Firm Sued by U.S. Trustee Over Billing Practices in Chapter 7s

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By Daniel Gill

The U.S. Trustee Program has filed a complaint against a California lawyer and her firm for its so-called “no money down” billing practices in Chapter 7 cases.

Peter C. Anderson, the U.S. trustee for the Central District of California, sued Patricia Ashcraft and the Law Offices of Gregory Ashcraft, APC, related to attorney fees collected for a Chapter 7 bankruptcy the firm filed for Mary Anne Gilmore on May 2.

The Dec. 12 complaint from the Justice Department’s trustee unit overseeing bankruptcies seeks disgorgement, or repayment, of attorneys’ fees, sanctions, and an order preventing such billing in future cases.

The outcome of the case should be noteworthy to firms that provide a no-money-down service for filing Chapter 7 cases, including those that use BK Billing LLC as a means to finance the case.

In Chapter 7, a trustee is appointed to liquidate the debtor’s assets for the benefit of creditors. The debtor ultimately receives a discharge, an order wiping out most debt. The filing also creates an automatic stay, preventing any collection activities against the estate or the debtor.

Most attorneys representing debtors in Chapter 7 insist on being paid in full before they file a case because the automatic stay and bankruptcy discharge prevent collection after the filing as a pre-petition claim.

But Ashcraft has found a means to provide services without any money up front.

According to the complaint, the firm bifurcates its representation into two components—representation pre-petition and representation post-petition. It has separate retainer agreements for the services, the complaint stated.

It provides its pre-petition services for free, and bills for its work for post-petition services on a monthly basis.

According to the firm’s website, Ashcraft partners with a company called BK Billing, LLC, the complaint said.

BK Billing funds the firm by a payment, in this case $2,100, and bills the client the entire fee, $3,000, at a rate of $250 per month for 12 months, according to the complaint.

Ashcraft doesn’t disclose that the client is paying financing fees or interest amounting to more than 40 percent, the complaint said.

The firm files a bankruptcy petition and attached schedules which are materially false, the complaint alleged. They essentially list all the debtor’s assets and liabilities at zero, don’t list any income or expenses, and fail to disclose properly the attorney fees received, according to the complaint.

The debtor is apparently unaware that her signature is attached to these original, materially inaccurate schedules, the complaint alleged.

Soon after the original filing date, creating the Chapter 7 case, the firm files amended schedules and other required papers, this time including the information the debtor provided to the firm related to her assets, liabilities, income and expenses.

BK Billing, which is not a defendant in the case, said it appears the trustee is mistaken about what the company does.

Sean Mawhinney, BK Billing president, told Bloomberg Law that it doesn’t charge interest, nor is it a “partner” with the firm or any other firm using its services. Bk Billing factors legal invoicing, Mawhinney said. In essence, BK Billing purchases the firm’s accounts receivable at a discount and bills the client for the post-petition services rendered by the firm.

Mawhinney, a former consumer bankruptcy attorney, insists that his business model is meant to be for the debtors’ benefit.

He said that often an individual or couple wanting to file bankruptcy would be best off in a Chapter 7 case, rather than the more expensive, complicated, and often less successful Chapter 13. But these debtors are prevented from filing Chapter 7 because they can’t come up with the entire legal fee in cash, before the filing.

Mawhinney said the company has never sued debtors to collect fees and that it doesn’t want to. Most clients want to pay their attorneys back and are grateful that the company allows them to file bankruptcy without having to pay the whole fee up front, he said.

Mawhinney insists that it is imperative firms charge reasonable fees, especially since bifurcating legal services is likely to lead to closer scrutiny by the courts and trustees.

His firm advises attorneys against raising their fees to cover the cost of entering into the factoring agreement.

“A firm should not and may not charge an unreasonable fee, and BK Billing doesn’t promote or suggest that,” he said. “We tell our attorneys you can’t raise your prices to cover BK Billing’s fees.”

Patricia Ashcraft didn’t respond to a request to comment from Bloomberg Law. The trustee’s office declined to comment.

Abram S. Feuerstein and Mohammed Tehrani represent the U.S. Trustee.

The case is US Trustee v. Ashcraft (In re Gilmore) , Bankr. C.D. Cal., 17-ap-01271, Complaint 12/12/17 .

To contact the reporter on this story: Daniel Gill in Washington at dgill@bloomberglaw.com

To contact the editor responsible for this story: Jay Horowitz at jhorowitz@bloomberglaw.com

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