In re Brandon
MEMORANDUM OPINION
These cases require the court to consider the effect of the Supreme Court’s recent decision in Harris v. Viegelahn, — U.S. —,
JURISDICTION
This court has subject matter jurisdiction over this proceeding under 28 U.S.C. § 1334, 28 U.S.C. § 157(a), and Rule 402 of the Local Rules of the United States District Court for the District of Maryland. This is a “core proceeding” under 28 U.S.C. § 157(b). This memorandum opinion constitutes the court’s findings of fact and conclusions of law.
FINDINGS OF FACT
Each of these cases was commenced by a voluntary petition filed by the debtor seeking relief in this court under Chapter 13 of title 11 of the United States Code (the “Bankruptcy Code”). These cases were later either dismissed or converted for various reasons.
At the time these cases were commenced, counsel for each of the debtors agreed to a $4,500.00 fixed fee engagement that is deemed presumptively reasonable under Appendix F of the Local Bankruptcy Rules of the United States Bankruptcy Court for the District of Maryland. In each instance and consistent with local practice, debtor’s counsel agreed to accept a portion of the fee in advance — in amounts that range from $480.00 to $1,500.00 — and to have the balance paid by the debtor through the Chapter 13 plan.
In each case, the Chapter 13 trustee holds undistributed postpetition wages of the debtor received as pre-confirmation plan payments in accordance with § 1326(a)(1) of the Bankruptcy Code. Consistent with local practice, counsel for each of the debtors filed a motion requesting allowance of attorney’s fees and entry of an order by the court directing the Chapter 13 trustee to pay the funds on hand to counsel up to the amount of the unpaid balance of the requested fee. In each instance, debtor’s counsel has requested an amount less than what would be required to pay the entire $4,500.00 agreed fee in full.
In at least two of these cases, the debtor assigned to debtor’s counsel the dеbtor’s interest in funds held by the Chapter 13 trustee to the extent necessary to pay counsel fees. In Burrows, the retainer agreement included an assignment by the debtor of her interest in funds held by the Chapter 13 trustee to the extent of Jeffrey M. Sirodys unpaid counsel fees.
CONCLUSIONS OF LAW
The Supreme Court was called upon in Harris to resolve a circuit split on the question of whether a debtor’s postpetition wages held by a Chapter 13 trustee at the time of conversion of a case to one under Chapter 7 should be returned to the debt- or or paid to creditors under the terms of the confirmed Chapter 13 plan. In the decision under review by the Supreme Court in Harris, the Fifth Circuit held that “returning undistributed funds to the debtor is not justified by the policy of encouraging debtors to proceed through Chapter 13 rather than Chapter 7.” Viegelahn v. Harris (In re Harris),
In Harris, the debtor’s Chapter 13 plan was confirmed. Thereafter, the debtor exercised in good faith his right to convert the case to one under Chapter 7 pursuant to § 1307(a) of the Bankruptcy Code. At the time of conversion, the Chapter 13 trustee was holding $5,519.22 in postpetition wages of the debtor that had not beеn distributed in accordance with the plan. The debtor’s notice of conversion was accompanied by an assignment to his counsel of $1,200.00 of that amount in payment of attorney’s fees. The Chapter 13 trustee paid debtor’s counsel and then disbursed the $4,319.22 in accordance with the plan. The debtor obtained a bankruptcy court order compelling the Chapter 13 trusteе to return the $4,319.22, which order was appealed by the Chapter 13 trustee and ultimately was reviewed and upheld by the Supreme Court. Harris v. Viegelahn,
The Supreme Court concluded that the issue before it was resolved by § 348 of the Bankruptcy Code, which governs the effect of conversion of a case from one chapter to another. Under § 348(f), the postpetition wages of a debtor whо converts a Chapter 13 case to one under Chapter 7 in good faith are not property of the Chapter 7 estate to be distributed to creditors. Under § 348(e), conversion to Chapter 7 terminates the service of the Chapter 13 trustee. The Supreme Court held that “[allowing a terminated Chapter 13 trustee to distribute the very same earnings to the very same creditors is incompatible with that statutory design.” Harris,
Moreover, the Supreme Court рointed out that a Chapter 13 plan is no longer binding once the case is converted. Speaking broadly, the Court also said: “When a debtor exercises his statutory right to convert, the case is placed under Chapter 7’s governance, and no Chapter 13 provision holds sway.” Id.
In these cases, this court is called upon to consider two questions not addressed by the Supremе Court in Harris — namely, whether postpetition wages of the debtor held by the Chapter 13 trustee may be used to pay the balance of the fee owed not to a creditor but rather to debtor’s counsel when the debtor either dismisses or converts the case before a Chapter 13 plan is confirmed. In both instances, nothing precludes this court from issuing the requested order directing the Chapter 13 Trustee to pay debtor’s counsel the remaining balance of a fee allowed as an administrative expense.
Chapter 13 Cases Dismissed Prior to Conñrmation
A case dismissed prior to confirmation of a Chapter 13 plan presents a situation entirely different from Harris. Such a case remains a Chapter 13 case in which the Chapter 13 provisions hold sway. Moreover, the effect of dismissal of a Chаpter 13 case is governed by § 349 of the Bankruptcy Code. Unlike § 348(e) of the Bankruptcy Code, which the Supreme Court relied on in Harris, § 349 does not provide that dismissal “terminates the service of any trustee.” Thus, the Chapter 13 trustee remains in office. Also, because no Chapter 13 plan has been confirmed the basis for the payment to be made by the Chapter 13 trustee is not founded on a plan that is no longer in effect and nonbinding.
In these circumstances, the Chapter 13 trustee is bound by the provisions of the third sentence of § 1326(a)(2) of the Bankruptcy Code, .which requires the Chapter 13 trustee to return undistributed plan payments to the debtor if a plan is not confirmed “after deducting any unpaid claim allowed under section 503(b).” Under § 503(b)(2) of the Bankruptcy Code, the administrative exрenses allowable under § 503(b) include “compensation and reimbursement awarded under section 330(a).” In a Chapter 13 case, such compensation includes “reasonable compensation to the debtor’s attorney for representing the interests of the debtor in connection with the bankruptcy case.” 11 U.S.C. § 330(a)(4)(B). Thus, the applicable statutory scheme expressly dirеcts Chapter 13 trustees' to return funds on hand to the debtor when (as here) a plan is not confirmed, but only after payment of the allowed fees of the debtor’s attorney.
Since the Supreme Court handed down its decision, few courts have considered the question of the impact of Harris on the payment of debtor’s counsel. The only' decisions of which I am aware that consider pre-confirmation dismissal all agree that Harris has no impact in such cases and that § 1326(a)(2) controls. In re Kirk,
Chapter 13 Cases Converted Prior to Confirmation
At first glance, a case converted prior to confirmation of a Chapter 13 plan might seem more analogous to the situation in Harris. Thus, such a ease might seem to be one in which a court is precluded from directing the Chapter 13 trustee to pay debtor’s counsel from postpetition wages of the debtor. I conclude, however, that payment by the Chapter 13 trustee is not precluded in such cases.
As a starting point, the Supreme Court found in Harris that no Chapter 13 provision holds sway upon conversion of a case to Chapter 7. It did so, however, in the context of a case in which a Chapter 13 plan had already been confirmed. Furthermore, it did so in the course of explaining that the terms of the Chapter 13 plan and the second sentence of § 1326(а)(2) are not a basis upon which to disregard the statutory scheme protecting postpetition wages from inclusion in a debtor’s Chapter 7 bankruptcy estate. In a case converted prior to confirmation, the service of the Chapter 13 trustee is similarly terminated under § 348(e). But as the Supreme Court acknowledged, the former Chapter 13 trustee nevertheless has some оngoing responsibilities after conversion. Because a plan has not been confirmed, I conclude that those post-conversion responsibilities continue to include compliance with the third sentence of § 1326(a)(2) requiring the payment of administrative expenses such as the remaining allowed fee of debtor’s counsel prior to returning unpaid funds to a debtor.
I am аware that other courts have considered this question and reached the opposite conclusion. The opinion in In re Beauregard,
In Harris, the Supreme Court resolved the circuit split by rejecting the Fifth Circuit view in favor of the view of the Third Circuit. In its opinion in Michael, the Third Circuit indicated that the third sentence of § 1326(a)(2) applies after conversion. As the Third Circuit said,
Conversion also “terminates the services” of the Chapter 13 trustee. Id. § 348(e). Though [her] services are ended after conversion, the trustee is required to account for the funds that came into [her] possession by filing a final report under Federal Rule of Bankruptcy Procedure 1019(5)(B)(ii). In addition, if the case is converted prior to confirmation of a plan, the trustee must return any payments held by [her] to the debtor after deducting adequate funds for [her] to pay allowed administrative expense claims. See 11 U.S.C. § 1326(a)(2).
In re Michael,
Each of the- three sentences in § 1326(a)(2) addresses a differеnt issue based on the procedural posture of the Chapter 13 case. The first sentence directs a Chapter 13 trustee to retain pre-confirmation plan payments “until confirmation or denial of confirmation.” The second sentence directs the Chapter 13 trustee to distribute such payments as soon as practicable if a plan is confirmed. Because under Hams a Chapter 13 plan is no longer binding and the Chapter 13 trustee’s services are terminated once the case is converted, it follows that a Chapter 13 trustee could not rely on the second sentence of § 1326(a)(2) as authority to continue to distribute plan payments in accordance with the plan. The third sentence of § 1326(a)(2), however, specifically deals with disрosition of plan payments if “a plan is not confirmed.” It does not follow that after Harris a Chapter 13 trustee must comply with a portion of this sentence (return pre-confirmation plan payments to the debtor), but ignore another portion of that same sentence (after deducting funds needed for payment of allowed administrative expense claims). As the Third Circuit indicated in Michael, the third sentence of § 1326(a)(2) applies generally to cases in which a Chapter 13 plan is not confirmed and is simply not a provision swept away by conversion of a case to one under Chapter 7.
Assignment of the Debtor’s Right to Payment
As pointed out in the memorandum filed by the Consumer Bankruptcy Section of the Maryland State Bar Association, there is also an independent basis for the court to authorize payment of funds held by a Chapter 13 trustee to counsel. In at least two of these cases, the debtors assigned pursuant to prepetition retainer agreements their interest in the funds held by the Chapter 13 trustee to the extent the fees of their counsel remain unpaid. An assignment of funds in the retainer agreement under applicable non-bankruptcy law permits direct pаyment to debtor’s counsel by the Chapter 13 trustee. See, e.g., Hernandez v. Suburban Hospital,
The question of assignments by debtors was commented on favorably by the court in Beauregard. As that court said,
We are mindful of the hardship Harris may impose on attorneys representing debtors in chapter 13 cases, and of the deleterious effect Harris could have on the willingness of attorneys to represent debtors in Chapter 13 cases. Harris rejected the argument that returning held funds to the debtor after conversion would amount to a “windfall,” reasoning that the debtor’s post-petition wages would not have been included in a Chapter 7 bankruptcy estate if the debt- or had started in Chapter 7 rather than' 13 . That may be true from the perspective of pre-petition creditоrs, but obtaining Chapter 13 representation without paying for it could well be considered a windfall to a debtor in a converted case.
Payment of attorney’s fees was not questioned or challenged in Harris. The attorney there obtained an assignment by the debtor of his right to the funds held by the Chapter 13 trustee, to secure payment of post-conversion attorney’s fees . The solutiоn for Chapter 13 debtor’s counsel might be to include in their engagement letters an assignment of and security interest in the debtor’s post-petition wages held by the standing trustee on the date of conversion, to pay allowed unpaid attorney’s fees and costs incurred during the Chapter 13 case.
.... Use of an assignment or security interest as outlined above, or something similar, might minimize the risk faced by debtor’s counsel in converted cases.
In re Beauregard,
CONCLUSION
For these reasons, I conclude that Harris does not preclude the court from directing Chapter 13 trustees to pay funds remaining in their possession to debtor’s counsel uр to the amount of the attorney’s fee allowed in cases that are dismissed ór converted prior to confirmation of a Chapter 13 plan. Separate orders will be entered in each of these eases consistent with this Memorandum Opinion.
Notes
.The Margret Brandon and Cynthia Burrows cases were dismissed after confirmation of each of their Chapter 13 plans was denied withоut leave to amend. James and Belinda Rucker’s case was dismissed on the Chapter 13 trustee’s motion prior to confirmation. Arthur Everest converted his case in good faith to one under Chapter 7 prior to confirmation. The Chapter 7 trustee for Arthur Everest’s bankruptcy estate issued a Report of No Distribution in his case, and Arthur Everest was recently issued a Chapter 7 discharge. These procedural differences have no bearing on the outcome of the issue now before the court.
. Motion to Direct Payment In re Burrows, Case No. 14-28940-DER [Docket No. 34, ¶ 6] ("Pursuant to a Retainer Agreement, dated Thursday, November 15, 2012, Debtor(s) has(have) assigned the interest in the funds held by the Trustee to the extent Counsel is still owed fees or expenses.”).
. Motion to Direct Payment of Plan Funds to Undersigned Counsel, In re Rucker, Case No.