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Lawyer Fees Charged to Client?s Credit Card; Court Orders U.S. Trustee to Examine Every Case He Filed Since 2005

By Craig Andresen, Minnesota Bankruptcy Attorney

Failing to return phone calls from a bankruptcy client, failing to help the client confirm her chapter 13 plan, and other mistakes may prove costly to an Ohio lawyer, whose client wrote a letter of complaint to the bankruptcy court, sparking an investigation into the lawyer’s conduct in that and other bankruptcy cases.  The court also ordered the U.S. Trustee to investigate the lawyer’s admitted practice of helping bankruptcy clients charge his fees to their credit cards, in all his cases going back the inception of the Bankruptcy Reform Act of 2005.

In this case, In re Seidel, No. 09-58731 (Bky.S.D.Ohio Sept. 30, 2010), the debtor consulted with the lawyer about filing a bankruptcy case to address her mounting credit card debt and burdensome second mortgage on her home.  The court found that during this meeting, the lawyer asked the debtor if she had any available credit, and when she responded that she did, the lawyer suggested that his $3,000 fee be charged to her Discover card.  After the lawyer charged the $3,000 fee to Discover, the debtor left his office thinking she was filing chapter 7.

She returned two weeks later with an appraisal of her home’s value of $56,500 along with a statement from her first mortgage that the balance owed was 56,900.  This seemed to indicate that her second mortgage could be “stripped,” and not paid in full, in a chapter 13 case.  Consequently, the lawyer stated she should file chapter 13.  The court noted that this “confounded” the debtor, who had expected a brief chapter 7 rather than a five year chapter 13 plan with $6,000 in payments.

After the chapter 13 was filed, the first mortgage submitted a claim saying the balance owed was $56,425.  However, buried in the supporting documentation was a different figure: an actual payoff with fees of $56,938.  This difference was critical because the lien stripping threshhold for the second mortgage was $56,500.

The debtor asked the lawyer to appear with her at her chapter 13 confirmation hearing.  He refused, saying that she must have given him the wrong amount for her mortgage balance.  She also asked the lawyer to object to the erroneous $56,425 proof of claim, but he refused this request as well.  The lawyer also failed to return many of her phone calls and would not agree to meet with her in his office unless she paid him an additional $60 fee.

The debtor then wrote a letter to the bankruptcy judge objecting to the $56,425 claim as being mistaken, which caused the court to hold a hearing on the claim.  The debtor appeared at the hearing alone, and the court sustained her objection, clearing the way to confirmation of her chapter 13 plan.

These events led the court to schedule a hearing into the lawyer’s conduct.  It found that the lawyer had violated section 526 of the bankruptcy code in advising the client to charge his fee onto her Discover credit card.  The court did not credit the lawyer’s explanation that whenever a client suggested paying his fee by credit card, he gave them a “warning document” before charging the credit card for his fee.

The court also found that the lawyer had violated section 526, as well as Ohio’s lawyer ethics rules, by failing to provide services necessary to her bankruptcy case.  These included meeting with the her, explaining bankruptcy relief so that she understood it, objecting to the erroneous proof of claim, and helping to get her chapter 13 plan confirmed.

The court ordered that the lawyer cease charging his fees to the credit cards of potential bankruptcy clients, that he refund his total $3,274 fee to his client’s Discover card account, that the lawyer could no longer submit a fee application for Ohio’s customary “no look” chapter 13 attorney fee in any case he filed in that court for the next one year, that he file a list with the court of every case he had filed since October 11, 2005, in which all or part of the fees were charged to a bankruptcy client’s credit card, and that the U.S. Trustee should investigate the lawyer’s transactions with his bankruptcy clients to determine whether further action should be taken.

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Full post as published by Bankruptcy Law Network on October 06, 2010 (boomark / email).