Cite as: Keith M. Lundin, Lundin On Chapter 13, § 73.9, at ¶ ____, LundinOnChapter13.com (last visited __________).
Compensation to a Chapter 13 debtor’s attorney awarded under § 330 is an administrative expense under § 503(b)(2) that has second priority under § 507(a)(2) after BAPCPA.1 The rule in § 1322(a)(2) that attorney compensation in a Chapter 13 case is a priority debt that must be paid in full through the confirmed plan was not changed. But BAPCPA made other changes to the Bankruptcy Code that will complicate the payment of attorney compensation in Chapter 13 cases notwithstanding its priority status and entitlement to full payment.
First, BAPCPA acknowledges the importance of the contribution that debtors’ attorneys make in Chapter 13 cases. BAPCPA amended § 330(a)(3)(E) to include whether an attorney is “board certified or otherwise has demonstrated skill and experience in the bankruptcy field” as a consideration in fixing compensation in a Chapter 13 case.2 Chapter 13 attorneys who are board certified should recover higher hourly rates and fees in Chapter 13 cases. Those fees are then entitled to priority and full payment through the plan.
Because BAPCPA authorized in forma pauperis petitions in Chapter 7 cases,3 the rules drafters amended Interim Bankruptcy Rule 1006(b)(3) to reflect that a Chapter 13 debtor’s attorney can be paid some or all of an agreed-upon fee before filing the case even when the debtor applies to pay the filing fee in installments.4 This new Interim Rule won’t help Chapter 13 debtors’ attorneys get paid through confirmed Chapter 13 plans, but it validates the practice in some jurisdictions that debtors’ attorneys take some or all of the agreed-upon fee in advance of filing. Prepetition payment of fees is now a choice even when the debtor does not have sufficient resources to also pay the filing fee in full with the petition.
But most of what BAPCPA did with respect to attorney fees is not good news for debtors’ attorneys. There are draconian new provisions regulating attorneys’ fees and Debt Relief Agencies (DRAs) in new §§ 526 and 528 of the Code. Although of questionable constitutionality, debtors’ attorneys who become DRAs are forbidden by § 526(a)(4) to advise an assisted person to incur more debt to pay an attorney for bankruptcy services.5 Chapter 13 attorneys are required by new § 528(a)(1) to execute a written contract for future payment of fees but then are forbidden by § 526(a)(4) to advise an assisted person to incur debt to pay an attorney through the Chapter 13 plan.
In the real world, bankruptcy attorneys have to be able to contract with debtors for payment of attorney fees through confirmed Chapter 13 plans without violating the Code. A step in the direction of sanity will be to interpret § 526(a)(4) to permit an attorney to negotiate a fee for Chapter 13 services payable through the plan that does not violate the prohibition on “advice” to incur debt in contemplation of bankruptcy.6
There are two new confirmation requirements that may interfere with the payment of attorney fees through Chapter 13 plans. Section 1325(a)(5) was amended by BAPCPA to require that periodic payments to allowed secured claim holders through a Chapter 13 plan must be in “equal monthly amounts.”7 Also, payments on account of claims secured by personal property must be sufficient “to provide . . . adequate protection during the period of the plan.”8 These two new confirmation requirements will change the mathematics of Chapter 13 plans with side effects for the payment of attorney fees.
It was common in many districts under pre-BAPCPA law for Chapter 13 attorneys to receive some or all of their fees with the first distribution under the confirmed plan.9 In some districts, attorney compensation was spread out over a handful of months after confirmation but some “front-loading” of priority attorney fees was routine. Sometimes this practice had the unfortunate effect of disabling the trustee in the early months after confirmation to make full monthly payments to other claim holders provided for by the plan.
For example, if the debtor scheduled a car payment and a mortgage payment through the plan, payments to the trustee from the very beginning must exceed the sum of the car and home mortgage payments by an amount sufficient to accumulate the attorney fee. Otherwise, the payment of the attorney fee during the early month(s) after confirmation cuts into the car and house money. There are reported opinions concluding that priority administrative expenses can or must be paid in advance of payments to ordinary secured or unsecured claim holders.10 There are other pre-BAPCPA decisions holding it is inappropriate for priority payment of an attorney to interfere with payments to secured claim holders required by the plan.11
The adequate protection and equal monthly payment provisions added by BAPCPA to § 1325(a)(5) give lienholders new ammunition to argue that priority attorney fees should not interfere with payments to lienholders during the early months after confirmation. Chapter 13 debtors’ attorneys who receive some or all of their fees through the plan must construct the plan so that distributions to the attorney do not threaten the availability of funds to make required equal installment payments to lienholders that are sufficient to provide adequate protection after confirmation. The collision of these stakeholders—the attorney armed with a priority claim and the lienholder entitled to adequate protection and equal monthly payments—will require more careful calculation of the funding of Chapter 13 plans after BAPCPA. Attorneys in some districts may have to adjust their practices to take smaller fee payments over a longer time in Chapter 13 cases.
Early reported decisions reveal efforts at accommodation of the equal payment and adequate protection rights of secured lenders under § 1325(a)(5)(B)(iii) and the payment of priority attorney fees during the early months after confirmation. Noting that § 1326(b)(1) permits the payment of priority administrative expenses “before or at the time of” payments to other creditors under the plan, some courts have concluded that a confirmed Chapter 13 plan can pay § 507(a)(2) attorney fees each month after confirmation and before equal monthly payments begin to a secured lender so long as adequate protection required by § 1325(a)(5)(B)(iii)(I) is paid to the lender.12 As a practical matter, this means calculating the plan to pay a car lender or other personal property lienholder an amount sufficient to provide adequate protection during each month after confirmation but in a lesser amount than will later be the required equal monthly payment for § 1325(a)(5)(B)(iii)(II) purposes. During those early months after confirmation, the difference is paid to the attorney toward fees and costs entitled to priority under § 507(a)(2). When attorney fees and costs are paid in full, then equal monthly payments begin in the larger amount necessary to provide not only adequate protection but whatever full payment is required by § 1325(a)(5). To date, most courts have held that a step-up of payments can be constructed that does not violate either the equal monthly installment requirement or the adequate protection requirement in § 1325(a)(5)(B)(iii).13
A less obvious problem with payment of attorney fees has been provoked by the new elevated priority for domestic support obligations (DSOs). BAPCPA made DSOs first priority by amendment to § 507(a)(1).14 BAPCPA did not amend § 1322(a)(2): all claims entitled to priority under § 507 must be provided full payment through the Chapter 13 plan.15 It occurred to some DSO claim holders to argue that the new first priority in § 507(a)(1) translates that DSO claims must be paid in full in a Chapter 13 case before attorney fees. Every court that has considered this argument has rejected the proposition because there are not priorities among priority claims in a Chapter 13 case and § 1326(b)(1) permits the payment of administrative expenses, including attorney fees, concurrently with payment of a DSO.16
The new requirements in § 1326(a)(1) that debtors make preconfirmation payments to lessors of personal property and to allowed purchase-money-secured claim holders will complicate the preconfirmation period—especially if debtors are permitted to make these preconfirmation payments directly to creditors.17 These added demands during the shortened period between the petition and confirmation could further complicate the payment of attorney fees through the plan. The best strategy to stabilize the debtor’s finances and produce a plan that satisfies the new rights of lienholders and pays priority attorney fees in full is to channel all payments through the Chapter 13 trustee before and after confirmation.18 Debtors should immediately commence payments to the trustee in the full amount required by the plan. Any arrangement that includes some payments directly to lessors or creditors and partial payments to the Chapter 13 trustee is an invitation to insufficient cash on hand at confirmation to allow the trustee to pay attorney fees and respect the new rights of secured creditors after BAPCPA.
2 11 U.S.C. § 330(a)(3)(E).
3 See 28 U.S.C. § 1930(f), discussed in § 385.1 [ Filing Fees, Installments and Waiver ] § 37.6 Filing Fees, Installments and Waiver after BAPCPA.
4 See Interim Bankr. R. 1006(b)(3) (provides that all of the installments of the filing fee must be paid in full “before the debtor or chapter 13 trustee may make further payments” to an attorney for services in connection with the case).
5 11 U.S.C. § 526(a)(4), discussed in § 366.1 [ WARNING! You Are a Debt Relief Agency ] § 4.1 WARNING! You Are a Debt Relief Agency.
6 This interpretation of 11 U.S.C. § 526(a)(4) is developed further in §§ 366.1 [ WARNING! You Are a Debt Relief Agency ] § 4.1 WARNING! You Are a Debt Relief Agency and 515.1 [ Debtors’ Attorneys’ Fees ] § 136.7 Debtors’ Attorneys’ Fees after BAPCPA.
7 See 11 U.S.C. § 1325(a)(5)(B)(iii)(I), discussed in § 448.1 [ Equal Monthly Installments ] § 74.14 Equal Monthly Installments after BAPCPA.
8 11 U.S.C. § 1325(a)(5)(B)(iii)(II), discussed in § 449.1 [ “Adequate Protection” after Confirmation ] § 74.15 “Adequate Protection” after Confirmation after BAPCPA.
10 These cases are collected in § 204.2 [ Order of Payments to Creditors ] § 113.7 Order of Payments to Creditors before BAPCPA.
11 These cases are collected in § 204.2 [ Order of Payments to Creditors ] § 113.7 Order of Payments to Creditors before BAPCPA.
12 See, e.g., In re Hill, No. 06-80502, 2007 WL 499622 (Bankr. M.D.N.C. Feb. 12, 2007) (Confirmed plan can pay § 507(a)(2) attorney’s fees and costs each month, before equal monthly payments begin to car lender so long as adequate protection required by § 1325(a)(5)(B)(iii)(II) is paid to car lender.); In re DeSardi, 340 B.R. 790 (Bankr. S.D. Tex. 2006) (Adequate protection payments to car lenders must be made before payment of other administrative expenses including attorney fees but only to the extent necessary to provide adequate protection. When the regular installment payment to a car lender is greater than the amount necessary to provide adequate protection, the difference cannot be paid to the car lender until attorney fees have been paid in full.).
13 See discussion of equal monthly installment requirement in § 448.1 [ Equal Monthly Installments ] § 74.14 Equal Monthly Installments after BAPCPA; see discussion of adequate protection requirement in § 449.1 [ “Adequate Protection” after Confirmation ] § 74.15 “Adequate Protection” after Confirmation after BAPCPA.
14 See §§ 440.1 [ New and Changed Priority Claims ] § 73.3 Priority Claims Added or Changed by BAPCPA, 441.1 [ New and Changed Treatment of Priority Claims ] § 73.6 Treatment of Priority Claims Changed by BAPCPA and 519.1 [ Domestic Support Obligations ] § 136.21 Domestic Support Obligations after BAPCPA.
15 11 U.S.C. § 1322(a)(2), discussed in § 441.1 [ New and Changed Treatment of Priority Claims ] § 73.6 Treatment of Priority Claims Changed by BAPCPA. See also § 98.1 [ Plan Must Provide Full Payment ] § 73.1 Plan Must Provide Full Payment.
16 See, e.g., In re Reid, No. 06-50147, 2006 WL 2077572, at *3 (Bankr. M.D.N.C. July 19, 2006) (Although DSO has first priority after BAPCPA, that priority gives way to payment of administrative expenses including attorney’s fees under § 507(a)(1)(C) and § 1326(b)(1). “[T]he Plan does not violate § 507(a)(1) by providing for payment of attorney’s fees before the Debtor’s domestic support obligations are paid in full.”); In re Vinnie, 345 B.R. 386, 389 (Bankr. M.D. Ala. 2006) (Citing In re Sanders, 341 B.R. 47 (Bankr. N.D. Ala. 2006), plan can pay first priority DSO in full concurrently with payment of attorney fees and other creditors. “[Section] 1326(b)(1) requires that the debtor’s attorney be paid contemporaneously with other creditors. Indeed, one may reasonably argue that § 1326(b)(1) would allow the attorney to be paid ahead of [the Department of Human Resources], notwithstanding the fact that it would have a higher priority in distribution in a case under Chapter 7.”); In re Sanders, 341 B.R. 47, 50–52 (Bankr. N.D. Ala.) (Attorney fees are second priority after BAPCPA, but in a Chapter 13 case attorney’s fees can be paid in full before a first priority DSO is paid in full. “To accomplish confirmation over the objection of a priority creditor, § 1322(a)(2) continues to require the Chapter 13 plan to provide for full payment, in deferred cash payments, of priority claims under § 507, but nothing in § 1322 requires higher priority claims to be paid in full before lower priority claims. . . . [Section] 502(a)(2) administrative expenses include attorneys’ fees to debtors’ counsel. These fees must be paid either before or contemporaneously with other claimholders under § 1326(b)(1) as amended. . . . [D]ebtors’ Chapter 13 plan does not violate § 507(a), as amended, by providing first for the payment of administrative expenses, including attorney fees, as required by § 1326(b)(1). . . . [T]he debtors’ plan does not violate § 507(a) by providing for the payment of secured claims concurrently with [Department of Human Resources’] first priority claim.”), aff’d, 347 B.R. 776 (N.D. Ala. 2006).
17 See 11 U.S.C. § 1326(a)(1), discussed in § 401.1 [ Preconfirmation Payments ] § 44.6 Preconfirmation Payments after BAPCPA.
18 See § 401.1 [ Preconfirmation Payments ] § 44.6 Preconfirmation Payments after BAPCPA.