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News Room

SERVICE TO THE ESTATE AND ETHICS
PROPOSAL #8: ATTORNEY REFERRAL SERVICES

Background

Bankruptcy Code section 504 prohibits fee-splitting arrangements except under two limited circumstances: (1) where a person is a partner or otherwise associated with an individual compensated from an estate; or (2) where an estate-compensated attorney for a creditor who filed an involuntary case under section 303 is assisted by another attorney. These provisions preclude fee-splitting in the case of a lawyer referral service that refers estate-compensated work to an attorney. In order to address this problem, the American Bar Association ("ABA") adopted the following resolution related to the payment of attorney referral fees at its meeting on February 3, 1997:

RESOLVED, That the American Bar Association urges the amendment of the United States Bankruptcy Code, to allow an attorney to remit a percentage fee awarded or received under the Bankruptcy Code to a bona fide public service lawyer referral program, operating in accordance with state or territorial laws regulating lawyer referral services or the rules of professional responsibility governing the acceptance of referrals.

Proposal

Section 504 should be amended to permit an attorney compensated out of a bankruptcy estate to remit a percentage fee to a bona fide public service referral program. Such attorney referral program must be operating in accordance with state laws and ethical rules and guidelines governing referrals. The Proposal does not affect the requirement that all compensation arrangements be disclosed in the application for retention under Fed. R. Bankr. P. 2014 and in the application for compensation under Fed. R. Bankr. P. 2016(a).

Reasons for the Change

The types of attorney referral services considered in the Proposal are those nonprofit services set up principally by state and local bar associations. This type of arrangement is not a classic fee-splitting scenario where two attorneys have an arrangement to share the fee. An attorney referral service under the Proposal is compensated from amounts paid to the attorney up to a limit in exchange for referring the representation to the attorney. As long as the arrangement with the referral service is disclosed (i) in the application for retention under Fed. R. Bankr. P. 2014, and (ii) in the application for compensation under Fed. R. Bankr. P. 2016(a), there should be no prohibition against the use of these types of bar association referral services in bankruptcy. The Proposal will also permit judges and clerks to refer pro se debtors seeking counsel to these types of services. Cottage industry opportunities for abusive referral services are limited because only not-for-profit organizations are eligible under the Proposal.

Competing Considerations

There do not seem to be any competing considerations.

 

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