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Easley v. Collection Services of Nevada, 17-16506 (9th Cir. Dec. 20, 2018)  The Ninth Circuit became the first court of appeals to rule that a debtor is entitled to appellate counsel fees for successfully overturning a lower court’s order and winning larger damages for a willful violation of the automatic stay.

The creditor had committed a willful violation of the automatic stay. The chapter 13 debtor sought damages and attorneys’ fees under Section 362(k). The section provides that “an individual injured by any willful violation of [the automatic stay] shall recover actual damages, including costs and attorneys’ fees, and, in appropriate circumstances, may recover punitive damages.”

The Bankruptcy Code (the Code) provides hard-pressed debtors with an opportunity to obtain some relief from their financial burdens. One critical tool in the Code aiding an orderly bankruptcy process is an automatic stay of creditor actions to collect preexisting debts from debtors who have filed for bankruptcy protection. See 11 U.S.C. § 362(a). The Code provides that injured debtors may sue for “actual damages, including costs and attorneys’ fees” for willful violations of the stay. Id.§ 362(k)(1). We previously held in In re Schwartz-Tallard, 803 F.3d 1095, 1101 (9th Cir. 2015) (en banc), that this provision authorizes the court to award reasonable attorneys’ fees and costs incurred on appeal in defending a judgment rendered pursuant to § 362(k). We now clarify that § 362(k) also authorizes attorneys’ fees and costs to the debtor incurred on appeal in successfully challenging an initial award made pursuant to § 362(k).

In re SCHWARTZ-TALLARD, 9th Cir. 10/14/15 BAP No. 11-1429 When a debtor files for bankruptcy, the Bankruptcy Code imposes an automatic stay on actions against the debtor to collect pre-petition debts. Sternberg v. Johnston, 595 F. 3d 937 (9th Cir. 2010), held that § 362(k) allowed a debt or to recover only those fees incurred to end the stay violation itself, not the fees incurred to prosecute a damages action. Agreeing with other circuits, the en banc court held that §362(k) authorizes recovery of the fees incurred to prosecute a damages action. The en banc court overruled Sternberg to the extent it was inconsistent with the en banc court’s opinion.

Can debtor pursue creditor for attorney fees in a non-dischargeable claim – see 523(d)

If a creditor requests a determination of dischargeability of a consumer debt under subsection (a)(2) of this section, and such debt is discharged, the court shall grant judgment in favor of the debtor for the costs of, and a reasonable attorney’s fee for, the proceeding if the court finds that the position of the creditor was not substantially justified, except that the court shall not award such costs and fees if special circumstances would make the award unjust.

In Matter of Love, 577 F.2d 344 (5th Cir.1978), the court affirmed a bankruptcy judge’s finding that the creditor had acted in bad faith in bringing a non-dischargeability petition, and affirmed an award of attorney’s fees on the basis of the inherent power of a court of equity to award fees where the losing party has acted in bad faith, vexatiously, wantonly, or for oppressive reasons, citing Alyeska Pipeline Co. v. Wilderness Society, 421 U.S. 240, 95 S.Ct. 1612, 44 L.Ed.2d 141 (1975). See also In re Urquhart, 427 F.2d 492 (8th Cir.1970) (fees awarded under pre-amendment Section 17 on finding of “overreaching and harassment” by creditor). An award of attorney’s fees was denied a bankrupt where no bad faith was demonstrated in In re Casper, 338 F.Supp. 327 (E.D.Va.1972). Cf. In re Kootenai Motor Co., Inc., 43 F.2d 462 (D.C.Idaho 1930).

In re Fulwiler, 624 F.2d 908, 910 (9th Cir. 1980)

Attorney fees awarded prepetition litigation establishing the fraud claim are nondischargeable under Cohen v. De La Cruz. For the § 523 litigation itself, see In re Dinan and the cases cited in Levitt and Burgueno.

In re Gilman, 9th Cir BAP, 7/12/19  Millions in attorney fees to collect $8250 judgment: Appellants, Tammy R. Phillips and Tammy R. Phillips, (jointly, “Creditors”), obtained an $8,250 judgment against debtor, Kevan Gilman, plus (under California law) $100,000 in prepetition fees, plus $1,000,000 for other state court fee requests. In this chapter 7 case, they obtained a determination that Debtor was not entitled to a discharge. They also actively litigated issues in the main case itself. The bankruptcy court determined that they were entitled to an award of reasonable fees in connection with this activity. Creditors
requested approximately $750,000 in fees arising from main case activity and $1,400,000 in fees in the adversary proceeding, plus costs. The bankruptcy court awarded $137,907.66 and $166,453.58, respectively, in fees and costs. This appeal arises from the reduced awards.

CONCLUSION: In sum, we conclude that, when a creditor voluntarily files a CCP § 685.080 motion with the bankruptcy court for an award of postpetition attorneys’ fees, § 108(c) does not toll the two-year limitation in CCP § 685.080. As a result, Creditors have not shown that the bankruptcy court erred when it disallowed fees on this basis. Accordingly, we AFFIRM. 

In re Yee, No. 16-11798, 2017 WL 2556933 (Bankr. D. Ariz. June 12, 2017).  A bankrupt Arizona woman’s ex-husband is not entitled to an award of attorney fees incurred during his successful effort to prevent her from discharging divorce-related debts through her Chapter 13 case, a Phoenix bankruptcy judge has ruled.

Neither the Bankruptcy Code nor Arizona family law statutes provide for attorney fees to prevailing parties in dischargeability proceedings, U.S. Bankruptcy Judge Daniel P. Collins of the District of Arizona said.

In June and August of 2016 an Arizona state court awarded Martin Yee nearly $60,000 in attorney fees in his divorce from ex-wife Karen Choy Lan Yee.  After she sought Chapter 13 protection in October, Martin prevailed in bankruptcy proceedings in which he contended that the fee awards were domestic support obligations and thus nondischargeable under Section 523(a)(5) of the Bankruptcy Code.

The Bankruptcy Court also ordered Martin to file an accounting of additional amounts he had claimed were not subject to discharge.

He then filed the accounting as well as an application seeking $34,000 in attorney fees incurred during bankruptcy proceedings, asking the court to recognize these fees as a domestic support obligation.

Karen objected to the accounting and fee application.

No basis for bankruptcy-related fee award

“Under the ‘American Rule’ a litigant in federal court is not entitled to an award of attorneys’ fees and costs unless an applicable statute or enforceable contract provides for such award,” Judge Collins said, citing Travelers Casualty & Surety Company of America v. Pacific Gas and Electric Co., 549 U.S. 443 (2007).

Nothing in the Bankruptcy Code, including Section 523(a)(5), provides for parties to recover fees, the judge said, citing Heritage Ford v. Baroff (In re Baroff), 105 F.3d 439 (9th Cir. 1997).

The judge rejected Martin’s argument that Arizona family law, Ariz. Rev. Stat. Ann. § 25-324, provided a basis for the fee award.

Section 25-324(A) authorizes “the court” to award costs and expenses incurred “maintaining or defending any proceeding” under Arizona’s divorce and parenting-time statutes, the judge said.

“The court” cannot mean a bankruptcy court because it has no jurisdiction over family law proceedings, he said, also noting that the nondischargeability matter was not a “proceeding” under Arizona law.

Section 25-324(B) authorizes fee awards against a party who filed a petition in bad faith, one that was not factually or legally grounded, or one that was filed for improper purposes.

The fees Martin seeks from the bankruptcy case did not involve a petition under Arizona family law, Judge Collins said.

The judge also rejected Martin’s argument that reasonable fees incurred in dischargeability proceedings are not subject to discharge, which cited In re Carson, 510 B.R. 627 (Bankr. E.D. Cal. 2014), a California case.

“Arizona’s family law statutes are not so broad,” he concluded.

Although attorney’s fees are ordinarily treated as administrative expenses during the pendency of a chapter 13, such that any unpaid fees still owed when the final discharge comes through are discharged, the bankruptcy code permits a different treatment if the plan is confirmed.In In re Johnson, __ B.R. __ (9th Cir. BAP 2006) the bankruptcy court originally held that the debtor’s attorney’s unpaid fees at the conclusion of the chapter 13 were discharged, because a chapter 13 discharge includes all debts provided for in the plan unless exempted from discharge; since attorneys’ fees are typically provided for in the plan and are not excepted from discharge, any unpaid balance is discharged. The Bankruptcy Appellate Panel reversed. Acknowledging that in the typical case the chapter 13 debtor’s unpaid attorney’s fees would be discharged, the court cited authority that a confirmed plan binds all parties, even if a provision of the plan is contrary to the Code. In this case, the debtor had signed off on a plan that was confirmed, and which contained a provision that any unpaid fees would not be discharged and that the attorney could collect directly from the debtor.

In ruling that the attorney’s fees were not discharged in this case, the court distinguished In re Hanson, 223 B.R. 775 (Bkrtcy.D.OR 1998), where the plan did not explicitly except the attorney’s fees from discharge.

In Schwartz-Tallard v. America’s Servincing Co. 2012 DJDAR 9091 (2012), the Bankruptcy Appellate Panel for the Ninth Circuit Court of Appeals decided a fee case under the so-called Sternberg bankruptcy doctrine. The doctrine was established under the Ninth Circuit’s decision in Sternberg v. Johnston, 595 F.3d 937 (9th Cir. 2010). Under this doctrine, attorney fees incurred in pursuit of damages for the violation of the automatic bankruptcy stay are recoverable as an exception to the American Rule. That rule states that the parties to litigation are required to pay their own attorney fees.

The debtor filed a Chapter 13 bankruptcy petition. The debtor made regular monthly mortgage payments, but the creditor asked for a lift of the stay, court granted the relief. Creditor sold home at foreclosure. Debtor proved payments current and court reinstated the automatic stay. The debtor moved for sanctions on the grounds that the creditor had violated the court’s stay order.

The bankruptcy court granted the sanctions motion. In addition, the court awarded the debtor damages and attorney fees. When the creditor appealed, the district court concluded that there had been a violation of the automatic stay. The debtor then moved for additional attorney fees incurred during the defense of the appeal. The creditor contended such fees were prohibited under the decision in Sternberg v. Johnson, cited above. The district court denied the request for the recovery of fees incurred on the appeal. The case was then appealed to the Ninth Circuit’s Bankruptcy Appellate Panel. The Ninth Circuit reversed the denial of the fee award. The Ninth Circuit noted that under the Sternberg doctrine, a debtor’s attorney fees incurred in “pursuit of damages” for a stay violation cannot be awarded as compensation for actual damages. However, a debtor’s appellate attorney fees may be awarded as actual damages for a stay violation. The Ninth Circuit reasoned that the debtor was defending a damages award for the creditor’s stay violation, and fees were appropriate under those circumstances.

Howard v. Derham-Burk (In re Howard), 17-1064 (B.A.P. 9th Cir. May 7, 2018)  The Ninth Circuit Bankruptcy Appellate Panel issued a warning to chapter 13 counsel: If you provide additional services at the end of the plan, be sure the court does not enter a discharge because you won’t collect, even though your additional services were critical, effective and beneficial.

The debtor’s confirmed chapter 13 plan provided for paying off mortgage arrears through plan payments. For counsel’s basic services, the plan allocated $6,500 in administrative expenses for the debtor’s attorney in deferred payments over the life of the plan. Adopting the district’s Rights and Responsibilities Agreement, the plan provided for paying fees through the plan and precluded counsel from receiving fees directly from the debtor, aside from the initial retainer.

The panel said that “nothing prevents [the debtor] from voluntarily repaying [her counsel’s] approved fees.” Voluntary payment, the panel conceded, was the “least desirable option” because it left counsel with no legal right to payment.

The BAP said there was no prohibition in the plan preventing the debtor from making direct payment of debts excepted from discharge. Therefore, counsel could have prevailed on the bankruptcy court to enter a discharge order that excepted additional fees allowed by the court.


By Jason Weber, Sirote & Permutt (as published in Lexology 5-2019)

It is hard to deny the growing sense of uncertainty that has developed since 2011 when the Bankruptcy Rules were amended to add Rule 3002.1 which requires, among other things, a notice to be filed itemizing any post-petition fees, expenses or charges incurred in connection with their claim.  With more and more disputes arising between Chapter 13 creditors, debtors and trustees over the reasonableness and entitlement of those fees it is imperative that creditors understand the best practices for recovering the full amount of their fees and how to defend against any unwanted objections.  For the purposes of this article, we will focus specifically on attorneys’ fees incurred in connection with the filing of a proof of claim and plan review since these are the two most frequently sought and contested fees.

  1. Look to the Agreement: does the mortgage provide for collection of bankruptcy related attorney fees?
  2. Fees for Filing POC: a defective claim could deprive a creditor of the prima facie evidence of the validity and amount of the claim.
  3. Plan review fees: diligent attorney review that would justify the standard $200-$300 plan review fees.
  4. Detail, Detail, Detail: Creditor attorney should include as much detail as possible is the best method for avoiding a dispute and convincing the debtor and trustee, on the front end, of the reasonableness of their fees.
  5. “No Look” standard: each district may have a ‘no look’ fee for basic POC and Plan review.
  6. Best Practices: It is important to describe the totality of responsibilities involved for filing a proof of claim and scope of performing the plan review as well as assert the significant legal risks to creditors and how those risks are substantially reduced when an attorney performs these functions on behalf of the creditor.

attorney fees

Undisbursed wages in possession of chapter 13 trustee go to the debtor on conversion to chapter 7

In Harris v. Viegelahn, 575 U.S. 510, 135 S. Ct. 1829 (2015), the debtor converted a chapter 13 case to chapter 7 after confirming a plan. Using post-petition wages paid to the trustee by the debtor, the chapter 13 trustee paid herself and the debtor’s counsel before paying the remainder to creditors under the confirmed plan. The debtor moved to compel the trustee to refund the money paid to creditors.

Resolving a split of circuits and answering a question where the statute is silent, the Supreme Court held in Viegelahn that undisbursed wages in possession of the chapter 13 trustee go to the debtor on conversion to chapter 7.

How about then the case was converted pre-confirmation?

In re Jessica Hayden, 4:15-BK-12619-BWM After Harris v Viegelahn (US Supreme Court, 2015): (6/26/18) Judge Whinery entered an order granting payment of attorney’s fees in a case that converted PRIOR to confirmation of a plan. So, in the narrow circumstance of a case converting prior to plan confirmation, Judge Whinery will enter orders allowing the payment of fees that may be on hand with the Trustee, rather than sending those funds back to the debtor as under the Harris case when a case dismisses or converts after a plan is confirmed.

Judge Gan’s initial reaction three years ago (but he has not been presented with the issue formally) was that he thought Harris would not allow the payment of fees under this circumstance.

In re Arnold, 19-54252 (Bankr. E.D. Mich. May 12, 2020 – 6th Cir.) As Judge Shefferly put it, the third sentence tells the trustee what to do “in plain and unambiguous terms” if a plan is not confirmed: “if a plan is not confirmed . . . the trustee shall return any such payments [made by the debtor before conversion] . . . to the debtor, after deducting any unpaid [administrative] claim allowed under section 503(b).”

Judge Shefferly declined to “read the broad language [in Viegelahn] as overriding the plain and unambiguous statutory command in the third sentence of § 1326(a)(2), which by its terms only applies to a case that is fundamentally different” from Viegelahn, where a plan had been confirmed. Judge Shefferly directed the chapter 13 trustee to pay allowed compensation to the debtor’s counsel before refunding the remainder to the debtor.

Suggestions, but these can change with the court, district, time and the wind:

  1. If the money the trustee is holding consists of post-petition earnings, then it won’t go to the Chapter 7 trustee. If it contains pre-petition assets, such as a tax refund, it arguably belongs to the Chapter 7 trustee.
  2. With respect to Russell’s office, if the debtor signs your fee application and “assigns” the funds the trustee is holding to pay any attorney fees awarded to the court, then Russell will pay them once he gets the fee order.
  3. If it doesn’t already, your Chapter 13 fee agreement should also grant a security interest and assignment in the funds the trustee holds for payment of your attorney fees.

The Chapter 7 Trustee’s attorney filed excessive fee application.  Trustee’s attorney not entitled to additional fees for defending his application.  See Baker Botts LLP v. ASARCO, 135 S.Ct. 2158 (2015).  There, the Supreme Court held that under section 330(a)(1) of the Bankruptcy Code, estate professionals are not entitled to fees for defending fee applications.  The Court found that in drafting the Bankruptcy Code, Congress had not expressly departed from the American Rule, which provides that each side must pay its own attorney’s fees, unless a statute or contract provides otherwise.

In re Savage, EC-14-1074-JuKuPa (BAP May 14, 2015)
Appellee Leonard Brill (Brill) filed an adversary proceeding against chapter 71 debtor, Steven James Savage, seeking a determination that his claim against debtor was nondischargeable under § 523(a)(2) and (6) and requesting denial or revocation of debtor’s discharge under § 727(a)(2) and (4). After a trial, the bankruptcy court entered judgment in debtor’s favor on all claims for relief. Debtor then filed a motion seeking $65,476.90 in attorneys’ fees and costs (Fee Motion), which the bankruptcy court denied. This appeal followed.

Although debtor suggests we interpret the attorney fee provision broadly to cover all disputes arising out of the contract, we decline to do so. On its face, the express language of the attorney fee provision limits recovery of attorneys’ fees to actions relating to breach of the contract.

The narrow language employed cannot be construed to cover all actions “resulting from” the agreement as debtor argues. Also, neither the § 523 claims nor the § 727 claims were “disputes arising from the contract” between Brill and CDC. Accordingly, CCP § 1021 is of no help to debtor under these circumstances.  Having found no error, we AFFIRM

In re Wallace, 9th Cir. BAP No. NV-13-1518-JuHlPa, October 28, 2014 “It is well settled that if a bankruptcy court finds that a party has willfully violated the discharge injunction, the court may award actual damages, punitive damages and attorney’s fees to the debtor. Espinosa v. United Student Aid Funds, Inc., 553 F.3d 1193, 1205 n.7 (9th Cir. 2008), aff’d 559 U.S. 260 (2010); Knupfer v. Lindblade (In re Dyer), 322 F.3d 1178, 1195 (9th Cir. 2003) (actual damages, including attorney’s fees, incurred as a result of the noncompliant conduct can be recovered as part of a compensatory civil contempt sanctions award). Applying the holding of In re Vasseli, 5 F.3d at 352., the Ninth Circuit concluded that a bankruptcy court’s express discretionary authority under § 105(a) to award fees at the trial level did not extend to allow it to award fees at the appellate level.

LAMIE v. US TRUSTEE (01/26/04 – No. 02-693) (U.S. Supreme Court) Bankruptcy Code section 330(a)(1) does not authorize compensation awards to debtors’ attorneys from estate funds, unless they are employed as authorized by section 327. To be paid from estate funds under section 330(a)(1) in a chapter 7 case, the attorney must be employed by the trustee and approved by the court.

SCHROEDER v. RO– USE (06/21/01 – No. 00-6092) Disgorgement of attorney’s fees is an appropriate sanction where the attorney violated the Bankruptcy Code, the procedural rules, and the local rules by failing to submit a statement detailing the attorney’s compensation relating to the bankruptcy proceedings.

See In re Philips, 520 B.R. 853 (Bankr. D. New Mexico 2014) (collecting cases and holding that attorney liens are generally secured claims and are not avoidable under 522(f) as judicial liens and In re Benbow, 496 B.R. 605 (Bankr. D. Colo. 2013) (attorney’s lien is not a judicial lien avoidable under 522(f), though separate judgment lien obtained by lawyer was). See also In re Sacerdote, 74 B.R. 487 (Bankr. E.D. Pa. 1987) (“A prepetition debt owed to an attorney may be a secured debt if the attorney’s claim is protected by one of the three Pennsylvania common law liens: a retaining lien; a legal charging lien; or an equitable charging lien.”).

Summitbridge National Investments III LLC v. Faison  (4th Cir Ct Appeals, February 8, 2019) The circuit courts are consistently allowing unsecured claims for post-petition attorneys’ fees when the creditor is entitled by contract to recover the costs of collection.

In an opinion on February 8, the Fourth Circuit joined the Second, Seventh and Ninth Circuits. Before the Supreme Court’s pivotal decision in Travelers Casualty & Surety Co. of America v. Pacific Gas & Electric Co., 549 U.S. 443 (2007), the First and Eleventh Circuits had reached the same conclusion.

Judge Harris: The question in this appeal is whether the Bankruptcy Code bars a creditor from asserting an unsecured claim for attorneys’ fees, if those fees are incurred after the filing of a bankruptcy petition but guaranteed by a pre-petition contract. We join other federal courts of appeals in holding that the Code does not preclude such claims. Accordingly, we reverse the contrary determination of the district court and remand for further proceedings.

Faison’s policy argument also upsets a second basic principle of federal bankruptcy law: “that state law governs the substance of claims, Congress having generally left the determination of property rights in the assets of a bankrupt’s estate to state law,” Travelers, 549 U.S. at 450–51 (internal quotation marks omitted). Allowing creditors, like SummitBridge, who have bargained specifically for attorneys’ fees under state law to enforce those rights in bankruptcy is fully consistent with that principle, even if it reduces the pool of assets otherwise available. Those creditors, it is presumed, “gave value, in the form of a contract term favorable to the debtor . . . in exchange for the [attorneys’ fees] provision.” Ogle, 586 F.3d at 149 (internal quotation marks omitted). So allowing them to assert unsecured claims for those fees, far from “providing an undeserved bonus for one creditor at the expense of others,” simply “effectuates the bargained-for terms of the loan contract.” Id. (internal quotation marks omitted). And in the end, if there is any tension between this policy of vindicating contract rights enforceable under state law and other bankruptcy principles, “it is the province of Congress,” not the courts, to adjust accordingly. In re SNTL Corp., 571 F.3d at 845.

In re Shannon 553 B.R. 380. “[U]nder Cohen [v. de la Cruz, 523 U.S. 213, 118 S.Ct. 1212, 140 L.Ed.2d 341 (1998)], the determinative question for awarding attorney’s fees is whether the creditor would be able to recover the fee outside of bankruptcy under state or federal law.” Fry v. Dinan (In re Dinan), 448 B.R. 775, 785 (9th Cir. BAP 2011) (citations omitted). Notably, Cohen is not limited to attorney’s fees awarded under state or federal statutes; it also applies to 395*395 cases in which fees are provided for by contract. Redwood Theaters, Inc. v. Davison (In re Davison), 289 B.R. 716, 722 (9th Cir. BAP 2003). Under the rationale of Renfrow v. Draper, 232 F.3d 688, 694 (9th Cir.2000), and Heritage Ford v. Baroff (In re Baroff), 105 F.3d 439, 441 (9th Cir. 1997), a prevailing debtor also can recover attorney’s fees, provided the parties have a written agreement which would award fees to the debtor if the same issues were tried in a state court.

In re BASMAJIAN, Case No. 2:18-bk-02153-BMW (Az Bankruptcy Court 1/30/19) (chapter 13) The State Court explicitly found that the Mr. Basmajian had greater financial resources than the Debtor and only awarded Mr. Basmajian the attorneys’ fees and costs at issue because it found that the Debtor had taken unreasonable positions during the course of the State Court litigation.

Upon consideration of the foregoing, and the entire record in this case, the Court finds and concludes that the debt at issue is not “in the nature of alimony, maintenance, or support” and is therefore not a domestic support obligation entitled to priority under § 507(a)(1)(A) of the Code.

6 Steps to Ethical Unbundling of Bankruptcy Representation, by Cathy Moran

Why Chapter 7 Bifurcated Fee Agreements are Problematic, David Cox, as published in the ABI Journal, 6/21

(provided here for educational purposes only)

In re Brown, In re Mcfarland, In re McCoy, Three bankruptcy cases our of S.D. Florida.  Excellent discussion about the pros and cons of bifurcation, plus specific steps how and what to do.  Th court found that the law firms must stop their current practices relating to bifurcated fee arrangements unless those arrangements comply with the requirements outlined by this Court.

Conclusion: The parties asked the Court for guidance regarding bifurcated fee arrangements in chapter 7 cases. The Court holds that so long as attorneys offering a bifurcated fee arrangement comply with the terms of this Order, those arrangements do not violate the Bankruptcy Code or Bankruptcy Rules, this Court’s Local Rules, or the Florida Bar Rules. 

In re Carr, 19-20873 (Bankr. E.D. Ky. 6th Cir. 1/22/20) – Question: May an attorney limit the scope of their bankruptcy services to a prepetition analysis of a
debtor’s bankruptcy options and filing the debtor’s skeletal chapter 7 petition? In short, if done properly, yes.
Much has been written about attorneys’ attempts to “unbundle” services and “bifurcate” their fee arrangements in chapter 7 proceedings. By these efforts, counsel seek to avoid the result occasioned by Lamie v. United States Trustee, 540 U.S. 526 (2004), Rittenhouse v. Eisen, 404 F.3d 395 (6th Cir.), cert. denied 546 U.S. 872 (2005), and § 329;1 to wit, that agreements by chapter 7 debtors to pay a portion of their attorneys’ fees post-petition are unenforceable dischargeable debts.

Judge Wise reviewed the fee arrangement under applicable statutes and ethical rules. As a matter of first impression in her district, Judge Wise approved the fee arrangement. She ticked off the following ways in which the arrangement passed muster:

  • The attorney and client had both signed a written agreement as required by Section 528(a)(1).
  • The attorney had not advised the client to incur debt and thus did not violate Section 526(a)(4).
  • The lawyer did not take payment of post-petition fees before full payment of the filing fee and thus did not violate Bankruptcy Rule 1006(b)(3).
  • Judge Wise found that the fee was “reasonable.”
  • In compliance with the Kentucky Rules of Professional Conduct, the limitations on the services to be performed were reasonable, and the client had given informed, written consent, accompanied by a “comprehensive written explanation.”

In sum, Judge Wise said that the attorney had “assiduously followed the best practices drawn from” other cases, such as In re Hazlett, 16-30360, 2019 BL 130455, 2019 WL 1567751 (Bankr. D. Utah April 10, 2019). To read ABI’s discussion of Hazlettclick here.

Because the lawyer was not factoring client receivables, Judge Wise was not required to grapple with the ethical question. She said that Kentucky had not issued an ethics opinion about factoring. She noted that Arizona bars the sale of client accounts, while Utah allows the sale or pledge of client accounts.

A Utah bankruptcy court upheld a chapter 7 debtor’s attorney’s bifurcated fee agreement in the face of a motion for sanctions by the U.S. Trustee. In re Hazlett, No. 16-30360 (Bankr. D. Utah Apr. 10, 2019).

Attorney Russell B. Weekes, of Capstone Law, entered into a fee agreement with the chapter 7 debtor, Brett Hazlett, under which Mr. Hazlett would pay no retainer fee, but would pay post-petition costs and expenses in the amount of $2,400 in ten monthly installments. Capstone had an arrangement with BK Billing, under which BK Billing would buy the account from Capstone for $1,800 and collect the fee payments from Mr. Hazlett. Mr. Weekes filed all the necessary bankruptcy papers and Mr. Hazlett received his chapter 7 discharge without complications in March of 2017.

No money down chapter 13 cases:

McBride v. Riley (In re Riley), 18-30535 (5th Cir. May 13, 2019)  Judge Elrod held that Section 330(a)(4)(B) “grants bankruptcy courts the discretion to authorize compensation to a Chapter 13 debtor’s counsel even when the underlying activity fulfills a personal obligation of the debtor — such as advancing the cost of a filing fee — so long as that obligation is an interest of the debtor connected with the bankruptcy case.”

Judge Elrod added, however, that the statute does not compel reimbursement. “That call remains within the discretion of each bankruptcy court.”

The appeals court upheld the lower courts’ rulings that counsel was not entitled to reimbursement of the expenses under the local rule, but the circuit vacated the rulings that the bankruptcy court could never award compensation including reimbursement of expenses.

In re Albert-Sheridan BAP No. CC-18-1222-LSF (9th Circuit, Apr 11, 2019) Not Published

Ruling : Debtor’s sanctions and costs ordered paid by the California Supreme Court as a condition of reinstatement of her law license were nondischargeable.

In re Kassas, Bankruptcy Court, Central District of CA (6/14/21) A disbarred California lawyer can’t use a bankruptcy to discharge more than $2 million in debt that is owed to a fund used to reimburse his former clients, a federal bankruptcy judge has ruled.

U.S. Bankruptcy Judge Ernest M. Robles of Los Angeles ruled against former lawyer Anthony Joseph Kassas in a June 14 opinion.

The State Bar of California’s Client Security Fund had made more than $1.3 million in payments to 356 of Kassas’ former clients. With interest and processing costs, Kassas owes the state bar more than $2 million.

In re Riley, 4:11-bk-31978-BMW (AZ BK Court, 5/20/21) The Debtors did not schedule any interests in any probate estates or trusts, but no party disputes that the Debtors’ interest in the Probate Litigation became an asset of the bankruptcy estate (the “Bankruptcy Estate”) upon the Debtors’ filing of the Petition.  Litigation pursued  Debtor – Rory has represented to the Court that at some point in time, Francis agreed to reimburse him for an equitable portion of the attorneys’ fees and expenses he incurred in the Probate Litigation (the “Agreement”).  Debtor- Rory argues he has an administrative priority claim.  

Trustee’s Counsel represented, and Rory did not dispute, that the Trustee: (1) did not know about the alleged Agreement; and (2)did not assume or reaffirm the Agreement, or otherwise enter into a post-petition agreement with Rory. There is nothing in the record that otherwise suggests that the Trustee or Trustee’s Counsel induced Rory to incur the fees at issue. Based upon the foregoing, even if § 503(b)(1)(A) is available to Rory, Rory has failed to establish that he is entitled to a § 503(b)(1)(A) claim for any of the fees or costs incurred pre- or post-petition. C.Whether the debt “directly and substantially benefited the estate”No party disputes that the fees that Rory incurred and seeks reimbursement for benefited the Bankruptcy Estate in that they contributed to or resulted in the Distribution. Further, the parties have represented that the Distribution is the only or the primary asset available for distribution to general unsecured creditors. However, Rory’s funding of the Probate Litigation benefited not only the Bankruptcy Estate, but also Rory and numerous other third-party beneficiaries.6As the Ninth Circuit B.A.P. has recognized, “[t]o qualify as an administrative expense under §503(b)(1)(A), the expense must not be incurred with the intent to benefit the person making the expenditure.” Nichols, 2010 WL 6259965, at *7. The record reflects that the fees and costs at issue were incurred by Rory primarily to benefit himself, or, at best, himself and numerous others, and not to preserve or specifically benefit the Bankruptcy Estate. Based upon the record before the Court, the benefit to the Bankruptcy Estate was incidental.