Tuesday, April 10, 2012

First Circuit reverses per se bar on "fee only" cases in Chapter 13 Plans.

A summary, where First Circuit will allow "fee only" cases in the right circumstances:

IN RE WAYNE ERIC PUFFER, Debtor. L. JED BERLINER, Movant, Appellant, v. DENISE M. PAPPALARDO, Trustee, Appellee, 2012 U.S. App. LEXIS 6037 (1st Cir. 3/22/12)(Before Justices Selya, Souter (sitting by designation), and Lipez, Opinon by Selya, Lipez concurring).

APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF MASSACHUSETTS. Hon. Michael A. Ponsor, U.S. District Judge. Hon. Henry J. Boroff, U.S. Bankruptcy Judge.
Berliner v. Pappalardo (In re Puffer), 453 B.R. 14, 2011 U.S. Dist. LEXIS 73602 (D. Mass., 2011)

PROCEDURAL POSTURE: After debtor's chapter 13 filing was converted to a chapter 7 filing by the Bankruptcy Court, appellant, debtor's attorney motion for an award of fees was denied. The United States District Court for the District of Massachusetts affirmed the denial. Appellant sought appellate review.
OVERVIEW: The chapter 13 plan was a "fee-only" plan that paid debtor's lawyer and the trustee their professional fees but left the general creditors holding an empty (or nearly empty) bag. The bankruptcy court rejected the proposed plan on the grounds that neither debtor's petition nor the plan itself was submitted in good faith, 11 U.S.C.S. § 1325(a)(3)(7), citing a case which held that fee-only chapter 13 plans were per se submitted in bad faith. Then the bankruptcy court told debtor he could amend his chapter 13 plan, convert to a chapter 7 filing, or dismiss the case. He chose to convert and ultimately received a discharge. As the bankruptcy court awarded the attorney less than the retainer he had collected, he was required to disgorge more than $200. The appellate court held that the bankruptcy court erred as a matter of law in adopting the per se rule. As the fee award rested on a legal error, it had to be vacated. What remained was for the bankruptcy court to reconsider, under the proper legal regime, the question of the entitlement to fees and to issue a new order in that regard. The court took no view as to the amount of fees, if any, that should be awarded.
OUTCOME: The appellate court reversed the order appealed from and remanded to the district court with instructions to vacate the bankruptcy court's fee order and remand to that court for further proceedings consistent with this opinion. All parties shall bear their own costs.
DISCUSSION:  This bankruptcy case involves a dispute over attorneys' fees. Resolving this dispute requires us to address a question of first impression at the appellate level concerning the propriety of so-called "fee-only" plans in Chapter 13 bankruptcy cases.  This is an issue that has divided the bankruptcy courts. Compare In re Paley, 390 B.R. 53, 59 (Bankr. N.D.N.Y. 2008) (rejecting fee-only plan as contrary to spirit and purpose of Bankruptcy Code), and In re Dicey, 312 B.R. 456, 459-60 (Bankr. D.N.H. 2004) (same), with In re Elkins, No. 09-09254-8, 2010 Bankr. LEXIS 1085, 2010 WL 1490585, at *3 (Bankr. E.D.N.C. Apr. 13, 2010) (stating that "[t]here are many permissible reasons to file [fee-only] chapter 13 cases"), and In re Molina, 420 B.R. 825, 829-33 (Bankr. D.N.M. 2009) (upholding good faith of fee-only plan). The bankruptcy court in this instance concluded that such plans are per se proffered in bad faith and disallowed virtually all attorneys' fees. On an intermediate appeal, the district court upheld the bankruptcy court's ruling.

The matter has now been appealed to this court. We have had the benefit of briefing (including the helpful submission of an amicus) and oral argument. After careful consideration, we hold that fee-only plans are not per se in bad faith. Consequently, we reverse the order appealed from and remand for further proceedings consistent with this opinion.

We believe that the totality of the circumstances approach to adjudicating good faith should apply equally to inquiries under section 1325. This belief is fortified by the fact that other courts interpreting section 1325's "good faith" element have performed a comparably holistic balancing of relevant factors. The totality of the circumstances test cannot be reduced to a mechanical checklist, and we do not endeavor here to canvass the field and catalogue the factors that must be weighed when determining whether a debtor has submitted a Chapter 13 plan in good faith.

Against this backdrop, we reject the bankruptcy court's holding that fee-only Chapter 13 plans are per se in bad faith.  While fee-only plans should not be used as a matter of course, there may be special circumstances, albeit relatively rare, in which this type of odd arrangement is justified. Given this possibility, prudence dictates that we hew to the overarching principle that the presence or absence of good faith should be ascertained case by case.  Let us be perfectly clear. This opinion should by no means be read as a paean to fee-only Chapter 13 plans. The dangers of such plans are manifest, and a debtor who submits such a plan carries a heavy burden of demonstrating special circumstances that justify its submission.  On the record before us, we cannot tell whether or not special circumstances sufficient to justify a fee-only Chapter 13 plan existed here. In the case at hand, the bankruptcy court did not consider the totality of the circumstances when measuring whether the debtor's Chapter 13 plan was presented in good faith. 

CONCURRENCE: The issue of fee-only Chapter 13 petitions has emerged in recent years largely as a result of two events. The first was the Supreme Court's decision in Lamie v. U.S. Tr., 540 U.S. 526, 124 S. Ct. 1023, 157 L. Ed. 2d 1024 (2004), which held that attorney's fees are not payable from estate funds in a Chapter 7 proceeding except in limited circumstances. Id. at 538-39 (construing 11 U.S.C. § 330(a)(1)). Attorneys who advise debtors on Chapter 7 filings thus may be unable to collect their fees once the plans are in place, prompting them to request payment in full up front. The second event was enactment of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), see 11 U.S.C. §§ 101-1532, which tightened the eligibility requirements for Chapter 7 bankruptcy and made the process more complicated -- increasing the need for legal advice and, in turn, the cost of filing for bankruptcy.  As I understand it, the fee-only Chapter 13 petition can be a creative solution for the "Lamie problem." At least some debtors who cannot afford an attorney-assisted Chapter 7 filing -- because the attorney, understandably, would expect to be paid up front -- can afford to pay for an attorney to assist with a Chapter 13 filing because the fee will be paid in post-petition installments.
Like my colleagues, I think that the totality of the circumstances test is the appropriate method to evaluate whether a particular fee-only Chapter 13 plan meets the good-faith requirements of the Bankruptcy Code. At this juncture, however, I would leave application of the test entirely to bankruptcy judges instead of prescribing a rule requiring "special circumstances" limited to "relatively rare" instances.  Nonetheless, we must keep in mind that a struggling debtor who lacks the resources to pay a Chapter 7 attorney's fee up front has limited options. Although he theoretically could proceed pro se, I doubt that bankrupt individuals will ordinarily be able to navigate the complexities of the bankruptcy process on their own. Moreover, lawyers play an important role in the bankruptcy system beyond their direct assistance to clients. A debtor could attempt to find cheaper, or free, legal services, but I have no reason to think that counsel fees vary widely or that competent bankruptcy legal advice is readily available for free. The majority notes that the debtor in this case stated that he could have saved enough money in three months to pay Chapter 7 fees, and they suggest that he should simply have waited to file for relief. The debtor's assertion of future ability to pay is certainly a factor to consider. For some debtors, however, the press of creditors, and the resulting stress, would likely make waiting intolerable.  It may turn out that balanced assessments will, in fact, result in designating a relatively small number of fee-only plans as filed in good faith. In sum, in declining to fully join my colleagues' approach, I do not question the need for caution in evaluating fee-only Chapter 13 plans. My concern is that a circumscribed totality of the circumstances analysis will unnecessarily, and perhaps unfairly, tilt the analysis against well meaning debtors. The experience thus far suggests that bankruptcy courts are able to draw distinctions between fee-only plans that comply with the Bankruptcy Code, including the good-faith requirement, and those that do not. Hence, unless further experience shows otherwise, I think we can be confident that the goals of Chapter 13 will be amply protected when the totality of the circumstances test is thoughtfully applied, without threshold limitation, by bankruptcy judges. 

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