§ 162.5 — On Administrative Expenses
Revised: June 17, 2004
Administrative expenses are not particularly well managed by the Bankruptcy Code in Chapter 13 cases.1 The discharge of administrative expenses is one more example of this problem.
It is not obvious that administrative expenses are discharged in a Chapter 13 case either at the completion of payments under § 1328(a)2 or at hardship discharge under § 1328(b).3 The discharge in § 1328 extends to “debts” provided for by the plan or disallowed under § 502. Administrative expenses are not prepetition debts or claims of the sort defined in 11 U.S.C. §§ 101(5) and (12).4 Administrative expenses typically are not treated as postpetition debts in a Chapter 13 case for purposes of § 1305, even though administrative expenses and postpetition debts may overlap in a Chapter 13 case.5 Administrative expenses are not allowed or disallowed under § 502; instead, administrative expenses are requested, allowed or disallowed under § 503 of the Code.6
Debtors’ attorneys’ fees in a Chapter 13 case are a good illustration of the lack of coverage by the Code of the discharge of administrative expenses. Debtors’ attorneys’ fees in a Chapter 13 case are awarded under § 330 and are defined as administrative expenses by § 503(b)(2).7 It is generally held that attorneys’ fees for services during a Chapter 13 case are not postpetition claims under § 1305.8 Many plans treat attorneys’ fees as priority claims entitled to full payment through the plan notwithstanding the absence of a reference to administrative expenses in § 1322(a)(2).9
If attorneys’ fees are priority claims rather than administrative expenses, then an unpaid fee is dischargeable on the same terms as any other priority claim. But if administrative expenses are not priority claims, are attorneys’ fees discharged at the completion of payments under the plan if no request for payment is made by the debtor’s attorney or fees remain unpaid through the plan? There is no specific provision of the Code that discharges whatever portion of an allowed expense for attorneys’ fees remains unpaid at the end of a Chapter 13 case.
In one of the few reported decisions addressing the discharge of administrative expenses in a Chapter 13 case, the Bankruptcy Appellate Panel for the Tenth Circuit concluded that disallowed attorneys’ fees are neither discharged nor collectible from the debtor. In Jensen v. Gantz (In re Gantz),10 the debtor’s counsel filed an application for $7,844.90 for fees during a prior Chapter 11 case and, after conversion, in the debtor’s Chapter 13 case. The bankruptcy court allowed $6,440. The confirmed plan provided for payment in full of the allowed fees. After completion of payments in the Chapter 13 case and entry of discharge, debtor’s counsel sought to collect the disallowed fees directly from the debtor. The Tenth Circuit BAP held that the disallowed attorney fees were not prepetition debts, were not discharged at completion of payments under the Chapter 13 plan, but also were not collectible from the debtor:
[A] debtor is discharged in Chapter 13 of any prepetition debt provided for in the plan or disallowed under 11 U.S.C. § 502. . . . Attorney’s fees are allowed (or denied) under 11 U.S.C. § 330, and to the extent that they are rendered and allowed in connection with the bankruptcy case, are administrative expenses. . . . Simply put, the Code does not discharge fees awarded under 11 U.S.C. § 330. Rather, fees are disallowed, allowed as an administrative expense, or allowed but must be paid by the debtor directly and not from the estate. Here, the fees [counsel] now seeks to collect from the debtor were disallowed—thus there was nothing to discharge. . . . [Counsel] was never entitled to any additional fees because, under § 330, no additional fee was allowed. . . . [N]either the debtor nor the estate was ever liable for the difference.11
There is contrary authority. In In re Hanson,12 the bankruptcy court held that postconfirmation attorneys’ fees for which no application was filed or allowed prior to discharge in a Chapter 13 case are administrative expenses that were discharged by § 1328. In Hanson, the debtor’s attorneys’ fees agreement provided an estimated fee of $1,400 and provided for billing and payment for legal work that exceeded the estimate. The debtor’s attorney applied for and was allowed fees and supplemental compensation totaling $1,677.25. After completion of payment and discharge, counsel billed the debtor for $238 in additional fees that were not applied for during the Chapter 13 case. The bankruptcy court concluded that the additional unbilled fees were discharged and could not be collected directly from the debtor:
A Chapter 13 discharge discharges the debtor “from all unsecured debts provided for by the plan . . .” if the debtor completes the plan, 11 U.S.C. § 1328(a), or “from all unsecured debts provided for by the plan . . .” if the debtor receives a hardship discharge. 11 U.S.C. § 1328(c). These discharge provisions contrast with a Chapter 7 discharge, which covers only prepetition debts, 11 U.S.C. § 727(b), and a Chapter 11 discharge, which covers debts that arose before confirmation. 11 U.S.C. § 1141(d). Thus, in Chapter 13, if a confirmed plan provides for the postconfirmation services of the debtor’s counsel, the Chapter 13 discharge bars collection of the debt for those services.13
One reported decision indicates that unpaid administrative expenses survive discharge in a Chapter 13 case and can become the debtor’s personal liability. In Cornelison v. Wallace (In re Cornelison),14 the district court affirmed the bankruptcy court’s conclusion that postconfirmation attorneys’ fees were administrative expenses entitled to full payment under § 1322(a)(2) in a Chapter 13 case. Because payment of the postconfirmation fees would extend the confirmed plan beyond the maximum five-year limitation in § 1322(d)(2),15 the court refused to permit modification to pay additional fees. However, the district court allowed a judgment against the debtor for the postconfirmation attorneys’ fees and affirmed the bankruptcy court’s holding that “the fee was a postpetition obligation that would not be affected by the discharge to be granted the debtors.”16 The postpetition fees in Cornelison thus were administrative expenses and were priority claims, but were not discharged and became a judgment against the debtor personally.
The logic of Hanson would render all administrative expenses provided for by the plan dischargeable at the completion of payments. Gantz finds no provision for discharge of administrative expenses, at least to the extent allowed under § 503 during the Chapter 13 case. Cornelison treats administrative expenses as (dischargeable) priority claims but finds an exception to discharge for allowed expenses that are not paid through the confirmed plan.
This is not a pretty picture. At conversion from Chapter 11 to Chapter 7, §§ 348(b) and 727(b) render administrative expenses incurred during the Chapter 13 case dischargeable in the Chapter 7 case.17 The Code should be clarified to discharge Chapter 13 administrative expenses provided for by the plan or disallowed under § 503.
1 See §§ 99.1 [ What Claims Are Priority Claims? ] § 73.2 What Claims Are Priority Claims?, 100.4 [ Special Provisions for Attorneys’ Fees ] § 73.8 Special Provisions for Attorneys’ Fees, 204.1 [ Providing for Postpetition Claims ] § 113.6 Providing for Postpetition Claims, 238.2 [ Effects of Confirmation on Postpetition Claims ] § 122.4 Effects of Confirmation on Postpetition Claims, 275.2 [ In General: Filing is Required for Allowance ] § 132.2 In General: Filing is Required for Allowance, 281.1 [ Postpetition Claims ] § 132.9 Postpetition Claims, 291.1 [ Treatment of Priority Claims ] § 136.1 Treatment of Priority Claims–298.1 [ Miscellaneous Administrative Expenses and Other Priority Claims ] § 136.14 Miscellaneous Administrative Expenses and Priority Claims before BAPCPA, 302.1 [ Postpetition Claims ] § 137.1 Postpetition Claims before BAPCPA and 314.1 [ On Postpetition Claims ] § 142.5 On Postpetition Claims.
2 See § 344.1 [ Broadest Discharge Available ] § 157.1 Broadest Discharge Available.
3 See § 352.1 [ In General ] § 160.1 In General.
4 See Sidney P. Levinson, Does an Administrative Expense Constitute a “Claim under the Bankruptcy Code?,” 25 Cal. Bankr. J. 389 (2000).
5 See § 302.1 [ Postpetition Claims ] § 137.1 Postpetition Claims before BAPCPA.
6 Unless the administrative expense is treated as a postpetition claim under § 1305 and a proof of claim is filed by the claim holder, in which case the expense would be allowed or disallowed as if it were a prepetition claim under § 502. See 11 U.S.C. § 1305(b), discussed in § 302.1 [ Postpetition Claims ] § 137.1 Postpetition Claims before BAPCPA.
7 See § 294.1 [ Debtors’ Attorneys’ Fees ] § 136.6 Debtors’ Attorneys’ Fees before BAPCPA.
8 See §§ 294.1 [ Debtors’ Attorneys’ Fees ] § 136.6 Debtors’ Attorneys’ Fees before BAPCPA and 302.1 [ Postpetition Claims ] § 137.1 Postpetition Claims before BAPCPA. See, e.g., In re Hanson, 223 B.R. 775 (Bankr. D. Or. 1998).
9 See §§ 99.1 [ What Claims Are Priority Claims? ] § 73.2 What Claims Are Priority Claims?, 100.4 [ Special Provisions for Attorneys’ Fees ] § 73.8 Special Provisions for Attorneys’ Fees and 294.1 [ Debtors’ Attorneys’ Fees ] § 136.6 Debtors’ Attorneys’ Fees before BAPCPA.
10 209 B.R. 999 (B.A.P. 10th Cir. 1997).
11 209 B.R. at 1003.
12 223 B.R. 775 (Bankr. D. Or. 1998).
13 223 B.R. at 778.
14 202 B.R. 991 (D. Kan. 1996).
16 202 B.R. at 993.
17 See § 314.1 [ On Postpetition Claims ] § 142.5 On Postpetition Claims. See, e.g., In re Toms, 229 B.R. 646 (Bankr. E.D. Pa. 1999).