Post-Petition Fee Agreement a No-Go

Posted by NCBRC - December 7, 2022

A fee agreement that purports to attach an attorney’s lien on the debtor’s exempt personal property is unenforceable under section 526(a) where state law allows such liens only on non-exempt property or on exempt personal property for specified exceptions not including attorney’s fees. In re Turner, No. 22-41570 (Bankr. D. Minn. Dec. 2, 2022).

The debtor entered into a “flat fee” agreement with her bankruptcy attorney under which she opted to pay chapter 7 attorney fees after the case was filed. The agreement provided that as security for post-petition payment of the fees, the attorney would take out an “attorney’s lien” under Minnesota law on “all of your furniture, appliances, household goods, clothing, electronics, cell phone, televisions and computing devices owned on 09/16/2022 and proceeds of these items.” The agreement explained that “If not for this lien, then it would be against bankruptcy laws to accept payment after filing the case.”

Then debtor exempted all her personal property in her bankruptcy and the value of the property was less than the allowed exemption amount.

The debtor’s attorney filed the agreement with the court in an Application for Review of an Attorney’s Fee Arrangement. Though there was no problem with the amount of the flat fee, the court held that the lien provision was misleading and contrary to law. Specifically, the court found that Minnesota prohibits attorneys from acquiring liens for their services on a client’s exempt personal property.

The court rejected the law firm’s argument that attorney’s liens are excepted from the exemptions. It found that, while there is an express exception to Minnesota’s homestead exemption for attorney’s liens, the only exceptions to the personal property exemption are for pawnbroker’s liens and purchase money security interests.

Section 526(a)(2) prohibits bankruptcy attorneys from making false or misleading statements concerning their fees. Here, the court found the fee agreement incorrectly informed the client that Minnesota law created an automatic lien on personal property, and that the lien made allowed the attorney to lawfully collect unpaid pre-petition fees from the client post-petition. The court found the misrepresentations to be significant in that they were likely to cause the client to waive fundamental bankruptcy protections such as exemptions and discharge.

Acknowledging good intentions of attorneys seeking novel ways to represent clients, the court stated: “For better or worse, attorneys must play the ball where it lies: Congress has not excepted unpaid prepetition legal fees from chapter 7 discharge under the Bankruptcy Code, and the Minnesota State Legislature has not created an exception to permit attorney’s liens in personal goods under the Minnesota exemption statute.”

The court found the agreement statutorily void and unenforceable by anyone other than the debtor.

Turner Bankr D Minn Dec 2022

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