For a year, there had been a breath of hope that so-called bifurcated fee arrangements would pass muster in South Carolina. Now, the breath of hope has become a last gasp.
Affirming the bankruptcy court, an opinion by District Judge Joseph F. Anderson, Jr. implies that counsel for a chapter 7 debtor can’t write a retention agreement for a bifurcated fee arrangement that will comply with Sections 526 and 528.
The Bifurcated Fee Structure
Many debtors cannot pay the entire fee for a chapter 7 case in advance of filing. Many are shunted into chapter 13, which turns out to be more expensive for the debtor but allows the debtor to pay the fee after filing.
Ostensibly to assist clients who are cash poor but in need of immediate chapter 7 relief, 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 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 debtors’ attorney brought three cases on appeal to Judge Anderson. The lawyer 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.
The U.S. Trustee filed a motion asking the bankruptcy court to cancel the bifurcated fee arrangements in the three cases. The bankruptcy court granted the U.S. Trustee’s motion, holding that the bifurcated agreements were impermissible under a local rule.
The First Appeal
The lawyer appealed. District Judge J. Michelle Childs found no binding precedent saying that bifurcated fee agreements were prohibited as a matter of law. She cited courts that approved bifurcated arrangements and those that didn’t.
Judge Childs said she was persuaded by 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.
Reversing and remanding, Judge Childs found no violation of the local rules. She 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. See Benjamin R. Matthews & Assoc. v. Fitzgerald (In re Prophet), 21-01080, 2022 BL 84916, 2022 US Dist. Lexis 44523, 2022 WL 766390 (D.S.C. March 14, 2022). To read ABI’s report, click here.
On Remand and the Second Appeal
On remand, the bankruptcy court found that the fees were excessive and that the disclosures were inadequate, in violation of Sections 526 and 528. The bankruptcy court once again disallowed the fees and ordered the attorney to return the fees to the three clients, less filing fees and out-of-pocket expenses.
The lawyer appealed but lost in Judge Anderson’s May 8 opinion.
Judge Anderson first dealt with the question of whether the bankruptcy court abused its discretion in finding that the fees were excessive.
To begin with, Judge Anderson found no fault in the bankruptcy court’s failure to employ a lodestar analysis, because the lawyer had not recorded how many hours were spent on the engagements.
Next, Judge Anderson agreed that the fees were excessive for post-petition services because the lawyer had purportedly waived fees for pre-petition services. Furthermore, the lawyer was charging more than the district’s going rate of $1,700 for clients who pay up front.
Even if he had found that the fees were not excessive, Judge Anderson said he still would have affirmed because he also found that the fee arrangements did not comply with Sections 526 and 528.
Turning to the adequacy of disclosures required by the two sections, Judge Anderson agreed with the seven deficiencies found by the bankruptcy court. Among those that were “particularly noteworthy,” he said that the retainer agreement would leave the clients confused about how much they would be paying. Likewise, the agreements did not explain why it cost more to pay after filing.
The lawyer emphasized the provision in the agreements saying that the lawyer would continue to represent the client in the bankruptcy case until relieved by the court, even if the client didn’t sign a post-filing agreement. Citing a district court decision from Colorado, Judge Anderson said that the provision “rings hollow” because the lawyer did not disclose that the bankruptcy court would not allow withdrawal even if the client failed to pay. See In re Suazo, 2023 WL 1961198, at *12 (D. Colo. Feb. 13, 2023). To read ABI’s report on Suazo, click here.
Judge Anderson also found deficiencies in the lawyer’s disclosures to the bankruptcy court under Bankruptcy Rule 2016. Specifically, he said that the disclosures did not say that the factor could sue the client if the client did not agree to pay fees after filing. In addition, the disclosure did not reveal that the lawyer didn’t retain everything a client would pay after filing. Rather, the factor kept 25% of the fee paid after filing.
Finally, Judge Anderson found that the pre- and post-filing agreements were actually one “unitary agreement,” just like the findings in Suazo. He decided that the two agreements were one in reality because the client was required to represent in the pre-filing contract that the client intended to sign the post-filing agreement.
Judge Anderson said that the lawyer “may very well be correct” that bifurcated arrangements solve the problem confronting clients who don’t have the cash to pay the chapter 7 fee in advance. However, he said that “this Court cannot make such a finding. Therefore, this Court centers its decision solely on the issues presented in this case and the law applicable to such issues.”
Judge Anderson affirmed the bankruptcy court’s order requiring the lawyer to repay all fees paid after filing, having found that “the pre-filing and post-filing agreements do not comply with the material provisions of Section 528 and thus, are void and unenforceable. See 11 U.S.C. § 526(c)(1).”
For a year, there had been a breath of hope that so-called bifurcated fee arrangements would pass muster in South Carolina. Now, the breath of hope has become a last gasp.
Affirming the bankruptcy court, an opinion by District Judge Joseph F. Anderson, Jr. implies that counsel for a chapter 7 debtor can’t write a retention agreement for a bifurcated fee arrangement that will comply with Sections 526 and 528.