Bankruptcy Code Section 329(a) mandates the disclosure of an attorney’s transactions with a debtor. Federal Rule of Bankruptcy Procedure 2016(b) implements the attorney disclosure requirements contained in Bankruptcy Code Section 329(a). (See 3 Collier on Bankruptcy at 329.02 (16th ed. 2018).) Rule 2016(b) requires a debtor’s attorney to disclose the compensation that he or she has received or to disclose an agreement that he or she has made with a debtor concerning the attorney’s compensation.
Rule 2016(b) states:
“Every attorney for a debtor, whether or not the attorney applies for compensation, shall file and transmit to the United States trustee within 14 days after the order for relief, or at another time as the court may direct, the statement required by §329 of the Code including whether the attorney has shared or agreed to share the compensation with any other entity. The statement shall include the particulars of any such sharing or agreement to share by the attorney, but the details of any agreement for the sharing of the compensation with a member or regular associate of the attorney’s law firm shall not be required. A supplemental statement shall be filed and transmitted to the United States trustee within 14 days after any payment or agreement not previously disclosed. Fed. R. Bankr. P. 2016(b).”
U.S. Bankruptcy Chief Judge Cecelia Morris of the Southern District of New York has made the following comments concerning the policies underlying Rule 2016(b) in In re Ortiz, 496 B.R. 144, 148 (Bankr. S.D.N.Y. 2013):
“Disclosure of compensation pursuant to Section 329 and Rule 2016(b) is mandatory, not permissive. See e.g., In re Basham, 208 B.R. 926 (9th Cir. BAP 1997); In re Kowalski, 402 B.R. 843, 848 (Bankr.N.D.Ill.2009) (citing In re Whaley, 282 B.R. 38, 41 (Bankr.M.D.Fla.2002)); In re Bennett, 133 B.R. 374, 378 (Bankr. N.D. Tex. 1991). The Bankruptcy Code requires fee disclosure so that courts can ‘prevent overreaching by debtors’ attorneys and give interested parties the ability to evaluate the reasonableness of the fees paid.’ In re Hackney, 347 B.R. 432, 442 (Bankr. M.D.Fla.2006); In re Waldo, 417 B.R. 854, 893 (Bankr.E.D.Tenn.2009) (citing Jensen v. United States Trustee (In re Smitty’s Truck Stop), 210 B.R. 844, 848 (10th Cir. BAP 1993)). ‘[P]ayments to a debtor’s attorney provide serious potential for evasion of creditor protection provisions of the bankruptcy laws, and serious potential for overreaching by the debtor’s attorney, and should be subject to careful scrutiny.’ Hackney, 347 B.R. at 442 (quoting H.R.Rep. No. 95–595, at 329 (1977), as reprinted in 1978 U.S.C.C.A.N. 5787, 6285).”
Not only is Rule 2016(b) intended to protect debtors from unscrupulous attorneys, but also it is intended to protect creditors from attorneys who seek to evade the Bankruptcy Code’s creditor protection provisions.
Rule 2016(b) applies to all attorneys representing a debtor. (See 9 Collier on Bankruptcy at 2016.16 (16th ed. 2018).) Rule 2016(b) is applicable regardless of whether an attorney makes an application for compensation. Rule 2016(b) requires an attorney to file and transmit to the U.S. trustee a statement concerning the payments and the source of those payments that he or she has received from a debtor one year prior to the filing of a bankruptcy case. An attorney, pursuant to Rule 2016(b), is also mandated to disclose any fee sharing agreement. Rule 2016(b) imposes a continuing duty on a debtor’s attorney to disclose all compensation that he or she receives concerning a debtor. If an attorney receives a subsequent payment from a debtor, then he or she is required to file a supplemental statement disclosing the payment. Rule 2016(b), moreover, requires an attorney to disclose to the court an agreement with a debtor concerning the future payment of compensation. An attorney must file a supplemental statement within 14 days after he or she has received supplemental compensation from a debtor. Rule 2016(b) is consequential because it implements the policy of transparency, and it enables the court to monitor the fees of a debtor’s attorney.
Pursuant to Rule 2016(b), a debtor’s attorney who receives additional compensation for additional work concerning a Rule 2004 examination, a motion to modify the automatic stay, an objection to exemption, an objection to discharge, or an appeal must file a supplemental 2016(b) statement. An attorney’s supplemental disclosure is important to protect the bankruptcy process. If the debtor has alleged that he or she is destitute, then it is vital for a court to ascertain how the debtor is paying his or her attorney. Is the debtor paying the attorney with secreted assets? Has the attorney been candid with the court? In a protracted bankruptcy case it is incumbent upon the U.S. trustee, the Chapter 7 trustee, and the bankruptcy judge to ensure compliance with Rule 2016(b).
Sanctions Can Be Imposed for Violations of Rule 2016(b)
A court is empowered to impose sanctions for a violation of Rule 2016(b). (See Mapother & Mapother, P.S.C. v. Cooper (In re Downs), 103 F.3d 472, 477-78 (6th Cir. 1996); In re Shelnut, 577 B.R. 605, 610 (Bankr. S.D.Ga. 2017).) The U.S. Court of Appeals for the Sixth Circuit has made the following statements in In re Downs concerning the imposition of sanctions for a violation of Rule 2016(b):
“Bankruptcy courts, like Article III courts, enjoy inherent power to sanction parties for improper conduct. In re Rainbow Magazine, 77 F.3d 278, 283-4 (9th Cir.1996). It follows that the bankruptcy court is vested with the inherent power to sanction attorneys for breaches of fiduciary obligations. See In re Arlan’s Dep’t Stores, 615 F.2d 925, 943 (2d Cir.1979). Accordingly, ‘a failure of counsel to obey the mandate of § 329 and Rule 2016 concerning disclosure, and by implication review by the court, is a basis for entry of an order denying compensation and requiring the return of sums already paid.’ In re Chapel Gate Apartments, 64 B.R. 569, 575 (Bankr.N.D.Tex.1986); see also In re Land, 116 B.R. 798, 806 (D.Colo.1990) (citing In re Kero-Sun, 58 B.R. 770, 777-81 (Bankr.D.Conn.1986)), aff’d, 943 F.2d 1265 (10th Cir.1991).”
Another court has observed that the imposition of sanctions for a violation of Rule 2016(b) is necessary to effectuate bankruptcy policy, in In re Bonilla, 573 B.R. 368, 378 (Bankr. D.P.R. 2017):
“’In short, the Rule 2016(b) statement is an attorney’s certification on which the debtor, the court, the trustee, and the creditors rely. It is not a meaningless paper that attorneys can ignore or blithely treat as insignificant.’ In re Kowalski, 402 B.R. 843, 848 (Bankr. N.D. Ill. 2009). Accordingly, ‘[c]ourts have been ready to impose severe sanctions on professionals who fail to comply with the rules and statutory scheme governing compensation.’ Alan N. Resnick & Henry J. Sommer, 9 Collier on Bankruptcy at 2016.01 (16th ed. 2015). ‘Failure to comply with Bankruptcy Rule 2016 can provide grounds for disqualification of debtor’s counsel, disallowance of fees in whole or in part and disgorgement of fees.’ McMullen v. Schultz, 428 B.R. 4, 13 (D. Mass. 2010).”
Courts have sanctioned attorneys that have violated Rule 2016(b). See, for example, Bonilla; In re Bennett, 133 B.R. 374, 378-79 (Bankr. N.D.Tex. 1991). A case in which an attorney was sanctioned for violating Rule 2016(b) is In re Shelnut, 577 B.R. 605 (Bankr. S.D.Ga. 2017). There, counsel for the debtor failed to disclose that it had received two post-petition payments for the benefit of the debtor from a third party. The court stated:
“In this case, notwithstanding MLF’s certifications that all payments were to be made by debtor, MLF received two post-petition payments from Four Seasons totaling $6,500.00 and failed to timely amend its application and disclosure. MLF’s argument that these were actually debtor’s funds because they were loan repayments does not alter the fact that MLF failed to disclose the payments were from Four Seasons’ account, rather than debtor’s. The details of the transaction are missing. The source of these funds was initially discovered upon Pannill’s deposition of Four Seasons’ bookkeeper. Counsel’s failure to properly disclose the required information may result in its disqualification, as well as the disgorgement of fees and imposition of sanctions. In re Prince, 40 F.3d 356 (11th Cir. 1994); see generally, Collier on Bankruptcy § 2014.03 (16th ed. 2015); In re Adam Furniture Industries, 158 B.R. 291, 299 (Bankr. S.D. Ga. 1993). For MLF’s failure to fully disclose the source of these payments as well as the source of payment, the Court finds disgorgement of the $6,500.00 is appropriate. Id. at 610.”
The enforcement of Rule 2016(b) is vital for the protection of the bankruptcy process. It is incumbent upon the Office of the U.S. Trustee and Chapter 7 trustees to enforce Rule 2016(b)’s disclosure requirements.
Carlos J. Cuevas is a solo practitioner in Yonkers, New York, and a research associate at the University of Houston School of Law.