Last year’s historic rise in bankruptcy filings has resulted in more business for bankruptcy attorneys, but it also has meant more lawyers and law firms getting stiffed on their bills.
Timothy F. Nixon, of Godfrey & Kahn SC in Green Bay, says lawyers who receive notices of bankruptcy filings by current or former clients should probably view their chances of collecting as their accountants do: They write it off.
Yet there are steps you can take that might mean you’ll get paid, at least in part. If that happens, the numbers can be put back on the ledger.
For starters, “There’s nothing special about attorneys, as far as being creditors in a bankruptcy case,” says Marie L. Nienhuis of Beck, Chaet, Bamberger & Polsky SC in Milwaukee.
Lawyers are subject to the automatic stay like every other creditor, and unpaid legal fees are typically treated as unsecured debts in bankruptcy. That means the attorney must file a claim just like any other unsecured creditor — and hope to eventually receive a disbursement.
Keep expectations low in a Chapter 7 bankruptcy, Nienhuis advises. This is a complete liquidation where all the debtor’s non-exempt assets are distributed to creditors and the debtor emerges, usually around six months later, free of unsecured debts.
But there’s a glimmer of hope in a Chapter 13 case, a personal reorganization where the debtor forms a payment plan for his or her total debt. Some dollars might trickle in over a three- to five-year period.
There’s also hope with a Chapter 11 business reorganization. Whether the attorney as a creditor will ultimately be paid depends upon the individual circumstances of the case, Nienhuis says, and the length of such cases will vary widely. But there is some possibility that you’ll at least partially recoup unpaid fees.
Importantly, all of a firm’s collection efforts must cease due to the automatic stay, Nienhuis reminds. Make sure that your staff is aware of that.
In addition, law firms that find themselves in the position of an unsecured creditor should know that when a client files for bankruptcy, even fees that the client has already paid, typically within 90 days, but maybe up to a year, pre-petition, are within the bankruptcy court’s jurisdiction.
Nixon says large, last-minute payments to the firm might be particularly suspect to the trustee and court as “preference payments,” especially if there was a close relationship between the debtor and attorney.
Going forward in the bankruptcy
If you decide to file a claim as a creditor, Nixon and Nienhuis agree that you can likely represent yourself or your firm in most garden-variety cases. The paperwork is not complicated.
But as basic as this may sound, Nixon says it’s important to read the instructions. The notice may specifically state that creditors should not file their proof of claims until instructed to do so “because there are no assets for creditors and courts are already clogged in paperwork,” he says.
Following a court’s directives is always wise, he notes.
In Chapter 11 filings, Nixon advises looking for the “bar date,” or the last date that proof of claims can be filed. It’s a deadline you cannot miss.
He also cautions that the duty of confidentiality means attorneys shouldn’t attach detailed fee statements revealing client confidences. Redact them or create a summary statement.
Moreover, don’t assume that the bankruptcy notice will be reason enough to end the representation. You’ll still need judicial consent to withdraw once you’ve filed that notice of appearance, Nienhuis reminds.
If the debtor is a corporation you formerly represented, the attorney-client privilege between yourself and the corporation will transfer to the bankruptcy trustee, says Nixon. So, if the trustee contacts you, take the call — he or she may subpoena you for information otherwise. And if the trustee requests your work product, some caselaw suggests you may need to hand it over as well.
It’s possible for an attorney to get paid for ongoing legal work while an individual or business is in bankruptcy, Nienhuis adds.
But, Nixon says, “If you want to get paid, you’re going to have to ask the bankruptcy court for approval. You’re going to have to put in an application to be employed, as well as disclose any adverse interests you might have, along with a fee application.”
Lawyers who do legal work unrelated to the bankruptcy for a debtor in a larger cases are sometimes considered “ordinary course professionals,” he explains. Court approval assures you’ll get paid for work going forward, but doesn’t necessarily mean you’ll get paid for pre-petition accounts receivable.
If there’s a separate contract for representation, such as a contingency-fee contract, that adds another level of complexity, according to Nixon, because the trustee will have the option to assume or reject that contract.
Before the petition is filed
Sometimes attorneys obtain secured interests in a client’s property, pre-bankruptcy, to guarantee that they’ll get paid. That might bolster the attorney’s chances of getting fees for past work. But, Nixon says it may persuade the bankruptcy court to preclude you from doing more legal work for the client, depending upon the circumstances.
Obtaining a lien for attorney fees under state law is commonplace for a number of practice areas, and if done properly a bankruptcy may have no impact upon enforceability.
But the court is going to closely scrutinize the documentation and circumstances, Nixon says.
Another common scenario is an attorney who has gotten a judgment in state court for unpaid fees. Nixon says the debtor may try to get that judgment avoided in the bankruptcy, or petition the circuit court after discharge to avoid those judgments. He or she will likely prevail, so seeking a judgment, pre-petition, is no guarantee of payment.
Most important, advises Nixon, try an ounce of prevention.
“If your client is in financial distress, get a retainer, so you get the money before you do the work,” he says. “Some lawyers do this regularly, especially with their individual clients, but they’re less likely to do it with corporate clients, because they’re just happy to have the work.
“But I’m not happy to get work that I eventually have to pay somebody back for. If I’m not going to get paid, I’d rather sit on a park bench and read a book.