Cite as: Keith M. Lundin, Lundin On Chapter 13, § 107.4, at ¶ ____, LundinOnChapter13.com (last visited __________).
In a deep composition plan, the only creditors that receive meaningful payment are secured claim holders and priority claimants that must be paid in full under § 1322(b)(1).1 Attorneys’ fees typically are treated as priority claims to be paid in full through the plan.2 It has appeared to move one court that the only purpose for filing Chapter 13 rather than Chapter 7 was the opportunity to defer the payment of priority attorneys’ fees over a period of months. One reported decision found a lack of good faith when the plan paid attorneys’ fees and little else, the court concluding that the debtor had no intention to pay “real” creditors.3 Other courts echo the sentiment that the amount of attorneys’ fees is a factor in assessing the debtor’s good faith.4
As the percentage of payment of unsecured claims approaches zero, the bankruptcy courts look harder at every aspect of the case. A stern look at attorneys’ fees is part of the scrutiny. If there are few secured claims, no payments to unsecured claims, and a large attorney’s fee built into the plan, counsel becomes an easy target.
But this is another example of courts reading unnecessary content into the good-faith test for confirmation in § 1325(a)(3). The reasonableness and necessity of attorney fees in Chapter 13 cases are fully addressed by other sections of the Code. 11 U.S.C. §§ 329 and 330 control a Chapter 13 debtor’s contract with an attorney and permit the court to regulate the payment of fees. Upon objection, bankruptcy courts routinely review for reasonableness and necessity the fees requested by debtors’ attorneys in Chapter 13 cases.5 If the attorneys’ fees pass muster under the applicable provisions of the Code, why would the payment of those fees be revisited as an element of good faith at confirmation under § 1325(a)(3)?
Reading conditions on the payment of attorneys’ fees into the good-faith test for confirmation in § 1325(a)(3) penalizes a Chapter 13 debtor for doing what the Code otherwise requires: payment in full through the plan (in deferred payments) of reasonable and necessary attorneys’ fees allowed as administrative expenses under §§ 503, 507 and 1322(a)(2). That the plan pays administrative claims in full but less than full payment to general unsecured creditors is an outcome of the priorities established by Congress, not evidence of a lack of good faith by the debtor.
3 See In re San Miguel, 40 B.R. 481 (Bankr. D. Colo. 1984).
4 See, e.g., In re Doersam, 849 F.2d 237 (6th Cir. 1988); Kitchens v. Georgia R.R. Bank & Trust Co. (In re Kitchens), 702 F.2d 885 (11th Cir. 1983); In re Petersen, 228 B.R. 19 (Bankr. M.D. Fla. 1998) (One factor indicative of bad faith is that attorneys’ fees paid by debtor in litigation against only creditor in state court far exceed amount the debtor proposes to pay under the plan.); In re Presley, 201 B.R. 570, 573 (Bankr. N.D. Fla. 1996) (One factor that supports the debtor’s good faith is that “attorney’s fees, in the amount of $1,700 do not appear to be excessive.”); In re Sharon, 200 B.R. 181 (Bankr. S.D. Ohio 1996) (That “attorney’s fees were reasonable” is one factor in support of a finding of good faith in a 60-month, 24% plan.), aff’d, 234 B.R. 676 (B.A.P. 6th Cir. 1999); In re Strauss, 184 B.R. 349 (Bankr. D. Neb. 1995) (That the payment of attorneys’ fees through the plan will “benefit only the debtors personally” supports conclusion that a 0% Chapter 13 plan filed within six years of a discharge in a prior Chapter 7 case is a bad-faith “disguised” Chapter 7 liquidation.).
5 See § 294.1 [ Debtors’ Attorneys’ Fees ] § 136.6 Debtors’ Attorneys’ Fees before BAPCPA.