Holding that a debtor’s lawyer has no Seventh Amendment right for a jury to decide what the debtor owes for fees in connection with a chapter 7 case, the Third Circuit upheld bankruptcy courts’ power under Section 329 to rule on the adequacy of disclosures and determine the amount of compensation paid to attorneys by chapter 7 debtors for post-petition services.

The April 24 opinion by Circuit Judge Cheryl Ann Krause permits no exception to the rule that lawyers must disclose what they are charging chapter 7 debtors. She reversed the district court and reinstated the judgment issued by Bankruptcy Judge Jerrold N. Poslusny, Jr.

Judge Krause was also the author of a Third Circuit decision just six day earlier where she held that Section 107 “displaces” common law and more broadly protects trade secrets and confidential information than does common law. Mesabi Metallics Co. LLC v. Cleveland-Cliffs Inc. (In re ESML Holdings Inc.), 23-2954 (3d Cir. April 16, 2025). Before Judge Krause’s appointment to the Third Circuit in 2014, she had clerked for both the Ninth Circuit and the Supreme Court. To read ABI’s report on Mesabi, click here.

Big Fees

The decision shows how hard cases sometimes make good law. Given what Judge Krause called their “misconduct,” the debtors were not a sympathetic lot, as the facts reveal.

A couple hired a law firm to file a chapter 7 case that the debtors said “would be a simple, no-asset bankruptcy” in New Jersey. It “was anything but,” Judge Krause said.

To file the petition, the debtors paid the firm a $3,500 prepetition retainer. In the disclosure on Official Form 2030, the firm said that the retainer covered “all aspects of the bankruptcy case,” including adversary proceedings and contested matters.

Judge Krause characterized the firm as saying that “the Debtors ‘withheld and concealed information regarding the existence and/or value of their assets,’ requiring it to ‘conduct[] its own extensive valuation analysis of the [debtors’] properties several times, correct[] the [debtors’] bankruptcy schedules and other submissions several times, and defend[] the [debtors] in litigation’ in the Bankruptcy Court.”

Given the extra work, the firm had billed the debtors $151,000 over the first 16 months after filing. The debtor and the firm cut a deal where the firm reduced the fee to $113,000. The debtors agreed to pay $100,000 from the impending sale of a home. The firm did not amend the Form 2030 filing, nor did they file a new one to disclose the billings and promised payments.

As it turned out, the couple sold the home but paid the firm nothing. “Instead,” Judge Krause said, “they kept the money and used it to purchase a new home.” The firm withdrew as counsel and sued the debtors in federal district court in Pennsylvania, requesting a jury trial.

After failing to transfer venue of the Pennsylvania case to New Jersey, the debtors “moved in the Bankruptcy Court in New Jersey for an examination of the reasonableness of [the firm’s] fees under § 329(a) and Bankruptcy Rule 2016(b),” Judge Krause said. The firm responded by claiming to have a Seventh Amendment right to a jury trial in Pennsylvania. According to Judge Krause, the firm argued that it “did not violate § 329(a) or Bankruptcy Rule 2016(b) because it was not required to disclose post-petition legal services, and it was [the firm’s] attorneys’ practice not to do so.”

Bankruptcy Judge Poslusny of Camden, N.J., sided with the debtors and ruled that the firm had violated Section 329(a) and Rule 2016(b) by failing to disclose the agreement to pay $113,000 in fees. He ordered the firm to disgorge whatever it had been paid and barred the firm from collecting for any other work in connection with the case. In re Aquilino, 20-15628, 2023 WL 2191494, at *7 (Bankr. D.N.J. Feb. 23, 2023).

The firm appealed. Reversing, the district court in New Jersey decided that the firm had the right to a jury trial because it never filed a proof of claim. In re Aquilino, 660 B.R. 197, 205–06 (D.N.J. 2024). To read ABI’s report on the district court opinion, click here.

The debtor appealed to the circuit. The Executive Office for the U.S. Trustee and the U.S. Trustee filed an amicus brief contending there was no right to a jury trial and that the bankruptcy court was empowered to enforce Section 329.

The Statute and the Rule

“Given the need for transparency in bankruptcy cases,” Judge Krause said,

[t]he Code requires attorneys who represent debtors to “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.” 11 U.S.C. § 329(a).

She added,

Federal Rule of Bankruptcy Procedure 2016(b) makes this disclosure obligation “a continuing one,” In re Stewart, 970 F.3d 1255, 1258 (10th Cir. 2020), by requiring attorneys to supplement their statements “within 14 days after any payment or agreement not previously disclosed.” Fed. R. Bankr. P. 2016(b).

The two provisions yield a “plain and simple rule,” Judge Krause said, quoting the Seventh Circuit:

“[A]ttorneys must inform the bankruptcy court of their compensation and promptly update the filing if their fees change.” In re Dordevic, 62 F.4th 340, 342 (7th Cir. 2023).

Seventh Amendment and Jurisdiction

Contrary to the firm’s argument, Judge Krause had “little difficulty” deciding that the bankruptcy court had jurisdiction. She held that the dispute “arose under” the Bankruptcy Code because it was a remedy expressly provided by the Code.

Judge Krause added that “the Bankruptcy Code provides both the right and remedy, and proceedings initiated under § 329(a) therefore fall within § 157(b)(2)’s non-exclusive list of ‘core’ proceedings.”

Having found core jurisdiction, Judge Krause turned to the question of whether the firm had a Seventh Amendment right to a jury trial. Of course, she said, “That right only attaches to claims that are ‘legal in nature,’ not ones that are equitable. Granfinanciera, S.A. v. Nordberg, 492 U.S. 33, 53 (1989).”

When the claim is both legal and equitable, Judge Krause cited SEC v. Jarkesy, 603 U.S. 109, 123 (2024), where the Supreme Court said that the remedy is the more important consideration. To read ABI’s report, click here. Again citing Jarkesy, she said there is no jury trial right when the remedy is solely to restore the status quo. Id.

From Jarkesy, Judge Krause held that “violations of § 329(a) give rise to equitable remedies, not legal ones.” Citing the Second, Fifth and Ninth Circuits, she went on to hold that “permissible sanctions for violations of § 329(a) include disgorgement of collected fees and cancellation of fee agreements for bankruptcy-related services.”

Having found “a § 329(a) proceeding and a claim that is equitable,” Judge Krause ruled that “the District Court erred by concluding that [the firm’s] right to a jury trial in the Collection Action extended to the § 329(a) proceeding in the Bankruptcy Court.”

The Equities

For several reasons, Judge Krause decided that the equities did not favor the firm. First, she said that the firm violated Section 329(a) and Rule 2016(b) “at a minimum because it was required to, and did not, disclose the Letter Agreement,” where the debtors agreed to pay $113,000. Even if the firm’s original Form 2030 were compliant, she said that the firm’s “subsequent failure to update [the] statement and disclose the Letter Agreement unequivocally violated its disclosure obligation.”

Similarly, Judge Krause decided that the bankruptcy court had not abused its discretion. Citing four circuits, she said, “Courts of Appeals that have addressed the issue have regularly held that full disgorgement and cancellation of fee agreements can be an appropriate sanction for violating the Code’s disclosure requirements.”

Because “the Bankruptcy Court was aware of and considered the Debtors’ misconduct that necessitated” the firm’s extensive services after filing, Judge Krause found no abuse of discretion, because the bankruptcy court had “considered all relevant factors, including the balance of equities.”

Even though it was “a fortuitous result for the Debtors,” Judge Krause “reverse[d] the District Court’s judgment and . . . reinstate[d] that of the Bankruptcy Court.”