On a question where the lower courts are split, Chief Bankruptcy Judge G. Michael Halfenger of Milwaukee decided that the fees paid for a chapter 13 debtor’s counsel must be taken into consideration in calculating whether the plan satisfies the best interests test.
The debtor filed a 36-month chapter 13 plan calling for payments to unsecured creditors totaling about $4,000. The debtor’s counsel fees of some $4,500 were presumed to be reasonable and would be an automatically allowed administrative expense under the local rules.
Were the debtor’s assets to be liquidated in chapter 7, the chapter 13 trustee calculated that the unsecured creditors would receive $8,500 in distributions after paying some $1,700 for the chapter 7 trustee’s commissions.
The chapter 13 trustee objected to confirmation of the chapter 13 plan, contending that unsecured creditors must be paid $8,500 to satisfy the so-called best interests test under Section 1325(a)(4). In other words, the trustee believed that the debtor’s attorneys’ fees should not be taken into consideration in calculating the best interests test.
In his February 16 opinion, Judge Halfenger acknowledged two bankruptcy court decisions that supported the trustee and disallowed deductions for the debtor’s counsel’s fees in the best interests calculation.
Judge Halfenger said the trustee’s position had “some intuitive appeal” and was based on a policy that unsecured creditors should not be paying the attorneys’ fees that would be avoided if the debtor filed directly into chapter 7.
However, Judge Halfenger said that the policy, “no matter how strong,” cannot “overcome either the statute’s plain text or the Supreme Court’s construction of the same phrase.” He therefore disagreed with the trustee and found the answer in the language of the governing statutes and rules.
Section 1325(a)(4) calls for employing the best interests test as of “the effective date of the plan,” a term not defined in the Bankruptcy Code. The word “effective” means the “operative” date of the plan, Judge Halfenger said.
Judge Halfenger concluded that a “plan is operative when its terms are binding on the debtor and creditors — i.e., when the court confirms it.” He cited two Supreme Court opinions reaching the same conclusion in different contexts under chapter 13.
What about the debtor’s counsel’s fees? What would their status be on confirmation?
The fees fell under the so-called no-look local rule and would be automatically allowed as administrative expenses on confirmation, because no one objected.
If the case converted to chapter 7 before confirmation, the debtor’s counsel’s fees would be allowed chapter 13 administrative expenses that the chapter 7 trustee would be obliged to pay in full before making distributions to unsecured creditors under Sections 507(a)(2) and 726(a)(1).
Judge Halfenger therefore deduced that the debtor’s counsel’s fees are included in the determination of best interests. There was a glitch, however.
The plan called for paying counsel fees before the chapter 13 trustee commences paying unsecured claims. The result would be a delay of at least one year before the first payments to unsecured creditors.
The best interests test in Section 1325(a)(4) requires giving unsecured creditors “the value” they would receive “as of the effective date of the plan.” Citing Supreme Court authority, Judge Halfenger said that value as of the effective date means that the present value of the deferred payments must equal $4,000.
Judge Halfenger in substance directed the debtor to amend the plan to give unsecured creditors the present value of $4,000 in future payments.
On a question where the lower courts are split, Chief Bankruptcy Judge G. Michael Halfenger of Milwaukee decided that the fees paid for a chapter 13 debtor’s counsel must be taken into consideration in calculating whether the plan satisfies the best interests test.
The debtor filed a 36-month chapter 13 plan calling for payments to unsecured creditors totaling about $4,000. The debtor’s counsel fees of some $4,500 were presumed to be reasonable and would be an automatically allowed administrative expense under the local rules.
Were the debtor’s assets to be liquidated in chapter 7, the chapter 13 trustee calculated that the unsecured creditors would receive $8,500 in distributions after paying some $1,700 for the chapter 7 trustee’s commissions.
The chapter 13 trustee objected to confirmation of the chapter 13 plan, contending that unsecured creditors must be paid $8,500 to satisfy the so-called best interests test under Section 1325(a)(4). In other words, the trustee believed that the debtor’s attorneys’ fees should not be taken into consideration in calculating the best interests test.
In his February 16 opinion, Judge Halfenger acknowledged two bankruptcy court decisions that supported the trustee and disallowed deductions for the debtor’s counsel’s fees in the best interests calculation.