Bifurcated Chapter 7 Attorney’s Fee Agreements Serve A Valid Purpose That is Not Prohibited By The Bankruptcy Code

A n initial negative reaction to a Ch apter 7 d ebtor incurring post-petition debt for bankruptcy representation within minutes of filing a Chapter 7 petition c o uld almost certainly be anticipated from bankruptcy judges an d the Office of the United States Trustee as such a debt negatively impacts a debtor ‘ s “ fresh start . ” R ecently , a Utah bankruptcy court held that the bifurcatio n of pre-petition an d post-petition attorney ‘ s fees attorneys ‘ fees is not per se prohibited and does not constitute a violation of the automatic stay un d er 11 U.S.S 362 ( k). In re Hazlet t , 609 B . R . 430 (Bankr . D . Utah 2019) , motion for reconsideration denied , In re Hazlett, 2 020 Bankr . Lexis 390* (Bankr. D . Utah February 13, 2020 ) . 

In Hazlett , the debtor retained Capstone Law pursuant to an agreement u n der which the debtor would not pay a retainer but rather would pay post-petition costs and expenses in the 

00 in ten monthly installments of $ 240 . Capstone used a factoring service , BK Bi lling, which purchased the account from Capstone for $1,800 and collected the payments from the debtor . Capstone ‘ s attorney fully explained the arrangement to the debtor and filed all the necessary paperwork to initiate t h e debtor ‘ s chapter 7 b ankruptcy. T h e debtor’ s case was uneventful , a no-asset report was filed by the Chapter 7 trustee and the debtor received his discharge of ove r $29,000 in debts within 113 days after the petition date. 

There was a complication, however ; specifically , the debtor had consulted with Lincoln Law prior to consulting with Capstone Law regarding the filing of a Chapter 7 bankruptcy. T h e debtor declined Lincoln Law ‘ s representatio n , however, because he lacked the funds to pay Lincoln Law ‘ s retainer. Capstone offered the debtor three options to accomplish the filing of his Chapter 7 bankruptcy case : ( i ) the upfront retainer option of paying $2,400 to Capstone which would include attorneys ‘ fees and the court filing fee; (ii) the $500-down option under which the d ebtor would pay a $500 retainer for the preparation of the bankruptcy petition, statement of social security number and application to pay the court filing fees in installments (the “Initial Bankruptcy Papers ‘ ) after which the debtor could either proceed pro se , hire another attorney to complete the bankruptcy case or enter into a post-petition fee arrangement with Capstone to complete the bankruptcy case ; and (iii) the “Zero Down Optio n ” of preparing and the filing of the Initial Bankruptcy Papers for $0 down and entering into a post-petition agreement pursua n t to which Capstone would represen t the debtor after the bankruptcy filing for $ 2 , 400 tha t could be paid in monthly installments. 

Capstone’s difficulty arose post-discharge when an attorney from Lincoln Law made an unsolicited call to the debtor purportedly to inquire why the Debtor engaged Capstone, rather t han Lincoln Law, to represent him in the bankruptcy case notwithstanding the fact that Capstone still represented the debtor . Lincoln Law then contacted the U . S . Trustee to report alleged improprietie s by Capstone Law in the bankruptcy case . The U.S . Trustee filed a motion to reope n the bankruptcy case to revie w Capstone ‘ s retainer agreements and the use of BK Billing to factor the post-peti t ion fee. Ultimately, the U. S . Trustee filed a motion for sanctions against Capstone fo r (i ) the marketing of zero-down Chapte r 7 b ankruptcy services ; (i i) the bifurcation of bankruptcy services into pre-petition and post – petition fee arrangements; (iii) filing the petition and Initial Bankruptcy Papers for purportedly no charge ; (iv) the reasonableness of the $2,400 post- petition fee; and ( v ) the propriety of using electronic signatures in bankruptcy . Under its motion , the U.S. Trustee sought (i) cancellation of the attorney fee agreements with Capstone Law under $ 329 and Local Rule 2091 – 1 ; ( ii ) sanctions under Local Rules 2090 – 3 , 2091-1( a ) and 50 05- 2 ( c ); and (iii ) sanctions and other relief under $ 526 . 

In its motion for summary judgment , Capstone asserted that : (i) it made full disclosures so that the debtor was able to make an informed decision about the use of the bifurcated fee arrangement ; (ii ) the bifurcated arrangement allowed the debtor to obtain a discharge without complications that otherwise he could not have afforded to obtain ; ( iii ) its fee of $2,000 wa s reasonable under $ 329 ; a n d ( iv ) the use of electronic s i gnatures does not merit the imposition of sanctions. 

The Court entered a Memorandum Decision and Order granting Capstone ‘ s Motion for Summary Judgment, finding tha t 

Lincoln Law filed its Motion for Sanctions on behalf of Capstone ‘ s client, the debtor , seeking the following relief: (i) disgorgement of all fees paid by the debtor in the case under § 329 , (i i) restriction of Capstone ‘ s e – filing privileges and (iii) sanctions and other relief under SS 

105 and 362( k ) . The interesting issue raised by Lincoln Law ‘ s M otion was whethe r Capstone Law was liable for any damages that may have resulted from a violation of the automatic stay if the stay had been violated . As noted by the court, the plain language of § 362 states that the “automatic stay has no effect whatsoever upon claims which arose after the petition . ” 

The Court concluded withou t difficulty t h at Capstone ‘ s attorney ‘ s fees did not arise under the pre – petition agreemen t as alleged by the debtor . Capstone’s fees arose under Option of preparing and the filing of the Initial Bankruptcy Papers for $0 down and entering into a post- petition agreement pursuant to which Capstone would represent the debtor after the bankruptcy filing for $ 2 , 400 that could be paid in monthly installments . After Capstone filed the Chapter 7 petition, the debtor signed a post-petition agreement to pay Capstone $2,400 in ten monthly installments for post -petition services , and those fees were reasonable. The Court found that Capstone had a reasonable, legal basis to employ bifurcated fee agreements when the clients were unable to p ay the full retainer prior to their bankruptcy filing . On the other h and, t h e court w as adamant that “f e es for pre -peti t ion services should n o t be directly o r surreptitiously slipped into the fee charged for post-petition services. ” T h e court further concluded that the debtor was an adult who , based upon his inability to pay an up-front retainer , made an informed business decision to enter into a post – petition agreement for BK Billing to advance Capstone’s legal fees and to repay BK Billing with monthly installments of $240 each for ten months.

In summary, the Hazlett Court recognized that bifurcated Chapter 7 attorney ‘ s fee agreements serve a purpose that is not prohibited by the Bankruptcy Code, namely, allowing individuals access to attorneys for a Chapter 7 bankruptcy despite the debtor ‘ s inability to pay attorney ‘ s fees. In reaching that conclusion, the Court found that (i) the bifurcated fee agreement with Capstone was in the debtor ‘ s best i n terests and without that agreement the debtor could not have a n attorney to file his Chapter 7 peti t ion; ( ii) Capstone ‘ s fees were reasonable ; and (iii) s i gnificantly , Capstone had provided full and complete disclosures to the debtor in writings acknowledged by the debtor so that he had made an informed business decision. Like in every bankruptcy case, an attorney is well – advised to properly inform her client and to charge that client a reasonable fee . 

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