CHICAGO (LN) — U.S. District Judge Sharon Johnson Coleman affirmed a bankruptcy court’s ruling that attorney Xiaoming Wu’s split-fee engagement letters violated Bankruptcy Code §§ 526 and 528, voiding the contracts and discharging his clients’ obligations to pay.
Wu, an Illinois-licensed attorney who regularly represents debtors in the Northern District of Illinois, required clients to execute a prepetition engagement letter before filing for bankruptcy and a second postpetition letter after the case was filed.
The bankruptcy court found Wu violated the code by failing to clearly disclose the services and fees in his contracts, creating confusion about whether he was obligated to perform services prepetition or postpetition.
In the case of debtor Ollistine Jude-Weathersby, Wu charged $430 for prepetition services but later sought $3,200 for postpetition services for the same work, including preparing schedules and representing the debtor of creditors.
In the cases of debtors Eddie Knighten and Amber Wright, Wu charged $0 for prepetition services but later sought $1,500 and $2,600 respectively for postpetition services covering the same scope of work.
The U.S. Trustee moved to examine the fees and void the contracts, arguing Wu’s practice constituted a pattern of violating §§ 526 and 528 by misrepresenting the services provided and the terms of payment.
Wu argued he did not intend to mislead clients and merely incorporated language from Local Rule 2040-4(B) into his contracts. He noted none of the clients complained about the quality of his services or the fee arrangements.
Coleman rejected Wu’s defense, finding no clear error in the bankruptcy court’s determination that the contracts were confusing. She pointed to discrepancies in his filings, such as stating a client was charged $500 for legal fees while also accepting $0 compensation document.
"The confusing nature of his agreements can be evidenced by the discrepancies in his filings alone," Coleman wrote. "This Court agrees that these factual finding do not constitute clear error and affirms the rulings of the bankruptcy court."
The bankruptcy court had determined it was unnecessary to determine the reasonable value of Wu’s services under § 329 because the contracts were void under § 526. Wu appealed, arguing the court should have valued his services before declaring them worthless.
Coleman agreed with the U.S. Trustee that once a contract is found void under § 526, it may not be enforced by any federal or state court. Therefore, the court was not required to conduct a reasonable value analysis.
The court also affirmed the bankruptcy court’s finding that Jude-Weathersby’s postpetition agreement was effectively a prepetition contract, crediting her testimony that she agreed to pay the full amount on the day she signed the prepetition documents, though the district court noted this specific finding was not necessary to the voiding of the contract.
In a footnote, Coleman noted Wu’s actions, "at best, arise from lax engagement letter contracting practices, and at worst, arise from improper intention to take advantage of debtor clients."
"The Court is certain that after this experience the Appellant will take greater care in his professional practice," she wrote, adding that his practices could lead to repercussions with the Attorney Registration and Disciplinary Commission.