Debtor’s Law Firm had to Disgorge Attorney’s Fees Where it Improperly “Unbundled” its Services, and Created Conflicts with Client

Debtor’s Law Firm had to Disgorge Attorney’s Fees Where it Improperly “Unbundled” its Services, and Created Conflicts with Client

This decision is about a chapter 7 debtor’s law firm which, in its zeal to ensure it was paid in full by the debtor for its services, potentially impaired its client’s ability to obtain effective relief through the bankruptcy filing. As will be explained, the lawyers’ strategy and actions likely violated a variety of bankruptcy laws and ethical rules and, ultimately, was counterproductive for all concerned.

On July 27, 2016, the Debtor entered into a “Chapter 7 Retainer Agreement & Promissory Note” (“the Agreement”) with the Law Firm to serve as her attorneys in a chapter 7 bankruptcy case. The petition commencing Debtor’s case was filed on August 24, 2016; it was signed by Counsel at the Law Firm.

At that time, only Debtor’s petition was filed; none of the schedules, Statement of Financial Affairs, statement of current monthly income, or other required documents were filed. Along with the petition, Debtor also filed an application to pay the case filing fee in two installments. The application, prepared by Counsel, was promptly granted by the Court. While no reason is apparent for the delay, on September 7, 2016, Counsel filed Debtor’s remaining schedules and documents, along with Counsel’s Rule 2016(b) disclosure of compensation. On September 23, 2016, Counsel paid the first filing fee installment.

In the weeks that followed, Debtor fell behind in her payments to Counsel under the Agreement. Presumably to motivate her to pay up, Counsel sent her emails and a letter, and left telephone messages for Debtor demanding payment, which collectively threatened dire consequences would befall Debtor in the event her account with Counsel was not brought current.  Debtor received each of these communications.

On October 28, 2016, after visiting with and receiving advice from an attorney-friend in Arizona, Debtor sent the Court a letter regarding her predicament, describing Counsel’s actions to collect its fees, and alleging that Counsel was subjecting her to harassment and threats of dismissal of the bankruptcy case for her non-payment of its attorney fees. The Court received and docketed the letter in Debtor’s bankruptcy case on November 7, 2016.

Others apparently read Debtor’s letter, because on November 16, 2016, the United States Trustee (“UST”) filed a “Motion for Entry of an Order Cancelling Agreements and Directing Law Firm (“the Motion”). Dkt. No. 26. The Motion asked the Court to condemn Counsel’s conduct and to, effectively, disallow all of Counsel’s fees earned in Debtor’s case.

On November 21, Counsel filed an amended Rule 2016(b) disclosure of compensation. On December 16, Debtor paid the second and final filing fee installment. The Court entered a discharge in Debtor’s favor on January 6, 2017.

On December 20, 2016, Counsel objected to the Motion, arguing that Counsel had engaged in no inappropriate acts concerning Debtor’s case, and urging the Court to deny the Motion. On March 3, 2017, Counsel filed a brief in opposition to the Motion. The Court conducted an evidentiary hearing concerning the Motion on March 8, 2017, at which Counsel testified. The issues raised by the Motion were taken under advisement by the Court.

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