Bifurcated Fee Agreements Approved in Southern District of Florida, But Banned in Western District of Kentucky | Fox Rothschild LLP


The United States Supreme Court has ruled that 11 USC § 330(a)(1) does not authorize the indemnification of debtors’ attorneys from estate funds. Lami c. US Trustee, 540 US 1023 (2004). A Chapter 7 attorney cannot look to the estate or to the debtor after the petition for payment of fees for services rendered or to be rendered if the obligation to pay the fees arose before the petition. This leaves four payment options:

(1) delay filing until all fees have been paid;

(2) file the Chapter 7 case without being paid and expect the debtor to voluntarily pay additional fees after the petition;

(3) the attorney may fork legal services; Where

(4) the debtor may file a petition under Chapter 13 so that the costs can be paid after the petition.

In an opinion that represents the legal conclusions of all the judges of the Southern District of Florida Bankruptcy Court, Judge Isicoff held that

So long as the attorneys proposing a bifurcated fee arrangement comply with the terms of this order, such arrangements do not violate the Bankruptcy Code or Bankruptcy Rules, Local Court Rules, or Florida Bar Rules. In Brown’s case, 631 BR 77, 105 (Bank. SD Fla. 2021).

In an opinion that represents the legal conclusions of all the judges of the Western District of Kentucky Bankruptcy Court, Judge Lloyd concluded that

bifurcated fee agreements entered into. . .in each of the above eleven cases violate the United States Bankruptcy Code, the Federal Rules of Bankruptcy Procedure, and the Kentucky Rules of Professional Conduct. These contracts are not for use by an attorney practicing bankruptcy law in the United States Bankruptcy Courts for the Western District of Kentucky. In re Balwin, 2021 Banker. LEXIS 2753 at *50 (Bankr. WDKy. 2021).

What made the difference?

Local rules?

Local Rule 2091-1 of the Southern District of Florida Bankruptcy Court provides:

(D) Attendance at hearings required for debtor’s attorney. A lawyer appearing on behalf of a debtor must attend all hearings scheduled in the debtor’s case which the debtor is required to attend under any provision of the Bankruptcy Code, Bankruptcy Rules, Local Rules or court order, unless the court has granted a motion to withdraw pursuant to Local Rule 2091-1.

(E) Duties of Debtor Counsel. Unless the attorney has retired as attorney for the debtor pursuant to Local Rule 2091-1, an attorney filing a petition on behalf of a debtor must advise the debtor of all of a debtor’s obligations under 11 and help them comply. USC §521.

Local Rule 9011-1 of the Local Rules of the United States Bankruptcy Court for the Western District of Kentucky provides:

Lawyers–Functions

(a) Scope of Counsel’s Duty to Represent.

(1) An attorney who files a bankruptcy cost petition for or on behalf of a debtor will remain the attorney in charge of the file for all purposes, including representing the debtor in all proceedings that arise in connection with the matter.

(2) A lawyer is relieved of his duties when the debtor’s case is closed, or when the lawyer is specifically relieved after notice and hearing on the application and order of this court.

The state of mind of the courts

The Florida court sought a way to allow bifurcated fee agreements.

These three cases provide the Court with an opportunity to provide a framework for determining when and under what circumstances the forking of Chapter 7 charges is permitted. 631 BR 77, 85.

The Kentucky court was convinced it could not be done.

The lawyer cannot split his representation of the debtor. 2021 Banker. LEXIS 2753 at *35.

With BAPCPA, Congress has strongly encouraged debtors to file Chapter 13. In the Western District of Kentucky, debtors need only pay a filing fee or a motion to pay the filing fee in installments to have the case Chapter 13 be filed, as attorneys are paid over time by a plan administered by a permanent Chapter 13 trustee. Although Chapter 13 is not necessarily available to all debtors, its flexibility (sic) is well known in the district and is used quite often when debtors cannot prepay their attorneys the full Chapter 7 fees on a pre-petition basis. 2021 Banker. LEXIS 2753 to *51.

The two courts are in agreement on certain points.

The filing fee is a pre-petition fee

Both courts agree that payment by a law firm of filing fees with reimbursement after petition by the debtor violates Bankruptcy Code §§ 526(a)(4)(a debt relief agency shall not not advise a assisted person or a potential assisted person to incur further debt in anticipation of that person filing a claim under this title), 362 and 524 (effect of release) and Rules of Professional Conduct 4- 1.8(a) (prohibiting financial assistance to a client).

Disclosure required

Both courts agree that adequate disclosure to debtors and to the court is required.

The Florida court held that disclosures to a potential customer were adequate as long as

  1. The potential client receives the separate disclosure form;
  2. b) The pre-petition agreement and the post-petition agreement are provided at the same time for the consideration of the potential debtor;
  3. c) The pre-request agreement clearly describes the services that must be performed before the request as well as the other services that can be provided; and
  4. The Post-Petition Agreement clearly describes the Included Services (delimited, where applicable, by “if required”) and specifically describes the Excluded Services, as well as any additional or fixed fees or hourly charges associated with such excluded Services.
  5. There must be a 14-day “cooling-off” period, either after the pre-petition is signed or until the post-petition agreement is signed, to allow for termination. Brown, 631 BR 77 100.

The Kentucky court seems satisfied with this list. 2021 Banker. LEXIS 2753 at *38.

Factoring of fee agreements is prohibited.

The Florida court determined that it would not allow any lawyer to consider his legal fees. This creates an inherent conflict of interest between attorney and debtor, and violates R. Regulating Fla. Bar 4-5.4, 4-1.8 and 4-1.7. 631 BR 77.99 n. 34.

The Kentucky court found that fee factoring violated 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 Banker. LEXIS 2753 at *25.

Fees must be reasonable.

Both courts specify that the fees must be reasonable, but they interpret this statement differently.

For the Florida court, reasonableness is not measured by a comparison between pre-petition charges and post-petition charges. The court will consider the reasonableness of the fixed fee billed after the motion taking into account not only the work that was performed, 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 $1,262 and $1,362 for post-petition services were reasonable. 631 BR 77, 104.

The Kentucky court found that a $2,500 fee for post-petition services was unreasonable when compared to the fees charged by this attorney in other Chapter 7 cases of $1,250.

Conclusion

Know your local courts.

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