ILC eBulletin: In re Howard

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Sent: Mon, Aug 27, 2018 1:19 pm
Subject: ILC eBulletin: In re Howard
Business Law Section
Insolvency Law Committee
August 27, 2018
Dear constituency list members of the Insolvency Law Committee, the following is a recent case update.
SUMMARY
In a pair of decisions, the United States Bankruptcy Court for the Northern District of California (the Bankruptcy Court) and United States Bankruptcy Appellate Panel of the Ninth Circuit (the BAPreatment of unpaid attorneys fees arising out of the bankruptcy case.
In Howard v. Derham-Burk (In re Howard), BAP No. NC-17-1064-STaB, 2018 WL 2107787 (9th Cir. BAP May 7, 2018), the BAP affirmed a ruling by the Bankruptcy Court finding that absent a chapter 13 plan provision providing for treatment of attorneys fees, a debtors discharge precludes payment of supplemental fees and expenses to debtors attorney. To read the full published decision, click here.
In the same week, in In re Bingham, Bk. No. 5:16-bk-53217-MEH, 2018 WL 2059604 (Bankr. N.D. Cal. May 1, 2018), the Bankruptcy Court approved a chapter 13 plan that contained a provision allowing debtors counselnds to pay the claimholding that such a provision was permissible so long as certain additional language was incorporated into the plan and order, and furthermore, counsel provided certain disclosures to the debtor regarding the effect of the provisions. To read the full published decision, click here: https://www.leagle.com/decision/inbco20180502b53
Howard v. Derham-Burk (In re Howard)
FACTS
Marsha Howard filed a chapter 13 case in March 2010. In conjunction with the bankruptcy filing, debtor entered into a Rights and Responsibilities of Chapter 13 Debtors and their Attorneys (RARA) with her bankruptcy counsel, the Moran Law Group, Inc. (Moran). The RARA provided that Moran could not receive fees directly from the debtor other than the initial retainer, and fees were to be paid through the plan unless otherwise ordered by the court.
In December 2010, the Bankruptcy Court confirmed Ms. Howards first amended chapter 13 plan. The plan was derived from the model chapter 13 plan adopted in the Northern District at the time and proposed payments for the maximum term of five years. The plan required the trustee to pay all allowed administrative expenses in deferred payments over the life of the plan, including Howards initial chapter 13 attorneys
After debtor made her final regular plan payment, a dispute arose with the lender regarding the final cure payment. In response to the trustee3002.1(f), the lender filed a response claiming that Howard was delinquent on her mortgage obligations. On behalf of Ms. Howard, Moran filed several motions in relation Rule 3002.1(i)(1), successfully precluded the lender from introducing evidence of outstanding but unpaid advances, and was awarded fees and costs incurred in connection with those efforts pursuant to Rule 3002.1(i)(2). Moran also obtained a determination that Howard was current on her mortgage. However, the court denied debtors request that the lender pay her attorneys fees and costs arising from the Rule 3002.1(h) determination because that subdivision does not provided for the recovery of attorneys fees.
The debtor received her discharge. Approximately one month later, Moran filed a supplemental fee application for approval and payment of unpaid fees and costs (approximately $5,800) related to Morans work on the Rule 3002.1(h) motion, for preparing the fee application, attending the hearing, and drafting a final fee order. The fee application sought to recover the fees directly from the debtor outside of the bankruptcy case.
The chapter 13 trustee objected on the basis that the Bankruptcy Court could not authorize Moran to collect the supplemental fees and expenses directly from the debtor in light of the debtors discharge, and because the chapter 13 plan provided for the payment of Howards attorneysn treatment was binding even if the supplemental fees had not actually been paid through the plan. The trustee focused on the fact that a month had passed between the conclusion of the dispute and the entry of the discharge and the supplemental fee application should have been filed before entry of the discharge order. The Bankruptcy Court approved the fees as reasonable and necessary, but determined that Morans supplemental fees and expenses were administrative expenses, had been discharged, and could not be collected directly from Howard.
The debtor appealed and the BAP affirmed.
REASONING
The BAP rejected the debtors argument that Morans fees, incurred after completion of debtors chapter 13 plan, were not administrative expenses. The BAP found:
Morans fees remained subject to bankruptcy court approval and constituted administrative expenses so long as such fees fell within the broad scope of 330(a)(4)(B),which applies to all chapter 13 debtorsts of the debtor in connection with the bankruptcy case.
Although the BAP recognized that Morans services did not relate to debtors ongoing performance under the plan because the debtor had already completed her regular plan payments by the time Moran rendered her services, they were still connected to debtors bankruptcy case and were, therefore, administrative expenses. Administrative expenses can be discharged, even if the fees are not actually paid. In re Hanson, 223 B.R. 775, 778-79 & n. 8 (Bankr. D. Or. 1998).
And, even though the Bankruptcy Code permits the payment of administrative expenses outside the plan when the claimant agrees to such treatment (Section 1322(a)(2)), and courts may allow debtors to make payments directly to counsel on fees excepted from discharge (Wolff v. Johnson (In re Johnson), 344 B.R. 104, 107 (9th Cir. BAP 2006)), the BAP found these options were of no help in this case because debtors chapter 13 plan did not provide for an alternate treatment of Morans post-discharge fees. Accordingly, Morans attorneys fees incurred at the end of the debtors case, and sought after debtors discharge, were discharged pursuant to debtors chapter 13 plan.
In re Bingham
FACTS
The Moran Law Group, Inc. also represented debtor Mark Bingham, whose case was filed after Marsha Howards discharge (and, presumably, after the adverse ruling in Howard). In Bingham, the chapter 13 trustee objected to the confirmation of the debtors chapter 13 plan. Relevant to this analysis, the chapter 13 trustee objected to the plan provision which provided that debtors approved, but unpaid, attorneys fees that are not otherwise paid through the plan would not be discharged and would be paid directly by the debtor, notwithstanding any discharge.
The chapter 13 trustee argued, among other things, that the districture. The trustee was also concerned that the plan provision nullified the very purpose of a bankruptcy case and could thwart the debtors fresh start.
Ultimately, the Bankruptcy Court overruled the objection but required that the order approving the plan provide that the additional provision would become void upon conversion of the case to one under chapter 7. The Bankruptcy Court further required specific disclosures from debtors counsel to the debtor (detailed further below).
REASONING
The Bingham court concluded that by including the additional provision in the plan, the debtor and Moran agreed to a payment arrangement that might continue following completion of the chapter 13 case, notwithstanding the discharge, and found this agreement neither flouted the Bankruptcy Code (Section 1322(a)(2)) nor contradicted case law (In re Johnson, supra. at 107; and, In re Vasquez, Bk. No. 5:14-bk-50507-SJ (Bankr. N.D. Cal. May 1, 2018).
The Bankruptcy Court also found that the language in the plan did not contradict the Northern Districts RARA (the same one as in the Howard case), which only stated that fees should be paid through the plan, unless otherwise ordered.
The Bankruptcy Court, however, was concerned about disclosure and transparency to the debtor and required the following conditions to confirmation of such a plan:
The additional plan provision had to be revised so as to apply only to a discharge in the Chapter 13 case and suggested the following language: on of the plan shall not be discharged and shall be paid directly by the debtor to counsel for the debtor notwithstanding a discharge entered in this Chapter 13 case.
The order confirming such a plan must contain the following provision: f converted, Counsel is required to file a claim for any unpaid fees, and will receive a distribution on such claim pursuant to 726 if there are sufficient assets in the estate to do so. Any unpaid portion of the claim is discharged.
Prior to incurring fees that would require the filing of a supplemental fee application in which counsel anticipated the fees would not be paid in full prior to discharge, counsel had to meet in person with the debtor to explain what fees were anticipated to be paid through the plan and what counsel would seek to collect following discharge.
Counsel had to explain, and provide in writing, the following to the debtor:
The debtor will not be able to discharge the fees in a subsequent Chapter 7 case for six years pursuant to 727(a)(9), unless payments under his or her Chapter 13 plan provided for 100% of the allowed unsecured claims in the case, or debtor paid 70% of allowed unsecured claims and the plan was proposed in good faith and was his or her best effort; and
He or she will not be able to discharge the fees in a subsequent Chapter 13 case for two years pursuant to 1328(f)(2).
Counsel also had to discuss with the debtor how he or she would pay the fees and how counsel would collect the fees if the debtor does not pay them.
In any supplemental fee application, counsel was to:
State that the plan included a provision authorizing payment of fees post-discharge;
State whether the requested fees were anticipated to be paid through the plan; and
If the requested fees were not anticipated to be paid through the plan, then specifically state the amount expected to remain due post- discharge and certify that counsel held an in person meeting with the debtor as required above.
Counsel also had to serve debtor with the fee application, accompanied by a cover letter consistent with the Guidelines for Compensation and Expense Reimbursement of Professionals and Trustees, paragraph 7. The letter had to clearly state the additional information required above in the supplemental fee application.
AUTHORS COMMENTARY
These cases highlight that debtors counsel needs to be mindful at the outset of a chapter 13 case about how he or she will collect fees for services provided, not only over the life of the chapter 13 plan but even after any discharge. Moran learned this lesson in the Howard case and added a specific plan provision to address unpaid administrative fees as of the discharge date in the Bingham case. Chapter 13 practitioners should consider doing so as well.
All California bankruptcy courts have adopted their own form of RARA. Read them to see how your district addresses plan provisions for the payment of post-discharge services. Even if there is no guidance in your districte of this additional [plan] provision is adopted by multiple counsel, I anticipate that the court will revise the Rights and Responsibilities of Chapter 13 Debtors and their Attorneys to address the use of this provision.
Unless there is clear guidance in your districts RARA, counsel should include a plan provision to deal with services that may not be paid through the plan and be prepared to make additional disclosures to your client as outlined by the court in Bingham. If you dont include a plan provision for unpaid services as of completion of the chapter 13 plan, you may have to rely on the kindness of your client (who may become a stranger) after discharge.
These materials were written by Radmila A. Fulton of the Law Offices of Radmila A. Fulton in San Diego (Radmila@rfultonlaw.com), with editorial contributions from ILC Members Michael W. Davis of Brutzkus Gubner in Woodland Hills (mdavis@bg.law), and Michael T. Delaney of Robins Kaplan LLP in Los Angeles (MDelaney@RobinsKaplan.com).
Thank you for your continued support of the Committee.
Best regards,
Insolvency Law Committee
Co-Chair
Radmila A. Fulton
Law Offices of Radmila A. Fulton
radmila@rfultonlaw.com
Co-Chair
John N. Tedford, IV
Danning, Gill, Diamond & Kollitz, LLP
jtedford@dgdk.com
Co-Vice Chair
Marcus O. Colabianchi
Duane Morris LLP
mcolabianchi@duanemorris.com
Co-Vice Chair
Rebecca Winthrop
Norton Rose Fulbright US LLP
rebecca.winthrop@nortonrosefulbright.com
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FYI ...Law Office of Eric Alan Mitnick
21515 Hawthorne Boulevard, Suite 1080
Torrance, California 90503
Telephone: (310) 792-5864Facsimile: (310) 347-4353
Email: MitnickLaw@aol.com, MitnickLaw@gmail.com
Although this email and any attachments are believed to be free of any virus or other defect that might affect any computer system into which it is received and opened, it is the responsibility of the recipient to ensure that it is virus free and no responsibility is accepted by the sender for any loss or damage arising in any way from its use. The information contained in this email message and any attached files may be privileged, confidential and protected from disclosure. If you are not the intended recipient, any dissemination, distribution or copying is strictly prohibited. If you think that you have received this email message in error, please notify the sender by reply email, and delete the email message you received and all of the attached files.
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***NOTICE OF EX PARTE HEARINGS WILL NOT BE ACCEPTED BY EMAIL***In a pair of decisions, the United States Bankruptcy Court for the Northern District of California (the Bankruptcy Court) and United















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