Cite as: Keith M. Lundin, Lundin On Chapter 13, § 87.4, at ¶ ____, LundinOnChapter13.com (last visited __________).
It is generally recognized that claims entitled to priority under § 507 and full payment under § 1322(a)(2)1 can be separately classified for more favorable treatment than other unsecured claims.2 If the debtor is unable to pay all unsecured claim holders in full during the life of the plan, separate classification of priority claims for full payment is the only way the debtor can confirm a plan.3 The unfair-discrimination standard applies to the separate classification of priority claims, but most courts approve separate classification of priority claims because to hold otherwise would preclude confirmation of any plan that includes a priority claim when the debtor is financially unable to pay all unsecured claims in full.
Discussed elsewhere,4 most Chapter 13 plans and many reported decisions treat administrative expenses the same as priority claims notwithstanding the absence of a reference to administrative expenses in § 1322(a)(2). For example, most plans propose to pay attorneys’ fees in full (without interest)5 even when the debtor is not financially able to pay other unsecured claims in full. Attorneys’ fees have been recognized as one possible separate classification,6 but when attorneys’ fees are the only debts being paid by the debtor, the separate classification may be unfairly discriminatory.7
The separate classification of attorney fees for payment in full in Chapter 13 cases may have to be viewed through a different lens if In re Busetta-Silvia8 is widely accepted. In Busetta-Silvia, the bankruptcy court held that prepetition work by a debtor’s attorney generates a prepetition claim that is not entitled to priority. The court reasoned that prepetition attorney fees are not listed in either the priority or dischargeability sections of the Bankruptcy Code but are treated the same as any other unsecured, nonpriority, dischargeable debt.9
When prepetition payment of attorney fees by the debtor is not practical and postponing work on behalf of the debtor into the postpetition period isn’t an option, one possible solution to the dilemma posed by Busetta-Silvia is the separate classification of attorney fees for payment in full. If Busetta-Silvia is correct that unpaid attorney fees for prepetition work is an ordinary unsecured claim, then the separate classification of the prepetition portion of attorney fees would be measured against the unfair discrimination standard in § 1322(b)(1). It is not hard to imagine that many courts would find it is fair discrimination to favorably classify fees for preparation of the petition, statement, schedules and other documents required by statute to maintain the Chapter 13 case. On the other hand, the creditor chorus will chant with some conviction that it is unfair to require other creditors to subsidize the construction of their own gallows. This could be an interesting debate.
After the Bankruptcy Reform Act of 1994,10 the limits on a Chapter 13 debtor’s power to separately classify priority claims will be tested in cases involving alimony, maintenance or support. The 1994 Act amended the list of claims entitled to priority in § 507(a) to add a new seventh priority for alimony, maintenance or support.11 In Chapter 13 cases filed after October 22, 1994,12 debts for alimony, maintenance or support described in § 507(a)(7) are priority claims entitled to full payment through the plan under § 1322(a)(2).13
Prior to the 1994 Act, Chapter 13 debtors who favorably classified alimony, maintenance or support could not argue that the priority character of such claims made the resulting discrimination fair for purposes of § 1322(b)(1). In cases filed before October 22, 1994, the separate classification of alimony, maintenance and support produced many inconsistent reported decisions.14
In cases filed after October 22, 1994, Chapter 13 debtors can argue the fairness of separate classification and full payment of alimony, maintenance or support based on the new priority in § 507(a)(7). In any Chapter 13 cases filed after October 22, 1994, in which the debtor is financially unable to pay all unsecured claim holders in full, the debtor cannot confirm a plan without separately classifying support claims entitled to priority under § 507(a)(7).15
2 See In re Powell, 15 B.R. 465 (Bankr. N.D. Ga. 1981); In re Garcia, 6 B.R. 35 (Bankr. D. Kan. 1980); In re Hill, 4 B.R. 694 (Bankr. D. Kan. 1980). But see In re Davidson, 10 B.R. 374 (Bankr. W.D. Mich. 1981) (Plan unfairly discriminates against unsecureds by separate more favorable classification of fees to debtor’s attorney.). See also In re Eiland, 170 B.R. 370, 373 (Bankr. N.D. Ill. 1994) (Debtor cannot separately classify a nondischargeable student loan as a “priority” claim to be paid in full in advance of other unsecured claim holders. “Since Congress did not give priority to such loans under § 507, a debtor may not do so in order to avoid [§ 523(a)(8)] and the standards for separate classification under § 1322(b)(1).”).
3 Unless priority claim holders consent to treatment other than full payment. See 11 U.S.C. § 1322(a)(2). See § 101.2 [ Acceptance of Plan ] § 74.3 Acceptance of Plan before BAPCPA.
5 See §§ 100.2 [ Interest Not Required, with Exceptions ] § 73.5 Interest Not Required, with Exceptions and 299.1 [ Postpetition Interest on Priority Claims ] § 136.16 Postpetition Interest on Priority Claims before BAPCPA.
6 In re Garcia, 6 B.R. 35 (Bankr. D. Kan. 1980); In re Hill, 4 B.R. 694 (Bankr. D. Kan. 1980).
7 See In re Davidson, 10 B.R. 374 (Bankr. W.D. Mich. 1981). See also In re Townsend, 186 B.R. 248, 249 (Bankr. E.D. Mo. 1994) (Plan cannot pay debtors’ attorneys’ fees ahead of and “to exclusion of” mortgage arrearage. “The opportunity to cure a default is a shield by which a debtor can heal a delinquent debt. It is not a sword which the debtor can use to further delay payment while the attorney collects a fee. . . . Payment of attorney fees cannot usurp the obligation to provide equal monthly payments beginning with the first disbursement under the plan.”).
8 300 B.R. 543 (Bankr. D.N.M. 2003).
9 See §§ 25.4 [ Getting Paid: Attorneys’ Fees for Representing Debtors ] § 27.4 Getting Paid: Attorneys’ Fees for Representing Debtors, 99.1 [ What Claims Are Priority Claims? ] § 73.2 What Claims Are Priority Claims? and 294.1 [ Debtors’ Attorneys’ Fees ] § 136.6 Debtors’ Attorneys’ Fees before BAPCPA for further discussion of this issue.
10 Pub. L. No. 103-394, § 304, 108 Stat. 4106 (1994).
11 See § 301.1 [ Alimony, Maintenance and Support in Cases Filed after October 22, 1994 ] § 136.20 Alimony, Maintenance and Support in Cases Filed after October 22, 1994.
12 See Pub. L. No. 103-394, § 702, 108 Stat. 4106 (1994).
13 See §§ 98.1 [ Plan Must Provide Full Payment ] § 73.1 Plan Must Provide Full Payment, 99.1 [ What Claims Are Priority Claims? ] § 73.2 What Claims Are Priority Claims?, 291.1 [ Treatment of Priority Claims ] § 136.1 Treatment of Priority Claims and 301.1 [ Alimony, Maintenance and Support in Cases Filed after October 22, 1994 ] § 136.20 Alimony, Maintenance and Support in Cases Filed after October 22, 1994.
14 See § 152.2 [ Alimony, Maintenance and Support ] § 88.4 Alimony, Maintenance and Support.
15 Consent to treatment other than full payment is rare in alimony and support litigation.