Bifurcated Chapter 7 Fee Agreement Void

Posted by NCBRC - June 3, 2022

A fee arrangement bifurcating the chapter 7 bankruptcy attorney’s representation into separate pre-petition and post-petition agreements violated sections 526 and 528 and was void. In re Siegle, No. 21-42321 (Bankr. D. Minn. May 19, 2022).

The chapter 7 debtor’s counsel used a bifurcated fee system under which he offered a pre-petition fee agreement which obligated him only to file the bankruptcy petition. After that, the agreement specified that the debtor had three options: “(1) complete the case pro se; (2) hire another bankruptcy attorney; or (3) execute the Post-Petition Agreement.” The agreement came to the court’s attention when the debtor entered into the post-petition agreement and her attorney filed for court approval.

The court analyzed the propriety of the two-phased fee agreements in light of sections 528 and 526. Section 528(a)(1) requires bankruptcy attorneys to execute written contracts with their clients setting out “clearly and conspicuously – (A) the services such [attorney] will provide” to the client. Section 526 prohibits an attorney from making “untrue or misleading” statements or from misrepresenting their services, “directly or indirectly, affirmatively or by material omission.”

Although the agreements here tracked the local rules in many respects, the court found they also included several misleading, inconsistent or untrue statements.

Specifically, the pre-petition agreement informed the debtor that the attorney’s services would “naturally terminate immediately after filing of the partial petition,” and that if the debtor did not execute the post-petition agreement, she would need to hire a different lawyer or proceed pro se. The agreement warned that the debtor would then be “solely responsible” for completion of her bankruptcy case.

The court found this language contrary to the law in the District of Minnesota, under which partial bankruptcy filings, if not completed within 14 days, result in automatic dismissal. The court stated that “[t]he assertion that an attorney can ‘reserve[] the right to withdraw’ . . . for nonpayment, or that they can condition the provision of legal services in the main case upon the debtor signing an additional fee agreement, has been considered and unequivocally rejected in the District of Minnesota.” These statements were thus untrue and violated section 526(a)(2).

In addition, the agreement violated section 526(a)(3) because it failed to inform the debtor that counsel is not permitted to withdraw from representation once a partial petition is filed in the absence of “extraordinary circumstances.” Instead, the agreement suggested that the debtor must sign a post-petition agreement to retain representation by counsel. The court stated: “In fact, the real purpose of the Post-Petition Agreement is to ensure the collectability of Applicant’s unpaid legal fees.”

The court found the agreements neither clear nor conspicuous as required by section 528(a)(1). For instance, in certain instances the agreements were internally inconsistent as when they informed the debtor that counsel would continue representation until released by the court, while at the same time informing the debtor that counsel’s services would end automatically upon the filing of the petition. Also, the pre-petition agreement assured the debtor that counsel would timely complete the petition, schedules, and certificates, etc. while at the same time, warning that she was responsible for filing schedules if she did not sign the post-petition agreement. The additional fact that the agreements were “lengthy, single-spaced documents,” made the terms inconspicuous.

These discrepancies and inaccuracies rendered the agreements void under section 526(c)(1) and unenforceable except by the debtor.

Siegle Bankr Minn May 2022


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