537 B.R. 231
Bankr. D. Md.2015Background
- Four Chapter 13 cases where debtors' counsel had agreed to a presumptively reasonable $4,500 fixed fee, with partial retainer paid prepetition and the balance to be paid through plan payments.
- None of the cases resulted in plan confirmation; each case was either dismissed or converted to Chapter 7 before confirmation.
- Chapter 13 trustees hold undistributed postpetition wages (pre-confirmation plan payments) under 11 U.S.C. § 1326(a)(1).
- Debtors’ counsel moved for allowance of fees and for orders directing trustees to pay the unpaid fee balance from the funds on hand; some retainer agreements included assignments of the debtor’s interest in trustee-held funds to counsel.
- No party opposed the fee requests; the court found the requested fees reasonable and raised the question whether Harris v. Viegelahn bars trustee payment of those funds to debtor’s counsel when a case is dismissed or converted pre-confirmation.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Harris v. Viegelahn precludes payment of unpaid counsel fees from pre-confirmation plan payments when a Chapter 13 case is dismissed before confirmation | Counsel: §1326(a)(2) third sentence requires trustee to return funds only after deducting unpaid §503(b) administrative claims (including counsel fees); Harris does not apply to dismissals | Trustee/Harris view: Harris limits post-conversion/disposition treatment of held wages; may counsel be paid when case terminates? | Court: Harris does not apply to dismissals; §1326(a)(2) controls — trustee may pay allowed counsel fees before returning funds to debtor |
| Whether Harris precludes payment of unpaid counsel fees from trustee-held funds when a case is converted to Chapter 7 before confirmation | Counsel: Third Circuit (Michael) supports applying §1326(a)(2) third sentence after conversion; trustee must deduct allowed administrative claims before returning funds | Trustee/Harris view: Harris held that conversion terminates Chapter 13 trustee authority and plan provisions do not survive; some courts read that to bar payment under §1326(a)(2) after conversion | Court: Harris does not preclude payment in pre-confirmation conversions; third sentence of §1326(a)(2) still governs and trustee may pay allowed counsel fees prior to returning funds |
| Whether a debtor’s prepetition assignment of their interest in trustee-held funds authorizes direct payment to counsel | Counsel: Valid assignment under non-bankruptcy law transfers debtor’s right in funds; trustee may pay assignee (counsel) up to unpaid fees | Trustee: Harris and conversion concerns do not nullify valid assignments | Held: Assignments in retainer agreements are enforceable and provide an independent basis to direct trustee payment to counsel up to unpaid fees |
Key Cases Cited
- Harris v. Viegelahn, 135 S. Ct. 1829 (2015) (Supreme Court holding postpetition wages held at conversion must be returned to the debtor and a terminated Chapter 13 trustee may not distribute those funds under the plan)
- Viegelahn v. Harris, 757 F.3d 468 (5th Cir. 2014) ( Fifth Circuit decision rejecting return-to-debtor rule later reversed by the Supreme Court )
- In re Michael, 699 F.3d 305 (3d Cir. 2012) (Third Circuit view that §1326(a)(2) third sentence requires trustee to account for and return pre-confirmation payments after deducting allowed administrative claims even after conversion)
- In re Beauregard, 533 B.R. 826 (Bankr. D.N.M. 2015) (court reading Harris to apply to conversions and expressing concerns about attorney hardship; discussed assignments as mitigation)