The Eighth Circuit Bankruptcy Appellate Panel approved a bifurcated fee arrangement, so long as the chapter 7 debtor pays nothing more after filing than would have been paid if the retainer were paid in full before filing.
A lawyer filed chapter 7 petitions for two clients. Both cases were “unremarkable,” according to the June 21 opinion by Bankruptcy Judge Michael E. Ridgway. Both debtors received their discharges a few weeks after filing.
For chapter 7 clients who pay fees in full before filing, the lawyer charged $1,500, representing the $335 filing fee and $1,165 for attorneys’ fees.
The lawyer offered his clients the option of paying the entire fee after filing. In that case, they would pay a total of $2,000 in 12 equal monthly installments after filing. Both clients opted to pay most or all of the fees after filing.
The lawyer disclosed the services to be provided before and after filing. Among other things, pre-filing services included meeting with the client, plus preparing and filing the petition along with the credit counseling certificate and the list of creditors.
The post-filing services included the preparation and filing of the schedules, the statement of affairs and the means test calculation, plus attendance at the creditors’ meetings.
Judge Ridgeway said that the fee arrangements “were clearly worded and explicit in their terms.” He found no violation of Section 329(a) “because [the lawyer] clearly disclosed such arrangements.”
However, the U.S. Trustee objected, contending that the fees were unreasonable, based on the idea that most of the services were actually performed before filing.
The bankruptcy judge decided that the additional $500 under the post-filing payment arrangement exceeded the value of the services. The bankruptcy judge excused the debtors from paying anything more than $1,500 and directed the lawyer to refund the excess if the client had paid more than $1,500.
The lawyer appealed, but Judge Ridgway affirmed. He found no “clear error” in the bankruptcy court’s findings of fact.
The lawyer argued that the bankruptcy court should have analyzed the reasonableness of the fee by using a lodestar analysis, calling for the multiplication of the number of hours reasonably expended by a reasonable hourly rate.
Judge Ridgway disagreed. He said that courts “are not bound to apply the lodestar calculation in every case where attorney’s fees are challenged.” In a chapter 13 case, the BAP had held that a lodestar approach may not be the best method for deciding reasonable compensation when the services are normal and customary.
In so-called no-look cases like those on appeal, the lawyer said he does not keep time records, and his fees are “all the same.” “Simply put,” Judge Ridgway said, the lawyer “presented no evidence that would enable the court to conduct a lodestar analysis.”
Seeing “no clear error” in the findings of fact, Judge Ridgway upheld the bankruptcy court because there was no abuse of discretion in reducing the fee by $500.
Limitation of the Precedent
In a footnote, Judge Ridgway said that “the only issue presented to us” was the “reasonableness of fees charged . . . for all work associated with filing a chapter 7 case using a bifurcated fee arrangement.” He went on to say, “We decline to express an opinion on the validity of bifurcation agreements generally or any problems associated with the ‘unbundling’ of legal services.”
The two cases on appeal also involved non-recourse factoring. In cases with payments after filing, the lawyer evidently sold the receivable to an outfit that seems to operate like a commercial factor. The factor would advance 75% of the fee to the lawyer, with 60% paid up front and 15% held back until the client pays all the fees.
The U.S. Trustee questioned the lawyer about the factoring arrangement, but the bankruptcy court did not address the issue, Judge Ridgway said.
“[N]othing about that arrangement changes our analysis,” Judge Ridgway said.
Observations
The opinion means that the lawyer in the future can charge $1,165 for attorneys’ fees when the client pays after filing. If the lawyer factors the receivables at a 25% discount, the arrangement may not be economical.
Like the bankruptcy judges in the Southern District of Florida, bankruptcy judges in districts elsewhere might consider coming to agreement on an opinion in a test case laying out the details of bifurcated fee arrangements that the judges in the district will uphold.
Until Congress solves the problem created by Lamie v. U.S. Trustee, 540 U.S. 526 (2004), test-case precedent, district by district, may be the best alternative. Because the question involves substantive legal issues and not purely procedural matters, local rules to validate bifurcated arrangements may not be feasible.
Click here to read ABI’s report on the district-wide precedent from Florida, In re Brown, 20-23632 (Bankr. S.D. Fla. June 16, 2021).
The Eighth Circuit Bankruptcy Appellate Panel approved a bifurcated fee arrangement, so long as the chapter 7 debtor pays nothing more after filing than would have been paid if the retainer were paid in full before filing.
A lawyer filed chapter 7 petitions for two clients. Both cases were “unremarkable,” according to the June 21 opinion by Bankruptcy Judge Michael E. Ridgway. Both debtors received their discharges a few weeks after filing.
For chapter 7 clients who pay fees in full before filing, the lawyer charged $1,500, representing the $335 filing fee and $1,165 for attorneys’ fees.
The lawyer offered his clients the option of paying the entire fee after filing. In that case, they would pay a total of $2,000 in 12 equal monthly installments after filing. Both clients opted to pay most or all of the fees after filing.
The lawyer disclosed the services to be provided before and after filing. Among other things, pre-filing services included meeting with the client, plus preparing and filing the petition along with the credit counseling certificate and the list of creditors.
The post-filing services included the preparation and filing of the schedules, the statement of affairs and the means test calculation, plus attendance at the creditors’ meetings.