Update on Possible Hacker Attack

After the PACER  and CM/ECF outage on Friday January 24, I asked the PACER service center if they had any comment.   They were kind enough to respond on January 27.   Here is the latest information: 

On Friday January 24th, PACER and a number of other federal judiciary web sites, experienced a denial of service attack.  The attack resulted in a loss of service for about four hours Friday afternoon. No judiciary records were compromised during the attack. Because the Electronic Case Filing system was not operational in some courts during this period, attorneys should contact their local courts with regard to any filing deadline issues that may have arisen.

According to Wikipedia, a denial of service attack is "an attempt to make a machine or network resource unavailable to its intended users."    Wikipedia further explained that:

One common method of attack involves saturating the target machine with external communications requests, so much so that it cannot respond to legitimate traffic, or responds so slowly as to be rendered essentially unavailable. Such attacks usually lead to a server overload. In general terms, DoS attacks are implemented by either forcing the targeted computer(s) to reset, or consuming its resources so that it can no longer provide its intended service or obstructing the communication media between the intended users and the victim so that they can no longer communicate adequately.

According to ZDnet.com, a group calling itself the European Cyber Army has claimed responsibility.   The ZDnet.com article also suggested that the system could have gone down due to a technical glitch instead.   

So at this time, we have two possibilities for what might have happened and one potential culprit but no motive so far.   

Who Knocked Out PACER/ECF???

On Friday January 24, 2014, attorneys trying to access the federal courts' electronic records and filing systems were unable to get through for almost four hours.   While occasional local outages for maintenance or technical problems are not unknown, there is some reason to believe that the PACER and ECF systems for the entire federal court system were taken down by hackers.   This raises questions of who was behind the hack and why they targeted the federal court system.

Here is what I have been able to piece together.   At approximately 2:45 p.m. CST, I attempted to access both the Western District of Texas and Southern District of Texas Bankruptcy PACER sites to look up some filings.   I received a message stating that the website was not available and to check whether I had spelled it right.  After multiple tries, I was not able to get through.

At 2:54 p.m. CST, I received an email from the Northern District of Georgia Bankruptcy Court stating:

Initial reports are indicating that a Hacker group is impacting PACER access for all U. S. Courts.  Another email will be sent when full access has been restored.

At 3:33 p.m. CST, I received an email from the Western District of Texas Bankruptcy Court stating:

The Case Management / Electronic Case Files System and the court website for the U. S. Bankruptcy Court of the Western District of Texas is currently UNAVAILABLE due to a network problem at the national level.  The problem is being worked on.  You will be notified when it is once again available.

We apologize for the inconvenience.

As the afternoon wore on, various other reports came in.   However, other than the initial report from the Northern District of Georgia, none mentioned the specter of hacking.

At 6:34 p.m. CST, I received a notification of a filing by another attorney.   Thus, it looks like the system was down from approximately 2:45 p.m. to 6:30 p.m. CST, an outage of nearly four hours.

As of this morning, the website for the U.S. Courts did not have any explanation for the outage, although it did feature a story entitled "Working Group Seeks Ways to Pull Plug on Cybercrime."   

Back in 2009, Wire.com reported that hackers had engineered a way to go around PACER's pay wall and get documents without payment.  However, I was not able to find any reliable reports of prior hacking attacks on both PACER and ECF.  

Having been mildly inconvenienced and perturbed by this possible hacking incident, I am curious at to whether we will learn more about what happened.   Who was behind this?   What was their motive?   Was this done by someone with a grudge against the court system or was it simply a case of teens with too much time on their hands?   

From what I can surmise, this was simply a denial of service attack and not an attempt to access and manipulate PACER or ECF data.   However, this should be a warning to the administrative office of the courts that someone could attempt a more audacious attack in the future.   That would be bad.

To the person or persons who did this, with apologies to Pink Floyd:

We don't need no electronic frustration

We don't need no nasty troll

No dark sarcasm on the internet

Hey hackers, leave CM/ECF alone!

9th Circuit Gives Some Protection to Both Bloggers and Trustees

The case of self-proclaimed "investigative blogger" Crystal Cox took another turn as the Ninth Circuit reversed and remanded the case against her.   The decision gives greater First Amendment protection to bloggers than the stingy view taken by the District Court.   However, it also recognizes that trustees are not public figures entitled to less deferential review.   The case is Cox v. Obsidian Finance Group, No. 12-35238 (9th Cir. 1/17/14), which can be found here.    I have previously blogged about the case here and here.

What Happened

Since I have already written extensively about the case, I will just quote the Ninth Circuit's excellent summation of what happened here.

Kevin Padrick is a principal of Obsidian Finance Group, LLC (Obsidian), a firm that provides advice to financially distressed businesses. In December 2008, Summit Accommodators, Inc. (Summit), retained Obsidian in connection with a contemplated bankruptcy. After Summit filed for reorganization, the bankruptcy court appointed Padrick as the Chapter 11 trustee. Because Summit had misappropriated funds from clients, Padrick’s principal task was to marshal the firm’s assets for the benefit of those clients.

After Padrick’s appointment, Crystal Cox published blog posts on several websites that she created, accusing Padrick and Obsidian of fraud, corruption, money-laundering, and other illegal activities in connection with the Summit bankruptcy. Cox apparently has a history of making similar allegations and seeking payoffs in exchange for retraction. See David Carr, When Truth Survives Free Speech, N.Y. Times, Dec. 11, 2011, at B1. Padrick and Obsidian sent Cox a cease-and-desist letter, but she continued posting allegations. This defamation suit ensued.

The district court held that all but one of Cox’s blog posts were constitutionally protected opinions because they employed figurative and hyperbolic language and could not be proved true or false. Obsidian Fin. Grp., LLC v. Cox, 812 F. Supp. 2d 1220, 1232–34 (D. Or. 2011). The court held, however, that a December 25, 2010 blog post on bankruptcycorruption.com made “fairly specific allegations [that] a reasonable reader could understand . . . to imply a provable fact assertion”—i.e., that Padrick, in his capacity as bankruptcy trustee, failed to pay $174,000 in taxes owed by Summit. Id. at 1238. The district judge therefore allowed that single defamation claim to proceed to a jury trial. The jury found in favor of Padrick and Obsidian, awarding the former $1.5 million and the latter $1 million in compensatory damages.

Opinion, pp. 3-4.

After trial, noted First Amendment scholar Eugene Volokh (who contributes to the excellent Volokh Conspiracy blog) agreed to represent Ms.Cox on a pro bono basis.  She also drew high-powered amicus support from the Reporters Committee for Freedom of the Press and Scotusblog.com.  

The Issues on Appeal

The First Amendment is an interesting thing.   It allows anyone to say almost anything without prior restraint from the government.   However, that does not mean that free speech is free of consequences.   However, whether speech can be punished as defamatory depends on both the situation of the speaker and the identity of the person spoken about.  As explained by the Court of Appeals:

The Supreme Court’s landmark opinion in New York Times Co. v. Sullivan began the construction of a First Amendment framework concerning the level of fault required for defamation liability. 376 U.S. 254. Sullivan held that when a public official seeks damages for defamation, the official must show “actual malice”—that the defendant published the defamatory statement “with knowledge that it was false or with reckless disregard of whether it was false or not.” Id. at 280. A decade later, Gertz v. Robert Welch, Inc., held that the First Amendment required only a “negligence standard for private defamation actions.” 418 U.S. 323, 350 (1974). This case involves the intersection between Sullivan and Gertz, an area not yet fully explored by this Circuit, in the context of a medium of publication—the Internet—entirely unknown at the time of those decisions.

 Opinion, pp. 8-9.

Crystal Cox had argued that she was entitled to be protected under the First Amendment but the District Court would have none of it.  It instructed the jury that “Defendant’s knowledge of whether the statements at issue were true or false and defendant’s intent or purpose in publishing those statements are not elements of the claim and are not relevant to the determination of liability.”   According to the District Court, Cox's speech did not relate to a matter of public concern because she did not meet the traditional definition of a journalist.   Among other things, she was not trained as a journalist, did not interview sources and did not seek to present both sides of a story.   The District Court also held that Padrick would not have been thrust into public controversy but for Cox's posts about him.

The Court of Appeals summarized Cox's position on appeal as:

Cox does not contest on appeal the district court’s finding that the December 25 blog post contained an assertion of fact; nor does she contest the jury’s conclusions that the post was false and defamatory. She challenges only the district court’s rulings that (a) liability could be imposed without a showing of fault or actual damages and (b) Padrick and Obsidian were not public officials.

Opinion, p. 7. 

The Ninth Circuit's Ruling

The Ninth Circuit conclusively rejected the argument that the institutional media is entitled to greater protection under the First Amendment than other speakers.   It quoted the recent Citizens United decision for the proposition that

We have consistently rejected the proposition that the institutional press has any constitutional privilege beyond that of other speakers.

Citizens United v. Federal Election Commission, 558 U.S. 310, 352 (2010).

The Court concluded that the professional media were not entitled to greater protection than anyone else so that the identity of the speaker was constitutionally irrelevant.  Instead, the critical issues were whether the plaintiff was a public figure and whether the speech related to a matter of public concern.

The protections of the First Amendment do not turn on whether the defendant was a trained journalist, formally affiliated with traditional news entities, engaged in conflict-of-interest disclosure, went beyond just assembling others’ writings, or tried to get both sides of a story. As the Supreme Court has accurately warned, a First Amendment distinction between the institutional press and other speakers is unworkable: “With the advent of the Internet and the decline of print and broadcast media . . . the line between the media and others who wish to comment on political and social issues becomes far more blurred.” Citizens United, 558 U.S. at 352. In defamation cases, the public-figure status of a plaintiff and the public importance of the statement at issue—not the identity of the speaker—provide the First Amendment touchstones. 

We therefore hold that the Gertz negligence requirement for private defamation actions is not limited to cases with institutional media defendants.

Opinion, pp. 11-12.

Having reached this conclusion, the Court still had to analyze whether Cox's speech was in fact related to a matter of public concern and whether Padrick was a public figure.   The Court had little difficulty ruling for Cox on the first issue.

The December 25 post alleged that Padrick, a court appointed trustee, committed tax fraud while administering the assets of a company in a Chapter 11 reorganization, and called for the “IRS and the Oregon Department of Revenue to look” into the matter. Public allegations that someone is involved in crime generally are speech on a matter of public concern. (citations omitted). This court has held that even consumer complaints of non-criminal conduct by a business can constitute matters of public concern. (citations omitted). Cox’s allegations in this case are similarly a matter of public concern. Padrick was appointed by a United States Bankruptcy Court as the Chapter 11 trustee of a company that had defrauded its investors through a Ponzi scheme. That company retained him and Obsidian to advise it shortly before it filed for bankruptcy. The allegations against Padrick and his company raised  questions about whether they were failing to protect the defrauded investors because they were in league with their original clients.

Opinion, pp. 13-14.

However, the Court did support the trustee on the public figure issue.

Although bankruptcy trustees are “an integral part of the judicial process,” (citation omitted), neither Padrick nor Obsidian became public officials simply by virtue of Padrick’s appointment. Padrick was neither elected nor appointed to a government position, and he did not exercise “substantial . . . control over the conduct of governmental affairs.” (citation omitted). A Chapter 11 trustee can be appointed by the bankruptcy court for cause or when the best interests of the estate or creditors dictate. (citation omitted). But, an appointed trustee simply substitutes for, and largely exercises the powers of, a debtor-in-possession. (citation omitted). No one would contend that a debtor-in-possession has become a public official simply by virtue of seeking Chapter 11 protection, and we can reach no different conclusion as to the trustee who substitutes for the debtor in administering a Chapter 11 estate.

 We also reject Cox’s argument that Padrick and Obsidian were “tantamount to public officials” because they received compensation from the court for their efforts. In Gertz, the Supreme Court held that there is “no such concept” as a “de facto public official,” (citation omitted), and that a lawyer who had served briefly on several housing committees appointed by the mayor of Chicago, but who had never held “any remunerative governmental position,” could not be considered a public official. Id. Bankruptcy trustees do not receive remuneration from the government. Their compensation is drawn from the assets of the Chapter 11 estate they administer. (citation omitted). They are not rendered public officials by virtue of that compensation, any more than is an expert witness compensated by the estate.

 Opinion, pp. 15-16.  

Finally, the Court affirmed the District Court's ruling that Cox's most outrageous and inflammatory statements were non-actionable.

Padrick and Obsidian argue on cross-appeal that the district court erred in granting Cox summary judgment as to her other blog posts. Among other things, those posts accuse Padrick and Obsidian of engaging in “illegal activity,” including “corruption,” “fraud,” “deceit on the government,” “money laundering,” “defamation,” “harassment,” “tax crimes,” and “fraud against the government.” Cox also claimed that Obsidian paid off “media” and “politicians” and may have hired a hit man to kill her.

In Milkovich v. Lorain Journal Co., the Supreme Court refused to create a blanket defamation exemption for “anything that might be labeled ‘opinion.’” (citation omitted). This court has held that “while ‘pure’ opinions are protected by the First Amendment, a statement that ‘may . . . imply a false assertion of fact’ is actionable.” (citation omitted). We have developed a three-part test to determine whether a statement contains an assertion of objective fact. (citation omitted). The test considers “(1) whether the general tenor of the entire work negates the impression that the defendant was asserting an objective fact, (2) whether the defendant used figurative or hyperbolic language that negates that impression, and (3) whether the statement in question is susceptible of being proved true or false.”(citation omitted).

As to the first factor, the general tenor of Cox’s blog posts negates the impression that she was asserting objective facts. The statements were posted on obsidianfinancesucks.com, a website name that leads “the reader of the statements [to be] predisposed to view them with a certain amount of skepticism and with an understanding that they will likely present one sided viewpoints rather than assertions of provable facts.” (citation omitted) The district judge correctly concluded that the “occasional and somewhat run-on[,] almost ‘stream of consciousness’-like  sentences read more like a journal or diary entry revealing [Cox’s] feelings rather than assertions of fact.” (citation omitted).

As to the second factor, Cox’s consistent use of extreme language negates the impression that the blog posts assert objective facts. Cox regularly employed hyperbolic language in the posts, including terms such as “immoral,” “really bad,” “thugs,” and “evil doers.” Id. (quoting blog posts). Cox’s assertions that “Padrick hired a ‘hit man’ to kill her” or “that the entire bankruptcy court system is corrupt” similarly dispel any reasonable expectation that the statements assert facts.

And, as to the third factor, the district court correctly found that, in the context of a non-professional website containing consistently hyperbolic language, Cox’s blog posts are “not sufficiently factual to be proved true or false.” (citation omitted).

Opinion, pp. 16-17.

What It Means

Part 1--The Founding Fathers Would Be Pleased

I have quoted large portions of the opinion because I think that Judge Hurwitz wrote a masterful opinion and said it better than I could have.   In my view, this opinion is an important contribution to First Amendment jurisprudence in the internet age.   The District Court's ruling appeared to be based on the elitist construct that only the professional media are entitled to speak on matters of public concern.   It is my belief that the founding fathers, who were well acquainted with the pamphleteering of citizen journalists, would have been appalled at the District Court's attempt to distinguish between speakers instead of speech.    In case I haven't been entirely clear, the Ninth Circuit corrected an egregiously misbegotten ruling from the lower court.

Part 2--Who Is a Public Figure?

The Court's ruling on who is a public figure is interesting.   Previously I did not think that public figure was synonymous with public official.   However, it is something that I have wondered about.  A few years back there was a case from Austin that suggested the issue.   Franco v. Cronfel, 311 S.W.3d 600 (Tex. App.--Austin, 2010, no pet.) is an intriguing case that does not quite get there.   In that case, an attorney was appointed as a state court receiver.   The judgment creditor became disenchanted with the receiver's performance and posted a report on a site called the Ripoff Report.   On motion for summary judgment, State District Judge Scott Jenkins held that the receiver was a public figure, but denied the defendant's motion that there was no evidence of actual malice.   The Court of Appeals affirmed the summary judgment ruling that actual malice had not been negted but found that it lacked jurisdiction over the appeal of the public figure ruling.   Because the court of appeals assumed that the receiver was a public figure for purposes of appeal but did not ultimately reach the issue, the case is intriguing but not substantive. 

In my view, a person does not become a public figure merely by being appointed trustee of a bankruptcy case.    However, I think that a trustee or other court-appointed official could become a public figure based on either the importance of the case or the trustee's efforts to seek the limelight.  To paraphrase Shakespeare, some are born public figures, some achieve public figure status and some have public figure status thrust upon them.   Attorneys are shameless self-promoters.    When an attorney or a trustee gets a really big case, it is human nature to want to proclaim it to the world since media exposure is free marketing.   In other cases, the trustee finds himself participating in a case of such public importance that he becomes a public figure whether he wants to or not.  In my view, Irving Picard is an example of both.    As the trustee for Bernard L. Madoff Investment Securities, LLC, Mr. Picard became a player in one of the largest scandals of our time.  According to the Huffiington Post,

A little more than two years into the job, the 69-year-old Picard, who was plucked from obscurity to recover the money, has become America's most unlikely celebrity lawyer, and perhaps its most underrated.

While Mr. Picard may not have consciously sought public figure status, any time you can be described as "America's most unlikely celebrity lawyer," you are one. 

Part 3--Hyperbole and Defamation

Finally, the court's discussion of the difference between defamation and hyperbole, while legally correct, is sadly ironic.   What it says is that if you are going to attack someone, the more outrageous and unprovable your statements are, the less likely it is that someone could successfully file a defamation suit against you.

An example.   Let's say that I have a case with bankruptcy trustee Ron Satija and get mad at him.  I post the following statement on my blog:

Ron Satija is an arrogant snot of a trustee who uses his East Coast education to oppress anyone he considers to be his social inferior.   The elitist indoctrination he received at Columbia serves him well in destroying the lives of ordinary Texas citizens.

In this example, the only factual statements are that Ron Satija is a trustee and that he was educated at Columbia which is on the East Coast.   The rest is hyperbole and opinion.   The factual statements are indisputably true because Ron is a trustee and he did attend Columbia.   While the remaining content is calculated to make people think bad things about Ron Satija, they are protected under the First Amendment.
On the other hand, assume I said:

At a 341 meeting on January 23, 2014, bankruptcy Trustee Ron Satija told debtor John Smith, "You are an ignorant cowturd who attended Texas A & M University.  Therefore, I shall object to your discharge."

At this point, I have made a factually provable statement.   There either was a 341 meeting held for John Smith or there was not.   The statement was either made or it was not.   While the statement conveys the same sentiment as before, it is now making an assertion of objective fact.

I guess that the lesson is that while we must all suffer the slings and arrows of outrageous fate, we can only sue if those arrows are tipped with factually verifiable statements.

Note:  Ron Satija is neither an arrogant snot nor an East Coast elitist.   He is a well-mannered and gracious individual.   I used Ron as an example because he is a friend and fellow blogger.   You should check out his blog at www.spirituallybankrupt.com.  

Fifth Circuit Reverses Excessive “Disgorgement” Remedy in Case Which (Also) Applied Pro-Snax to Chapter 13 Case

Finding that 11 U.S.C. §329(b) limited the court to disgorgement of the actual amount received, the Fifth Circuit has reversed the most draconian penalties assessed against an attorney who represented a former chapter 13 debtor.   However, the portions of the case that were not appealed raise serious questions. The case is Baker v. Cage, No. 12-41125 (5^th Cir. 12/16/13), which can be found here.

What Happened

James Glen Whitley (Debtor or Whitley) filed a pro se chapter 13 bankruptcy in 2008 in an attempt to save his rental properties.  At the court’s urging, he engaged counsel.   The lawyer he hired was Reese Baker (Baker), an attorney who is board certified in both consumer and business bankruptcy.   During the 2008 case, Whitley paid Baker a retainer of $1,800.   Baker did not seek court approval for this payment and did not file a disclosure of compensation until much later.   Baker was not able to salvage the 2008 case and it was dismissed without objection on March 4, 2009.   After the case was dismissed, Baker filed a fee application but withdrew it after several parties objected.

On April 6, 2009, Whitley paid Baker an additional $10,274.00 consisting of $10,000 to be applied against the fees from the 2008 case and $274.00 to pay the filing fee on the new case.   The next day, on April 7, 2009, Baker filed a second chapter 13 case for Whitley.   After Whitley unsuccessfully filed five plans, the 2009 case was dismissed with prejudice on July 20, 2009.

This is where it gets interesting.  

• First, Baker moved for reconsideration on whether the dismissal should be with or without prejudice. 
• Second, on August 3, 2009, Baker filed a fee application.
• Third, on August 27, 2009, Whitley deeded two properties to an affiliate of Baker in partial payment of fees owed.    At the time the properties were transferred to Baker’s affiliate, they were posted for foreclosure.   On September 1, 2009, Baker’s agent appeared at the foreclosure sale and was the successful bidder for the properties.
• Fourth, on September 29, 2009, five months after the 2009 case was filed, Baker filed his disclosure of compensation for the 2009 case.    He did not disclose the transfer of the two properties.

This set the stage for a hearing on October 6, 2009.   At the hearing, Baker attempted to withdraw both the motion for reconsideration and the fee application.   At this hearing, there was testimony about the transfer of the two properties.   Judge Wesley Steen vacated his prior order of dismissal and instead converted the case to chapter 7.   Lowell Cage was appointed as chapter 7 trustee.

The Trustee filed an adversary proceeding against Baker.   However, Judge Steen denied a motion for summary judgment.

At this point, Judge Steen retired and Judge Jeff Bohm took over the case.   On February 2, 2011, Judge Bohm issued a Show Cause Order to determine the reasonable value of the services provided by Baker pursuant to 11 U.S.C. Sec. 329(b).

The Bankruptcy Court Ruling

The Court held hearings on six days between April 8, 2011 and September 15, 2011.   By this time, Whitley had been sentenced to life in prison for sexual assault of a minor.   He also had his discharge denied.   

On November 21, 2011, the Court released its opinion, which can be found here.   The Court found that Baker should disgorge all compensation received in the 2008 and 2009 cases because:

•  He did not file timely disclosures of compensation.
• He received a post-petition payment in the 2008 case without court approval.
• He failed to disclose “all connections that he, or any entity with which he is affiliated, had relating to any party in interest in the Debtor’s case.”
• He did not disclose transfer of the two properties.
• He did not provide an “identifiable, tangible and material the Debtor or the Chapter 13 estate.    That’s right, Judge Bohm applied Pro-Snax to fees in a chapter 13 case.

Judge Bohm ordered Baker to return the money that he received from the Debtor in the amount of $12,074 and to transfer the two properties that he purchased at foreclosure to the estate.

The Fifth Circuit Ruling

Baker did not appeal the ruling with respect to disgorgement of the monies received from the Debtor.   However, he did appeal the order requiring him to transfer the properties.   

The Fifth Circuit reversed and remanded.    It found that the Court had ordered Baker to show cause why “any compensation previously paid” should be disgorged, but exceeded this remedy when it ordered that the properties be disgorged.  Because Baker had satisfied $98,775 in liens against the properties, the Court not only ordered disgorgement but an additional penalty of nearly one hundred thousand dollars.    The Fifth Circuit noted that the Bankruptcy Court did not address the payment of $98,775 in its order, did not value the properties at the time they were transferred and did not value them at the time that they were ordered returned.    

Nevertheless, the Fifth Circuit did hold out the possibility that additional sanctions could be imposed if proper procedures were followed but cautioned that any sanction should be awarded with restraint and discretion.   The Court stated:

The bankruptcy court has authority to impose disciplinary sanctions on attorneys beyond the return of compensation, but the amount of the sanction imposed is essential to a bankruptcy court’s sanction analysis because “[w]hen a court metes out a sanction, it must exercise such power with restraint and discretion.” (citation omitted). Although a $98,775 sanction may have been appropriate considering Baker’s conduct as adverted to in these proceedings (e.g. Baker’s “ill-gotten gains” and his “nasty habit of non-disclosure”), in order to ensure that a sanction is “chosen to employ the least possible power to the end proposed,” the bankruptcy court must in the first instance compare the sanction amount to the sanctioned party’s conduct. (citation omitted).

 Opinion, pp. 11-12.

Lessons Learned

The first lesson to be learned from this case, as in all bankruptcies, is DISCLOSE, DISCLOSE, DISCLOSE.  Baker got in trouble because he waited to file his disclosure of compensation until after the cases were dismissed.   The rules require that it be filed within fourteen days after the petition is filed.   While the information contained within the disclosure of compensation was apparently contained within the Statement of Financial Affairs, the attorney had an obligation to make his own disclosure in a required filing under his own signature.  Furthermore, when the case was reinstated, he should have amended his disclosure to reflect the properties transferred to him.  Making timely disclosure of compensation is an important practice point.  I have seen judges penalize attorneys who filed accurate but tardy disclosures under circumstances much less egregious than here.   Be forewarned that this judges and trustees can be expected to look carefully for attorney disclosures.

The other unfortunate lesson that Mr. Baker learned was that it’s not over until it’s over.   After the 2009 case was dismissed with prejudice, the Court would have lost the ability to police post-dismissal payments to the attorney.   However, because Baker sought to temper the Court’s order by seeking reconsideration of the “with prejudice” aspect, the Court arguably retained jurisdiction and this allowed bad things to happen to him.   No doubt Baker viewed the properties as of no value to the debtor or the estate because of the pending foreclosure.   However, because the Court unwound its dismissal order, the properties arguably reverted to their status as property of the estate.    With the benefit of 20/20 hindsight, Baker either should not have sought reconsideration of the court’s order or should not have accepted property from his client.   

Things That Are Sort of Disturbing About This Case

Besides the obvious, glaring problem that was corrected by the Fifth Circuit, there are several other aspects of this case which are disturbing to this author.   

First, what authority did the Bankruptcy Court have to convert the case to chapter 7?   Baker filed a motion to reconsider whether the dismissal order should be with prejudice.   The Chapter 13 Trustee filed a response which contended that dismissal with prejudice was proper.    Prior to the hearing, Baker filed a Motion to Withdraw his Motion for Reconsideration.   Once Baker withdrew his motion and no other party had requested affirmative relief, there should not have been a live case or controversy for the Court to hear.   Nevertheless, the Court proceeded to conduct a hearing and enter relief.   In its ruling, the Court did not give any justification for the relief it was granting.   Thus, while I am willing to be proven wrong, it sure looks like the Court granted sua sponte relief in a situation where there was not a live controversy before it.   

Next, what was Judge Bohm thinking when he referred to the obligation of a chapter 13 debtor’s attorney to disclose all connections?    The requirement to disclose connections is contained in Fed.R.Bankr.P. 2014(a).   This rule only applies to applications for employment of a professional by the bankruptcy estate.   A chapter 13 debtor’s lawyer is not a professional employed by the estate.    If you compare section 327 with section 330, you will notice that professionals employed by the estate must be formally employed while compensation may be awarded to estate professionals as well as debtor’s attorneys in cases under chapters 12 and 13.   The obvious conclusion is that chapter 12 and 13 debtor’s attorneys do not represent the estate and need not be employed.    Nevertheless, Judge Bohm cited chapter 11 case law for the proposition that the chapter 13 debtor’s attorney had an obligation to make the disclosures required by rule 2014(a).   I do not understand this ruling.

Even More Cause for Concern

Finally, and most disturbingly, the Court applied the Pro-Snax standard to the debtor’s attorney in a chapter 13 case.    Although the order to show cause was issued under section 329(b), the Court applied section 330(a) to deny compensation.    This appears questionable since sections 329 and 330(a) are quite different sections. 

 

Section 329 allows the court to examine “compensation paid or agreed to be paid” within one year before the filing of the case “in contemplation of or in connection with the case.”   The Court has the ability to order the return of compensation if “such compensation exceeds the reasonable value of such services.”    Section 329 serves two important purposes.   First, it is a consumer protection statute protecting clients from being overcharged by attorneys.   It also protects the interest of the creditors by ensuring that debtors do not transfer property to their attorney to keep it out of the estate.   The legislative history to section 329 expresses this purpose:

Payments 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.

On the other hand, section 330 allows compensation to “officers” of the estate for services provided during the bankruptcy.    The statute allows compensation to attorneys representing individual chapter 12 and 13 debtors for “representing the interests of the debtor in connection with the bankruptcy case.”     The standard for allowing compensation to officers of the estate is “reasonable compensation for actual, necessary services,” while the standard for chapter 12 and 13 debtor’s attorneys is “reasonable compensation . . . based on a consideration of the benefit and necessity of such services to the debtor and the other factors set forth in this section.”

In addition to these more general statements, section 330 includes six factors to be included in awarding compensation and two factors to be considered in denying compensation.   See 11 U.S.C. Sec. 330(a)(3) and (4).   To further complicate things, the Fifth Circuit has added a judicial gloss (which may or may not contradict the statutory language as well as other language within the opinion) requiring that any services provide an “identifiable, tangible and material benefit.”   Matter of Pro-Snax Distributors, Inc., 157 F.3d 414 (5^th Cir. 1998).     

Following chapter 11 case law, Judge Bohm found that in order to be compensable, services had to be reasonable at the time they were rendered and result in an identifiable, tangible and material benefit.    Judge Bohm found that the services “were probably necessary to the administration of the Debtor’s case at the time that Baker rendered the services.”   Opinion, p. 16.   However, he found that Baker failed to meet the benefit test.

Turning to the retroactive analysis, the Court concludes that Baker's services did not result in an identifiable, tangible, and material benefit to the Debtor's interest. None of the plans that Baker proposed were confirmed, [Finding of Fact No.7]; nor did the Debtor retain any properties. See [Finding of Fact No. 13]. Baker presented no evidence of any result beneficial to the Debtor or-for that matter-to the estate. Baker's services did nothing other than delay foreclosure on the properties owned by the Debtor. Moreover, the Debtor failed to receive his discharge. [Finding of Fact No. 12]. It is therefore no understatement to conclude that Baker's services rendered absolutely no benefit to the Debtor, which is exactly what the Debtor said in his testimony.  

Opinion, p. 16.

I have three problems with this ruling.   (Keep in mind that as the author of a blog, my opinions carry no weight beyond whether anyone finds them persuasive.  When I take issue with an opinion, as I have done here, it is meant to encourage discussion among those who care about these issues.   However, it is important to remember that the opinions of Judge Bohm and his colleagues have the force of law and mine do not).

• First, section 330(a) does not apply to services rendered pre-petition; that is what section 329 is for.   Section 329(b) incorporates a reasonable value standard which presumably refers to what is reasonable in the marketplace.  It does not incorporate section 330(a) or the Pro-Snax gloss.
• Second, Pro-Snax is a dubious and controversial decision.   Section 330(a)(3)(C) provides that the Court may consider whether services were beneficial “at the time” they were rendered.   Section 330(a)(4)(a)(ii)(I) provides that the Court may deny compensation for services that were “not reasonably likely to benefit the debtor’s estate.”  As a result, Pro-Snax appears to add a new requirement beyond what Congress required.   Additionally, the Pro-Snax case itself referred to identifiable, tangible and material in one place and reasonably likely to result in a benefit in another.   So which is it?  Is it the standard in the statute or something more?  Given Pro-Snax’s dubious provenance, courts would do well to limit it to its original context of chapter 11 fees.
• Finally, even the cases that scrupulously follow Pro-Snax allow compensation for those services which the attorney is required to perform under the Code.    I have not seen any other case that says that you get nothing because the case turned out badly.

Hard Facts Make Bad Law (A Personal Rant)

It is very clear that Judge Bohm did not like the way that the attorney handled this case.   His disclosures were untimely and omitted important details.   He also invited trouble by dealing in his client’s property.    There is also the very human tendency to taint the attorney with the fact that his client went to prison for life and lost his discharge.    However, Judge Bohm did not limit his opinion to holding that attorneys who fail to make timely and accurate disclosures while representing child abusers should forfeit their compensation.   He relied on Pro-Snax to rule that if a chapter 13 case does not succeed, the attorney may not receive any additional compensation and must return all compensation received in that case and prior cases.    

Considering that close to two-thirds of chapter 13 cases fail, this ruling amounts to declaring open season on chapter 13 debtor’s attorneys.   Think about that for a moment.   If this case is carried to its logical conclusion, then chapter 13 debtor’s lawyers should receive no compensation whatsoever for 67% of their cases.  In my mind, the high rate of failure in chapter 13 cases is an important distinction from the chapter 11 case which gave birth to Pro-Snax. Why would any competent lawyer practice under such a regime?

The danger inherent in this ruling is further shown by the element of prosecutorial discretion. Trustees are not going to file disgorgement motions in every failed chapter 13 case.   If they did, they would spend more time litigating over fees than disbursing money to creditors. As a result, the trustee's self-interest will prevent the consequences of this decision from metastasizing out of control.    However, the open-ended legal standard, if generally applied, could allow trustees to seek disgorgement in most cases.   While one expects that trustees will limit their attempts to seek return of fees to truly bad cases, it is entirely possible that trustees could use this enormous power to retaliate against attorneys they do not like.   (I am not suggesting that any trustee in the State of Texas would do this.   I am merely pointing out the application of the dictum that power corrupts and absolute power corrupts absolutely).

In every court, there are attorneys who go along to get along and others who zealously represent their clients even if it means clashing with the standing trustee or the U.S. Trustee.    The go along to get along attorneys are likely to remain below the radar and avoid having their fees targeted.   On the other hand, the attorneys who make a pain of themselves and stick their necks out are likely to face additional scrutiny.   Even if you assume the good intentions of those doing the objecting, it is simply human nature to pay more attention to cases in which they have actively participated.   Whether objections are motivated by malice, frustration or simply randomness, a selectively applied legal standard which mandates denial of compensation in most cases will deter zealous advocacy and harm the profession.   Even if you assume that trustees and judges will exercise restraint and discretion (to use the Fifth Circuit’s term), even the possibility of being financially destroyed will cause a rational attorney to hold back.    To put it mildly, I think this is a bad thing.  On this note, I will end my rant.

Disclosure:  I do not know any of the parties to this case and was not involved. My knowledge about the case is limited solely to the published opinions and other documents in the case that I read.  This means that there may be nuances that I missed.  Additionally, I have a personal interest in these issues because I have represented an attorney who was faced with a disgorgement motion under section 329 and I have an appeal involving application of Pro-Snax to my firm's fees pending before the Fifth Circuit.