CHAPTER 7, B. Disclosure of Bifurcation and Financing in Chapter 7 Cases

• Jurisdiction: United States

B. Disclosure of Bifurcation and Financing in Chapter 7 Cases

ABI Journal

July 2019

Daniel E. Garrison

Fresh Start Funding

Tempe, Ariz.

In several jurisdictions across the nation — notably, California, Oklahoma, Missouri, Idaho, Maryland and Utah — U.S. Trustees have challenged attorneys who bifurcate chapter 7 case attorneys' fees into pre-petition and post-petition, and allow their clients to pay fees in post-petition installments. Following the petition filing, an attorney has a duty to disclose such compensation pursuant to 11 U.S.C. § 329(a) and Rule 2016(b) of the Federal Rules of Bankruptcy Procedure. However, in each bifurcation fee-agreement case, the attorneys in question might also have had a factoring relationship with a third party and delegated management of the debtors' payments to the factor in order to manage the business challenges of offering clients post-petition payment plans. Therefore, one of the primary arguments made by the U.S. Trustee challenging these disclosures has been that court disclosures of the bifurcation and financing have been inadequate or misleading. This article suggests an approach to disclosing these matters fully using a modified version of Form B2030 (the "Disclosure of Compensation of Attorney for Debtor").

Background

A bifurcation fee agreement involves splitting a consumer chapter 7 engagement into two written agreements. The debtor signs the first agreement pre-petition, and it covers the minimum fee required to commence the case. The debtor signs the second agreement post-petition, and that fee covers the remaining work necessary to complete the case. Attorneys often waive their pre-petition fees in order to offer a true "$0-down" filing to clients, but some simply split their total fees between the two agreements and collect a portion before filing the case. Attorneys who bifurcate the attorneys' fees commonly offer payment terms for their post-petition fees.¹

The primary business challenges to attorneys (especially "small-shop" operations) of offering $0-down chapter 7 are usually cash flow strain and lack of capacity to manage installment payments. Accordingly, a few companies have entered the market to provide attorneys with a "turn-key" solution to these challenges, including working-capital financing, payment management and related services.

Some of these companies offer factoring arrangement, whereby the attorney sells the client receivable to the factor at a discount, and the factor then collects the balance from the client for the factor's own benefit and at its sole risk and with no recourse from the attorney.² Even where the financing does not take a form of a factoring arrangement, the attorney must draw against a secured line of credit a percentage of the amount of post-petition fees owed by each client, with the lender keeping the difference as its compensation for the financing, payment management, credit reporting and other services that might be offered. In either the factoring or financing-arrangement scenarios, the attorney receives funding from the lender, and the lender takes on payment management responsibilities, thereby solving the attorney's primary business challenges of bifurcating the chapter 7 case attorneys' fees.

Current Disclosure Requirements and Form B2030

Section 329 of the Bankruptcy Code provides that "[a]ny attorney representing a debtor ... whether or not such attorney applies for compensation ... shall file with the court a statement of the compensation paid or agreed to be paid ... and the source of such compensation."³ Section 329 is implemented through Bankruptcy Rule 2016(b), which requires that the attorney file "the statement required by § 329" and disclose "whether the attorney has shared or agreed to share the compensation with any other entity ... includ[ing] the particulars of any such sharing or agreement."⁴ The requirement to disclose fee-sharing relates not to § 329 but instead to § 504, which is discussed below. Other than this additional requirement to disclose fee-sharing, Rule 2016(b) does not add substantive disclosure requirements beyond § 329's mandate.

In turn, Bankruptcy Rule 9009 governs the promulgation and use of bankruptcy forms. "Official Forms" are prescribed by the Judicial Conference, and "Director's Forms" are issued by the Director of the Administrative Office of the U.S. Courts (AOUSC).⁵ Pursuant to Rule 9009(c), both types...