Reversing the bankruptcy court, a district judge in South Carolina permitted so-called bifurcated fee arrangements for chapter 7 debtors despite a local rule that could be read to bar them outright.
In her March 14 opinion, District Judge J. Michelle Childs seemed motivated by the realization that prospective chapter 7 debtors who can’t afford the entire fee before filing have no suitable alternatives, especially if they need bankruptcy relief quickly.
Judge Childs said,
Bifurcated agreements, when utilized properly and with sufficient safeguards, enable debtors who otherwise could not afford counsel to obtain legal services of an attorney to aid them in navigating the complex bankruptcy process.
The Bifurcated Fee Structure
When a client cannot pay the entire attorney’s fee before filing, a typical bifurcated arrangement entails two engagement agreements, one signed before filing and a second signed after filing. Clients pay nothing or a fraction of the ordinary fee before filing, with an explicit understanding that they are not required to hire the same lawyer for services after filing. The agreements explain what services the lawyer will provide before and after filing.
The attorney who brought three cases on appeal to Judge Childs ordinarily charged a fixed fee of $2,350 (including the filing fee) for clients who could pay before filing. On a sliding scale, the clients paid more when some or all of the fee was paid after filing.
A client who paid nothing before filing was obligated to pay $2,800 under the bifurcated arrangement. The lawyer justified the increase by the cost of factoring the receivable.
Based on a local rule, the U.S. Trustee filed a motion asking the bankruptcy court to cancel the bifurcated fee arrangements in three cases. The local bankruptcy rule provides that an attorney who files a petition is “the responsible attorney of record for all purposes . . . and in all matters arising in connection with the case . . . .”
The bankruptcy court granted the U.S. Trustee’s motion, holding that “bifurcated agreements are entirely impermissible” under the local rule, Judge Childs said.
The attorney appealed. Of perhaps no little import, Judge Childs said that the three debtors “obtained satisfactory results” and said in depositions that they appreciated the chance to have bifurcated arrangements.
The lawyer won on appeal.
A ‘Charitable’ Interpretation of the Local Rule
Judge Childs found no “binding precedent where a court determined that bifurcated fee agreements like those at issue were prohibited as a matter of law.”
However, Judge Childs did identify nonbinding decisions coming down both ways. She said that “many courts faced with similar agreements have found that bifurcated fee agreements are not prohibited per se, but that the agreements before the court were either improper under the applicable rules or that the court could not determine their propriety based on the record.”
Among the courts that have permitted bifurcated fee agreements, Judge Childs cited In re Carr, 613 B.R. 427 (Bankr. E.D. Ky. 2020). The Carr court, she said, found that “dual contracts satisfied the requirements of the Bankruptcy Code, the Bankruptcy Rules, and applicable ethical rules.” Id. at 436. To read ABI’s report on Carr, click here.
Judge Childs said she was “persuaded by the reasoning” in In re Hazlett, No. 16-30360, 2019 WL 1567751 (Bankr. D. Utah Apr. 10, 2019), a case where the bankruptcy court had a similar local rule. To read ABI’s report on Hazlett, click here.
Like Hazlett, the attorney on appeal to Judge Childs conceded that he was the attorney of record until allowed by the court to withdraw.
Reading the local rule to bar bifurcated arrangements entirely “would undermine the very purpose of the Rule,” Judge Childs said. Assuming there are safeguards, a bifurcated agreement permits a debtor who cannot pay a retainer to have counsel “in navigating the complex bankruptcy process,” she said.
Reversing and remanding, Judge Childs ended her opinion by noting that the local rule was the only issue on appeal. She made no ruling about the reasonableness of the fees, the adequacy of disclosures or informed consent by the debtors regarding the fee structure.
Reversing the bankruptcy court, a district judge in South Carolina permitted so-called bifurcated fee arrangements for chapter 7 debtors despite a local rule that could be read to bar them outright.
In her March 14 opinion, District Judge J. Michelle Childs seemed motivated by the realization that prospective chapter 7 debtors who can’t afford the entire fee before filing have no suitable alternatives, especially if they need bankruptcy relief quickly.
Judge Childs said,
Bifurcated agreements, when utilized properly and with sufficient safeguards, enable debtors who otherwise could not afford counsel to obtain legal services of an attorney to aid them in navigating the complex bankruptcy process.