658 B.R. 706
Bankr. S.D. Ga.2024Background
- Rodney and Debora Gibson, Georgia residents, engaged Recovery Law Group (RLG) via an online retainer agreement to file a Chapter 7 bankruptcy case.
- Stephanie K. Sheppard, a Georgia attorney, was hired on a part-time contract basis by RLG and ultimately filed the bankruptcy petition for the Gibsons, but received only $300 of the $1,838 paid by the debtors to RLG.
- The Disclosure of Compensation misrepresented both the recipient of the fee and the amount received by Sheppard, and did not disclose the real nature of the arrangement between Sheppard and RLG.
- The U.S. Trustee sought sanctions after discovering these facts, alleging multiple violations of the Bankruptcy Code, including improper disclosures, unauthorized fee-sharing, and unauthorized practice of law by RLG.
- The Bankruptcy Court previously granted sanctions and ordered all fees disgorged, but Sheppard and RLG moved for reconsideration, arguing the ruling was erroneous and the sanction excessive.
- On reconsideration, the court reaffirmed most violations but reduced the sanction from $1,838 to $1,500 to exclude the filing fee.
Issues
| Issue | Trustee's Argument | Sheppard/RLG Argument | Held |
|---|---|---|---|
| Inadequate disclosure of compensation (§ 329(a), Rule 2016(b)) | Sheppard and RLG failed to disclose true fee arrangement; false certification. | Sheppard considered a regular associate/employee of RLG, so disclosures were appropriate. | Disclosure was inadequate and misleading; violation found. |
| False statements and insufficient investigation (§ 707(b)(4)(C), Rule 9011) | Sheppard did not conduct reasonable inquiry; RLG staff gathered facts. | Sheppard had sufficient contact, reviewed and amended documents, and discussed with clients. | Sheppard's investigation was cursory and did not meet legal standards; violation found. |
| Validity of retainer agreement (§§ 528, 526) | Not signed by all parties; failed to provide copy to debtors; void. | Agreement detailed fees; meets requirements. | Retainer not fully executed or served on all parties; void and unenforceable. |
| Unauthorized fee-sharing (§ 504) | Fees split between RLG and Sheppard’s firm; impermissible. | Sheppard was an employee of RLG, so sharing permitted. | Court not clear § 504 applies to Ch. 7 debtor’s counsel; no sanction on this basis, but others justify sanction. |
| Unauthorized practice of law (Georgia law, Rule 5.5) | RLG non-attorneys and out-of-state attorneys gave legal advice, chose bankruptcy chapter, and prepared papers. | Sheppard, a Georgia attorney, filed and represented debtors; thus, lawful. | RLG engaged in unauthorized practice of law; reviewing and filing by local attorney does not cure. |
| Amount of sanction | Full $1,838 fee should be disgorged. | Only $1,500 applicable; $338 was court filing fee. | Sanction reduced to $1,500 to exclude filing fee. |
Key Cases Cited
- In re Gorski, 519 B.R. 67 (Bankr. S.D.N.Y. 2014) (scrutiny of debtor’s attorney compensation required to prevent abuse)
- In re Deighan Law LLC, 637 B.R. 888 (Bankr. M.D. Ala. 2022) (business models using non-local, non-attorney staff to provide legal services violate ethics and state law)
- Milavetz, Gallop & Milavetz, PA v. U.S., 559 U.S. 229 (2010) (attorneys who assist consumer debtors are debt relief agencies subject to statutory requirements)