In re Brown, No. 20-23632-BKC-LMI (Bankr. S.D. Fla. Jun. 16, 2021)

Decided June 16, 2021 by the Chief Judge for the bankruptcy courts in the Southern District of Florida

In this case, the U.S. Trustee sought guidance on the business practices of three law firms in the Southern District of Florida that were offering zero-down bifurcated Chapter 7 bankruptcies.

This case was decided by Chief United States Bankruptcy Judge Laurel M. Isicoff of the Southern District of Florida, although she took pains to note that “the legal conclusions in this opinion represent the legal conclusions of all of the judges of the Bankruptcy Court of the Southern District of Florida.”

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This case is as seminal as Hazlett, and it’s also as resounding a victory for modern bifurcations:

The Court holds that so long as attorneys offering a bifurcated fee arrangement comply with the terms of this Order, those arrangements do not violate the Bankruptcy Code or Bankruptcy Rules, this Court’s Local Rules, or the Florida Bar Rules.

The court observed that:

The UST specifically stated it is NOT, at this time, arguing that fee bifurcation in chapter 7 cases should be prohibited.

Despite this professed neutrality, though, the UST seemed to have problems with many practical aspects of how these law firms offered bifurcated Chapter 7s.

For one, the UST argued that the postpetition fees charged were “excessive and unreasonable, especially compared to the low or non-existent prepetition charge.”

However, the court disagreed with the UST’s logic that the prepetition cost was too low:

The UST’s argument falls short because it measures the reasonableness of the postpetition fee solely by comparing the charge to the fee for the services and charges prepetition. However, that is not the appropriate test. … The Court agrees [with Carr]; reasonableness is not gauged by a comparison between the prepetition charges and the postpetition charges.

Somehow, the UST also argued that the prepetition cost wasn’t high enough:

If, in fact, most of the services were provided postpetition, then … the Law Firms failed to competently represent their clients prepetition. Additionally, if the Law Firms failed to perform the appropriate diligence prepetition, the Law Firms may have violated [Rule 9011 of the Federal Rules of Bankruptcy Procedure].

In response, the court held that a bankruptcy attorney in its district must perform the following tasks prepetition, which the firms in this case had done:

To address the issues of competency and unbundling, this Court holds that any lawyer choosing to represent a debtor must comply with the Bankruptcy Code, the Bankruptcy Rules, the Florida Bar Rules, and this Court’s Local Rules. These statutes and rules collectively require sufficient inquiry by the attorney, not staff, when initially meeting with a client to ascertain whether filing bankruptcy is the appropriate relief, determining under what chapter a bankruptcy case could or should be filed, and additionally compel the attorney to adequately inform a potential debtor of the consequences of that choice. Further, the attorney must assist the debtor with all of the debtor’s obligations under section 521 unless he or she is permitted to withdraw. The attorney must prepare and file all documents necessary to commence the bankruptcy case, which includes, at a minimum, the petition, the creditor’s matrix, any motion to waive or pay the filing fee in installments, the statement of attorney compensation, and the Debtor Credit Counseling Certificate, or, if applicable, a motion to waive the need to file or file late, the certificate (collectively the “Minimum Required Documents”). And finally, the attorney must attend the section 341 meeting of creditors unless he or she is permitted to withdraw prior to the meeting.

When considering the reasonableness of postpetition fees, the court also lowered the bar for bankruptcy attorneys charging flat fees for postpetition work by ruling that:

The Court holds that it will review the reasonableness of the postpetition flat fee charged by each of the Law Firms by taking into account not only the work that was done but also the services that might have been required in the case for which there would have been no additional charge.

The court’s only caveat was that when considering the reasonableness of attorney’s fees for a particular debtor, the value of contingent services that were not relevant for that debtor could not be included:

The Court agrees that in determining the reasonableness of the flat fees charged by the Law Firms the Court should not consider services that would not possibly arise in the case, such as dealing with student loan issues when the debtor does not have student loans.

The court also ordered better disclosures on Form 2030 about the nature and structure of postpetition fees, asking that attorneys disclose that “the ‘to be paid’ portions of the fees that were contingent upon the debtor’s execution of, or agreed to by virtue of, an agreement signed postpetition. The court also requested that attorneys disclose that ”the [postpetition] fees were to be paid on a monthly basis.”

The court also shot down an odd request from the UST that would have required monthly amendment of Form 2030:

Both Law Firms acknowledge that the Form 2030 Fee Disclosure needs to be amended when and if a debtor signs a postpetition agreement, and, if the fees are being paid monthly, disclose the details of the monthly payment arrangement. The UST argues that the Form 2030 Fee Disclosure must be amended, and disclosure needs to be made, each time the law firm receives payment – meaning every month if payments are due monthly. The Court finds that this level of disclosure is not necessary so long as the form is amended when the postpetition agreement is signed, and that the amended form discloses the payments that will be made monthly.

Surprisingly, the court held that future postpetition payments did not need to be added to Schedule J, disagreeing with both Wright and Hazlett:

Schedule J requires that a debtor list all monthly expenses. The UST argues, and both Law Firms agree, that if a debtor signs the postpetition agreement and it includes a monthly payment, Schedule J must be amended to reflect the payment obligation, and then amended again, once the monthly payments are completed. The Court does not agree. Schedules I and J reflect information as of the petition date. As of the petition date, a chapter 7 debtor does not have an obligation to pay an attorney a fee postpetition. Once the debtor signs the postpetition fee agreement, the debtor’s counsel must file the Form 2030 Fee Disclosure. There is no need to amend Schedule J.

The court also ruled that attorneys must include the now-standard “three option disclosure,” but mandated that this disclosure be in a separate disclosure form, as described in Hazlett and Carr, rather than in the prepetition agreement, as described in Walton. This disclosure must also highlight any extra amount a client would pay in order to make postpetition payments:

The debtor must be given a separate disclosure form that discloses he or she is being provided the option to choose the bifurcated fee arrangement, and whether the bifurcated fee arrangement will have a different cost than a flat fee arrangement paid in advance of the filing. The disclosure should also clearly describe the debtor’s options, including the consequences of choosing a particular option: (a) sign the postpetition agreement and get the services described in that agreement at the stated cost (flat fee or hourly rate); (b) do not sign the agreement, and once the attorney is permitted to withdraw, proceed with the case without a lawyer; or (c) retain a new lawyer postpetition.

As with Walton (requiring the allowance of rescission) and Carr (requiring a grace period to sign the postpetition agreement), the court demanded that law firms give clients an “off ramp” after the prepetition agreement to give clients “breathing room”:

The postpetition agreement, if it is signed immediately following the petition, must include a 14-day rescission period and describe the consequences if the debtor rescinds the agreement. Alternatively, the debtor should be given a 14-day window after the petition is filed in which to sign a postpetition agreement. The prepetition agreement must disclose that regardless of whether the postpetition agreement is signed, the attorney must continue to represent the debtor unless allowed to withdraw.

As with both Walton and Carr, if a client doesn’t sign the posptetition agreement, the attorney may not withdraw immediately:

​​The prepetition agreement must disclose that regardless of whether the postpetition agreement is signed, the attorney must continue to represent the debtor unless allowed to withdraw. If the postpetition agreement has a rescission clause, it must contain the same disclosure.

Notably, Judge Isicoff broke from previous decisions by treating the filing fee as a prepetition obligation. Given the dischargeability of prepetition obligations, it’s natural that the court then ruled that attorneys cannot advance the filing fee and expect payment postpetition:

The Court finds that a law firm’s payment of the filing fee with postpetition repayment by the debtor violates the Bankruptcy Code as well as the Florida Bar Rules. The filing fee is due upon the filing of the bankruptcy petition. Therefore, the debtor’s obligation to repay the filing fee to the firm is a prepetition obligation that is dischargeable. A law firm that advances the fee with the expectation of repayment postpetition is violating section 526 by advising the debtor to incur a debt “to pay for bankruptcy related legal services”, violating 11 U.S.C. §362 and, assuming the debtor gets his or her discharge, violating 11 U.S.C. §524.

Treating the filing fee as a prepetition obligation is not a self-evident truth. In fact, it can easily be argued that the filing fee is a postpetition expense, since the payment of the filing fee occurs chronologically after the filing of the petition, and the filing fee can be paid up to five days after the petition is filed. It can even be argued that the filing fee is due at the exact moment of time that the petition is filed, and hence, the payment of the filing fee is nether prepetition or postpetition. However, speaking strictly chronologically, there does not appear to be a reason to view the filing fee as an expense that occurs before the petition is filed.

Moreover, if the filing fee is a prepetition obligation subject to discharge, Judge’s Isicoff’s decision means the bankruptcy court itself is routinely violating the automatic stay. That’s because all bankruptcy courts allow financing of the bankruptcy filing fee over the 120 days after a petition has been filed. Debtors merely need to fill out Official Bankruptcy Form Number: B103A, “Application for Individuals to Pay the Filing Fee in Installments.” Courts routinely approve this Application, which allows postpetition payment of what Judge Isicoff is categorizing as a prepetition obligation that should be discharged.

In addition to ruling that advancing the filing fee violated the Bankruptcy Code, Judge Isicoff ruled that advancing the filing fee violated Rule 4-1.8(a) of the Florida Bar Rules, which states that:

A lawyer is prohibited from providing financial assistance to a client in connection with pending or contemplated litigation, except that:

(1) a lawyer may advance court costs and expenses of litigation, the repayment of which may be contingent on the outcome of the matter; and

(2) a lawyer representing an indigent client may pay court costs and expenses of litigation on behalf of the client.

The Brown court ruled that this meant that a lawyer who advanced a filing fee must make repayment contingent on the outcome of the case:

The Court finds that the word “may” means that the attorney may advance costs the repayment of which is contingent on the outcome of the case, not that the attorney may always advance costs for a client regardless of whether the repayment is contingent on the outcome of the case.

It seems that a simple workaround to this Florida Bar Rule would be to make repayment of the filing fee contingent on clients receiving a successful discharge in their cases.

In any case, aside from the forbidding the advancing of filing fees to clients, the Brown decision is a strong endorsement of bifurcated Chapter 7 bankruptcies, as well as offering many useful guidelines to bifurcation practitioners.

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