Bankruptcy Law

Much Ado About Harris

The U.S. Supreme Court’s recent decision in Harris v. Viegelahn, 575 U.S. — (2105), has created a good deal of consternation for some chapter 13 trustees and debtors’ attorneys, alike. In Harris, the Court held that once a confirmed chapter 13 case was converted to chapter 7, the chapter 13 trustee was no longer authorized to disburse the funds on-hand in the debtor’s trustee account to creditors. The Court based its decision on § 348(e)’s termination of the chapter 13 trustee’s services upon conversion of the case and the fact that no other code section authorized the trustee to continue performing “chapter 13 trustee services” such as disbursing to creditors.

Much Ado About Harris

In the aftermath of Harris, a number of chapter 13 trustees now question whether they have the authority to disburse to creditors, including fees to debtors’ attorneys, once a case is dismissed or converted prior to confirmation of a chapter 13 plan. My position, not surprisingly, is that they can. Unlike the situation in Harris – where the plan had been confirmed – the Bankruptcy Code does provide for and requires the chapter 13 trustee to disburse to certain creditors when a chapter 13 case is dismissed or converted prior to the confirmation of a plan. 11 U.S.C. § 1326(a)(2) directs the trustee to pay the money on hand to the debtor after deducting for the trustee’s fees and costs, unpaid but due adequate protection payments, and unpaid claims allowed under § 503(b) – which circuitously includes debtor’s attorneys fees in chapter 13 cases.

The purpose of § 1326(a)(2) is three-fold. First, it seeks to prevent discouraging debtors from seeking relief under chapter 13 rather than chapter 7, “by returning to the debtor post-petition assets that were devoted to the ultimately unsuccessful, unconfirmed plan, since those assets would not have been part of the chapter 7 estate.” Second, it seeks to shift some of the risk of the failure of the case from administrative claimants (especially chapter 13 trustees) to the debtor. Finally, it promotes the Bankruptcy Code’s goal of attracting competent attorneys to represent debtors in bankruptcy. By allowing for limited disbursments, § 1326(a) seeks to balance these competing policies as well as the diverse interests of the parties.

Still, the trustees’ problem is not totally resolved by § 1326(a)(2) – at least not in the Northern District of Georgia (NDGa). Here in NDGa, debtor’s attorneys fees in chapter 13 cases are governed by General Order 6-2006, which purports to provide the mechanism for counsel to get paid. But § 1326(a)(2) provides for payment of claims allowed under § 503(b). Some of our local judges have expressed doubts that General Order 6-2006 in fact provides a viable method for the allowance of debtor’s attorneys fees as administrative claims under § 503(b). The Bankruptcy Court has asked the Bench & Bar Committee to review the matter and make recommendations. Don’t be surprised if we see a new general order relating to debtors’ attorneys fees in chapter 13 cases in the near future.