ORDER DENYING AMENDED APPLICATION FOR ALLOWANCE
OF ATTORNEY'S FEES, VACATING ORDERS APPOINTING
WILLIAM ARTUS AS ATTORNEY FOR THE ESTATE, REQUIRING
TURNOVER OF RETAINER AND DISGORGEMENT OF FEES,
GRANTING MOTION FOR SANCTIONS AND REQUIRING
RETENTION OF NEW COUNSEL

William Artus's amended application for allowance of attorney's fees and costs and the United States Trustee's motion for sanctions duly came before the court for hearing on September 8, 1999. William Artus appeared on his own behalf. Barbara Franklin appeared on behalf of the United States Trustee's Office. After a review of the file and hearing the arguments of counsel, IT IS ORDERED:

1. William Artus's amended application for allowance of attorney's fees and costs is denied;

2. The orders appointing William Artus as attorney for the debtor, entered February 8 and 25, 1999, are vacated;

3. William Artus and the firm of Artus & Choquette shall turn over the balance of the retainer held in their trust account, in the sum of $10,951.86, to the debtor and provide proof of turnover to the United States Trustee no later than October 15, 1999;

William Artus and the law firm of Artus & Choquette shall disgorge the sum of $4,048.14 to the debtor and provide proof of disgorgement to the United States Trustee no later than October 15, 1999;

5. William Artus will not be allowed to be employed as a professional in any future bankruptcy case within this district without first obtaining, and filing with this court, written certification from the United States Trustee that Artus holds no interest adverse to the estate and is a disinterested party within the meaning of 11 U.S.C. § 101(14);

6. The United States Trustee's motion for sanctions is granted as provided above; and

7. The debtor shall retain new counsel within thirty days.

Background

William Artus is an Anchorage bankruptcy attorney with several decades of bankruptcy experience. Artus first met with Wayne Browning, the president and sole shareholder of Browning Timber of Alaska, Inc. ("Browning"), on corporate business in February of 1998.⁽¹⁾ Monthly billing statements for the firm of Artus & Choquette indicate Browning was charged $367.50 for two conferences in February and May of 1998. Artus charged $210.00 per hour. He billed Browning for 3.6 hours during July of 1998 with regard to attachment proceedings by Northern Air Cargo. He continued working for the corporation from August through October, 1998, charging an additional $854.74 for fees and costs. Artus dealt with attorney       6 ABR 204   Joan Travostino regarding Heller Financial Leasing's attempted recovery of equipment from Browning. Browning made one token payment of $157.50 for the January conference on July 2, 1998. By the end of December, 1998, however, it owed Artus and his law firm, Artus & Choquette, nearly $3,000.00. Artus worked for Browning through January, primarily on the corporation's chapter 11 filing. According to the monthly billing statements, Browning owed Artus $4,048.14 by the end of January, 1999.

After receiving a check for $15,000.00 from Browning on February 1, 1999, Artus prepared the initial chapter 11 bankruptcy filing for the corporation. The petition was filed February 1st. Artus prepared a list of the debtor's twenty largest unsecured creditors, a chapter 11 petition and a "matrix verification" listing the names and addresses of Browning's creditors. Artus & Choquette was not listed on the matrix. Artus also prepared, signed and filed an application for authority to be employed as attorney for the estate. Paragraph 8 of that application provided:

8. That to the best of Debtor's knowledge, William D. Artus neither represents nor holds any interest adverse to Debtor as a debtor in possession or the estate in the matter upon which he is to be engaged for Debtor as debtor in possession, his employment would be to the best interest of this estate, and William D. Artus is a disinterested person as defined in section 101(14) of the Bankruptcy Code, 11 U.S.C. § 101(14).

3. I do not hold or represent any interest adverse to the debtor or this estate.
      6 ABR 205  

4. I am a disinterested person as defined in Section 101 (14) of the Bankruptcy Code, 11 U.S.C. § 101(14).

Artus filed Browning's schedules and statements on February 22, 1999. His law firm was not listed as a creditor on the schedules, despite the accrual of over $4,000.00 in prepetition fees. Further, Browning's $15,000.00 payment to Artus was buried in the attachments to its statement of financial affairs. Question 3 of the statement of affairs requires the debtor to list all payments of more than $600.00 made to creditors within 90 days of the filing of the petition. The debtor is required to list the name and address of each creditor, the dates and amounts of each payment made and any amount still owing. The debtor responded to paragraph 3 by referring to an attached list of payments. Attached to the statement of financial affairs are 9 pages with various entries. The pages are not labeled as answers to question 3. They do not contain all of the information required by question 3. Rather, they list specific checks to various vendors, with the amount of each check and a total of all checks paid to each vendor. The amount still owed to vendors is not provided. Artus & Choquette is listed as having received $15,000.00, but the amount of its prepetition bill is not listed, nor is any amount outstanding shown. Question 9 of Browning's statement of affairs provides:

9. Payments related to debt counseling or bankruptcy

None

[x]

List all payments made or property transferred by or on behalf of the debtor to any persons, including attorneys, for consultation concerning debt consolidation, relief under the bankruptcy law or preparation of a petition in bankruptcy within on [sic] year immediately preceding the commencement of this case.

The debtor's response to this question was "none," despite having transferred $15,000.00 to Artus on February 1, 1999.

This court issued an order to show cause to the debtor on March 1, 1999, for various filing infractions. Included in the list was Artus's failure to file an attorney disclosure statement. Artus was served with the order to show cause on February 26, 1999. On March 2, 1999, Artus transferred $4,048.14 from his trust account to apply to prepetition fees. One day later, on March 3, 1999, Artus executed an attorney disclosure statement, which he filed with the court on March 4, 1999. The disclosure statement did not follow official form B203, nor did it contain the certification requirements of the official form. Additionally, the disclosure statement failed to list the $15,000.00 received by Artus on February 1, 1999, instead showing a payment of $10,951.86 on that date. The disclosure statement failed to list the payment of $4,048.14 to Artus on March 2, 1999. It also failed to disclose Browning's earlier payment of $157.50 received by Artus on July 2, 1998.

Artus first applied to this court for allowance and payment of attorney's fees and costs on July 9, 1999, seeking fees of $15,813.00 and expenses of $2,276.95. He again misinformed the court as to the size of his retainer, alleging he had received $10,951.86 rather than the $15,000.00 actually paid by Browning. The United States Trustee noticed the discrepancy, based upon the attachments to the debtor's statement of financial affairs. After the United States Trustee questioned Artus about this discrepancy, he filed an amended application which finally disclosed the full $15,000.00 retainer and his application of a portion of the retainer to the debtor's prepetition bill. In his amended notice, Artus represented that he would waive his prepetition claim and apply the complete $15,000.00 retainer solely to postpetition       6 ABR 207   services. The United States Trustee filed an objection to the amended application and moved for sanctions. At the hearing on September 8, 1999, Artus indicated he would no longer waive his prepetition claim and apply the retainer solely to postpetition fees.

Discussion

A bankruptcy judge has an independent duty to review fee applications.⁽²⁾ Further, the bankruptcy court has the authority to regulate the retention of an attorney after his employment has been authorized.⁽³⁾

11 U.S.C. § 327(a) permits a trustee or a chapter 11 debtor to employ an attorney that is disinterested and does not hold interests adverse to the estate. A creditor holds interests adverse to the estate and is not a disinterested person.⁽⁴⁾ Artus was a creditor of the debtor at the time the petition was filed. He had performed services for the debtor from February 1998 through January 1999. He was not qualified to serve as attorney for the debtor and the orders authorizing his employment were procured through misrepresentation. These orders will, accordingly, be vacated.

Further, Artus is not entitled to attorney's fees and costs for several reasons. First, as Artus cannot be employed as debtor's counsel under § 327(a), he cannot receive compensation from the estate.⁽⁵⁾ Second, his unauthorized postpetition transfer of       6 ABR 208   $4,048.14 to his firm created a potential preference claim as well as a potential claim for sanctions for violation of the automatic stay pursuant to 11 U.S.C. § 362(h). Artus has a conflict of interest between his personal stake in retaining the payment and his duties to the debtor to recover preferences and to seek sanctions against parties violating the stay. Professionals with conflicts of interest are not entitled to compensation under the Bankruptcy Code.⁽⁶⁾

Finally, attorneys who violate the Bankruptcy Code's disclosure requirements may be subject to sanctions, including disgorgement of attorney's fees. The disclosure requirements of 11 U.S.C. § 329 and Fed. R. Bankr. P. 2014 and 2016 are to be applied strictly so that the bankruptcy court can ensure that attorneys are disinterested and don't have conflicts of interest.⁽⁷⁾ "A bankruptcy court must be able to rely on the veracity of the representations made by an attorney in an application for employment."⁽⁸⁾ An attorney cannot be coy or selective about what he chooses to disclose, but must reveal all facts that may be pertinent so that the court can determine whether he is disinterested or holds a conflict.⁽⁹⁾ An attorney's failure to comply with the disclosure rules is sanctionable even where proper disclosure would have shown       6 ABR 209   that the attorney had not actually violated any provision of the Bankruptcy Code or Rules.⁽¹⁰⁾ The failure to disclose need not be willful; even a negligent or inadvertent failure to disclose may result in a denial of all fees requested by an attorney.⁽¹¹⁾ Further, the bankruptcy court has the authority to order disgorgement of attorney fees for an attorney's failure to make the required disclosures.⁽¹²⁾

Artus has violated the disclosure requirements of the Bankruptcy Code. His initial disclosures failed to disclose his firm's prepetition debt, the amount of his retainer, his postpetition payment of prepetition attorney's fees and the $157.50 payment made by the debtor in July of 1998. This failure, alone, is a sufficient basis for denial of fees and disgorgement of the attorney's fees paid postpetition. Artus's arguments to the contrary are not persuasive. He suggests that, if he had split the retainer and paid the prepetition fees at the inception of the case, there would have been no problem. However, he would still be the recipient of a potential preference and ineligible for employment. Nor is his reference to an unpublished Ninth Circuit BAP decision, In re Alaska Hosts, Inc.,⁽¹³⁾ of any assistance. There, the BAP sustained Judge Ross's disallowance of attorney's fees based in part on non-disclosure. The BAP cited Park-Helena Corp.⁽¹⁴⁾ for the proposition that a failure to disclose is sanctionable regardless of whether an attorney has violated a bankruptcy rule or statute. Here, Artus's failures to disclose are well documented and his       6 ABR 210   violations of the Bankruptcy Rules and Code are numerous. Alaska Hosts does not aid Artus. He must disgorge all fees previously received and return the balance of his retainer to the debtor.

Conclusion

William Artus engaged in a pattern of misrepresentation and deceit in this case. He obtained an order authorizing his employment knowing he was a creditor of the estate. When forced to file a disclosure statement, he knowingly violated the automatic stay, paid his prepetition bill and then covered it up in fraudulent Rule 2016(b) disclosures filed two days later. Severe sanctions are warranted. His application for fees and costs will be denied and the orders authorizing his employment will be vacated.

DATED: October 8, 1999.

BY THE COURT
DONALD MacDONALD IV
United States Bankruptcy Judge

1.       6 ABR 203   See billing statements attached to United States Trustee's addendum, filed September 21, 1999 [Docket No. 230].

2.       6 ABR 207   Fed. R. Bankr. P. 2017(b); In re Maruko, Inc., 160 B.R. 633, 637 (Bankr. S.D. Ca. 1993).

3.       6 ABR 207   Peugeot v. United States Trustee (In re Crayton), 192 B.R. 970, 976 (B.A.P. 9th Cir. 1996).

4.       6 ABR 207   11 U.S.C. § 101(14)(A).

5.       6 ABR 207   11 U.S.C. § 330(a). A debtor in possession's retention of an attorney is subject to the requirements of § 327, pursuant to 11 U.S.C. § 1107(b).

6.       6 ABR 208   In re Florence Tanners, Inc., 213 B.R. 129, 133 (Bankr. E.D.Mich. 1997); see also Woods v. City Nat'l. Bank & Trust Co., 312 U.S. 262, 268 (1941) ["Where an actual conflict of interest exists, no more need be shown in this type of case to support a denial of compensation."]; First Interstate Bank of Nevada, N.A. v. CIC Inv. Corp. (In re CIC Inv. Corp.), 175 B.R. 52, 56 (B.A.P. 9th Cir. 1994), citing In re Michigan General Corp., 77 B.R. 97, 106 (N.Tex. 1987) ["A lack of disinterestedness on the part of a professional . . . is, without any exception known to this court, a disqualifying fact."]; Hansen, Jones & Leta, P.C. v. Segal, 220 B.R. 434, 469 (D.Utah 1998); Quait v. Berger (In re Vann), 136 B.R. 863, 870-71 (D. Colo. 1992), aff'd, 986 F.2d 1431 (10th Cir. 1993).

7.       6 ABR 208   Neben & Starrett, Inc. v. Chartwell Financial Corp. (In re Park-Helena Corp.), 63 F.3d 877, 880-881 (9th Cir. 1995), cert. denied, 516 U.S. 1049 (1996).

8.       6 ABR 208   Law Offices of Nicholas A. Franke v. Tiffany (In re Lewis), 113 F.3d 1040, 1045 (9th Cir. 1997).

9.       6 ABR 208   Park-Helena, 63 F.3d at 881-882.

10.       6 ABR 209   Id. at 880.

11.       6 ABR 209   Park-Helena, 63 F.3d at 882.

12.       6 ABR 209   Lewis, 113 F.3d at 1045.

13.       6 ABR 209   Blackman v. United States Trustee (In re Alaska Hosts, Inc.), BAP No. AK-97-1420-BJO (filed May 8, 1998).

14.       6 ABR 209   63 F.3d 877 (9^th Cir. 1995).