Thursday, November 19, 2009

Chapter 13 Debtors Can Pay Their Attorney Fees Directly from Proceeds of Adversary Proceeding, Instead of Paying Those Proceeds Into the Plan

By Andrew Toth-Fejel, Bankruptcy Litigation Support for Attorneys,

In re McIntyre
U. S. Bankruptcy Court for the District of Oregon,
Case No. 08-34900-tmb13
November 13, 2009

Last week Judge Trish Brown ruled in this unpublished opinion that attorney fees paid by a creditor, in settlement of an adversary proceeding brought by Chapter 13 debtors against the creditor for its violations of the automatic stay, could be paid directly to the attorney instead of to the Chapter 13 trustee. Although such fees are property of the estate, they vest in the debtor unless stated otherwise by a modified plan, including one proposed by the trustee. Absent that here, debtors could pay those fees directly to their attorney.

After the confirmation of their Chapter 13 plan Debtors, through their attorney, M. Caroline Cantrell, filed an adversary proceeding against a bank for post-petition violations of the automatic stay. A few months later this matter was settled. The settlement agreement contained a confidentiality clause, but Judge Brown's opinion reveals that the agreement provided for creditor's payment of damages to debtors as well as their attorney fees incurred in the proceeding.

Ms. Cantrell then filed a "Motion to Pay Fees Direct," with a fee itemization. She argued that because the adversary proceeding dealt with post-petition stay violations, the fees earned need not be paid to the trustee. The trustee, Brian D. Lynch, objected, countering that the fees were property of the estate and should be distributed through the Chapter 13 plan. Very shortly thereafter, Debtors filed an amended plan "which specifically allowed them to keep the settlement proceeds to purchase a car." (The opinion does not state if this plan referred specifically to the attorney fee portion of the settlement.) The trustee did not object to this amended plan.

Judge Brown acknowledged that attorney fees paid by a creditor in such circumstances are property of the estate under § 1306. But such property of the estate vests in the debtors under § 1327(b), which states, in full:
Except as otherwise provided in the plan or the order confirming the plan, the confirmation of a plan vests all of the property of the estate in the debtor.
Although the plan had no language reserving any assets in the estate, the judge referred to a prior reported local opinion which had held that avoided transfers and tax refunds do not revest to the debtor. But any other assets, unless referred to in the plan, do revest to the debtor.

The judge further asserted that the standard plan language requiring debtors to inform the trustee if they receive the right to receive assets worth more than $2,500
does not prevent the revesting provided for in § 1327(b). It merely requires that debtors report the funds to the trustee and request authorization to use them, either from the trustee or the court. The terms of the OCP insure that the trustee has full knowledge of a debtor’s post confirmation finances and allows him to seek modification of a debtor’s plan to account for any post confirmation increases in income should he so desire. However, absent such modification, the funds do not become estate property and the debtors need not pay them over to the trustee.
Since here the trustee did not propose
his own modified plan or [seek] turnover of a portion of those funds in conjunction with confirmation of Debtors' . . . amended plan . . . the funds at issue are not estate property and need not be paid over to the Trustee for distribution under the plan.
The Bottom Line
Presumably the lesson here is that the trustee will be more aggressive in objecting to a modified plan involving attorney fees awarded for post-petition services, and will not just rely on an objection to the fee application.

New Bulletins on this website will provide summaries of other opinions within the Ninth Circuit shortly after they are published. PLEASE EMAIL ME at IF YOU WOULD LIKE TO BE EMAILED A LINK TO SUCH FUTURE REPORTS.

by Andrew Toth-Fejel
Bankruptcy Litigation Support for Attorneys
PLEASE NOTE that the writer is not licensed to practice law in any state. This means that he is not legally permitted to give any legal advice or perform any legal services. Any non-attorney reading this must consult an attorney about ANYTHING contained here. Nothing in this website is intended to be nor should be read as being legal advice to anyone.

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