The United States Supreme Court ruled that 11 U.S.C. § 330(a)(1) does not authorize compensation to debtors’ attorneys from estate funds. Lamie v. U.S. Trustee, 540 U.S. 1023 (2004). A chapter 7 lawyer cannot look to the estate or to the debtor postpetition for payment of fees for services rendered or to be rendered if the obligation to pay the fee arose prepetition. That leaves four payment options:
(1) delay filing the case until all the fees are paid;
(2) file the chapter 7 case without getting paid and hope that the debtor will voluntarily pay additional fees postpetition;
(3) the attorney can bifurcate the legal services; or
(4) the debtor can file a chapter 13 case so that the fees can be paid post- petition.
In an opinion that represents the legal conclusions of all the judges of the Bankruptcy Court of the Southern District of Florida, Judge Isicoff held that
so long as attorneys offering a bifurcated fee arrangement comply with the terms of this Order, those arrangements do not violate the Bankruptcy Code or Bankruptcy Rules, this Court’s Local Rules, or the Florida Bar Rules. In re Brown, 631 B.R. 77, 105 (Bankr. S.D. Fla. 2021).
In an opinion that represents the the legal conclusions of all the judges of the Bankruptcy Court for the Western District of Kentucky, Judge Lloyd held that
the bifurcated fee agreements entered . . .in each of the eleven cases herein violate the United States Bankruptcy Code, the Federal Rules of Bankruptcy Procedure, and the Kentucky Rules of Professional Conduct. Such contracts are not to be used by any attorney practicing bankruptcy law in the United States Bankruptcy Courts for the West District of Kentucky. In re Balwin, 2021 Bankr. LEXIS 2753 at *50 (Bankr. W.D.Ky. 2021).
What made the difference?
Local Rule 2091-1 of the Bankruptcy Court for the Southern District of Florida provides:
(D) Attendance at Hearings Required for Debtor’s Counsel. An attorney who makes an appearance on behalf of a debtor must attend all hearings scheduled in the debtor’s case that the debtor is required to attend under any provision of the Bankruptcy Code, the Bankruptcy Rules, the Local Rules, or order of the court, unless the court has granted a motion to withdraw pursuant to Local Rule 2091-1.
(E) Duties of Debtor’s Counsel. Unless the attorney has withdrawn as attorney for the debtor pursuant to Local Rule 2091-1, an attorney who files a petition on behalf of a debtor must advise the debtor of, and assist the debtor in complying with, all duties of a debtor under 11 U.S.C. §521.
Local Rule 9011-1 of Local Rules of United States Bankruptcy Court of the Western District of Kentucky provides:
(a) Extent of an Attorney’s Duty to Represent.
(1) An attorney who files a bankruptcy petition for or on behalf of a debtor will remain the responsible attorney of record for all purposes including the representation of the debtor in all proceedings that arise in conjunction with the case.
(2) An attorney is relieved of his duties when the debtor’s case is closed, or when the attorney is specifically relieved after notice and a hearing upon motion and order of this court.
The Florida court looked for a way to authorize bifurcated fee arrangements.
These three cases present this Court with the opportunity to provide a framework for when and under what circumstances bifurcation of chapter 7 fees is allowable. 631 B.R. 77, 85.
The Kentucky court was satisfied that it could not be done.
The attorney cannot bifurcate his or her representation of the debtor. 2021 Bankr. LEXIS 2753 at *35.
With BAPCPA, Congress greatly encouraged debtors to file chapter 13. In the Western District of Kentucky debtors must only tender a filing fee or a motion to pay the filing fee in installments to get the Chapter 13 case filed, as counsel are paid over time through a plan administered by a standing Chapter 13 trustee. While Chapter 13 is not necessarily available to all debtors, it’s (sic) flexibility is well-known in the district and is used quite often when debtors cannot pay their lawyers the full Chapter 7 fee up front on a pre-petition basis. 2021 Bankr. LEXIS 2753 at *51.
The two courts agree on some issues.
The filing fee is a prepetition charge
Both courts agree that a law firm’s payment of the filing fee with post-petition repayment by the debtor violates Bankruptcy Code §§ 526(a)(4)(a debt relief agency shall not advise any assisted person or prospective assisted person to incur more debt in contemplation of such person filing a case under this title), 362 and 524 (effect of discharge), and Rule of Professional Conduct 4-1.8(a)(prohibiting financial assistance to a client).
Both courts agree that adequate disclosure to the debtors and the court is required.
The Florida court held that the disclosures to a potential client are adequate so long as
- The potential client receives the separate disclosure form;
- b) The prepetition agreement and the postpetition agreement are provided at the same time for the potential debtor’s review;
- c) The prepetition agreement clearly describes the services that must be performed prepetition as well as other services that may be provided; and
- The postpetition agreement clearly describes the included services (delineated, where appropriate as “if necessary”) and specifically describes the excluded services, and any additional or flat fee or hourly charge associated with those excluded services.
- There must be a “cooling off” period of 14 days, whether after the prepetition is signed, or until the postpetition agreement must be signed, to permit recission. Brown, 631 B.R. 77,100.
The Kentucky court seems satisfied with this list. 2021 Bankr. LEXIS 2753 at *38.
Factoring of fee agreements is prohibited.
The Florida court determined that it will not allow any attorney to factor its legal fees. This creates an inherent conflict of interest between the attorney and the debtor, and violates R. Regulating Fla. Bar 4-5.4, 4-1.8, and 4-1.7. 631 B.R. 77,99 n. 34.
The Kentucky court held that the factoring of fees violates the United States Bankruptcy Code, the Federal Rules of Bankruptcy Procedure, the Local Rules of the United States Bankruptcy Court for the Western District of Kentucky and the Kentucky Rules of Professional Conduct. 2021 Bankr. LEXIS 2753 at *25.
Fees must be reasonable.
Both courts specify that fees must be reasonable, but they interpret this statement differently.
For the Florida court reasonableness is not measured by a comparison between the prepetition charges and the postpetition charges. The court will review the reasonableness of the postpetition flat fee charged taking into account not only the work that was done but also the services that might have been required in the case for which there would have been no additional charge. The court holds fees of $1262 and $1362 for postpetition services was reasonable. 631 B.R. 77, 104.
The Kentucky court found that a fee of $2,500 for postpetition services was unreasonable by comparing it to the fees charged by that attorney in other chapter 7 cases of $1,250.
Know your local courts.