In re Rosema

641 B.R. 896

IN RE: Amber Dawn ROSEMA and Brandon Michael Rosema Debtors.

In re: Trista Dawn Winter Debtor.

In re: Louis R Dusenberry and Melissa Ann Dusenberry Debtors.

In re: Stephen Charles Fleener Debtor.

In re: Justin Robert Keene and Anna Marie Keene Debtors.

In re: Jennie Lynn Anderson Debtor.

In re: Roman Dean Palmer Debtor.

In re: Karen Jean McCormick Debtor.

In re: Regina A Brown Debtor.

In re: Travis Dwight Evans Debtor.

In re: Jacquelynn M Smith Debtor.

In re: Jennie Ann Smith Debtor.

In re: Kenneth Lee LaHue Debtor.

In re: Clay Michael Conley and Samantha Adell Conley Debtors.

In re: Linda Paulette Reynolds Debtor.

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United States Bankruptcy Court, W.D. Missouri.

Signed July 8, 2022

Jennifer L. Benedict, Independence, MO, for Debtors.

Adam E. Miller, Office of the United States Trustee, Kansas City, MO, for U.S. Trustee.

Bruce E. Strauss, Merrick Baker Strauss, Kansas City, MO, Trustee, Pro Se.

MEMORANDUM OPINION AND ORDER GRANTING THE UNITED STATES TRUSTEE'S AND DEBTORS’ ATTORNEYS’ JOINT MOTION TO APPROVE A SETTLEMENT CONCERNING THE COURT'S ORDERS TO SHOW CAUSE AND THE ALLOWANCE OF DEBTORS’ ATTORNEYS’ FEES

Cynthia A. Norton, U.S. Bankruptcy Judge

Yet again, this court is compelled to examine whether attorneys for individual chapter 7 debtors completely and accurately disclosed their fee agreements and otherwise complied with the Bankruptcy Code, Rules, this court's local rules, and the applicable Missouri Rules of Professional Conduct ("MRPC").¹ After more than two years of litigation in response to this court's orders to show cause ("OSC") to the two attorneys in this case (collectively, the "Attorneys"), the Attorneys now concede that their disclosures were "insufficient and misleading." They otherwise have entered into a proposed settlement with the intervening interested party, the United States Trustee ("UST"), agreeing to disgorgement and self-reporting to the disciplinary authorities, among other agreements, admissions, and representations. For the reasons set forth below, the court approves the settlement, but writes its own order in the hope that other debtors’ attorneys may find guidance in this opinion before embarking upon nontraditional methods to get paid.

Procedural Background

The Filing of the Rosema Case and How the Court Discovered the Financing and Bifurcation of Attorney Fees

In February 2020, one of the two Attorneys involved in these cases filed a "skeletal" chapter 7 bankruptcy case for the lead debtors in these cases, the Rosemas. The filing consisted only of the petition and the "mailing matrix" of creditors. Such a "skeletal" filing is, of course, authorized both under the Bankruptcy Rules and the court's local rules. These rules recognize that a bankruptcy case may be commenced without the filing of all schedules, statements, and other documents, with the remaining documents typically to be filed within 14 to 21 days.² Attached to the Rosemas’ petition, however, was also an executed copy of this court's "Rights and Responsibilities Agreement," or the "RRA."

The RRA is a local form identifying the pre- and postpetition duties and obligations of both individual debtors and their attorneys in individual chapter 7 and chapter 13 bankruptcy cases. If attorneys certify that the RRA has been executed and that the attorney's fees do not exceed the "no look" amount, this court's local rule excuses attorneys from the requirement to seek approval of their fees.³ In all other situations, attorneys are required to promptly file a motion to approve their fees and to hold the fees in trust pending court approval.⁴ Nothing in L.R. 2016-1, governing disclosure of fees in chapter 7 cases, requires attorneys to file a copy of the executed RRA with the court.

Even though the executed RRA is not required to be filed with the court, in the Rosemas’ case, the Attorney attached a copy of the executed RRA to the petition in addition to certifying that the RRA had been executed. The Rosemas’ RRA stated that the Rosemas had agreed to pay their attorney $2,400 "for all legal services to be provided in the case," including both pre- and postpetition services.

The First Disclosure of Compensation Filed in the Rosema Case

When the Rosemas’ Attorney filed the remaining schedules, statements, and related documents, she included a Rule 2016(b) Disclosure of Compensation. In addition to the fact that the Disclosure was not filed using the standard Form B2030,⁵ the Disclosure contradicted the terms of the RRA. The Rosemas’ Attorney certified that fees for her legal services were $2,200, and not $2,400; that she had received no payments; that the filing fee had been paid; and that the source of payments to be paid was the Rosemas. The Disclosure also stated she had "bifurcated" her fee agreement with the Rosemas into two contracts, one prepetition and one postpetition, in which she had charged nothing for prepetition legal services but had charged $2,200 for postpetition legal services.

The Attorney also disclosed that she had offered her clients two options: to pay the fees upfront or to bifurcate the fees, and that the clients chose the second option, even though under a bifurcated fee arrangement, the debtors would pay more. Under the bifurcation option, the Attorney represented she had signed a prepetition agreement with the Rosemas "to prepare and file the bankruptcy petition, statement about social security number, creditor list and other documents required at the time of filing" and for "review, analysis and advisement of the typical matters that are required to be performed prior to filing by a bankruptcy attorney under the applicable bankruptcy and ethical rules." For this work, however, the Rosemas’ Attorney represented that "any fees earned but not paid for the pre-petition work were waived by Counsel."

With respect to the second, postpetition agreement, the Rosemas’ Attorney represented that the agreement was signed postpetition and covered postpetition "work to be performed," including "the preparation of schedules of assets and liabilities and statement of financial affairs; preparation and filing of other required documents; representation at the first meeting of creditors; and other services outlined in the fee agreement." The Disclosure stated that the postpetition agreement "allows the debtor(s) to pay these post-petition fees and costs in installments over 12 months following the bankruptcy filing."

With respect to the postpetition agreement, the Rosemas’ Attorney represented that she had a recourse line of credit from Fresh Start Funding, LLC ("FSF") secured by a lien against her accounts receivable, including the accounts receivable created by the Rosemas’ agreement to pay $2,200 for the legal services for their bankruptcy filing. According to the Disclosure, FSF "provides payment management, and processing services" and "will collect installment payments from debtor(s) as well as any third-party guarantor (if applicable) on behalf of Counsel."⁶ With respect to FSF's role, including FSF's apparent agreement to defend and indemnify counsel if the FSF model was challenged, the Disclosure continued:

FSF will apply amounts paid by debtor(s) against Counsel's indebtedness to FSF under the line of credit. FSF also provides credit reporting services to the debtor(s), education and training to counsel and her staff, and a defense guaranty and indemnity to counsel. For its services, FSF charges a fee calculated at 25% of the receivable by debtor(s) to counsel and counsel is required to pay this fee regardless of whether debtor(s) make their required payments. As a full-recourse obligation this fee does not constitute fee sharing under the Bankruptcy Code or the Rules of Professional Conduct.⁷

FSF's 25% fee was reasonable, according to the Disclosure, for "a number of reasons." The reasons set out in the Disclosure were:

a. Counsel performs additional work to split the engagement;

b. Counsel takes on risk by allowing the debtor to pay the attorney fee over time instead of collecting the entire fee up front; c. The option provides the debtor(s) with the benefit of a quicker filing than if the debtor(s) had to come up with the money to pay in advance;

d. The option gives the debtor(s) an opportunity to begin rebuilding their credit score by making timely payments towards the attorney fee;

e. Counsel will not charge the debtor additional fees for certain services that, if required, would otherwise cost the debtor(s) more if debtor(s) had paid the entire fee before the case was filed; and

f. FSF [ ] charges a fee to Counsel for its financing, payment management, credit reporting and other services provided to Counsel for which FSF charges a fee equal to 25% of the attorney fee that the Law Firm charges debtor(s).⁸

This section of the Disclosure ended with the statement that "[t]his higher fee nonetheless satisfies the reasonability requirement under Section 329 [of the Bankruptcy Code] applying the Lodestar analysis [and the] additional cost was fully disclosed to debtor(s) and debtor(s) chose the second option."⁹ Similarly, the Disclosure also assured the court that the Rosemas had been fully informed and had consented:

Counsel has fully informed debtor(s) and obtained their informed consent to the bifurcation of services, lien of FSF against the receivable, FSF's payment management and credit reporting services and to a limited sharing of information with FSF concerning debtor(s) to facilitate counsel's financing and FSF's payment management, processing and credit reporting concerning debtor(s).¹⁰

The Rosemas’ Attorney signed the Disclosure certifying "that the foregoing is a complete...