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Pre-Petition Installment Retainer Agreements for Post-Petition Legal Services—

An Avoidable Circuit Split

By:  Sarah L. Fowler

July, 2013

 

            Although experienced bankruptcy practitioners representing chapter 7 debtors know that it is best practice to obtain their fee for both pre-petition and standard post-petition bankruptcy services prior to filing the bankruptcy petition, other practitioners may not be aware that, at least in the 9th Circuit, the U.S. Court of Appeals has opened the door for attorneys to receive compensation for their services even when installments of the fee are not paid to the attorney until after the bankruptcy petition is filed.  Despite this possibility in the 9th Circuit, it appears the best practice continues to be obtaining payment in full from the debtor prior to filing the chapter 7 petition.

            As set forth by the 9th Circuit in In re Hines, there are generally two types of fee arrangements an attorney can enter into in order to obtain payment for legal services rendered to a bankruptcy debtor.[1]  First, the attorney may receive full payment from the debtor in advance of the bankruptcy petition filing for all of the work anticipated in the case.[2]  Alternatively, the attorney may receive a minimal payment in advance of filing the petition with an agreement that the debtor will pay the remaining fee from the debtor’s post-petition earnings.[3]  Although neither arrangement is ideal for a variety of reasons under the Bankruptcy Code, the latter is particularly problematic because of the way such an arrangement is treated by different courts across the county.

            On the one hand, many circuits, including the 7th Circuit, have held that any installments that remain unpaid by the bankruptcy debtor after the filing of their bankruptcy petition are discharged along with most of the debtor’s other debts by operation of § 727 of the Bankruptcy Code.[4]  In Bethea v. Adams & Associates, three chapter 7 debtors made payment arrangements with their bankruptcy attorneys to pay for the attorneys’ legal services in installments, some installments pre-petition and some installments post-petition.[5]  After the debtors received their discharge and their bankruptcy cases were closed, the attorneys attempted to collect the remainder of the installments from the debtors.  The debtors then initiated adversary proceedings against their former lawyers seeking to hold the lawyers in contempt for violating the injunctions implementing their discharges.[6]  The 7th Circuit reviewed the Bankruptcy Code’s discharge provisions in § 727(b), along with the exceptions to discharge found in § 329, and held that pre-petition legal fees are subject to discharge under § 727.[7]  The court remanded the case to the bankruptcy court and ordered that the former attorneys return any fees that were collected after the petition date to the debtors.[8]

            In addition to simply interpreting the Bankruptcy Code, the 7th Circuit also addressed and dismissed concerns that discharging installment retainers would preclude low-income debtors from filing bankruptcy.  The court expressly noted that “[t]hose who cannot prepay in full can tender a smaller retainer for prepetition work and later hire and pay counsel once the proceeding begins.”[9]

            Similarly, In re Hines, a chapter 13 debtor hired a new attorney to convert her case to chapter 7.[10]  Prior to the conversion, the debtor entered into a fee agreement with the attorney that she would pay her retainer for both pre-petition and post-petition legal services in seven monthly installments—the first pre-petition and the remaining six post-petition.  Prior to completing the bankruptcy case, the debtor switched back to her original attorney and refused to pay any more installments to her former attorney.[11]  The debtor filed a motion for contempt against her former attorney for willful violation of the automatic stay provisions of § 362(a)(6) and sought compensatory and punitive damages.[12]  In the interest of avoiding a chilling of competent counsel’s willingness to represent chapter 7 debtors, the 9th Circuit held that a “doctrine of necessity” allows claims for a lawyer’s compensation for post-petition services to avoid falling under either the automatic stay provisions of § 362(a)(6) or the discharge provisions of § 727.[13]  The 9th Circuit also discussed that the same result could also be reached by construing the lawyer’s “claim” arising when the services were actually performed rather than when the parties entered into the agreement, thereby allowing the attorney to collect fees for post-petition services from the debtor post-petition.[14]

            As evidenced by this split in authority, attorney compensation in a chapter 7 bankruptcy is far from straight-forward.  However, what is clear is that it is in the practitioner’s best interest to obtain its entire fee prior to filing the bankruptcy petition.  Although the 9th Circuit appears to have created a narrow exception, it does not appear that other circuits are following their lead, and it is certainly not a winning argument in the 7th Circuit.

 

[1] 147 F.3d 1185, 1189 (9th Cir. 1998).

[2] Id.

[3] Id.

[4] See 11 U.S.C. § 727.

[5] Interestingly, and as the concurrence notes, the court did not explicitly address the status of payment for post-petition services.  352 F.3d at 1130 (Cudahy, J., concurring and dissenting).

[6] See 11 U.S.C. § 524.

[7] Interestingly, and as the concurrence notes, the court did not explicitly address the status of payment for post-petition services.  352 F.3d at 1130 (Cudahy, J., concurring and dissenting).

[8] 352 F.3d at 1127.

[9] Id. At 1127-28.

[10] 147 F.3d at 1187-88

[11] Id. at 1187.

[12] Id. at 1188.

[13] Id. at 1191.

[14] Id. This argument was also addressed and dismissed by the 7th Circuit in Bethea.  See 342 F.3d at 1128-29.

 

Disclaimer

 

This article is designed to provide a basic understanding of concepts of the law. The law, however, is very much subject to change and to interpretation by different courts. Additionally, the applicable law varies from situation to situation. Accordingly, this article should be viewed as educational in nature, and not to be considered as either legal advice or a substitute for competent advice from a qualified attorney. Rubin & Levin, P.C., and the author of this material encourage that you seek independent legal counsel to address any questions pertaining to particular issues or situations which you may encounter.

 

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