In re Nicodemus

Judge Humphrey

Chapter 13

Decision Denying Confirmation of Chapter 13 Debtor's Proposed Plan

This decision concerns whether the court may confirm a chapter 13 debtor's plan that contains a special plan provision assigning any funds which the Chapter 13 Trustee is holding at the time of a conversion of the case to the debtor's bankruptcy counsel for payment of attorney fees. The court determines such a special plan provision is prohibited by § 348 of the Bankruptcy Code, as interpreted by the United States Supreme Court in Harris v. Viegelahn, 135 S. Ct. 1829 (2015).

The debtor in this case included the following special plan provision language:

In addition to this case, debtors in four additional cases filed by the same legal counsel included identical special plan provisions: In re Lewis, 16-30228, doc. 19; In re Blackbern, 16-30011, doc. 19; In re Davis, 16-30726, doc. 18 and In re Kiser, 16-30595, doc. 20. The court is denying confirmation of the plans in those cases through orders incorporating this decision.

In the event that the Debtor's case is converted post-confirmation and there are still approved outstanding attorney fees due to the Debtors attorney, the Debtor hereby assigns and further consents to said attorney fees shall be paid [sic] by the chapter 13 Trustee to [Debtor counsel], before any refund is used to the Debtor.

doc. 18. The Chapter 13 Trustee, Jeffrey M. Kellner (the "Trustee"), has objected to this language. In addition, the court independently reviewed this provision. See United Student Aid Funds, Inc. v. Espinosa, 559 U.S. 260, 278 n.15 (2010) (bankruptcy courts have the "statutory obligation" to review a plan and deny confirmation, whether or not an objection is filed); 11 U.S.C. § 1325(a) (the court shall confirm a plan that "complies with the provisions of this chapter and with the other applicable provisions of this title").

Harris involved a Chapter 13 case that was converted to Chapter 7. The Chapter 13 trustee distributed funds it was holding, all of which were the debtor's post-petition wages. See 11 U.S.C. § 1306 (property of the state in Chapter 13 includes "earnings from services performed by the debtor after the commencement of the case, but before the case is closed, dismissed, or converted . . . whichever occurs first"). Some of the funds went to unsecured creditors, and $1,200 went to the debtor's counsel for unpaid attorney fees. Harris, 135 S. Ct. at 1836. The Debtor moved the court to return the wages paid to the unsecured creditors to the debtor, arguing the trustee acted outside her statutory authority. Id. The Supreme Court held that those funds must be returned to the debtor. Id. In reaching that conclusion, the Court first noted under § 348(f)(1)(A), those funds did not belong to the Chapter 7 estate. Id. Therefore, the Court found that allowing the Chapter 13 trustee "to distribute the very same earnings to the very same creditors is incompatible with that statutory design." Id. at 1837. Further, the Court noted that 11 U.S.C. § 348(e) terminates the services of the Chapter 13 Trustee. Id. at 1838. The court found that "[a] core service provided by the Chapter 13 Trustee is a disbursement of payment to creditors." Id. Upon conversion, the plan was no longer binding under § 1327. Id. See also 11 U.S.C. § 1327(a) ("The provisions of a confirmed plan bind the debtor and each creditor . . ."). The Court found that returning funds to the debtor was not a trustee "service" barred by § 348(e). Id.

11 U.S.C. § 348(f)(1)(A) provides that in a Chapter 13 case converted to another chapter, except for a bad faith conversion, "property of the estate in the converted case shall consist of property of the estate, as of the date of filing of the petition, that remains in the possession of or under the control of the debtor on the date of conversion."

The language in the special plan provision is an attempt to limit the effect of the holding of Harris through the Debtor's consent to the assignment of the funds to her counsel. However, even assuming the consent was freely given and a proper assignment was made under Ohio law, the provision requires the Chapter 13 Trustee to distribute funds to an individual other than the Debtor post-conversion. However, the Court was quite clear in Harris that the Chapter 13 plan ceased upon conversion and the Chapter 13 Trustee was statutorily required to return to the debtor any funds which the Trustee was holding at the time of conversion. The Trustee's limited role upon conversion stems not from the language of the Plan but from the requirements of the Bankruptcy Code itself.

The Debtor was present at the initial hearing on this matter on May 3, 2016 and counsel advised the court that she was prepared to testify as to the voluntariness of the assignment. Counsel for the Chapter 13 Trustee also advised the court at that hearing as to steps which the Trustee takes at the creditors' meeting held pursuant to 11 U.S.C. § 341 to assure the Trustee that the debtor understands the import of such provisions and is voluntarily agreeing to the provision. --------

The court recognizes that, ironically, in Harris, the appeal did not seek return of the $1,200 in attorney fees paid to the debtor's counsel based upon an assignment. Instead, debtor's counsel asked for the return of the other $4,319 paid to creditors. See Motion to Compel Return of Funds, Case No. 10-50655, ECF No. 39 (Bankr. W.D. Tex. Dec. 29, 2011). Nevertheless, the Supreme Court's decision did not indicate it was distinguishing between administrative claimants and creditors and there is no reason to consider distributing funds to an administrative claimant any less a "service" than distribution to an unsecured creditor. The Court simply did not address the distribution of the attorney fees since an issue as to that distribution was not raised on appeal.

Finally, it is worth noting that although the special plan provision addresses post-confirmation conversion, to the extent the provision was not so limited, the Trustee would have no basis to enforce the provision pre-confirmation either since the court would not have entered an order confirming the plan.

In reaching its conclusion, this court expresses no opinion on the validity of any other plan provision concerning debtor's counsel fees and this opinion is solely limited to the language in question relating to funds in the possession of the Chapter 13 Trustee at the time of the conversion of a Chapter 13 case. Nor does this decision address the enforceability of the assignment or other agreement between the debtor and his counsel under applicable non-bankruptcy law. The holding of this decision is merely that an assignment of attorney fees contained in a Chapter 13 special plan provision cannot be enf0rced by requiring the Chapter 13 Trustee to distribute funds to counsel which the Trustee is holding at the time of conversion of the case. Although it may be of little assistance in many converted cases that have little or no assets to distribute to creditors, Chapter 13 debtors' counsel may be able seek allowance and payment of their unpaid fees as an administrative expense in another chapter, subject to the timing and substantive requirements for such an administrative expense. See generally 11 U.S.C. §§ 348(d), 503(b), and Fed. R. Bankr. P. 1019(6).

The proposed Chapter 13 plan violates 11 U.S.C. § 1325(a)(1) because it does not comply with § 348 of the Bankruptcy Code. Confirmation of the proposed plan is denied. The court will enter a separate order denying confirmation and incorporating this decision.

This document has been electronically entered in the records of the United States Bankruptcy Court for the Southern District of Ohio. IT IS SO ORDERED.

/s/ _________

Guy R. Humphrey

United States Bankruptcy Judge
Dated: June 30, 2016 Copies to: All Filing Parties MaryAnne Wilsbacher, Office of the United States Trustee, 170 North High Street, Suite 200, Columbus, Ohio 43215 (Assistant United States Trustee)