In re Waldo, 417 B.R. 854 (Bankr. E.D. Tenn. 2009)
Decided October 27, 2009 by a bankruptcy court in Tennessee in the Sixth Circuit
This opinion begins a series of cases involving Atlanta-based law firm Clark & Washington, P.C. over several years and multiple states. Clark & Washington’s persistence eventually helped lead to the establishment of the constellation of best practices used in modern bifurcations.
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In this Tennessee case, Clark & Washington argued that:
[I]ts [one-contract] Engagement Contract created a “straddle obligation,” wherein [the law firm] entered into a prepetition obligation to perform post-petition work, and that the Debtors had an obligation to pay when performance was rendered. To accomplish this, Clark & Washington … accepted post-dated checks in each of the Chapter 7 cases in dispute and had each Debtor execute an Acknowledgment that “[t]he initial payment represents fees earned pre-Petition and the future payments are to be applied as contemporaneous compensation for post-Petition services.”
However, the Waldo court ruled against Clark & Washington:
[T]he attorneys’ fees in each case are flat fees which arose pre-petition, irrespective of when services were to be rendered. Upon the signing of each Engagement Contract, Clark & Washington … became obligated to each of the Debtors to represent them in their Chapter 7 bankruptcy cases in exchange for payment of the agreed upon flat fee, and the fact that some services were to be provided postpetition does not change the nature of the fee, nor does it change the nature of the obligation.
The court also held that:
the original Compensation Disclosures filed by Clark & Washington … were false, primarily because they represented that the flat fee had been paid in full in each case, when in fact, the fees had not been paid, and they did not disclose that they had accepted post-dated checks from the respective Debtors.
For these reasons, the court ordered the disgorgement of all fees in associated cases, cancellation of those contracts, the return of any uncashed post-dated checks, and amendment of the Form 2030 and Schedule F to list the law firm as a creditor for unpaid prepetition legal fees. It also ordered Clark & Washington to refund bank fees for insufficient funds that were incurred by clients when the law firm attempted to cash its clients’ post-dated checks.
However, the court also outlined what it considered a potential solution:
The following options, however, which have been employed by other courts, appear to fall within the scope of potential and allowable solutions: … (2) revising retainer agreements and expressly designating pre-petition services, which are paid pre-petition, and post-petition services, which shall be paid post-petition.
This first Clark & Washington case is mostly a case study demonstrating business practices to avoid, like using a single contract signed prepetition, using post-dated checks collected prepetition, and having sloppy disclosures that don’t clearly disclose the facts peculiar to bifurcated Chapter 7 bankruptcies.