Employment of Professionals for Personal Injury, Medical Malpractice, and Employment Claims While Filing Bankruptcy
If you are a practitioner in any area of the law where you represent clients in any kind of personal injury, medical malpractice, or employment claims you need to be aware that the claim in question might be property of a bankruptcy estate. Always ask your client at the intake stage if they are in a bankruptcy or if they plan to file a bankruptcy. Make sure you contact their bankruptcy attorney to let them know what is going on so they can help you through the process. Please do yourself a favor and whenever you take a case run a PACER check to find if the client is in an active bankruptcy case. If for some reason you do not have access to PACER please contact our office and we will run the check for you for free.
Is Your Client in a Chapter 13 Bankruptcy?
Sometimes clients need more than just their bankruptcy attorney to help them handle issues that arise before or during their bankruptcy. Attorneys that we commonly interact with that are also representing our clients are personal injury, employment discrimination, disability, and workman’s compensation attorneys. These types of attorneys should be aware of rules that may affect their ability to collect fees if their client files for bankruptcy. This post details rules and procedures that may apply to an attorney for representation in connection with a bankruptcy case.
Do I Need Court Approval Before Taking This Case?
If the attorney finds their client is involved in a bankruptcy, the attorney providing services must first determine if the services are “in connection with” the bankruptcy case. “In connection with” the bankruptcy case means that if it is objectively determined that the services rendered will have an impact on the bankruptcy estate. In (somewhat) simpler terms, the services will assist the debtor in their reorganization plan to pay creditors. If the services are “in connection with” the case the attorney will likely need to file a motion to employ under 11 USC 327, the required disclosures under 329 and Bank.R 2016, and fee applications to collect payments which are scrutinized under 330.
Motion to Employ-11 USC § 327
Any professional that is handling a matter for the estate needs to be employed by motion and there are required disclosures. LBR 2014.1. Although there is case law in Kansas that indicates you might not always have to file a motion to employ we believe it is best to err on the side of caution and work with the bankruptcy attorney to get the required documentation to the bankruptcy court and provide notice to all the client’s creditors.
Bankruptcy courts are divided on whether a Ch. 13 debtor seeking to employ special counsel to represent the debtor in non-bankruptcy litigation must comply with 11 U.S.C.S. § 327(e) and obtain court approval. The 10th Circuit has not directly addressed the 327 employment issue, but the District of Kansas follows the In re Gorski, 519 B.R. 67, 71 (Bankr. S.D.N.Y. 2014) line of cases. This means a Ch. 13 debtor has the right to employ counsel so long as the attorneys (1) disclose compensation paid or agreed to be paid pursuant to 11 U.S.C.S. § 329, Bank.R 2016 and (2) requests approval of post-petition payments from property of the estate pursuant to 11 U.S.C.S. § 330(a)(4)(B).
Our office, although in Kansas, has erred on the side of caution and filed 327 employment motions in most cases even though it is doubtful they are always required. In part this is to make sure all the parties including the trustee have notice that there is a pending issue that could impact the bankruptcy case. In part it is to obtain a “comfort” order just in case the issues involved cross over into assisting the debtor in their repayment plan. The failure to properly handle these issues can result in disgorgement of your attorney fees for the work done or having to defend additional issues in the underlying claim. The motion to employ is a small price to pay.
Contents of Fee Agreements-11 USC 329
The attorney providing the services will need to include a copy of the fee agreement with the motion to employ. Section 329 requires the debtor’s attorney to file a statement disclosing fees and is mandatory, even if the attorney does not plan to apply for compensation later. The disclosure must include a statement of the compensation paid or agreed to be paid, the existence of a fee-sharing agreement (if with another lawyer not within the same firm), and the particulars of the fee-sharing agreement. Disclosures are required to protect the debtor from overreaching attorneys who may overcharge for their services and leave creditors without their proper share.
In addition to the fee agreement, a letter stating the attorney has no conflicting interests with any of the creditors listed in the client’s bankruptcy petition must be included. A notice of the motion to employ is sent to all the creditors and if no objections, the attorney will likely be approved.
Note this is only the first step in the process, approval is required even if the attorney is not to be compensated from the estate funds (i.e., debtor paid a flat fee as payment in full) and even if approved there is no guarantee the attorney’s fees will be approved for services provided after a Chapter 13 plan confirmation. It is especially important that attorneys file a motion to employ BEFORE beginning to provide services, or they run the risk of being unable to collect fees later, or worse they must repay the fees they collected.
Court Approval of a Settlement and Bankruptcy
Obtaining court approval for employment is a great start, but the attorney will never escape the oversight of the bankruptcy court. Morris v. King gives us an idea of what personal injury attorneys should not do. Do not settle the matter without bankruptcy court approval, and do not pay out the debtors share without approval. Motions will need to be filed by the bankruptcy attorney to approve the settlement and for the debtor to retain funds if possible. In some cases we do one motion to approve the settlement and a separate motion to direct the disbursement of funds. This allows the settlement to be approved (normally this goes without objection) while the thornier issue of retention of proceeds by the debtor is reserved for a separate hearing.
Be aware that confidentiality agreements do not go very far in the bankruptcy court. If a settlement includes a nondisclosure agreement that purports to hide the terms of the settlement from the public, the terms still must be disclosed in the motion to approve the settlement. This means at a minimum the creditors in the case will be on notice of the terms of the settlement and the motion will be filed in the bankruptcy case and not under seal. The concept of keeping the terms under seal with respect to the parties to the bankruptcy case flies in the face of required disclosures of assets in bankruptcy cases.
Getting Paid For Your Work
Now that all the hard work of the case is done, we still need to address how the attorney gets paid. Getting a fee award is not automatic and a fee application will need to be submitted to the court. Most of the time the attorney’s fees are awarded during the settlement motion and no further fee application is needed, but you need to make sure there is an order that addresses this issue to protect yourself.
Occasionally, a client needs work over an extended period and the fee arrangement may not be on a contingency basis. When this happens, the attorney may apply for interim payments throughout the representation. The attorney may apply for fees “not more than once every 120 days after an order for relief in a case under this title, or more often if the court permits, for such compensation for services rendered before the date of such an application” 11 USC 331. The fee application will again include notice to all creditors and a hearing is held to allow fees to be dispersed.
Property of the Estate
A common misconception is that a certain claim or cause of action is not property of the estate because it accrued post-filing, or it is exempt from creditors. While this is true in Chapter 7 cases it is not in Chapter 13 cases. While in many cases the claim will not have to be paid into an estate for one of the reasons mentioned previously you should always consult with the debtor’s attorney to decide if there is an issue. Even if the claim is not subject to seizure by the trustee that does not relieve counsel of all the obligations listed above.
Did Your Client file a Chapter 7 Bankruptcy?
If the cause of action that you are bringing on behalf of the client arose before the client filed a Chapter 7 case, then it is most likely property of the bankruptcy estate. If it is property of the estate then there is a possibility the bankruptcy trustee in that case has the sole right to proceed with the claim and can take over the action completely. The client/debtor might have an exemption they can use to protect some or even all the claim but it must be disclosed to the court. In some cases this might require reopening the case and notifying the trustee.
In some class action cases over the last few decades the administrators of the trusts have carefully checked to see if there were individuals filing claims that were in prior bankruptcy cases that were filed after the claim arose. In Kansas there were defenses to turnover to the estate of those claims based on the need for future medical care. Your client’s bankruptcy attorney should be contacted and consulted to determine what course of action should be followed.
There are also cases where the defendant in the personal injury or employment lawsuit discovers the bankruptcy and files a motion to dismiss the underlying claim for failure to disclose it in the bankruptcy schedules. There is case law in some jurisdictions supporting this action.
In most Chapter 7 cases where the trustee will need the help of the debtor to prosecute the action the trustee will work with the debtor and sometimes keep counsel that the debtor has worked with on the claim. The debtor will usually be afforded some benefit, such as a share of the recovery, for their cooperation.
If your client does become involved or is currently in a bankruptcy, reach out to their bankruptcy attorney for guidance on what extra documentation is needed for representation. Just because a cause of action is exempt or arose after the filing of the bankruptcy case does not necessarily mean it is not property of the bankruptcy estate or that you can avoid the requirements above. Failure to follow the rules set out above can result in an order of disgorgement, while simple disclosures and basic motions will protect everyone involved. We are always happy to discuss the filing requirements and we file the motions for you if we are representing the same client.
We are always available if you have any questions. We have offices in Wichita, Topeka, Lawrence, and Overland Park and we limit our practice to consume bankruptcy in Kansas.