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Counsel for Debtor filed his first fee application five years into the case seeking approval of compensation of approximately $80,000. In the fee application, Counsel disclosed for the first time that, three years prior, he had received approximately $40,000 directly from a third party non-debtor business entity in which the Debtor held an ownership interest. This compensation arrangement was not outlined in the disclosure of compensation filed with the petition and at no time thereafter did Counsel submit an amended disclosure pursuant to Section 329 and Fed. R. Bankr. P. 2016(b). In response to the Court's concerns, Counsel argued that approval of the undisclosed payments was not required because the funds were not property of the estate. Counsel also argued that the exercise of billing judgment is generally not mandatory and was not warranted in this case save for a de minimis write-off. The Court held that 1) income derived by the Debtor from his passive ownership interest in business entities was in the nature of dividends or profits and not wages for post-petition services rendered, was not excepted from property of the estate under Section 541(a)(6), and should not have been used to pay Counsel without court approval, 2) fee applicants must conduct a searching and thorough analysis to determine whether the exercise of billing judgment is necessary, 3) the exercise of billing judgment was required in this case because certain services were of marginal value or were necessitated by Counsel's own failure to meet deadlines, 4) Section 329 and Fed. R. Bankr. P. 2016(b) provide an inflexible rule requiring counsel to disclose the precise nature of the fee arrangement with the debtor and the source of compensation to be paid, regardless of whether counsel will seek approval of compensation from the estate, 5) Severe sanctions are rightly imposed for violating the duty to disclose and may require denial of all fees, and 6) Counsel did violate his duty by not disclosing the payment of $40,000 until three years after he received the funds, but since the confirmed plan provided for the payment of all claims in full and there was no apparent harm to the estate, the appropriate sanction in this instance was reduction of compensation by $10,000.

PDF File: 
Entered: 
2008-06-27
Case: 
02-56825
Judge: 
Robert A. Gordon