631 B.R. 77
Bankr. S.D. Florida2021Background
- United States Trustee challenged fee-splitting practices by Semrad Law Firm and Van Horn Law Group in three consumer Chapter 7 cases (Brown, Mcfarland, McCoy) where small or zero prepetition fees were charged and larger flat fees were charged postpetition.
- In some matters the firms advanced the bankruptcy filing fee and were repaid by the debtor postpetition.
- The UST alleged violations of 11 U.S.C. §§329, 526, Fed. R. Bankr. P. 2016, Local Rule 2090-1(E), and Florida Bar rules; sought examination and injunctive relief.
- The Court held hearings, analyzed competing precedent, and issued a memorandum opinion setting standards for permissible bifurcated Chapter 7 fee arrangements.
- Rulings: bifurcated fee arrangements are permissible if they meet prescribed disclosure, competency, timing, and disclosure-to-court requirements; advancing filing fees with expectation of repayment is prohibited going forward; the firms’ fees in these cases were found reasonable but their disclosures were inadequate and must be corrected.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Permissibility of bifurcated Chapter 7 fees | Bifurcation may be a disguised method to collect prepetition fees postpetition and can violate Code/Rules | Bifurcation is common, lawful, and helps access to counsel | Allowed if firms comply with the Court’s disclosure, competency, timing, and procedural requirements |
| Minimum prepetition services (competency/unbundling) | Attorneys cannot shift core prepetition work to postpetition; must competently advise and prepare necessary documents | Firms may limit scope and charge separately for postpetition services | Counsel must perform adequate prepetition inquiry and prepare/file Minimum Required Documents; assist with §521 obligations and attend 341 unless permitted to withdraw |
| Reasonableness of postpetition flat fees under §329 | Postpetition fees are unreasonable when most substantive work occurred prepetition and prepetition fee was minimal | Reasonableness is assessed against the services promised for each flat fee, not by comparing pre/post fees | Reasonableness measured by the value of services covered by each flat fee and likely services that might be required (excluding services that could not arise); fees in these cases were reasonable |
| Adequacy of disclosures to debtor (timing/content/rescission) | Agreements were overlapping/misleading and deprived debtors of informed consent | Disclosures were adequate as presented | Prepetition and postpetition agreements must be provided together with a separate disclosure form; postpetition agreement must include a 14‑day rescission/cool‑off and clearly state the debtor’s options and the nondischargeable nature of postpetition obligations |
| Court/case disclosures (Rule 2016/Form B2030 and Schedules) | Form B2030 must disclose that postpetition fees depend on signing and monthly payment terms; amend frequently; Schedule J should list payments | Amendment only required when postpetition agreement signed; Schedule J reflects petition-date facts and need not be amended | Amend Form B2030 when the postpetition agreement is signed to disclose payment terms; no need to repeatedly amend B2030 with every payment and no need to amend Schedule J (schedules reflect petition-date) |
| Advancing the filing fee and repayment postpetition | Payment advances by firms with expectation of repayment violate §526 and Florida Bar Rule 4-1.8(e) | Firms argue advancing costs promotes access to justice and is permitted under the Rule and some precedent | Court finds advancing filing fee with expectation of repayment violates the Bankruptcy Code and Fla. Bar Rule and prohibits the practice in new cases (no disgorgement ordered for the cases before the Court) |
| Injunctive relief requested by UST | Seek broad injunction against these practices | Firms opposed broad injunction; sought guidance instead | Partial injunction granted: firms must stop existing bifurcated practices unless they comply with Court’s standards; broader relief denied |
Key Cases Cited
- Lamie v. U.S. Trustee, 540 U.S. 526 (2004) (Section 330(a)(1) does not authorize compensation awards to debtors' attorneys from estate funds)
- Rittenhouse v. Eisen, 404 F.3d 395 (6th Cir.) (prepetition attorney-fee obligations dischargeable)
- Fickling v. Rodriguez, 361 F.3d 172 (2d Cir.) (prepetition attorney-fees dischargeable)
- Bethea v. Adams & Assocs., 352 F.3d 1125 (7th Cir.) (prepetition attorney-fees dischargeable; courts must apply enacted law)
- Biggar v. Bay Area Credit Servs., 110 F.3d 685 (9th Cir.) (addressing dischargeability of prepetition attorney fees)
- Walton v. Clark & Washington, P.C., 469 B.R. 383 (Bankr. M.D. Fla.) (approved detailed "two-contract" disclosure and 14-day rescission for bifurcated arrangements)
- Carr v. [In re Carr], 613 B.R. 427 (Bankr. E.D. Ky.) (reasonableness of each flat fee analyzed on services covered; approved certain bifurcation practices)
- Slabbinck v. [In re Slabbinck], 482 B.R. 576 (Bankr. E.D. Mich.) (competence evaluated by agreed and performed work; limited representation permissible)
- Dabney v. [In re Dabney], 417 B.R. 826 (Bankr. N.D. Ga.) (flat-fee reasonableness must relate to likely work and circumstances)
- Cadwell v. Kaufman, 886 F.3d 1153 (11th Cir.) (attorney advising client to use certain credit/payment options can violate §526)