In re Prophet

Decision Date14 March 2022
Docket NumberCivil Action No. 3:21-cv-01080-JMC
Citation639 B.R. 664
Parties IN RE: Charles Pernell PROPHET and Shirley Ann Prophet, Debtors. In re: Steven Rosenschein, Debtor. In re: Christine Marie Naughton, Debtor. Benjamin R. Matthews & Assoc., Appellant, v. John P. Fitzgerald, III, United States Trustee, Appellee.
CourtU.S. District Court — District of South Carolina

Benjamin Rushton Matthews, Matthews and Megna, Columbia, SC, Daniel E. Garrison, Pro Hac Vice, Protego Law PLLC, Tempe, AZ, for Appellant.

Linda Karen Barr, Office of the US Trustee, Columbia, SC, Beth Ann Levene, Pro Hac Vice, US Department of Justice Executive Office for United States Trustees, Washington, DC, for Appellee.


J. MICHELLE CHILDS, United States District Judge

This matter is before the court on the appeals of Appellant Benjamin R. Matthews & Associates ("Appellant") from orders filed on March 29, 2021, by the Hon. David R. Duncan of the United States Bankruptcy Court for the District of South Carolina ("Bankruptcy Court"). (CSP ECF No. 50; SR ECF No. 43; CN ECF No. 41.)1 The Bankruptcy Court held that Appellant's use of bifurcated fee agreements in bankruptcy cases are impermissible under District of South Carolina Local Bankruptcy Rule 9011-1(b) ("SC LBR 9011-1(b)" or "Local Rule"). For the reasons set forth below, the court REVERSES the Bankruptcy Court's order and REMANDS the case for further proceedings.

A. Relevant Factual & Procedural Background

Appellant represents debtors filing for relief under Chapter 7 of the Bankruptcy Code. (CSP ECF No. 50 at 2.) Due to financial struggles caused by the COVID-19 pandemic, Appellant began offering his clients two (2) payment options. (Id. at 3.) The first option allowed clients to enter into traditional fee arrangements in which the client prepaid all the fees for the case prior to filing. (CSP ECF No. 42 at 2.) Appellant refers to this option as "pay before you file." (CV ECF No. 4-1 at 10.) The second option allowed clients to bifurcate Appellant's engagement. (CSP ECF No. 42 at 2.) Appellant refers to this option as "file now pay later." (CV ECF No. 4-1 at 10.) The bifurcated agreements were a popular option amongst Appellant's clients, and Appellant filed more than one hundred bifurcated cases. (CV ECF No. 8 at 17; CV ECF No. 8-1 at 105–06.)

If the client chooses the bifurcated option, then the engagement is split into pre-petition and post-petition services. (CSP ECF No. 42 at 2.) In that case, client and Appellant first enter into a Pre-Filing Agreement and then have the option of entering into a Post-Filing Agreement. These agreements explicitly list the services provided by Appellant. The Pre-Filing Agreement specifically provides that Appellant "will only provide the Pre-Filing Services listed ... The Pre-Filing Services are not all of the tasks that must be completed to successfully complete your chapter 7 case." (CV ECF No. 4-1 at 10.) The Pre-Filing Agreement is clear that it does not cover post-filing services. The agreement provides three (3) options for the client to choose from after the case is filed: (1) "You can represent yourself in your bankruptcy case (called ‘proceeding pro se ’);" (2) "You can hire another attorney to represent you in your bankruptcy case; or," (3) "Within ten (10) days after your case is filed , you can enter into a Post-Filing Agreement with us." (Id. )

Further, the Pre-Filing Agreement specifically lists three (3) categories of services involved in a Chapter 7 case. The first category is pre-filing services, which includes the following:

• Meeting and consulting with you as needed prior to filing your case;
• Analyzing the information from your intake questionnaire and other documents;
• Providing due diligence, legal analysis and legal advice in order to help you make important legal choices and to comply with the bankruptcy code and rules; and
• Preparing and filing your Chapter 7 Voluntary Petition, Statement about Social Security Numbers, Pre-Filing Credit Counseling Certificate and List of Creditors to start your Chapter 7 case.

(CV ECF No. 4-1 at 8.) The other two (2) categories are pre-filing services and supplemental post-filing services. The Pre-Filing Agreement also lists specific post-filing services:

• Preparing and filing your Statement of Financial Affairs and Schedules;
• Preparing and filing your Means Test calculations and disclosures;
• Conducting a second signing appointment for you to review and sign your statements and schedules;
• Preparing for and attending your Section 341 Meeting of Creditors;
• Administering and monitoring your case and communicating with you throughout the process;
• Forwarding the Trustee Questionnaire and debtor documents to the Trustee;
• Noticing your employer to stop any garnishments;
• Reviewing and responding to Trustee requests; • Reviewing and advising you regarding any motions for stay relief;
• Reviewing and advising you regarding any reaffirmation agreements or redemptions;
• Reviewing and advising you regarding any creditor violations; and
• Any legal service required by the local rules.

(CV ECF No. 4-1 at 8.) Finally, the Pre-Filing Agreement lists specific supplemental post-filing services:

• Reviewing and advising regarding any turnover demands from the Trustee[;]
• Attending any continued Section 341 Meeting of Creditors;
• Reviewing and advising regarding any 2004 exams and attending related exam;
• Reviewing and advising you regarding any audit by the US Trustee;
• Preparing and filing claims or objections to claims when appropriate;
• Reviewing and advising you regarding any lien avoidance matters;
• Drafting and/or negotiating a reaffirmation agreement and attending any related hearing;
• Preparing and filing any amendments to your statements and schedules; and
• Preparing and filing a motion to reinstate the case.

(CV ECF No. 4-1 at 8–9.) Although the Pre-Filing Agreement expressly limits the services provided, the "Additional Important Terms" section of the Pre-Filing Agreement states:

Unbundling or Limited-Scope Representation. By signing below, you acknowledge that the Law Firm has expressed that it is ready, willing and able to represent you for your entire Chapter 7 case, even if you choose the File Now Pay Later option, which will require you to sign a Post-Filing Agreement. If you choose the File Now Pay Later option, you further represent that you are not doing this with the intention of having the Law Firm simply file your case and then withdraw, but instead to facilitate you making payments over time for your attorney fee so that you can have an attorney represent you through the entire Chapter 7 process.

(CV ECF No. 4-1 at 14–15.)

To fund the bifurcated agreements' "file now pay later" approach, Appellant entered into a Line of Credit and Accounts Receivable Management Agreement ("FSF Agreement") with a third party, Fresh Start Funding ("FSF"). (CSP ECF No. 42 at 6.) Pursuant to the FSF Agreement, FSF collects payments for Appellant and applies those payments to the amount Appellant owes under the line of credit. (Id. at 7.) However, the service comes at a cost. FSF advances 75% of the post-petition fee associated for each approved account and maintains 25% of the post-petition attorney fees as a fee for its services. (CV ECF No. 8-1 at 119.) Accordingly, the client pays a different fee for the bifurcated arrangements. If the client chooses the traditional "pay before you file" option, then the client enters an agreement with Appellant "covering both pre-filing and post-filing services for a fixed fee of $2,350 (including the filing fee) and providing for a certain supplemental post-filing services charged at $300 per hour for attorney time and $250 per hour for paralegal time." (CSP ECF No. 50 at 3–4.) On the other hand, if the client chooses the bifurcated "file now pay later" option, Appellant charges more money to cover the added cost of fees owed to a third-party, FSF. (Id. at 4.) However, despite charging more, Appellant testified that he is still making less on the case because the added fees go to FSF—not to Appellant. (CV ECF No. 8-1 at 120.)

These appeals arise from three (3) separate Chapter 7 cases that Appellant filed using the bifurcated agreement approach.2 Pursuant to their respective agreements, Charles and Shirley Prophet paid $1,200.00 for pre-filing services and $1,200.00 for post-filing services, (CSP ECF No. 42 at 10 ¶¶ 46, 55); Steven Rosenschein paid $500.00 for pre-filing services and $2,060.00 for post-filing services, (CSP ECF No. 42 at 12 ¶¶ 60–61); and Christine Naughton paid $0.00 for pre-filing services and $2,800.00 for post-filing services, (CV ECF No. 8-1 at 153; CN ECF No. 41 at 8 ¶ 39).

Acting United States Trustee3 John P. Fitzgerald, III, (the "UST") moved in all three (3) cases for review of Appellant's use of the bifurcated fee agreements, cancellation of the bifurcated agreements, disallowance and return of the fees paid to Appellant, and other relief appropriate under 11 U.S.C. §§ 105(a), 329(b), 526, Fed. R. Bankr. P. 2016 and 2017. (CSP ECF No. 22 at 1; CV ECF No. 8-1 at 12.) The UST alleged that the agreements violated SC LBR 9011-1(b). (CSP No. 22 at 12; CV ECF No. 8-1 at 23.) The Bankruptcy Court agreed with the UST, holding that the bifurcated agreements are impermissible under the Local Rule and ordered Appellant to return all fees paid post-petition under the agreements, less any filing fees or out of pocket costs.4 (CSP ECF No. 50; SR ECF No. 43; CN ECF No. 41.) Appellant appealed all three (3) orders to this court. (CV ECF No. 1.)

B. Chapter 7 Bankruptcy Cases

The cases before the court illustrate the challenges faced by Chapter 7 debtors and debtors’ counsel when individuals in need of bankruptcy relief are unable to pay a pre-petition flat fee to hire an attorney. See, e.g. , In re Hazlett , No. 16-30360, 2019 WL 1567751, at *5 (Bankr. D. Utah Apr. 10, 2019) ("The Court is not alone in its concern as to how the...

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  • Fake and Real People in Bankruptcy
    • United States
    • Emory University School of Law Emory Bankruptcy Developments Journal No. 39-3, September 2023
    • Invalid date
    ...").93. See Melissa B. Jacoby, Superdelegation and Gatekeeping in Bankruptcy Courts, 87 Temp. L. Rev. 875 (2015).94. In re Prophet, 639 B.R. 664, 676 (Bankr. D.S.C. 2022) (holding that bifurcated fee agreements were not per se prohibited by local rules of procedure and remanding for further ......

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