Opinion
Case No. 96-11976-SSM
July 23, 1997
Mr. Ali R. Darvishian, 4806 Black Alder Drive, Alexandria, VA for debtor
John E. Smircina, Esquire, 221 South Alfred Street, Alexandria, VA for the debtor
Gerald M. O'Donnell, Esquire, 211 South Alfred Street, Alexandria, VA for chapter 13 trustee
Donald Fishman, Esquire Wolpoff Abramson 10605 Judicial Drive, Fairfax, VA for Hassan Abrishamian
MEMORANDUM OPINION AND ORDER
This matter is before the court on the application of the debtor's attorney for compensation in the amount of $8,939.00. A hearing was held on July 15, 1997, at which only counsel for the debtor appeared. No objections have been filed with respect to the application. On its own motion, however, the court questioned whether approval of the requested attorney's fees would affect the feasibility of the confirmed plan, since the debtor was already contributing all disposable income to the plan over the maximum period, 60 months, allowed by law. At the conclusion of the hearing, the court took the matter under advisement to determine whether the requested fees should be approved.
The application represents that the attorney and the debtor agreed to a "flat fee" of $1,500.00 for the preparation and filing of the petition, schedules, and plan and for representation at the meeting of creditors and one confirmation hearing. The application states that the attorney has been paid $1,014.00 of that amount. The current application seeks payment of the remaining $486.00 plus compensation for an additional 4R.3 hours at $175.00 per hour.
Facts
This case, and the facts underlying it, have a long history. The debtor filed a voluntary petition for relief under chapter 13 of the Bankruptcy Code in this court on April 17, 1996. The debtor had previously filed a chapter 7 case, Case No. 95-12284-AM, in the course of which this court held that a $172,400 judgment plus accrued interest, entered by the United States District Court for the Eastern District of Virginia, in favor of Hassan Abrishamian ("Abrishamian") on December 23, 1986, was nondischargeable under §§ 523(a)(2) and (a)(4), Bankruptcy Code. The facts underlying both this case and the prior case have been the subject of two memorandum opinions and several court hearings and need not be repeated in detail here.
The original plan proposed by the debtor was dated May 2, 1996 and provided for a 100% dividend to unsecured creditors. The plan, however, did not provide for payment of Abrishamian's judgment because the debtor took the position that the judgment had recently been satisfied by a $20,000 payment. Prior to the confirmation hearing, the debtor filed on July 3, 1996, a "provisional" plan (the first amended plan) to pay Abrishamian 5.6 cents on the dollar if the court determined that Abrishamian had a claim. An evidentiary hearing was held on August 19, 1996, at which the court ruled that $20,000 had indeed been paid by the debtor to Abrishamian, but that such payment had been accepted only in reduction of the amount owed and not in satisfaction of the debt. The court found that the amount owed on the judgment, after application of the credit, was $245,143.22, including accrued interest. Based on the court's determination that the first amended plan had not been proposed in good faith, the court denied confirmation by order entered August 26, 1996. On August 28, 1996, the debtor filed a modified plan (the second amended plan) which proposed a 12% dividend to unsecured creditors. By memorandum opinion and order dated November 5, 1996, the court denied confirmation of that plan as well, holding that the plan was not proposed in good faith, as required by § 1325(a)(3), Bankruptcy Code, with particular consideration given to the fact that a nondischargeable claim incurred by fraud was being compromised at 12 cents on the dollar.
There is no plan dated May 2, 1996 in the case file or reflected on the docket. However, it appears that counsel for Abrishamian and the Chapter 13 trustee both received copies of this plan, as both parties filed objections to confirmation. The court was subsequently supplied with a copy of the May 2, 1996 plan as an exhibit.
Other than Abrishamian, the only other unsecured creditor listed in the debtor's schedules is Abrishamian's attorneys in the amount of $3,500. However, they did not file a proof of claim. One other unsecured creditor has filed a proof of claim in the amount of $75. Although this creditor was not listed in the debtor's schedules, the claim has not been objected to.
The debtor then filed yet another modified plan (the third amended plan), dated November 15, 1996, that projected a 17.9% dividend to unsecured creditors. That plan was confirmed, over the objection of the judgment creditor, by order entered on December 18, 1996. One of the factors considered by the court in confirming the plan, despite the relatively minimal payment of unsecured claims, was that the debtor was contributing to the plan, over the maximum period permitted by law, all of his disposable income — a sum approximately equal, in this case, to the maximum amount that could be garnished from his salary.
At a hearing held on December 3, 1996, counsel for Abrishamian informed the court that the November 15, 1996, plan contained the case number for the debtor's prior chapter 7 case, which apparently explains why that plan was not actually filed in this case until December 17, 1996.
The plan is a "pot" plan, with the actual payout dependent on the amount of allowed unsecured claims. Given the attorneys fees provided for in the plan and the trustee's compensation, the actual payout would have been closer to 15% than the 17.9% estimated in the plan. The increase in the amount of payments required by the court as a condition of confirmation increases that percentage to approximately 16%.
As proposed, the plan required payments of $725.00 per month for 60 months. At the confirmation hearing, the court, as a condition of confirmation, required that the payments be increased to $750.00 per month.
The debtor's amended schedules I ("Current Income") and J ("Current Expenditures") filed with the confirmed plan reflect that the net monthly income of the debtor and his spouse is $6,617.28 and that the family expenses are $5,890 — after a "voluntary reduction" of $340.00 per month — leaving a difference of $727.00. The "voluntary reduction" in living expenses was agreed to by the debtor in order to increase the dividend to unsecured creditors. Given the fact that payments under the plan already exceed the scheduled disposable income of the debtor and his wife by $23 per month — even after substantial belt-tightening — it is clear that payment of the requested attorneys fees through the plan cannot be accomplished without a substantial reduction in the dividend being paid on unsecured claims.
The plan also requires that all income tax refunds in excess of $250 be turned over to the trustee and that payments be increased by the same percentage that the debtor's and his wife's income increases over the term of the plan. Additionally, a rental property owned by the debtor is to be offered for sale at the expiration of the current tenant's lease, with any equity in the property applied to the plan.
The third amended plan confirmed by the court allows for the payment of $1,500.00 in fees to the debtor's attorney as a priority expense of administration. The application for compensation currently before the court seeks fees of $8,939.00 for representation of the debtor in the numerous matters involved with this case. The application states that the debtor's attorney has already been paid $1,014.00 (of the original $1,500 flat fee) by the chapter 13 trustee. There is no provision in the confirmed plan for payment of the additional amounts now being requested. As noted above, the court took the fee request under advisement, despite the lack of formal objection, because the court was concerned that approval of such substantial fees would threaten the feasibility of the confirmed plan and would doom the plan to failure if counsel were to be paid through, or during the pendency of, the plan.
As noted above, this consists of $8,452.50 in fees over and above the $1,500.00 flat fee agreed to before the case was filed, plus the $486 remaining unpaid of the flat fee. The total fees payable in connection with this case would therefore be $9,952.50.
Under § 330(a)(2), Bankruptcy Code, the court has the authority on its own motion to award compensation that is less than the amount requested.
Conclusions of Law and Discussion
This court has jurisdiction of the fee application under 28 U.S.C. § 1334 and 157(a) and the general order of reference entered by the United States District Court for the Eastern District of Virginia on August 15, 1984. Under 28 U.S.C. § 157(b)(2)(A), this is a core proceeding in which final orders and judgments may be entered by a bankruptcy judge, subject to the right of appeal under 28 U.S.C. § 158.
Under § 330(a)(4)(B), Bankruptcy Code, the court may award debtor's counsel in a chapter 13 case "reasonable compensation . . . for representing the interests of the debtor . . . based on a consideration of the benefit and necessity for such services to the debtor and the other factors set forth in this section." Thus, the granting of an award of compensation, and a determination of whether such compensation is reasonable, is within the court's discretion. See In re Junco, Inc., 185 B.R. 215, 218 n. 2 (Bankr. E.D. Va. 1995) (Shelley, J.). Having reviewed the fee application — to which, as noted above, there has been no objection — the court is satisfied that the services rendered by counsel resulted in a substantial benefit to the debtor, and that the requested fees — although greatly in excess of those commonly charged in consumer chapter 13 cases — are reasonable given the number and complexity of the hearings in this case.
In a case brought under chapter 13 of the Bankruptcy Code, the court "shall" confirm a plan if, among other requirements, "the debtor will be able to make all payments under the plan and to comply with the plan." § 1325(a)(6), Bankruptcy Code. This requirement for confirmation of a chapter 13 plan is commonly referred to as the "feasibility" test. Feasibility of a plan is established when the debtor "prove[s] with reasonable certainty his ability to make the payments under the proposed plan." In re Harrison, 203 B.R. 253, 256 (Bankr. E.D. Va. 1996) (Tice, J.). However, the "court should not confirm a plan unless it appears under the totality of circumstances that the plan has a reasonable likelihood of success." Id. In this case, the chapter 13 trustee recommended confirmation, and the order confirming the plan recites that the plan is feasible.
Of course, the court's finding of feasibility was predicated on the assumption that only $1,500.00 in attorneys fees would be paid through the plan. That is the amount provided for in the plan drafted by debtor's counsel, and debtor's counsel never intimated at the hearing at which the plan was confirmed that he would be seeking fees in an amount dramatically larger than that, even though the bulk of the work reflected on the fee application was done prior to that hearing. As noted above, the debtor's budget is stretched to the limit, and there is no apparent way the debtor would be able to increase the amount of his plan payments in order to cover the requested attorneys fees. Although debtor's counsel suggested at the fee application hearing that his client was willing to "extend" the plan in order to provide for such payment, an extension beyond the current five year plan term is plainly prohibited by § 1329(c), Bankruptcy Code. The only way the fees could be paid, therefore, would be through a reduction in the dividend to unsecured creditors.
Section 1329, Bankruptcy Code, provides in relevant part as follows:
(a) At any time after confirmation of the plan but before the completion of payments under such plan, the plan may be modified, upon request of the debtor, the trustee, or the holder of an allowed unsecured claim, to—
(2) extend or reduce the time for such payments[.]
(c) A plan modified under this section may not provide for payments over a period that expires after three years after the time that the first payment under the original confirmed plan was due, unless the court, for cause, approves a longer period but the court may not approve a period that expires after five years after such time.
(emphasis added).
It is perhaps true that an inability to pay the full dividend projected in the plan would not, technically speaking, constitute a default, since the current plan is a "pot" plan. That is, the plan does not guarantee unsecured creditors payment of a fixed percentage of their claims.
Rather, the plan provides simply for pro-rata payment of allowed unsecured claims from available funding after payment of administrative claims, priority claims, and secured claims. The plan sets forth an estimate of the resulting dividend to unsecured creditors but expressly notes that the actual dividend will be dependent on the amount of allowed claims. Nevertheless, the percentage payout on unsecured claims — particularly here, where all but $75.00 of the unsecured debt arises from fraud and would be nondischargeable in the chapter 7 context — is a factor properly considered in connection with confirmation of a chapter 13 plan. The projected dividend to unsecured creditors was in fact given heavy weight by the court in denying confirmation of the earlier plans and, ultimately, in confirming the second amended plan. Payment of the fee requested by debtor's counsel would reduce the dividend to unsecured creditors to approximately 12 cents on the dollar. While under Deans and Neufeld, the percentage payment of claims is only one of many factors that must be considered in the "good faith" calculus, there is no question in the court's mind that a plan providing for only a 12% dividend on a fraud claim determined to be nondischargeable in a prior chapter 7 case simply would not have been confirmed.
See Deans v. O'Donnell, 692 F.2d 968 (4th Cir 1982) (adopting totality of the circumstances test) and Neufeld v. Freeman, 794 F.2d 149 (4th Cir 1986) (nondischargeability of debt in chapter 7 is circumstance that may be considered).
The court is then faced with the dilemma of allowing proper compensation to counsel for the debtor while at the same tune not dooming the plan to failure. Basically, there appear to be only three options: (1) approve the fees as requested and simply accept the fact that unsecured creditors will receive less on account of their claims than was envisioned by the court when the plan was confirmed; (2) disapprove the fees altogether to the extent they exceed the $1,500 provided for in the plan; or (3) approve the fees but not permit them to be paid, to the extent they exceed $1,500, until the plan is completed. The first option is simply unacceptable: this court would not have confirmed the plan, taking into account the totality of the circumstances, knowing that it would have resulted in a dividend to unsecured creditors of only 12 cents on the dollar. Accordingly, the court will not approve fees to be paid through the plan in an amount which reduces the dividend to that level, particularly when the applicant never revealed to the court at the confirmation hearing that the $1,500 allowance in the plan for counsel fees was only approximately one-fifth of the actual fees accrued through that point. At the same time, to allow counsel no compensation for many hours of work that provided a significant benefit to the debtor in a complicated case would be unjust. For that reason, the court concludes that the proper solution is to approve the fees but not allow them to be paid through the plan or before the debtor has made all the payments required by the plan. While it is regrettable that the applicant may have to wait five years before being paid, the dilemma in which the court finds itself arises largely from the applicant's failure to make full and complete disclosure to the court at the time of the confirmation hearing.
Under § 329, Bankruptcy Code, the court has the power to review the compensation paid or agreed to be paid to the attorney for the debtor whether or not the attorney seeks to be compensated from the bankruptcy estate.
ORDER
For the foregoing reasons, it is
ORDERED:
1. The court has reviewed, and approves as reasonable under § 329, Bankruptcy Code, total fees of $9,952.50 for the representation of the debtor in this chapter 13 case. Of this sum, $1,500.00 is allowed as an expense of administration under § 330(a)(4)(B), Bankruptcy Code, to be paid through the plan. The trustee is authorized and directed to pay to counsel for the debtor any portion of such $1,500.00 not previously paid. The balance of the approved fees in the amount of $8,452.50 are not allowed as an expense of administration and may not be collected from the debtor until the conclusion of the plan.
2. The clerk will mail a copy of this memorandum opinion and order to the debtor, counsel for the debtor, the chapter 13 trustee, and counsel for Hassan Abrishamian.