In Re Porubsky

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Code¹provision requiring as a matter of law that attorney fees be paid through the Chapter 12 trustee, the Court overrules the objection to confirmation filed on that basis.²

I. Factual and Procedural Background

Debtors Steven and Shauna Porubsky³filed a Chapter 12 petition, and in the Disclosure of Compensation filed with the petition counsel disclosed that prepetition he had received $50,000 from Robert and Mary Porubsky for legal services and that no balance was due on the petition date.⁴Debtors also filed an Application to Employ Legal Counsel,⁵seeking to employ the law firm of Prelle Eron & Bailey, P.A. as counsel for their Chapter 12 case. The Application disclosed the law firm was holding retainer funds in its trust account on the petition date of $47,310.50 and was paid for fees for work up to the date of filing. The law firm also filed a motion for approval of procedures for compensation,⁶seeking approval of monthly interim compensation, with twenty percent of the fees for legal services rendered to be held in trust pending Court approval of an interim fee application. Orders were entered granting both the Application and the motion on November 12, 2025.

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Debtors later filed their Chapter 12 plan.⁷In the proposed plan, Debtors state that except as otherwise set forth, "all payments to be paid during the Plan shall be paid to the Trustee" and will include both the sum for the creditor payment and the Trustee's fee as determined by 28 U.S.C. § 586(e).⁸The treatment of each individual class of creditor claims then either indicates that payments "shall be made through the Trustee during the term of the Plan, and directly by the respective Debtors afterwards, until the claims, together with interest, are paid in full"⁹or more simply that payments "shall be made through the Trustee."¹⁰

As to administrative claims, the plan states:

Class 1 consists of those administrative expenses that the Court shall allow in accordance with 11 U.S.C. § 503. Debtors anticipate such claims to consist of unpaid fees to professionals and unpaid post-petition expenses in the approximate amount of $0.00. The Debtors shall directly pay Class 1 Claims as and when funds are available, but in no case more than 12 months after the Effective Date or following allowance by the Court, whichever is later.¹¹

The Chapter 12 trustee Carl Davis ("Chapter 12 Trustee") objected to this language, stating debtors' attorney fees "should be paid through Trustee case administration."¹²The Trustee's position is that administrative expenses allowed under § 503 should be paid through the Trustee absent a court order and that the

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plan's proposed treatment would bypass trustee oversight, risk unequal or delayed payment, and conflict with § 1226(b).

Additional objections to confirmation were filed and the Court set an evidentiary hearing on confirmation of Debtors' Chapter 12 plan. Resolutions to those objections were ultimately reached and the plan was confirmed. In the order confirming Debtors' plan the parties included a notation that "[t]he issue concerning the payment of fees for Debtors' counsel following exhaustion of any retainer shall be reserved and the Plan shall not be binding concerning these issues."¹³The parties then briefed the issue now under consideration. The confirmation order also states the following as to payments to creditors: "Standing Trustee compensation shall be determined in accordance with 28 U.S.C. § 586(e) and is based upon payments received by the Trustee under the Plan. To the extent proceeds from liquidation or refinancing are paid directly and not through the trustee to the secured creditor in that property and do not constitute payments received by the Trustee under the Plan, no trustee fee shall be assessed."¹⁴ The law firm has filed its First Application for Compensation and Reimbursement of Expenses, seeking interim approval of fees of $38,703.50 and expenses of $1,699.88.¹⁵In that Application, the law firm stated of that total of

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$40,403.38, "all has been paid by Debtors to Applicant, and is held in trust,"

pursuant to the order granting motion for approval of compensation procedures.¹⁶ The Trustee objected, arguing the law firm had not complied with the order granting the motion for approval of compensation procedures because it had not filed itemized statements on a monthly basis, which supported the Trustee's contention that attorney's fees and expenses should be paid through case administration and not directly.¹⁷In a reply filed by the law firm, counsel argued this court's Local Rule (D. Kan. LBR 2016.1) does not require monthly statements of fees, and while the compensation procedures order did indicate the law firm would file itemized fee statements on a monthly basis, the intent was to file those itemized fee statements if and when compensation was received. In other words, the law firm did not fail to follow the Local Rule and there was no legal or pragmatic reason to file a monthly itemized statement when funds were not taken by counsel.¹⁸ After a hearing on the matter, an agreed order was entered allowing the fees and expenses in full. The order also stated: "The allowed fees shall be paid exclusively from the funds held in counsel's client trust account that were received from the Debtors' parents."¹⁹

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II. Analysis A. Jurisdiction, Venue, and Burden of Proof

The Court has jurisdiction over the confirmation of the plan in this Chapter 12 case,²⁰and venue is proper.²¹Debtors have the burden to show they can meet the confirmation requirements of Chapter 12.²²

B. Confirmation of the Chapter 12 Plan

Chapter 12 has comprehensive requirements in §§ 1222 and 1225 for both the contents of a plan and the confirmation of that plan. Chapter 12 also addresses the payments under a plan in §§ 1221 and 1226. Further, under § 1202, a Chapter 12 trustee's duties are laid out. The interpretation of these sections of Chapter 12 governs the parties' dispute.

First, under § 1202(b)(1), a Chapter 12 trustee has the statutory duty to account for payments received, furnish information about the estate's administration, and make a final report and final account of payments and distributions.²³Under § 1202(b)(4), a Chapter 12 trustee shall "ensure that the debtor commences making timely payments required by a confirmed plan." Multiple

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sections of Chapter 12 of the Code then govern plan payments and distribution while within the Chapter 12 case.

Section 1222(a)(1) states that a plan shall "provide for the submission of all or such portion of future earnings or other future income of the debtor to the supervision and control of the trustee as is necessary for the execution of the plan."

Section 1226 then addresses payments. Subsection (a) of § 1226 generally states that "payments and funds received by the trustee shall be retained by the trustee until confirmation," and then once a plan is confirmed, the payment shall be distributed in accordance with the plan. Subsection (b) states that before or at the time of payments to creditors under the plan, the unpaid § 507(a)(2) claims (which includes "administrative expenses allowed under section 503(b)") and the trustee's percentage fee shall be paid. Section 1226(c) then establishes the trustee as the default disbursing agent for payments to creditors, as it states: "Except as otherwise provided in the plan or in the order confirming the plan, the trustee shall make payments to creditors under the plan."

Courts have concluded that payments to secured creditors may be made directly, as a function of the interplay of § 1226(c), which permits a debtor to

"provide otherwise" in the plan for direct payments to creditors and § 1225(a)(5)(B)(ii), which states in reference to secured claims that the value of property to be distributed may be from "the trustee or the debtor."²⁴Multiple courts

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have addressed the factors to be considered to determine whether a Chapter 12 debtor should be permitted to pay a secured creditor directly.²⁵In contrast, payments to unsecured creditors do not have this statutory hook permitting direct payments, and courts have concluded direct payments to unsecured creditors are generally not permitted.²⁶

The Trustee's compensation is set by 28 U.S.C. § 586(e)(2). Under that statute, a trustee "shall collect such percentage fee from all payments received by such individual under plans in the cases under . . . chapter 12 . . . of title 11 for which such individual serves as standing trustee." A standing chapter 12 trustee like in this District, i.e., one not appointed by the U.S. Trustee on a case-by-case basis, collects a capped percentage fee on payments received up to $450,000 and 1225(a)(5)(B)(ii)), and "based on the plain language of the statute, we hold that, just as a Chapter 12 debtor may bypass the trustee and directly pay fully secured claims, so may the debtor directly pay the secured portion of undersecured claims"); Wagner v. Armstrong (In re Wagner), 36 F.3d 723, 726 (8th Cir. 1994) ("[T]he [C]ode does not forbid plan provisions allowing direct payments by the debtor to impaired secured creditors."); In re Aberegg, 961 F.2d 1307, 1309 (7th Cir. 1992) (permitting Chapter 13 debtors to make direct payments to creditors as requiring all payments to go through the trustee would be "inconsistent with the language of the statute"). But see Fulkrod v. Savage (In re Fulkrod), 973 F.2d 801, 803 (9th Cir. 1992) ("Chapter 12 of the bankruptcy code does not authorize a debtor to make payments directly to creditors with claims modified by a plan of reorganization [i.e., impaired secured claims] in order to avoid paying the bankruptcy trustee the statutory fee under 28 U.S.C. § 586.").

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then a smaller percentage on payments received exceeding $450,000.²⁷A Chapter 12 trustee's fee is not reviewable by the bankruptcy court.²⁸ The takeaway of the above is this: a Chapter 12 trustee, who has statutory duties in the case regardless of compensation,²⁹does not collect and is not entitled to a fee on payments that are made directly by a debtor and not received and then paid out through the trustee's office. The Chapter 12 trustee collects and is entitled to a fee only on "payments received by [the trustee] under plans in the cases under. .

. chapter 12."³⁰

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What remains for analysis is payments to administrative claimants. First, an administrative claimant is not a creditor,³¹so is not governed by § 1226(c), which by its terms applies only to "payments to creditors."³²As one bankruptcy court noted,

"[t]he term creditor under this section does not include administrative expense claimants."³³Chapter 12 attorney's fees are claims under § 503(b) are entitled to administrative priority under § 507(a).³⁴

The Code provisions applicable to administrative claimants are found in § 1222(a)(2) and § 1226(b). Section 1222(a)(2) states that the Chapter 12 plan must

"provide for the full payment, in deferred cash payments, of all claims entitled to priority under section 507, unless the holder of a particular claim agrees to a different treatment of that claim." Then § 1226(b) states: "Before or at the time of each payment to creditors under the plan, there shall be paid-- (1) any unpaid claim of the kind specified in section 507(a)(2) of this title."

There is no direct Code requirement that payments of these claims be made through a Chapter 12 trustee. The default section, § 1222(a)(1), does provide that a Chapter 12 debtor's earnings and income "as is necessary for the execution of the

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plan" be provided "to the supervision and control of the trustee."³⁵And as noted above, § 1222(a)(2) requires that the administrative fees be paid. But no Code section directly addresses the situation here: how they are to be paid. The Chapter 12 Trustee cites a handful of cases addressing the issue. One case, In re Citrowske, simply states, without citation to any Code section, that "all payments to . . . administrative expense claimants are paid under the plan and thus subject to the trustee's percentage fee."³⁶But in In re Citrowske, the bankruptcy court also noted a Chapter 12 standing trustee collects the percentage fee "from payments under the plan" per 28 U.S.C. § 586(e)(2). However, the language in 28 U.S.C. § 586(e)(2) had been recently changed from awarding a percentage fee "from all payments under plans,"³⁷to "from all payments received by such individual under plans,"³⁸an important distinction that was not analyzed in the In re Citrowske case.³⁹

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Another case cited by the Chapter 12 Trustee is In re Greseth, which holds that §§ 1222(a)(2), 1202(b)(4) and 1226(b) work together to require a Chapter 12 debtor to pay the trustee's percentage "fee with regard to administrative payments."⁴⁰The court in In re Greseth reasoned that because § 1222(a)(2) requires Chapter 12 plans to provide for full payment of all priority claims, § 1202(b)(4) requires a Chapter 12 trustee to ensure a debtor "commences making timely payments required by a confirmed plan," and § 1226(b) requires the trustee "to pay administrative claims prior to or at the time other creditors are paid under the plan," the overall scheme of Chapter 12 places "great importance on payment of administrative claims and requires significant attention to those claims by the standing trustee," thereby requiring the trustee percentage fee on attorney fee claims.⁴¹But actually, § 1226(b) does not require the trustee to pay administrative claims—rather, § 1226(b) says those unpaid claims "shall be paid," but it does not direct that the trustee pay them. And § 1222(a)(2) specifically states that while a plan must provide for the full payment of all priority claims, the holder of such distribution. Indeed, there is nothing in the legislative history that would suggest a different interpretation. It follows, therefore, that the debtor may make certain payments directly without incurring the trustee's statutory percentage."); In re McCann, 202 B.R. 824, 830 (Bankr. N.D.N.Y. 1996) ("the plain language of section 586(e)(2) clearly requires the trustee to collect the statutory 'percentage fee from all payments received by such individual'").

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claim may agree to different treatment, and it does not address the trustee's involvement in these claims at all.

Finally, the Chapter 12 Trustee cites In re Beard, which also required attorney fees to be paid through the Chapter 12 trustee.⁴²The court in that case focused on the first position priority given to attorney's fees by § 507 and the special attention they should be given for trustee monitoring.⁴³The court reasoned the Chapter 12 trustee was '"better equipped and more capable'" of monitoring the payment of fees than the court would be through periodic reporting and should be compensated for that monitoring.⁴⁴But the only statutory basis given for this conclusion was § 1202(b)(4)—the trustee's general duty to "ensure that the debtor commences making timely payments required by a confirmed plan."

The Court does not find the In re Citrowske, In re Greseth, and In re Beard cases persuasive. The cases were decided before the Sixth Circuit issued its decision in In re Beard⁴⁵and the Eighth Circuit issued its decision in In re Wagner,⁴⁶both of which circuit decisions would have impacted the bankruptcy courts in those respective circuits. In In re Beard and In re Wagner, the Sixth and Eighth Circuits, while not directly addressing direct payment of attorney fee claims, did conclusively hold that the overall scheme of Chapter 12 and the direct language of the applicable

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Code sections therein permitted direct payment of secured creditors and direct payment of the secured portion of undersecured claims.⁴⁷The Sixth Circuit relied in part on the language of 28 U.S.C. § 586(e)(2), noting Congress did '"not state 'payments received or that could have been received,' 'payments made by the trustee or debtor under the plan,' or other similar language which would mandate payment of the percentage fee on a constructive receipt basis.' Instead, Congress constructed a scheme that envisioned that debtors would at times be able to pay their debts directly to their creditors, allowing them to bypass the trustee."⁴⁸The Sixth and Eighth Circuit focused on the language of 28 U.S.C. § 586(e)(2) as controlling.

No Tenth Circuit case law provides direction. There is a Tenth Circuit Bankruptcy Appellate Panel (BAP) case, In re Miller, which in dicta makes the observation that "case law" supports the conclusion that "administrative expense payments should be monitored by the trustee as part of his statutorily-imposed duties and, therefore, should be made through the plan."⁴⁹In the In re Miller case,

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one of the issues on appeal was whether the bankruptcy court properly ordered the payment of attorney fees "through the plan" rather than "outside the plan" - i.e., whether the fees should be paid through the Chapter 12 trustee's office.⁵⁰The Tenth Circuit BAP affirmed the bankruptcy court, concluding the confirmation order and plan both required the payment through the Chapter 12 trustee's office.⁵¹As noted, the Tenth Circuit BAP mentioned cases supporting that practice, citing the bankruptcy court decisions in In re Beard⁵²and In re Heller.⁵³But as indicated above, those two cases were decided based on policy considerations, and have been considered by some courts as the minority position.⁵⁴Regardless, the Tenth Circuit BAP did not discuss the applicable Code provisions, and its statement was made in dicta.

The Chapter 12 Trustee acknowledges two cases permitting the payment of attorney fees directly and not through trustee administration and subject to the trustee's percentage fee, albeit with caveats. First, in In re Heller, although the bankruptcy court states a preference for a default position of attorney fee claims to be paid through the Chapter 12 trustee, based on the trustee's duty to monitor and

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review the payments,⁵⁵the bankruptcy court then indicated there could be "extreme circumstances where the trustee believed that his duty to monitor could be met without making the actual distribution," in which case "the trustee could allow for the payment of attorney's fees directly."⁵⁶The bankruptcy court stated its preferred position was for the plan and confirmation order to reflect a negotiation between the parties to determine the appropriate combination of payments to be made by the Trustee and the Debtors in order "to achieve a balance between the divergent and competing interest involved."⁵⁷

Second, in In re Pianowski, the bankruptcy court addressed confirmation of a plan that provided for direct payment of all secured creditors and all entities holding administrative claims.⁵⁸Based on its considerations of §§ 1226(c), 1225(a)(5)(B)(ii), and 1222 and 28 U.S.C. § 586(e)(2), and the related legislative history, and policy considerations, the bankruptcy court concluded "a Chapter 12 debtor may be permitted to directly pay secured creditors and administrative attorneys' fees pursuant to a Chapter 12 plan of reorganization" without payment of the Chapter 12 trustee percentage fee.⁵⁹The Pianowski court noted Chapter 12 debtors would not have an "automatic or absolute right" to make direct payments, but the Court would instead consider direct payments on a case-by-case basis when

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asked to do so.⁶⁰The bankruptcy court then laid out thirteen factors it would use to

"balance an individual debtor's needs and desires to succeed in his or her reorganization efforts, a creditor's rights in preserving its property interest and receiving fair repayment of its indebtedness, and society's interests in an efficient, economical and non-abusive bankruptcy reorganization process."⁶¹Regarding the attorney fees proposed to be paid directly, the bankruptcy court noted the attorneys agreed to deferred payment from future income of the debtors without the Chapter 12 trustee's supervision, that any payments would be subject to bankruptcy court approval, and the court found no reason to prohibit the direct payment as long as the attorneys' fee reports were filed with the court and served on the Chapter 12 trustee.⁶²

As other courts have noted, and this Court concludes, there is no statutory directive either permitting or forbidding the direct payment of attorney fees. There are defaults in the Code, but those also clearly indicate exceptions can be made. For example, § 1226(c) directly specifies payments to creditors shall be made by the trustee except as otherwise provided. This section contemplates that even as to the default payment through the trustee to creditors, the plan can provide otherwise. Then § 1225(a)(5)(B)(ii) expressly permits payments to secured creditors by the debtor. And 28 U.S.C. §586(e)(2) also contemplates payments may either be paid

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through the trustee or by the debtor - otherwise, why would it specify that the trustee percentage fee is to be paid on payments received by the trustee? If all payments were to go through the Chapter 12 trustee, that language would be superfluous.

Admittedly, the Code is silent on who and how attorney fee claims should be paid; only that they are entitled to priority and should be paid. But as the bankruptcy court in In re Heller noted, the implication from this is that the silence leaves the issue open for negotiation, not rule.⁶³This Court also concludes negotiation is the best approach. Chapter 12 is a balancing act. If the administrative fees of Chapter 12 are too onerous, there will be no debtors willing or able to utilize Chapter 12. But also, there are benefits to Chapter 12, and debtors must pay their share of the costs of the administration of Chapter 12 cases. As more recent bankruptcy case law has noted, in the absence of a clear statutory directive or controlling circuit case law, ultimately, the decision whether to permit direct payment is a discretionary one of the bankruptcy court.⁶⁴In a case such as this, when the parties need a decision from the Court about whether a debtor's attorney fees must be paid through case administration, the Court finds the Pianowski factors to be a helpful (nonbinding) tool for analysis. The factors are:

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1. The past history of the debtor;

2. the business acumen of the debtor;

3. the debtor's post-filing compliance with statutory and court-imposed duties;

4. the good faith of the debtor;

5. the ability of the debtor to achieve meaningful reorganization absent direct payments;

6. the plan treatment of each creditor to which a direct payment is proposed to be made;

7. the consent, or lack thereof, by the affected creditor to the proposed plan treatment;

8. the legal sophistication, incentive and ability of the affected creditor to monitor compliance;

9. the ability of the trustee and the court to monitor future direct payments;

10. the potential burden on the Chapter 12 trustee;

11. the possible effect upon the trustee's salary or funding of the U.S. Trustee system;

12. the potential for abuse of the bankruptcy system;

13. the existence of other unique or special circumstances.⁶⁵ The application of those factors here supports the result that direct payment of the attorney fees should be permitted.

In this case, Debtors are sophisticated and operate a large, multi-aspect farm operation. There has been no bad faith in the filing or the prosecution of the

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Debtors' Chapter 12 case. Debtors appear to have maintained reliable and consistent operations. A significant portion of the attorney fees have been and will be paid via the prepetition, third party retainer. Debtors' counsel has consented to the direct payment of the fees and obviously has the incentive to monitor payments. Debtors will file fee disclosures as necessary, apprising the Court, all creditors, and the Chapter 12 Trustee of fee payments. The Court sees no evidence of abuse or manipulation of the Chapter 12 process through the direct payments proposed. There is no evidence direct payments will result in preferential treatment of clams or unfair discrimination. Debtors are paying the vast majority of the payments under their confirmed plan through the Chapter 12 Trustee⁶⁶—this is not a case of unfair manipulation of the Chapter 12 process by Debtors or their counsel. Debtors are not using the Chapter 12 system without paying their share of the fees for that system. The Court has reviewed Debtors' plan, the confirmation order, and its own docket, and concludes direct payment of attorney fees in this case is permissible.

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The Chapter 12 Trustee contends attorney "fees should be paid through the Trustee as a matter of law."⁶⁷The Court finds no provision of the Bankruptcy Code demanding that result. The Trustee's objection to confirmation on this basis is overruled.

III. Conclusion

The Court overrules the Chapter 12 Trustee's objection to confirmation reserved for this Court's decision. Debtors are permitted to directly pay professional fees as they are allowed by this Court.

It is so ordered.

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