Prepetition Attorney Fees Collected Post Petition Violate Automatic Stay

       There is a common practice that has long taken place in the Chapter 7 bankruptcy realm which attorneys and debtors need to be aware of has some problems.  The practice is the acceptance of attorney fees after the debtor's bankruptcy petition has been filed and case commenced.  A majority of courts, including the 6^th Circuit, have held that the requiring payment of attorney fees post petition is a violation of the automatic stay in section 362 of the Code.  Despite the 2009 Tennessee decision, I still see this practice continuing.  Maybe its because more young attorneys are entering the bankruptcy field and are unaware of this 2009 case, or local attorneys just did hear of it (The Nevin Law Firm is based in the Middle District of Tennessee in Nashville while the decision was in the Eastern District of Tennessee of Knoxville.)  No matter the reason, this practice openly continues despite the Bankruptcy Court's obvious using one law group as an example.

       The far reaching consequences of this decision, and the rich analysis of the Bankruptcy Code, make the case worthy of a law review article; however, tempted as I am to write a full-blown review of this decision, I will keep this article brief.

       The United States Bankruptcy Court of the Eastern District of Tennessee held that an agreement to pay attorney fees for the bankruptcy case, entered into prepetition, is a prepetition debt and is therefore dischargeable.  They also held that where an attorney makes the arrangement not to be paid in full upfront before filing the case creates a conflict of interest because the attorney then becomes a creditor of their own debtor-client once the case has been filed.  Moreover, any attempt to collect the unpaid balance from the debtor, the court held, would violate the automatic stay of section 362 and be cause for the debtor's own attorney to be issued sanctions by the court which would include a disgorgement of the fees already paid prepetition. 

       The court had multiple problems with the law group in this specific case including:  (1) the fact that the attorneys did not disclose to the client that such an agreement could at least potentially be dischargeable (since this was a case of first impression);  (2) the attorneys' disclosure to the court was that they had been paid in full prepetition, when in fact that was not true;  (3) after post-dated checks from the debtors had been returned, they made collection phone calls and sent collection letters. 

       However, the court did note that there are acceptable ways to receive proper compensation for attorney fees, for both post and prepetition payments.  The following are such options, which have been employed by other courts, and appear to fall within the scope of potential and allowable solutions: “(1) requiring Chapter 7 debtors to pay flat attorney’s fees in full prior to filing; (2) revising retainer agreements and expressly designating pre-petition services, which are paid pre-petition, and post-petition services, which shall be paid post-petition; or (3) accepting payment by third parties.”

       Therefore, if you are a debtor and your attorney is asking for post-petition payment, you might have found a way to have free legal service.  Attorneys! Make sure you get paid up front in full before filing the case! If, however, a debtor is in a bind and needs a case filed ASAP, then take either of the two following actions.  First either have a family member or friend of the debtor sign the fee agreement as a surety, since they would not fall under the protection of the Bankruptcy Code for your debtor's case.   

       Or, second, write two separate contracts.  The first contract should specifically delineate prepetition services, duties, and disclosures with fees scheduled next to each.  State specifically that any prepetition payments are for only the delineated services and that this contract does not bind the attorney to perform any post petition work on the case.  After filing the case, sign a second contract with the debtor which is for postpetition services.  Specifically delineate what those services are and how much you charge.  Also make full disclosure to the bankruptcy court of your fee arrangement on Form 7 Statement of Financial Affairs and the Compensation Statement of Attorney for Debtor. You must also disclose to your client the reason for the separate contracts, explaining to your client the automatic stay implications and the attorney fees. 

To read the case in full please see In re Waldo, 417 B.R. 854.

For more information, visit www.TheNevinLawFirm.com

Can Stockbrokers file for Bankruptcy?

            One issue in practicing bankruptcy that has come up time and time again is the rumor that stockbrokers are not allowed to file bankruptcy.  Most of the public, and many bankruptcy lawyers for that matter, are under the impression that the Bankruptcy Code precludes stockbrokers and commodity brokers from filing bankruptcy.  Well, like most rumors, this one is partially true. 

            To answer the question simply: stockbrokers and commodity brokers are allowed to file for bankruptcy under Chapter 7 of the code, but not under 11 or 13.  The relevant provisions belong in 11 U.S.C. 109, titled Who may be a Debtor.  Under section 109, subsection (b) deals with Chapter 7 filers, subsection (c) with Chapter 9 (municipalities), subsection (d) with Chapter 11, subsection (e) with chapter 13, and subsection (f) with farmers.  Thus the relevant subsections for our discussion are (b), (d), and (e).

             Subsection (b) is an expansive list that enumerates all those who may NOT file for bankruptcy under Chapter 7 of the code. Nowhere in this list are stockbrokers or commodity brokers mentioned.  Read for yourself:

(b) A person may be a debtor under chapter 7 of this title only if such person is not - (1) a railroad; (2) a domestic insurance company, bank, savings bank, cooperative bank, savings and loan association, building and loan association, homestead association, a New Markets Venture Capital company as defined in section 351 of the Small Business Investment Act of 1958, a small business investment company licensed by the Small Business Administration under subsection (c) or (d) (!1) of section 301 of the Small Business Investment Act of 1958, credit union, or industrial bank or similar institution which is an insured bank as defined in section 3(h) of the Federal Deposit Insurance Act, except that an uninsured State member bank, or a corporation organized under section 25A of the Federal Reserve Act, which operates, or operates as, a multilateral clearing organization pursuant to section 409 of the Federal Deposit Insurance Corporation Improvement Act of 1991 may be a debtor if a petition is filed at the direction of the Board of Governors of the Federal Reserve System; or (3) a foreign insurance company, bank, savings bank, cooperative bank, savings and loan association, building and loan association, homestead association, or credit union, engaged in such business in the United States.

            Therefore, the fact that they are not included in the prohibitive section indicates the intent of the legislature to allow stockbrokers and commodity brokers to file for relief under Chapter 7.  But our analysis does not stop here.

            Next let's look at subsection (d), which deals with filing under Chapter 11.  Read the following section and notice the language dealing with stockbrokers and commodity brokers.

Only a railroad, a person that may be a debtor under chapter 7 of this title (except a stockbroker or a commodity broker), and an uninsured State member bank, or a corporation organized under section 25A of the Federal Reserve Act, which operates, or operates as, a multilateral clearing organization pursuant to section 409 of the Federal Deposit Insurance Corporation Improvement Act of 1991 may be a debtor under chapter 11 of this title. (emphasis added)

            This section delineates who may file under Chapter 11, unlike Chapter 7, which lists who may not. This section allows railroads (who were excluded from protection of a Chapter 7 in subsection (b)) and all of those who are able to file under a Chapter 7 “except a stockbroker and a commodity broker.”  By implication, a stockbroker and a commodity broker must be able to file for protection under Chapter 7, otherwise that language is (1) superfluous and (2) inconsistent. 

             The drafters specifically excluded brokers from filing under Chapter 11.  They did so by allowing all those who qualify for  a Chapter 7 file a Chapter 11 with the exception of brokers.  Therefore, the writers are telling us that brokers do qualify for a 7 but are specifically exempted out of filing for an 11.  Furthermore, brokers are specifically precluded from filing an 11 in subsection (d), yet not specifically excluded in subsection (b).  This word choice demonstrates that in order to remain consistent with delineations and exclusions, and with the implication of the specific exclusion from qualifying 7 debtors, brokers are allowed to file bankruptcy under Chapter 7, but not Chapter 11.

            Finally is subsection (e), which deals with those allowed to file bankruptcy under Chapter 13.  This section reads as follows:

(e) Only an individual with regular income that owes, on the date of the filing of the petition, noncontingent, liquidated, unsecured debts of less than $250,000 and noncontingent, liquidated, secured debts of less than $750,000, or an individual with regular income and such individual's spouse, except a stockbroker or a commodity broker, that owe, on the date of the filing of the petition, noncontingent, liquidated, unsecured debts that aggregate less than $250,000 and noncontingent, liquidated, secured debts of less than $750,000 may be a debtor under chapter 13 of this title.  (emphasis added)

Subsection (e) makes it easy.  The Code here specifically says that a stockbroker and a commodity broker are not allowed to file a Chapter 13 bankruptcy case. No “ifs,” “ands,” or “buts” about it.

             To remain consistent with the rest of the language used in the other subsections a broker must be allowed to file for bankruptcy under Chapter 7.  Subsections (d) and (e) specifically exclude brokers from their filing bankruptcy under those respective chapters, while the one section, subsection (b), that delineates specifically who may note file under its respective chapter does not list brokers.  Therefore, the exclusion of brokers in subsection (b), coupled with the specific exclusions in (d) and (e), along with the implication created in (d)'s language of allowing all qualifying 7 filers, except brokers, to file an 11, lead to the conclusion that a stockbroker and a commodity broker are allowed to filed for bankruptcy under Chapter 7 of the Code, but not 11 or 13. 

How to Prove the Validity of a Will

The process of "proving" or showing the validity of someone's will involves multiple considerations beyond just the will's existence. In some cases, where there is ample evidence that the will isn't consistent with the decedent's intentions, the will may be thrown out entirely.

While the loss of a loved one is a trying time for any family, sometimes situations arise wherein the contents of a loved one's will become the source of controversy. Perhaps you've found a will that no one in the family knew existed, or one that was written in the last few weeks before your loved one's death. Maybe the contents of the will are not exactly what the family might have expected. How will the court determine whether or not that will is valid? 

Mental Capacity

When determining whether a will is valid, one of the most important considerations is the decedent's mental capacity at the time the will was written. For a will to be considered valid, the individual who wrote it must have been of sound mind at the time it was drafted. If you believe that your loved one was not "himself" when he wrote his will, as in the case of dementia or Alzheimer's disease, you may be in a position to contest his will. You will need to show proof of your loved one's mental capacity (as in the form of a letter from his doctor). Undiagnosed conditions and anecdotal evidence will be more difficult for the court to accept.

Undue Influence

While more difficult to prove than straightforward mental capacity concerns, undue influence is another valid reason to contest a will. Sometimes, wills are contested because it's believed that someone unduly influenced the decedent to write his will in a certain way. This situation is less common than mental capacity cases, but can sometimes go hand in hand with a mental capacity issue. A close friend or family member may be suspected of taking advantage of the decedent's diminished mental capacity in order to pressure him to distribute his assets in a certain way.

Proper Execution

The act of putting one's final wishes on paper, as in a handwritten will that's kept at home, for example, doesn't ensure that those wishes will be followed after one's death. There is a process that must be followed in order to properly execute a will. This is part of the problem with DIY wills and downloadable templates. While the contents may be fine, if the will isn't properly executed – including all required signatures and notarization – there is a good chance that the court won't honor it.

Will Contests

Will contests are not only emotionally difficult for everyone involved, they can also be quite complex. If you truly believe that the contents of your loved one's will are not consistent with his intentions, you will need to hire a probate attorney to help you file a contest. In most states, there is a time limit, so you'll want to take action quickly. You will also want to find an attorney with both the skill and experience to handle your case.

This article is for informational purposes only. You should not rely on this article as a legal opinion on any specific facts or circumstances, and you should not act upon this information without seeking professional counsel. Publication of this article and your receipt of this article does not create an attorney-client relationship.

For more information, visit www.TheNevinLawFirm.com

What is Involved in the Probate Process

The death of a spouse, parent or other loved one is a difficult time that involves heightened emotions, complicated paperwork, and a seemingly endless task list. If you've been named as a loved one's executor, then it is wise to hire a probate attorney. Probate is the legal process that takes place after someone dies. It involves determining whether that person had a will, "proving" the will, securing and listing the person's assets, and then settling the person's outstanding financial affairs.

Identifying the Executor

The first step in the probate process is identifying someone to act as the decedent's personal representative. This will be the person responsible for "administering the estate," or handling the affairs of the estate, for the duration of the probate process. If the decedent had a will, he probably named an executor. Unless there is a compelling reason not to, the court will, in most cases, honor the decedent's wishes by allowing the executor to act as his personal representative. If there was not a will, the court is likely to select the deceased individual's spouse, adult child or close family member to act as his personal representative. In the event that no family can be identified, the court may give this responsibility to a bank, trust company or attorney.

Determining the Assets

You are going to have a lot of work ahead of you if you've been named as a loved one's executor. First, you will need to gather and inventory all of the decedent's assets, including bank and brokerage accounts, real estate, and personal property, and determine its value (which sometimes requires an appraisal). You'll also need to file for any life insurance benefits the decedent may have been entitled to and check with his employer to secure any unpaid salary or pension.

Settling the Debts

Once the assets have been gathered and their values determined, you'll begin the process of settling your loved one's outstanding debts. This involves notifying any known creditors of his death and, in most states, placing a notice in the local newspaper to inform any unknown creditors of his death. Creditors may then begin to file claims against the estate. As the executor, your role is to review these claims, determine their validity (or file an exception), and, assuming that assets are available, make payments to cover them.

You will also need to ensure that the estate does not incur any additional costs by closing out all of your loved one's accounts, including credit cards, bank accounts and any subscription services. When all debts have been settled, you'll be responsible for distributing the remaining assets according to your loved one's will or, if he didn't have a will, according to your state's laws of descent and distribution.

Hiring a Probate Attorney

Losing a loved one is one of the hardest things you'll ever have to go through. Spending countless hours handling the affairs of his estate can make the mourning process even longer and more difficult. Therefore, it is a good idea to hire a probate attorney. Like most legal processes, probate is not a simple matter. It involves complex paperwork, deadlines, and serious consequences for missteps.

In fact, there is quite a lot of paperwork to keep track of. When you're already going through a difficult, emotional time, it's easy to become overwhelmed. If you hire a probate attorney, then your attorney will act as an advisor, guiding you through each step of the probate process to ensure that you are 1) aware of your responsibilities and 2) completing all paperwork properly and 3) according to deadlines.

For more information, visit www.TheNevinLawFirm.com

Filing for Chapter 7 Bankruptcy

When it comes to the concept of bankruptcy, most people associate it with having their debts permanently relieved. In reality, there is more than one type of bankruptcy. In a Chapter 13 bankruptcy, the debtor keeps his assets but agrees to a payment plan to eliminate his debt within a few years. When faced with a major financial setback, however, such as a job loss or costly illness, many people choose to file for a Chapter 7 bankruptcy.

Discharge of Most Debts

Also called a "straight" bankruptcy, a Chapter 7 bankruptcy will result in a discharge of most debts. When debts are discharged, you are no longer legally required to pay them and creditors are prohibited from taking any kind of collection action against you. Chapter 7 can eliminate credit card debt, medical bills, payday loans, judgments against you, deficiency debts, or repossessed motor vehicles. A Chapter 7 bankruptcy does not, however, relieve you from child support responsibility, taxes or student loans.

Because bankruptcy is a federal law, filing for Chapter 7 bankruptcy in Tennessee is not much different than filing for bankruptcy in any other state. However, state law does play an important role in one area. The state in which you file for bankruptcy will determine the amount of money and assets you will be left with after your bankruptcy filing is complete.

Exemptions for Personal Property and Real Property

A portion of your assets will be exempt from your creditors when you file for bankruptcy. The exemption amounts in a bankruptcy filing are the amounts of money and assets you will have that are exempt from creditors. These assets and money are intended to help you get a fresh start after your bankruptcy.

There are separate exemptions for personal property and real property. Your personal property includes money you have in a bank, your household goods, any equity you may have in an automobile, or anything else of value that you own. When you file for bankruptcy, the amount of personal property you will be allowed to keep is determined by your state's personal property exemption limits. In Tennessee, the personal property exemption for a single filer is $10,000. For a married couple, the personal property exemption is $20,000. The exempt amounts are for the equity in personal property after deducting any amount of debt on the property such as an automobile.

The real property exemption amounts in Tennessee are $5,000 for an individual and $7,500 for a married couple. Some exceptions to this rule allow for greater exemptions for those people over 62 and for single parents. The real property exemption (or homestead exemption) is intended to allow you to stay in your home after your bankruptcy. This exemption, however, only applies to your primary residence. So, if you're filing for Chapter 7 and happen to own more than one home, you will only be allowed to keep the home in which you live most of the time.

Remember, before filing for bankruptcy in Tennessee, it's essential that you contact an experienced attorney to help you determine whether Chapter 7 bankruptcy is the best course of action for you.

For more information, visit www.TheNevinLawFirm.com