Galloway
Filing
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OPINION and ORDER vacating Bankruptcy Court's order denying fee application and remanding for reconsideration. Signed by District Judge Stephen J. Murphy, III. (DWor)
UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF MICHIGAN
SOUTHERN DIVISION
IN THE MATTER OF:
Bankruptcy Case No. 10-49179
DERECK MALLOYED GALLOWAY,
Debtor
/
Case No. 11-cv-10380
B.O.C LAW GROUP, P.C., d/b/a LAW
FIRM OF ORLOW AND CARDASIS,
HONORABLE STEPHEN J. MURPHY, III
Appellant,
v.
KRISPEN S. CARROLL,
Appellee.
/
OPINION AND ORDER VACATING BANKRUPTCY COURT’S ORDER DENYING
FEE APPLICATION AND REMANDING FOR RECONSIDERATION
B.O.C. Law Group, doing business as the law firm of Orlow and Cardasis, (“B.O.C.”)
appeals the Bankruptcy Court’s order denying its fee application requesting $6,972.38 in
fees and $175.22 in costs related to the Chapter 13 Bankruptcy of Debtor Dereck
Galloway. The Bankruptcy Court denied the application after finding that the written fee
agreement between B.O.C. and Galloway was not executed within “5 business days after
the first date” on which B.O.C. rendered “bankruptcy assistance services” to Galloway, as
required by 11 U.S.C. § 528(a)(1), and that it was therefore void as a matter of law
pursuant to 11 U.S.C. § 526(c)(1). For the following reasons, the Court will vacate the
order denying the fee application and remand for reconsideration consistent with this
opinion.
BACKGROUND
Galloway first met with B.O.C. on January 26, 2010 for an initial consultation. During
the meeting, attorney William R. Orlow reviewed Galloway’s financial circumstances,
advised him of his bankruptcy and non-bankruptcy options, and provided him with a written
estimate of attorney’s fees for a Chapter 7 filing. Appellant Br. 1. The billing entry for the
initial consultation states:
Initial office conference with client. Review of debts, interview sheet, initial
work on Schedules and estimated Plan payments. Client will obtain all
information to complete necessary forms for filing of Petition. Will file
remainder of Schedules once all information is collected and reviewed.
Reviewed bankruptcy time frame and court proceeding required.
Appellant Designation of Appeal Documents (hereinafter “Appellant Designation”) ex. gg
at 14. Galloway met with B.O.C. again nine days later on February 4, 2010, and signed a
retainer agreement for a Chapter 7 Bankruptcy filing. Appellant Br. at 2. During that
meeting, Galloway expressed a desire to retain his residence; in order to do so, however,
Galloway had to file for Chapter 13 Bankruptcy. Accordingly, B.O.C. provided Galloway
with a written estimate of his Chapter 13 fees, and arranged for Galloway to obtain a
comparative market analysis of his residence. Id. Galloway signed a second retainer
agreement with B.O.C., this time for a Chapter 13 Bankruptcy filing, on March 4, 2010, and
filed for Chapter 13 Bankruptcy on March 22, 2010. The Bankruptcy Court confirmed the
Chapter 13 plan on August 25, 2010.
Subsequently, B.O.C. filed an application for pre-confirmation fees and costs,
requesting $6,972.38 in fees and $175.22 in costs, less the $400 already paid in retainer.
The Trustee objected to the application, asserting that it should be denied because B.O.C.
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failed to execute a signed written fee agreement with Galloway within five business days
of the initial consultation pursuant to 11 U.S.C. § 528(a)(1). Moreover, the Trustee
asserted that B.O.C. should not receive compensation for the following activities: 1) review
of unsecured proof of claims filed in Galloway’s case; 2) work completed in prosecution of
Galloway’s adversary proceedings because the work was excessive or clerical in nature;
3) completion of a stipulation and order to excuse a third-party wage order; 4) appearance
at the confirmation hearing; and 5) preparation of a Motion for Entry of Default Judgment
related to adversary proceedings to “strip” Galloway’s second mortgage. Id. at 3-4.
After a hearing, the Bankruptcy Court denied B.O.C.’s fee application, based on a
finding that the written fee agreement between B.O.C. and Galloway was not signed within
five business days from the date on which B.O.C. first provided Galloway with “bankruptcy
assistance services” pursuant to 11 U.S.C. § 528(a)(1).1 Jan. 19, 2011 Hr. Tr. (docket no.
9, ex. 3).
The Bankruptcy Court held that the failure to comply with the five-day
requirement rendered the contract void under 11 U.S.C. § 526(c)(1), which mandates that
“any contract for bankruptcy assistance that does not comply with the material
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§ 528(a)(1) provides:
(a) A debt relief agency shall-(1) not later than 5 business days after the first date on which such
agency provides any bankruptcy assistance services to an assisted
person, but prior to such assisted person's petition under this title being
filed, execute a written contract with such assisted person that explains
clearly and conspicuously-(A) the services such agency will provide to such assisted person; and
(B) the fees or charges for such services, and the terms of payment;
(2) provide the assisted person with a copy of the fully executed and
completed contract . . . .
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requirements of [11 U.S.C. §§ 526, 527, 528]” is void and cannot be enforced by anyone,
except the “assisted person.” Id.; 11 U.S.C. § 526(c)(1). Moreover, the Bankruptcy Court
rejected B.O.C.’s contention that the fee application should be granted because Galloway,
as the “assisted person,” could enforce the contract.2 The Bankruptcy Court found that the
provision allowing “assisted persons” to enforce a contract otherwise void under § 526(c)(1)
only allows the Debtor to enforce a debt relief agency’s obligation to perform services for
the Debtor without compensation, and does not allow the Debtor to enforce the agreement
in order to provide the debt relief agency with fees and costs. Jan. 19, 2011 Hr. Tr.
Subsequently B.O.C. filed this appeal, asserting that the Bankruptcy Court erred in
finding that the five-day requirement under § 528(a)(1) is a “material requirement” of §
526(c)(1), and, accordingly, also erred in finding that failure to comply with the five-day rule
rendered its fee agreement void.
LEGAL STANDARD
District courts have appellate jurisdiction over final judgments, orders, and decrees
of the bankruptcy court, including orders conclusively granting or denying attorney’s fees.
28 U.S.C. § 158(a)(1). A bankruptcy court’s conclusions of law are reviewed de novo,
while findings of fact are reviewed under the clear-error standard. B-Line, LLC v. Wingerter
(In re Wingerter), 594 F.3d 931, 935-36 (6th Cir. 2010).
ANALYSIS
The primary issue before the Court is a legal one: whether the Bankruptcy Court erred
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In support, B.O.C. submitted an affidavit to the Bankruptcy Court from Galloway,
stating that he had “reviewed the Application for Pre-Confirmation Fees prepared by
Counsel and in full knowledge, information and belief, state my approval of the fees
requested therein.” Appellant Designation, ex. hh.
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when it held that the requirement in § 528(a)(1) that a written agreement between a debt
relief agency3 and a debtor must be signed within “5 business days after the first date on
which [the] agency provides any bankruptcy assistance services to an assisted person,”
is a “material requirement” pursuant to § 526(c)(1), such that B.O.C.’s failure to comply
with the requirement rendered the fee agreement void.
As a preliminary matter, the Court addresses B.O.C.’s contention that the Bankruptcy
Court erred in holding that B.O.C. provided Galloway with “bankruptcy assistance services”
at the time of the initial office consultation on January 26, 2011. 11 U.S.C. § 101(4A)
defines bankruptcy assistance as:
[A]ny goods or services sold or otherwise provided to an assisted person with
the express or implied purpose of providing information, advice, counsel,
document preparation, or filing, or attendance at a creditor’s meeting or
appearing in a case or proceeding on behalf of another or providing legal
representation with respect to a case or proceeding under this title.
11 U.S.C. § 101(4A). B.O.C. argues that during the initial consultation it merely provided
Galloway with information regarding available bankruptcy options, and that it rendered
assistance services only after Galloway had officially retained B.O.C. on February 4, 2010.
Another judge in this District rejected an identical argument advanced by B.O.C. in a case
with similar facts. See B.O.C. Law Group, P.C. v. Carroll (In re Humphries), No. 10-14928,
2011 U.S. Dist. LEXIS 42849, at *14 (E.D. Mich. April 19, 2011) (“B.O.C. maintains that the
initial conference amounted to no more than an explanation of the process, costs, and fees
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There is no dispute that B.O.C. is a “debt relief agency.” See 11 U.S.C. § 101(12A);
Milavetz, Gallop & Milavetz, P.A. v. United States, 130 S. Ct. 1324, 1333 (2010)
(“[A]ttorneys who provide bankruptcy assistance to assisted persons are debt relief
agencies within the meaning of the [Bankruptcy Abuse Prevention and Consumer
Protection Act.]”).
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so that Ms. Humphries could decide whether to hire the law firm. Actual services were not
furnished, says B.O.C., [until after Humphries hired B.O.C.]”). The court recognized that
the argument had some merit because not every encounter between a law firm and a
prospective client amounts to “providing legal services, and clients certainly may shop
around before making a hiring decision.” Id. Nonetheless, the Court held that B.O.C.’s
argument broke down when the Court considered that the billing entry, which is identical
to the billing entry in this case, demonstrated that B.O.C. had charged for work done during
the initial consultation, including preparation of bankruptcy schedules. Id. The Court held
that “[t]o suggest that no bankruptcy services were provided, and then seeking
compensation for those same services, is an untenable argument.” Id. The Court finds this
reasoning persuasive and applies it here. Accordingly, the Bankruptcy Court did not err in
holding that B.O.C. provided “bankruptcy assistance services” to Galloway during the initial
consultation. Moreover, because the agreement was not signed within five business days
after the initial consultation, the Bankruptcy Court was correct in holding that the agreement
did not comply with § 528(a)(1).
The Court next turns to the issue of whether the Bankruptcy Court erred in holding
that the five-day requirement in § 528(a)(1) is a material requirement under § 526(c)(1),
such that B.O.C.’s failure to comply with it rendered the written fee agreement void. B.O.C.
contends that the determination was erroneous because the five-day requirement is not
material pursuant to § 526(c)(1).
The Bankruptcy Court based its holding in this case on a prior decision by the same
bankruptcy judge in In re Humphries, No. 10-41229 (Bankr. E.D. Mich. April 14, 2011), in
which the judge held that the five-day requirement under § 528(a)(1) is material. Two
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courts have addressed the Bankruptcy Court’s decision in In re Humphries – the district
court on appeal in that case and a different bankruptcy judge in In re Kinsman, No.
1057364 (Bankr. E.D. Mich. Dec. 14, 2010). In Kinsman, the bankruptcy court rejected the
ruling in Humphries. The court found that the Humphries holding – that “because the
requirement of the five days is in the statutory provision of 528(a)(1), the requirement is
material” – was problematic because “[i]f all the requirements in 526 through 528 are
material, then there’s no purpose to the word ‘material’ in 526(c)(1).” In re Kinsman,
Appellant Designation, ex. xx at 45.
Rather, the Kinsman court considered the
congressional intent of the statute – preventing abusive practices and misconduct by
attorneys – in conjunction with the various requirements in Sections 526, 527, and 528,
and held that the most important requirements are having a contract which clearly identifies
the fees and terms of payment and the services to be rendered. Id. at 50. Thus, the
Kinsman court found that the five-day temporal requirement was not material, and,
accordingly, that non-compliance therewith did not render a written fee agreement void
pursuant to § 526.4 Id. at 50-51.
Subsequently, this Court considered the bankruptcy court’s ruling in In re Humphries
on appeal. See In re Humphries, 2011 U.S. Dist 42849. The district court rejected the
bankruptcy court’s holdings in both Humphries and Kinsman, after finding that the approach
taken in these cases was problematic because it focused on the materiality of the five-day
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The Trustee argues that the Kinsman decision was limited to its facts, and that the
court ruled as it did in that case because the fee agreement was signed only one day late.
Appellee Br. 6. The Court disagrees with this interpretation. While the bankruptcy court
noted that the fee provision was signed only one day late, the crux of the holding was that
the five-day rule was not a material requirement in light of the legislative intent of the
statute and the other requirements which were more vital for serving that purpose.
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requirement, and “ignored the precise language set out in section 526(c)(1) and the context
in which the provision appears in the scheme of regulating debt services agencies.” Id. at
*17. It explained:
‘Congress enacted the [Bankruptcy Abuse Prevention and Consumer
Protection Act (“BAPCPA”)] . . . as a comprehensive reform measure to curb
abuses and improve fairness in the federal bankruptcy system.’ Connecticut
Bar Ass’n v. United States, 620 F.3d 81, 85 (2d Cir. 2010) (citing Milavetz,
130 S. Ct. at 1329-30, and H.R. Rep. No. 109-31, reprinted in 2005
U.S.C.C.A.N. 88, 89). Sections 526, 527, and 528 are the three sections
added by BAPCPA aimed at curbing ‘abusive practices undertaken by
attorneys as well as other bankruptcy professionals.’ Milavetz, 130 S. Ct. at
1332 n.3. As noted above, these three sections set out the required and
prohibited practices for debt relief agencies, together with the mandatory and
forbidden contents of the documents — contracts and notices — that they
use. Section 526(c) prescribes the sanctions and remedies that may be
imposed if a debt relief agency runs afoul of any of these requirements.
Subsection 526(c)(1) deals with “contract[s] for bankruptcy assistance,” and
says that if such a contract does not measure up, it is void and cannot be
enforced against the debtor. Subsection 526(c)(2) deals with the conduct of
debt relief agencies (including law firms) themselves, and it sets forth a list
of remedies that may be directed against them if they ‘intentionally or
negligently fail[] to comply with any provision of’ these three sections,
‘provide[] bankruptcy assistance to an assisted person in a case or
proceeding under this title that is dismissed or converted to a case under
another chapter of this title because of such agency’s intentional or negligent
failure to file any required document,’ or ‘intentionally or negligently
disregard[] the material requirements of this title or the Federal Rules of
Bankruptcy Procedure.’ 11 U.S.C. § 526(c)(2)(A)-(C). These two sanctions
provisions are separate and distinct, but the bankruptcy court's treatment of
the five-business-days provision in section 528(a)(1) conflates the two
subsections.
Id. at *17-18. The court reasoned that the five-day requirement pertains to the conduct of
the debt relief agency, and not to the “contents of the agreement for services.” Id.
(emphasis added). Thus, the court held that the remedy for violation of the five-day rule
is not avoidance of the contract pursuant to § 526(c)(1), but rather is set forth in §
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526(c)(2).5 Id. at *19. According to the reasoning of the district court in Humphries, the
authority to avoid contracts pursuant to § 526(c)(1) “is triggered only when the ‘contract .
. . does not comply with the material requirements’ of the statutes.” Id. (quoting 11 U.S.C.
§ 526(c)(1)).
“By applying a contract-violation remedy to an agency violation, the
bankruptcy court rendered meaningless the distinction Congress made between faulty
documents and nonconforming conduct in BAPCPA’s remedial statute.” Id. at *19-20. The
Court finds the reasoning above persuasive and will follow it.
The Trustee, however, argues that the district court’s distinction in Humphries
between the contents of a contract and the conduct of the debt relief agency is unsupported
by the plain language of the statute. The Trustee asserts that a contract can be voided
based on a debt relief agency’s conduct, and cites language in § 526(a) stating that a “debt
relief agency shall not” and § 528(a) asserting that a “debt relief agency shall,” in support.
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§ 526(c)(2) states:
2) Any debt relief agency shall be liable to an assisted person in the amount
of any fees or charges in connection with providing bankruptcy assistance to
such person that such debt relief agency has received, for actual damages,
and for reasonable attorneys' fees and costs if such agency is found, after
notice and a hearing, to have-(A) intentionally or negligently failed to comply with any provision of this
section, section 527 [11 USCS § 527], or section 528 [11 USCS § 528] with
respect to a case or proceeding under this title for such assisted person;
(B) provided bankruptcy assistance to an assisted person in a case or
proceeding under this title that is dismissed or converted to a case under
another chapter of this title because of such agency's intentional or negligent
failure to file any required document including those specified in section 521
[11 USCS § 521]; or
(C) intentionally or negligently disregarded the material requirements of
this title or the Federal Rules of Bankruptcy Procedure applicable to such
agency.
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Appellee Br. at 8.
The Trustee’s argument does not convince the Court that its reading of the statute is
erroneous. The starting point for the Court’s interpretation of the statute is the language
of the statute itself. See United States v. Boucha, 236 F.3d 768, 774 (6th Cir. 2001) (“[T]he
language of the statute is the starting point for interpretation, and it should also be the
ending point if the plain meaning of the statute is clear.” (internal citation and quotation
marks omitted)). Although the Trustee correctly notes that § 526(a) and § 528(a) pertain
to actions which debt relief agencies are authorized to engage in, § 526(c)(1) relates only
to avoidance of a contract when the contract itself fails to comply with the material
requirements of Sections 526 through 528. In re Humphries, 2010 U.S. Dist. LEXIS 42849,
at *18. The five-day requirement, however, is not a material requirement of the contract
because, as this Court stated in Humphries, “[t]he requirements of the contract are
described in the provisions of section 526, 527, and 528 that prescribe the mandatory and
prohibited terms of the agreement for services. The five-business-day language does not
set out what must be in the agreement; it states when the agency must execute the
agreement . . . .” Id. § 526(c)(2), by contrast, pertains to the remedies for violation of the
statute as a result of the debt relief agency’s intentional or negligent conduct. 11 U.S.C.
§ 526(c)(2); In re Humphries, 2011 U.S. Dist. LEXIS 42849, at *17-18. Accordingly, the
Court agrees with the district court in Humphries that the Bankruptcy Court here conflated
§ 526(c)(1) and § 526(c)(2) when it voided the written fee agreement for failure to comply
with the five-day requirement.6
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Because the Court finds that the Bankruptcy Court erred on this ground, the Court
need not consider B.O.C.’s other arguments, including the argument that the Bankruptcy
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The Court, therefore, remands the case for reconsideration consistent with this
opinion. “B.O.C. is entitled to ‘reasonable compensation . . . for representing the interests
of the debtor in connection with the bankruptcy case based on a consideration of the
benefit and necessity of such services to the debtor and the other factors set forth’ in the
Bankruptcy Code.” In re Humphries, 2011 U.S. Dist. LEXIS 42849, at *21 (quoting 11
U.S.C. § 330(a)(4)(B)). In determining reasonable compensation, the Bankruptcy Court
should consider the Trustee’s other arguments, including the Trustee’s assertion that
B.O.C. is not entitled to compensation for 1) review of unsecured proof of claims filed in
Galloway’s case; 2) work completed in prosecution of Galloway’s adversary proceedings
because the work was excessive or clerical in nature; 3) completion of a stipulation and
order to excuse a third party wage order; 4) appearance at the confirmation hearing; and
5) preparation of a Motion for Entry of Default Judgment.
ORDER
WHERFORE it is hereby ORDERED that the order of the Bankruptcy Court denying
B.O.C.’s fee application is VACATED.
IT IS FURTHER ORDERED that the case is REMANDED for a determination of
reasonable compensation to which B.O.C. is entitled consistent with this opinion.
SO ORDERED.
s/Stephen J. Murphy, III
STEPHEN J. MURPHY, III
United States District Judge
Dated: May 30, 2011
Court’s interpretation of the statute is unconstitutional.
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I hereby certify that a copy of the foregoing document was served upon the parties and/or
counsel of record on May 30, 2011, by electronic and/or ordinary mail.
Carol Cohron
Case Manager
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