Harris Does Not Preclude Attorney Fees Upon Pre-Confirmation Conversion

A bankruptcy court for the District of Maryland held that the chapter 13 trustee could use funds that were undisbursed at the time of conversion to pay accrued fees owed by the debtors to their bankruptcy attorneys. In re Everest, No. 14-29084 (Sept. 10, 2015) consolidated with In re Brandon, No. 14-23735 (lead case), In re Rucker, No. 14-27630, and In re Burrows, No. 14-28940. Readers of this blog may remember the recent post discussing cases finding that, under Harris v. Viegelahn, 135 S. Ct. 1829 (2015), upon conversion the chapter 13 trustee must return all undisbursed funds to the debtor without paying outstanding attorney’s fees regardless of whether a plan was confirmed prior to conversion. In re Beauregard, No. 11-13069 (Bankr. N. M. July 10, 2015) (recognizing that the attorney’s right to seek payment out of the chapter 7 estate offered “cold comfort”) ; In re Sowell, No. 14-44130 (Bankr. D. Minn. Aug. 7, 2015).

Of the four consolidated cases only Everest involved payment upon conversion; the other three involved dismissals. With respect to distribution of attorney fees in Everest, the court found that while the facts were closer to Harris than the dismissal cases, the issue was not answered by Harris. The court distinguished Harris on the basis that Harris dealt with a confirmed plan while, in Everest, there was no plan confirmed prior to conversion. The crux of the decision rested on the court’s analysis of section 1326(a)(2). After finding that the first two sentences did not apply to cases converted prior to plan confirmation, the court found that “[t]he third sentence of § 1326(a)(2) . . . specifically deals with disposition of plan payments if ‘a plan is not confirmed.’ It does not follow that after Harris a Chapter 13 trustee must comply with a portion of this sentence (return pre-confirmation plan payments to the debtor), but ignore another portion of that same sentence (after deducting funds needed for payment of allowed administrative expense claims).” It noted that in deciding Harris, the Supreme Court upheld the Third Circuit’s view in Michael which gave effect to the third sentence of section 1326(a)(2) after conversion, finding that “if the case is converted prior to confirmation of a plan, the trustee must return any payments held by him to the debtor after deducting adequate funds for him to pay allowed administrative claims [under section 1326(a)(2)].”  The court concluded that “because a plan has not been confirmed . . . those post-conversion responsibilities continue to include compliance with the third sentence of § 1326(a)(2) requiring the payment of administrative expenses such as the remaining allowed fee of debtor’s counsel prior to returning unpaid funds to a debtor.”

The court acknowledged that Beauregard had reached the opposite conclusion with respect to the effect of confirmation. The Beauregard court found that despite the fact that Harris dealt with post-confirmation conversion and therefore interpreted the second sentence of section 1326(a)(2), under Harris’s reasoning no part of that section applied once the case was converted regardless of timing with respect to confirmation. The Everest court rejected that extension of Harris as unjustified.

With respect to the dismissed cases, section 349 (which did not apply in Harris) held sway. Unlike section 348 which applies to converted cases, dismissal under section 349 does not immediately end the services of the chapter 13 trustee. Therefore, the barrier to distribution of undisbursed funds to the debtor’s counsel was inapplicable in dismissed cases. Rather, when a case is dismissed the trustee is bound to return undisbursed funds to the entities to which they belonged prior to the petition, with the exception of administrative fees and costs as described in section 503. Section 503(b)(2) provides that the trustee may pay administrative expenses such as “compensation and reimbursement awarded under section 330(a)” including reasonable compensation to the debtor’s attorney.

The court went on to address the effect of a pre-petition agreement between the debtor and his counsel assigning undisbursed funds to pay outstanding attorney fees. In both Burrows and Rucker there was a prepetition agreement assigning undistributed funds to counsel upon conversion or dismissal. Noting that even Beauregard opined in dictum that such assignments could be enforced, the court concluded that “an assignment like the ones made by the debtors in the Burrows and Rucker cases is a valid independent basis upon which to approve payment by a Chapter 13 trustee to debtor’s counsel to the extent of their unpaid counsel fees and expenses.” As a practical matter the court expressed concern that if such assignments were not honored the number of attorneys willing to take on chapter 13 cases, in which fees are often paid through the plan, would be greatly reduced to the detriment of debtors in general.

Everest Bankr Md opinion