Opinion
Case No. 03-20058-svk.
October 1, 2007
MEMORANDUM DECISION
Facts
The Debtors retained Attorney Mont Martin to represent them in their Chapter 13 case which was filed on January 3, 2003. Attorney Martin submitted a statement pursuant to Fed.R.Bankr.P. 2016(b) disclosing his compensation in connection with the case. According to the Rule 2016(b) statement, the compensation promised to be paid for services rendered or to be rendered on behalf of the Debtors in contemplation of or in connection with the bankruptcy case is "$200 paid, $1,300 to be paid through the plan." The total fee of $1,500 was the "presumed reasonable fee" in this Court at the time of the Debtors' petition. The plan was confirmed on March 4, 2003. The Debtors' case required substantial additional work; for example two Motions for Relief from Stay were filed, resolved, renewed and resolved again. On April 12, 2006, based on the Affidavit of Default by one of the mortgage creditors, relief from stay was granted. On July 13, 2006, the Chapter 13 Trustee filed a Notice of Completion of the Plan, and on July 13, 2006, the Debtors were granted a discharge. On September 22, 2006 the Trustee's final account was approved, and on October 4, 2006, the Debtors' bankruptcy case was closed. On December 26, 2006, Attorney Martin filed an Amended Rule 2016(b) Statement, stating "Unanticipated additional work was performed after filing as set out in the attached itemization amounting to $2,358.75 in fees which have not been paid." On August 6, 2007, the U.S. Trustee filed a Motion to Reopen the Debtors' case and a Motion to determine the reasonable value of the services rendered by Attorney Martin. In a brief submitted in connection with this Motion, the U.S. Trustee represented that after the Debtors completed their plan, received their discharge and their case was closed, Attorney Martin had filed a lawsuit against them to collect the $2,358.75 in fees that were incurred in their 2003 Chapter 13 case. The U.S. Trustee also informed the Court that the Debtors have now filed another Chapter 13 case in this Court. It is the U.S. Trustee's position that Attorney Martin's unpaid fees from the first case were discharged in that case.
Analysis
The issue is whether the attorneys' fees that were not paid were discharged when the Debtors received their discharge on July 13, 2006. According to 11 U.S.C. § 1328(a), a Chapter 13 discharge includes "all debts provided for by the plan or disallowed under § 502." The Debtors' plan provided that all priority claims would be paid in full, as is required by § 1322(a). Priority claims are defined by § 507(a), and pre-BAPCPA § 507(a)(1) states that "administrative expenses allowed under § 503(b) have priority." Section 503(b)(2) provides that compensation awarded under § 330(a) has priority, and § 330(a)(4)(B) allows for "reasonable compensation to the debtor's attorney" in a Chapter 13 case.
11 U.S.C. § 502 governs allowance of claims or interests.
Local Rule 2016.1 in effect at the time of the Debtors' case stated: "A fee of $1,500 or less may be allowed as an administrative expense in a chapter 13 case without a formal fee application." The implication is that a "formal fee application" is required to obtain approval of fees in excess of $1,500. The reason for the rule is clear: "Supplemental fee applications provide notice of the amount of the fees and opportunity to object, see Fed.R.Bankr.P. 2002, as well as a mechanism for court scrutiny for reasonableness. See 11 U.S.C. § 329(b)." In re Hanson, 223 B.R. 775 (Bankr. D. Or. 1998). Moreover, Bankruptcy Code § 329(a) is "a mandatory provision that requires the debtor's attorney to file with the court a statement of fees paid or agreed to be paid to the debtor's attorney regardless of the source of payment." In re Chapman, 323 B.R. 470, 476 (Bankr. W.D. Wis. 2005). Logic dictates that such a disclosure must be made before the case is closed to be effective.
While there is limited precedent addressing this issue, the facts of the Hanson case are very close to the instant case. In Hanson, the attorney and his debtor client agreed before filing the petition that the client would pay $1,400 plus supplemental compensation as necessary. The attorney filed notice of the fee arrangement with the court along with the petition, and at confirmation the court approved $1,400 plus $277.25 in supplemental fees. The client paid that amount. After discharge, the attorney then billed the client for an additional $238 for services "not billed through the court" for the purpose of "expediting the discharge of your case." The debtor and the United States trustee objected to this additional fee, and the court sustained the objection, reasoning that the attorney's fees were administrative expenses that were to be paid through the plan. A chapter 13 discharge includes all debts provided for by the plan. 11 U.S.C. § 1328(a). Accordingly, the chapter 13 discharge disposes of all attorney fees, including those that were never submitted to or approved by the court. In re Hanson, 223 B.R. at 781; Keith M. Lundin, Chapter 13 Bankruptcy, 3d Edition § 359.1 (2000 Supp. 2004).
In this case, similar to Hanson, the confirmed plan is complete and the discharge has been entered. It is not appropriate for the Debtors' counsel to come in after the case has been closed to disclose pre-discharge fees that were not mentioned prior to the discharge. Sections 329 and 330 evidence the important role of the Court in the regulation of debtors' counsel fees in bankruptcy cases. These provisions are circumvented by disclosing fees after the case has been closed, and such a disclosure ignores the authority of the Court to review the reasonableness of the fees, and the right of the trustee, U.S. Trustee and other parties in interest to object to the fees.
The Court suspects that the fees and expenses were not disclosed or applied for sooner because the allowance of the additional $2,300 in priority claims may have prevented the Debtors from completing their plan and receiving their discharge. At least one court has allowed unpaid administrative expenses to survive discharge in a Chapter 13 case. See Cornelison v. Wallace (In re Cornelison), 202 B.R. 991 (D. Kan. 1996). In Cornelison, the attorney did not apply for the supplemental fees prior to discharge because it would have extended the plan beyond the five-year maximum length set forth in § 1322(d)(2), thereby preventing completion of the Chapter 13 plan. The court allowed the administrative expenses and held the debtors responsible for payment of the attorney fees outside of the plan after discharge. "Cornelison treats administrative expenses as (dischargeable) priority claims but finds an exception to discharge for allowed expenses that are not paid through the confirmed plan." Keith M. Lundin, Chapter 13 Bankruptcy, 3d Edition § 359.1 (2000 Supp. 2004). Cornelison demonstrates what should be done when a supplemental fee will interfere with completion of the plan: disclose and obtain court approval for the unpaid fees to survive the discharge. Such a rule reinforces the provisions of the Code dealing with debtors' attorneys' fees. "Any and all property received by counsel from a debtor . . . for payment of fees in a bankruptcy case must be disclosed. Anything less is a violation of the spirit and the letter of 11 U.S.C. § 329 and Fed.R.Bankr.P. 2016." In re Lewis, 309 B.R. 597 (Bankr. N.D. Okla. 2004).
Conclusion
The supplemental attorneys fees were part of the priority claim provided for by the plan. Accordingly, they were discharged by the Debtors' completion of that plan and discharge. In the future, such fees could survive the discharge by a disclosure and court approval of the debtor's and the attorney's agreement that the additional fees will be paid outside the plan, after the discharge. Such disclosure must be made prior to the discharge to be effective. The U.S. Trustee's Motion asks the Court to determine that the fees were not reasonable and to order any excess to the Debtors. There is no evidence that any of these fees were paid (in fact the proof of claim filed in the Debtors' second case shows that they were not), and therefore, no fees will be ordered to be refunded. Based on a review of the file, the Court finds that the supplemental fees were reasonable; however, since they were not disclosed and approved prior to discharge, they were discharged. That is a basis on which Attorney Martin's claim in the second case could be disallowed, upon an appropriate objection. An order will be entered on the U.S. Trustee's Motion and this case will again be closed.