In re Lettie
In re Lettie
Opinion of the Court
The debtors' counsel have asked this Court-via a motion to vacate the Court's *639prior order granting their application for compensation-to direct the Chapter 13 trustee to pay counsel's approved fees before the debtors proceed with their imminent intent to convert their case to Chapter 7. CM-ECF Doc. No. 55. The debtors were unable to achieve a confirmed plan, largely because of limited income and a recent fire loss on their uninsured home. See In re Lettie , No. 18-24510,
BACKGROUND
The debtors filed their Chapter 13 case on May 7, 2018. Their counsel first submitted a fee application, CM-ECF Doc. No. 39, on October 17, 2018. The request stated "[c]ounsel believes that interim compensation will not create an undue hardship on any party, since payments can be made in the usual course of the Chapter 13 plan."
But there was no confirmed plan at the time the fee order was signed. That same day, the trustee objected to confirmation of the debtors' plan, an objection the Court sustained. The Court's December 10, 2018 order (docketed on December 11) required the debtors to file an amended plan or convert their case to Chapter 7 on or before December 28, 2018. CM-ECF Doc. No. 48.
On December 21, 2018, the debtors' counsel filed correspondence, noting the differences between their original proposed fee order and the edited order signed by the Court. Counsel stated "the original Application should have been clearer as to the Debtors' intentions. The Debtors are under an existing Order to convert the case or file a Modified Plan.... Counsel wishes to be paid the awarded fees upon conversion of the case." CM-ECF Doc. No. 50. Counsel attached another copy of their original proposed order for fees, and asked the Court to vacate its November 19, 2018 order, and instead enter the originally proposed order with the alternative language about payment.
On December 28, 2018, the Court directed counsel to file their letter request in the form of a formal motion with supporting *640memorandum. The Court also directed counsel to address Harris v. Viegelahn , --- U.S. ----,
Counsel thereafter submitted a motion to vacate and memorandum of law. CM-ECF Doc. Nos. 55, 54, 57. The motion reiterated that "it is the intention of the debtors to convert this case to a Chapter 7 bankruptcy prior to confirmation, and counsel therefore wishes to be paid the approved fees prior to conversion.... Should the Court agree the approved fees can be paid prior to conversion, any remaining funds the Trustee is holding above and beyond the fees awarded and paid to counsel will be paid to debtors upon conversion." The motion also stated, "[c]ounsel for debtors hereby requests that the order is corrected so as to account for the likelihood that this case will be converted to Chapter 7, and that any approved fees are paid to counsel prior to conversion." CM-ECF Doc. No. 55, at 1.
The trustee also filed a legal memorandum. CM-ECF Doc. No. 58. The Chapter 13 trustee has $ 5,735.88 on hand. The fee application seeks $ 2,750.00. No parties have objected.
DISCUSSION
1. Rule 60 Standard
The debtors' counsel filed a motion to vacate this Court's order of November 19, 2018, an order which allowed counsel's fees to be paid through the debtors' plan. Counsel's motion cites Federal Rule of Bankruptcy Procedure 9024, which incorporates Federal Rule of Civil Procedure 60, to support their request to vacate due to "an omission from that order, as well as any other reason that justifies relief." CM-ECF Doc. No. 55, at 1.
Federal Rule of Civil Procedure 60(a), made applicable by Federal Rule of Bankruptcy Procedure 9024, provides that "[t]he court may correct a clerical mistake or a mistake arising from oversight or omission whenever one is found in a judgment, order, or other part of the record. The court may do so on motion or on its own, with or without notice." The bankruptcy court may correct an order under Rule 60(a) if the error was mechanical in nature and not the result of a deliberate choice, and the correction reflects the intent of the bankruptcy court at the time it entered the order. In re McClellan ,
It is not clear from the motion to vacate if the error asserted is that the Court mechanically omitted a sentence from counsel's proposed order, or if the asserted error is counsel's own "lack of *641clarity" in the original application-"Counsel now realizes that the original Application should have been clearer as to the Debtors' intentions.... Counsel wishes to be paid the awarded fees upon conversion of the case." CM-ECF Doc. No. 50. Attorney oversight rarely warrants relief from an order. In re Kellogg ,
Rule 60(b), also cited by the Letties' counsel, provides other grounds for relief from an order. On motion and just terms, the Court may relieve a party from a final order for:
(1) mistake, inadvertence, surprise, or excusable neglect;
(2) newly discovered evidence that, with reasonable diligence, could not have been discovered in time to move for a new trial under Rule 59(b);
(3) fraud (whether previously called intrinsic or extrinsic), misrepresentation, or misconduct by an opposing party;
(4) the judgment is void;
(5) the judgment has been satisfied, released or discharged; it is based on an earlier judgment that has been reversed or vacated; or applying it prospectively is no longer equitable; or
(6) any other reason that justifies relief.
The first five clauses and the catchall clause, clause (6), are mutually exclusive, so that if the asserted grounds for relief fall within one of the first five clauses, relief under the catchall section is not available. Webb v. James ,
Counsel has effectively conceded that exceptional circumstances are absent: "Counsel now realizes that the original Application should have been clearer as to the Debtors' intentions." Counsel submitted the application and plainly and solely asked that fees be paid as part of the debtors' plan. Although the relief sought in counsel's application and proposed order didn't match up exactly, the Court edited the order before entering it. If Rule 60(b)(6), the catchall provision, is mutually exclusive of 60(b)(1), which concerns mistake or neglect, see Webb v. James ,
But there may be another circumstance that could justify relief. Arguably, a portion of the Court's own directive to counsel to follow proper procedure, and seek reconsideration or vacation of an order not by letter but by formal motion, could have created a basis to justify reconsideration under Rule 60(b)(6). It is the second part of the Court's December 28, 2018 directive, the part which requested both the debtors' counsel and the Chapter 13 trustee to address the *642Harris v. Viegelahn holding and progeny, that could be read to open the door to reconsideration. Accordingly, the Court will take a second look.
2. Counsels' Argument on Reconsideration
The debtors' counsel contend that Harris v. Viegelahn does not preclude payment of approved fees upon conversion, but simply requires that any such approved fees must be paid before the conversion, citing --- U.S. ----,
Next, the Letties' counsel argue that 11 U.S.C. section 330 is silent as to whether confirmation is required before a Chapter 13 trustee may pay counsel fees. Counsel look for support from In re Woerner ,
As a last argument, the debtors' counsel note that 11 U.S.C. section 331 permits interim compensation, even occasionally in Chapter 13 cases. Counsel assert that "nothing in section 331 requires confirmation of the plan as a prerequisite to awarding interim compensation."
While not advocating a particular outcome, the Chapter 13 trustee filed a memorandum outlining some of the caselaw on either side of the fee disbursement question. First, the trustee points to In re Brandon ,
The trustee then acknowledged that a number of courts disagree with Brandon and Hayden , and require that funds be returned to the debtor upon conversion, including *643In re Beckman ,
ANALYSIS
At the outset, it should be clear that whether counsel ably represented Mr. and Mrs. Lettie is not at issue. The record amply manifests counsel's efforts to advocate for these debtors-not only the filing of the petition and a proposed plan, but preparation of a motion to continue the stay, marshalling of several affidavits, and appearance at several hearings and § 341 meetings. These items necessarily required multiple discussions with the debtors themselves, other witnesses, and communication with the debtors' primary creditor as well as with the Chapter 13 trustee. Dealing with the debtors' housefire on the eve of a motion to continue the stay hearing, while primarily traumatic for the debtors, certainly required additional advocacy resources from counsel.
The legal question presented, whether the trustee can pay allowed fees on the eve of conversion when no plan has been confirmed, assumes that the initial inquiries of reasonable and beneficial service to the debtor, under
Second, counsel argues briefly that interim compensation is allowed in some instances, citing
In Harris , the debtor exercised his one-time right to convert his Chapter 13 case to a Chapter 7 proceeding, without starting a new case. See
The Supreme Court found additional support in section 348(e). That section states: "Conversion [from Chapter 13 to Chapter 7] terminates the service of [the Chapter 13] trustee." The Harris Court explained:
A core service provided by a Chapter 13 trustee is the disbursement of "payments to creditors ." § 1326(c) (emphasis added). The moment a case is converted from Chapter 13 to Chapter 7, however, the Chapter 13 trustee is stripped of authority to provide that "service." § 348(e).
Section 348(e), of course, does not require a terminated trustee to hold accumulated funds in perpetuity; she must ... return undistributed postpetition wages to the debtor. Returning funds to a debtor, however, is not a Chapter 13 trustee service as is making "paymen[t] to creditors." § 1326(c).
In re Molloy , another case cited by debtors' counsel, framed two narrow questions: whether Harris v. Viegelahn precludes the payment of attorneys fees in a Chapter 13 case prior to conversion to a Chapter 7 case, and whether the bankruptcy court erred as a matter of law when it found it could not award attorney fees in a Chapter 13 case, prior to confirmation and prior to conversion to Chapter 7 or dismissal. But Molloy only talked around the first question, stating: "The ruling in Harris does not preclude payment of attorney's fees in a Chapter 13 case prior to the conversion,"
Another court tried to distinguish Harris based on whether the debtors had achieved plan confirmation. In Brandon , also cited by the Letties' counsel, the court analyzed § 1326(a)(2)
As noted above, the trustee has cited several cases that do not read Harris to permit the trustee to pay counsel fees at conversion (but recognize that counsel could file a claim against the Chapter 7 estate). See, e.g. In re Sowell ,
A number of other courts beyond those noted by the trustee likewise hold that a Chapter 13 trustee cannot pay counsel fees on conversion. Those cases include In re Post ,
These latter decisions, which refuse to distinguish Harris based on whether a plan is confirmed or not, are the better-reasoned. This Court agrees with the growing majority that Harris applies equally to cases converted from Chapter 13 to Chapter 7 after confirmation and prior to confirmation. To adopt the reasoning of Brandon and rely on section 1326(a)(2) to allow payment of fees in a preconfirmation converted case would ignore the Harris court's sweeping statement that "no chapter 13 provision holds sway" after conversion.
But this conclusion does not fully resolve the question before the Court; because the Letties' case is on the verge, but has not yet been converted to a Chapter 7, the Chapter 13 provisions still "hold sway." Those provisions, however, do not authorize the relief that counsel has requested: a prospective, pre-conversion order directing the Chapter 13 trustee to distribute attorneys' fees prior to an impending conversion.
The Supreme Court has "long held that 'whatever equitable powers remain in the bankruptcy courts must and can only be exercised within the confines of the Bankruptcy Code." Law v. Siegel ,
CONCLUSION
The Supreme Court noted in Harris "the 'fortuity' ... that a 'debtor's chance *647of having funds returned' is 'dependent on the trustee's speed in distributing the payments' to creditors"-contrasting a trustee who distributes payments regularly (and thus may have little or no accumulated wages to return to the debtor) with one who distributes payments infrequently (possibly entitling a debtor who converts to Chapter 7 to a sizable refund)-but explained that these (disparate) outcomes "follow directly from Congress' decisions to shield postpetition wages from creditors in a converted Chapter 7 case, § 348(f)(1)(A), and to give Chapter 13 debtors a right to convert to Chapter 7 'at any time,' § 1307(a)."
A similar "fortuity" of circumstance and timing has come into play here. The Letties might have had their plan confirmed, and their counsel paid regularly through the plan, had not the extensive house fire occurred so early in their case. Ultimately, the outcome is consistent with congressional intent to shield post-petition wages from creditors in a converted Chapter 7 case, and debtors like the Letties have the right to convert at any time. Unfortunately, the fire at the Letties' uninsured home means they intend to exercise that right early, before a plan can be confirmed and any plan payments distributed to creditors or administrative claimants.
The Court appreciates that representation of Chapter 13 debtors who may not attain plan confirmation, and who may even face a need to convert to Chapter 7, carries some financial risk for debtors' counsel. See, e.g. , Post-Harris Fee Review, National Consumer Bankruptcy Rights Center, found at http://www.ncbrc.org/blog/2015/10/30/post-harris-attorney-fee-review/; see also Beauregard ,
ORDER
For the foregoing reasons, the request for reconsideration is GRANTED, but on reconsideration, IT IS HEREBY ORDERED that the debtors' counsel's request that the Court vacate its November 19, 2018 order and further order the Chapter 13 trustee to pay allowed administrative expenses prior to the impending conversion of this case to Chapter 7 is DENIED.
The order signed by the Court on November 19, 2018, and docketed on November 20, is largely consistent with the form order appearing on the bankruptcy court's website, https://www.wieb.uscourts.gov/sites/default/files/chambers/svk/Sample Order on Fee App_0.pdf under the Local Sample Forms link, Chapter 13 General Forms section, Order Allowing Compensation to Debtor's Attorneys. The form order bears a caution at the bottom: "Implying or stating that the unpaid administrative claim will be paid before refunding to the Debtor on CONVERSION may violate Harris v. Viegelahn , --- U.S. ----,
See, e.g. , Robert E. Ginsberg, Robert D. Martin & Susan V. Kelley, Ginsberg and Martin on Bankruptcy § 15.07[C][2], noting that "courts issued conflicting decisions on whether the debtor or the creditors were entitled to undistributed plan payments [in Ch. 7 case converted from a Ch. 13] and the Supreme Court settled the matter in 2015, ruling that the debtor is entitled to return of the funds held by the trustee. Courts are now divided over whether the trustee can pay administrative expenses such as the debtor's attorney before refunding funds to the debtor; most courts hold that compensation can be paid to an attorney only on a preconfirmation dismissal , when the attorney's compensation has been allowed as an administrative claim under § 503(b)." (Emphasis supplied.)
Persuasive caselaw recognizes that the text of section 331, which provides court discretion to award interim compensation where counsel has been employed under section 327, is seldom if ever applicable to Chapter 13 counsel, whose employment need not be approved by the bankruptcy court. See, e.g., In re Stevens , No. 05-12056 MER,
The Supreme Court also explained the exception for bad faith conversions, a topic not at issue in the instant case.
The Court has located only one other (unreported) case dealing with a similar, prospective preconversion payment request by counsel: In re Ulmer , No. 15-30220,
The same is not true when a case is dismissed, rather than converted, preconfirmation. See, e.g. , supra n.2, Ginsberg and Martin on Bankruptcy § 15.07[C][2].
Reference
- Full Case Name
- IN RE: Nicholas D. LETTIE and Angela M. Renier-Lettie, Debtors.
- Status
- Published