Bankruptcy

Why Bankruptcy Lawyers Require Fees Before Filing

By Bill McLeod, Esq.

There really is a good reason. And to help prove my point, I turn to an October 2008 decision out of the US Bankruptcy Court for the Eastern District of Pennsylvania: In re Mansfield. In that case, the court was called upon to ask what it viewed as a ?deceptively simple question:? may an attorney who charges a ?flat fee? for services pursue the uncollected balance due?

In this case, the attorney charged a flat fee for preparing the necessary documents and schedules, but also for attending the first meeting of creditors (which occurs after the case is filed). The fee was paid in one large installment, with the remaining balance divided into smaller installments which were paid or due after the case was filed.

The US Trustee sought a review of the fee practice as well as disgorgement of the fees collected after the case was collected. The attorney claimed there was no authority supporting the relief sought by the US Trustee, and he was entitled to collect at least the value of the services he rendered.

The court did not agree. Under Section 727(b) of the Bankruptcy Code, a ?debtor?s obligation under a fee agreement to pay a fixed or flat fee to his attorney for legal services rendered pre- and postpetition in a Chapter 7 case, regardless of how the fee is scheduled to be paid, is a prepetition debt that is dischargeable. The attorney avoided having to return the fees paid because there is a difference of opinion among Bankruptcy Courts throughout the country as to whether the practice of collecting fees post-petition is permissible?.and if permissible, the circumstances they are permissible.

In flat fee cases (and it is fair to say most, if not all consumer Chapter 7 cases are flat fee), the court found that the ?division of a flat fee arrangement into prepetition and postpetition parts to be conceptually inconsistent and therefore untenable. The Court therefore joins those other courts which hold what when a flat or fixed prepetition agreement is at issue, the fee must be paid in full prior to the commencement of the debtor?s case or the fee is discharged under Section 727(b).?

So in reality, when an attorney requires fees and costs prior to the filing of the petition, it?s because they need to get paid?unlike creditors in a Chapter 7 who in many cases do not get paid at all. There?s case law all over the country that supports it, and other case law that suggests that it can be done. While the current code and the case law leave room for creative argument, debtor?s attorneys can be expected to be wise and take the path of least resistance: earn the fee and serve the client. Certainly, there are bigger battles for debtor?s attorneys to engage in for their clients other than fighting for a fee for postpetition services.

In re Mansfield, US Bankruptcy Court, Eastern District of Pennsylvania, No. 08-11648 SR (Ocobter 2, 2008)

Full post as published by McLeod Law Offices on November 25, 2008 (boomark / email).