Decided June 21, 2021 by the Bankruptcy Appellate Panel in the Ninth Circuit

In this case, the attorney followed all the basics of a modern bifurcated bankruptcy.

Despite this, the U.S. Trustee raised a novel issue about the attorney’s fees for financed cases. Specifically, this attorney charged $1,165 in attorney’s fees to clients who prepaid with cash for a Chapter 7. Meanwhile, the attorney charged $1,665 in attorney’s fees to clients who paid postpetition by financing Chapter 7 payments.

In other words, the UST didn’t like that the attorney charged an extra $500 in attorney’s fees for financed cases.

The attorney justified his fee on an absolute basis, reasoning that “the bankruptcy court was required to consider the reasonableness of his fees in these cases under a lodestar analysis, that is “the number of hours reasonably expended on the litigation [is] multiplied by a reasonable hourly rate.” The attorney didn’t keep detailed time records, but presented a “demonstrative exhibit” that used a lodestar analysis of his average time spent providing various postpetition services to justify the reasonableness of his fixed fee.

However, in both the lower court decision and this appeal to the Eighth Circuit Bankruptcy Appellate Panel, the judge held that a lodestar analysis did not have to be used.

As the Eighth Circuit BAP held:

Courts are not bound to apply the lodestar calculation in every case where attorney’s fees are challenged.

Thus, the BAP upheld a fee disgorgement of $500 for each of the two filings at issue in this case, thus refunding the “financing premium.”

This case appears to create a favorable ruling for USTs to cite if an attorney charges more for a financed case in attorney’s fees. However, this issue is remarkably easy to resolve. That’s because this narrow opinion focuses solely on the differences in attorney’s fees when a client pays cash versus when a client finances postpetition payments.

The obvious workaround to this opinion is to charge the same amount for attorney’s fees in both cases. Then, the attorney (or a financing company) can charge an administrative fee to the client for financing cases.

This administrative fee is easily justifiable because clients who pay regularly over the course of a year have to make at least 12 monthly payments or as many as 52 weekly payments. Even if the collection of these payments are automated, a law firm or financing company that collects these payments must also regularly contact debtors, especially after automated payments bounce. This is real work, and there’s a lot of it, so it’s easy to justify administrative fees, particularly if those fees are relatively small when measured as a percentage of attorney’s fees.

Thus, the practical impact of this Eighth Circuit BAP decision for financed Chapter 7s is to take a portion of the fee that used to be the “attorney’s fee” and rename it to be an “administrative fee.”

With that minor change, attorneys may continue to offer bifurcated Chapter 7s with clients paying different total amounts for cash and financed cases, albeit the same amount in attorney’s fees.

Notably, the UST in this case didn’t raise any concerns about the general validity of modern bifurcations, and the Eighth Circuit BAP did not express an opinion on the issue. In this case, even the UST treated the concept of properly-done bifurcated Chapter 7s as settled law.