In re Duane G Jaworski Frances Jaworski, BKY Case No. 13-43296-MER

In re: Duane G Jaworski Frances Jaworski, Debtors.

BKY Case No. 13-43296-MER

UNITED STATES BANKRUPTCY COURT DISTRICT OF MINNESOTA

November 30, 2018

Chapter 13

MEMORANDUM DECISION

At Minneapolis, Minnesota, November 30, 2018.

This voluntary chapter 13 case came before the Court on the "Motion for Hearing for Final Application for Fees and Expenses by Law Firm for Debtors." The chapter 13 Trustee filed a response in opposition to the application. A hearing was held on the issue on October 11, 2018. Kenneth Keate appeared on behalf of the debtors, and Jeffrey Bruzek appeared for the Trustee. At the conclusion of the proceeding, the Court granted Mr. Keate until October 22, 2018 to file a supplemental brief, and granted Mr. Bruzek an additional seven days to respond to Mr. Keate's brief. On October 22, 2018, Mr. Keate filed two documents: (1) a one-page amendment and supplement to his own statement of fees, and (2) a two-page supplemental reply to the objection of the Trustee to Mr. Keate's fee application. On October 29, 2018, Mr. Bruzek, on behalf of the chapter 13 Trustee Gregory Burrell, filed a supplemental brief. The matter is now ready for resolution.

This is a core proceeding under 28 U.S.C. § 157(b)(2), and this Court has jurisdiction over this contested matter pursuant to 28 U.S.C. §§ 157(a) and 1334. This memorandum decision is based on all the information available to the Court and constitutes the Court's findings of fact and conclusions of law under Fed. R. Bank. P. 7052, made applicable to this contested matter by Fed. R. Bankr. P. 9014(c).

For the reasons stated herein, this Court finds that a debtor's attorney's priority claim for allowed but unpaid fees does not survive the discharge under § 1328(a), and the Trustee's objection to Mr. Keate's "Final Application for Fees and Expenses" is therefore SUSTAINED.

BACKGROUND

Duane and Frances Jaworski filed their chapter 13 petition on June 28, 2013, and their modified chapter 13 plan was confirmed more than a year later, on November 7, 2014. The Jaworskis then worked steadily over the course of nearly four years to comply with each of their plan payment requirements, and paid the Trustee a total of $150,000.00 by the time of their final payment in June 2018. Throughout that time, Mr. Keate failed to file an application for fees.

More than a month after the Jaworskis made their final payment, Mr. Keate still had not submitted an application for fees. On July 26, 2018, the chapter 13 Trustee filed a motion to compel Mr. Keate to file his fee application in this case by August 10, 2018, stating that, pursuant to the debtors' confirmed modified chapter 13 plan, the Trustee was holding $5,000.00 for the attorney fee claim and had an additional $4,191.22 available. By that time, the Trustee's office was holding a total of more than $55,000.00 in funds earmarked for Mr. Keate in a variety of ongoing bankruptcy cases, including this one. The chapter 13 Trustee stated that Mr. Keate's failure to submit a fee application unduly delayed the Trustee's ability to file: (1) the final report to close the case, and (2) a motion to modify the plan to distribute the remaining available funds to the unsecured creditors.

Mr. Keate cited a plethora of health and computer problems as reasons for his delays in filing his fee applications, and promised to file his fee application in this case by October 1, 2018. A hearing was held on the motion on August 24, 2018, and a resulting order from this Court required Mr. Keate to file his fee application by 4:00 p.m., on September 14, 2018.

On September 14, 2018, the debtors were discharged. That same day, Mr. Keate filed an application for fees for the period from May 15, 2009, to October 28, 2018, totaling $17,527.54, including $456.04 in expenses. The motion stated that the debtors had already paid Mr. Keate $3,408.00; he requested $14,071.56 in net compensation, including $9,491.83 from the Trustee. The Trustee objected to Mr. Keate's motion, stating that: (1) the Trustee's office had only $5,335.08 on hand due to paying the debtors' unsecured creditors' claims - an amount that would have been awarded to Mr. Keate had he filed his fee application in a timely manner; (2) $1,276.00 of the amount requested was for work performed outside the time period allowed in the statute of limitations for fees; and (3) the Trustee was concerned that an order allowing for the full $17,527.54 requested would allow Mr. Keate to seek funds from the debtors after their discharge amounting to approximately $8,784.06.¹

Mr. Keate has asserted that the debtors agreed to pay him his fees after their discharge, including those fees not covered by the modified chapter 13 plan. This is apparently a common practice for him, and he has stated to this Court that if he is unable to collect fees post-petition and is required to make an initial application for the full amount of his fees, that would cause his clients' cases to be dismissed, because his fees would require his clients to have unaffordable payments in their plans. Mr. Keate's new proposed allowed compensation totaled $12,121.31, including the $3,408.00 already paid by the debtors; the $5,335.08 available from the Trustee; and $47.98 that remains in Mr. Keate's trust account for this case for reasons that are still unclear to this Court.² Mr. Keate stated during the October 11, 2018 hearing that the reduced amount was to reflect the funds the Trustee paid to the general unsecured creditors when Mr. Keate did not timely file his fee application. Although Mr. Keate later stated that he would be willing to accept less compensation within the bankruptcy rubric, he made that statement with the explicit understanding that he planned to collect the additional funds from his clients after their case is discharged.³

Mr. Keate's application is the sole issue currently creating an impediment to the Trustee's obligations to make a final report and file a final account under § 704(a)(9) of the Bankruptcy Code⁴ (made applicable to chapter 13 cases by § 1302(b)(1)).⁵

DISCUSSION

I. Attorney's fees are classified as priority claims under the Bankruptcy Code, and must be included in the confirmed plan in order to be paid.

When debtors file for bankruptcy, they are put in the common position of owing fees to the attorneys who represent them. In contrast, when attorneys accept debtors' bankruptcy cases, attorneys are put in the uncommon position of becoming the very kind of creditors their clients file bankruptcy to avoid.

Understanding the statutory framework governing attorney's fees in chapter 13 cases starts with § 1322(a)(2) of the Bankruptcy Code, which states that a chapter 13 plan "shall provide for full payment, in deferred cash payments, of all claims entitled to priority under section 507 of this title, unless the holder of a particular claim agrees to a different treatment of such claim." 11 U.S.C. § 1322(a)(2). Under § 507(a)(1), first priority is given to "administrative expenses allowed under section 503(b)," which states that "there shall be allowed, administrative expenses, . . . including-- . . . (2) compensation and reimbursement awarded under section 330(a) of this title." 11 U.S.C. § 507(a)(1). Section 303(a)(1) states that the Court may award "(A) reasonable compensation for actual, necessary services rendered by the . . . attorney . . . ; and (B) reimbursement for actual, necessary expenses." 11 U.S.C. § 303(a)(1). Under § 303(a)(2), however, courts may "award compensation that is less than the amount of compensation that is requested." 11 U.S.C. § 303(a)(2).

Taken together, these statutes state that while an attorney may agree otherwise, attorneys who are awarded fees under § 330(a) are entitled to a first priority claim under § 507(a)(1), and these fees must be both provided for in the plan and paid in full under the terms of the chapter 13 plan. In re Connor, 559 B.R. 526, 531 (Bankr. D. N.M. 2016), citing In re Busetta-Silvia, 314 B.R. 218, 222-23 (B.A.P. 10th Cir. 2004).

Once confirmed, the plan rules; it becomes the binding mechanism for all the parties under § 1327.⁶ In re Reiser, 569 B.R. 499 (Bankr. D. Minn. 2017). Outside agreements, like the one Mr. Keate references here (and that is apparently included in his retainer agreement), in which the debtors stated they would pay him after discharge, do not control. In re Siemers, 205 B.R. 583, 586 (Bankr. D. Minn. 1997) ("[I]t is the terms of a debtor's Chapter 13 plan that govern the post-confirmation treatment of the claims of participating secured creditors, not the debtor's Statement of Intention or other informal agreement."). Since the debtor's attorney is a creditor, and the confirmed plan governs payment of creditors, the attorney must ensure that the attorney's fees are included in the plan, and - like all other creditors - must monitor the administration of the plan to ensure that the attorney's claim is paid. Id. ("If a creditor doesn't like the treatment of its claim under the terms of a proposed plan, the creditor's remedy is to object to confirmation, not to ignore the plan and try to attack it later. Once a secured creditor chooses to participate in a bankruptcy case by filing a proof of claim, it acts at its peril and cannot be excused for failing to monitor the treatment of its claim under the terms of a properly noticed Chapter 13 plan.").

Here, Mr. Keate's fees were included in the modified plan as follows:

9. PRIORITY CLAIMS - The trustee will pay in full all claims entitled to priority under § 507, including the following. The amounts listed are estimates. The trustee will pay the amounts actually allowed.

. . .

Tax and Bankruptcy Attorney, PLLC . . . [$]5,000.00

ECF. No. 26 ¶ 9. Although Mr. Keate, as a creditor, had the opportunity to agree to a different treatment of his claim, he did not do so. He did not object to the modified plan's confirmation, nor did he raise objections to the treatment of his claim before that...