KEVIN R. ANDERSON, Bankruptcy Judge.
In this case, the Debtor lacked the funds to pay a pre-petition retainer for an attorney to represent him in a Chapter 7 case. Capstone Law offered the Debtor a bifurcated fee arrangement that involved no retainer for filing the petition, and then a post-petition fee agreement to pay $2,000 in ten monthly installments. The parties agreed, Capstone Law filed the case, and the Debtor expeditiously received a discharge. Based on the issues raised by the attorney's use of the bifurcated fee agreements, the U.S. Trustee brought a motion for sanctions, and the attorney filed this motion for summary judgment. Thus, the Court will address the legal and ethical issues that arise when a consumer client needs Chapter 7 relief but, understandably, lacks the cash to pay an up-front retainer.
The Court has jurisdiction over this contested matter pursuant to 28 U.S.C. §§ 1334(a)-(b), 157(b). Weekes' Motion for Summary Judgment is a core proceeding under 28 U.S.C. § 157(b)(2)(H). Venue is appropriate in this District under 28 U.S.C. §§ 1408-1409, and notice of the hearing was properly given to all parties in interest.
1. On October 5, 2016, the Debtor was sued on a collection action in a Utah state court. On November 14, 2016, the state court entered a default judgment against the Debtor in the amount of $7,302.
2. Prior to the entry of the default judgment, the Debtor sought legal assistance to file a Chapter 7 bankruptcy case. The Debtor contacted Lincoln Law Center and was told he would need to first pay a $1,200 retainer before Lincoln Law would file the bankruptcy petition.
3. The Debtor did not have $1,200 to pay a retainer to Lincoln Law.
4. The Debtor then contacted Russell B. Weekes ("Weekes") and his law firm Capstone Law, LLC ("Capstone Law" or "Capstone") about filing for bankruptcy.
5. During the initial consultation on October 27, 2016, Weekes offered the Debtor three options to accomplish the filing of a Chapter 7 bankruptcy case:
6. Weekes then explained to the Debtor the following: (1) the terms of the Prepetition Agreement and its limited scope of services (e.g., Capstone Law would only file the Initial Bankruptcy Papers); (2) the Debtor's options to proceed pro se, hire another attorney, or hire Capstone Law; and (3) the terms of the Post-Petition Agreement wherein Capstone Law would continue to represent the Debtor after the bankruptcy filing for $2,400 that could be paid in monthly installments.
7. After these explanations, the Debtor selected the Zero-Down Option because: (1) he did not have the funds to pay a retainer; (2) even though Capstone Law charged a higher fee, the Debtor could pay that fee over ten months after the bankruptcy filing; and (3) the Debtor was experiencing pressure from creditors and feared a garnishment of his wages.
8. On October 29, 2016, the Debtor personally signed the Pre-Petition Agreement, the Two-Contract Disclosure, and the Third-Party Disclosure and Consent. Weekes also instructed the Debtor in writing on what the Debtor needed to do and the information to be provided before Capstone Law could file the bankruptcy petition.
9. The above-mentioned documents included a multitude of disclosures, explanations, and warnings regarding the fee arrangement, the bankruptcy process, the possible use of BK Billing as a third party to collect payments, and the importance of providing true, complete, and accurate information to Weekes.
10. Weekes also provided the Debtor a detailed questionnaire that elicited the information needed by Weekes to prepare the bankruptcy papers. The Debtor completed the questionnaire, signed it in ink, and returned it to Capstone Law.
11. Weekes also provided the Debtor with a document titled "General Information and Instructions" (the "Instructions"). The Instructions contain almost fifty paragraphs of disclosures and explanations that the Debtor was required to read and initial. Except for the paragraph on student loans, the Debtor initialed all of the disclosures and explanations and signed the document in ink.
12. As to bankruptcy papers requiring the Debtor's signature, Weekes utilized Adobe Sign
13. On November 22, 2016, Weekes filed the Chapter 7 petition for the Debtor along with the Initial Bankruptcy Papers.
14. The filed bankruptcy papers included an application for the Debtor to pay the filing fee in installments with $200 due on December 6, 2016, and a final installment of $135 due on January 2, 2017.
15. After filing the petition, the Debtor electronically signed the Post-Petition Agreement, the Check Draft Authorization, and the Third-Party Disclosure and Consent.
22. Because the Debtor agreed that Weekes would represent him post-petition, Weekes prepared and filed all the other required bankruptcy papers, which were also signed electronically by the Debtor.
23. The Form 2030, Disclosure of Compensation of Attorney for Debtor ("Disclosure of Compensation"), which is required by Bankruptcy Rule 2016, states that Weekes agreed to accept $2,007 for his legal services (exclusive of costs), and that he had not received a retainer.
24. Under the Post-Petition Agreement and the Check Draft Authorization, the Debtor has paid a total of $1,800 towards the $2,007 attorney fee.
25. Weekes represented the Debtor at a meeting of creditors, provided documents to the Chapter 7 Trustee in accordance with 11 U.S.C. § 521,
26. On April 12, 2017, the Chapter 7 Trustee filed a no-asset report, and the case was closed on May 15, 2017.
27. The Court has reviewed the docket and observes that in all respects the case was uneventful in that no motions or adversary proceedings were filed, and the Debtor received a full discharge within 113 days after the bankruptcy filing.
28. On September 25, 2017, the U.S. Trustee filed a motion to reopen the case to review the Capstone Law retainer agreements and Capstone's use of BK Billing to factor the post-petition fee. On October 23, 2017, the Court granted the motion, and the U.S. Trustee took the Debtor's examination under Bankruptcy Rule 2004.
29. On March 9, 2018, after completing its investigation, the U.S. Trustee filed its motion for sanctions against Weekes and Capstone Law based on the following: (1) the marketing of Zero-Down Chapter 7 bankruptcy services; (2) the bifurcation of bankruptcy services into pre-petition and post-petition fee agreements; (3) filing the petition and the Initial Bankruptcy Papers for purportedly no charge; (4) the reasonableness of the $2,400 post-petition fee; (5) the use of BK Billing to factor and collect the fee; and (6) the propriety of utilizing electronic signatures in bankruptcy.
30. On March 9, 2018, the U.S. Trustee filed its motion seeking the following relief: (1) cancellation of the attorney fee agreements between Weekes under § 329 and Local Rule 2091-1; (2) sanctions under Local Rules 2090-3, 2091-1(a), and 5005-2(c); and (3) sanctions and other relief under § 526.
31. In its motion, the U.S. Trustee asserted that Weekes' use of the BK Billing Model had an adverse impact on the Debtor, created a prohibited conflict of interest, and diminished the integrity of the bankruptcy system. As remedy, the U.S. Trustee asked the Court for an order cancelling the fee agreements between Weekes and the Debtor, disgorging all fees paid by the Debtor, and imposing monetary sanctions.
32. Weekes filed an opposition to the Motion,
33. Weekes asserts that he made full disclosures to the Debtor so that the Debtor could make an informed decision about the bifurcated fee agreements. Weekes asserts that the use of the bifurcated fee agreements allowed the Debtor to retain and pay for legal counsel, who facilitated the Debtor receiving a discharge without complications. Finally, Weekes asserts that his fee of $2,000 was reasonable under § 329, and that his use of electronic signatures does not merit the imposition of sanctions.
34. At the hearing on Weekes' Motion for Summary Judgment held on January 4, 2019, the parties discussed the need to comply with the Bankruptcy Code and the ethical rules while enabling cash-poor debtors to retain and pay for legal counsel to represent them during a Chapter 7 case.
35. At the hearing, the U.S. Trustee expressed more interest in obtaining guidance from the Court regarding the use of bifurcated fee agreements in consumer Chapter 7 cases than in sanctioning Weekes in this specific case.
This case evidences the challenges to debtors, debtors' counsel, and the Chapter 7 system when individuals in need of bankruptcy relief do not have the ability to pay a pre-petition retainer to hire an attorney. Whether intentional or not, there are statutory and ethical challenges, unique to consumer Chapter 7 cases, that arise when debtors can only afford to pay for legal services with payments made
As a result, debtors who cannot pay an up-front retainer are left with three ineffectual options. First, the debtor can proceed as a true pro se party by preparing, filing, and prosecuting a bankruptcy case entirely on their own. Second, and more problematic, is that a debtor can turn to a bankruptcy petition preparer. There may be competent petition preparers who charge a reasonable fee and appropriately limit their services to typing bankruptcy papers. However, the Court's experience strongly suggests that debtors are not only being overcharged by petition preparers,
Under either of these pro se options, the Chapter 7 consumer system becomes unnecessarily time-consuming and ineffective for debtors, creditors, trustees, and the Court. Not surprisingly, the Court's statistics evidence that 30% of pro se Chapter 7 debtors fail to receive a discharge.
The Court is not alone in its concern as to how the present system makes it difficult for individuals in need of Chapter 7 relief to afford an attorney. As noted by one bankruptcy judge:
Further, if debtors cannot afford an up-front Chapter 7 retainer, they may opt to file under Chapter 13, where attorneys can appropriately offer a "zero-down" option because their fees can be paid post-petition through the plan.
In an effort to work around the conundrum of providing consumer debtors with competent legal representation while offering an affordable payment system, debtors' counsel have employed a number of processes with unsatisfactory results. These include debtors issuing post-dated checks,
This outcome is ironic given that the Bankruptcy Code and Rules governing attorney's fees, coupled with the applicable ethical canons, are intended to protect debtors. Yet, these high-minded requirements and restrictions often result in greater prejudice to debtors who do not receive a discharge (or worse are denied a discharge under § 727) simply because they are too poor to pay a retainer up front to procure the needed legal representation.
Lastly, these impediments are sometimes enforced against counsel based on an assumption that debtors are unable to make rational decisions about how best to manage their financial affairs and legal options. With appropriate disclosures, debtors can make informed decisions as to the risks and benefits of incurring a post-petition obligation in order to retain an attorney's services. Certainly, debtor's counsel must assiduously avoid misleading a consumer debtor into filing an unnecessary bankruptcy case or taking financial advantage of debtors when they are most vulnerable. But providing a means for debtors to pay a reasonable attorney's fee through post-petition payments so debtors can afford the necessary legal services to obtain a Chapter 7 discharge should not, standing alone, implicate negative ethical issues.
At the time when the Debtor filed his Chapter 7 petition, there was no clear guidance in this District about the propriety of bifurcated retainer agreements in consumer Chapter 7 cases. However, cases from other jurisdictions at this time, including the Ninth and Seventh Circuit Courts of Appeals, supported, or at least acquiesced to, this approach to enable cash-challenged debtors to retain and pay for legal counsel to assist them in achieving a Chapter 7 discharge.
Based on these cases, the Court finds that Weekes had a reasonable, legal basis to employ bifurcated fee agreements when clients were unable to pay a full retainer prior to their bankruptcy filing. Further, without a specific ruling from this Court on bifurcated fee agreements, it was reasonable for Weekes to continue to use them. Moreover, as explained more fully below, the Court finds that this process did not harm the Debtor. Indeed, it facilitated the Debtor's ability to afford legal counsel to expeditiously receive a discharge.
The Court wishes to distinguish between the use of bifurcated fee agreements and a limited services agreement or unbundling. With unbundling, the attorney is contractually limiting services to a discrete task, such as filing the bankruptcy petition. With bifurcated fee agreements, the attorney is contracting to represent the debtor during the entire case, contingent on the debtor signing the post-petition agreement. The primary concern with unbundling is that the attorney provides a limited service and then leaves the client to his or her own devices to complete the legal process. This is problematic, even though it is becoming more widely recognized that having at least some legal representation in a consumer Chapter 7 case is better than none.
However, in this case, the purpose of the bifurcated fee agreements is decidedly not to abandon the debtor,
Some months after the Debtor's bankruptcy filing, the Utah State Bar issued an ethics opinion on the use of "zero-down" bankruptcy filings, bifurcated fee agreements, and the factoring of attorney's fees (the "Utah Ethics Opinion").
On the issue of unbundling, the Utah Ethics Opinion holds that a "lawyer is allowed to limit the scope of her engagement if the limitation is reasonable under the circumstances and the client gives informed consent."
As noted above, this case does not specifically involve unbundling, and the Court is not willing at this point to alter its view on this issue. As discussed in more detail below, debtor's counsel must still comply with Local Rule 2091-1 and be committed to providing the appropriate scope of services if the debtor is willing to sign the post-petition fee agreement.
The Utah Ethics Opinion then addresses the ethical constraints of requesting a debtor client to sign a post-petition fee agreement:
The Court agrees with this statement. The propriety of using bifurcated fee agreements in consumer Chapter 7 cases is directly proportional to the level of disclosure and information the attorney provides to the client, and the existence of documentary evidence that the client made an informed and voluntary election to enter into a post-petition fee agreement.
Further, the Court is likewise adamant that fees for pre-petition services should not be directly or surreptitiously slipped into the fee charged for post-petition services. If this happens, it could be cause for disgorgement under § 329 or other sanctions. As noted below, the Court finds that Capstone's fees in this case were for post-petition services, and that they were reasonable. Nonetheless, the Utah Ethics Opinion states that it is not expressing an opinion as to Utah bankruptcy law on bifurcated fee agreements.
Section 329 mandates disclosures for payments made "in a case under this title, or in connection with such a case," and requires that all fees paid for bankruptcy-related services be reasonable.
Thus, all aspects of any compensation agreement between debtor's counsel and the client should be explained in the Form B2030 Disclosure of Compensation filed with the court. Violations of this rule can result in sanctions, including the disgorgement of compensation.
Therefore, based on its review of the Utah Ethics Opinion, the Bankruptcy Code, and applicable law, the Court finds that the use of bifurcated fee agreements in consumer Chapter 7 cases to effectuate affordable legal services are not per se prohibited by the Bankruptcy Code and applicable law, they do not per se implicate ethical issues, and they are not per se unfair.
However, the use of bifurcated fee agreements and the related payment options in consumer Chapter 7 cases must be governed by the following prime directives. First, other than deciding whether to represent a debtor, all dealings and decisions, including the offered methods of payment, must be based on the client's best interests and not the lawyer's financial interests.
Second, all fees for legal services, including any finance charge on installment payments, must be reasonable and necessary.
Third, all fee arrangements must be fully revealed in the Form B2030 Disclosure of Compensation, which must be filed within fourteen days of the petition.
Fourth, if the client elects to proceed pro se or to retain the services of another lawyer, the filing attorney must immediately comply with Local Rule 2091-2 regarding the substitution or withdrawal of counsel.
In summary, the Court is neither encouraging nor prohibiting the use of bifurcated fee agreements in consumer Chapter 7 cases. But debtor's counsel may employ this option in situations where: (1) it is in the best interests of the client (e.g., the client could not otherwise afford to hire bankruptcy counsel); (2) the attorney provides appropriate disclosures, options, and explanations; (3) the client gives informed consent in writing; and (4) the attorney's fee and costs are reasonable and necessary. Of course, all fee arrangements with debtors are subject to review under § 329 by motion of a debtor or the U.S. Trustee, or sua sponte by the Court.
The U.S. Trustee next raised the question whether the use of bifurcated fee agreements violated Local Rule 2091-1, which establishes minimum requirements relating to an attorney's scope of representation:
The issue is that the Rule does not allow the scope of representation to be modified by agreement, yet Capstone's agreements gave the Debtor the option to proceed pro se or to retain new counsel. The intent of this rule is indeed to restrict the use of limited service agreements (unbundling) by debtor's counsel. However, as noted above, the difference with Capstone's bifurcated agreement procedure is that the law firm is willing to complete the representation, and it is only by the debtor's election that the case proceeds pro se. Debtors are free at any time to terminate a lawyer's services, so the Court does not see the use of bifurcated fee agreements as creating the problem addressed by Local Rule 2091-1. Thus, the Court finds that it is not a per se violation of this Rule if an attorney uses bifurcated fee agreements in a consumer Chapter 7 case to facilitate the debtor's ability to afford legal representation.
The U.S. Trustee has also asserted that Capstone Law should be required to refund the attorney's fees to the Debtor under § 329. This section provides that if a fee agreement "exceeds the reasonable value of any such services, the court may cancel any such agreement, or order the return of any such payment."
The Tenth Circuit has held that the factors set forth in § 330(a)(3) must be considered in determining whether an attorney's fees are reasonable.
The U.S. Trustee's motion asserts the following:
However, after reviewing the facts of this case, the Court finds that the Debtor received reasonable value for the fee paid. First, the $2,400 fee included the post-petition payment of the $350 filing fee along with other costs, with the balance of $2,007 constituting the attorney's fee. Second, Capstone Law provided billing records showing that the post-petition services, excluding time spent dealing with the Debtor's installment payments, had a lodestar value of $2,240. Third, Capstone Law adequately represented the Debtor in the case in that there were no complications, the Debtor was not required to turnover assets or provide additional information to the Chapter 7 trustee, the Debtor expeditiously received a discharge 118 days after the petition date, and the Debtor's discharge is now final under § 727(e). This is an appropriate result for the fee paid. For these reasons, the Court finds that there is no basis to "order the return of any such payment" to the Debtor under § 329.
The U.S. Trustee also raised concerns about the use of BK Billing to "factor" the Debtor's legal fee. In this case, Weekes assigned to BK Billing the right to collect the total of $2,400 in fees and costs in exchange for the immediate receipt of $1,800 from BK Billing—essentially a 25% discount. Weekes disclosed this arrangement to the Debtor in the Third-Party Disclosure and Consent that was signed by the Debtor; however, the arrangement was not revealed in Capstone's Disclosure of Compensation.
When this case was filed in November 2016, there were no reported decisions regarding the use of BK Billing by a debtor's counsel. Since then, decisions from other jurisdictions have raised significant objections to an attorney's use of BK Billing to collect fees.
In addition, the subsequent Utah Ethics Opinion addressed the issue of factoring attorney's fees in bankruptcy cases with the following comments:
The Court agrees with this guidance regarding the factoring of attorney's fees. But given the potential concerns raised in other cases, including those described in Wright, the Court would discourage the use of the BK Billing arrangement, or a similar factoring mechanism, unless it strictly complies with the guidance in the Utah Ethics Opinion. And even then, such must be fully disclosed, and the Court may review these arrangements for compliance with § 329 and any applicable rules.
Nonetheless, the Court has reviewed the Third-Party Disclosure and Consent signed by the Debtor. Even though it predates the Utah Ethics Opinion, the Court finds it to generally comply with the principles stated therein (with the possible omission of a statement that Capstone would not represent the Debtor in any dispute with BK Billing).
In their Motion for Sanctions, the U.S. Trustee requested additional sanctions against Weekes because he had the Debtor electronically sign some of the bankruptcy papers. The Court finds that Weekes' use of electronic signatures in this case does not justify a sanction.
Regarding electronic signatures, Bankruptcy Rule 5005(a)(2) states that "a court may by local rule permit or require documents to be filed, signed, or verified by electronic means that are consistent with technical standards, if any, that the Judicial Conference of the United States establishes."
Weekes argues that he complied with this Local Rule because he retained both the Debtor's original ink signature and the Debtor's electronic Adobe Sign signature. Weekes references Utah District Court Rule 5.1(a), which expressly allows electronic signatures: "Papers may be filed, signed, and verified by electronic means consistent with the administrative procedures adopted by the court. . . ." Weekes also cites to Fed. R. Evid. 1001(d), which states:
Further, Weekes notes that in 2000, Utah adopted the Uniform Electronic Transactions Act,
Consequently, Weekes argues that e-signatures are broadly permitted in court proceedings as valid and binding signatures. He further argues that Local Rule 5005-2(e) should be read consistent with DUCivR 5.l(a) that allows e-signatures on court documents. Lastly, Weekes notes that the Local Rule does not expressly require the retention of holographic or "wet" signatures.
Based on these arguments, the Court finds that it was not unreasonable at the time of the Debtor's bankruptcy filing for Weekes to interpret the phrase "original signatures" in Local Rule 5005-2(e) as including e-signatures. Thus, Weekes' use of e-signatures in this case does not merit the imposition of sanctions.
Pending an amendment to Local Rule 5005-2(e), attorneys should continue to obtain and retain a party's holographic signature on court papers, and specifically as to a debtor's signature on the bankruptcy petition, the bankruptcy schedules, and the Statement of Financial Affairs. However, the Court is mindful of special circumstances where a debtor may need immediate bankruptcy relief, but it is not logistically possible for the debtor to holographically sign the bankruptcy papers before the petition is filed.
Under Fed. R. Civ. P. 56(a), as incorporated into bankruptcy proceedings by Fed. R. Bankr. P. 7056, the Court is required to "grant summary judgment if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." The parties do not dispute the facts as set forth herein. For the reasons stated above, the Court grants summary judgment in favor of Weekes and finds the following:
