Analysis of allowance of chapter 13 plans that pay only attorney fees

  The Court in In re Doucet, No. 15-21531, 2016 WL 2603072 (Bankr. D. Kan. May 3, 2016) confirmed a chapter 13 plan paying only attorneys fees, after an extensive analysis of the current case law on the issue.  The Debtor had obtained an order to pay the filing fee in installments, was below median-income, and had no prior cases in the last 8 years.  She supported three dependents, including a 31 year old daughter.  The plan proposed 36 payments of $90 to pay $2,900 attorneys fees and the $310 court filing fee with no dividend to unsecured creditors.  She was employed as a registered nurse with $2,840 gross monthly income.  She owned no real estate, had no unsecured creditors, and no significant non-exempt assets.
  The Debtor asserted she has insufficient funds to employ chapter 7 counsel, and may never be able to save funds to do so.  She indicated she was unable to get assistance from friends or family to pay counsel.  She had faced 17 garnishment actions since 2006, at least three of her vehicles had been repossessed, and she had faced numerous eviction actions.
  The chapter 13 trustee argued that the “inability to pay attorneys fees for the filing of a Chapter 7, does not constitute ‘special circumstances' permitting the case to proceed as a Chapter 13.  The trustee did not object to the feasibility or reasonableness of the $2,900 fee requested.
  In Chapter 13 cases, the court does not approve the employment of a chapter 13 debtor's counsel. Thus, a chapter 13 debtor may generally employ bankruptcy counsel without filing an application to employ.  Unlike other bankruptcy attorneys, a Chapter 7 attorney has no right to compensation under § 330.  Attorneys filing chapter 7 petitions must collect fees pre-petition or risk a discharge of pre-petition fees.
  Under Chapter 13, attorney's fees are allowed pursuant to § 330(a) as an administrative expense described in § 503(b)(2). With the enactment of § 330, “Congress intended to provide adequate compensation, on a par with that available in other areas of practice, to attract competent counsel to the bankruptcy specialty.” The bankruptcy practice needs competent attorneys as
[i]t is absolutely imperative that competent counsel be motivated to seek, accept and ably handle Chapter 13 cases. That motivation starts with being fairly compensated for the work they perform. The complexity and importance of the work, alone, justify such compensation, but there are other reasons able counsel are vital to the system. The most important reason is that this Court rather routinely sees pro se debtors “give away” rights or property that they would otherwise be legally entitled to retain because of their ignorance of the law.  
In re Beck, 2007 Bankr.LEXIS 517, at *9 (Bankr.D.Kan. Feb. 21, 2007)
“Studies show that debtors with legal representation tend to have a much higher success rate in bankruptcy proceedings than pro se filers.”1  In one study, only 0.8 percent of post-BAPCPA pro se debtors received a discharge . 2 The same study found that “[n]ot one of the post- BAPCPA cases filed with the assistance of a petition preparer ended in the debtor receiving a discharge.”  Fairly compensated counsel is beneficial to both debtors and the bankruptcy bar because “attorneys must be zealous advocates for their clients while attempting to keep their lights on in their own offices. Preserving the integrity of the bankruptcy system includes encouraging, not discouraging, excellence in legal representation of consumer debtors.  A requirement that attorneys provide pre-petition representation for free or that debtors find family members or friends to bankroll their case runs contrary to the priority structure outlined in §§ 330, 503, and 507 and to the notion that debtors are entitled to competent and properly compensated representation.
     Bankruptcy courts are divided on this issue. Courts in New York, New Hampshire, and Massachusetts have rejected attorney-fee-only plans as contrary to the spirit and purpose of the Code.3  However, three circuit courts have found that attorneyfee-only Chapter 13 plans are not per se bad faith.4 Courts in North Carolina, New Mexico, Wisconsin, Illinois, and Kansas have also upheld attorney-fee-only Chapter 13 plans.5 The first circuit's decision in Pufer indicated that the test in determining whether a fee-only plan is filed in good faith is the totality of the circumstances, but added a court-made rule that the debtor “carries a heavy burden of demonstrating special circumstances” justifying their plan, a provision not applicable out of the 1st Circuit.  
      The Eleventh Circuit in In re Brown, 742 F.3d 1309 (11th Cir.2014) affirmed the bankruptcy court's denial of an attorneyfee-only plan, applying a totality-of-the-circumstances approach. The Eleventh Circuit noted that “the bankruptcy court did not apply a categorical rule prohibiting attorney-fee-centric or attorney-fee-only chapter 13 plans.”  742 F.3d. at 1318.  Additionally, a few months after denying Brown's Chapter 13 plan, the same bankruptcy judge confirmed an attorney-fee-centric Chapter 13 plan.  
    In Matter of Crager, 691 F.3d 671 (5th Cir.2012)., the Fifth Circuit found that “[t]here is no rule in this circuit that a Chapter 13 plan that results in the debtor's counsel receiving almost the entire amount paid to the Trustee, leaving other unsecured creditors unpaid, is a per se violation of the ‘good faith’ requirement....”  691 F.3d at 675–76.   The Crager bankruptcy court also noted “that it would ‘border on malpractice’ for Crager's attorney to advise her to file a Chapter 7.”Id. at 675.  Ultimately, applying the totality-of-the-circumstances test, the court found the debtor's filing responsible, given the debtor's circumstances.
    In Missouri, In re Arlen, 461 B.R. 550 (Bankr.W.D.Mo.2011) held that a Chapter 13 plan which pays only the administrative expenses of the proceeding, primarily debtors' counsel's fees, and makes no payment to any creditor, secured or unsecured, violates the spirit and purpose of Chapter 13 and is not proposed in good faith.   The Doucet Court rejected this analysis, instead finding that a debtor in economic straights should be permitted to file a fee only plan.  
   The Court rejected the rulings that fee-only plans were automatically in bad faith, rather following the decisions that looked at the totality of the circumstances to determine good faith under §1325.  The purpose of the totality of the circumstances test is simply to determine if there has been an abuse of the provision, spirit, or purpose of chapter 13.  The Court quoted In re Wark, 542 B.R. 522 (Battler.D.Kan.2015) where the court noted that while in a perfect world chapter 13 debtors would be able to pay their debts in full

Instead, this is a world where debtors are harassed by daily collection calls for admittedly delinquent debts. Where they are repeatedly required to miss work to attend a cattle call docket to explain why they haven't paid old medical bills. Where they cannot afford to keep the gas on, and feel compelled to incur title or payday loans at exorbitant rates to feed their families. Where their meager wages are reduced even further by garnishments. Where they opt not to seek necessary medical care or take prescribed medication because they cannot afford it. This is the world these Debtors live in, and this real world sometimes requires bankruptcy, even if the debtor cannot save enough to pay the up front [sic] attorney's fees required to file a Chapter 7.

Id at 578.
  The Court rejected the argument that the fee-only cases benefit only the debtor's attorney rather than the debtor.  First, counsel take the risk that they do not receive fees if the case is not confirmed.  Second, if the case is dismissed post-confirmation a substantial portion of the fees may still go unpaid.  These are risks not faced by counsel in chapter 7 cases.  Much of the fees are spent preparing the case for confirmation, and the lower income debtor's often require more work than those of higher income.  Allowing fee-only plans gives debtors access to the automatic stay and the fresh start while adequately compensating counsel.
  §1325(b)(1) provides for confirmation if a debtor is committing all their disposable income to the plan.  This suggests that the percentage to unsecured creditors is not a factor in determining good faith so long as the debtor complies with §1325(b)(1) and §1325(a)(4).  The court found that the plan met the requirements of §1325(a)(3) and (a)(7) for good faith, and should be confirmed. 

1 Alexander F. Clamon, Per Se Bad Faith? An Empirical Analysis of Good Faith in Chapter 13 Fee–Only Plans, 30 Emory Bankr.Dev. J. 473, 481 (2014).

2 Lois R. Lupica, The Consumer Bankruptcy Fee Study Final Report, 20 Am. Bankr.Inst. L, Rev. 17, 81 (2012).

3In re Paley, 390 B.R. 53, 59 (Bankr.N.D.N.Y.2008); In re Dicey, 312 B.R. 456, 459–60 (Bankr.D.N.H.2004); In re Buck, 432 B.R. 13, 21–22 (Bankr.D.Mass.2010).

4 In re Brown, 742 F.3d 1309 (11th Cir.2014)In re Puffer, 674 F.3d 78 (1st Cir.2012); Matter of Crager, 691 F.3d 671 (5th Cir.2012).

5 See In re Banks, 545 B.R. 241 (Battler.N.D.Ill.2016) (finding special circumstances allowing debtor to file an attorney fee-only Chapter 13 instead of a Chapter 7); In re Wark, 542 B.R. 522 (Battler.D.Kan.2015); In re Elkins, 2010 WL 1490585, at *3 (Bankr.E.D.N.C. Apr. 13, 2010) (stating that a Chapter 13 trustee should not summarily object to the presumptive fees in a Chapter 13 case solely because the case is an attorney-fee-only case); In re Molina, 420 B.R. 825, 829–33 (Bankr.D.N.M.2009); In re Guzman, 345 B.R. 640 (Bankr.E.D.Wis.2006) (confirming debtors' plan showing no disposable income); In re Alexander, 344 B.R. 742 (Bankr.E.D.N.C.2006) (debtors acted in good faith proposing a no projected disposable income plan).