Trustee Lynda Bui’s duties include reviewing bankruptcy petitions in Chapter 7 to see if the debtor received sufficient value for the fee paid to an attorney. Recently I saw a case where the debtor paid over $1500 to an attorney and several parts of the petition had to be amended. The entire matter was then continued in order to clean up the paperwork.
As the trustee was concluding the hearing he also said that the matter was being referred to the United States Trustee on a 11 U.S.C. 329 action. This is not a common action and it bears reviewing section 329:
(a) Any attorney representing a debtor in a case under this title, or in connection with such a case, whether or not such attorney applies for compensation under this title, shall file with the court a statement of the compensation paid or agreed to be paid, if such payment or agreement was made after one year before the date of the filing of the petition, for services rendered or to be rendered in contemplation of or in connection with the case by such attorney, and the source of such compensation.
(b) If such compensation exceeds the reasonable value of any such services, the court may cancel any such agreement, or order the return of any such payment, to the extent excessive, to—
(1) the estate, if the property transferred—
(A) would have been property of the estate; or
(B) was to be paid by or on behalf of the debtor under a plan under chapter 11, 12, or 13 of this title; or the entity that made such payment.
The important section for our purposes is section (b) “If such compensation exceeds the reasonable value of any such services, the court may cancel any such agreement, or order the return of any such payment, to the extent excessive”. The trustee in the above case thought that the paperwork was prepared so poorly that the amount of fee charged was excessive.
This uncommon action may be a taste of the future as the United States Trustee may be sending a message to the regular trustees to be on the lookout for these bad cases. The US Trustee may bring an action to have the attorney fees disgorged.