Lawyer to Lawyer

U.S. Fifth Circuit Upholds Fee-Only Chapter 13 Plan

by Gary on August 24, 2012

On August 16, 2012, the U.S. Court of Appeals issued its opinion in Sikes v. Crager (In re Crager), No. 11-30982 (5th Cir. August 16, 2012), rev’g, W.D. La. 10-1863 (Sept. 30, 2011) holding that “fee-only” Chapter 13 plans are not per se bad faith. The debtor, Ms. Crager, was unemployed and subsisting only on social security benefits and food stamps, totaling $1,076 per month.  Her modest $55,000 home was encumbered by a mortgage, with a monthly payment of $327.10 per month. Her $7,850 in credit card debts required minimum monthly payments totaling $197 per month.

Ms. Crager computed that paying off her credit cards at the minimum payment would take her 17 to 20 years to pay the debt in full. She tried first to negotiate better repayment terms with her creditors, but was unsuccessful. Ms. Crager filed a chapter 13 bankruptcy, with her attorney advancing the $274 filing fee. The plan payment was devoted almost exclusively to administrative costs and attorneys’ fees. The Chapter 13 Trustee objected to confirmation, asserting that the Chapter 13 plan was not proposed in good faith because virtually the entire amount of the plan payment would go to attorney’s fees and administrative costs, leaving little or no distribution to creditors.

The debtor testified that she was concerned that she may need another bankruptcy in the future due to looming medical concerns and that filing Chapter 7 would bar her from filing another case for longer than Chapter 13. The bankruptcy court agreed and found good faith. On appeal, the district court held that a chapter 13 plan that proposed to pay only attorneys fees was per se bad faith. The district court remanded the case with instructions to the bankruptcy court to deny confirmation.

The Fifth Circuit started its analysis by restating that the “totality of the circumstances” rule applies in determining good faith in this circuit (citing In re Chaffin, 816 F.2d 1070, 1073 (5th Cir. 1987), modified, In re Chaffin, 836 F.2d 215, 216-17 (5th Cir. 1988)). Accordingly, the district court was wrong to set forth a per se rule that a fee only chapter 13 plan is not filed in good faith.

Instead, the court said that the distribution to creditors is one factor of several. The bankruptcy court found credible the debtor’s fear about future medical bills and the potential need for another bankruptcy petition. The court concludes that “[i]t was not clearly erroneous for the bankruptcy court to find that Crager’s plan was . . . a responsible decision given her particular circumstances.” (slip. op. at 5).

In so ruling, the Fifth Circuit joins the First Circuit, which upheld “fee-only” chapter 13 plans earlier this year. Berliner v. Pappalardo (In re Puffer), 674 F.3d 78 (1st Cir. 2012)

A second issue in the case concerned whether the standard “no look” fee, approved under a standing order in the district, was reasonable for this case. The chapter 13 Trustee argued that the $2,800 “no look” fee was too high because this case involved no distributions to secured creditors, only 5 unsecured creditors, the debtor’s sole income was non-taxable food stamps and social security, and the debtor had no non-exempt assets.

The Fifth Circuit reasoned that the standing order could not displace the requirements of Section 330 of the Bankruptcy Code given an objection to fees by the trustee, but concluded that the bankruptcy court had not erred in awarding the fees. The Trustee’s own argument that this case was “more simplistic and less complicated” than the average chapter 13 case was belied by the fact of the Trustee’s objection for lack of good faith and the subsequent appeals. The trustee’s objection to confirmation transformed the case from a routine chapter 13 matter into a complicated proceeding.

To read more about this case and to find a copy of the opinion go to NCBRC.org.

Leave a Comment

Previous post:

Next post: