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If there’s a lesson to be learned about representing clients who are nearly broke, it is to have them pay their legal fees upfront before filing bankruptcy petitions on their behalf. On Dec. 7, the 5th U.S. Circuit Court of Appeals blessed a consumer bankruptcy lawyer’s unusual way of securing his fees, but frowned on another of his methods. Barron v. Countryman centers around Robert E. Barron, a consumer bankruptcy lawyer and managing partner of Nederland’s Robert E. Barron PC, who has a high-volume practice in the Eastern District of Texas. Under the Eastern District’s local rules, attorneys are permitted to charge a client a total fee of up to $2,000 for a Chapter 13 bankruptcy without filing a fee application with the court. Barron’s standard practice was to charge a Chapter 13 client a total fee of $2,000 or less, but he did so in an unorthodox manner, according to the opinion. In 167 cases at issue, Barron would generally require a client to pay about $400 before he filed a bankruptcy petition on the client’s behalf. He referred to those payments as “deposits” in his retainer agreements. Barron testified at trial that such payments were necessary to ensure that debtors remained active in their cases, according to the opinion. However the client would forfeit the deposit if he or she decided not to file for bankruptcy. And Barron did not place the prepetition fees into an interest on lawyers trust account. Rather, he made the funds immediately available to himself and his firm for prepetition work, according to the opinion. In 64 of the 167 cases, Barron took additional payments ranging from $30 to $500 from clients, after he had filed their bankruptcy petitions, for his efforts in contested proceedings. But Barron neither requested nor received bankruptcy court approval to accept the postpetition payments, according to the opinion. Janna L. Countryman, a Chapter 13 trustee, complained to a U.S. Bankruptcy Court in the Eastern District that Barron failed to place prepetition fees in escrow pending court approval and failed to file a fee application for his postpetition fees, the 5th Circuit wrote. Then-U.S. Bankruptcy Judge Donald R. Sharp found that Barron had willfully and knowingly violated the U.S. Bankruptcy Code, the Texas Disciplinary Rules of Professional Conduct and local bankruptcy rules, and ordered him to return all prepetition and postpetition fees he received in the 167 cases at issue — a ruling affirmed by U.S. District Judge Marcia Crone. But the 5th Circuit ruled that Barron did nothing wrong in accepting advance payments in the form of deposits, reversing that part of the lower court decision. “While it might have been prudent for Barron to place in escrow the prepetition payments he received, the Texas Rules do not require an advance payment retainer, earned by the attorney prepetition, to be placed in trust,” wrote Judge Edith Jones, in an opinion joined by Judges Jacques Wiener and Edith Brown Clement. “Further, because the retainers at issue in this case were advance payments in nature, they became Barron’s property upon remittance,” Jones wrote. But Barron did violate local bankruptcy rules by accepting postpetition fees directly from clients, the 5th Circuit ruled in affirming another part of the lower court ruling. “Barron plainly violated this rule in taking additional funds from debtors without disclosing such payments,” Jones wrote, adding that it is elementary bankruptcy law that all postpetition earnings of a Chapter 13 debtor constitute property of a Chapter 13 estate. “Since Barron never requested permission from the court to receive these funds, he denied the court an opportunity to review the transfers,” Jones wrote. Neither Barron nor Countryman returned a telephone call to each seeking comment before presstime on Dec. 15. COURT APPROVAL John Durkay, a partner in Beaumont’s MehaffyWeber who represents Barron, says his client did nothing wrong — which the 5th Circuit partially recognized. “His system had been in place for 20 years in the district,” Durkay says. “This came up after many years of doing it the same way.” Greg Arnove, a staff attorney for Countryman who represented her in the case, is pleased with the ruling. “I think the clear statement is that if you’re representing a bankrupt debtor, you can’t get any fees from the client after the case is filed without getting the court’s approval,” Arnove says. In general, getting paid upfront is a common practice of consumer bankruptcy attorneys whenever possible, says James Musselman, who teaches consumer bankruptcy law at South Texas College of Law in Houston. It’s a necessity in a practice area where fees are generally low and are harder to collect once a consumer bankruptcy petition is filed, Musselman says. “To be a consumer bankruptcy attorney, there’s a lot of work to be done in each case, and you’ve got to do a volume business. You’ve got to do hundreds of them to make any money,” Musselman says of Chapter 13 cases. “So you’ve got to do a lot of them, and you kind of have to be a computer mill.” Barron’s practices may have concerned the Chapter 13 trustee and the bankruptcy court, because he referred to part of his retainer as a deposit, Musselman says. “I don’t know why he called it a deposit. He could have just said it was a flat fee. I wouldn’t have called it a deposit, because that means you can get it back,” Musselman says. “And the court wrestled with that language. It was clear from his agreement that he really earned it when he got it.” The 5th Circuit recognized the need for upfront fees in its opinion, says Mac McMahan, a bankruptcy lawyer and associate with Fort Worth’s J. Michael McBride PC. “That goes really for any chapter. And as the 5th Circuit pointed out, it’s customary for Chapter 13 to be paid current before filing a petition,” McMahan says. “And to require all fees to be paid in escrow before a filing would put a burden on all bankruptcy practitioners.” Chapter 13 allows a consumer to repay debt without forfeiting property. It requires that a debtor maintain a source of income and adhere to a payment schedule set forth by the bankruptcy court. But sometimes it’s impossible for a debtor-client to pay legal fees upfront, because he is down to his last dime, says Dale Wootton, a Dallas bankruptcy solo. “If you have someone who has nothing, you take a very small retainer or none. And the advantage of Chapter 13 is they could take a very low retainer and take monthly payments from the trustee, because the debtor has to make a payment,” Wootton says. The debtor files Chapter 13 “to save the car, the house or [fend off] the IRS. So they’ve got to make payments to the trustee, and out of those payments you get the fee,” he says. But getting postpetition fees can be a huge hassle, Wootton says. The lawyer must wait hours in bankruptcy court to obtain approval for a few hundred dollars in fees. “Do you eat it, lose it or charge the client?” Wootton asks. “There’s no easy way.” Deborah Langehennig, the Chapter 13 trustee for the Austin Division of the Western District of Texas, says she’s glad the 5th Circuit ruling clears up a misperception that some bankruptcy attorneys have about postpetition fees. While bankruptcy courts and local rules always require attorneys to disclose their fees before filing a petition, the 5th Circuit reaffirmed the proposition that attorneys must also get court approval when they collect postpetition fees, she says. “Some attorneys think that filing that disclosure is enough,” Langehennig says. “And I think the court reiterated that you have to have court approval for any fees that arise after the filing of the case.”

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