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Bifurcating Fees Does not Justify a Premium

By Alexander Beeby posted 09-26-2021 14:05

  
BANKRUPTCY BULLETIN
Contributing Editor: James C. BrandFredrikson & Byron, P.A.

In Ridings v. Casamatta (In re Allen), 628 B.R. 641, (B.A.P. 8th Cir. June 21, 2021), the Bankruptcy Appellate Panel affirmed a Missouri bankruptcy court’s decision approving only a portion of a chapter 7 debtor attorney’s fees. 

The case involved an experienced chapter 7 debtor attorney who offered debtors two options to pay his fees.  The attorney would charge a debtor $1,165 if paid upfront, and $1,665 if paid on a payment plan, including up to a year post-petition.  To prevent the “pay later” fees from being discharged, the attorney divided his services into prepetition services and post-petition services, and allocated fees to the post-petition services. 

In ruling on the United States Trustee’s objection to the reasonableness of the fees, the bankruptcy court found that the attorney provided the same services to debtors, regardless of which fee option they chose, and therefore concluded that the extra $500 for the “pay later” fee exceeded the value of the services. The BAP found no clear error in the findings of fact and concluded that the bankruptcy court did not abuse its discretion in reducing the fee by $500. 

Put plainly, the extra $500 was a financing fee, and not compensation for attorney services.  It is important to note that this case did not involve a challenge to the concept of allocating services between pre- and post-petition, and did not prohibit the attorney from collecting a portion of the fee post-petition.  The problem was the difference between the fees.  The BAP rejected the attorney’s attempt to justify the higher fee on its own terms using the “lodestar” method, independently from the lower fee, so the attorney probably would have been fine if he charged $1,665 to all clients.  He would just lose the upfront-pay clients to his competitors.  It will be interesting to see whether debtor attorneys end up becoming “upfront fee” attorneys or more expensive “pay later” attorneys, or whether that level of fragmentation among the consumer bar is one inefficiency too many.

Co-Editors in Chief
Alexander J. Beeby, Larkin Hoffman Daly & Lindgren Ltd.
Kesha Tanabe, Tanabe Law

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