Attorney Fees OK After Ch. 13 Debtor Completes Plan Payments

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By Diane Davis

Oct. 11 — A debtor’s attorney can get $1,800 in supplemental fees and costs even though the debtor already made his final Chapter 13 plan payment, a bankruptcy court in New Mexico held Oct. 4 ( In re Conner , 2016 BL 331793, Bankr. D.N.M., No. 11-11696 ta13, 10/4/16 ).

Judge David T. Thuma of the U.S. Bankruptcy Court for the District of New Mexico acknowledged that when the debtors’ discharge order is entered, the debtors’ obligation to pay the supplemental fees would be discharged in bankruptcy. To remedy that situation, Thuma said he would hold a hearing with the debtor in attendance, either in person or by telephone, to discuss the timing of the discharge order.

Attorneys’ fees are generally entitled to priority in bankruptcy as an administrative expense and must be provided for in the Chapter 13 plan, unless the attorney agrees otherwise, the court said. Chapter 13 allows individuals receiving regular income to obtain debt relief while retaining their property, but to do so, the debtor must propose a plan that uses future income to repay all or a portion of his debts over a three to five year plan period.

Debtors Michael and Lyndee Conner’s plan provides for allowed attorneys’ fees to be paid in the plan and there is no provision for attorneys’ fees to be paid “outside” the plan. Because counsel’s supplemental fees are provided for in the plan, they will be discharged when the discharge order is entered, the court said. Imminent discharge shouldn’t prevent the fees being allowed, the court said.

The bankruptcy court approved counsel’s first fee application covering work performed through confirmation of the plan. Four years later, the debtors totaled their car, which they were paying off through the plan. As a result, debtor’s counsel needed to modify the plan, which resulted in about $1,800 worth of work. Counsel filed his supplemental fee application after the debtors made their 60th, and final Chapter 13 plan payment.

The Chapter 13 trustee didn’t dispute that the fees were reasonable or necessary, but objected to the delay, arguing that the debtors were prejudiced by the application’s timing because plan payments could have been used to pay fees rather than unsecured creditors.

Change Ch. 13 Practice?

Thuma didn’t favor setting deadlines for filing post-confirmation fee applications in Chapter 13 cases to remedy these situations because there are too many variables. The court did recommend several changes in Chapter 13 practice, including:

  •  using a “reserve fee” for a small administrative expense to pay for routine “end-of-case” work” added in the Chapter 13 plan;
  •  filing any final fee application shortly after the trustee files her notice that the final plan payment is due in six months;
  •  adding language in the plan that attorney’s fees approved near the end of the case would be paid “outside” the plan even though they would have to be approved under Bankruptcy Code Section 330(a); and
  •  amending the plan so that supplemental fees are paid “outside” the plan if the debtors can’t increase plan payments enough to pay the fees.

Still Get ‘Fresh Start.’

The bankruptcy court rejected the trustee’s arguments, concluding that the harm in this case was “de minimis.”

The debtors will still get their discharge and “fresh start,” the court said, but once that discharge order is entered, the debtors may elect to pay the supplemental fee or voluntarily delay entry of the discharge order while they pay the fees, but they don’t have to do so. If the debtors elect to pay the fees, they will pay little or no more than if the application had been filed in 2015, the court said.

Ronald E. Holmes, Davis Miles McGuire Gardner, PLLC, Albuquerque, N.M., represented debtors Michael Allyn Conner and Lynee Christine Conner; Kelley L. Skehen, Albuquerque, N.M., is the Chapter 13 trustee.

To contact the reporter on this story: Diane Davis in Washington at DDavis@bna.com

To contact the editor responsible for this story: Jay Horowitz at JHorowitz@bna.com

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