognized, however, that § 330(a)(1)

26

does not prevent a debtor from paying a bankruptcy attorney in advance of filing a chapter

27

7 petition. “It appears to be routine for debtors to pay reasonable fees for legal services

28

before filing for bankruptcy to ensure compliance with statutory requirements. [Citation
16

1

omitted.] So our interpretation accords with common practice. Section 330(a)(1) does not

2

prevent a debtor from engaging counsel before a Chapter 7 conversion and paying

3

reasonable compensation in advance to ensure that the filing is in order.” Id. at 537-38.

4

Kun relies on the advance payment exception, as recognized in Lamie, to argue that

5

a prepetition retainer fee cannot be disgorged because it is not part of the bankruptcy

6

estate. Kun confuses the bankruptcy court’s authority to order disgorgement of fees under

7

section 329, with the bankruptcy court’s authority under section 330 to compensate

8

attorneys who are hired and approved under section 327. As the bankruptcy court

9

recognized in In re Blackburn, 448 B.R. 28, 38 (Bankr. D. Idaho 2011), Lamie held that
prepetition retainer fees “are not estate property for which § 330 approval is required.” The

11
For the Northern District of California

United States District Court

10

issue of court approval for payment of attorney compensation pursuant to section 330 is

12

not presented here, however. Rather, the issue presented on Kun’s appeal is whether the

13

bankruptcy court had authority to order Kun to return each debtor’s $1,000 retainer fee as

14

excessive pursuant to § 329. Kun cites no authority that deprives the bankruptcy court of

15

its authority to order the debtor’s attorney to return compensation that exceeds the

16

reasonable value of the services rendered pursuant to 11 U.S.C. § 329(b), which provides

17

that “[i]f such compensation exceeds the reasonable value of any such services, the court

18

may cancel any such agreement, or order the return of any such payment, to the extent

19

excessive.”

20

In Hale v. United States Trustee, the Ninth Circuit held, “Under § 329(b), a

21

bankruptcy court may examine the reasonableness of a debtor's attorney fees and, ‘if such

22

compensation exceeds the reasonable value of any such services, the court may cancel

23

any such agreement, or order the return of any such payment, to the extent excessive.’”

24

509 F.3d at 1147. In Hale, the court found that the bankruptcy court did not abuse its

25

discretion in disgorging the debtors’ attorney of his fees where “the only service Hale

26

provided to Debtors was the completion of a bankruptcy petition that was incomplete and

27

erroneous and that required extensive amendments.” Id.

28
17

1

Here, the bankruptcy court held a hearing on the trustee’s motion to disgorge fees in

2

each case. At the hearing on the motions in In re Gilda Alvarado, the bankruptcy court

3

ordered Kun to disgorge his fees pursuant to section 329 and Federal Rule of Bankruptcy

4

Procedure 2017 after finding that “in not getting the credit counseling within the proper time

5

period is why Ms. Alvarado is not going to get the benefit of this bankruptcy, and she needs

6

relief, and she needs to pay another lawyer, and you ought to pay that other lawyer by

7

giving her back the thousand dollars.” Oct. 5, 2012 Transcript at 17. At the In re Reyna

8

Alvarado motion hearing, the bankruptcy court found that the fee was unreasonable

9

because “a lawyer who takes a thousand dollars to file a bankruptcy for a client for a case
that is dismissed for failed – defect in the qualification, namely, and untimely credit

11
For the Northern District of California

United States District Court

10

counseling, has not provided any benefit.” Nov. 9, 2012 Transcript at 7. The bankruptcy

12

court rejected Kun’s argument that the fee was reasonable and was not part of the estate,

13

and held that the disgorgement of fees was governed by section 329 as well as rule 2017.

14

Id.

15

Kun also argues that attorney’s fees that are not property of the estate are governed

16

by state law, which does not recognize summary disgorgement. Appellant Br. at 7. Under

17

Ninth Circuit authority, however, the bankruptcy court has “inherent authority over the

18

debtor’s attorney’s compensation.” In re Lewis, 113 F.3d 1040, 1045 (9th Cir. 1997).

19
20
21

The Bankruptcy Code contains a number of provisions (e.g., §§ 327,
329, 330, 331) designed to protect the debtor from the debtor’s
attorney. As a result, several courts have recognized that the
bankruptcy court has broad and inherent authority to deny any and
all compensation when an attorney fails to meet the requirements of
these provisions.

22
23

Id. In particular, the court in Lewis cited Fourth Circuit authority recognizing that

24

section 329 and rule 2017 are designed to protect the creditors and the debtor against

25

overreaching by attorneys. Id. (citing In re Walters, 868 F.2d 665, 668 (4th Cir. 1989)).

26

Kun offers no authority for the proposition that being paid his fees prior to filing the

27

chapter 7 petition would divest the bankruptcy court of its authority under § 329 to order

28

him to return fees that it has determined to be excessive or unreasonable. In Lamie, the
18

fee arrangements, and authorizes the bankruptcy court’s oversight of the reasonableness

3

of those fees, by requiring that “debtors’ attorneys must disclose fees they receive from a

4

debtor in the year prior to its bankruptcy filing and courts may order excessive payments

5

returned to the estate.” Lamie, 540 U.S. at 538 (citing 11 U.S.C. § 329). Upon notice and

6

hearing on the trustee’s motions, the bankruptcy court had authority under 11 U.S.C.

7

§ 329(b) and Federal Rule of Bankruptcy Procedure 2017(b) to order Kun to return to

8

debtors any fees that exceeded the reasonable value of the services provided. Hale, 509

9

F.3d at 1147; In re Jastrem, 253 F.3d 438, 443 (9th Cir. 2001). The court determines that

10

the bankruptcy court did not abuse its discretion in ordering disgorgement upon finding that

11
For the Northern District of California

Supreme Court expressly recognized that the Bankruptcy Code anticipates such advance

2

United States District Court

1

the fees were unreasonable.

12

4.

13

Kun contends that the trustee lacks standing and exceeded his authority in these

Authority of Trustee

14

cases by seeking disgorgement of fees. Kun argues that the trustee is authorized by

15

statute to appear and supervise the attorney’s fee applications under § 330, but may not

16

ask the bankruptcy court to disgorge fees because he is not expressly authorized to seek

17

disgorgement under § 329. Appellant Br. at 8-9 (citing 28 U.S.C. § 586(a)(3)(A)). Kun

18

does not cite authority for this restrictive view of the trustee’s powers, which contradicts

19

statutory provisions that generally confer standing on the trustee to appear on issues raised

20

in bankruptcy, as recognized by the Ninth Circuit and other appellate authority.

21

Section 586 enumerates the duties of the United States trustee, which include

22

“reviewing, in accordance with procedural guidelines adopted by the Executive Office of the

23

United States Trustee (which guidelines shall be applied uniformly by the United States

24

trustee except when circumstances warrant different treatment), applications filed for

25

compensation and reimbursement under section 330 of title 11.” 28 U.S.C. § 586(a)(3)(A).

26

Section 586 does not, however, limit the trustee’s authority to the enumerated duties. As

27

the trustee correctly points out, section 586(a)(5) broadly authorizes “[e]ach United States

28

trustee, within the region for which such United States trustee is appointed . . . [to] perform
19

1

the duties prescribed for the United States trustee under title 11 and this title, and such

2

duties consistent with title 11 and this title as the Attorney General may prescribe.” Section

3

307 of title 11, in turn, provides that the United States Trustee “may raise and may appear

4

and be heard on any issue in any case or proceeding under this title but may not file a plan

5

pursuant to section 1121(c) of this title.” 11 U.S.C. § 307. The plain language of the

6

statute confers standing on the trustee to raise any issue in bankruptcy, except to file a

7

chapter 11 plan.

8

The legislative history of section 307 also demonstrates that the statute was

seek disgorgement under section 329. As the Third Circuit articulated in In re Columbia

11
For the Northern District of California

intended to confer standing on the trustee to challenge the reasonableness of fees and

10

United States District Court

9

Gas Sys. Inc., 33 F.3d 294 (3d Cir. 1994), Congress enacted the Bankruptcy Act of 1986 to

12

expand the United States Trustee Program, and the House Report accompanying the

13

statute listed certain broad general responsibilities of the trustee, such as “‘to monitor

14

applications for compensation and reimbursement.’” Id. at 296 (quoting H.R. Rep. No. 764,

15

99th Cong., 2d Sess. 24 (1986), reprinted in 1986 U.S.C.C.A.N. 5227, 5237). The Third

16

Circuit found that “in discussing the standing of the U.S. Trustee the Report did not limit it

17

to the specific duties referred to above.” Id. The court in Columbia Gas Systems quoted

18

the House Report as evidence of congressional intent to confer standing on the trustee to

19

raise “any issue in any case or proceeding” in bankruptcy:

20
21
22
23

The U.S. Trustee is given standing to raise, appear, and be heard on
any issue in any case or proceeding under title 11, U.S. Code except that the U.S. Trustee may not file a plan in a chapter 11 case.
In this manner, the U.S. Trustee is given the same right to be heard
as a party in interest, but retains the discretion to decide when a
matter of concern to the proper administration of the bankruptcy laws
should be raised.

24

Id. (quoting H.R. Rep. No. 764, 99th Cong., 2d Sess. at 27, 1986 U.S.C.C.A.N. at 5240)

25

(emphasis added in original). The Third Circuit concluded that enactment of section 307,

26

which provides that the United States Trustee “may raise and may appear and be heard on

27

any issue in any case or proceeding under this title but may not file a plan pursuant to

28

section 1121(c) of this title,” reflects this intent. Id. “It is difficult to conceive of a statute
20

1

that more clearly signifies Congress’s intent to confer standing.” Id. See also Hayes & Son

2

Body Shop, Inc. v. United States Trustee, 124 B.R. 66, 68 (W.D. Tenn. 1990) (U.S. Trustee

3

had standing to object to the reasonableness of the fees sought by a chapter 11 debtor’s

4

attorney, noting that “[t]he language, legislative history, and judicial interpretation of § 307

5

reveal that Congress intended to enhance the role of the United States Trustee by

6

permitting direct involvement in bankruptcy proceedings”), aff’d on other grounds, 958 F.2d

7

371 (6th Cir. 1992) (per curiam).

8

Although the Ninth Circuit has not considered the precise question whether the

recognized that the trustee has standing under section 307 to appear on any issue in any

11
For the Northern District of California

trustee has standing under section 329 to seek disgorgement of fees, the Ninth Circuit has

10

United States District Court

9

case or proceeding and has standing to appeal from denial of a motion seeking

12

disgorgement. In Stanley v. McCormick (In re Donovan Corp.), 215 F.3d 929 (9th Cir.

13

2000), the bankruptcy court denied the trustee’s motion for disgorgement of fees previously

14

paid to counsel for the former debtor in possession. The trustee filed an appeal with the

15

district court, which dismissed the appeal on the ground that the trustee lacked standing

16

because the creditors who arguably could have benefitted from the disgorgement did not

17

express any interest. The trustee appealed the decision that she lacked standing, and the

18

court of appeals reversed, holding that the trustee had standing to appeal the bankruptcy

19

court’s ruling on her motion for disgorgement. Id. at 930. The Ninth Circuit cited 11 U.S.C.

20

§ 307, which states, “The United States trustee may raise and may appear and be heard

21

on any issue in any case or proceeding under this title but may not file a plan pursuant to

22

section 1121(c) of this title.” The court in Donovan reasoned that “[t]he United States

23

trustee may be heard on any issue in any case or proceeding under title 11. The case at

24

bar was a proceeding under title 11. Therefore the trustee had standing to appeal the

25

bankruptcy court’s denial of her motion.” 215 F.3d at 930. The court further held that “[t]he

26

United States trustee ‘may also intervene and appear at any level of the proceedings from

27

the bankruptcy court on, 11 U.S.C. § 307, as either a party or an amicus.’” Id. (quoting

28

Bernard v. Coyne, 31 F.3d 842, 844 (9th Cir. 1994)).
21

1

Furthermore, Rule 2017, which implements section 329, expressly provides that the

2

trustee may file a motion to determine whether any payment of fees by the debtor is

3

excessive. Fed. R. Bankr. P. 2017(b) (“On motion by the debtor, the United States trustee,

4

or on the court's own initiative, the court after notice and a hearing may determine whether

5

any payment . . . by the debtor to an attorney after entry of an order for relief in a case

6

under the Code is excessive”). The weight of authority supports the determination that the

7

trustee had standing to seek disgorgement of excessive fees.

8

CONCLUSION

9

For the reasons set forth above, the orders of the bankruptcy court dismissing the
bankruptcy cases and requiring disgorgement of attorney’s fees are AFFIRMED. This

11
For the Northern District of California

United States District Court

10

order fully adjudicates the appeals and terminates all pending motions for these

12

consolidated cases. The clerk shall close the files.

13

IT IS SO ORDERED.

14
15

Dated:

April 29, 2013
______________________________
PHYLLIS J. HAMILTON
United States District Judge

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