Hazards Of Carelessness In Bankruptcy Fee Agreements (In re Aquilino)

A winding path (photo by Marilyn Swanson)

There is a lesson for all debtor attorneys in the Chapter 7 case of In re Aquilino.[Fn. 1]

The moral of the In re Aquilino story is this:

a little carelessness in describing and disclosing bankruptcy fees in a Chapter 7 case can create big problems.

Fee Agreements & Disclosures

Here is the winding path of fee agreement descriptions and disclosures, between the Debtors and their attorneys, in the In re Aquilino Chapter 7 case:

Pre-petition email—we “can do the personal bankruptcy for you for a flat fee of $6500 plus a $335 filing fee”;
Rule 2016(b) fee disclosure in the Chapter 7—
- Par. 1 & 2, “I have agreed to accept . . . [and] have received $2,500.00,” plus the $355.00 filing fee”; and
- Par. 6, “I have agreed to render legal service . . . , including . . . Representation of the debtor in adversary proceedings and other contested bankruptcy matters”; and
- Par. 7, “the above-disclosed fee does not include the following service: [left blank].”
Amended Rule 2016(b) fee disclosure changes the $2,500.00 amount to $3,500.00 but is otherwise the same; and
Post-petition agreement for post-petition services in an adversary objecting to Debtors’ discharge and other post-petition disputes:
- outstanding legal fees and costs total $152,200 but are being reduced; and
- $100,000 is to be paid from the upcoming sale of Debtors’ residence.

Nonpayment & Federal Court Lawsuit

Long story made short:

Debtors sell their residence but fail to pay anything to their attorneys; and
So, the attorneys sue Debtors in a federal district court in Pennsylvania to recover legal fees.[Fn. 2]

Bankruptcy Court Ruling

Meanwhile, Debtors ask the New Jersey Bankruptcy Court to disallow the fees of their attorneys.

The Bankruptcy Court grants Debtors’ request, based on findings that the attorneys wrongfully seek the following remedies in the Pennsylvania case:

“to collect all fees incurred in connection with” Debtors’ bankruptcy case, including fees for pre-petition services “which would be in violation of the automatic stay”; and
to recover fees in “violation of its duty to disclose.”

The Bankruptcy Court determines “the appropriate sanction” is to:

require Debtors’ attorneys to “disgorge all fees it received”; and
“disallow any other fees it is seeking to collect.”[Fn. 3]

Appeal to District Court

Debtors’ attorneys appeal the Bankruptcy Court’s denial of their fees to the U.S. District Court in New Jersey.[Fn. 4]

On appeal, the District Court reverses the Bankruptcy Court’s decision, declaring:

“Here, it is without question that the Seventh Amendment entitled [Debtors’ attorneys] to a jury trial” in the Pennsylvania lawsuit;
Debtors’ attorneys, in the Pennsylvania lawsuit, “clearly” seek “to enforce the Letter Agreement in which the [Debtors’] promised to pay for their outstanding, post-petition legal fees out of an asset that was decidedly not part of the bankruptcy estate”;
“the Bankruptcy Court did not assess the reasonableness of” the requested fees, which assessment can be made in the Pennsylvania lawsuit; and
“Try as they might, the [Debtors] cannot leverage the Bankruptcy Code to drag [the law firm’s] claims into their preferred forum.”

Accordingly, the District Court declares: “the Seventh Amendment entitles [the law firm] to have its claims heard and decided in the” Pennsylvania lawsuit.

Further Appeal

On April 26, 2024, Debtors appeal the District Court’s reversal to the United States Court of Appeals for the Third Circuit.[Fn. 5]

What will happen in the Third Circuit . . . remains to be seen.

Conclusion

A little more care in drafting the fee agreements and disclosures in the In re Aquilino case might have saved a bunch of legal problems.

Hind-sight is always clear.

———————–

Footnote 1. The Chapter 7 bankruptcy case is In re Aquilino, Case No. 20-15628 in the New Jersey Bankruptcy Court.

Footnote 2. The Pennsylvania lawsuit is captioned Spector v. Aquilino, and is identified as Case No. 22-905 in the U.S. District Court for the Eastern District of Pennsylvania.

Footnote 3. See the New Jersey Bankruptcy Court’s “Amended Memorandum Decision” at Doc. 316 of Case No. 20-15628.

Footnote 4. The case on appeal to the U.S. District Court for the District of New Jersey is identified as Case No. 1:23-CV-01099.

Footnote 5. The appeal to the U.S. Court of Appeals for the Third Circuit is identified as Case No. 24-1781.

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