613 B.R. 427
Bankr. E.D. Ky.2020Background
- Debtor Chanda S. Carr engaged Dennery, PLLC under a "Dual Contract Option": a prepetition contract for limited "skeletal" chapter 7 services (paid $300) and a post-petition contract for routine completion services (total $1,185 paid in installments, including the $335 filing fee).
- Attorneys prepared and filed the skeletal petition and later (post-petition) executed a second agreement, filed schedules and the Rule 2016(b)/§329 fee statement, and continued representation through the §341 meeting; debtor received a discharge.
- The Court sua sponte queried the fee disclosure practice after reviewing similar filings and ordered production of engagement agreements and a hearing; UST and the Chapter 7 Trustee raised objections about the fee structure.
- Key legal concerns: whether the dual-contract structure improperly creates nondischargeable post-petition debt to evade Lamie/Rittenhouse, whether it violated §526(a)(4) (advising incurrence of debt), Rule 1006(b)(3) (priority of filing-fee payments), disclosure obligations (§329/Rule 2016), and Kentucky ethics rules on limited scope/informed consent.
- The Court found the contracts were executed in compliance with §528(a), the attorneys did not advise impermissible incurrence of debt or factor receivables, payments were applied to the filing fee first (complying with Rule 1006(b)(3)), and the arrangement met Kentucky RPC requirements; it declined to disgorge fees under §329(b) but admonished more detailed Rule 2016(b) disclosures in future cases.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Validity of dual pre/post-petition contracts under §329/Bankruptcy policy (Lamie/Rittenhouse) | Dual contracts are a workaround to evade discharge rules; post-petition fee may actually compensate prepetition work and be improper | Separate written agreements; no unpaid prepetition debt on petition date; post-petition obligation is a new, enforceable personal debt | Court: Arrangement permissible here; Rittenhouse inapplicable because attorneys were not creditors prepetition; no §329(b) action taken |
| Violation of §526(a)(4) (advising debtor to incur debt to pay fees) | Structure effectively advises debtor to incur post-petition debt to pay counsel | Payments are bank withdrawals (not credit-card financing); counsel did not instruct debtor to incur other debt to pay fees | Court: No violation of §526(a)(4) |
| Compliance with Rule 1006(b)(3) re: filing-fee priority | Concern that attorneys collected fees before filing fee fully paid | Second contract applied payments first to filing fee; attorneys did not allocate payments to legal fees until filing fee paid in full | Court: Arrangement complied with Rule 1006(b)(3) |
| Ethical compliance (Kentucky RPC on limited scope, informed consent; disclosure duties) | Trustee argued disproportionate prepetition work and insufficient prepetition disclosure of true scope/costs | Attorneys obtained written, conspicuous informed consent, limited scope was reasonable, fees reasonable; disclosures provided though Fee Statement lacked detail about dual contracts | Court: Arrangement met Kentucky RPCs; counsel must provide clearer Rule 2016(b) disclosures going forward |
Key Cases Cited
- Lamie v. United States Tr., 540 U.S. 526 (2004) (prepetition attorney fees are dischargeable; counsel cannot be paid from estate absent §330 authorization)
- Rittenhouse v. Eisen, 404 F.3d 395 (6th Cir. 2005) (prepetition agreements to pay attorney fees do not survive chapter 7 discharge)
- Milavetz, Gallop & Milavetz v. United States, 559 U.S. 229 (2010) (bankruptcy attorneys are "debt relief agencies" for certain statutory duties)
- Henderson v. Kisseberth (In re Kisseberth), 273 F.3d 714 (6th Cir. 2001) (attorney has affirmative duty to fully disclose fee arrangements under §329/Rule 2016)
- In re Slabbinck, 482 B.R. 576 (Bankr. E.D. Mich. 2012) (upheld separate pre- and post-petition fee agreements where disclosures and consent were adequate)
- Walton v. Clark & Washington, P.C., 469 B.R. 383 (Bankr. M.D. Fla. 2012) (recognized two-contract fee systems can be permissible with proper disclosures)
- In re Gourlay, 483 B.R. 496 (Bankr. E.D. Mich. 2012) (discusses limits on post-petition collection of prepetition fees and stay/discharge injunction issues)
- In re Ortiz, 496 B.R. 144 (Bankr. S.D.N.Y. 2013) (court's duty to review attorney compensation and ethical limits on limiting scope in some jurisdictions)