Judith Lynn Digregorio

ORDERED.

Dated: October 19, 2022

Michael G. Williamson

United States Bankmptcy Judge

UNITED STATES BANKRUPTCY COURT

MIDDLE DISTRICT OF FLORIDA

TAMPA DIVISION

www.flmb.uscourts.gov

In re: Case No. 8:21-bk-00079-MGW

Chapter 7

Judith Lynn Digregorio,

Debtor.

MEMORANDUM OPINION ON

BIFURCATED FEE AGREEMENT

Under the Van Horn Law Group’s bifurcated fee agreement, a debtor signs

one agreement for prepetition services and, after the firm has filed a bankruptcy case

for the debtor, the debtor signs a second agreement for postpetition services. Under

the prepetition agreement, the debtor asks Van Horm to pay the bankruptcy filing fee

on his or her behalf, for which “the firm will seek reimbursement from me.”

The United States Trustee objects to Van Horn’s bifurcated fee agreement. As

set forth below, because Federal Rule of Bankruptcy Procedure 1006 mandates that a

bankruptcy petition be accompanied by a filing fee, this Court cannot approve a fee

agreement that specifically contemplates that Van Horn will disregard the rule.

I. BACKGROUND

The Van Horn Law Group entered into a bifurcated fee agreement with the

Debtor (the “Fee Agreement”).1 Under the Fee Agreement, Van Horn charged

Debtor $388 for its prepetition services, which, when paid, becomes property of Van

Horn to be deposited into the firm’s operating account—not its trust account.2 The

amount of Van Horn’s prepetition flat fee ($388) is not happenstance: it equals the

costs of the mandatory prepetition credit counseling and postpetition financial

management courses ($50) and the chapter 7 filing fee ($338).

Under the Fee Agreement, the debtor elects to ask Van Horn—postpetition—

to advance the $338 filing fee on his or her behalf. When the debtor exercises that

option, Van Horn advances the filing fee and seeks reimbursement of it from the

debtor postpetition. The Fee Agreement states:

I understand that there are filing fees of $338.00 payable to

the Bankruptcy Court. I have elected to request that

VHLG pay these costs on my behalf after filing for which

it will seek reimbursement from me.3

The U.S. Trustee filed a motion asking the Court to examine the

reasonableness of Van Horn’s fees.4 In its motion, the U.S. Trustee raised a variety of

issues relating to the Fee Agreement. To their credit, the U.S. Trustee and Van Horn

1 Doc. No. 65, ¶ 2.

2 Id. at ¶ 3.

3 Id.

4 Doc. No. 14.

have resolved all but one of those issues: how Van Horn treats the $388 prepetition

payment.5 The U.S. Trustee has now filed a motion for summary judgment asking

the Court to invalidate the Fee Agreement as a matter of law—to the extent it treats

the $388 as earned when paid and allows Van Horn to advance the filing fee on the

Debtor’s behalf—on two alternative grounds.6

On the one hand, if the $388 prepetition payment is really to cover costs—

which the U.S. Trustee suggests is the case—the U.S. Trustee contends it must be

held in Van Horn’s trust account on the client’s behalf.7 And because Van Horn does

not hold the $388 in trust, the U.S. Trustee contends the firm violates Rule

Regulating the Florida Bar 5-1.1. Rule 5-1.1 requires attorneys to “hold in trust,

separate from the lawyer’s own property, funds and property of clients or third

persons that are in a lawyer’s possession in connection with a representation.”8

On the other hand, the U.S. Trustee contends that if the $388 truly is for

prepetition services, Van Horn is advancing the bankruptcy filing fee on the debtor’s

behalf. Relying on Chief Judge Isicoff’s decision in In re Brown, the U.S. Trustee

5 Doc. No. 54, p. 1.

6 Doc. No. 54, pp. 2 – 3.

7 Doc. No. 54, p. 3 (citing R. Regulating Fla. Bar 5-1.1(a)). If the $388 is for costs, then the U.S.

Trustee contends the firm should be required to refund the $388 to the client if the client decides not

to file for bankruptcy. Under the Van Horn Law Group’s current prepetition agreement, however,

clients who decide not to file for bankruptcy are not entitled to a refund of the $388. Id.

8 Id. at p. 3; R. Regulating Fla. Bar 5-1.1(a).

argues that if Van Horn advances the filing fee, it runs afoul of Bankruptcy Code §

526 and Rule Regulating the Florida Bar 4-1.8.9

Although Van Horn acknowledges that Rule 4-1.8 bars a lawyer from

providing financial assistance to a client, it contends that Rule 4-1.8 does not “bar all

financial assistance given during the attorney-client relationship.”10 Citing to the

commentary to Rule 4-1.8(e), Van Horn argues that the purpose of Rule 4-1.8 is to

“prevent attorneys from acquiring a financial interest in litigation, thus creating a

conflict of interest.”11 Van Horn says the Fee Agreement does not violate Rule 4-1.8

because it is not structured in a way that gives the firm a pecuniary interest in the

bankruptcy case.12

Van Horn all but concedes the $388 prepetition fee is a prepayment of costs.

But Van Horn does not want to treat the $388 as the prepayment of costs—and

therefore have to hold it in trust—for two reasons. First, many people who come in

for consultations decide not to file for bankruptcy. All those individuals, Van Horn

says, received legal services. Thus, the firm earned the $388, and the clients are not

entitled to have it returned to them. Second, if Van Horn were required to hold the

9 Id. at pp. 2 – 3 (citing In re Brown, 631 B.R. 77, 103 (Bankr. S.D. Fla. 2021)).

10 Doc. No. 65, ¶ 6.

11 Id. at ¶ 7.

12 Id. at ¶¶ 8 & 10.

$388 in trust, it would have to hire an accounting staff just to deal with the

accounting issues.

II. ANALYSIS

A. Clark & Washington

Over ten years ago, in Walton v. Clark & Washington, P.C. (“Clark & Washington

I”), this Court prohibited Clark & Washington, a consumer debtors’ firm, from

accepting postdated checks as a retainer for postpetition services.13 There, Clark &

Washington entered into fee agreements with clients under which the firm accepted a

relatively small payment for its prepetition work (typically $250) and postdated

checks from the debtor (typically four or five checks totaling $1,000) as a “retainer”

for its postpetition work.14

This Court concluded that the postdated checks gave rise to prepetition claims;

therefore, negotiating the checks violated either the automatic stay or the discharge

injunction (depending on when the checks were cashed).15 So the Court prohibited

Clark & Washington from accepting postdated checks for deposit after the petition

date as payment of its fees.16

13 454 B.R. 537, 546 (Bankr. M.D. Fla. 2011) (“Clark & Washington I”).

14 Id. at 539 – 40.

15 Id. at 541 – 46.

16 Id. at 546.

The following year, Clark & Washington asked this Court to approve a revised

bifurcated fee agreement. Under the revised agreement, the debtor signed one

agreement for prepetition services and, after the bankruptcy case was filed, a second

agreement for postpetition services.17 The fee for prepetition services was typically

$250 (with the debtor paying the filing fee), while the fee for postpetition services was

typically $1,000.18 Subject to certain conditions not relevant here, the Court

approved the bifurcated fee agreement (“Clark & Washington II.)19

B. In re Brown

Fast forward ten years to In re Brown. In Brown, Chief Judge Isicoff of the

Southern District of Florida was asked to approve three bifurcated fee agreements

that were similar to the one in Clark & Washington,20 but with two main differences.

First, two of the three prepetition agreements at issue in Brown were “zero-

dollar down agreements.” In other words, the debtor was not required to pay any fees

17 Walton v. Clark & Washington, P.C., 469 B.R. 383, 38 – 86 (Bankr. M.D. Fla. 2012) (“Clark &

Washington II”).

18 Id. at 385.

19 Id. at 387 – 88. Those conditions included disclosing the “two-contract procedure” on separate

cover pages for the prepetition and postpetition agreements; requiring clients to acknowledge that

they received and read the “two-contract procedure” disclosures; requiring the client to sign the

prepetition agreement before the bankruptcy case is filed and the postpetition agreement after the

case is filed; requiring the firm to notify clients that postpetition, they have the option to proceed pro

se, retain a new firm, or sign the postpetition agreement to retain Clark & Washington; and

requiring the postpetition agreement to notify the client that he or she has the right to cancel the

postpetition agreement at any time within fourteen days. Id. at 386 – 88.

20 631 B.R. 77, 91 (Bankr. S.D. Fla. 2021).

for prepetition services.21 Second, two of the three postpetition agreements gave the

debtor the option of asking the law firm to pay the filing fee on the debtor’s behalf, in

which case the law firm would seek reimbursement of the filing fee from the debtor.22

The U.S. Trustee objected to the bifurcated fee agreements in Brown on several

grounds,23 including that the postpetition fee agreement’s provision permitting the

law firm to advance the filing fees on the debtor’s behalf violated Bankruptcy Code §

526 and Rule 4-18 (e) of the Rules Regulating the Florida Bar.24 On that issue, Chief

Judge Isicoff agreed with the U.S. Trustee, ruling that the provision permitting the

law firm to advance the filing fee violated both Bankruptcy Code § 526 and Rule

Regulating the Florida Bar 4-1.8.25

C. Federal Rule of Bankruptcy Procedure 1006

Federal Rule of Bankruptcy Procedure 1006(a) requires that, subject to two

exceptions, the filing fee must accompany the bankruptcy petition:

Every petition shall be accompanied by the filing fee

except as provided in subdivisions (b) and (c) of this rule.26

21 Id. at 86 – 90. For instance, under one agreement, the debtor paid zero dollars for prepetition

services and $1,262 for postpetition services; under the second agreement, the client paid zero dollars

for prepetition services and $1,362 for postpetition services. Id. at 88 – 90.

22 Id. at 86 – 90.

23 Id. at 91.

24 Id.

25 Id. at 101 – 03.

26 Fed. R. Bankr. P. 1006(a).

Subsection (b) allows a voluntary petition to be accepted for filing if it is

accompanied by a petition to pay the filing fee in installments, and subsection (c)

allows a chapter 7 voluntary petition to be accepted if it is accompanied by a request

to waive the filing fee.27

Here, the Debtor did not request that the filing fee be waived or that she be

permitted to pay it in installments. To the contrary, the Fee Agreement contemplates

that a debtor—regardless of his or her particular financial circumstances—will ask

Van Horn to advance the filing fee on his or her behalf.

But this scheme runs afoul of the Bankruptcy Code. To understand why,

consider the two points in time—prepetition or postpetition—when a debtor and a

law firm could enter into an agreement for the law firm to advance filing fees on the

debtor’s behalf.

A prepetition agreement would present the same problems as the postdated

checks in Clark & Washington I: the agreement would give rise to a prepetition claim,

and any attempt to seek reimbursement of the filing fee would violate either the

automatic stay or the discharge injunction. Thus, a prepetition agreement for a law

firm to advance a debtor’s filing fee and later seek reimbursement would not pass

muster under Clark & Washington I—irrespective of Rule 4-1.8.

And here, Van Horn’s Fee Agreement is careful to make clear that the parties

have no prepetition agreement with respect to Van Horn’s advancing costs and

27 Fed. R. Bankr. P. 1006(b), (c).

specifically contemplates that any agreement to advance costs will be made

postpetition, the second point in time in which the agreement could be made:

I [the Debtor] have elected to request that VHLG pay these

costs on my behalf after filing for which it will seek

reimbursement from me.28

While a postpetition agreement to advance fees would not run afoul of Clark &

Washington I, it is not possible for Van Horn and the Debtor to agree postpetition for

Van Horn to advance and pay a filing fee that is due when the Debtor’s bankruptcy

petition is filed with the Court.

In fact, the only way this would work and pass muster under Clark &

Washington I would be for Van Horn to file the bankruptcy petition without paying

the filing fee.29 In other words, if the Court excuses Van Horn from complying with

Bankruptcy Rule 1006.

But this Court cannot approve a Fee Agreement that is predicated on Van

Horn’s disregarding—or being excused from complying with—Bankruptcy Rule

1006’s command that a filing fee must accompany a voluntary bankruptcy petition.

28 Doc. No. 65, p. 1.

29 In this case, it appears that Van Horn paid the filing fee at the same time it filed the chapter 7

petition. The U.S. Trustee has suggested that the contemporaneous payment of the filing fee

“somewhat addresses” the issue. Not so. If Van Horn paid the filing fee at the same time it filed the

petition, with the expectation that it would be reimbursed by the Debtor, then the agreement for Van

Horn to advance the filing fee must have been entered into prepetition, in which case the agreement

runs afoul of Clark & Washington I.

III. CONCLUSION

Of course, there is no problem with Van Horn charging clients $388 for

prepetition services; treating that money as earned once paid; and depositing the

$388 into the firm’s operating account. What Van Horn may not do, though, is file a

bankruptcy petition on a client’s behalf without paying the required filing fee in

direct violation of Bankruptcy Rule 1006.30

And it is unclear how Van Horn could rewrite its Fee Agreement in a way that

would allow the firm to enter into a postpetition agreement to advance the filing fee on

its client’s behalf while, at the same time, complying with Rule 1006’s mandate that

a bankruptcy petition be accompanied by the filing fee.

For these reasons, the Court will enter a separate order granting the U.S.

Trustee’s summary judgment motion and disapproving Van Horn’s Fee Agreement.

Attorney J. Steven Wilkes is directed to serve a copy of this Memorandum Opinion

on interested parties who do not receive service by CM/ECF and to file a proof of

service within three days of entry of the Memorandum Opinion.

30 In re Brown, 631 B.R. 77, 103 (Bankr. S.D. Fla. 2021) (“A bifurcation agreement, like any other fee

arrangement, should give the debtor the three choices allowed by federal law: pay the fee up front,

complete the paperwork to pay the filing fee in installments, or, if applicable, seek waiver of the

filing fee.”).

J. Steven Wilkes, Esq.

Trial Attorney

U.S. Department of Justice

Office of the U.S. Trustee, Region 21

G. Steven Fender, Esq.

Fender, Bolling and Paiva, P.A.

Attorney for Chad Van Horn and Van Horn Law Group, P.A.