Summary:
In order to provide for attorney's fees and allow for filing of a Chapter 7, Mr. Pace's attorney took a voluntary lien against Mr. Pace's motorcycle and boat for pre- and post-petition services.
The court reviewed this arrangement, finding that taking a lien for pre-petition services is not expressly prohibited, but strongly discouraged by the Bankruptcy Code and subject to "heightened scrutiny of the propriety of this type of fee agreement." Under North Carolina Rule of Professional Conduct 1.8, a lien is permitted if the following safeguards are provided:
(1) the transaction and terms on which the lawyer acquires the interest are fair and reasonable to the client and are fully disclosed and transmitted in writing in a manner that can be reasonably understood by the client;
(2) the client is advised in writing of the desirability of seeking and is given a reasonable opportunity to seek the advice of independent legal counsel on the transaction; and
(3) the client gives informed consent, in a writing signed by the client, to the essential terms of the transaction and the lawyer's role in the transaction, including whether the lawyer is representing the client in the transaction.
Here, Mr. Pace was not advised in writing of the desireability of seeking independent counsel, so the lien was disallowed for pre-petition services.
As to post-petition services, following Lamie, the motorcycle and boat were assets of the bankruptcy estate and not available for payment of fees for post-petition services.
Commentary:
While the lien of debtor's counsel was disallowed in this case, this opinion should serve as a guide for how such liens can actually be permitted. A written contract that explicitly advises the client of the advisability of seeking independent legal counsel, with adequate time to rescind such contract, should suffice.
This case also points to the need for courts to not only protect debtors regarding attorney's fees, but to be open to options for paying attorneys' fees. Whether this is through allowance of liens, third party funding of attorney's fees, attorney fee only Chapter 13 plans or unbundling of pre- and post-petition services, debtors very often need both speedy relief in filing and a means of paying for competent representation.
For a copy of the opinion, please see:
Pace - Disallowance of Lien against Personal Property Securing Attorney's Fees
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