CHICAGO (LN) — U.S. District Judge Sharon Johnson Coleman affirmed bankruptcy court rulings that voided engagement letters used by Chicago attorney Xiaoming Wu, finding the split-fee structure violated Bankruptcy Code provisions requiring clear and conspicuous disclosure of services and fees.
Coleman ruled Wednesday that Wu’s contracts misled clients by promising identical services in two separate agreements while charging vastly different amounts, making it impossible for debtors to determine what they were actually paying for.
The dispute arose from three bankruptcy cases involving debtors Ollistine Jude-Weathersby, Eddie Knighten, and Amber Wright. In each case, Wu required clients to sign a prepetition engagement letter before filing for bankruptcy, followed by a postpetition letter after the case was filed.
Wu’s prepetition letters were pre-printed contracts with blank spaces. In two cases, Wu charged $0 for prepetition services. In Jude-Weathersby’s case, he charged $430.
The prepetition letters stated that Wu’s representation was "conditioned on Client entering into an agreement after the filing of the case to pay Attorney for services rendered after the filing of the case."
Despite this language, the prepetition disclosures filed with the court stated Wu would "render legal services for all aspects of the bankruptcy case" for the disclosed fee.
Wu then required each debtor to sign a postpetition letter disclosing fees ranging from $2,600 to $3,200 for services that were already listed in the prepetition letters, such as preparing schedules and representing the debtor of creditors.
The U.S. Trustee filed motions to examine fees and void the contracts, arguing the dual-letter system violated Sections 526 and 528 of the Bankruptcy Code.
Section 528 requires debt relief agencies, including bankruptcy attorneys, to execute a written contract within five days of first providing services that explains "clearly and conspicuously" the services to be provided and the fees.
Section 526 prohibits debt relief agencies from making statements that are untrue or misleading, or from misrepresenting the benefits and risks of becoming a debtor.
The bankruptcy court found Wu violated both sections in two of the three cases, and Section 526, determining that his promise to perform identical services in each agreement made it "difficult to determine what he was supposed to do and when."
The bankruptcy court also found that Wu’s prepetition letters failed to clearly disclose payment terms, noting discrepancies such as one letter stating Wu accepted $0 in compensation while simultaneously charging a $500 pre-filing legal fee and $92 in expenses.
Wu appealed, arguing he did not intend to mislead clients and merely incorporated language from Local Rule 2040-4(B) into his contracts. He noted that none of his clients complained about the fee arrangements or suffered injury.
Coleman rejected the argument that the lack of client complaints was relevant, stating the U.S. Trustee has a mandate to oversee bankruptcy administration regardless of whether a specific debtor complains.
"The confusing nature of his agreements can be evidenced by the discrepancies in his filings alone," Coleman wrote.
She noted that one agreement stated a $3,200 flat fee covered all postpetition services, despite the prepetition letter stating Wu would render all legal services for $0. Another agreement stated a $2,600 flat fee covered all postpetition services, also despite a $0 prepetition fee.
Coleman affirmed the bankruptcy court’s finding that Wu omitted critical information, making it difficult for debtors to tell if they were obligated to perform services under the prepetition letter or the postpetition contract.
Wu also argued the bankruptcy court erred by voiding the contracts without first determining the reasonable value of his services under Section 329 of the Bankruptcy Code.
Coleman agreed with the U.S. Trustee that once the contracts were found void under Section 526, the court was not required to conduct a reasonable value analysis.
"A contract that does not comply with this provision is void and may not be enforced by any federal or state court or by any other person, other than such assisted person," Coleman wrote.
The court also upheld the bankruptcy court’s credibility determination that Jude-Weathersby signed the postpetition letter on the same day as the prepetition letter, despite Wu pointing to different dates on the documents.
Coleman noted that while the bankruptcy court should have explained why the debtor’s recollection was more credible than the writing, such a determination was not necessary to the decision to void the agreement because the inconsistencies were dispositive.
In a footnote, Coleman described Wu’s practices as arising "at worst, from improper intention to take advantage of debtor clients involved in the stressful process of obtaining a bankruptcy discharge."
"The Court is certain that after this experience the Appellant will take greater care in his professional practice," she wrote, adding that Wu’s actions could lead to repercussions with the Attorney Registration and Disciplinary Commission.