On an issue where the courts are divided, bankruptcy and district judges in Indianapolis allow a chapter 13 debtor’s attorney to be paid in full before secured creditors receive more than adequate protection payments.
The chapter 13 debtor owed $12,000 on a car he intended to retain. His lawyer had a $3,900 allowed administrative claim. The debtor was paying the auto lender adequate protection payments of 1% a month.
The plan called for the debtor to pay his attorney’s fees in full before starting to pay full monthly debt service on the auto lender’s secured claim. The full monthly debt service of $285 would begin in the 21st month of the plan. The adequate protection payments would cease when the monthly debt service began.
The lender objected to confirmation of the plan, contending that the debtor must begin paying full monthly debt service alongside payments on the attorney’s priority claim.
Bankruptcy Judge James M. Carr of Indianapolis overruled the objection and confirmed the plan. Chief District Judge Jane Magnus-Stinson affirmed in an October 2 opinion. She explained that courts are split on the outcome and that no circuit has ruled on the question so far.
The appeal chiefly turned on Section 1326(b)(1), which provides that any unpaid administrative claims “shall” be paid “[b]efore or at the time of each payment to creditors under the plan.”
Judge Magnus-Stinson said that courts are split three ways. Two groups of courts employ different rationales, but end up holding that the trustee cannot make only partial payments to the debtor’s attorney while giving full debt service to a secured lender.
The third group, with the opposite result, requires full debt service to secured lenders upon confirmation.
Judge Magnus-Stinson sided with the decision by Bankruptcy Judge Marvin Isgur of Houston in In re DeSardi, 340 B.R. 790 (Bankr. S.D. Tex. 2006). Like Judge Isgur, she held that the attorney’s administrative claim must be paid in full before the lender receives anything other than adequate protection.
Judge Magnus-Stinson found the answer in the “plain language” of Section 1326(b)(1), which says that unpaid administrative claims “shall be paid” either “[b]efore or at the time of each payment to creditors under the plan.” She reasoned that adequate protection is paid “independent of the plan” and therefore “can begin before any plan is approved and do[es] not necessarily have to be provided for in the plan.”
Therefore, Judge Magnus-Stinson concluded that unpaid attorneys’ fees “‘shall be paid’ either ‘before or at the time of each’ [regularly monthly] payment [of debt service] required by the plan.”
Judge Magnus-Stinson agreed with a second reason given by Judge Isgur: “[T]he most natural reading of the phrases ‘any unpaid claim’ and ‘shall be paid’ is that any outstanding balance owed must be paid in full.”
As a third reason for her conclusion, Judge Magnus-Stinson said that the plain language of Section 1326(b)(1) “would not be satisfied” if full monthly payments were made simultaneously to the attorney and the auto lender.
Judge Magnus-Stinson therefore held that Section 1326(b)(1) “requires that an administrative claim for the debtor’s attorney’s fees be paid in full before or at the same time as [full debt service] payments to secured creditors begin.” In that regard, she noted that the Code does not say when full debt service begins or ends.
Judge Magnus-Stinson found a practical reason for her conclusion.
If full debt service and full monthly payments to secured creditors must begin on confirmation, the statute would effectively mean that debtors would be required to pay administrative claims in full in the first month after confirmation, but, Judge Magnus-Stinson said, “it is unlikely that a bankrupt debtor would be able to pay the entire attorney fee and all [full monthly debt service] to secured creditors at the same time.”
The result would be “absurd and infeasible,” Judge Magnus-Stinson said, if the statute required payments that many debtors could not make.
Finally, Judge Magnus-Stinson said that her holding “is consistent with the policy of incentivizing attorneys to participate in bankruptcy proceedings.”
On an issue where the courts are divided, bankruptcy and district judges in Indianapolis allow a chapter 13 debtor’s attorney to be paid in full before secured creditors receive more than adequate protection payments.
The chapter 13 debtor owed $12,000 on a car he intended to retain. His lawyer had a $3,900 allowed administrative claim. The debtor was paying the auto lender adequate protection payments of 1% a month.
The plan called for the debtor to pay his attorney’s fees in full before starting to pay full monthly debt service on the auto lender’s secured claim. The full monthly debt service of $285 would begin in the 21st month of the plan. The adequate protection payments would cease when the monthly debt service began.
The lender objected to confirmation of the plan, contending that the debtor must begin paying full monthly debt service alongside payments on the attorney’s priority claim.
Bankruptcy Judge James M. Carr of Indianapolis overruled the objection and confirmed the plan. Chief District Judge Jane Magnus-Stinson affirmed in an October 2 opinion. She explained that courts are split on the outcome and that no circuit has ruled on the question so far.