Harris Precludes Attorney Fee Payments Out of Undisbursed Funds

In two cases involving the courts’ practice of permitting the chapter 13 trustee to distribute undisbursed funds to creditors upon conversion to chapter 7, the courts found that Harris v. Viegelahn, 575 U.S. ___, 135 S.Ct. 1829 (2015), dictated a different result, even with respect to the debtor’s chapter 13 attorney fees and without regard to whether the case was converted prior to confirmation of the plan. In re Beauregard, No. 11-13069, consolidated with, In re Rule-Osburn, No. 14-13624, In re Montano, No. 14-12950 (Bankr. N. M. July 10, 2015); In re Sowell, No. 14-44130 (Bankr. D. Minn. Aug. 7, 2015).

In Beauregard, the trustee in all three cases held undisbursed post-petition wages of the debtor at the time of conversion. While two of the cases involved unconfirmed plans, the third involved a confirmed plan which provided that upon conversion undisbursed funds would be distributed to creditors according to the plan provisions. The pre-Harris practice of the court was to permit such distribution. Harris changed that when the Supreme Court held that once a case is converted, the chapter 13 trustee no longer has any power to perform the functions of that role. As the primary function of the chapter 13 trustee is to distribute funds to creditors, conversion halts that process.

The Beauregard court noted that attorney fees incurred in the chapter 13 case are different from the debts that led to the filing of the bankruptcy case in the first place, but it nonetheless held that Harris was broad enough to encompass a claim by the debtor’s attorney. Furthermore, section 1326(a)(2), which requires payment out of undisbursed funds for fees and administrative expenses when a plan is not confirmed, does not apply once the case is converted.

Recognizing that the attorney’s right to seek payment out of the chapter 7 estate offered “cold comfort,” the court suggested that “[t]he solution for Chapter 13 debtor’s counsel might be to include in their engagement letters an assignment of and security interest in the debtor’s post-petition wages held by the standing trustee on the date of conversion, to pay allowed unpaid attorney fees and costs incurred during the Chapter 13 case.”

Beauregard Bankr. NM opinion

A bankruptcy court in Minnesota reached the same conclusion in In re Sowell, No. 14-44130 (Aug. 7, 2015). That case was before the court on the attorney’s fee application in which he specifically sought to recover from undisbursed funds. The court acknowledged that, prior to Harris, it was a matter of course that the chapter 13 trustee would distribute the funds to the debtor’s counsel upon conversion. Like the Beauregard court however, the court in Sowell held that the ruling in Harris put an end to that practice.

Sowell Bankr. D Minn opinion