The bankruptcy court has limited but sufficient jurisdiction to decide whether a creditor’s attorneys have valid liens on the distribution the creditor will receive under a chapter 11 plan, according to Bankruptcy Judge Frank J. Bailey of Boston.
Even though it may result in delaying confirmation of the plan, Judge Bailey declined to abstain over the lien-distribution dispute in his Aug. 16 opinion.
A creditor was slated to receive a $3 million distribution on its secured claims following confirmation of the debtor’s plan. Their fees not having been paid in full, two of the creditor’s former law firms asserted attorneys’ liens over the expected distribution.
The plan called for the bankruptcy court to determine the extent to which the creditor’s attorneys’ fees would increase the amount owing on the portion of the claims that were fully secured under Section 506(b).
Although the creditor’s attorneys and the debtor consented to complete adjudication by the bankruptcy court, the creditor contended there was no jurisdiction over the lien dispute. The creditor argued it had no liability to the lawyers but at the same time insisted on adding the fees to its secured claim.
While finding neither “arising in” nor “arising under” jurisdiction, Judge Bailey decided he had “related to” jurisdiction under 28 U.S.C. § 1334(b) because the “attorneys’ lien disputes may affect the bankruptcy case.” Deciding “whether particular fees are in fact owed” to the firms “would be highly relevant to the [creditor’s] burden under Section 506(b) of establishing” the right to add fees to its over-secured claim, he said.
Despite finding jurisdiction, Judge Bailey nonetheless ruled that the fee dispute was non-core and would require entry of a final order in district court. Moreover, the creditor was likely to demand a jury trial, further necessitating parallel proceedings in district court.
Given the need for proceedings in two courts and possible delay in confirmation, the bank wanted Judge Bailey to abstain under Section 1334(c)(1).
At first seeming inclined to abstain, Judge Bailey conceded that deciding the lien dispute as part of the confirmation process would “considerably intensify” the “burden on the [creditor], the [debtor], this case and the bankruptcy court, and perhaps also the district court.”
Judge Bailey nevertheless decided that abstention was “not warranted” because the creditor could not contend that its claim should be inflated by the attorneys’ fees while, at the same time, arguing that it owed nothing to the firms.
Waiting for the separate lien litigation to “ramp up” in district court might delay the balance of the confirmation hearing in bankruptcy court, Judge Bailey predicted. If delay results, he said, “then so be it.”