Bankruptcy Attorney Skewered By Court For Inadequate Compensation St...

Bankruptcy attorneys are required to file a statement of compensation for each bankruptcy case. The statement discloses all forms of past, present, and future compensation. If they charge a client additional fees after the case is filed the attorney is supposed to file a supplemental statement of compensation within 14 days. Many attorneys do not strictly follow these rules. Frequently, attorneys neglect to file supplemental fee statements during complicated bankruptcy cases where clients pay for additional services after the case is filed.

Many bankruptcy judges are trying to stress this requirement among their local bankruptcy attorneys. In a recent Florida case a judge lambasted an attorney for failing to property disclose compensation. 

It appears from the facts, although not explicit, that clients needed to file bankruptcy quickly but did not have the full amount of the attorney’s fee. The attorney came up with a plan to “finance” part of the fee. The clients expected a tax refund. The attorney and clients agreed that the client would pledge part of the tax refund to pay the balance of the attorneys fee. However, the attorney failed to disclose the security interest in the future tax refund on his compensation statement. The Chapter 7 trustee claimed the entire tax refund as part of the bankruptcy estate. 

The judge presented the issue as whether the banrkuptcy attorney may enforce his pre-petition security interest in the debtors future fedeal tax refund. The court said “no” and ordered the attorney to turn over the money to the trustee.

 The court did not stop there. The court further held that the attorney violated bankruptcy rules by not filing a truthful statement of compensation. More importantly, the court found that the arrangement violated the “high standards of the Florida Bar rules. The court also criticized the debtors for not disclosing their debt to their attorney on their bankruptcy petition, although this too was probably the attorney’s omission.

The attorney in question is an experienced and very well-respected bankruptcy attorney. He has a well-deserved reputation in the local community for thorough, conservative, and highly ethical practice of law. That the court would openly criticize a bankruptcy attorney of this stature demonstrates fairness, and most importantly, the court’s commitment to making attorneys fully and accurately disclose compensation.