Bloomberg Law’s® Bankruptcy Law News publishes case summaries of the most recent important bankruptcy law decisions, tracks major commercial bankruptcies, and reports on developments in bankruptcy...
By Daniel Gill
A consumer bankruptcy attorney has to return client payments in 17 Chapter 7 cases where he improperly billed for services and failed to provide appropriate required disclosures, an Oklahoma bankruptcy judge ruled.
Attorney J. Ken Gallon failed to properly disclose his compensation to the court or the source of such payments; he charged unreasonable fees; and he allowed legal fees to be paid before case filing fees were paid in full, Chief Judge Terrence L. Michael of the U.S. Bankruptcy Court for the Northern District of Oklahoma wrote in his Sept. 4 opinion.
At the center of the court’s problems with Gallon’s practices was his use of what the court called the “BK Billing Model.” BK Billing is a Utah company that factors receivables for consumer bankruptcy attorneys. It essentially buys the attorneys’ receivables for about 75 percent of their face value.
BK Billing was created to benefit debtors who lacked the resources to pay all their attorneys fees for filing a Chapter 7 prior to filing the case, the company’s president, Sean Mawhinney, previously told Bloomberg Law.
Many, including the American Bankruptcy Institute’s Commission on Consumer Bankruptcy, have highlighted the problem of access to Chapter 7 for consumers unable to pay fees up front, because an attorney can’t collect on a pre-petition debt after the case is filed. Currently many of these debtors are compelled to file Chapter 13, which allows for paying attorneys fees over time, but which is also significantly more expensive, time consuming (up to five years for Chapter 13 compared to less than one for Chapter 7), and far less successful in discharging, or wiping out, debts.
BK Billing proposes a system where the debtor enters into two separate agreements with his bankruptcy attorney—one for services rendered prior to the filing and another for post-filing, or post-petition, services. The first contract would be for no or little money, with the bulk of the attorneys’ fees loaded into the post-petition agreement. As a post-petition debt, the Chapter 7 attorney wouldn’t be barred from collecting.
“If debtors had the money upfront to afford a bankruptcy attorney they would pay upfront,” Mawhinney said in a Sept. 5 email to Bloomberg Law. "[B]ifurcation of services allows desperately-needed Chapter 7 cases to be filed quickly without debtors resorting to filing an unnecessary Chapter 13 case, or facing a continued wage garnishment, with no relief in sight,” he said.
But it remains unclear whether courts will ultimately approve of the bifurcating of a Chapter 7 case to pre- and post-petition services.
Gallon had sloppy record keeping, the court said. The required disclosures he filed were often inaccurate and failed to indicate when he was paid from advances by BK Billing, which would subsequently collect monthly payments from the client.
Worse, the court was “troubled by Gallon’s practice of charging a higher fee to his clients that use the BK Billing Model than to his conventional clients.”
BK Billing cautions lawyers not to charge clients a premium when they use the company’s services, Mawhinney said.
Attorneys’ fees must always be reasonable and properly disclosed, Mawhinney told Bloomberg Law. He suggests that attorneys can avoid problems by filing a motion for approval of the fee agreement, or by stipulating with the U.S. Trustee’s office in advance or at the beginning of the case, he said.
While expressing reservations regarding the validity of bifurcating fees in Chapter 7, Judge Michael declined to make a ruling on the issue, instead finding that Gallon failed in his duties to properly disclose the details of his fee arrangement with his clients, as required by the Bankruptcy Code and applicable rules.
The court voided Gallon’s post-petition contracts and ordered him to return whatever the debtors wound up paying to BK Billing. He could keep the funds that were paid by the clients directly to him, it said.
Brian W. Huckabee, Tulsa, Okla., represented Gallon. The United States Trustee was represented by Katherine Vance, Tulsa, Okla.
The case is In re Wright, 2018 BL 318559, Bankr. N.D. Okla., 17-11936, 9/4/18.
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