Sarah A. Hall, United States Bankruptcy Judge.
On October 2, 2019, the following matters came on for hearing before the Court:
The UST appeared by and through Charles Snyder; Sisson appeared by and through Daniel E. Garrison, who is a principal in Fresh Start, a financing and collection management service for attorneys (defined below). After the hearing, the Court directed the UST and Sisson to file written closing arguments on or before November 4, 2019. The UST filed its closing argument on November 4, 2019 [Doc. 35], and Sisson filed his closing argument on November 4, 2019 [Doc. 36].
In this matter, the UST asks the Court to review the compensation received or to be received by Sisson from the chapter 7 consumer debtor pursuant to 11 U.S.C. § 329 and his conduct as a debt relief agency pursuant to 11 U.S.C. § 526.
The Court is also well aware of the desperate need of individual consumer debtors to obtain the advice and assistance of qualified counsel in filing for chapter 7 or 13 relief, but such advice and assistance is often beyond their means due to their unfortunate financial circumstances. Judge Kevin Anderson of the United States Bankruptcy Court for the District of Utah provides a thorough summary and analysis of the hardships facing consumer debtors in finding and retaining counsel to file
1. Sisson testified that he usually requires a flat fee of $1,800.00 (exclusive of filing fees) to be pre-paid by a debtor prior to filing the bankruptcy petition. (Sisson testimony). Sisson's flat fees include the cost of credit counseling and the financial management course, a credit report and postage. (Sisson testimony). His services routinely exclude "[r]epresentation of the debtor in any dischargeability actions, judicial lien avoidance, reaffirmation agreements, relief from stay actions or any other adversary proceeding or contested matters." (UST Ex. 3, p. 12 and Ex. 6).
2. The Court questioned Sisson about a $1,500.00 flat fee which it found to be prevalent in his chapter 7 consumer cases. Per Sisson, the $1,500.00 flat fee is a discounted rate only offered to people who can pre-pay and provide all of the necessary documentation within 30 days. Debtors who pay on a "lay-away" basis and provide documents in piece-meal fashion are not eligible for this rate. Sisson claims 25% of his cases fall within the $1,500.00 retainer model. (Sisson testimony).
3. The Court reviewed all of the individual chapter 7 cases filed by Sisson from January 1, 2019 to April 30, 2019 (the month this case was filed and the three preceding months), of which the Court can take judicial notice.
Flat Fee Paid to Sisson Number of Cases Percentage of Cases $1,200.00 1 2.6% $1,500.00 31 79.5% $1,800.00 2 5.1% $2,700.00 4 10.2% $2,835.00 1 2.6%
Based on the four-month sample during the relevant time period, Sisson received a flat $1,500.00 for the bulk of his individual chapter 7 cases,
4. Additionally, the $1,500.00 flat fee was offered and used in three cases (7.7% of such cases) where the bankruptcy filing was a "bare bones" filing without schedules, statement of financial affairs, and the like. In contrast, in the two cases where a $1,800.00 flat rate was charged by Sisson (100%), the bankruptcy petition was not "bare bones" but included the schedules, statement of financial affairs, and other related documents.
5. In an effort to be able to provide assistance to consumer debtors financially unable to pay his up-front retainer and the bankruptcy filing fee, Sisson turned to the use of bifurcated contracts — one contract for pre-petition services executed pre-petition and one contract for post-petition services executed post-petition. He claims the practice of using bifurcated contracts was used only as a last resort, designed to address debtor emergencies. (Sisson testimony).
6. Sisson offers the bifurcated contract model to those clients that cannot raise the funds necessary to pay his fees up front and need bankruptcy relief immediately as they generally have waited too long to seek legal help. This model requires the payment of additional fees but allows the fees to be paid over time while exposing Sisson to a risk of non-payment; it also offers a solution to clients who otherwise could not afford to engage counsel and pay their fees immediately or over-time but in full pre-petition. (Sisson testimony).
7. Under the bifurcated contract model, after the bankruptcy petition is filed, a debtor can either (i) proceed pro se, (ii) hire a different lawyer or law firm, or (iii) enter into a post-petition contract with Sisson to complete the bankruptcy case at a cost of an additional $2,400.00 payable $200.00 per month for 12 months. (Sisson testimony; UST Ex. 8, ¶ 4). Per Sisson, he does not charge interest on the attorney fees due post-petition. (Sisson testimony).
8. In July 2018, Sisson entered into a Line of Credit and Accounts Receivable Management Agreement (the "Line of Credit Agreement") pursuant to which Fresh Start Funding, Inc. ("Fresh Start") would extend a $100,000.00 line of credit to Sisson ("Line of Credit"). (Sisson testimony; UST Ex. 7).
10. For its administrative functions under the Line of Credit Agreement, Fresh Start receives a fee equal to 25% of the funds administered. (Sisson testimony; UST Ex. 7).
11. Fresh Start has no role in how Sisson's debtors' cases are administered. (Sisson testimony).
12. Fresh Start will report a debtor's payments and defaults to the credit reporting agencies, if a debtor consents to such reporting. (Sisson testimony; UST Ex. 7, ¶ 6.3).
13. The Line of Credit Agreement provides that Fresh Start may pursue any and all rights to collect assigned accounts receivable. (UST Ex. 7, ¶ 5.4).
14. Under the Line of Credit Agreement, Fresh Start's first action in the event of non-payment by a debtor is the loss reserve, then it will look to Sisson and then to the debtor (but Sisson testified he would make Fresh Start whole before it looked to the debtor). (Sisson testimony). However, the Line of Agreement does not dictate this progression. (UST Ex. 7).
15. The Line of Credit Agreement also offers a defense guaranty and indemnity, which are features Sisson considered important in entering into the relationship with Fresh Start. (Sisson testimony).
16. Per Sisson, the bifurcated contract model and the Fresh Start Line of Credit Agreement are about the debtor/client's needs. (Sisson testimony).
17. Sisson only submits bifurcated contracts to Fresh Start. Even though some of his clients cannot pay the up-front fees in 30 days to obtain the purportedly discounted $1,500.00 flat rate, the contracts with those clients who take time to pay the $1,800.00 pre-petition flat fee in full are not submitted to Fresh Start. (Sisson testimony, p. 44).
18. Sisson unsuccessfully attempted to explain why he needed the Line of Credit offered by Fresh Start. However, since Sisson remains liable for unpaid fees, and very few of his cases use a bifurcated contract model,
19. Debtor is a low wage earner, working in a prison cafeteria. (Sisson testimony). Debtor is also a single mother, raising 2 sons (ages 3 and 8) and 2 nieces (ages 10 and 11). (Sisson testimony; UST Ex. 4, p. 24).
20. At the time of her bankruptcy filing, Debtor had gross monthly wage income of $2,170.00 and net monthly wage income of $1,757.62. She also received $304.00 per month in SNAP benefits, giving her a combined monthly net income of $2,061.62. (UST Ex. 4, pp. 22-23).
21. Based on her number of dependents, Debtor's income places her below the poverty level. (Sisson testimony).
22. Debtor's monthly expenses, which in general do not include any otherwise "dischargeable" monthly expenses, exceed her monthly income by $994.24 per month. (UST Ex. 4, pp. 22-25). Her expenses include a $200.00 monthly payment to Fresh Start.
23. Debtor "crashed into" Sisson's office on April 16, 2019, very distressed and "virtually hysterical" over an imminent wage garnishment that she could not survive. Sisson adjusted his schedule to accommodate Debtor's emergency.
24. Under Oklahoma law, the maximum amount that can be garnished from a debtor's wages and compensation is generally 25%. Okla. Stat. tit. 12, § 1171.1. Sisson could not recall if he considered filing for an undue hardship exemption in the garnishment proceeding, claiming Debtor just wanted to file bankruptcy. (Sisson testimony). Sisson did not suggest Legal Aid or a less expensive attorney
25. Garnishment is not an unusual reason for filing a bankruptcy case. (Sisson testimony).
26. Debtor could not afford to pay Sisson's typical flat rate fee
27. Sisson cannot recall if he offered Debtor the $1,500.00 discounted flat rate but it was his regular practice to do so. (Sisson testimony).
28. As a last resort, Sisson offered Debtor the bifurcated contract model, i.e., one contract for pre-petition services and another contract for post-petition services. Thereunder, Debtor and Sisson would enter into an engagement contract prior to the filing of her bankruptcy case to prepare a "bare bones" bankruptcy filing, and Debtor
(Sisson testimony).
29. Sisson analyzed Debtor's income and expenses and knew, at a minimum, she would be running a $500.00 deficit per month and possibly a $900.00 deficit per month. (Sisson testimony, p. 125-126).
30. While Sisson discouraged using bifurcated contracts generally, he could not recall if he told Debtor she could not afford the post-petition $200.00 monthly payment under the bifurcated contract model. (Sisson testimony, p. 127).
31. Sisson informed Debtor it was more expensive to enter into the bifurcated contracts than paying all of his fees up-front. However, Debtor felt "she had to do" the bifurcated contracts as she could not afford to pre-pay his entire fee, had no time to accumulate money, and had no prospect of raising the money. (Sisson testimony).
32. Sisson believed that the bifurcated contract model and higher retainer, including the new debt it created, was in Debtor's best interest. (Sisson testimony).
33. Sisson does not recall if he discussed Fresh Start's ability to pursue collection activities against Debtor under the Line of Credit Agreement. (Sisson testimony).
34. Sisson's oral disclosures to Debtor did not include that failure to enter into the Post-Petition Contract (defined below) would result in Sisson filing a motion to withdraw from her bankruptcy case. (Sisson testimony).
35. At some point during the consultation on April 16, 2019, Sisson or his legal assistant gave Debtor both an unsigned pre-petition contract and an unsigned post-petition contract for his services. (UST Ex. 8 and 9). Debtor was also provided with a recurring payment authorization and consent form respecting Sisson's Fresh Start Line of Credit and Fresh Start's management and collection of her account receivable under the post-petition contract (the "Fresh Start Consent"). (UST Ex. 10).
36. Sisson believed it was better for Debtor to incur a $2,400.00 post-petition debt than allow a garnishment to take effect as the garnishment would be approximately $500.00 per month rather than only $200.00 per month. (Sisson testimony).
37. Debtor purportedly returned to Sisson's office on April 17, 2019, with minimal documents, a list of creditors, and a signed, pre-petition contract (the "Pre-Petition Contract").
38. The Pre-Petition Contract contains an express representation by Debtor that "even if my expenses exceed my income as shown in the bankruptcy statements and schedules, I believe that I am able to make the [post-petition] payments contemplated by this agreement." (UST Ex. 8, ¶ 4).
39. The Pre-Petition Contract includes a waiver of any conflict of interest between Debtor and Sisson. (UST Ex. 8, ¶ 5).
40. The Pre-Petition Contract acknowledges that "executing the post-petition agreement may not be in [Debtor's] best interest." (UST Ex. 8, ¶ 5).
42. Debtor allegedly signed the emergency petition and the Pre-Petition Contract on April 17, 2019. Sisson filed Debtor's chapter 7 bankruptcy case late that same day (the "Petition Date"). (UST Ex. 3).
43. Sisson also filed the Disclosure of Compensation of Attorney for Debtor(s), Form 2030 (the "Initial Attorney Disclosure"). (UST Ex. 3, pp. 12-13). The Initial Disclosure provides as to attorney fees:
The source of the compensation paid and to be paid to Sisson was Debtor, and Sisson had not agreed to share his compensation with any other person. (UST Ex. 3, p. 12).
44. The Initial Disclosure further discloses the Fresh Start Line of Credit requiring assignment of Debtor's account to Fresh Start and allowing Debtor to make payments up to 12 months post-petition. (UST Ex. 3, p. 12).
45. The Initial Disclosure,
46. According to Sisson, Debtor returned to his office on April 18, 2019, and signed the post-petition contract (the "Post-Petition Contract").
47. The Post-Petition Contract contains many of the same provisions contained in the Pre-Petition Contract. Those include an express representation by Debtor that she is able to make the payments contemplated by such agreement even if her expenses exceed her income as set forth in her bankruptcy schedules. (UST Ex. 9, ¶ 1).
48. The Post-Petition Contract includes a waiver of any conflict of interest between Debtor and Sisson. (UST Ex. 9, ¶ 2).
49. The Post-Petition Contract acknowledges that "executing the post-petition agreement may not be in [Debtor's] best interest." (UST Ex. 9, ¶ 2).
50. The Post-Petition Contract specifically provides that Sisson is not representing Debtor with respect to such contract and advises her to seek independent legal counsel to review it. (UST Ex. 9, ¶ 6).
52. The Fresh Start Consent authorizes Fresh Start to debit Debtor's debit card for $200.00 per month starting on May 20, 2019, until $2,400.00 has been paid in full. Notably, the very fine print beneath Debtor's signature on the Fresh Start Consent also provides that if a payment does not process for any reason, Sisson or Fresh Start may process the payment multiple times until such payment clears and that an additional $25.00 may be charged each time payment does not clear. Further, it also prohibits Debtor from disputing the transactions or cancelling the payment authorization unless Debtor disputes the amount of fees owed to Sisson. (UST Ex. 10).
53. The Fresh Start Consent includes Debtor's consent to be contacted directly by Fresh Start for collection purposes and acknowledgment that Fresh Start may report on-time payments and late payments to credit bureaus. (UST Ex. 10).
54. Both the Post-Petition Contract and the Fresh Start Consent were sent to Fresh Start. (Sisson testimony).
55. Under the Fresh Start Line of Credit Agreement and the Post-Petition Contract, Sisson is to receive 75% of the $2,400.00 ($1,800.00) to be paid by Debtor, in addition to the $300.00 paid by Debtor under the Pre-Petition Contract, for a total attorney fee of $2,100.00 to Sisson. Fresh Start is to receive $600.00 of the $2,400.00 to be paid by Debtor under the Post-Petition Contract. (Sisson testimony; UST Ex. 7, 8, and 9).
56. After Debtor's bankruptcy case was filed, Sisson immediately and successfully stopped the garnishment proceeding and obtained a refund check of $360.93. (Sisson Ex. 2 and 3).
57. Sisson then turned to completing Debtor's schedules, statement of financial affairs, and the like. While generally cooperative, Debtor provided written responses to a questionnaire and provided supporting documentation to Sisson on a piece meal basis. (Sisson testimony).
59. Sisson concluded the Initial Disclosure did not adequately explain the bifurcated contracts entered into with Debtor or the Fresh Start Line of Credit. (Sisson testimony). As a result, on April 30, 2019, Sisson filed an Amended Disclosure of Compensation of Attorney for Debtor(s), Form 2030 (the "Amended Disclosure"), which provides as to attorney fees:
(UST Exhibit 6, ¶ 1).
60. The source of the compensation paid, and to be paid, to Sisson was Debtor, and Sisson had not agreed to share his compensation with any other person. (UST Exhibit 6, ¶¶ 2, 3 and 4).
61. The Amended Disclosure further discloses the Pre-Petition Contract and the Post-Petition Contract and their respective terms including the fees paid and payable under each ($300.00 paid under the Pre-Petition Contract, and $2,400.00 to be paid under the Post-Petition Contract, payable in monthly installments up to 12 months post-petition). (UST Exhibit 6, ¶ 7). The Amended Disclosure clearly provides that the Pre-Petition Agreement was signed prior to the Petition Date, and the Post-Petition Contract was signed after the Petition Date. (UST Ex. 6, ¶ 7).
62. The Amended Disclosure also states: (i) the Fresh Start Line of Credit is a recourse line of credit secured by a collateral assignment of Sisson's accounts receivable, including the amounts owed by Debtor; (ii) Fresh Start provides payment management and processing services and will collect Debtor's payments; and (iii) Debtor consents to the assignment and the sharing of information from Sisson to Fresh Start to facilitate Sisson's financing and the payment management and collection from Debtor. (UST Ex. 6, ¶ 8).
63. Sisson had not noticed, and could not explain why, he changed the Amended Disclosure to state "Debtor agreed to pay" rather than "I have agreed to accept" as in the Initial Disclosure.
64. The disclosures made as to Fresh Start and the Line of Credit were based on guidelines provided to Sisson by Fresh Start; he did not personally draft the disclosures. (Sisson testimony). Sisson occasionally gets updated disclosures from Fresh Start. (Sisson testimony).
65. After the garnishment was successfully terminated, Debtor's bankruptcy case proceeded as normal to the Section
66. The remaining documentation necessary to obtain Debtor's discharge was filed by Sisson on April 30, 2019,
67. Sisson agreed that the use of the Pre-Petition and Post-Petition Contracts and Fresh Start Line of Credit was at a cost to Debtor of a compensation premium of at least $900.00 (based on a $1,800.00 pre-petition flat rate). (Sisson testimony).
68. Sisson admitted that Debtor did not understand or appreciate the distinction between Sisson's contractual duties under the Pre-Petition and Post-Petition Contracts and his professional obligations thereunder. (Sisson testimony).
69. There is always a question in Sisson's mind whether consumer clients understand the bankruptcy process as they generally do not have sophisticated legal minds. Per Sisson, it can be challenging to put the process in simple terms, and a lot of questions get answered multiple times. In the end, Sisson often does not know if his clients fully understand what is happening — they just need help and want a lawyer. (Sisson testimony).
70. Sisson does not know if Debtor subjectively understood the conflict discussions surrounding the Pre-Petition and Post-Petition Contracts. (Sisson testimony). In general, based on his experience, most chapter 7 debtors do not have sophisticated legal minds and the bankruptcy process must be explained in simple terms, and Sisson does not know if they fully understand everything that is happening. (Sisson testimony).
71. Attached as an Exhibit to his Objection is a "Pre- and Post-Petition Fee Calculator" (the "Fee Calculation") Sisson prepared to assist him in reviewing and updating the cost of his representation in bankruptcy cases to conclusion. (UST Ex. 2). The Fee Calculation uses rates of $300.00 per hour for Sisson, $200.00 per hour for an associate attorney,
72. Although it was prepared after Sisson's work in Debtor's case had been concluded and she had received a discharge, the Fee Calculation is not based on what happened in Debtor's case, and, in fact, has little relationship or relevance thereto. (Sisson testimony).
73. Under the Fee Calculation, Sisson estimated pre-petition fees to file a "bare-bones" bankruptcy filing (
74. Under the Fee Calculation, Sisson estimated post-petition fees to file the remaining required documentation and see the bankruptcy case through discharge, and if necessary, reopen a closed case and file amendments, to be $3,100.00. (UST Ex. 2).
75. Consequently, Sisson estimates the actual cost in attorney fees incurred for a bifurcated contract model to be $4,000.00. (UST Ex. 2). Admittedly, not all of the services listed in the "Post-Petition Work" section are always provided in every case, but according to Sisson, he is committing to provide such services in every case, if required. (Sisson testimony).
76. In Debtor's case, most of the "Post-Petition Work" was not required, and thus the Fee Calculation does not accurately reflect the work performed by Sisson on Debtor's case. (Sisson testimony).
77. The Fee Calculation was prepared after the UST questioned Sisson about his contractual relationships with Debtor when Sisson knew that most of the "work" to be done post-petition under the Fee Calculation was not necessary in Debtor's case. (Sisson testimony). Nevertheless, the Fee Calculation was presented as a calculation of what Sisson's fees would have been in the case and contains no disclaimer or caveat that it is not an accurate representation of the services actually rendered by Sisson to Debtor, either pre- or post-petition. (Sisson testimony; UST Ex. 2).
78. The Billing Statements prepared by Sisson were never issued to Debtor but were typical of what Sisson used to help track his time and ensure that the fees he charged his clients were in line with the amount of work performed. (Sisson testimony; Sisson Ex. 4, 5, and 6). Sisson claims he inadvertently failed to include all of his time on the invoices, and approximated that there should be entries for an additional hour of his time and an additional half hour for his legal assistant. (Sisson testimony).
79. Sisson's testimony and evidence were not credible with respect to (i) the motivation for using Fresh Start, (ii) the costs of the bifurcated contract model and the Fresh Start Line of Credit to his clients, (iii) the alleged amount of extra work required under the bifurcated contract model, or (iv) his "lodestar" calculation of the value of his legal services under a bifurcated contract. Unfortunately, Sisson was the only witness.
11 U.S.C. § 329 (emphasis added) —
(a)
(b) If such compensation exceeds the reasonable value of any such services, the court may cancel any such agreement,
Rule 2016(b), Fed. R. Bankr. P. —
Rule 2017(b), Fed. R. Bankr. P. —
11 U.S.C. § 526(a) — A debt relief agency shall not—
11 U.S.C. § 526(c)(1) — "Any contract for bankruptcy assistance between a debt relief agency and an assisted person that does not comply with the material requirements of this section, section 527, or section 528 shall be void and may not be enforced by any Federal or State court or
11 U.S.C. § 528(a)(1) — A debt relief agency shall—
This Court has subject matter jurisdiction over this matter pursuant to 28 U.S.C. § 1334. This matter is a "core" proceeding pursuant to 28 U.S.C. § 157(b)(2)(A).
The Court is faced with a seemingly simple task — assessing the sufficiency of an attorney's disclosure of his compensation arrangements with a chapter 7 debtor and the reasonableness or excessiveness of that compensation under Sections 329 and 526 to 528 of the Bankruptcy Code. But this statutorily mandated assessment, when juxtaposed with the desperate need of many chapter 7 consumer debtors to obtain advice and assistance of counsel to successfully navigate through bankruptcy, often leads to anguished and tortured interpretation of clear statutory and rule provisions against a backdrop of valid policy arguments and paternalistic concerns. However, this Court's job is limited to interpreting the law and applying it to the facts, leaving the policy decisions to Congress. As the United State Supreme Court has decreed "[i]n the last analysis, these always-fascinating policy discussions are beside the point. The role of this Court is to apply the statute as it is written — even if we think some other approach might "`accor[d] with good policy.'""
In
Sisson, like most chapter 7 debtors' counsel, seeks to avoid
First, the Court cannot find that it was in Debtor's best interest to agree to pay Sisson $2,400.00 under the Post-Petition Contract (12 monthly payments of $200.00), and $2,700.00 in the aggregate under both contracts. Debtor is a below-poverty level wage earner, with four young children in her care. Her Schedule I reflects monthly net income of $2,061.62, which includes SNAP benefits of $304.00. Her Schedule J reflects monthly expenses of $3,055.86 (including the anticipated $200.00 a month payment to Fresh Start), for a net loss of $994.24 per month (or $794.24 per month without the Fresh Start payment). Debtor simply does not have the means to make the post-petition attorney fee payments. And, while the compelling circumstance of a pending wage garnishment existed in this case, other alternatives were available, which would likely not have resulted in Debtor taking on further debt she clearly could not service.
Second, with respect to the disclosures made by Sisson, they were inadequate and convoluted at best. Third, Sisson and his counsel agreed it was unlikely Debtor fully understood her contractual arrangements with Sisson given her agitation over the garnishment and the complexity of the contracts.
Accordingly, in these circumstances, Sisson's use of the bifurcated agreements does not satisfy the standards set by
"Disclosure, disclosure, disclosure," should be every debtor's counsel's mantra, whether relating to the debtor's schedules and statement of financial affairs or to the attorney's own disclosures.
Disclosure of attorney compensation and agreements for compensation pursuant to Section 329 and Rules 2016 and 2017 is mandatory rather than permissive.
The Bankruptcy Code requires attorney fee disclosure so that courts can "prevent overreaching by debtors' attorneys and give interested parties the ability to evaluate the reasonableness of the fees paid."
Sisson filed the Initial Disclosure when the bankruptcy petition was filed on April 17, 2019, and filed the Amended Disclosure on April 30, 2019, contemporaneously with the filing of Debtor's schedules and statement of financial affairs. (UST Ex. 3, p. 12; UST Ex. 6). The following information provided on the Initial Disclosure remained the same on the Amended Disclosure: (i) the amount of the total fee (including filing fee) to be paid of $3,035.00; (ii) the amount of $635.00 (including the filing fee) having been paid pre-petition; (iii) the balance of $2,400.00 due post-petition; (iv) the source of such compensation was Debtor; and (v) Sisson did not agree to share his compensation with anyone.
The Court identifies two problems with these disclosures that render them inaccurate or at least misleading. First, with respect to the total amount of compensation, the Initial Disclosure states that Sisson "agreed to accept $3035.00," while the Amended Disclosure states "Debtor has agreed to pay $3035.00." When questioned by the Court about the reason for this change in language, Sisson had no explanation, responding only that Fresh Start had provided him with updated disclosures. As Sisson fails to comprehend the reason for the change, its relative importance, or the impact on the attorney-client relationship, the Court is confident that Debtor, likewise, did not understand the difference in language.
To the Court, the reason for the revision is evident. As originally disclosed, Sisson is representing that he would be accepting $3,035.00. In reality, however, under the bifurcated contract model and the Fresh Start Line of Credit Agreement, Sisson would only be receiving $2,435.00, with Fresh Start receiving the remaining $600.00. Thus, although the Initial Disclosure was consistent with the language in the Pre-Petition Contract and the Post-Petition Contract, it was simply incorrect. While the Court is not suggesting that counsel cannot alter a Director's Form such as Form 2030,
Additionally, the Court also firmly believes that Sisson is sharing the compensation to be paid by Debtor post-petition with Fresh Start. In fact, the $2,400.00 balance due post-petition is never paid directly to Sisson. Instead, Sisson draws 60% of the balance due from the Fresh Start Line of Credit immediately after Fresh Start approves the Debtor's contract, but before Debtor has made any post-petition payments. An additional 15% of the balance due is subject to a holdback provision. Then, about a month post-petition, Fresh Start begins collection of the Sisson receivable directly from Debtor. If Debtor pays the $2,400.00 in full, Sisson will, generally speaking, receive the money subject to holdback under the Line of Credit Agreement. The Initial Disclosure and the Amended Disclosure do not disclose these arrangements. Thus, although
The Initial Disclosure, filed on the Petition Date, also speaks in past tense regarding Debtor and Sisson having "entered" into the Pre-Petition Contract and the Post-Petition Contract. (UST Ex. 3, p. 12, ¶ 5.d). Upon reading this paragraph, the only rational conclusion is that although Debtor and Sisson entered into one contract to address pre-petition services and another contract to address post-petition services,
The Amended Disclosure, however, attempts to rewrite history and undo damage already done. It asserts the contracts were executed separately — the Pre-Petition Contract prior to the Petition Date, with $300.00 in fees having already been paid, and the Post-Petition Contract after the Petition Date, with fees of $2,400.00 to be paid. (UST Ex. 6, ¶ 7). Either the Initial Disclosure — or the Amended Disclosure — is correct, but both cannot be. Therefore, one of them is incorrect and misleading. The Court concludes the Initial Disclosure likely best reflects the reality of how the events transpired.
The Initial Disclosure further states that Sisson has a Fresh Start Line of Credit that "allow[s] the Debtor(s) to make payments for up to 12 months post-petition." (UST Ex. 3, p. 12, ¶ 4). In the Amended Disclosure, it is the Post-Petition Contract, not the Fresh Start Line of Credit, which allows Debtor to pay the $2,400.00 in installments up to 12 months (UST Ex. 6, ¶ 7.b). Consequently, the Initial Disclosure is, once again, plainly incorrect and misleading.
In sum, Sisson's disclosures are confusing and less than complete.
(Transcript, p. 180, lines 4-17).
To add insult to injury, the Pre-Petition Contract purports to disclose Debtor's other payment option with Sisson, namely that she could pay $335.00 in filing fees and $1,800.00 to Sisson prior to her bankruptcy case being filed. (UST Ex. 8, p. 5, ¶ 1). In that context, the contract requires Debtor to expressly acknowledge that not paying the attorney fee pre-petition creates more work and cost for Sisson.
Additional lack of disclosure problems exist, namely that clear comparisons were not set out for Debtor to highlight the differences between what she will pay and what a debtor who can prepay will pay for the exact same services:
In other words, for the exact same legal services provided, Debtor paid between $900.00 and $1,200.00 more to Sisson and/or Fresh Start solely for the benefit of
For these reasons the Initial Disclosure and the Amended Disclosure violate Section 329(a). The appropriate penalty therefor will be discussed in the conclusion section below.
"Once a question of the reasonableness of counsel's fees is raised by a party, the attorney bears the burden of proving his fee was reasonable."
Section 329(b) provides that, if an attorney's compensation exceeds the reasonable value of the services, the bankruptcy court may order the return of the excessive payment. 11 U.S.C. § 329(b);
If a court determines the attorney fees are excessive, it may cancel the compensation agreement between the attorney and the client, or it may order the return of the excessive portion.
Specifically, a review of the Fee Calculation time entries reveals that all but 0.8 hours of the 14.5 hours incurred post-petition are the same services performed for a debtor whether one pre-petition contract or the bifurcated contract model is used. Other than the 0.8 hours for conducting a second signing appointment to review and sign statements and schedules, the Court is not convinced it would take any more time to perform those same tasks just because there are two contracts and the work is being performed post-petition rather than pre-petition.
At the hearing, Sisson also presented his Billing Statements (Sisson Ex. 4, 5 and 6) as evidence of the reasonableness of his compensation. With respect to Debtor's case, the Billing Statements reflect payment of expenses and time spent by Sisson and his assistant between April 16, 2019 and July 24, 2019, that would generate total fees and expenses in the amount of $2,079.15. Sisson testified that such time was not accurate as he failed to record all of his time but had not bothered to quantify or document such time or correct the Billing Statements prior to their use at the October hearing. For this reason alone, the Court finds the Billing Statements to be
As for the customary rate in the area, Sisson testified that the average flat fee rate for chapter 7 debtor's counsel is $1,200.00 to $1,400.00 per case. Upon completion of her installment payments, Debtor will have paid a total of $2,700.00 in attorney fees (although Fresh Start will have received $600.00 thereof). So, Debtor, who supports four children and whose income is below the poverty level, paid Sisson $1,300.00 to $1,500.00 more than the average local rate for chapter 7 cases for the right to make post-petition payments for essentially the same services. Similarly, Sisson himself ordinarily charges $1,500.00 to $1,800.00 for his chapter 7 representation, so Debtor paid $900.00 to $1,200.00 more to Sisson than his customary rates for the right to make post-petition payments. This up-charge is absurd.
The justification provided by Sisson for the increased fees was additional work required by the bifurcated contract process and not receiving all of the necessary documentation pre-petition. But, at most, this would amount to another meeting to have the Post-Petition Contract signed, generating perhaps an additional fee of $300.00 for an hour of his time, over the customary $1,500.00 or $1,800.00 rates. All of the other underlying bankruptcy work would be the same whether a debtor initially paid the entire fee and provided all necessary documentation pre-petition ($1,500.00), paid the fee and provided the documentation over time but pre-petition ($1,800.00), or paid $300.00 pre-petition and $2,400.00 post-petition in installments and provided the bulk of the documentation post-petition because the same schedules, statement of financial affairs, statement of intent, etc. are prepared regardless of such timing.
As much as the Court cringes at the thought of finding attorneys fees to be unreasonable, in this instance, the Court has no choice. The numbers do not lie. Sisson charged Debtor 80% more than clients he charges $1,500.00 because Debtor could not provide the necessary documentation and pay the fee up-front within 30 days even though Debtor provided the necessary documentation to Sisson well within 30 days. Sisson charged Debtor 50% more than clients he charges $1,800.00 simply because Debtor could not pay the fees up-front pre-petition. Sisson failed to present any compelling evidence justifying this excessive up-charge solely so that Debtor could pay the fees in installments over a year.
The ramifications of the unreasonableness of Sisson's attorney fees will be discussed in the conclusion section below.
Sisson, as an attorney providing legal services to consumer debtors, is a debt relief agency subject to the provisions of Sections 526-528.
Section 528 specifically governs the required written contract between the consumer debtor and the attorney. It provides that a written contract between the debtor and its counsel must be executed not later than five business days after bankruptcy assistance was first provided to the debtor and before the petition is filed. The contract must clearly and conspicuously explain the services that will be provided to the debtor, the fees and costs for such services, and the terms of payment.
Section 526(c) provides the liability to which an attorney may be exposed as well as the enforcement mechanism to compel compliance with the debt relief agency requirements and restrictions.
"The high standard of § 528(a) has been interpreted as encompassing the duty to explain with clarity in the written contract the services to be provided and the fees or charges for such services."
Here, both the Pre-Petition Contract and the Post-Petition Contract were entered into within the five day limitation of Section 528(a)(1). But that is where Sisson's compliance with Section 528(a) ceases. The Pre-Petition and Post-Petition Contracts are anything but models of clarity, and fall far short of the required clear and conspicuous explanation of services to be provided, fees to be charged, and terms of payment.
The Pre-Petition Contract is a 4½ page single-spaced document (notably all pages are numbered "5") with 10 numbered paragraphs, signed by both Debtor and Sisson on April 17, 2019. (UST Ex. 8). The Post-Petition Contract is similar — a 3½ page single-spaced document with 6 numbered paragraphs, allegedly signed by both Debtor and Sisson on April 18, 2019. (UST Ex. 9). While they both contain disclosures and purported explanations of the payment and filing options, and the legal services to be provided, the Pre-Petition and Post-Petition Contracts are perplexing. Specifically,
The Court finds the disclosure of the compensation terms set forth above extremely confusing. Additionally, key components of the payment terms are noticeably missing, i.e. when does Debtor begin making the installment payments and to whom are they to be made.
Additionally, both contracts contain what can only be described as "legalese" not easily understood by a layperson such as Debtor, which is inconsistent with the requirements of Section 528(a).
Finally, the Court finds fault with the disclosure of Debtor's options under the Pre-Petition Contract with respect to the amount of fees Sisson would be entitled to thereunder. Specifically, Sisson should have spelled out in a more simplistic, clear, and concise manner all of the fee options available to Debtor, such as set forth on page 31
The Pre-Petition Contract and the Post-Petition Contract do not comply with the material requirements of Section 528(a) and are, therefore, void pursuant to Section 526(c)(1).
For the reasons set forth above,
IT IS SO ORDERED.
