SUMMARY - UPDATED TO 5/7/04
Two weeks ago CBL invited
readers to participate in a "fast and dirty" survey on
typical fee arrangements in consumer Chapter 7 bankruptcy
cases. Although the results were not voluminous, we think
they are reasonably close to being a cross section of the
consumer bankruptcy bar. For one thing, the answers came
from 35 different states. So, we know we're not seeing
one area being over-represented in the survey. The
original sample of 67 responses at the end of the first
week has grown to 91 responses. Although this sample is
still relatively small, we noted that the additional 24
responses didn't appreciably change the breakdown,
suggesting that the sample is a fair representation of
the consumer bankruptcy bar.
The survey concluded as
of May 7, 2004.
Some of
the results were fairly predictable - for example, 100%
collect a pre-petition retainer fee. Some others were a
surprise - 51% say their jurisdictions allow
""limited-engagement" retainer agreements.
The total number of responses was 91.
The number of states represented was 35.
A quick glance at some of the results:
100% of consumer bankruptcy lawyers collect a
pre-petition retainer fee.
For a modest majority (63%) Chapter 7 cases represent
more than 50% of their practice.
80% use a written fee agreement.
A microscopic 4% include an attorney's lien on the
retainer fee, in the fee agreement.
A majority - 71% - collect for both pre-petition and
post-petition services in the pre-petition retainer
fee.
48% require a new written post-petition fee agreement for
adversary matters.
Here
is a table showing the complete
results:
COMPLETE TABLE OF RESULTS
1. How much of your practice is
devoted to consumer Chapter 7 cases?
|
|
|
More than half
|
63%
|
|
About half
|
14%
|
|
Between 25% and 50%
|
17%
|
|
Less than 25%
|
8%
|
|
|
|
2. Do you typically take a
prepetition retainer fee?
|
|
|
Yes
|
100%
|
|
|
|
3. Do you have a written fee
agreement?
|
|
|
Yes
|
80%
|
|
No
|
17%
|
|
Sometimes
|
3%
|
|
|
|
4. Does your written fee
agreement include a provision for an
attorney's lien on funds on deposit, to
secure payment?
|
|
|
Yes
|
4%
|
|
No
|
84%
|
|
N/A or no answer
|
12%
|
|
|
|
5. What level of services does
your prepetition fee agreement cover?
|
|
|
Prepetition services up to filing
only
|
18%
|
|
Both prepetition and foreseeable
postpetition problems
|
71%
|
|
A portion of the prepetition
services only, with collection of remainder
postpetition
|
12%
|
|
|
|
6. For prepetition retainer that
includes postpetition services, which
postpetition services are covered?
|
|
|
Only routine administrative tasks
such as 341 hearing, etc.
|
77%
|
|
Both administrative, and
foreseeable contested and adversary matters
|
11%
|
|
N/A or no answer
|
12%
|
7. Do you require a separate fee
agreement to cover postpetition
administrative tasks?
|
|
|
Yes
|
6%
|
|
No
|
92%
|
|
|
|
8. Do you require a separate fee
agreement to cover postpetition contested
matters?
|
|
|
Yes
|
35%
|
|
No
|
66%
|
|
|
|
9. Do you require a separate fee
agreement to cover postpetition adversary
matters?
|
|
|
Yes
|
48%
|
|
No
|
52%
|
|
|
|
10. Does Your local jurisdiction
permit limited engagement retainer
agreements?
|
|
|
Yes
|
51%
|
|
No
|
33%
|
|
N/A or no response
|
16%
|
OUR REMARKS ON THESE RESULTS
In our opinion,
certain of the results have important ramifications that
should be noted. We comment on these results, as
follows:
VOLUME OF
CHAPTER 7 WORK
Question #1: Most
of the respondents (77%) devote half or more of their
bankruptcy practice to chapter 7 work.
LAWYERS COLLECT
RETAINER FEES
Question #2: First,
it can be said with confidence that the usual practice in
consumer Chapter 7 cases is for the attorney to obtain an
"up front" retainer fee; 100% of the respondents said
they collected a prepetition fee.
Question #3:
Approximately 20% of the attorneys either do not use a
written fee agreement, or only use one "sometimes." In
our view, this is a bit alarming. It should be deemed
good practice to have a written fee agreement.
LIEN ON FUNDS IS
RARELY INCLUDED IN AGREEMENT
Question #4: Only
4% of the attorneys include in their fee agreements a
provision for an attorney's lien on the retainer funds
deposited. We were surprised to see such low number using
this device to protect their right to payment out of the
funds deposited with the firm. At least some, and perhaps
most of the states recognize the validity of an
attorney's lien on the funds in his or her possession to
secure payment; where this security method is allowed
under state law, they are generally recognized in
bankruptcy law. See for example In re Goco Realty
Fund, 151 B.R. 241 (Bkrtcy.N.D.Cal. 1993); In re
Printcrafters, Inc. 233 B.R. 113 (D.Colo. 1999);
In re Hodes, __ B.R. __ (Bkrtcy.Kan.
2003).
WHAT DOES THE
FEE COVER?
Question #5: A
substantial majority of the prepetition retainer
agreements (71%) are intended to cover both prepetition
services up to filing, and foreseeable postpetition
services as well. A smaller number (18%) of the
prepetition retainers are intended to cover prepetition
services only, while 12% cover only a portion of the
prepetition services, with the balance to be collected
postpetition.
FUNDS HELD OVER
ARE PROPERTY OF THE ESTATE
The lawyers who
collect, prepetition, for postpetition services are at
risk, because the portion of the funds in the lawyer's
possession that have not been consumed by prepetition
services (i.e., the portion still credited to the client
to cover postpetition services) has been held in a number
of cases to be property of the estate; and, under the
Supreme Court ruling in Lamie v. United States,
124 S.Ct. 1023 (2004), the debtor's attorney in Chapter 7
cases cannot be paid out of property of the estate unless
previously appointed by the court to represent the
estate. The basis of this ruling was the literal meaning
of the text of 11 U.S.C. § 330, which permits
professionals in certain categories to be paid out of the
estate, but omits any mention of the debtor's attorney
being among them. This suggests strongly that any funds
the attorney is holding after date of filing cannot be
used to pay for the attorney's postpetition services,
such as the 341 hearing or contested or adversary
issues.
Prior to
Lamie, most of the reported cases had already
established the notion that the held-over portion of the
retainer fee is property of the estate, but had held that
under 11 U.S.C. § 330 the Code permitted debtors'
attorneys to be paid out of the estate, notwithstanding
that the text of the code did not include debtors'
attorneys. Others had held that even though the held-over
funds may be property of the estate, a limited portion of
such funds could be paid to the debtor's attorney to
cover the routine required administrative tasks, such as
attendance at the meeting of creditors, and perhaps a few
other matters such as reviewing reaffirmation agreements.
However, under a
strict interpretation of the Lamie ruling, we
expect to see more trustees demanding turnover of even
those funds held to pay for the routine administrative
postpetition tasks.
Hence, the question
arises, if the debtor's attorney cannot secure payment
from the start to cover postpetition administrative tasks
such as attending the meeting of creditors, is it fair to
say that such attorney is not required to attend the
meeting or perform other routine postpetition tasks? This
is problematic in view of the cases that hold that once
attorney of record, the attorney's duties include
attendance at 341 meetings. In such jurisdictions, if the
debtor refuses or is incapable of paying a postpetition
fee for postpetition work, is the attorney still on the
hook to provide those services?
LIMITED
ENGAGEMENT AGREEMENTS
One solution that
may be available is the use of the "limited engagement"
fee agreement. This is an agreement that spells out
exactly which tasks and services the attorney will
provide, and a retainer fee sufficient to cover only
those services. Thus, the parties could agree that the
attorney will cover only prepetition services up to
filing the petition, and any postpetition services, such
as attendance at the 341 hearing must be the subject of a
new fee agreement and a postpetition retainer fee. To our
surprise, 51% of the responding attorneys indicated that
such retainer agreements are allowed in their
jurisdictions. We are surprised only because we had not
heard much about these kinds of agreements in the past,
and assumed that most jurisdiction would not allow them.
(Question #10).
PARTIAL PAYMENT
PREPETITION‚ BALANCE DUE AFTER FILING
Returning to
question #5: Some of the lawyers avoid the problem
described above by taking only sufficient prepetition
fees to cover services up to filing (18%).
Another 12% take a
prepetition fee sufficient to cover only a portion of the
prepetition services, up to date of filing, with the
balance owed collected postpetition. While this makes
sense in terms of providing access to bankruptcy for
really broke clients, it raises another problem; the
majority rule in published opinions is that any portion
of the fee for prepetition services, due to be paid after
filing, is a discharged debt, and the attorney violates
the automatic stay and permanent discharge by leaning on
the client to pay such fees after date of filing. See the
Hessinger line of cases; In re Hessinger &
Assocs., 165 B.R. 657 (Bkrtcy.N.D.Cal.
1994).
To summarize: fully
83% of the respondents either collect, prepetition, fees
to cover foreseeable postpetition services, or they
collect only a portion of the fee intended to pay for
services up to date of filing, expecting the balance to
be paid postpetition. This means that 83% of these
attorneys are at risk of either paying themselves out of
property of the estate, forbidden by Lamie, or
collecting a part of their prepetition fee after date of
filing, which violates the automatic stay.
The only
respondents who appear to be on safe ground are the 18%
who collect, prepetition, all of the fee necessary to pay
for prepetition services, and not a dime more; by doing
so, they violate neither rule. However, even these
lawyers face a conundrum; if they take a case but collect
only sufficient money to pay for services up to date of
filing, and upon filing become the attorney of record on
the case, are they then obligated to provide routine
postpetition administrative services such as attendance
at the meeting of creditors, reviewing reaffirmation
agreements, filing such amended schedules as may be
necessary, and postpetition counseling for the debtors?
If they are expected to represent the debtor
postpetition, but the debtor is either unable or
unwilling to pay for the services out of postpetition
income, then the attorney is being forced to provide free
legal services. In most consumer debtor firms, the margin
of profit on any case is very slim. Can attorneys afford
to take the risk of being stuck on a case without
assurance of adequate compensation to pay for the
time?
Until that question
is resolved, our conclusion is that debtors' attorneys
may be in trouble in connection with their fee collection
practices, and should give serious thought to how their
fees may be protected without violating one section of
the Bankruptcy Code or another.
REMARKS BY SOME OF THE ATTORNEYS
Florida attorney
Please do a survey on the fees allowed
for Chapter 13 cases. I am in the SD of Fla. and the
local rules committee just refused, again, to allow a
higher safe harbor fee. The committee went further,
however, and required even more work than before while
refusing to allow an increase. The committee says that we
are one of the highest in the nation at $2500 for no-look
fee for C13. But we are required to object to all claims
and provide many post-confirmation services that
practitioners in other jurisdictions don't.
Minnesota attorney
I am really amazed at the naivete
displayed by the responses. Lamie and the other cases
have made it clear that any pre-petition agreement to pay
attorneys fees creates a debt that is discharged. The
balance of any upfront retainer that is not fully earned
by filing becomes prpoerty ofg the estate from which
Chapter 7 attorneys cannot be paid. A lien on the
retainer may protect the retainer balance. I appears
that, so far, the U.S. Trustee in this district is not
challenging this practice. We'd all better get creative
because this Congress is not going to "fix" any problem
that will make it easier for debtors to file bankruptcy.
California attorney
NACBA* will be doing its members a
disservice if a legislative "fix" is not immediately run
through Congress to correct this outrageous Supreme Court
case.** This is a case where "letter of the law" standard
was used and a "public policy" standard SHOULD have been
used.
You're right about the fee agreements.
Where do I find more information about attorneys' liens
in California bankruptcy cases?
* National Association
of Consumer Bankruptcy Attorneys
** Lamie v.
United States, 124 S.Ct. 1023 (2004)
Montana attorney
If the case is anything other than a
"routine consumer 7" involving W-2 wage earners, it is an
hourly engagement.
California attorney
I had not thought about the importance
of a grant by the client of a lien against the retainer
to secure fees and will add such a provision forthwith.
Since I typically do not attend 341a meetings in chapter
7 cases (and my clients in the retainer letter so agree)
I really do not perform many services post-petition. I
provide one reaffirmation without charge but I tell my
clients prepetition that I rarely see a case where a
reaffirmation makes sense, so I see few of them.
Louisiana attorney
Case law states a (chapter 7) debtor
attorney cannot collect post-petition fees. I collect a
small amount up front in a 13 with the rest in the plan
but ALL up front in a 7.
[ed. note: We do not
believe case law prohibits postpetition collection of
fees per se. The prohibitions are, 1) the attorney
cannot collect postpetition fees for
prepetition services, because the amount due is a
prepetition debt that is discharged in the bankruptcy; 2)
although the attorney may as a general rule collect fees
postpetition for postpetition services, the
attorney may not collect such funds if they are property
of the estate. Funds could be property of the estate if
they are 1) from money in possession of the debtor
as of date of filing the bankruptcy, or 2) funds held by
the debtor's attorney for fees, or 3) if the funds were
the issue or produce of property that was itself property
of the estate; but if the source of the postpetition
funds was the debtor's postpetition income generated from
his personal services postpetition, they would not be
property of the estate.]
Indiana attorney
I only handle the fairly
straightforward Chapter 7 bankruptcies. I do them quite
inexpensively $600 plus the $209 filing fee and I insist
that the client(s) complete a questionnaire and make the
calls to get all the creditor information. The whole $809
must be paid prior to filing. I include any
reaffirmations and one Stay of Judgment in the $809 fee.
When they sign their schedules I have them sign a release
indicating that they have provided me with all the
required info and that if any additional creditors "pop
up" there will be additional fees. Generally, all goes
well and I have happy and satisfied clients who refer
their friends and coworkers to me!
California attorney -
My fee range is
$1,000 to $2,500 depending on the complexity of the case.
It's always paid in full in advance. It's made clear in
the papers filed that adversary actions or trustee
challenges to exemptions or discharge aren't included in
the fee, and such did arise, the debtor would pay extra
for that service. I've never had either debtor or trustee
challenge my fees, except for one case in Riverside where
the Ch7 trustee informed me that the "agreed-on" fee was
$1,200, which I personally found outrageous as I had to
make THREE appearances in that case to satisfy him. The
complexity of that case more than justified the $1,800
fee I charged.
Tennessee
attorney
We have a potential problem much
like that which has arisen in other circuits. This is a
garnishment and notice foreclosure state. For as long as
I have practiced law, we have taken chapter 7 cases for a
portion of the fee down, the rest over the 4 month life
of the case. The contract provides for a continuing
stream of services to be rendered both pre- and
post-petition, and allows for additional fees only in the
event of adversaries or contested hearings. I am
concerned that should our fees be deemed discharged, that
many debtors will be denied access to the courts and will
suffer garnishments and foreclosures and repossessions
because we attorneys will be required to collect all our
fees pre-petition.
California
attorney
Retainer letter states only
pre-bankruptcy planning, preparation of petition,
statements and schedules and representation at first
meeting of creditors for flat fee. Any adversary or
motion practice reguires a separate fee
agreement.
Illinois attorney
[I'm] still scrambling on
how to structure post-petition fee agreements in light of
recent 7th C case which came down 12/03.
Recent Central Dist of IL case
(Judge Perkins) follows 7th cir case indicating that any
pre-petition agreement, NOT REAFFIRMED, is discharged,
under plain reading of BK code.
Perkins also ruled that 2016
Disclosure must detail what's done before and after
filing and comport with fee agreement.
Catch 22 - if 2016 disclosure shows
any further moneys to come in after filing date....then
doesn't that constitute a "pre-petition fee agreement"
despite the charade of entering into a new post-petition
agreement.
I'm most concerned court will
ultimately rule that ANY post-petition agreement is an
end-run around a reaffirmation.
But how can we ethically enter into
a reaff with own client? Who's gonna sign the atty
declaration? In our district any reaff not approved by
d's atty must go before the judge.....will he approve it?
I don't wanna be the first one to blaze that murky
trail....(even tho I am the rock n roll attorney
maverick).
Bottom line - more attorneys, for
fear of reprimand or class action disgorgement, will just
capitulate and demand all fees up front.....which really
eats into our profits, interferes with our freedom to
contract, goes against the basic grain of "the fresh
start" provision and will delay the filing of thousands
of bk's, which will line the pockets of more
creditors....."A Bankrutpcy Delayed Is Money Paid" ( I
just made that up).
Query - even if [you] get
all of your retainer up front for a "routine" case and
the pre-petition agrmt carves out adversaries/contested
matters from being included in the fee, isn't that really
part of the pre-petition fee that's to be
discharged[?]. What insanity. It's a vast right
wing conspiracy I tell you!!!
North Carolina
attorney
I want to clarify that I do have a
written fee agreement, but I don't have the clients sign
it. It's in the form of an engagement letter, which I
give the client at the first consultation and then send
them a second time when they pay the retainer. For some
reason it seems to set up an adversarial relationship to
have the client sign an agreement, and the letter is just
as good under my local rules. Anyway, it doesn't matter
what I put in the agreement. When I sign my name to the
petition I'm in the case forever, regardless of how many
adversary proceedings, etc. are filed, until the judge
allows me to withdraw (which I've asked for exactly three
times in 25 years).
Maryland attorney
A separate pre-petition retainer is
NOT permitted to be held in escrow for potential
adversary matters, See, In re Printing Dimensions, which,
if obtained, is considered property of the bankruptcy
estate. A retainer may be paid after the filing of the
Ch. 7 case for additional services contemplated in the
retainer agreement, which would then be disclosed on a
supplemental 2016(b) -- even though it would be from
post-petition, non-estate funds.
Maryland attorney
In Maryland, the Trustee will
usually object to any fee over $1500 and require you to
file a petition to justify. The Court is usually quick to
approve most fees in an operating business 13 and
generally in the closed down business 13. Not so quick to
approve a larger fee in the closed business Chapter
7
New York attorney
There must be a remedy to protect
fees that a client cannot pay pre-petition but agrees to
pay from future income. The only remedy is not to file
until paid in full to the detriment of the dentors. NOT
AN ACCEPTABLE REMEDY.
California
attorney
Every client has a written fee
agreement clearly stating what is and is not covered. The
flat fee and filing fee are paid 100% in advance and then
I pay the filing fee from the trust account to the
clerk's office. Clients are clearly told in writing that
adversary proceedings are NOT covered by the flat fee,
but that basic reaffirmations and calls with creditors
are covered. Clients initial several additional
paragraphs that they will keep secured debt current, that
they must bring picture id and SS identification to the
341, etc. I also go over this with them at the signing
interview. Any adversary or hearing matters that are post
341 are entered into separately and paid from post
petition earnings or exempt property.
California
attorney
the US Trustee is looking at the
wrong side of the problem.
The "tall building" creditors'
firms can charge double per hour and literally grind down
debtors, while we are forced to work the worse of the
worst for our fees: contingent-hourly.
Other than the joy of helping
others, there is no up side to doing debtor work.
I just try to keep my head down and
out of the way as much as possible. I sure do like the
occassional creditor case that I get once in a great
while: easy hourly fees that surpass (about double I
calculate) what I get for my chapter 7 "flat fee cases",
and no one looking over my shoulder to "review fees"
after the fact.
Arizona attorney
Yes, I suppose that it is possible
to be too broke to be bankrupt, but to disallow fee
payments post petition makes it so that either the lawyer
gets cheated or the debtor cannot get proper
representation. Time-wise, the 341 and ancillary matters
take up more time than the original filing usually, so
most of the "work" is post petition. Recent rulings seem
to decide that no work is done post petition and that all
work is pre petition. Dumb at best!
Texas attorney
My jurisdiction does not require me
to represent clients in adversary proceedings filed
against them. When such a proceeding is filed, I discuss
fee arrangements with the client. My written fee
agreement specifically excludes adversary representation
from the original fee.
Indiana attorney
I am in the 7th Circuit, therefore
I must get my basic fee before the filing. For post
filing additional work, I can bill additional fees as per
my contract and the recent "Bethea" case.
Texas attorney
Our down payment is generally
$509.00 which includes $209 filing fee (ch. 7) and $300
down payment. The balance is paid by the client in 2 or 3
monthly installments as agreed on between client and
attorney. A contract is signed by the client agreeing to
the payment arrangement. The contract also covers
additional items such as amendments to schedules (adding
creditors which requires an additional fee) as well as
setting an hourly rate on contested matters such as
adversaries, etc.
Pennsylvania
attorney
It includes the fee for a normal
case with no litigation or, at most, a few 522f
proceedings. It does not include adversary proceedings.
Kansas attorney
I would be happy to collect my
entire fee prior to filing, but I think that practice
would result in many people being forced to file pro se,
which isn't good for the debtors or the bankruptcy
system.
Tennessee
attorney
The debtors in our jurisdiction are
poor, the competitive situation is such that if you won't
work with the client re fees, they'll go somewhere else.
I get half the fee plus costs up front and feel fortunate
when I get anything past that. (Although about 50% do pay
the balance, it usually takes longer than I want or
ask.)
California
attorney
I will not charge extra if I have
to amend and appear at a continued 341 hearing or to
contest a motion to dismiss or convert to a chapter
13.
