The Ninth Circuit Bankruptcy Appellate Panel issued a warning to chapter 13 counsel: If you provide additional services at the end of the plan, be sure the court does not enter a discharge because you won’t collect, even though your additional services were critical, effective and beneficial.
The debtor’s confirmed chapter 13 plan provided for paying off mortgage arrears through plan payments. For counsel’s basic services, the plan allocated $6,500 in administrative expenses for the debtor’s attorney in deferred payments over the life of the plan. Adopting the district’s Rights and Responsibilities Agreement, the plan provided for paying fees through the plan and precluded counsel from receiving fees directly from the debtor, aside from the initial retainer.
After the final plan payment, a dispute arose with the mortgage lender regarding the arrears. The debtor’s counsel prevailed in litigation before the discharge when the bankruptcy judge ruled in favor of the debtor and declared that the arrears had been paid.
Shortly after the discharge was entered, the debtor’s counsel filed an application for about $5,600 in additional fees incurred in litigating with the lender. After discharge, the bankruptcy court approved the fee request as reasonable and necessary but validated the chapter 13 trustee’s objection by ruling that payment was barred by the discharge.
Seeking to pay her counsel, the debtor appealed but lost in the BAP’s nonprecedential, per curiam opinion on May 7.
The debtor contended that the end-of-case fees were not administrative expenses because they were incurred after the final plan payment. The BAP disagreed, because all fees awarded to a debtor’s counsel in connection with a case are administrative expenses under Section 330(a)(4)(B) that must be paid under the plan and could not be paid directly by the debtor.
The debtor’s discharge barred payment of the fees, the BAP said, even though they were “critical, effective, and beneficial.” The BAP gave several reasons.
The BAP cited provisions in the plan requiring payment of attorneys’ fees through the plan and precluding direct payment by the debtor. Furthermore, the obligation to pay the fees was discharged by the plan along with all other administrative expenses “whether or not they actually were paid.”
The BAP said it was sympathetic to counsel’s plight and mentioned options that would be available in similar cases to pay the end-of-case fees. The panel said that “nothing prevents [the debtor] from voluntarily repaying [her counsel’s] approved fees.” Voluntary payment, the panel conceded, was the “least desirable option” because it left counsel with no legal right to payment.
The BAP said there was no prohibition in the plan preventing the debtor from making direct payment of debts excepted from discharge. Therefore, counsel could have prevailed on the bankruptcy court to enter a discharge order that excepted additional fees allowed by the court.