668 B.R. 267
Bankr. D. Ariz.2025Background
- My Arizona Lawyers (sole owner Candace Kallen) and EZLegalFees, LLC (owner Katherine Kiesel) operated a multi‑year arrangement financing bifurcated Chapter 7 cases: firm used pre‑petition skeletal filings and required post‑petition retention agreements for an Attorney Flat Fee (typically $3,000).
- Three iterations: (1) EZ Legal paid 75% of agreement face value to the firm in exchange for right to collect full fee; (2) verbal modification to 62%/38% split with EZ Legal retaining the remainder and keeping all defaults; (3) debtors required to sign a "Promise to Pay" in favor of EZ Legal (12 monthly payments stated as $0 finance/interest) while Promises contained draconian default terms (300% default rate).
- The firm’s court Form 2030 disclosures and retention agreements misrepresented the source and amount of attorney compensation, failed to disclose fee‑sharing with EZ Legal, and contained confusing/overreaching conflict waivers; debtors were not given meaningful explanations or independent advice.
- The Court issued an Order to Show Cause after inconsistent and false disclosures; parties repeatedly amended/retracted sworn statements, failed to comply with document requests, and EZ Legal disbursed debtor funds despite a court order prohibiting disbursements.
- The Court found the relationship a covert, undisclosed fee‑sharing arrangement that violated 11 U.S.C. §§ 329, 526, Fed. R. Bankr. P. 2016, and Arizona ER 1.8; it voided all retention/financing agreements (including Promises to Pay), ordered disgorgement of $1,644,566, cancelled outstanding debtor obligations, barred collections, imposed a two‑year filing suspension on Kallen/Firm, permanently enjoined EZ Legal and Kiesel from bankruptcy lending in the District, and required credit‑report remediation.
Issues
| Issue | Plaintiff's Argument (UST) | Defendant's Argument (Kallen / EZ Legal) | Held |
|---|---|---|---|
| Jurisdiction / core proceeding | Court has core jurisdiction over fee disclosures and related practices in bankruptcy cases | EZ Legal argued lack of jurisdiction/authority to void private financing agreements | Court: core proceeding; has jurisdiction over fee arrangements tied to bankruptcy; EZ Legal deemed to have consented to final orders |
| Disclosure & fee‑sharing violations (11 U.S.C. §329; Fed. R. Bankr. P. 2016) | Firm failed to disclose fee sharing and true source/amount of compensation; disgorgement required | Firm contended fees were reasonable and nondisclosures were inadvertent; EZ Legal denied bad faith | Court: fee sharing occurred, disclosures false; ordered full disgorgement of $1,644,566 and cancellation of debtor obligations |
| Validity/enforceability of retention agreements and Promises to Pay (§§526, 528) | Retention agreements and Promises were misleading, inconsistent, and failed §528 requirements for debt relief agencies; therefore void and unenforceable | EZ Legal maintained Promises to Pay were independent post‑petition loans enforceable against debtors | Court: retention agreements and Promises to Pay void as to listed cases; Promises were not independent loans and must be voided |
| Sanctions / disciplinary relief (including practice suspension and permanent bar) | Pattern of misconduct, lack of candor, harm to debtors justify disgorgement, suspension, and injunction against EZ Legal | Defendants argued sanctions were excessive and unwarranted; EZ Legal contested court's remedial reach | Court: sanctions imposed—disgorgement; two‑year suspension for Kallen/Firm to file in District (reinstatement requires Chief Judge approval); permanent ban on EZ Legal/Kiesel from bankruptcy lending in District; credit reporting remediation ordered |
Key Cases Cited
- In re Wilshire Courtyard, 729 F.3d 1279 (9th Cir. 2013) (definition/scope of bankruptcy court jurisdictional terms)
- In re Gen. Carriers Corp., 258 B.R. 181 (9th Cir. BAP 2001) (related‑to analysis for bankruptcy jurisdiction)
- In re Richards, 655 B.R. 782 (9th Cir. BAP 2023) (authority on core vs. non‑core proceedings and final orders)
- Stern v. Marshall, 564 U.S. 462 (U.S. 2011) (requirement to timely assert objection to bankruptcy court authority to enter final orders)
- In re Park‑Helena Corp., 63 F.3d 877 (9th Cir. 1995) (disgorgement authority for attorneys under §329)
- In re Basham, 208 B.R. 926 (9th Cir. BAP 1997) (bankruptcy court authority to disgorge attorney fees for disclosure violations)
- In re Byrne, 152 F.3d 924 (9th Cir. 1998) (affirming disgorgement principles)
- Milavetz, Gallop & Milavetz, P.A. v. United States, 559 U.S. 229 (U.S. 2010) (debt relief agency concept and related Consumer‑protection provisions)
- Erickson v. Newmar Corp., 87 F.3d 298 (9th Cir. 1996) (bankruptcy court inherent authority to sanction and manage practice before it)
- In re Brooks‑Hamilton, 400 B.R. 238 (9th Cir. BAP 2009) (attorney discipline and bankruptcy court sanctioning authority)