In re Prophet, Civil Action 3 21-cv-01080-JMC (D.S.C. Mar. 14, 2022)

Decided March 14, 2022 by a District Court in South Carolina in the Fourth Circuit

This case was a successful appeal of a decision that had ruled bifurcated bankruptcies violated a Local Rule in South Carolina. See In re Prophet, 628 B.R. 788 (Bankr. D.S.C. 2021).

In that lower court decision, the Bankruptcy Court had held that bifurcated agreements are impermissible under South Carolina Local Rule 9011-1(b).

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That Local Rule states that:

Except as may be provided in a written agreement with the debtor concerning appeals and adversary proceedings, the law firm/attorney which files the bankruptcy petition for the debtor shall be deemed the responsible attorney of record for all purposes including the representation of the debtor at all hearings and in all matters arising in conjunction with the case, including service, notice and communication via CM/ECF and the Federal Rules of Bankruptcy Procedure.

The UST had argued that an attorney who only performed prepetition duties for a debtor violated this Local Rule:

The UST argues that the pre-filing and post-filing agreements do not comply with SC LBR 9011-1(b) because [the bankruptcy attorney] is only agreeing to provide limited services and is not actually agreeing to represent the debtor for the duration of the case, unless the post-filing agreement is signed.

The judge agreed, ruling that Local Rule 9011-1(b):

imposes a continuing duty on a debtor’s attorney to represent a debtor throughout a bankruptcy case (with the exception of adversary proceedings and appeals).

When the bankruptcy attorney appealed, the District Court judge summarized the appellant’s argument as follows:

Appellant argues, however, that neither the bifurcated agreements nor Appellant’s conduct violated South Carolina’s Local Rule because the policy behind the bifurcated agreements aligns with the policy behind the Rule. … He argues that the purpose behind the S.C. LBR 9011-1(b) is to ensure debtors have representation for the duration of their case and that allowing debtors to separate payment fulfills this purpose.

The opinion in this case cites Hazlett, which had a remarkably similar set of facts. In that Tenth Circuit case in Utah, the UST had argued that bifurcated Chapter 7 bankruptcies violated Utah Local Rule 2091, which provides that:

Scope of Representation. A debtor’s attorney must represent and advise the debtor in all aspects of the case, including the §341 Meeting, motions filed against the debtor, reaffirmation agreements, agreed orders, and other stipulations with creditors or third parties, and post-confirmation matters. The debtor’s attorney must also represent the debtor in adversary proceedings filed against the debtor unless, pursuant to this rule, the Court has excused the attorney from this requirement. The scope of representation cannot be modified by agreement. The court may deny fees or otherwise discipline an attorney for violation of this rule.

In the Hazlett case, a Utah judge held that while the Utah Local Rule prevented unbundling, bifurcated bankruptcy agreements complied with this Local Rule, because the purpose was not to unbundle:

[I]n this case, the purpose of the bifurcated fee agreements is decidedly not to abandon the debtor, but to enable the attorney to be paid for the post-petition services. It is true that under the process followed by [the bankruptcy attorney], debtors were given the option to proceed pro se. But that decision is solely up to the debtor, as the attorney is ready and willing to complete the representation upon the signing of the post-petition fee agreement. Thus, the 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.

In this appellate opinion, the District Court judge found this Hazlett argument to be compelling:

The court is persuaded by this reasoning. Like debtors in Utah, South Carolina debtors are free to terminate an attorney’s services at any time, and [Local Rule 2091-1(a)] provides a method for an attorney to request court permission to withdraw from a case “upon motion and cause shown or upon the consent of the represented party.” Additionally, Appellant’s agreements with the debtors below provide the debtors with the election to choose whether to represent themselves pro se, hire another attorney, or enter a post-filing agreement with Appellant within ten (10) days of filing. Appellant acknowledges that, regardless of whether the debtor signs a post-petition agreement, he is the attorney of record for the debtor unless and until the court allows him to withdraw. And, in the cases before the court, Appellant did not attempt to withdraw and obtained satisfactory results in each case. In fact, the depositions of the debtors in these cases illustrate that the debtors were appreciative of the opportunity to use bifurcated agreements to file for bankruptcy sooner and were satisfied with the results Appellant obtained in their cases. Even if Appellant had attempted to withdraw from the case, he could not do so without permission from the court. Thus, the Local Rules provide their own safety measure to protect debtors from attorneys who seek to withdraw in bad faith.

Thus, the appellate court held that this South Carolina Local Rule that prevent unbundling did not prevent bifurcated fee agreements from being used in bankruptcy cases.

The lower court had based its opinion forbidding bifurcation on the finding that this Local Rule forbade bifurcated fee agreements. Thus, this was the only matter considered by the District Court upon appeal.

Thus, the judge remanded the case to the lower court for further proceedings, which are also covered in this bifurcation case law summary.

Like Hazlett and Slabbinck, beforeit, this opinion remains as powerful support for the idea that Local Rules against unbundling do not preclude bifurcated fee agreements.

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