Substitution of Counsel (Debtors’ Attorneys)

You agree to the $3,500 “no-look” fee.  Sometime before confirmation, you and your client part ways, and you do an agreed order of substitution with the debtor’s new attorney.  Who is supposed to be paid, and how much?

Neither attorney should get the full $3,500 because neither attorney has performed or will perform all of the services required in the Rights and Responsibilities of Chapter 13 Debtors and Their Attorneys (KYEB Local Form 2016-2a) (all services through confirmation plus two post-confirmation matters).

Do you agree to split the fee?  I don’t think you can because section 504 of the Code prohibits the sharing of compensation.  But unless the prior attorney is waiving all fees, there needs to be some way for both attorneys to be fairly compensated.

There is no clear answer on what to do, so this is my two cents’ worth.

I think both attorneys need to file amended Rule 2016 fee disclosures (Official Form 2030). KYEB Local Rule 2016-3 requires an attorney who begins representing a debtor post-petition to file a Rule 2016 disclosure within 14 days, so the substitute attorney must file a fee disclosure. [updated June 28, 2016].  Don’t forget – the Rule 2016 Disclosure of Compensation is a statement of compensation paid or agreed to be paid to the attorney for the debtor.  So what is the debtor agreeing to pay to the first attorney for services rendered so far, and what is the debtor agreeing to pay to the substitute attorney for services to be rendered?

My personal opinion is that the debtor and each attorney can agree to a flat fee as opposed to an hourly fee, as long as the total compensation paid to both attorneys doesn’t exceed $3,500.  If the new attorney is accepting a “no-look” flat fee, the new attorney should file a Certification of Rights and Responsibilities for Chapter 13 Debtors and Their Attorneys (Local Form 2016-2b) to show that the new attorney is assuming the responsibilities for providing the required post-confirmation services covered by the flat fee.  Otherwise, file a fee application. [updated June 28, 2016].  If one or both attorneys agree with the debtor to charge an hourly rate, that needs to be disclosed.  The key is (in my opinion) that it is the debtor who must agree to the compensation arrangement; the attorneys cannot decide between themselves who should get paid how much.

But the amended fee disclosure doesn’t get the attorneys paid.  In order for an attorney for the debtor to be paid, there must be a court order allowing compensation.  The order confirming the plan also allows compensation to the attorney for the debtor (at the time of confirmation) if the attorney is requesting the no-look fee, but that doesn’t authorize the prior attorney to be paid.

I think the agreed order of substitution of counsel could allow compensation to the prior attorney up to $1,000, provided a plan is confirmed, in an amount consistent with the amended Rule 2016 Disclosure.   However, if compensation exceeds $1,000, Rule 2002(a)(6) would seem to require a hearing on 21 days’ notice.  Maybe do a motion to substitute counsel and combine it with the request for compensation?  Otherwise, the prior attorney will need to do a fee application and get an order allowing the fees.

If both attorneys are to be paid through the plan, it would help if the order of substitution of counsel would state whether one attorney is to be paid ahead of the other, or whether the two attorneys are to be paid concurrently on a pro-rata basis.

If the prior attorney is waiving compensation (which often occurs when there has been friction between the attorney and the debtor), tell the court (and me) in an amended fee disclosure and in the order of substitution of counsel.

Same issue, same solution if there is a substitution of counsel after confirmation, but before the first attorney has been paid in full.

I’d love to hear feedback from attorneys on this issue.  Please post your comments (Look for the “Leave a Comment” link under the title of this post).

5 comments

  1. I believe when you have co-counsel, then under EDKY Local Rule 2016-2, each attorney for the Debtor should file the Certification regarding Rights and Responsibilities of Chapter 13 Debtors and Their Attorneys as set forth in Local Form 2016-2a.

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  2. I have not done any research but KRS 376.460 grants an attorney’s lien for work performed by the original attorney. The question is does anything in the bankruptcy code supersede that? I think fair compensation to the original attorney is allowed but I am sure the question is who severed the relationship, how much work was competed, and what was the quality of work is very important. What if this is complicated case and 100 hours of post petition work is performed and the relationship collapse, does the original attorney have a post petition claim that can be collected on after the bankruptcy?

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