To Bundle or Unbundle: That is the Question.

The appropriateness of unbundling bankruptcy services to individual debtors has recently raised its head again in a case decided by the Ninth Circuit Bankruptcy Appellate Panel, DeLuca v. Seare (In re Seare), BAP No. NV-13-1196-KiTaJu. The case involved an attorney who agreed to represent a debtor in a Chapter 7 case for a flat fee, but who, in his retention agreement, explicitly excluded non-dischargeability adversary proceedings from the scope of the engagement. The BAP, affirming the Bankruptcy Court below, admonished the debtor’s attorney for taking on the representation on those terms without first adequately investigating the debtor’s debts and advising the debtor regarding whether they were likely nondischargeable.

Before the bankruptcy filing, the debtor’s wages were being garnished by a hospital judgment creditor. Although the debtor advised the attorney of the garnishment, he did not inform the attorney that the judgment was for attorney fees awarded as a result of the debtor having altered evidence and committed fraud in a lawsuit with the hospital (the debtor’s former employer). The attorney did not perform any independent investigation into the debt, and listed it in the schedules as a “garnishment” and the nature of the proceeding as a “collection.”

After the case was filed, the hospital filed a complaint for non-dischargeability under Sections 523(a)(4) and (a)(6). The attorney notified the debtor that the fee agreement did not cover non-dischargeability proceedings and referred him to another attorney. The debtor testified that he was unable to obtain other counsel because they either refused to take the case or were too expensive.

Although the debtor had initialed every paragraph and signed each page of the fee agreement that excluded non-dischargeability proceedings from the scope of the representation, both the Bankruptcy Court and the BAP found the attorney had violated his duty to the debtor by failing to obtain his client’s informed consent to the exclusion. The Court found that the debtor did not completely understand what the exclusion meant, that the debtor’s main goal in filing bankruptcy was to obtain relief from the garnishment, and the attorney had failed to investigate and provide the debtor with adequate advice regarding the hospital debt and the consequences of the attorney’s services not covering the probable non-dischargeability proceeding. Had the lawyer not failed to do those things, the Court reasoned, the debtor might have chosen to forgo the bankruptcy filing or hire an attorney that offered a different fee structure.

Although the Court did not rule that unbundling of services when non-dischargeability of a debt is likely to become an issue is categorically prohibited, the Court’s decision potentially raises the bar for debtor’s attorneys at the client consultation and investigation stage. This case sends the message that attorneys must fully investigate the facts and circumstances leading to the incurrence of all debts, and if dischargeability of any debt is potentially an issue, adequately discuss the adversary proceeding process, the estimated costs of defending the action, the fee structure, alternatives to filing the bankruptcy, and possible referral to another attorney that might offer a different fee structure.

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