In re Hazlett, Bankruptcy Number: 16-30360 (Bankr. D. Utah Apr. 10, 2019)

Decided April 10, 2019 by a bankruptcy court in Utah in the Tenth Circuit

In re Hazlett is a rousing affirmation for the modern Chapter 7 bifurcation.

In this case, debtor Hazlett was unable to afford a traditional bankruptcy for $1,200 from another law firm. He chose to do a bifurcated, $0 down Chapter 7 for $2,400 with attorney Russell Weekes of Capstone Law.

Weekes rigorously followed the principles laid down in prior cases involving bifurcated Chapter 7s. Notably, Weekes split his retainer into prepetition and postpetition agreements, and used the “three options” disclosure in his prepetition contract, as outlined in Slabbinick and the second Walton opinion. Weekes also disclosed properly to the court on his Form 2030 and Schedule J, as outlined in Wright. Finally, he charged reasonable attorney’s fees of $2,007 for his postpetition work, which was supported by detailed billing records.

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Because Weekes avoided obvious bifurcation mistakes made by previous bankruptcy attorneys, the judge was able to make a more fundamental ruling on the U.S. Trustee’s allegation that “the bifurcation of bankruptcy services into pre-petition and post-petition fee agreements” was improper:

[C]ases from other jurisdictions at this time, including the Ninth and Seventh Circuit Courts of Appeals, supported, or at least acquiesced to, this approach to enable cash-challenged debtors to retain and pay for legal counsel to assist them in achieving a Chapter 7 discharge.

Based on these cases, the Court finds that Weekes had a reasonable, legal basis to employ bifurcated fee agreements when clients were unable to pay a full retainer prior to their bankruptcy filing.

Here, the court refers to two cases in the Ninth and Seventh Circuit Court of Appeals, both of which were reviewed earlier in this case law summary. The Ninth Circuit Court of Appeals case is In re Hines, and the Seventh Circuit Court of Appeals case is Bethea v. Robert J. Adams Associates.

The U.S. Trustee also raised another fundamental concern relating to Attorney Weeke’s “use of a third-party financing company to factor and collect the fee.”

Attorney Weekes had attempted to comply with disclosure requirements by having clients sign a separate agreement to acknowledge that a third party will be purchasing the client’s accounts receivable, as well as directly debiting their bank account for payment for a period of time. The judge ruled for Attorney Weekes on this count, too, with two caveats:

While it is not a violation of the Utah Rules of Professional Conduct to sell a lawyer’s accounts receivable, the client must be fully informed with respect to the transaction. … [In addition, t]he fee charged the client (including the finance company discount) must be reasonable.

The court also made clear that unbundling, while permitted by the Utah bar rules, was not permitted under Local Rule 2091-1, but that a bifurcated fee arrangement, where only the timing of services and the associated payment are separate, is not unbundling:

[T]he bifurcated fee agreement is not for unbundling but to facilitate the debtor’s post-petition payment for the attorney’s post-petition services. And the fact that the post-petition payments can be made in installments only increases the affordability of the attorney’s services and thereby increases a debtor’s access to legal representation.

The court also mentioned in dicta that attorneys were allowed to charge different prices for clients who paid cash versus those who financed payments over time:

[A]ll fees for legal services, including any finance charge on installment payments, must be reasonable and necessary. This does not mean the attorney must charge the same to a client who can pay an up-front retainer versus a client who must use a bifurcated fee agreement, but that pricing differential must be based on reasonable and quantifiable factors, and it must not include the cost of pre-petition services. Also, if the price differential is challenged by any party, including the Court, counsel should be prepared to justify it.

Notably, on August 23, 2019, Director White of the U.S. Trustee Program gave a speech at the 2019 Annual Conference of the National Association of Bankruptcy Trustees where he commented on this case:

In the District of Utah, the bankruptcy court handed down a decision in In re Hazlett. I commend that opinion to your attention because the careful reasoning of the court actually highlights the factors we look for and which are almost always absent in the cases we bring.

In the Hazlett case, the court upheld the bifurcated fee because it found that four essential elements were present: (1) the lawyer’s dealings with the client were based on the client’s best interests; (2) all fees charged for post-petition services were reasonable and did not include fees for pre-petition services; (3) the arrangement was fully disclosed in the lawyer’s Rule 2016(b) statement; and (4) the lawyer complied with local rules governing substitution or withdrawal. Moreover, in the context of factoring, the court found that the fees charged to the client were reasonable on a lodestar basis and did not reflect a markup to offset the premium charged to the lawyer by the financing company.

Hazlett is a favorable precedent in the Tenth Circuit for modern bifurcation (and for financing bifurcated Chapter 7s), as well as offering the sort of model opinion that other jurisdictions cite favorably.

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