The Limits of Unbundling Legal Services

By: Heather Navo
St. John’s Law Student
American Bankruptcy Institute Law Review Staff

 

Although the Ninth Circuit barely addresses the unbundling of consumer bankruptcy services in Hale v. U.S. Trustee,[1] one of the first appellate cases on the point,[2] the court appears to require that an attorney provide, at a minimum, those services “critical and necessary” to the bankruptcy case.[3]   Tom Hale, like any other bankruptcy attorney, charged debtors to analyze their financial situation and prepare their petitions.[4]  However, unlike most other attorneys, Hale charged debtors for doing just that and nothing more; Hale referred to this practice as the “unbundling of legal services to pro se debtors.”[5]  The bankruptcy court deemed Hale’s fee disclosure inadequate, and ordered sua sponte that Hale submit an itemization to determine whether the amount was reasonable under section 329.[6]  However, after numerous opportunities, Hale never fully complied with the court’s order, but instead filed a Motion to Recuse, Vacate and Jury Trial Demand on the issue of his fee.[7]  The court scheduled a hearing, but Hale did not attend; the court set response dates, but Hale never filed a reply brief.[8]  Finally, the bankruptcy court published a decision denying both Hale’s motion for recusal as well as Hale’s request for a jury trial, finding that an attorney has no Seventh Amendment right to a jury trial regarding the reasonableness of his fees.[9]  Moreover, the court ordered Hale, a repeat “unbundler”,[10] to disgorge his fees and further penalized him with both monetary and non-monetary sanctions.[11]  On appeal, the Ninth Circuit affirmed both the jury trial determination and the imposition of sanctions.[12]  Although the appellate court’s discussion of the unbundled service is brief and intertwined with its review of the sanction award, the court appears to adopt the view that an attorney cannot limit consumer debtors to merely pre-petition advice and preparation of the petition and related papers.[13]  The attorney must sign the petition or be subject to sanctions under the bankruptcy court’s inherent power to sanction vexatious conduct, may not exclude critical and necessary services, adequately advise the client of any limitations on services and obtain the client’s informed consent to those limitations.[14]  

 

While several courts have considered limited representation matters, they disagree on the extent to which limitation is permitted.[15]  Despite these differences, courts are in agreement regarding certain aspects of limited representation.  For example, courts agree that an attorney who limits his representation must adhere to Rule 9011 of the Federal Rules of Bankruptcy Procedure and sign the petition.[16]  Courts also agree that an attorney must obtain the debtor’s informed consent to any limitation of the representation.[17]  Courts uniformly require disgorgement of fees when an attorney limits his representation beyond the permissible bounds.[18]  Additionally, many courts require that debtor’s counsel “must be prepared to assist that debtor through the normal, ordinary and fundamental aspects of the process.”[19]  However, different courts interpret “normal, ordinary and fundamental” differently; some courts find that attending the section 341 meeting is included within the fundamental aspects of the process,[20] while others do not.[21]  And finally, even though the court affirmed the sanction against Hale,[22] it is unclear whether the non-monetary aspects of the sanction reflect the limits of unbundling or were specific to Hale’s conduct.[23]

 

While allowing attorneys to limit representation may seem unfair to debtors,[24] the counter-argument is that a debtor is better off getting some expert legal advice rather than none.[25]  If attorneys are allowed to charge a lesser fee for providing fewer services, this may provide access to counsel to debtors who could not otherwise afford legal advice.[26]  Nonetheless, many courts do not permit attorneys to limit representation in consumer bankruptcy cases; these courts follow the notion that once attorneys initiate a case, they cannot simply abandon a debtor, even if the debtor’s funds are depleted.[27]  Although the Hale court determined that Hale improperly limited the scope of his representation,[28] it is too early to determine whether this should be read as an outright rejection of limited representation because of Hale’s egregious pattern of behavior.[29]

 

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