Risk Update

Bankruptcy Matters and Fees — Firm Business Engagement Models and Conflicts, Recent Bankruptcy DQ Discussions

Posted Dan Bressler

“The Problem With “Zero Down” Chapter 7 Bankruptcy” —

  • “There is no shortage of attorneys advertising on the internet and on television their willingness to file Chapter 7 bankruptcy cases under ‘zero down,’ ‘low money down,’ or ‘file now, pay later’ fee agreements.”
  • “Precisely because lawyers stand in a fiduciary relationship with their clients, they are all bound by rules of professional conduct that prohibit them from doing things that are allowed in many other kinds of business relationships; those same rules require lawyers to do things that are not required in many other kinds of business relationships.”
  • “When you file a Chapter 7 bankruptcy case you have an undeniable conflict of interest with all of your pre-bankruptcy creditors; your creditors want to be paid, and you want to discharge your liability to them in bankruptcy.”
  • “And if, before you file your Chapter 7 case, you enter an agreement with the attorney who files the case for you that obligates you to pay them after the case is filed, then that attorney becomes your creditor. In fact, most courts that have considered this question have concluded that pre-petition debts for legal services are dischargeable in the debtor’s Chapter 7 case just like any other unsecured debt, and have also held that post-petition attempts by the attorney to collect on such debts would be improper.”
  • “If you or someone that you know entered a fee arrangement with an attorney who agreed to file a Chapter 7 bankruptcy case and collect any portion of his or her legal fees after the case was filed, that attorney, in accordance with their fiduciary duties, should have disclosed that the promise to pay the attorney’s legal fees would be discharged in the bankruptcy case, and that attempts to collect the fee from the debtor after the discharge was granted would be prohibited by law.”
  • “Some attorneys in Minnesota, and around the country, try to avoid these consequences by filing ‘no money down’ and ‘low money down’ Chapter 7 bankruptcy cases for clients under so-called bifurcated fee arrangements. Under such arrangements, the full scope of legal services necessary for a client to secure the benefit of a Chapter 7 discharge are “unbundled” and covered under two separate fee agreements:
    • “One fee agreement that is signed pre-petition and covers only services essential to get the case filed; and”
    • “A second fee agreement signed post-petition that covers the additional services necessary to conclude the Chapter 7 case, including preparing the actual schedules and statement of financial affairs, appearing with the client at the meeting of creditors, and other services as may be required to conclude the Chapter 7 case and secure the discharge.”
  • “As of late December 2021 (when this blog is being written), we do not know whether the judges of the Minnesota Bankruptcy Court will approve the use of “file now and pay later” fee arrangements in Chapter 7 cases filed here. But there is compelling evidence that our local bankruptcy judges are concerned that such fee arrangements are improper, and every reason to conclude that bifurcated fee arrangements run afoul of the Local Rules of Bankruptcy Procedure.”

“Firm DQ For Bad Disclosure In Del. Bankruptcy Case Upheld” —

  • “A federal judge on Wednesday [October 20, 2021] affirmed Delaware bankruptcy court decisions that disqualified and sanctioned a law firm for failing to disclose it was using a “fictitious trade name” when it served as special counsel to debtor entities that held ownership stake in an office building.”
  • “The bankruptcy court orders took issue with Rubin & Rubin for various disclosure violations, including a failure to provide notice of the fee sharing agreement with the consultant and filing false or materially incomplete information in its retention application, according to the decision.”
  • “After filing for Chapter 11 in 2016 when loan refinancing efforts failed and foreclosure proceedings were initiated, numerous debtor entities that collectively own an office building in Little Rock, Arkansas retained Rubin & Rubin as special counsel. As an adversary suit between the debtors and various lenders proceeded over loan terms and other issues, lenders called into question whether Rubin & Rubin PA is ‘an actual entity or not, and what representations were made to the court regarding the retention of Rubin & Rubin,’ according to a 2019 court filing.”
  • “Although the bankruptcy court did not find an issue with fee sharing by the firms, given the nature of their partnership, it did take issue with the failure to disclose ‘the existence of their firms and Rubin & Rubin’s fictitious name status,’ the opinion said.”
  • “The bankruptcy court ‘correctly held that it had authority to sanction the disclosure violations under’ bankruptcy rules, and such sanctions ‘do not require a finding of bad faith,’ Judge Connolly said.”