Bifurcated Fee Agreement Violates Rules

Posted by NCBRC - October 24, 2022

A prepetition fee agreement where the debtor agreed to have the law firm pay the filing fee postpetition at which time the debtor would reimburse the firm, was unenforceable in that it was predicated on ignoring Bankruptcy Rule 1006(a) which requires the fee to be paid when the petition is filed. In re Digregorio, No. 21-79 (Bankr. M.D. Fla.  Oct 19, 2022).

The bankrutpcy law firm, Van Horn, used a bifurcated fee agreement under which the debtor signed a prepetition agreement to pay the firm $388, which equaled the total of the filing fee and costs but was treated by the firm as money earned. In the agreement, the debtor also requested the law firm to pay the filing fee post-petition and then seek reimbursement from the debtor. The trustee objected to the agreement.

Van Horn essentially admitted that the $388 fee was intended to cover pre-petition costs but argued that its fee structure allowed it to receive payment for services in the event the client decided not to file for bankruptcy.

The court was guided by Walton v. Clark & Washington, P.C. (“Clark & Washington I”), 454 B.R. 537, 546 (Bankr. M.D. Fla. 2011), where the debtor signed a prepetition fee agreement paying the filing fee and costs, but also gave his bankruptcy counsel post-dated checks totaling $1,000 to cover postpetition fees. The court found the post-dated checks created a prepetition debt, enforcement of which would violate either the automatic stay or the discharge injunction, depending on when the law firm cashed them.

In this case, the court found that if the prepetition fee agreement were interpreted to require the law firm to advance the fees and costs for postpetition repayment, it would run into the same problem as the post-dated checks in Clark & Washington in that it would create a prepetition claim which could not be collected postpetition.

If the agreement were interpreted as having the law firm actually pay the fees postpetition, it would violate the rule that the filing fee be paid when the petition is filed. Bankruptcy Rule 1006(a) provides that, unless one of two exceptions applies, debtors must pay the filing fee in payid australia casino when they file their petitions. While the court found a prepetition fee agreement for $388 was not on its face problematic, its disregard for the Rules rendered it unenforceable.

Digregorio Bankr MD Fla Oct 2022


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