In re Hill

IN RE: DERRICK LARON HILL and TIA MARIE HILL, Debtors.

IN RE: PRAYOON RANDY CHANTHAVONG and MANIVONE CHANTHAVONG, Debtors.

Case No. 17-11083-M

Case No. 17-11503-M

UNITED STATES BANKRUPTCY COURT FOR THE NORTHERN DISTRICT OF OKLAHOMA

March 22, 2018

Chapter 7

MEMORANDUM OPINION

Most people expect to be compensated when they provide services in an arms-length transaction. A bankruptcy case often thwarts those expectations. Many unsecured creditors are taken by surprise when their otherwise legitimate claims go unpaid due to a debtor's bankruptcy filing. But professionals that target their services to bankruptcy debtors are well aware of the minefield they are entering when they engage with a financially insolvent client. Debtors' counsel and the courts, relying on the applicable provisions of the Bankruptcy Code, work together to see that such services are reasonably compensated in order to ensure that such services will continue to be available to debtors. Sometimes, despite their best efforts, even the fees of bankruptcy professionals cannot escape the fate of an unpaid debt. The following findings of fact and conclusions of law are made pursuant to Federal Rule of Bankruptcy Procedure 7052.

Jurisdiction

This Court has jurisdiction over this matter pursuant to 28 U.S.C. § 1334(b), and venue is proper pursuant to 28 U.S.C. § 1409.¹ Reference to the Court of this matter is proper pursuant to 28 U.S.C. § 157(a). This is a core proceeding as contemplated by 28 U.S.C. § 157(b)(2)(A).

Findings of Fact

Derrick and Tia Hill

On May 31, 2017, Derrick LaRon Hill and Tia Marie Hill (the "Hills") filed a petition for relief under Chapter 13 of the United States Bankruptcy Code (the "Hill Case").² The case was filed with the assistance of counsel, Greggory T. Colpitts and The Colpitts Law Firm ("Colpitts"). For his services related to the Hill Case, Colpitts agreed to accept $2,800, $800 of which was received prior to filing the case.³ Colpitts indicated that his services would be billed at a rate of $300 per hour for attorney time and $65 per hour for legal assistant time, in addition to actual expenses. Colpitts also advised the Court that in the event the value of his services exceeded $2,800, he would file an additional application for fees and expenses with the Court. The balance due to Colpitts was to be paid through the Hill's Chapter 13 Plan, as amended (the "Hill Plan").⁴ The Hill Plan set forth that $500 of their monthly plan payments in months 1 through 9 would be reserved and paid to Colpitts upon confirmation of the Hill Plan and approval by the Court of a fee application submitted byColpitts.⁵

The Hills were unable to propose a confirmable Chapter 13 Plan. On October 11, 2017, the Hills filed a Notice of Conversion exercising their right under § 1307(a) to convert their case to one under Chapter 7.⁶ As a result, the services of Lonnie D. Eck ("Eck"), the Standing Chapter 13 Trustee, were terminated, and Karen C. Walsh ("Walsh") was appointed the Chapter 7 Trustee. On November 9, 2017, Walsh filed a Chapter 7 Trustee's Report of No Distribution stating there was no estate property available for distribution, and that the estate had been fully administered. An Order of Discharge was entered for both debtors in the Hill's Chapter 7 case on January 16, 2018.

Soon after filing the Notice of Conversion, Colpitts filed a second Disclosure of Compensation, indicating that the Hills had provided him with a retainer of $1,475 to provide services related to their Chapter 7 bankruptcy case.⁷ Colpitts also filed an Application for Allowance of Attorney's Fees (the "Hill Fee Application"), in which he itemized 18.35 hours of attorney services and 8.93 hours of administrative assistant services provided in the Hill Case.⁸ Colpitts also sought reimbursement of expenses of $208. In total, Colpitts details $5,963.87 in fees and expenses. Colpitts has applied a retainer of $1,475 to the fees, leaving a balance due of $4,488.87. In the Hill Fee Application, Colpitts asserts that Eck is holding $6,712.50 in this case, and requests that Eck pay him directly for his fees and expenses incurred before refunding any monies to the Hills. Ecksupports the request.

Prayoon and Manivone Chanthavong

On July 28, 2017, Prayoon Randy Chanthavong and Manivone Chanthavong (the "Chanthavongs") filed a petition for relief under Chapter 13 of the United States Bankruptcy Code (the "Chanthavong Case").⁹ The case was filed with the assistance of Colpitts as counsel. For his services related to the Chanthavong Case, Colpitts agreed to accept $2,800, $800 of which was received prior to filing the case.¹⁰ Colpitts disclosed that his services would be billed at a rate of $300 per hour for attorney time and $70 per hour for legal assistant time, in addition to actual expenses. Colpitts also stated that in the event the value of his services exceeded $2,800, he would file an additional application with the Court. The remaining balance due to Colpitts was to be paid over time through the Chanthavong's Chapter 13 Plan (the "Chanthavong Plan").¹¹ The Chanthavong Plan set forth that $750 of their monthly plan payments in months 1 through 6 would be reserved and paid to Colpitts upon confirmation of the Chanthavong Plan and approval by the Court of a fee application submitted by Colpitts.¹²

The Chanthavong Plan was never confirmed. On October 31, 2017, the Chanthavongs filed a Notice of Conversion, exercising their right under § 1307(a) to convert their case to one under Chapter 7.¹³ As a result, the services of Eck were terminated, and Steven W. Soule ("Soule") wasappointed the Chapter 7 Trustee. On January 2, 2018, Soule filed a Chapter 7 Trustee's Report of No Distribution, indicating that there was no estate property available for distribution, and that the estate had been fully administered. An Order of Discharge was entered for both debtors in the Chanthavong's Chapter 7 case on February 1, 2018.

Colpitts filed an Application for Allowance of Attorney's Fees (the "Chanthavong Fee Application"), in which he indicated that he had provided 14.15 hours of attorney services and 12.16 hours of administrative assistant services in the Chanthavong Case.¹⁴ He also listed reimbursable expenses of $123.41. The Chanthavong Fee Application contains a detailed description of the time spent by Colpitts and his staff on the Chanthavong Case. In total, Colpitts seeks approval and payment of $4,988.94 in fees and expenses. He states that he has applied a retainer of $800, and taken a voluntary discount of $367.62, leaving a balance due of $3,821.32. In the Chanthavong Fee Application, Colpitts asserts that Eck is holding $4,650 in this case, and he requests that Eck pay him directly for his fees and expenses incurred. Eck supports the request.

On January 9, 2018, the Court held a hearing in both cases to allow Colpitts and/or Eck to address concerns regarding the direct payment of Colpitts's fees from funds held by Eck. Specifically, the Court asked them to address whether the decision of the United States Supreme Court in Harris v. Viegelahn¹⁵ affected Colpitts's fee applications. The Court heard argument and took the matter under advisement.

Conclusions of Law

Chapter 13 bankruptcy is a voluntary arrangement whereby debtors present a plan to theCourt and their creditors to repay all or some of their debts out of their future earnings or other future income. After notice to all affected creditors and a hearing, the Court will confirm a plan if it complies with the provisions of the Code. The Chapter 13 Trustee is charged with collecting payments made under the proposed plan and, after the plan has been confirmed, distributing those funds to creditors. The structure of this scheme requires the Chapter 13 Trustee to accumulate and hold funds until the plan is confirmed.¹⁶ Once a plan is confirmed, the Chapter 13 Trustee will then distribute those funds according to the plan.¹⁷

Sometimes things go awry before a Chapter 13 plan gets confirmed. Because Chapter 13 bankruptcy is wholly voluntary, debtors are free, in the absence of bad faith, to dismiss or convert their cases to a case under Chapter 7 at any time, assuming they are eligible for relief under that chapter.¹⁸ When that happens, the Chapter 13 Trustee is often, as here, left holding money that he or she received during the pendency of the Chapter 13 case. With certain exceptions,¹⁹ because those funds represent future earnings and income of the debtors, they are not property of the debtors'Chapter 7 estate, and must be returned to the debtors.²⁰ It is just such funds, being held by Eck, that Colpitts seeks to have paid directly to him as compensation for services rendered to the Hills and Chanthavongs in their Chapter 13 cases.

The Hill Fee Application and the Chanthavong Fee Application (collectively, the "Fee Applications") present three distinct questions for the Court. The first is whether the Fee Applications reflect a reasonable expense of administration under §§ 330(a)(4)(B)²¹ and 503(b).²² The second is whether those administrative expenses can be paid directly to Colpitts from funds held by Eck, or whether Eck must distribute those funds directly to the debtors. Lastly, the Court must consider what other means might be available to Colpitts to recover his fees.

1. Administrative expenses under §§ 330(a)(4)(B) and 503(b)

There was no dispute presented to the Court regarding the reasonableness or the necessity of Colpitts's fees in either case. The Court finds that Colpitts's hourly rate and the time spent in the Hill and Chanthavong Cases are reasonable, to the extent they were provided prior to the filing ofthe Notice of Conversion in each case. Except for 1.2 hours of attorney time and $94.64 in expenses billed on October 12, 2017, a date after the filing of the Notice of Conversion, the Court finds that the fees and expenses requested by Colpitts in the Hill Case are reasonable under § 330(a)(a)(4)(B), and may...