Aquilino v. Spector Gadon Rosen & Vinci P.C. (In re Aquilino)
The debtors’ inequitable conduct didn’t relieve counsel of the duty to disclose fees charged for post-petition litigation.
- Rochelle Quick Take
View Rochelle Summary- Case Type:
- Consumer
- Case Status:
- Reversed
- Citation:
- No. 24-1781 (3rd Circuit, Apr 24,2025) Published
- Tag(s):
- Ruling:
- The U.S. Court of Appeals for the Third Circuit reinstated a bankruptcy court's order sanctioning the Appellee Law Firm by (a) disgorging all fees it collected from the ch. 7 Debtors/Appellants as the Law Firm, post-petition, billed Debtors far more than the amount in the disclosed flat fee agreement, and (b) cancelling a second undisclosed fee agreement. A district court had reversed this order, concluding the Seventh Amendment guaranteed the Law Firm a jury trial in a related collections action. The circuit court held this was error as the relief rendered was "quintessentially equitable."
- Procedural context:
- The Law Firm offered a few arguments to support affirmance of the district court's decision overturning the bankruptcy court's sanctions order: (1) Debtors "waived" their objection to the Law Firm's jurisdictional and Seventh Amendment arguments in the district court, which precluded review at the circuit level; (2) the bankruptcy court lacked “core” subject matter jurisdiction to examine the Law Firm's fees under 11 U.S.C. § 329(a); (3) the Law Firm was entitled to a jury trial in the § 329(a) proceeding under the Seventh Amendment; and (4) the bankruptcy court abused its discretion in imposing sanctions. The Third Circuit rejected each argument. In a footnote, it stated the district court's decision "stands to 'unduly restrict bankruptcy courts’ authority to enforce the protections of section 329(a) in chapter 7 cases,' . . . and disrupt the administration of thousands of bankruptcy cases, [and thus] is undoubtedly a legal question of significant public importance." The opinion also states "Bankruptcy Form 2030 is not a model of clarity" and suggests that "the Director of the Administrative Office of the United States Courts may wish to consider whether revisions are warranted."
- Facts:
- Debtors Robin and Louie Joseph Aquilino filed a chapter 7 bankruptcy petition in the U.S. Bankruptcy Court for the District of New Jersey in April 2020 through counsel at Spector Gadon Rosen & Vinci P.C. (the "Law Firm"). Prepetition, Debtor engaged the Law Firm for a flat fee of $3,500, and Debtors paid the filing fee. The Law Firm filed a Disclosure of Compensation form (which was "materially identical to" Bankruptcy Form 2030) on the petition date reflecting their agreement. The form stated the Law Firm "'agreed to render legal service for all aspects of the bankruptcy case" and did not exclude any services from the scope of the $3,500 arrangement. The Law Firm soon learned Debtors withheld and concealed information from the Law Firm regarding their assets, "requiring [the Law Firm] to “conduct[] its own extensive valuation analysis of [Debtors'] properties several times, correct[] [Debtors'] bankruptcy schedules and other submissions several times, and defend[] [Debtors] in litigation' in the Bankruptcy Court." The Law Firm "billed the Debtors for its post-petition services, which, by August 2021, tallied approximately $151,000." At that point, Debtors signed a written agreement (the "Letter Agreement") to pay the Law Firm $113,000, with $100,000 to come from the imminent sale of real property. The Law Firm did not disclose the Letter Agreement to the bankruptcy court. After Debtors sold the real property, they did not send any funds to the Law Firm. It withdrew as Debtors' counsel and filed a collection action in the United States District Court for the Eastern District of Pennsylvania, seeking a jury trial. Debtors then moved the bankruptcy court in New Jersey to examine the reasonableness of the Law Firm's fees under § 329(a) and Bankruptcy Rule 2016(b). The bankruptcy court held a hearing on Debtors' motion, at which the Law Firm did not contest the court's jurisdiction. Instead, it asked the court for a "stay" in favor of the federal jury trial in Pennsylvania. The Law Firm also advised the bankruptcy court "it did not violate § 329(a) or Bankruptcy Rule 2016(b) because it was not required to disclose postpetition legal services, and it was [the Firm's] practice not to do so." The bankruptcy court found it had "core" subject matter jurisdiction over Debtors' motion, held the Law Firm violated § 329(a) and Bankruptcy Rule 2016(b) by failing to disclose the Letter Agreement, ordered the Law Firm to disgorge all fees it had received from Debtors, and disallowed the collection of any additional fees from Debtors related to their bankruptcy case. The Law Firm appealed to the U.S. District Court for the District of New Jersey, which "agreed the firm was entitled to a jury trial in the Collection Action and that the Bankruptcy Court’s ruling on the Debtors’ § 329(a) motion improperly deprived the firm of that right" as it had "filed 'neither a proof of claim nor an application for fees' from the estate in the bankruptcy case [and thus] had retained its right to a jury trial." Debtors appealed this ruling to the Third Circuit.
- Judge(s):
- KRAUSE, PORTER, and ROTH