Pending before the court is the application of William D. Artus for allowance of fees and costs covering the period August, 1995, through February, 1998. Mr. Artus requests allowance of $376,282.90 in fees and $36,002.95 in costs. An objection to the motion and request for disgorgement and sanctions was filed by the United States Trustee. After Mr. Artus filed a response to the objection on August 31, 1998, and a supplement to his motion for allowance of fees and costs on September 10, 1998, the United States Trustee withdrew of its objection to his application. Having reviewed the motion, objection, reply and supplement to motion,

IT IS ORDERED:

1. Mr. Artus has received a total of $412,285.85 from the estate without obtaining prior court authorization for this compensation. This sum represents the amounts requested in his pending fee application. Because of his failure to comply with the requirements of 11 U.S.C. § 330, the sum of $9,750.00 is disallowed. Mr. Artus is required to disgorge this amount and pay it to the trustee, Kenneth Battley, within 10 days of the date of this order.

6 ABR 30      2. The balance of attorney fees and costs requested by Mr. Artus in his motion filed on June 5, 1998, is allowed. Mr. Artus is awarded fees in the sum of $366,532.90, and costs in the amount of $36,002.95, for a total award of $402,535.85.

3. Mr. Artus shall not receive any further payment of fees and costs for his services in this bankruptcy case, whether provided pursuant to the Order Granting Trustee's Motion to Employ Attorney on Contingent Fee Basis (Docket No. 1932) or the Order Authorizing

Special counsel for Chapter 7 Trustee [ Nunc Pro Tunc ] (Docket No. 2208), absent a further order of this court after proper application in accordance with 11 U.S.C. § 330, Fed. R. Bankr. P. 2016, and AK LBR 2016-1.

Discussion

On June 9, 1995, this court entered an order authorizing Mr. Artus's employment as attorney for the trustee on a contingent fee basis. ⁽¹⁾ Under the terms of the employment agreement which the trustee entered, Mr. Artus was hired to pursue the recovery of accounts receivable, contract claims, causes of action and other claims and rights to payment that arose before December 22, 1994, as well as preferences and other rights or claims to recover money paid by the debtor to third parties prior to the bankruptcy filing. Mr. Artus was employed on a contingency basis for these services, his fee being 25% of all amounts recovered prior to an appeal being perfected, and 35% of amounts recovered after appeal. In addition, Mr. Artus was to recover his reasonable and necessary expenses. The order authorizing employment on a contingent fee basis "ratified and approved" the terms of Mr. Artus's employment, but did not expressly authorize payment of his percentage fees on sums collected without prior court 6 ABR 31      approval. The employment agreement itself indicates that the trustee "agrees to pay" the contingent fee, but does not provide any mechanism for payment of the fee.

On February 9, 1996, an order was entered which authorized Mr. Artus's employment as special counsel for the trustee, nunc pro tunc to March 29, 1995. ⁽²⁾ His services as special counsel included review and investigation of the trustee's right to recover payments made to chapter 11 professionals, and providing assistance to the trustee in collecting prepetition accounts receivable and contract claims. For these services, Mr. Artus was to receive compensation on an hourly basis.

An order approving Mr. Artus's first interim application for fees and costs as special counsel for the trustee was entered March 21, 1996. ⁽³⁾ In that order, it was noted that Mr. Artus was "wearing two hats in this case" and that it appeared some of the fees and costs billed were more appropriately charged under the contingency fee arrangement. To avoid confusion in the future and assure that services or costs were not charged to the estate twice, Mr. Artus was directed to maintain 2 sets of records, one listing his services as special counsel and the other containing his services under the contingent fee arrangement.

Mr. Artus filed a second interim application for allowance of fees and costs incurred as special counsel for the trustee on June 27, 1997. ⁽⁴⁾ This application was partially approved on August 6, 1997. ⁽⁵⁾ The court was unaware that Mr. Artus had received compensation from the trustee under the contingent fee arrangement until late April, 1998, in conjunction with its review of another professional's fee application. A status conference to clarify the 6 ABR 32      trustee's compensation arrangement with Mr. Artus was scheduled for June 2, 1998. ⁽⁶⁾ Mr. Artus filed the pending application for allowance of the compensation he had collected under the contingent fee arrangement the same day the status conference was held.

A bankruptcy judge has an independent duty to review fee applications. ⁽⁷⁾ Even in instances where a professional is retained on a contingency fee basis, the professional is still required to make application for allowance and payment of his fees, and the fees remain subject to the court's review under 11 U.S.C. § 330. ⁽⁸⁾ "The only procedural requirement established by section 330 is that an award of compensation be preceded by notice to any parties in interest and to the United States trustee and by a hearing." ⁽⁹⁾ Even though Mr. Artus's contingent fee arrangement was approved pursuant to § 328, he was still employed as an attorney for the trustee pursuant to § 327, and thus still subject to the requirements of § 330. ⁽¹⁰⁾ A professional is not entitled to receive compensation absent compliance with the requirements of the Bankruptcy Code and Rules. ⁽¹¹⁾

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 6 ABR 33      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. ⁽¹²⁾

Mr. Artus has received more than $400,000.00 from the bankruptcy estate without receiving prior court approval. He explains that this was simply a mistake; that he has never represented a trustee before on a contingency fee basis in a bankruptcy case, and that both he and the trustee believed that no special authorization to receive his fee was required since the contingency fee agreement had been approved. He argues that when a professional is employed under § 328, the terms of his employment cannot be modified except under the conditions stated in that section, specifically, "if such terms and conditions prove to have been improvident in light of developments not capable of being anticipated at the time of the fixing of such terms and conditions." ⁽¹⁴⁾ He cites In re Confections by Sandra, Inc., ⁽¹⁵⁾ in support of this argument. That case is distinguishable, because there the professional did move for approval of his fees prior to their receipt.

In reviewing Mr. Artus's fee application, I am not seeking to alter the terms of his contingency employment. However, Mr. Artus is an experienced bankruptcy attorney. He 6 ABR 34      has done a substantial amount of trustee work and is aware of the requirements of §§ 327 and 330. Even so, this is not the first instance in this case where he has failed to follow the Code's requirements. He neglected to obtain approval for his employment as special counsel for the trustee prior to rendering services to the trustee in that capacity as well, and had to seek nunc pro tunc approval of that employment. ⁽¹⁶⁾ To the best of my knowledge, all other professionals who have received compensation in this case, even those retained on a contingency basis, have moved for approval of their fees prior to receipt. Mr. Artus must also do so. Compliance with the requirements of § 330 is not a matter of convenience.

Mr. Artus has recovered in excess of $1.5 million for the estate. Further, the fees and costs he seeks in the pending application are within the terms of his contingency arrangement with the trustee. Finally, unlike the situations in Lewis or Park-Helena, where the attorneys being sanctioned had made misrepresentations to the court, Mr. Artus has made no attempt to conceal his receipt of compensation from the trustee. ⁽¹⁷⁾ The payments have all been itemized on the trustee's interim reports. Therefore, though I feel some sanction for Mr. Artus's non-compliance with the Code is appropriate, disgorgement of all fees would be too harsh a penalty. I have reviewed the trustee's interim reports which have been filed in this case. These reports reflect that Mr. Artus received compensation on a contingency basis, without receiving 6 ABR 35      prior court approval, 39 times between November 29, 1995, and March 20, 1998. ⁽¹⁸⁾ Each date on which Mr. Artus received a payment or payments without prior court approval will be treated as one violation of the Code. A sanction of $250.00 will be imposed for each violation, for a total of $9,750.00. This sum will be deducted from the fees which Mr. Artus has requested, leaving a balance of $366,532.90. Mr. Artus's fees will be allowed in the amount of $366,532.90, and his costs will be allowed in the sum of $36,002.95, for a total award of $402,535.85. As Mr. Artus has already received the sum of $412,285.85, he shall disgorge the sum of $9,750.00 and may retain the balance. No further compensation may be received by Mr. Artus from this estate, either as special counsel or on a contingency fee basis, without full compliance with 11 U.S.C. § 330 and prior court approval.

DATED: November 30, 1998.
BY THE COURT

DONALD MacDONALD IV

United States Bankruptcy Judge

1. 6 ABR 30 Docket Entry 1932.

2. 6 ABR 31 Docket Entry 2208.

3. 6 ABR 31 Docket Entry 2223.

4. 6 ABR 31 Docket Entry 2450.

5. 6 ABR 31 Docket Entry 2467.

6. 6 ABR 32 Docket Entry 2569.

7. 6 ABR 32 Lobel & Opera v. United States Trustee (In re Auto Parts Club, Inc.), 211 B.R. 29, 33 (B.A.P. 9th Cir. 1997);In re Maruko, Inc., 160 B.R. 633, 637 (Bankr. S.D. Ca. 1993).

8. 6 ABR 32 Pitrat v. Reimers (In re Reimers), 972 F.2d 1127 (9th Cir. 1992); Seiler v. First Nat'l Bank of Babbitt (In re Benassi), 72 B.R. 44, 47 (D. Minn. 1987); 3 Collier on Bankruptcy ¶ 328.02 [ 1 ] [ f ] at 328-17 (Lawrence P. King ed., 15th ed. revised 1997).

9. 6 ABR 32 3 Collier on Bankruptcy ¶ 330.02 at 330-7.

10. 6 ABR 32 Section 328(a) provides that " [ t ] he trustee, . . . , with the court's approval, may employ or authorize the employment of a professional person under section 327 or 1103 of this title, as the case may be, on any reasonable terms and conditions . . ." Section 330(a) requires professionals employed under § 327 to make application for approval of their compensation, even where the terms for such compensation have previously been approved under § 328.

11. 6 ABR 32 3 Collier on Bankruptcy ¶ 330.02 [ 1 ] [ c ] .

12. 6 ABR 33 Law Offices of Nicholas A. Franke v. J. K. Tiffany (In re Lewis), 113 F.3d 1040, 1045 (9th Cir. 1997) [ citations omitted ] .

13. 6 ABR 33 Neben & Starrett, Inc. v. Chartwell Financial Corp. (In re Park-Helena Corp.), 63 F.3d 877, 880 (9th Cir. 1995).

14. 6 ABR 33 11 U.S.C. § 328(a).

15. 6 ABR 33 83 B.R. 729 (B.A.P. 9th Cir. 1987).

16. 6 ABR 34 Mr. Artus's first interim application for fees as special counsel was filed January 25, 1996 (Docket No. 2198). This application covered fees for services rendered from March 14, 1995 through December 31, 1995. An order authorizing Mr. Artus's employment as special counsel was entered February 9, 1996 (Docket No. 2208), eleven months after he first provided services to the trustee in that capacity.

17 .6 ABR 34 In Park-Helena, 63 F.3d 877, Ninth Circuit upheld the bankruptcy court's denial of all fees and costs ($74,497.30) requested by attorneys for a chapter 11 debtor. The attorneys had willfully misrepresented the source of a prepetition retainer. In Lewis, 113 F.3d 1040, an attorney was required to disgorge $37,000 it had received as a prepetition retainer because he had misrepresented to the court the dates on which he had received the retainer. He had disclosed a $40,000 retainer, but had received only $10,000 of it prepetition.

18. 6 ABR 35 This information was compiled from the Trustee's Interim Reports filed January 7, 1995, June 19, 1996, December 6, 1996, June 9, 1997, December 3, 1997, and June 15, 1998 (Docket Entries 2155, 2256, 2353, 2443, 2492 and 2594).