In re Barbour-Freeman

Citation: 590 B.R. 147Docket: Case No. 16-54594

Court: United States Bankruptcy Court, E.D. Michigan; September 10, 2018; Us Bankruptcy; United States Bankruptcy Court

SummaryOriginalCytator Case TreatmentBackward CitatorAnalysis

EnglishEspañolSimplified EnglishEspañol Fácil

Phillip J. Shefferly, United States Bankruptcy Judge, presides over a Chapter 13 case involving joint debtors Garvin Duane Freeman and Kathryn Barbour-Freeman, who seek damages and disgorgement of attorney fees from their former attorney, Adam J. Gantz. The Court has jurisdiction over this core proceeding under 28 U.S.C. 1334(a) and 28 U.S.C. 157(a). 

The debtors, a retired musician and a patient companion, faced foreclosure from Stonecrest Financial on their property due to mortgage default. Gantz approached them to propose a "foreclosure prevention plan," which led to the debtors retaining him to file a Chapter 13 bankruptcy case. They filed the petition on October 26, 2016, agreeing to pay Gantz a flat fee of $3,500. 

Their bankruptcy case proceeded without significant issues until confirmation. On January 14, 2017, the Court confirmed their amended Chapter 13 plan, requiring 60 monthly payments of $1,112.63 to the Chapter 13 Trustee, with provisions to maintain their property and make payments to Stonecrest. Despite the plan including payments to Stonecrest, the mortgage holder did not file a proof of claim by the March 2, 2017 bar date, preventing the Trustee from disbursing payments as outlined in the plan. The Trustee alerted Gantz about the lack of a filed proof of claim on May 12, 2017. The Court will grant partial relief to the debtors in their motion against Gantz.

On May 26, 2017, the Trustee emailed Gantz, urging him to file a protective proof of claim for Stonecrest, as the Trustee intended to disburse funds to holders of allowed unsecured claims. Gantz did not file this claim, and subsequent reminders from the Trustee on July 7, August 9, and August 22 indicated the urgent need for a claim by August 28 to prevent funds from being allocated to unsecured creditors. Despite assurances from Stonecrest that a claim would be filed, Gantz did not act. By September 5, 2017, the Trustee notified Gantz of the impending disbursement of funds, leading Gantz to finally commit to filing a claim on September 7. However, he filed it late on September 15 for $110,110.21, after the Trustee had already distributed $8,762.49 to unsecured creditors on September 6, 2017. As a result, the Debtors not only retained their arrearage to Stonecrest but also missed eleven additional mortgage payments. The situation escalated, and by January 30, 2018, the Trustee indicated the Plan was prolonged, prompting the Debtors to seek alternative legal representation due to Gantz's lack of responsiveness. On February 27, 2018, they officially substituted Gantz with attorney Charles J. Schneider, P.C.

On March 30, 2018, Schneider proposed to modify the Debtors' payment plan, increasing monthly payments by $189.39 for 45 months to compensate for prior disbursements to unsecured creditors that should have been allocated to Stonecrest. Stonecrest had not filed a proof of claim until September 15, 2017, resulting in unsecured creditors receiving $8,762.49 intended for Stonecrest under a plan with a confirmed zero dividend for unsecured claims. The modification was approved without objections, and the Debtors continued their payments while the Trustee made disbursements to Stonecrest.

On April 16, 2018, Schneider filed a Motion for Disgorgement of Attorney Fees and Award of Damages against Gantz, seeking $19,309.64 for damages, costs, and attorney fees under § 526 of the Bankruptcy Code and $3,500.00 in disgorgement under §§ 329 and 330. Gantz responded on May 9, 2018, and after a hearing on June 12, 2018, the Court suggested mediation, which both parties agreed to, directing completion by July 31, 2018. Mediation was unsuccessful, prompting the Court to proceed with a ruling on the Motion.

The Motion seeks relief under § 526, which restricts the conduct of debt relief agencies, including attorneys, as established by the Bankruptcy Abuse Prevention Consumer Protection Act (BAPCPA) of 2005. In *Milavetz, Gallop, Milavetz, P.A. v. United States*, the Supreme Court clarified that § 526 applies to attorneys. The Debtors allege Gantz violated § 526(a)(1) by failing to perform a promised service and § 526(a)(3) by misrepresenting the services to be provided. Specifically, they claim Gantz did not give priority of payment to their mortgagee to avoid future foreclosure on their residence, as he had assured.

The service required was for Gantz to file a proof of claim on behalf of the Debtors' mortgagee if it failed to do so. Gantz assured the Debtors that the mortgagee would receive priority payments under the chapter 13 plan. The Debtors assert Gantz had a duty to file this proof of claim and claim he neglected to follow up or compel the mortgagee to act in a timely manner, despite their repeated attempts to contact him. Gantz contends he fulfilled his obligations by filing the chapter 13 plan that halted foreclosure and secured priority for Stonecrest, the mortgagee. He claims he only indicated he would file a protective proof of claim in a September 7, 2017 email and did so on September 15, 2017. Gantz argues any issues with Stonecrest receiving distributions were due to Stonecrest's actions, and that his filing did not violate sections 526(a)(1) or (3) since there is no evidence he promised to file the claim sooner. The Motion's assertions do not provide sufficient evidence of Gantz's failure to comply with legal obligations under section 526, leading to the denial of the requested relief. Additionally, without establishing a violation of section 526, there is no support for an award under section 526(c)(2)(A).

An award under 526(c)(2)(C) may be justified if Gantz "intentionally or negligently disregarded" the Bankruptcy Code or applicable Federal Rules of Bankruptcy Procedure. The central issue is whether Gantz was legally required to file a protective proof of claim for Stonecrest. According to Section 501(c) of the Bankruptcy Code, if a creditor fails to file a claim on time, the debtor or trustee can file it within 30 days of the claim's bar date, as detailed in Federal Rule of Bankruptcy Procedure 3004. The bar date was March 2, 2017, giving Gantz until April 1, 2017, to file. While Gantz was permitted to file a claim, the law did not obligate him to do so. He did not file initially, citing insufficient information and reliance on Stonecrest's assurance to file its own claim. Although relying on Stonecrest was reasonable, Gantz had sufficient information to know that failing to file could jeopardize the Debtors' Chapter 13 case, aimed at saving the Property. After the Trustee's email on August 22, 2017, warning of the need to file by August 28 to avoid disbursements to unsecured creditors, Gantz's delay became unreasonable. He eventually filed a protective proof of claim on September 15, 2017, too late for effective action. Although Gantz's delay was imprudent, the motion does not specify any material requirement of the Bankruptcy Code or Rules that he violated.

Debtors did not provide any case law demonstrating that an attorney's delay in a permitted task constitutes intentional or negligent disregard under 526(c)(2)(C) of the Bankruptcy Code. Although Gantz's delay in filing a protective claim for Stonecrest was unreasonable, it does not indicate a violation of the Bankruptcy Code. The court emphasized that the complaint against Gantz revolves around the timing of actions permitted by law, not a failure to fulfill legal obligations. The Debtors expressed frustration over Gantz's delay, especially given their efforts to prompt him. However, the court concluded that Gantz's actions did not meet the threshold for abuse under section 526.

Regarding Sections 329 and 330, the Debtors contend that Gantz's accepted fee of $3,500, approved during the confirmation of the Plan, exceeded the reasonable value of his services due to his delay, which resulted in disbursements intended for Stonecrest going to unsecured creditors instead. While the court found no violation of 526, it agreed with the Debtors that the fee exceeded the reasonable value of Gantz’s services and ordered its disgorgement.

The Debtors were in default on their Stonecrest mortgage and facing foreclosure when they hired Gantz to file a Chapter 13 petition to save their Property. Gantz's plan included zero distributions to unsecured creditors while making regular payments to Stonecrest. However, when Stonecrest failed to file a proof of claim, Gantz's inaction prevented the Debtors from benefiting from the bankruptcy process. His delayed filing of a protective proof of claim ultimately left the Debtors worse off, as they fell further behind on their mortgage. The Trustee's disbursement of funds to unsecured creditors instead of Stonecrest rendered Gantz's services ineffective, leading to additional expenses for the Debtors in hiring a new attorney to modify their Plan. The Court ordered Gantz to refund the $3,500 fee, recognizing that although he did not violate Section 526, his services held no value until a proof of claim was filed. The document notes changes to bankruptcy rules requiring secured creditors to file claims, emphasizes that Section 526 does not establish a federal malpractice standard, and clarifies that existing state regulations on attorney conduct still apply.