District Court Reverses Bankruptcy Court’s Decision to Deny Attorney’s Fee Application Where Debtor Intended to Convert to Chapter 7

District Court Reverses Bankruptcy Court’s Decision to Deny Attorney’s Fee Application Where Debtor Intended to Convert to Chapter 7

On February 26, 2015, the Debtor  filed a voluntary petition under Chapter 13 of the United States Bankruptcy Code. At that time, the Debtor maintained full time employment as a tow truck driver for Tow Masters.  The Debtor filed his Chapter 13 bankruptcy petition in an effort to prevent the seizure of his 2011 Ford F-150 by the credit union which held a lien on it.

At the Debtor’s Section 341 meeting of creditors, held on April 6, 2015, the Debtor informed the Trustee and Debtor’s counsel (Appellant) that he left his employment at Tow Masters in order to begin working as an independent taxi driver through the IP Taxi Service. The Chapter 13 Trustee objected to the Debtor’s proposed Chapter 13 plan, in part, on the basis of the Debtor’s new employment and requested verified copies of all pay records from the date of hire.

On June 30, 2015, the Debtor filed a “Corrected Amended Chapter 13 Plan Before Confirmation and Amended Schedules I and J,” , reflecting the Debtor’s anticipated new income and expenses. The Chapter 13 Trustee filed an “Objection to the Amended Plan” and requested that the Debtor provide the Trustee with income records.

Business records were provided to the Chapter 13 Trustee and, on August 25, 2015, an “Amended Chapter 13 Plan Before Confirmation” was filed to resolve the Trustee’s objection and to surrender a rent-to-own television and recliner. Nonetheless, the Chapter 13 Trustee objected to the amended Chapter 13 plan, questioning the feasibility of the Debtor’s plan based upon the reduced income reflected in the Debtor’s records. After the Debtor had a number of confirmation hearings on his Chapter 13 plan and continued to make payments, the Debtor decided to convert his Chapter 13 case to one under Chapter 7.

With the Debtor’s approval and before any motion to convert the case had been filed, Appellant filed an “Application for Compensation by Attorney for Debtor Requesting an Ex-Parte Order Approving Compensation” (the “Application”).  The Application sought ex-parte attorney fees pursuant to Local Bankruptcy Rule 2016-1.  The compensation for attorney fees sought in the Application were for services provided in the Chapter 13 case.  The Application recognized that the Debtor intended to convert his case to one under Chapter 7.  On January 25, 2016, the Bankruptcy Court denied the Application for the following reasons:

See Harris v. Viegelahn, 2015 WL 2340847, the Supreme Court has held that plan payments in the hands of a chapter 13 trustee return to the debtor upon conversion. Chapter 13 trustees cannot pay creditors from accumulated plan payments after conversion; such an act would contravene 348(3)’s termination of their services, and distribute property to creditors that is not part of the estate in the converted case pursuant to 348(f)(1).

In response to the Court’s denial of the Application, the Appellant filed a “Motion to Vacate Order” on January 27, 2016, asking the Bankruptcy Court to reconsider its denial of the fee application as Harris v. Viegelahn does not apply to prevent the payment of attorney fees prior to a Chapter 13 case. On January 28, 2016, the Court entered an “Order Denying Motion to Vacate and Request for Expedited Hearing” and provided written reasons for the denial. Appellant filed the instant appeal on February 2, 2016. In support of the appeal, Appellant filed a brief on April 18, 2016. No opposition brief has been filed.

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