In re Riley, CASE NO. 17–80108

577 B.R. 497

IN RE: Sharon Boyd RILEY

CASE NO. 17–80108

United States Bankruptcy Court, W.D. Louisiana, Alexandria Division.

Signed September 29, 2017

Thomas C. McBride, Alexandria, LA, for Debtor.

REASONS FOR DECISION DISALLOWING REIMBURSEMENT OF ADVANCES THROUGH DEBTOR'S CHAPTER 13 PLAN

JOHN W. KOLWE, UNITED STATES BANKRUPTCY JUDGE

Before the Court on confirmation is Sharon Boyd Riley's ("Debtor") Chapter 13 plan which proposes to pay her attorney, Thomas C. McBride ("McBride"), as an administrative expense of her estate, the "no-look" attorney fee allowed by standing order in this District plus reimbursement of advances made by McBride to pay the filing fee and other prepetition costs on behalf of the Debtor. McBride advanced these costs as part of his "no-money-down" Chapter 13 practice, which began late 2009. For most of this time period, this District had in place a Standing Order Regarding "No–Look" Fees in Chapter 13 Cases, which provided that the attorney's fee payable under the order was inclusive of any prepetition expenses advanced by the debtor's attorney. As a result, in those cases in which attorneys requested the no-look fee, they were prohibited from requesting reimbursement of expenses, effectively requiring them to absorb those costs. Effective February 1, 2017, this District adopted a new Standing Order Regarding "No–Look" Fees in Chapter 13 Cases that is silent regarding whether the limit on the no-look fee includes any pre-petition expenses advanced. This case is the first of many filed by McBride (and other debtors' counsel) after the effective date of the new order, in which he seeks reimbursement of the advances through the plan in addition to the compensation allowed under the new order. The Court is now called upon to determine whether McBride may seek reimbursement of the advances through the Debtor's Chapter 13 plan.

The Court has jurisdiction over this proceeding under 28 U.S.C. §§ 157 and 1334. This matter is designated a core proceeding under 28 U.S.C. § 157(b)(2)(L). The Court makes the following findings of fact and conclusions of law in accordance with Fed. R. Bankr. P. 7052.

I. BACKGROUND

A. Description of McBride's practice and his agreement with the Debtor

This case is a "no-money-down" bankruptcy case—a case in which the debtor's attorney agreed to advance the funds to pay the filing fee, the credit counseling course fee and a credit report fee on behalf the debtor, with the understanding by the debtor that the advances would be reimbursed through the confirmed plan, along with payment of the no-look attorney's fee. McBride has been filing no-money-down cases since at least 2009, and according to him, approximately 80% of his Chapter 13 cases are no-money-down cases.¹ McBride's no-money-down arrangement with the Debtor in this case is set forth in a February 2, 2017 agreement entitled "Chapter 13 Contract and Fee Agreement."² The first section of the agreement, entitled "Attorney's Fees," states that the Debtor agrees to pay an attorney fee in the amount of $2,150.00.³ It also sets forth the costs that McBride will be paying on behalf of the Debtor, and which the Debtor affirmatively states she will repay. These include the filing fee of $310, a $24 charge for credit counseling, and a $33 charge for a credit report, for a total of $367. This amount is then added to the attorney fee to provide a total of $2,517 to be paid by the Debtor for McBride's representation in the case. The agreement states that this total will be paid through the plan.

The proposed Plan provision on administrative expenses is the only one at issue in this case and mirrors the terms set forth in the engagement agreement by providing: "Thomas C. Bride, LLC shall receive attorney and administrative fees of $2,517 (this total includes attorney fees of $2,150 plus reimbursement of court costs of $310, credit counseling fee of $24, and credit report fee of $33)."⁴ Administrative expenses are paid in preference to all other creditors being paid through the plan.

McBride submitted, without objection, the Debtor's affidavit, in which she states that she was three months behind in payments on her car note at the time she filed her case. She acknowledged that she signed a Contract and Fee Agreement with McBride and agreed "to pay attorney fees of $2,150.00 and costs of $367.00, totaling $2,517.00."⁵ She further stated that she "would not have been able to pay the filing fees and costs of $367.00 to file the Chapter 13 Bankruptcy and prevent [her] vehicle from being repossessed."⁶ The Debtor did not present any documentary evidence to support her assertion that her vehicle was in the process of being repossessed at the time of filing. During the confirmation hearing, McBride asserted that if he did not pay the filing fees and other costs for his clients, many clients would be denied access to the court. He views his willingness to advance the prepetition expenses as a valuable service to his clients, and he assumes the risk that the advances will not be repaid if either the debtor defaults on plan payments or the case is dismissed for any other reason. He also stated this practice benefits the clerk of court since he pays the filing fee in full with the petition.

B. No-look fees in this District and their impact on no-money-down cases

Effective April 1, 2010, the Bankruptcy Judges in this District adopted a District-wide standing order on no-look fees.⁷ It established "a presumptively reasonable" attorney fee that all Chapter 13 debtor's counsel could choose to accept in lieu of filing a formal fee application. It generally described the services expected of the attorneys in exchange for the fee. While it did not prohibit an attorney from advancing the filing fees and other pre-petition costs on behalf of a Chapter 13 client, it stated that "any advances made by debtor's counsel for filing fees or expenses pre-confirmation will be considered included in the no-look fee."⁸ That order was amended on September 13, 2013; the provision concerning advances made by debtor's counsel remained in the amended order.⁹

Effective February 1, 2017, this District's Bankruptcy Judges revoked the prior standing order on no-look fees and adopted a new one.¹⁰ Under this order, the total no-look fee is $3,600, but the last $600 of the fee is not payable until the last six months of the debtor's plan, provided the certain conditions are met.¹¹ It also provides that in cases where the debtor's monthly plan payment is less than $300, the no-look fee is limited to 10 times the monthly payment. The order also sets forth in more detail the services expected of the debtor's attorney in return for the fee. And, like the previous orders, it provides tiers of payments for various post-confirmation matters. Additionally, the order confirms the right of an attorney to forego receiving the no-look fee and submit a traditional fee application as contemplated by, and in conformity with, applicable statutes and rules.¹² Although the new order specifically allows a debtor's attorney to be reimbursed the costs of noticing a modified plan when required, it is silent with regard to other expenses, and it no longer expressly states that the no-look fee is inclusive of the filing fee and other advances.

C. Attorneys' and Trustee's responses to the new no-look fee order

Virtually all attorneys representing Chapter 13 debtors in this Court file no-money-down cases. The bar responded to the new order by immediately filing plans which seek reimbursement of the advances as administrative expenses of the estate. Without taking a position on the issue, the Chapter 13 Trustee filed "Comments" to numerous plans, including the plan in this case, requesting the Court to clarify whether the advances are reimbursable under the new standing order. In response, McBride filed a brief in support of confirmation.¹³ Following the hearing on confirmation, the Court confirmed the plan with a reservation with respect to the reimbursement of expenses, taking this matter under advisement.

II. DISCUSSION

McBride argues that he may seek reimbursement of the advances because they are permissible administrative expenses of the estate. First, he contends the advances were made to preserve the estate, thus allowing them to be reimbursed as administrative expenses under § 503(b)(1)(A). Second, he claims that the advances may be viewed as reimbursable expenses awarded under § 503(b)(2), which allows compensation and expenses awarded under § 330(a) as administrative expenses. For the following reasons, the Court finds that McBride may not seek reimbursement of the advances through the Debtor's plan.

A. The advances are not reimbursable under § 503(b)(1)(A)

Section 503(b)(1)(A) allows a bankruptcy court to award administrative expenses for the "actual, necessary costs of preserving the estate." 11 U.S.C. § 503(b)(1)(A). If a debt is characterized as an administrative expense, the creditor on such debt enjoys an entitlement to distribution second only to domestic support obligations. See 11 U.S.C. § 507(a). Because of this entitlement, § 503(b) expenses are generally narrowly construed to maximize the value of the estate for all creditors. In re Frazier, 569 B.R. 361, 367 (Bankr. S.D. Ga. 2017).

Courts have developed a two-part test for determining whether a debt is an administrative expense of the estate. First, the debt must arise from a transaction with the bankruptcy estate. Second, the goods or services evidenced by the debt must directly and substantially benefit the estate. In re Jack Wade Drilling, Inc. 258 F.3d 385, 387 (5th Cir. 2001) ; 4 Collier on Bankruptcy¶ 503.06[3] (16^th ed. 2015). The earliest a bankruptcy estate exists is on the petition date. 11 U.S.C. 541(a). Thus, in order to satisfy the first prong of the test, goods or services must be delivered or provided pursuant to a post-petition transaction with the estate; "it is not enough that payment becomes due after the petition...