Decided January 22, 2020 by a bankruptcy court in Kentucky in the Sixth Circuit

In Carr, the court decided sua sponte to seek information from a law firm in its district who performed bifurcated Chapter 7s, and then asked for briefs from the UST.

The result was more judicial support for bifurcation in general, as well as support for specific modern bifurcation practices.

The court noted approvingly that the attorneys properly used a two-contract retainer agreement that comported with the case law of other attorneys who had successfully bifurcated Chapter 7s in Slabbinck, Hazlett, and Walton v. Clark & Washington, P.C..

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Moreover, the attorneys used a separate written disclosure document, which they required clients to sign, explaining the two-contract approach, the fees associated with the postpetition contract, and various other disclosures.

This cleared the hurdle for the firm’s obligations under §528(a)(1) and §528(a)(2):

[T]he Attorneys and Debtor executed the First Contract at their initial meeting, before the Attorneys filed Debtor’s petition. It “clearly and conspicuously” outlined the services that the Attorneys would perform, the fees charged for those services, and the payment terms. … [A]t a subsequent, post-petition meeting, Debtor and the Attorneys executed the Second Contract that also “clearly and conspicuously” outlined the post-petition services that the Attorneys would perform, the fees charged for those services, and the payment terms. Debtor also received a fully-executed copy of the Second Contract. The Court concludes that the Attorneys complied with their obligations under §528(a).

The court also noted approvingly that the attorneys ensured they didn’t get paid first before the court:

The [postpetition contract] provides that Debtor’s monthly payments first will be applied to the amounts owed on her filing fee and then to the interest and principal due under the Second Contract.

This complies with Rule 1006(b)(3), which states that:

All installments of the filing fee must be paid in full before the debtor or chapter 13 trustee may make further payments to an attorney or any other person who renders services to the debtor in connection with the case.

Also, since Kentucky is in the Sixth Circuit, the court checked that the attorneys followed the Rittnehouse precedent in the Sixth Circuit that prepetition debt is dischargable in bankruptcy. The court found that while the attorneys did charge a prepetiion fee, that fee was paid before the petition was filed, which made Rittenhouse inapplicable.

The court also held that the prepetiton attorney’s fee of $300 and the pospetition attorney’s fee of $800 were reasonable.

The court also held that the structure of the attorney’s fee agreements complied with Kentucky’s Rules of Professional Conduct, as both contracts had a reasonable limited scope of representation, with debtors expressing their informed consent in writing.

In addition, the court’s approval covered an arrangement where the attorneys advanced the filing fee.
The court did find some fault with the attorneys for not making it extremely clear on the Form 2030s that they were using a two-contract approach to enable postpetition payments of postpetition services. The court ordered the attorneys to disclose this more clearly in future cases.

Notably, the court also took pains to rebut the U.S. Trustee’s presumption that the attorneys should charge the same hourly rate for the prepetition and postpetition portions of its cases. Indeed, the court observed that it was acceptable for the attorneys to charge two entirely different hourly rates, as long as the attorney’s fees associated with each part of the case were reasonable.

In other words, the court endorsed the use of a separate lodestar analysis for each of the preptition and postpetition contract.

Because the attorneys did not finance their fees with a third-party financing company, the court did not rule on the propriety of financing postpetition bankruptcy fees.

This decision was a resounding victory for properly-executed modern bifurcations in the Eastern District of Kentucky.

To download this case brief, 20 other case briefs in our Bifurcation Case Law Summary, and the full text of all opinions, click the button below:

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