The Road Paved with Good Intentions: Tension Between the Equal-Monthly-Payments Requirement of § 1325(a)(5) and Debtors’ Attorneys Paid First in Chapter 13

A split among courts continues to persist with respect to the statutory interpretation of 11 U.S.C. § 1325(a)(5)’s equal-monthly-payment provision and the prioritization of payments of the debtor’s attorney’s fees pursuant to 11 U.S.C. § 1326(b)(1). Two recent decisions with differing views on the issue highlight the tension between the “salutary goal” of paying debtor’s attorney’s fees on an expedited basis and the lienholder entitled to adequate protection and equal monthly payments. This article, provided in two parts, will first discuss In re Williams[1] followed by In re Amaya.[2]

In In re Williams, the U.S. Bankruptcy Court for the Northern District of Illinois (Hunt, J.) recently sided with the minority of courts holding that the Bankruptcy Code does not permit a two-tiered payment provision, wherein administrative expense claims, including that of the debtor’s attorney, are paid at an accelerated rate to the detriment of secured creditors.[3] Such provisions, known as “step-plans,” provide a secured creditor initially with only de minimis payments, or at best the equivalent of adequate-protection payments until the debtor’s attorney fees are paid in full. The Williams court emphasized that pursuant to § 1325(a)(5)(B)(iii), the plan must provide an objecting secured creditor with equal and consistent monthly payments, beginning with the first post-confirmation disbursement.[4]

Felicia Williams proposed a chapter 13 plan that would pay a creditor with a purchase-money security interest in a motor vehicle the equivalent of adequate-protection payments until administrative expense claims, including those of her attorney, had been paid in full. Upon completion of the payment of the debtor’s attorney fees, the car creditor would receive a step up in payments. The car creditor objected to the step-plan treatment, arguing that the plain language of § 1325(a)(5) is clear about equal periodic payments beginning at confirmation, not a later date.

In reviewing the record and relevant case law, the Williams court held that a chapter 13 plan providing a secured creditor with only adequate-protection payments initially, until administrative expense claims including that of the debtor's attorney had been paid in full, with a step up in payments to the secured creditor, could not be confirmed over the creditor's objection.[5]

In reaching its holding, the court was unable to reconcile the plain language of § 1325(a)(5) and the slight majority viewpoint “that secured claims may be deferred until later in the plan so long as the secured creditor is provided adequate protection payments in the interim.”[6] Prominent to the court’s holding was that no logical basis could be found at the intersection of §§ 1325(a)(5) and 1326(a)(1) that a payment of a priority administrative expense trumped an objecting secured creditor’s right to equal monthly payments under the Code.[7]

Following the sound interpretation offered by In re Denton regarding the terms “periodic payments” and the use of the word “and” as a conjunctive, the Williams court deduced that “periodic” referred to all recurring post-confirmation payments to be made to secured creditors. As such, a plan must provide for such creditors to receive equal monthly payments, beginning with the first distribution post-confirmation and the payment amount must be sufficient to provide adequate protection during the period of the plan.[8] Essentially, the Denton court put an end to the tortured interpretation of § 1325(a)(5)(B)(iii) wherein periodic payments are payments made on an amortized debt, and prohibited an interpretation that simply allows extending adequate-protection payments beyond confirmation.[9]

In disavowing the reasoning followed by the majority view supporting a two-tier interpretation, the Williams court took a progressive step against the elegant accommodation fashioned to be the “solution” to the tension between payment of attorney's fees and the secured creditor.[10]

Conversely, the court in In re Amaya faced with a similar question followed the slight majority decision allowing for a chapter 13 plan that provides a two-tiered payment system. The Amaya court approved a plan that provided an accelerated repayment arrangement wherein the debtor’s attorneys’ fees are deemed an administrative expense that must be paid in full under 11 U.S.C. § 1326(b)(1) before payments to secured creditors other than adequate-protection payments.[11] Such a line of reasoning stems from the expansive interpretation endorsed by the majority view that the Code does not require plan payments on allowed secured claims to begin at confirmation, but rather that adequate-protection payments required pre-confirmation under 11 U.S.C. § 1326(a)(1)(C) may continue post-confirmation until attorneys’ fees are paid in full.

Amaya proposed a chapter 13 plan providing for two monthly payment amounts — the first two monthly payments in the amount of $1,100, and the remaining 58 monthly payments in the amount of $1,200. The plan specified that both the debtor’s attorney’s fees and a secured tax creditor would be paid pro rata from month one through month 58 of the plan. The trustee had her own internal distribution procedures under which the debtor’s attorney’s fees would be accelerated and paid in full before disbursements to other creditors. The secured tax creditor objected to the plan’s treatment, arguing that the payment of its secured claim pro rata over a period of 58 months rather than in fixed, equal monthly payments from month one, coupled with the trustee’s policy of paying administrative claims prior to distributing funds pro rata to creditors, violates the equal-monthly-payment requirement of § 1325(a)(5).

The court held that a chapter 13 plan that provided for pro rata payments to a secured creditor distributed after full payment of administrative claims does not violate the equal-monthly-payments requirement under § 1325(a)(5).[12]

The Amaya court relied heavily on its sister court’s determination that pro rata payments satisfied the equal-monthly-payment requirement when “the monthly plan payment and fixed amounts to be deducted therefrom remain the same” throughout the payment period.[13] The court noted that the requirements for plan confirmation under § 1325 are distinct from the trustee’s obligations under § 1326 and that administration of chapter 13 plans is necessarily flexible, as the trustee “must balance her directives under the Code and make distributions in accordance with the terms of a confirmed plan.”[14] The Amaya court also relied heavily on the DeSardi court’s ruling that once monthly payments to creditors are commenced, they must be equal until they cease, but also that such fixed payments need not extend over the entire course of the plan.[15]

Whether the Bankruptcy Code permits a prioritization of payments of the debtor’s attorney’s fees at the expense of a secured creditor in the context of a chapter 13 is all of matter of statutory interpretation. The underlying cause of the divergence of courts is the competing interest between encouraging attorneys and debtors to engage in chapter 13 proceedings and the risk to the secured creditor of delayed payments and depreciation of its collateral’s value.