In re Suazo

In re: HALI MAEANN SUAZO, Debtor.

Bankruptcy No. 20-17836 TBM

United States Bankruptcy Court, D. Colorado

May 10, 2022

Chapter 7

MEMORANDUM OPINION AND ORDER ON MOTION TO EXAMINE FEE AGREEMENTS

Thomas B. McNamara Bankruptcy Judge

I. Introduction.

Attorneys who represent Chapter 7 debtors in bankruptcy generally require payment of their fees up front. Up-front payment is sought because, under the Bankruptcy Code, ^[1] a debtor's pre-petition promise to pay attorney fees after the bankruptcy filing may be discharged as part of the bankruptcy process. The system creates a conundrum because many debtors have difficulty paying attorney fees in advance.

In recent years, some attorneys have begun using so-called "bifurcated" fee agreements as a means of enabling debtors to pay most of the fees after they file for bankruptcy. Under the bifurcated fee agreement model, a debtor is asked to sign a pre-petition contract wherein an attorney agrees to provide only very limited legal services through the petition date. The attorney typically charges nothing or a small fee for performing the unbundled legal services, which consist of filing a "bare-bones" or "skeletal" case missing most of the documents required for a bankruptcy case to proceed to discharge. Then the idea is that after the petition date, the debtor will be offered a new post-petition contract in which the debtor agrees to pay for the remaining deferred legal services (usually at a rate materially in excess of the standard up-front fee and payable in installments). The debtor is informed that if the debtor declines to sign a second fee agreement post-petition, counsel may withdraw, in which case the debtor will then need to proceed pro se or engage another lawyer. There are some possible benefits as well as drawbacks to such a bifurcated fee agreement scheme.

This matter came before the Court on the "United States Trustee's Motion to Examine the Reasonableness of Fees Charged by Debtor's Counsel Under 11 U.S.C. § 329 and Review of Attorney Conduct Under 11 U.S.C. §§ 526 and 105" (Docket No. 33, the "Motion to Examine") filed by Patrick S. Layng, United States Trustee for Region 19 (the "UST") and the Response and Objection thereto (Docket No. 40, the "Objection") filed by Ovation Law LLC ("Ovation") and Jonathan P. Shultz ("Mr. Shultz") who is a partner with Ovation. Through the Motion to Examine, the UST attacked the propriety of the bifurcated Pre-Petition Agreement and Post-Petition Agreement used by Ovation and Mr. Shultz under a variety of legal theories. The Court ultimately concludes that the Pre-Petition Agreement and Post-Petition Agreement utilized in this bankruptcy case both contain misrepresentations and are misleading since, among other things, they did not accurately disclose counsel's obligations under the Bankruptcy Code and Local Rules. Thus, the Pre-Petition Agreement and the Post-Petition Agreement are void under Section 526.

II. Jurisdiction and Venue.

The Court has jurisdiction over this contested matter pursuant to 28 U.S.C. § 1334(a) and (b). This controversy is a core proceeding under 28 U.S.C. § 157(b)(2)(A) since it concerns administration of the bankruptcy estate. Venue is proper in the Court pursuant to 28 U.S.C. §§ 1408 and 1409. The UST, Mr. Shultz, and Ovation all concur that the Court has jurisdiction to enter final judgment regarding this dispute.^[2] All the parties also agree that venue is proper in the Court.^[3]

III. Procedural Background.

The Debtor, Hali Maeann Suazo ("Ms. Suazo"), filed a "Petition" (the "Petition") for bankruptcy protection under Chapter 7 on December 9, 2020 (the "Petition Date"), through her legal counsel: Mr. Shultz.^[4] Ms. Suazo and Mr. Shultz both signed the Petition.^[5] Mr. Shultz executed the Petition, noting his relationship with an Arizona-based law firm: Ovation.^[6]

Contemporaneously with the commencement of the bankruptcy case, Mr. Shultz submitted a "Disclosure of Compensation of Attorney for Debtor" (the "Initial Compensation Disclosure"), wherein he disclosed that Ms. Suazo had not paid anything before the Petition Date but agreed to pay him (not Ovation) $2, 998.00 later.^[7] The United States Trustee appointed Simon E. Rodriguez as the Chapter 7 Trustee (the "Chapter 7 Trustee") for Ms. Suazo's bankruptcy estate.^[8]

The initial bankruptcy filing was a "bare-bones" or "skeletal" submission which did not include many documents required by Section 521. Accordingly, on December 10, 2020, the Court issued a "Notice of Deficiency" requiring Ms. Suazo to file various documents by December 23, 2020.^[9] Thereafter, Mr. Shultz drafted the missing "Statement of Financial Affairs," "Summary of Assets and Liabilities," "Schedules," "Chapter 7 Statement of Current Monthly Income," and "Chapter 7 Means Test Exemption." Ms. Suazo signed the foregoing documents on December 13, 2020.^[10] A few days later, on December 15, 2020, Mr. Shultz filed all such documents with the Court.^[11]

Over the next few months, Ms. Suazo made a few minor changes. On her behalf, Mr. Shultz filed an "Amended Statement of Intention for Individuals Filing Under Chapter 7," "Amended Schedule D," and "Amended Schedule E/F," a "Notice of Amendment," and a "Financial Management Course Certificate."^[12] Ms. Suazo received her Chapter 7 "Discharge Order" on March 15, 2021.^[13] The entry of a discharge effectively ended Mr. Shultz' work for Ms. Suazo.

Several months later, on April 22, 2021, the Trustee filed the Motion to Examine.^[14] The Motion to Examine seemingly prompted Mr. Shultz to submit an "Amended Disclosure of Compensation of Attorney for Debtor."^[15] Mr. Shultz and Ovation also filed their Objection to the Motion to Examine.^[16] The Court conducted a preliminary hearing on the Motion to Examine and Objection, during which the UST, Mr. Shultz, and Ovation requested a full evidentiary hearing. The Court concurred and set a trial, along with various associated deadlines.^[17] Prior to the evidentiary hearing, the UST, Mr. Shultz, and Ovation submitted a "Joint Statement Regarding Stipulations of Fact and Exhibits" pursuant to which the parties agreed to certain stipulated facts and the admissibility of certain documents.^[18]

On December 8, 2021, the Court conducted a trial on the Motion to Examine and Objection. At the trial, the Court heard testimony from two witnesses: the Chapter 7 Trustee and Mr. Shultz. The Court admitted Exhibits 1-23 and 25 proffered by the UST. The Court also admitted Exhibit A as a demonstrative exhibit proffered by Mr. Shultz and Ovation. At the conclusion of the evidentiary presentation, counsel for the UST, Mr. Shultz, and Ovation presented comprehensive closing arguments based on the evidence. The UST later submitted a post-trial legal brief (Docket No. 70) and Mr. Shultz and Ovation filed a supplemental citation to authority (Docket No. 71) alerting the Court to new case law which addresses issues similar to those presented in this case.

Thereafter, the Court took the dispute under advisement. In the interim, the Court has considered the testimony, evaluated all the exhibits admitted into evidence, and reviewed the applicable law. The disputed issues are now ripe for consideration. The Court wishes to acknowledge the especially professional and capable trial conduct and arguments of counsel for the UST, Mr. Shultz, and Ovation.

IV. Findings of Fact.

The Court makes the following findings of fact under Fed.R.Civ.P. 52(a)(1), as incorporated by Fed.R.Bankr.P. 7052 and 9014(c), based upon the admissible evidence presented at the trial (including both testimony and exhibits) and the Stipulated Facts:

A. Mr. Shultz and Ovation.

Mr. Shultz is an attorney who has been licensed to practice law in the State of Colorado since 2008.^[19] Over the last 14 years, he has centered his practice exclusively in the area of consumer bankruptcy: both Chapter 7 liquidations and Chapter 13 reorganizations. During his career, Mr. Shultz has been counsel of record in approximately 469 individual consumer bankruptcy cases. Mr. Shultz represents clients through two separate law firms: (1) his own firm, the Law Offices of Jonathan P. Shultz LLC (the "Shultz Law Firm")^[20]; and (2) and Ovation.^[21]Ovation is a law firm (structured as a limited liability company) based in Phoenix, Arizona.^[22]

Mr Shultz entered into a "Partnership Agreement" (the "Partnership Agreement") with Ovation just a month and a half before the Petition Date, whereby he became a new "Partner."^[23] In broad strokes, the Partnership Agreement states that Ovation will "originate[ ]" consumer bankruptcy clients and refer Ovation's Colorado clients to Mr. Shultz. After a referral, Mr. Shultz will provide legal services to Ovation's clients.^[24] Then, in return for servicing Ovation's bankruptcy clients, Mr. Shultz will receive compensation from Ovation in an amount referred to as the "Partner Share." In Chapter 7 bankruptcy cases, the "Partner Share" is "33 1/3% of the Agreed Fee" (which term means the "legal fees (exclusive of out-of-pocket costs such as filing fees, credit report fees, or fees for third-party financing in bifurcated chapter 7 cases) paid or agreed to be paid by clients of [Ovation]").^[25] The Partner Share is payable to Mr. Shultz only to the extent paid by Ovation's client and only after Ovation is reimbursed for all out-of-pocket costs and receives its 66 2/3% share of the Agreed Fee.^[26] Although Mr. Shultz is characterized as a "Partner" of Ovation, he is not a member of Ovation, has no equity in Ovation, and has no right to participate in management of Ovation.^[27] Both Mr. Shultz and Ovation agreed to Mr. Shultz's being able to maintain "a legal practice separate from [Ovation]."^[28] As part of the...