§ 73.8 — Special Provisions for Attorneys’ Fees

Revised: September 24, 2010

[1]

Attorneys’ fees for debtors’ counsel are administrative expenses under 11 U.S.C. §§ 503(b)(2) and 330(a)(4)(B) and are entitled to priority under 11 U.S.C. § 507(a)(2).1 Many reported decisions treat attorneys’ fees as priority claims entitled to full payment under § 1322(a)(2) (without interest) notwithstanding the absence of a clear reference to administrative expenses in § 1322(a)(2).2 It has been held that fees for postpetition and postconfirmation services by debtor’s counsel are administrative expenses entitled to priority and full payment through the plan, and are not properly treated as postpetition claims under § 1305.3

[2]

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA)4 changed the order of priorities in § 507(a), reducing administrative expenses from first to second priority.5 This change in the order of priorities should not cause any change in the treatment of attorneys’ fees in Chapter 13 cases.6 Other provisions of BAPCPA changed the entitlements of some secured creditors and lessors in ways that may affect the payment of attorneys’ fees.7

[3]

To address changes in the Code by BAPCPA with respect to in forma pauperis petitions in Chapter 7 cases, Bankruptcy Rule 1006(b)(3) was amended to limit payment of attorneys’ fees by requiring full payment of filing fees before “further payment to an attorney.”8 Although the Rule as amended permits payment of attorneys’ fees prior to the petition, when filing fees are paid in installments through a Chapter 13 plan9 full payment of the filing fee must be accomplished before deferred payment of attorneys’ fees can continue.10

[4]

The manner and timing of payment of debtors’ attorneys’ fees in Chapter 13 cases vary dramatically from jurisdiction to jurisdiction.11 Typically, attorneys’ fees are paid in whole or in part through the Chapter 13 plan, often based on a formula for installments over time.12

[5]

Section 1326(b)(1) of the Code provides that “any unpaid claim of the kind specified in § 507(a)(2)” shall be paid “before or at the time of each payment to creditors under the plan.”13 Use of “claim” in § 1326(b)(1) in a sentence referencing § 507(a)(2) is a less-than-perfect choice of words. Section 507(a)(2) identifies expenses, fees and charges entitled to second priority—including attorneys’ fees—but, technically, there is no mention of claims in § 507(a)(2). To give meaning to these linked sections, it is reasonable to interpret claim in § 1326(b)(1) to include administrative expenses allowed under § 503(b).14

[6]

It has been said that § 1326(b) ordinarily entitles the debtor’s attorney in a Chapter 13 case to be paid fees before or at the same time as payments to other creditors under the confirmed plan.15 It has been held that the plan can pay attorneys’ fees as administrative expenses in advance of payments to other claim holders.16 One reported decision approved the creation of a $2,000 fund culled from payments to the trustee during the first 30 days of the plan to pay attorneys’ fees before other creditors.17 Another court ordered the trustee to pay attorneys’ fees in advance of other claimants but to escrow 20 percent of allowed fees pending plan completion.18 It has been argued with some success that a Chapter 13 plan that only pays attorneys’ fees and proposes no payments to other creditors is a disguised Chapter 7 case that fails good-faith analysis.19 When the payment of priority attorneys’ fees in advance of other creditors defeats the rights of other claim holders to payments under the plan, confirmation has been denied.20

[7]

Local rules or practice often ties the payment of attorneys’ fees to payments by the debtor into the plan.21 For example, in some jurisdictions debtor’s counsel is entitled to a percentage of payments into the plan until attorneys’ fees are paid in full.22 In other jurisdictions, the debtor advances some portion of the attorneys’ fees, with the balance payable through the plan. It has been held that § 1326 prohibits debtor’s counsel from collecting preconfirmation payments into the plan as part of an effort to secure attorneys’ fees pending confirmation.23

[8]

In some jurisdictions, the amount of attorneys’ fees and a statement of how the fees will be paid are included in the plan.24 In other jurisdictions, the amount of fees is determined on separate application, and the plan contains only a general statement that fees will be paid in full when fixed by the court.25 Many jurisdictions have a “standard” fee or “no-look” amount that is allowable to debtors’ counsel in Chapter 13 cases without formal application or by abbreviated procedures.26


 

1  See, e.g., Jensen v. Gantz (In re Gantz), 209 B.R. 999, 1003 (B.A.P. 10th Cir. July 15, 1997) (McFeeley, Pearson, Cornish) (“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.”); In re Bottone, 226 B.R. 290 (Bankr. D. Mass. Nov. 4, 1998) (Boroff) (After conversion from Chapter 7 to Chapter 13, debtor’s attorneys’ fees incurred during the Chapter 7 case are priority administrative expenses in the Chapter 13 case that must be paid in full under § 1322(a)(2).); In re Hallmark, 225 B.R. 192 (Bankr. C.D. Cal. Sept. 10, 1998) (Ryan) (Ordinarily, fees awarded to debtor’s counsel in a Chapter 13 case are administrative expenses under § 503(b)(2) and § 330(a)(4)(B).); In re Hanson, 223 B.R. 775 (Bankr. D. Or. Aug. 4, 1998) (Perris, Dunn) (Administrative expenses such as attorneys’ fees allowed under § 503(b) are priority claims in a Chapter 13 case, and administrative expenses include compensation of a debtor’s attorney under § 330.); In re Oliver, 222 B.R. 272, 274 (Bankr. E.D. Va. May 13, 1998) (Bostetter) (Section 503(b)(2) provides for the allowance of administrative expenses for compensation awarded under § 330(a). Section 330(a)(4)(B) provides that the bankruptcy court can allow reasonable compensation to the debtor’s attorney in a Chapter 13 case. “Reading sections 1326(a)(2), 503(b)(2) and 330(a)(4)(B) together, we conclude that the debtor’s attorney’s fees and expenses are administrative expenses.”). Prior to the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), Pub. L. No. 109-8, 119 Stat. 23 (2005), administrative expenses were the first priority in § 507(a)(1).

 

2  See below in this section, and see § 294.1 [ Debtors’ Attorneys’ Fees ] § 136.6  Debtors’ Attorneys’ Fees before BAPCPA.

 

3  See §§ 294.1 [ Debtors’ Attorneys’ Fees ] § 136.6  Debtors’ Attorneys’ Fees before BAPCPA, 302.1 [ Postpetition Claims ] § 137.1  Postpetition Claims before BAPCPA, 515.1 [ Debtors’ Attorneys’ Fees ] § 136.7  Debtors’ Attorneys’ Fees after BAPCPA and 524.1 [ Postpetition Claims ] § 137.2  Postpetition Claims after BAPCPA. See, e.g., Cornelison v. Wallace (In re Cornelison), 202 B.R. 991 (D. Kan. Nov. 4, 1996) (Brown) (Postconfirmation attorneys’ fees are priority administrative expenses entitled to full payment under § 1322(a)(2).); In re Hanson, 223 B.R. 775, 776–81 (Bankr. D. Or. Aug. 4, 1998) (Perris, Dunn) (“Because postconfirmation attorney fees are administrative expenses, the plans’ provision for payment of administrative expenses includes payment of those fees. . . . The postconfirmation fees and costs of debtor’s counsel related to the Chapter 13 case are administrative expenses, a specific category of postpetition debts distinct from the more general types of consumer debts covered by section 1305(a)(2).”); In re Phillips, 219 B.R. 1001, 1009 (Bankr. W.D. Tenn. May 8, 1998) (Brown) (Disapproves practice of debtor’s attorney filing postpetition claims under § 1305 for routine postconfirmation attorneys’ fees and reimbursement of expenses. “The more appropriate procedure for approval of postpetition attorney’s fees and reimbursement of expenses . . . is an application for the court’s approval of attorney’s fees and expenses pursuant to § 330.”).

 

4  Pub. L. No. 109-8, 119 Stat. 23 (2005).

 

5  See §§ 440.1 [ New and Changed Priority Claims ] § 73.3  Priority Claims Added or Changed by BAPCPA and 441.1 [ New and Changed Treatment of Priority Claims ] § 73.6  Treatment of Priority Claims Changed by BAPCPA.

 

6  See §§ 442.1 [ Attorney Fees after BAPCPA ] § 73.9  Attorney Fees after BAPCPA and 515.1 [ Debtors’ Attorneys’ Fees ] § 136.7  Debtors’ Attorneys’ Fees after BAPCPA.

 

7  See § 442.1 [ Attorney Fees after BAPCPA ] § 73.9  Attorney Fees after BAPCPA. See also §§ 448.1 [ Equal Monthly Installments ] § 74.14  Equal Monthly Installments after BAPCPA and 449.1 [ “Adequate Protection” after Confirmation ] § 74.15  “Adequate Protection” after Confirmation after BAPCPA.

 

8  Fed. R. Bankr. P. 1006(b)(3), as amended (Dec. 1, 2008). See §§ 385.1 [ Filing Fees, Installments and Waiver ] § 37.6  Filing Fees, Installments and Waiver after BAPCPA and 443.1 [ Filing Fees ] § 73.11  Filing Fees after BAPCPA.

 

9  See § 385.1 [ Filing Fees, Installments and Waiver ] § 37.6  Filing Fees, Installments and Waiver after BAPCPA.

 

10  See §§ 385.1 [ Filing Fees, Installments and Waiver ] § 37.6  Filing Fees, Installments and Waiver after BAPCPA, 442.1 [ Attorney Fees after BAPCPA ] § 73.9  Attorney Fees after BAPCPA and 515.1 [ Debtors’ Attorneys’ Fees ] § 136.7  Debtors’ Attorneys’ Fees after BAPCPA.

 

11  See §§ 25.4 [ Getting Paid: Attorneys’ Fees for Representing Debtors ] § 27.4  Getting Paid: Attorneys’ Fees for Representing Debtors, 294.1 [ Debtors’ Attorneys’ Fees ] § 136.6  Debtors’ Attorneys’ Fees before BAPCPA, 442.1 [ Attorney Fees after BAPCPA ] § 73.9  Attorney Fees after BAPCPA and 515.1 [ Debtors’ Attorneys’ Fees ] § 136.7  Debtors’ Attorneys’ Fees after BAPCPA.

 

12  See, e.g., Clark v. LaBarge (In re Clark), 223 F.3d 859 (8th Cir. Aug. 21, 2000) (Wollman, Beam, Frank) (Local rules and practice in the Bankruptcy Court for the Eastern District of Missouri permit a Chapter 13 debtor’s attorney to elect a flat fee of $1,250.); In re Pappas & Rose, P.C., 229 B.R. 815, 817 (W.D. Okla. Dec. 1, 1998) (Alley) (“[A]ttorneys’ fees will be paid in equal installments over not less than 24 months, unless the plan proposes to pay unsecured creditors 20% or more. Then attorneys’ fees may be paid over a ten-month period.”); In re Moore, No. 02-03960, 2003 WL 22946433, at *1 (Bankr. D. Haw. May 28, 2003) (unpublished) (Faris) (“[F]ee guidelines permit counsel to ‘opt in’ or ‘opt out.’ . . . [A]ttorneys who opt in may have their fees allowed without a formal fee application, but the attorney fees may not exceed a fixed maximum amount. An attorney who opts out can seek reasonable compensation that is not constrained by a fixed limit, but must file and obtain court approval of a compensation application. . . . The fee guidelines also provide that Chapter 13 Trustee shall pay the attorney the lesser of 50 percent of the monthly plan payment or $250 of each plan payment. . . . [T]he limitation does not apply to attorneys who ‘opt out’.”); In re Rogers, 239 B.R. 883 (Bankr. E.D. Tex. Oct. 14, 1999) (Parker) (Plan must provide that no more than one-half of funds on hand at confirmation are distributed to the attorney for the debtor and any other holder of an administrative expense under § 507(a)(1).); In re Pedersen, 229 B.R. 445, 447 (Bankr. E.D. Cal. Jan. 22, 1999) (McManus) (Attorneys electing to have their fees paid pursuant to local guidelines agree to “‘[l]imit their fees to no more than $1,750.00 in nonbusiness cases and $3,000.00 in business cases. Limit their pre-petition retainers to $750.00 in nonbusiness cases and $1,500.00 in business cases. Receive payment of their fees through the plan at the lesser of $200.00 per month or 50% of the debtor’s monthly plan payment.’”).

 

13  11 U.S.C. § 1326(b)(1). See §§ 204.2 [ Order of Payments to Creditors ] § 113.7  Order of Payments to Creditors before BAPCPA and 501.1 [ Order of Payments to Creditors ] § 113.8  Order of Payments to Creditors after BAPCPA.

 

14  See §§ 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.

 

15  See In re Bosse, 407 B.R. 444 (Bankr. D. Me. July 14, 2009) (Haines) (Section 1326(b)(1) does not require full payment of administrative expenses before any distribution to secured creditors; when plan provided payments on secured claim in specific amount for 57 months, attorney fees are paid in monthly installments concurrently with payments to secured creditor.); In re Hallmark, 225 B.R. 192 (Bankr. C.D. Cal. Sept. 10, 1998) (Ryan).

 

16  In re Tenney, 63 B.R. 110 (Bankr. W.D. Okla. Aug. 4, 1986) (Bohanon). Accord In re Moses, 293 B.R. 711 (Bankr. E.D. Mich. June 5, 2003) (Shefferly) (Section 1322(a)(2) permits payment of attorney fees in a lump sum before secured claims notwithstanding that a one-month delay in distributions to lienholders will result.).

 

17  In re Meadows, 297 B.R. 671, 672, 673–74 (Bankr. E.D. Mich. Sept. 4, 2003) (McIvor) (Thirty-day reservation of funds for payment of attorney fees is permissible. Proposed plan provided: “For 30 days following the entry of the Order Confirming Plan, the Trustee shall hold from distribution the sum of $2,000.00 as a fund for the payment of the attorney fees and costs and that shall be determined by the court . . . . If no application has been served and filed within this 30 day period, the reserved funds will be released for distribution to creditors.” Chapter 13 trustee objected. “Section 1326(b) requires the payment of administrative expenses such as attorney fees to be made before or contemporaneously with the payments to creditors. . . . The precise manner and timing of payment of attorney fees in Chapter 13 cases varies among jurisdictions and is controlled by local rules and customs. . . . A fee reserve is a reasonable way of effectuating the priority scheme imposed by the Code. . . . [P]ayment of attorney fees prior to distribution to other creditors is not improper, it is expressly permitted under the Code.”).

 

18  In re Bellamy, 379 B.R. 86, 98 (Bankr. D. Md. Nov. 28, 2007) (Keir) (Section 1326(b) requires trustee to pay allowed administrative claims before distributions to other claimants, “except possibly holders of domestic support obligations entitled to priority under Section 507(a)(1).” However, because debtor’s attorney provides ongoing services, trustee is ordered to escrow 20% of allowed fees, pending completion of case or further order.).

 

19  See §§ 191.1 [ Payment of Attorney Fees ] § 107.4  Payment of Attorney Fees, 496.1 [ Good-Faith Filing Requirement ] § 110.1  Good-Faith Filing Requirement after BAPCPA and 496.2 [ Good-Faith Plans after BAPCPA ] § 110.2  Good-Faith Plans after BAPCPA.

 

20  See In re Rogers, 239 B.R. 883, 886–90 (Bankr. E.D. Tex. Oct. 14, 1999) (Parker) (Court conditions continuation of stay that plan provide secured claim holders with one-half of the money accumulated between filing and confirmation, in advance of payment of administrative expenses. “Even if the Chapter 13 plan is confirmed, it activates what has developed into an almost universal plan provision in this district; that first available funds distributed by the Chapter 13 Trustee will go to the payment of the fees for the debtor’s attorney. There is nothing impermissible about this provision and, in fact, it is expressly authorized, though not mandated, by § 1326(b)(1) of the Bankruptcy Code. However, depending on the size of the monthly plan payment being paid by a debtor, it is undoubtedly true that a secured creditor is often not paid from the first distributions arising from a confirmed plan in this district, despite the fact that its collateral has been used throughout the pre-confirmation period without remuneration of any kind. Under this system as it currently exists in this district, it is apparent that the risk of failure of a Chapter 13 case is entirely placed upon the shoulders of secured creditors. . . . While prompt compensation of professionals is certainly one objective of the Bankruptcy Code, the protection of creditor interests is given an equivalent degree of prominence . . . . [Section] 1326(b) specifically authorizes the payment of administrative claims either ‘before or at the time of each payment to creditors under the plan.’ . . . Accordingly, the Debtor in this case shall be required to modify her Chapter 13 plan to provide that, following payment of the percentage fee fixed and owing to the Chapter 13 Trustee under 28 U.S.C. § 586(e)(1) and (2), the funds to be distributed under the confirmed plan shall be halved, with one-half (½) of such funds to be distributed equally among the Bank and any other party authorized to share in such a distribution pursuant to an order of this Court; and the remaining one-half (½) of such funds to be distributed equally among the attorney for the Debtor and any other holder of an unpaid claim of the kind specified in § 507(a)(1) of the Bankruptcy Code, with such division of funds to continue until such time as the unpaid claims under § 507(a)(1) have been paid in full. . . . [I]n the event that the Chapter 13 case is dismissed or converted . . . a secured creditor [may] receive an equivalent share of the accumulated plan proceeds on an equivalent basis with any similarly-situated secured party, as well as any holder of an unpaid § 503(b) administrative claim.”); In re Townsend, 186 B.R. 248, 249 (Bankr. E.D. Mo. Jan. 14, 1994) (Schermer) (Plan cannot pay debtor’s 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.”).

 

21  See, e.g., In re Pappas & Rose, P.C., 229 B.R. 815, 817–20 (W.D. Okla. Dec. 1, 1998) (Alley) (District court approves guidelines for payment of attorneys’ fees in Chapter 13 cases. “The challenged guideline provides that attorneys’ fees will be paid in equal installments over not less than 24 months, unless the plan proposes to pay unsecured creditors 20% or more. Then attorneys’ fees may be paid over a ten-month period. . . . [P]riority payments, including attorneys’ fees under 11 U.S.C. § 507(a)(1) are limited by 11 U.S.C. § 1326. . . . [T]hese payments may be made concurrently with payments to creditors. . . . [A] bankruptcy court has some discretion in awarding attorneys’ fees. . . . This Guideline is not contrary to law, and does not rearrange priority claims.”); In re Moore, No. 02-03960, 2003 WL 22946433, at *1 (Bankr. D. Haw. May 28, 2003) (unpublished) (Faris) (Local fee guidelines permit counsel to claim fees not to exceed a fixed maximum amount without a formal fee application; attorney opting into local fee guidelines agrees to accept fees based on “the lesser of 50 percent of the monthly plan payment or $250 of each plan payment.”); In re Pedersen, 229 B.R. 445, 447–50 (Bankr. E.D. Cal. Jan. 22, 1999) (McManus) (Debtor’s application for payment of attorneys’ fees is denied because it neither complies with local Chapter 13 fee guidelines nor is it an acceptable conventional fee application. “Compliance with the chapter 13 fee guidelines is optional. . . . Those attorneys electing to have their fees approved pursuant to the chapter 13 fee guidelines and in connection with confirmation of a plan are required to: ‘File an executed copy of the “Rights and Responsibilities of Chapter 13 Debtors and their Attorneys” . . . . Limit their fees to no more than $1,750.00 in nonbusiness cases and $3,000.00 in business cases. Limit their pre-petition retainers to $750.00 in nonbusiness cases and $1,500.00 in business cases. Receive payment of their fees through the plan at the lesser of $200.00 per month or 50% of the debtor’s monthly plan payment.’ . . . The chapter 13 fee guidelines are nothing more than a presumption that compensation is reasonable if paid in the amounts and in the manner prescribed by the guidelines. The court or any party in interest may reject this presumption and compel the attorney to file a conventional fee application and prove that his or her fees are reasonable.” Because guidelines are voluntary, an attorney’s voluntary acceptance of fees concurrently with payments to other creditors is consistent with Schorb v. Bishop (In re Schorb), 101 B.R. 185 (B.A.P. 9th Cir. July 11, 1989) (Jones, Ashland, Russell). “Requiring the fee to be paid in installments over a brief period at the beginning of the case is not unreasonable or unfair considering that a portion of the fee is for work yet to be performed.”).

 

22  See In re Moore, No. 02-03960, 2003 WL 22946433 (Bankr. D. Haw. May 28, 2003) (unpublished) (Faris) (Attorney who opts in agrees to accept fee guideline payments equal to the lesser of 50% of the monthly plan payment or $250 of each plan payment.); In re Pedersen, 229 B.R. 445, 447 (Bankr. E.D. Cal. Jan. 22, 1999) (McManus) (Attorneys electing to have their fees paid pursuant to guideline agree to be paid through the plan “‘at the lesser of $200.00 per month or 50% of the debtor’s monthly plan payment.’”).

 

23  In re Barbee, 82 B.R. 470 (Bankr. N.D. Ill. Jan. 29, 1988) (Ginsberg).

 

24  See, e.g., In re Hallmark, 225 B.R. 192 (Bankr. C.D. Cal. Sept. 10, 1998) (Ryan) (Although fees awarded to debtor’s counsel in a Chapter 13 case are ordinarily administrative expenses entitled to full payment under § 1322(a)(2), when the confirmed plan provided zero payment of debtor’s attorneys’ fees, trustee had no authority to pay fees through the plan pursuant to § 1326(b).).

 

25  See §§ 294.1 [ Debtors’ Attorneys’ Fees ] § 136.6  Debtors’ Attorneys’ Fees before BAPCPA and 515.1 [ Debtors’ Attorneys’ Fees ] § 136.7  Debtors’ Attorneys’ Fees after BAPCPA for discussion of allowance of attorneys’ fees.

 

26  See §§ 294.1 [ Debtors’ Attorneys’ Fees ] § 136.6  Debtors’ Attorneys’ Fees before BAPCPA and 515.1 [ Debtors’ Attorneys’ Fees ] § 136.7  Debtors’ Attorneys’ Fees after BAPCPA.