A case involving attorney fee structures caught the eyes of Vincent Howard and our Redlands consumer bankruptcy attorneys. As you can imagine, attorney fees are a subject important to us; they're also important to clients, who of course pay the fees and sometimes incorporate them into their bankruptcies. In Berliner v. Pappalardo, the First U.S. Circuit Court of Appeals decided that a Massachusetts attorney may set up a "fee only" Chapter 13 plan for clients. The fee only issue has been somewhat controversial in bankruptcy courts, but the First Circuit seems to be the first federal appeals court to weigh in, and ultimately approved the structure. (Interestingly, a separate decision on the same day, Sullivan v. Pappalardo, denied the same attorney the full amount of fees he requested, saying they were excessive.)
In Berliner, bankruptcy lawyer L. Jed Berliner was approached by client Wayne Eric Puffer, who had debts of almost $15,000 and only $100 a month in anticipated disposable income. Berliner offered Puffer two choices: Puffer could file a Chapter 7 bankruptcy, the conventional choice for someone in his situation, and pay Berliner up front. Or, he could file for Chapter 13 bankruptcy, which takes longer than Chapter 7 and repays more debts, and roll higher attorney fees into the bankruptcy plan. Puffer, not having enough money to pay for the Chapter 7 representation up front, chose Chapter 13, paid Berliner $500 and eventually submitted a bankruptcy plan including the fees. Of the $3600 proposed to be paid over the life of the plan, almost $3000 would go to Berliner, with a few hundred set aside for court fees and $200 available to creditors. This is called a "fee only" plan because only the fees of the attorney and trustee are fully paid.
The bankruptcy court rejected the plan, finding that it and the Chapter 13 bankruptcy had both been submitted in bad faith. In so finding, it relied on a previous case from Massachusetts bankruptcy court. Puffer ultimately chose to convert to Chapter 7 and received a discharge under that chapter, but Berliner moved in the bankruptcy court for the fees he was now not scheduled to receive. He got $299, the cost of filing the petition, which effectively took $200 of the $500 he had originally been paid. The bankruptcy court reasoned that bankruptcy attorneys are not permitted to receive fees for plans they knew were submitted in bad faith. The district court affirmed and Berliner appealed.
The First Circuit ultimately reversed. "Good faith" is not well defined by bankruptcy law, but the court reached into its caselaw to decide it should look at the totality of the circumstances. Using that standard, it ruled that fee-only bankruptcy plans are not inherently made in bad faith. It cautioned that it understood the bankruptcy court's concerns about the plans subverting the important function of repayment of creditors, and about attorneys placing their interests above those of their clients. However, banning all fee-only plans "would be to throw the baby out with the bathwater," the First said. They should not be used as a matter of course, the court cautioned, but they may be appropriate in special circumstances. In this case, however, the court found it unclear whether Puffer had such special circumstances, because Berliner's pleadings were conclusory. It reversed and remanded with orders for the bankruptcy court to consider the totality of the circumstances when deciding bad faith.
Vincent Howard and our Garden Grove personal bankruptcy lawyers were interested to see that Judge Lipez concurred specially with some of the history of fee-only plans, which of course we know all too well. Rolling the fee into the bankruptcy used to be an option with Chapter 7 as well, but a Supreme Court case called Lamie v. U.S. Treasury put an end to that in 2004, and the passage of changes to the bankruptcy law in 2005 made filing more expensive for everyone. Thus, it became increasingly likely to find clients who wanted to file but needed help with the fees, making a fee-only Chapter 13 their best or only option. This puts bankruptcy filers in a tough position. Some can wait and save the money, but they have to balance that against the harassment they endure from creditors or the threat of foreclosure or repossession. This is more than our Vista individual bankruptcy attorneys believe it's reasonable to ask, particularly since it fails to serve another important function of the bankruptcy law: to allow honest but overwhelmed people a fresh start.
If you're considering bankruptcy because you have more debt than you believe you can reasonably pay, call Vincent Howard and the team at Howard Law, P.C. For a consultation or to learn more, you can reach us through our website or call 1-800-872-5925.