Debtors’ counsel have a problem. If a case converts to chapter 7 before confirmation of a chapter 13 plan, they might not be paid.
If a chapter 13 case is dismissed before confirmation, Section 1326(a)(2) says that the trustee pays administrative expenses (such as allowed counsel fees) before the remainder is returned to the debtor. However, the statute doesn’t say how or whether debtor’s counsel is paid if the case converts to chapter 7 before confirmation.
Previously, Bankruptcy Judge Robert H. Jacobvitz of Albuquerque, N.M., held that counsel are not paid if the case converts before confirmation. He found a solution, however.
Chapter 13 debtor’s counsel should include a provision in the retention agreement assigning funds in the trustee’s possession to the lawyer to the extent of the lawyer’s allowed fees, in the event that the case converts to chapter 7 before confirmation.
Conversion to ‘7’ Before ‘13’ Confirmation
A couple’s chapter 13 case was on the verge of dismissal or conversion to chapter 7 before confirmation of a chapter 13 plan. The debtors’ counsel had withdrawn, but Judge Jacobvitz had granted a fee application by the debtors’ counsel. Following Section 1326(a)(2), it called for the chapter 13 trustee to pay the lawyer’s allowed compensation if the debtors were to elect having their case dismissed.
The fee order was silent about how or whether the allowed fees would be paid if the debtors elected for conversion to chapter 7.
That’s what happened. The case converted to chapter 7, and Judge Jacobvitz was tasked with deciding whether there were any circumstances under which the debtors’ counsel could be paid. In other words, could counsel be paid, or was Judge Jacobvitz compelled to return everything to the debtors that was being held by the chapter 13 trustee?
Harris v. Viegelahn, 575 U.S. 510 (2015), did not provide an answer but may have suggested the outcome, although adverse to counsel. In Viegelahn, the chapter 13 plan had been confirmed, but the case later converted to chapter 7. The disposition of the money held by the chapter 13 trustee was not answered by Section 1326.
The Supreme Court held that undistributed money goes back to the debtor. After conversion, the Court also said that the services of the chapter 13 trustee terminate and that “no Chapter 13 provision holds sway.” Id. at 520.
In 2015 after Viegelahn, Judge Jacobvitz and his colleague on the Albuquerque bench, Bankruptcy Judge David T. Thuma, ruled together that the court cannot pay counsel fees if the case converts to chapter 7 before confirmation. See In re Beauregard, 533 B.R. 826, 832 (Bankr. D.N.M. 2015). However, Judge Jacobvitz cited judges from elsewhere who found reasons for paying counsel in a case converted to chapter 7 before confirmation.
Judge Jacobvitz found a method for (sometimes) paying counsel by following dicta in Beauregard.
Paraphrasing Beauregard, Judge Jacobvitz said that a “possible way” to pay counsel would be the inclusion “in [the lawyer’s] engagement letter [of] an assignment of such funds to debtor’s counsel.” In his November 12 opinion, he held “that such an assignment is permissible.”
Viegehahn was no roadblock, Judge Jacobvitz said, because he was giving no effect to any provision in chapter 13, nor was he calling on the chapter 13 trustee to carry out a chapter 13 service. Instead, he was only directing the chapter 13 trustee to “honor the private agreement” between the debtors and their counsel.
Of greater significance, Judge Jacobvitz said he was furthering “an important public policy of giving individuals in financial distress who wish to take advantage of the chapter 13 fresh start access to counsel willing to represent them in a chapter 13 case with little or no upfront payment.”
Judge Jacobvitz cited Bankruptcy Judge David E. Rice for having agreed with the dicta in Beauregard. See In re Brandon, 537 B.R. 231, 236-37 (Bankr. D. Md. 2015).
Judge Jacobvitz told bankruptcy lawyers in New Mexico that an “assignment by the debtor to the debtor’s bankruptcy counsel of the debtor’s right to payment from the chapter 13 trustee upon conversion to chapter 7 may be included in the engagement letter by which the debtor retained bankruptcy counsel.”
In the case before him, the retention agreement was not in the record. If debtors’ counsel were to file the agreement with the court, and if it had an assignment, Judge Thuma directed the chapter 13 trustee to pay the allowed fee and return the remainder to the debtors.
If the retainer agreement had no assignment, Judge Jacobvitz threw the lawyer a lifeline: The lawyer could have the client sign an assignment belatedly.
In an ordinary case, asking a client to sign an assignment after filing would be ethically “problematic,” Judge Thuma said. Because the lawyer had already withdrawn, he said there was not the same “inherent undue pressure.”
If the lawyer was to have the clients sign an assignment for the first time after conversion, Judge Thuma required counsel to file a certification to prove that the assignment was voluntary. The certification must read:
[The debtors] (1) understand that they are under no obligation to direct the former Chapter 13 Trustee to pay any moneys to [the lawyer], (2) understand that if the Chapter 13 Trustee does not pay monies she has on hand to the [lawyer,] she will refund the monies to [the debtors], and (3) of their own free will, and without any duress or pressure, direct the Chapter 13 Trustee to pay the monies she has on hand to the [the lawyer] up to the amount of the court-allowed unpaid compensation, with any excess funds returned to the [the debtors].
Debtors’ counsel have a problem. If a case converts to chapter 7 before confirmation of a chapter 13 plan, they might not be paid.
If a chapter 13 case is dismissed before confirmation, Section 1326(a)(2) says that the trustee pays administrative expenses (such as allowed counsel fees) before the remainder is returned to the debtor. However, the statute doesn’t say how or whether debtor’s counsel is paid if the case converts to chapter 7 before confirmation.
Previously, Bankruptcy Judge Robert H. Jacobvitz of Albuquerque, N.M., held that counsel are not paid if the case converts before confirmation. He found a solution, however.
Chapter 13 debtor’s counsel should include a provision in the retention agreement assigning funds in the trustee’s possession to the lawyer to the extent of the lawyer’s allowed fees, in the event that the case converts to chapter 7 before confirmation.