584 B.R. 268
Bankr. N.D. Ill.2018Background
- Two chapter 13 debtors (Carr and Lindsey) proposed plans that pay their attorneys (Geraci; Semrad) ahead of or concurrently with secured auto lenders, resulting in lower early payments to lenders and larger payments later.
- Neither auto lender objected to the proposed treatment in either case; the Chapter 13 trustee objected to plan confirmation and to fee applications.
- Both debtors signed Court Approved Retention Agreements (CARAs) shortly before filing; Lindsey also initialed disclaimers acknowledging early attorney payment; Carr submitted an affidavit showing he understood consequences of accelerated attorney payment.
- Trustee argued plans violate §1325(a)(5)(B)(iii)(I) (equal monthly payments), attorneys breached fiduciary duties by inadequate disclosure, and Local Rule 2016-1 was violated because fee-related understandings weren’t filed.
- Court held both plans are confirmable (secured creditors had notice and did not object), but denied fee applications without prejudice because attorneys failed to comply with Local Rule 2016-1; additionally found Semrad breached pre-retention fiduciary disclosure duties while Geraci did not.
Issues
| Issue | Trustee's Argument | Attorneys' Argument | Held |
|---|---|---|---|
| Whether §1325(a)(5)(B)(iii)(I) (equal monthly payments to secured creditors) applies when secured creditors do not object | Plan violates equal-monthly-payments requirement because payments to secured creditors increase after attorneys are paid | If secured creditors had notice and do not object, §1325(a)(5)(A) is satisfied and (B) is not implicated | Overruled trustee; where secured creditors had notice and did not object, §1325(a)(5)(A) satisfied and cramdown rule (B) not implicated |
| Whether plan proposals paying attorneys ahead of secured creditors violate §1325(a)(3) good-faith requirement | Accelerated attorney payment shows bad faith and harms debtor-creditor balance | Payment of administrative attorney fees ahead of creditors is permissible under §1326(b)(1); not per se bad faith | Overruled trustee; no per se bad faith found; plan permissible under §1326(b)(1) |
| Whether attorneys breached fiduciary duty by failing to disclose implications of accelerated fee payment before retention | Attorneys failed to disclose that early dismissal would impair debtor’s ability to keep vehicle; breach of pre-retention fiduciary duty | Fee arrangements were contractual (CARA) and lawful under Bankruptcy Code; disclosures were made or not materially prejudicial | Court found a pre-retention fiduciary disclosure duty in consumer chapter 13 cases; Semrad breached it (denied disclosure), Geraci adequately disclosed (no breach) |
| Whether Local Rule 2016-1/Local Rule 5082-2 required filing of any understanding about fee payment mechanics and whether failure to file bars no-look fee | Understandings regarding accelerated payment are "agreements" pertaining to compensation and must be in writing, signed, and filed; failure invalidates nolook fee certification | CARA is the only agreement required for nolook fee; additional understandings did not "modify" CARA and thus need not be filed | Held that any understanding altering or clarifying how counsel will be paid falls within Rule 2016-1 and must be filed; because counsel failed to disclose these understandings, nolook fee certifications were false and fee applications denied without prejudice |
Key Cases Cited
- United Student Aid Funds, Inc. v. Espinosa, 559 U.S. 260 (Sup. Ct.) (all conditions of §1325(a) are mandatory)
- Johnson v. Home State Bank, 501 U.S. 78 (Sup. Ct.) (§1325(a) requirements are mandatory for plan confirmation)
- In re Andrews, 49 F.3d 1404 (9th Cir.) (disjunctive reading of §1325(a)(5) — if (A) satisfied, (B) need not be considered)
- Lamie v. U.S. Trustee, 540 U.S. 526 (Sup. Ct.) (limitations on administrative fee recovery outside chapters 12 and 13)
- In re Crager, 691 F.3d 671 (5th Cir.) (no per se rule that paying attorney before creditors violates good faith in chapter 13)
- In re Brent, 458 B.R. 444 (Bankr. N.D. Ill.) (description and justification of "no-look" flat fee regime in chapter 13)
- In re Maldonado, 483 B.R. 326 (Bankr. N.D. Ill.) (administrative fees under §1326(b)(1) may be paid before or concurrently with creditor payments)