For consumer debtor attorneys, getting paid has become quite a challenge. A debtor’s attorney must either get paid pre-petition in a chapter 7, diminishing what would otherwise be nonexempt property of the debtor, or get paid out of “projected disposable income” in a chapter 13. In re Goudreau[1] primarily focuses on 11 U.S.C. § 1325 (a)(4)’s “best interest of creditors test,” which must be satisfied for confirmation of any chapter 13 plan. In Goudreau, in an attempt to get a composition case confirmed at the lowest dollar amount possible, debtor’s counsel utilized a calculation different than that ordinarily used to meet the § 1325(a)(4) test. While ultimately unsuccessful, the attempted approach provides interesting food for thought.
The Case
The debtor’s schedules listed nonexempt property of $5,505. Debtor’s counsel sought a fee of $3,250. In performing his interpretation of the required hypothetical chapter 7 liquidation analysis, the debtor’s attorney attempted both to subtract his fee and hypothetical chapter 7 administrative costs from the nonexempt asset value, leaving only $328.25 as the amount required to be paid to unsecured creditors under the plan. Hon. Dale L. Somers, U.S. Bankruptcy Judge for the District of Kansas, found that this approach was improper, and sustained the trustee’s objection.
The Test
Section 1325(a)(4) requires that the “best interest of creditors” test be met in all chapter 13 cases. Section 1325(a)(4) states the Court shall confirm a plan if:
the value, as of the effective date of the plan,[2] of property to be distributed under the plan on account of each allowed unsecured claim is not less than the amount that would be paid on such claim if the estate of the debtor were liquidated under chapter 7 of this title on such date.
This statutory provision refers to an amount to be paid on each unsecured claim in a chapter 13 case, compared to what such claim would receive in a chapter 7 liquidation.
Although the statute does not set forth the proper method of calculation, or state whether certain expenses should be subtracted, courts have clarified the process. For example, the Tenth Circuit case cited in Goudreau, Jansen v. Dunivent (In re Dewey)[3] outlines how each calculation is to be done.
The Math
The “best interest of creditors” test involves two calculations. The first required calculation (the hypothetical chapter 7 analysis) is a determination of the net value of the debtor’s nonexempt assets. “Net” is calculated in the District of Kansas by adding the value of the nonexempt assets and subtracting 35 percent for hypothetical chapter 7 administrative expenses.[4]
The second calculation (the chapter 13 analysis) takes the total of the payments being made through the proposed chapter 13 plan, subtracts reasonable administrative expenses (i.e., attorneys’ fees and chapter 13 trustee expenses), and finally subtracts payments to secured creditors. The amount left over is the sum to be distributed to priority unsecureds and general unsecureds pursuant to the proposed plan. The dollar amount to be distributed must be at least as much as the dollar amount from the first required calculation.
Goudreau’s Approach
Goudreau’s counsel attempted to do the calculation differently; namely, he subtracted his hypothetical chapter 13 fees and the chapter 7 trustee’s expenses from the net value of nonexempt assets in order to further reduce the amount that creditors would receive in a hypothetical chapter 7, thereby allowing the debtor to avoid paying a higher amount pursuant to his chapter 13 analysis. In support of this “new math,” debtor’s counsel argued that because the hypothetical chapter 13 fees would be a priority unsecured claim in a chapter 7, this methodology was proper. The court ruled that while this might be true if the case were converted from chapter 13 to chapter 7, no chapter 13 fees would be incurred if the debtor originally filed a chapter 7 case. The court therefore rejected this argument.
Undaunted, counsel next argued that his fees should be a priority unsecured claim in the chapter 13, and should be counted as part of what was to be distributed (per the chapter 13 analysis) to the unsecureds through the plan. This methodology also left very little to be distributed to unsecured creditors, as most of the money would be distributed to the debtor’s attorney and to secured creditors.[5]
The court rejected this approach as well. Pursuant to §§ 330(a)(4)(B) and 503(b)(2), chapter 13 attorneys’ fees are considered “administrative expense” claims, rather than “unsecured priority” claims. Therefore, for purposes of the “best interest of creditors” test, the amount to be paid to unsecureds should not include attorneys’ fees. The court found that the best-interest-of-creditors test was not met and denied confirmation.
Conclusion
The best-interest-of-creditors test leaves the burden of chapter 13 attorney fees solely on the debtor. The cost of attorney fee administrative expenses is in addition to the amount going to unsecureds. This means that a chapter 13 debtor must pay both the best-interest-of-creditors test amount to unsecureds and his attorney’s fees out of his “projected disposable income.”
However, chapter 13 attorneys’ fees are for services performed by the attorney in calculating the plan, filing the plan and schedules, getting the debtor’s case confirmed, and monitoring and modifying the case when necessary. The fees are, therefore, administrative expenses, just like the chapter 7 trustee fees subtracted in the hypothetical liquidation analysis described above. Excluding chapter 13 attorney fees from “the best interest of the creditors test” overlooks the necessity and true cost of entering into and maintaining a chapter 13 plan for everyone’s “best interest.”
The express language of § 1325(a)(4), in stating “property to be distributed under the plan on account of each allowed unsecured claim”, does not allow the inclusion of attorney’s fees in the best-interest-of-creditors analysis. In Goudreau, the debtor’s attorney felt that the fees should be included somewhere in the calculation; however, his proposed method of inclusion is prohibited by the express language of the statute.
Setting aside modification to § 1325(a)(4), one alternative would be to include the hypothetical chapter 7 attorney fees (as opposed to the hypothetical chapter 13 attorney fees) in the chapter 7 liquidation part of the analysis. The inclusion of these fees is not expressly prohibited by § 1325(a)(4). These fees (since they hypothetically diminish the nonexempt property of the debtor) could be subtracted, along with all other costs of administration, for the purpose of the best-interest-of-creditors test. This approach would comply with the express language of § 1325(a)(4) and would be a more accurate calculation. This approach also creates a much more realistic analysis, and the result would likely be much closer to the true amount that creditors would receive in the event of a liquidation.
[1] In re Goudreau, 530 B.R. 783 (Bankr. D. Kan. 2015).
[2] The Supreme Court has said that “the effective date of the Plan” is the date of confirmation, unless the plan states otherwise. Hamilton v. Lanning, 130 S. Ct. 2464, 2474, 560 U.S. 505, 518 (S. Ct. 2010).
[3] 237 B.R. 783, 788 (B.A.P. 10th Cir. 1999).
[4] 11 U.S.C § 326 pays a chapter 7 trustee 25 percent of the first $5,000 and 10 percent of any amount over $5,000 and up to $50,000, etc. This 35 percent amount is apparently used locally and takes into consideration administrative expenses, such as costs of sale, and is not unreasonable.
[5] The plan called for payments of $1,376 per month for an undisclosed period. 11 U.S.C. § 1325(b)(4) requires at least 36 months. This would have provided substantially more to unsecured creditors than either calculation set out in the opinion, unless a significant undisclosed amount was being paid to secured creditors first.