Case Doc 66 Filed 04/20/12 Page 1 of 9 UNITED STATES BANKRUPTCY COURT MIDDLE DISTRICT OF FLORIDA TAMPA DIVISION In re: Donald F. Walton, Case No. United States Trustee for Region 21, Plaintiff, V. Clark Washington, P.C., Defendant. ORDER AND MEMORANDUM OPINION DETERMINING THAT CLARK TWO-CONTRACT PROCEDURE DOES NOT CONFLICT WITH THE JULY 12, 2011 MEMORANDUM OPINION This Court previously ruled in this miscellaneous proceeding that Clark Washington was prohibited from accepting postdated checks as a prepetition retainer for postpetition services to be provided to their consumer clients.1 Clark Washington now has its clients execute two separate agreements: one for prepetition services and another for postpetition services. The agreement for prepetition services is executed before the petition is ?led, and all services provided for under the agreement are completed with the ?ling of the chapter 7 petition. The relatively small payment for the prepetition services is also made before the petition is ?led. The agreement for postpetition services is executed after the petition is filed. Payments under the postpetition retainer agreement are automatically debited from the debtor?s bank account. The US. Trustee has moved to determine whether this new practice violates the Court?s previous 1 Walton v. Clark Washington, P. C., 454 BR. 537 (Bankr. M.D. Fla. 2011). Case Doc 66 Filed 04/20/12 Page 2 of 9 ruling.2 For the reasons discussed below, the Court determines that, with certain modi?cations, this new practice is acceptable and does not con?ict with the Court?s previous ruling. Background The Defendant, Clark Washington, P.C., is a law ?rm based in Atlanta, Georgia, with of?ces in various cities in the southeastern United States. Clark Washington limits its practice to representing individual debtors in consumer cases ?led under Chapters 7 and 13 of the Bankruptcy Code. The U.S. Trustee originally ?led this miscellaneous proceeding seeking a declaration that the prepetition fee agreement Clark Washington used at the time, which depended upon the use of postdated checks for payment, was impermissible. This Court agreed with the U.S. Trustee?s position and entered an order prohibiting Clark Washington from using postdated checks as part of its fee agreement with clients. The U.S. Trustee now seeks a determination as to whether a new two-contract procedure used by the ?rm is permissible. To understand whether the new two-contract procedure is permissible, it is helpful to understand how Clark Washington?s original prepetition fee agreement worked and the reason that fee agreement was impermissible. The Postdated Check Fee Agreement Before this miscellaneous proceeding was ?led in 2009, Clark Washington regularly entered into fee agreements with its consumer clients under which it would receive a relatively small payment for its prepetition work and postdated checks as a ?retainer? for its postpetition work. Typically, the client provided Clark Washington with four or ?ve postdated checks in equal amounts to pay this retainer. Clark Washington deposited the checks on the date 2 Doc. No. 49 (the ?Motion). Case Doc 66 Filed 04/20/12 Page 3 of 9 speci?ed on the checks. The dates speci?ed were always after the petition date, and in some instances, they were after the discharge had been entered. The US. Trustee files this miscellaneous proceeding The US. Trustee objected to that fee arrangement. So he ?led this miscellaneous proceeding seeking a declaration that Clark Washington?s fee arrangement: violated Bankruptcy Code 362?s automatic stay (Count (ii) violated Bankruptcy Code 524?s discharge injunction (Count and created a con?ict of interest between Clark Washington and its clients (Count 111).3 Clark Washington moved for entry of summary judgment in its favor on all three counts of the US. Trustee?s Complaint.4 The Court invalidates the Postdated Check Fee Agreement In its July 12, 2011 Memorandum Opinion, the Court ruled that the postdated checks gave rise to prepetition claims as a matter of law and that depositing the checks after the petition date violated the 362 automatic stay or the 524 discharge injunction (depending on when the check was deposited). This Court also ruled that the fee arrangement created a con?ict of interest. Accordingly, the Court prohibited Clark Washington from accepting postdated checks for deposit after the petition date as payment of its fees for chapter 7 cases. Clark Washington implements a new two-contract procedure After the Court?s Memorandum Opinion, Clark Washington modi?ed its fee agreement to remove the provisions that the Court had found to be impermissible. The result was a new two-contract procedure under which the client executes separate fee agreements for prepetition and postpetition services. Under this new procedure, the client ?rst agrees to retain 3 Doc. No. 1. 4 Doc. Nos. 32 33. Case Doc 66 Filed 04/20/12 Page 4 of 9 Clark Washington to prepare and ?le the chapter 7 petition. After the prepetition retainer agreement is signed, the initial intake is done and the petition and schedules are prepared. The client then comes back for a second appointment to sign the petition and schedules. Clark Washington ?les the petition and then immediately prepares a postpetition retainer agreement, which the client executes while at the firm?s of?ce. The client also makes arrangements to pay the postpetition fees (generally in the form of automatic debits from the client?s bank account) while at the ?rm?s of?ce. Once that is done, the balance of the schedules, statement of ?nancial affairs, and other papers are ?led. The fee for the prepetition services is generally $250, while the fee for the postpetition services is generally $1,000. The US. Trustee ?led the Motion to determine whether Clark Washington?s new two- contract procedure violates this Court?s prior ruling.5 At the initial hearing on the Motion, the Court expressed two key concerns about the ?rm?s new procedure. First, the transition from the prepetition contract to the postpetition contract appeared to be one continuous process with no time for the client to consciously choose whether to retain the ?rm for postpetition services. Second, the disclosures in the initial contract did not appear to be suf?cient to fully explain the client?s options for postpetition services. Clark Washington modi?es the two-contract procedure As a result of the Court?s comments at the initial hearing, Clark Washington modi?ed its two-contract procedure.6 Under the modi?ed procedure, the prepetition fee agreement describes the two-contract procedure in detail and sets forth the client?s three options for 5 Doc. No. 49. 6 Doc. No. 56. Case Doc 66 Filed 04/20/12 Page 5 of 9 postpetition legal services.7 Those three options are: the client can proceed pro se, (ii) the client can retain Clark Washington, or the client can retain another ?rm.8 Clark Washington now gives its clients two weeks to exercise one of those three options; the debtor is no longer required to exercise one of those options on the same day the petition is ?led.9 In effect, Clark Washington now provides a cooling off period. It is the validity of this modi?ed two-contract procedure that is before the Court. The Court will next consider whether this modi?ed procedure violates the Court?s prior ruling or is otherwise legally impermissible. Conclusions of Law10 As the Seventh Circuit recognized in In re Bethea, debtors ?who cannot pay in full can tender a smaller retainer for prepetition work and later hire and pay counsel once the proceeding begins?for a lawyer?s aid is helpful in prosecuting the case as well as in ?ling it.?11 The Supreme Court has also recognized that a debtor is free to use postpetition funds to pay for postpetition legal services.12 Put another way, there is nothing inherently wrong with a lawyer giving terms to clients for the payment of legal services. As a consequence, the Court must uphold the validity of the modi?ed two-contract procedure absent some compelling reason not The Court has jurisdiction over this miscellaneous proceeding under section 28 U.S.C. 1334(b) and 11 U.S.C. 544, 548, and 550. This is a core proceeding pursuant to 28 U.S.C. (H), and (O). Bethea v. RobertJ. Adams Assocs., 352 F.3d 1125, 1128 (7th Cir. 2003). 12 Lamie v. Trustee, 540 US. 526, 535-36 (2004). Case Doc 66 Filed 04/20/12 Page 6 of 9 The Court, as set forth above, previously expressed two key concerns with the original two-contract procedure. Both of those concerns, however, have been substantially addressed by the modi?cations Clark Washington made to its two-contract procedure. To begin with, under the modi?ed two-contract procedure, the prepetition agreement now more fully sets out the costs and fees associated with ?ling the client?s case; and (ii) speci?es the client?s three options for postpetition legal services. Moreover, Clark Washington?s initial Rule 2016 disclosure statement explicitly speci?es that the prepetition fee is $250 and that the contract between the client and the ?rm does not include postpetition services. Finally, the two-contract procedure contemplates the ?rm ?ling a supplemental disclosure that sets out the additional $1,000 fee in the event the client retains Clark Washington for postpetition services. That leaves the three concerns raised by the US. Trustee.13 First, the US. Trustee contends that, under the modi?ed two-contract procedure, debtors are forced to proceed pro se from the time their petitions are ?led until they decide whether to retain Clark Washington or another ?rm (or continue proceeding pro se). According to the US. Trustee, this could cause problems because the client has to provide information to the chapter 7 trustee and prepare for the meeting of creditors during this ?gap? period, and the client will be left without representation. Making matters worse, creditors, other lawyers, and the chapter 7 trustee will not know the client is proceeding pro se during the gap period. Second, the US. Trustee contends that the disclosures contained in Clark Washington?s prepetition and postpetition contracts are insuf?cient. Third, the US. Trustee says the two-contract procedure is simply unnecessary as there are other alternatives. 13 Doc. No. 57. Case Doc 66 Filed 04/20/12 Page 7 of 9 The ?rst two concerns are valid. But neither of them warrants precluding Clark Washington from implementing its modi?ed two-contract procedure. To begin with, Clark Washington has already addressed the US. Trustee?s concern that clients will be left unrepresented. Under the modi?ed two-contract procedure, the ?rm agrees to continue representing the client during the two-week ?cooling off? period. And if the client opts to retain another ?rm or continue pro se, Clark Washington will continue to represent the client until the Court enters an order allowing the ?rm to withdraw. In order to leave no doubt, the Court will require Clark Washington to include in its initial Rule 2016 statement that the ?rm will represent the client until the Court enters an order allowing the ?rm to withdraw from representation. So that adequately resolves the US. Trustee?s ?rst concern. The second concern?inadequate disclosure?is admittedly more problematic. In fact, Clark Washington concedes the disclosures in its modi?ed two-contract procedure could be improved. For starters, it has agreed?and the Court will require?that the ?rm move the ?Two- Contract Procedure? disclosure from the end of each contract to a separate cover page. In addition, the ?rm has agreed to have their clients sign and acknowledge that they have received and read the two-contract procedure disclosures. These modi?cations resolve the US. Trustee?s second concern. As for the US. Trustee?s third concern, the Court is not persuaded that the two?contract procedure is objectionable simply because there may be other alternatives. In this regard, the US. Trustee contends that there are other approaches that would allow individuals with modest means to obtain legal representation. Yet the US. Trustee does not identify any of those other approaches. And in any event, that is not the standard. Clark Washington is not precluded from using one fee arrangement simply because other arrangements may exist. Case Doc 66 Filed 04/20/12 Page 8 of 9 Conclusion In the end, there is no prohibition against a debtor making postpetition installment payments for postpetition services. The Court concludes that Clark Washington?s two?contract procedure?with the modi?cations directed by the Court and agreed to by the ?rm?does not violate the Court?s July 12, 2011 Memorandum Opinion. Nor does it con?ict with any applicable Bankruptcy Code provision or rule of professional conduct. Accordingly, it is ORDERED: 1. Clark Washington?s new two-contract procedure set forth in the exhibits attached to its November 28, 2011 Response to the Court14 is approved with the following modi?cations: a. The ?two-contract procedure? disclosure currently on pages 4-5 of the prepetition agreement and page 5 of the postpetition agreement must be set forth on a separate cover page. b. Firm clients must acknowledge that they have received and read the ?two-contract procedure? disclosure. 0. The client must execute the prepetition agreement before the bankruptcy case is ?led and the postpetition agreement after the bankruptcy case is ?led. d. There must be at least 14 days between the execution of the prepetition agreement and postpetition agreement. e. Clark Washington shall include language in its initial Rule 2016 disclosure stating that the ?rm will continue to represent the debtor in the case even where the debtor chooses not to retain the ?rm for postpetition services until the Court enters an order allowing the ?rm to withdraw from representation. 14 Doc. No. 56. Case Doc 66 Filed 04/20/12 Page 9 of 9 2. The Court reserves jurisdiction to enforce the terms of this Order. DONE and ORDERED in Chambers at Tampa, Florida, on Copies to: Denise E. Barnett, Esq. Attorney for United States US. Trustee Richard H. Thomson, Esq. Glenn E. Gallagher, Esq. Attorneys for Clark Washington, P.C. April 20, 2012 Michael G. Williamson United States Bankruptcy Judge