Court Opinion

ID: 8412236
Source: CourtListenerOpinion
Date Created: 2022-11-02 19:28:02.691729+00
Date Added: 2024-06-11T16:47:56.234497
License: Public Domain

LIPEZ, Circuit Judge,
concurring in the judgment.
I.
The issue of fee-only Chapter 13 petitions has emerged in recent years largely as a result of two events. The first was the Supreme Court’s decision in Lamie v. U.S. Tr., 540 U.S. 526, 124 S.Ct. 1023, 157 L.Ed.2d 1024 (2004), which held that attorney’s fees are not payable from estate funds in a Chapter 7 proceeding except in limited circumstances. Id. at 538-39, 124 S.Ct. 1023 (construing 11 U.S.C. § 330(a)(1)). Attorneys who advise debtors on Chapter 7 filings thus may be unable to collect their fees once the plans are in place, prompting them to request payment in full up front. The second event was enactment of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), see 11 U.S.C. §§ 101-1532, which tightened the eligibility requirements for Chapter 7 bankruptcy and made the process more complicated — increasing the need for legal advice and, in turn, the cost of filing for bankruptcy. See In re Beck, 2007 Bankr. LEXIS 517, at *7 (D.Kan. Feb. 21, 2007) (referring to the “significantly increased burdens” placed on debtors’ attorneys after BAPCPA); Angela Litwin, The Affordability Paradox: How Consumer Bankruptcy’s Greatest Weakness May Account for Its Surprising Success, 52 Wm. & Mary L.Rev.1933, 1935-37 (2011) (hereinafter The Affordability Paradox) (noting that the BAPCPA “made consumer bankruptcy more expensive for all debtors” and that “one of BAPCPA’s major effects was a rise in the cost of representation”).4
As I understand it, the fee-only Chapter 13 petition can be a creative solution for the “Lamie problem.” See, e.g., In re Buck, 432 B.R. 13, 22 n. 15 (Bankr.D.Mass.2010) (noting that Lamie “exacerbated the problem” of debtors’ inability to afford attorney’s fees); In re Johnson, 397 B.R. 486, 489-90 (Bankr.E.D.Cal.2008) (noting “the problem of the puzzle lying in the wake of the Lamie holding”). As a high priority expense under Chapter 13, attorney’s fees may properly be scheduled for payment in a Chapter 13 plan ahead of other types of debts. See generally Michelle Arnopol Cecil, A Reappraisal of Attorneys’ Fees in Bankruptcy, 98 Ky. L.J. 67, 73-74, 84 (2009) (citing Lamie, 540 U.S. at 537, 124 S.Ct. 1023); 11 U.S.C. § 330(a)(4)(B). At least some debtors who cannot afford an attorney-assisted Chapter 7 filing — because the attorney, understandably, would expect to be paid up front — can afford to pay for an attorney to assist with a Chapter 13 filing because the fee will be paid in post-petition installments. See Buck, 432 B.R. at 22 n. 15 *85(recognizing that “some debtors are simply not able to afford the attorneys fees associated with filing a Chapter 7 case”). That approach results, of course, in the situation we face in this case: the debtor is in such bad shape that he is eligible to file for an immediate discharge of his debts under Chapter 7, but he files under Chapter 13 with his attorney’s fees as the only (or dominant) debt scheduled to be paid over the course of the Chapter 13 plan (which typically runs three to five years).
Like my colleagues, I think that the totality of the circumstances test is the appropriate method to evaluate whether a particular fee-only Chapter 13 plan meets the good-faith requirements of the Bankruptcy Code. At this juncture, however, I would leave application of the test entirely to bankruptcy judges instead of prescribing a rule requiring “special circumstances” limited to “relatively rare” instances. As the majority notes, the bankruptcy courts have expressed mixed views on fee-only plans as their experience accumulates in the wake of Lamie and BAPCPA’s enactment. We should allow that process to continue so that we have an adequate basis for deciding whether there is a need to construct an appellate rule disfavoring such plans in every case. Presently, I do not think we have that basis.
II.
We have observed that the Bankruptcy Code’s purposes are two-fold: to give the deserving debtor a fresh start and to maximize the payment to creditors. See In re Cunningham, 513 F.3d 318, 324 (1st Cir.2008) (“The Supreme Court has stated that ‘a central purpose of the Bankruptcy Code is to provide a procedure by which certain insolvent debtors can reorder their affairs, make peace with their creditors, and enjoy “a new opportunity in life and a clear field for future effort, unhampered by the pressure and discouragement of preexisting debt.” ’ ” (quoting Grogan v. Garner, 498 U.S. 279, 286, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991))); In re Marrama, 430 F.3d 474, 477 (1st Cir.2005) (noting “the principle that all the debtor’s assets are to be gathered and deployed in a bona fide effort to satisfy valid claims”); In re Sullivan, 326 B.R. 204, 211-12 (1st Cir.BAP 2005) (stating that a primary objective of bankruptcy is “to relieve the honest but unfortunate debtor from the weight of oppressive indebtedness, allowing the debtor to start afresh”). A fee-only Chapter 13 plan may accomplish little toward the goal of satisfying creditors, but such a plan may nonetheless be essential to free “the honest but unfortunate debtor” from intolerable circumstances.
Bankruptcy judges evaluating a particular fee-only plan may properly take into account whether the plan “is consistent with the spirit and purpose of [Chapter 13] — rehabilitation through debt repayment,” In re Molina, 420 B.R. 825, 831 (Bankr.D.N.M.2009) (quoting In re Paley, 390 B.R. 53, 58 (Bankr.N.D.N.Y.2008))— but I fear that circumscribing the totality of the circumstances assessment with the requirement of special circumstances will in practical effect impose on debtors the more daunting task of disproving bad faith rather than proving good faith. I am therefore reluctant to confine what should be, in the majority’s apt words, a “holistic balancing of relevant factors.”
I must emphasize that I agree with my colleagues’ view that a Chapter 13 plan calling for payment of the debtor’s attorney’s fee, but none (or virtually none) of the outstanding debts that triggered the need for bankruptcy, warrants close examination. The typical attorney’s fee for a Chapter 13 case is higher than the fee for a typical Chapter 7 case, see, e.g., In re *86Elkins, 2010 WL 1490585, at *2, 2010 Bankr. LEXIS 1085, at **4-5 (Bankr. E.D.N.C. April 13, 2010), and there undoubtedly are costs imposed on the bankruptcy system as a whole when a debtor eligible for Chapter 7 relief prolongs the bankruptcy process by filing a Chapter 13 plan for the sole purpose of paying attorney’s fees. Moreover, as the majority observes, the fee-only structure may leave unknowledgeable debtors vulnerable to attorneys seeking to maximize their compensation. See Kerry Haydel Ducey, Note, Bankruptcy, Just for the Rich? An Analysis of Popular Fee Arrangements for Pre-Petition Legal Fees and a Call to Amend, 54 Vand. L.Rev. 1665, 1703 (2001) (hereinafter Just for the Rich?) (noting that, “[i]n some cases, self interest ... compels the attorney to advise debtors to file Chapter 13 or other high percentage payment plans when Chapter 7 would actually better serve the debtor” (footnote omitted)).
Nonetheless, we must keep in mind that a struggling debtor who lacks the resources to pay a Chapter 7 attorney’s fee up front has limited options. Although he theoretically could proceed pro se, I doubt that bankrupt individuals will ordinarily be able to navigate the complexities of the bankruptcy process on their own. See, e.g., In re Beck, 2007 Bankr. LEXIS 517, at *19-20 (stressing the importance of counsel for debtors and noting that the court “routinely” saw debtors giving away rights or property they would be entitled to retain). Indeed, an empirical study indicating that the percentage of pro se debtors has increased in the aftermath of BAPCPA shows that such cases are not succeeding. See The Affordability Paradox, 52 Wm. & Mary L.Rev. at 1938 (“[T]he high pro se failure rate since 2005 suggests that it is reasonable to equate the inability to afford a lawyer with having less than full access to the bankruptcy system.”); see also Just for the Rich?, 54 Vand. L.Rev. at 1667 (“Legal counsel is indispensable if a debtor is to effectively file for bankruptcy. The bankruptcy laws are complex, and legal counsel is often crucial in helping the debtor make an informed decision based on his unique circumstances and the available alternatives.” (citing William C. Hillman, Personal Bankruptcy: What Every Debtor and Creditor Needs to Know 20 (1993) (“Many mistakes people make by trying to do it on their own often cannot be corrected later. Even the simplest choices involve uncertainties and risks if you are not thoroughly familiar with the law.”))). Moreover, lawyers play an important role in the bankruptcy system beyond their direct assistance to clients. See In re Beck, 2007 Bankr. LEXIS 517, at *9-10 (noting that pro se debtors increase the administrative costs for the court); The Affordability Paradox, 52 Wm. & Mary L.Rev. at 2010 (“At the most basic level, lawyers help the system run smoothly.”).
A debtor could attempt to find cheaper, or free, legal services, but I have no reason to think that counsel fees vary widely or that competent bankruptcy legal advice is readily available for free. See In re Beck, 2007 Bankr. LEXIS 517, at *21-22 (noting the absence of evidence that “there are sufficient attorneys available to file Chapter 7 cases pro bono, or for a reduced rate”); In re Nieves, 246 B.R. 866, 873 (Bankr.E.D.Wis.2000) (“This court fully recognizes that ... debtors who cannot afford to pay attorney’s fees before filing for bankruptcy may have difficulty in obtaining legal counsel.”). We should have a better understanding of critical facts like these before we fashion a rule that may, in practical effect, make fee-only Chapter 13 plans unavailable.
The majority notes that the debtor in this case stated that he could have saved enough money in three months to pay *87Chapter 7 fees, and they suggest that he should simply have waited to file for relief. The debtor’s assertion of future ability to pay is certainly a factor to consider. For some debtors, however, the press of creditors, and the resulting stress, would likely make waiting intolerable. See, e.g., In re Molina, 420 B.R. at 829 (noting the debt- or’s “sincer[ity] in seeking chapter 13 relief since stopping the garnishment and preserving her home and income for herself and her grandson are critical for her”). In Hamilton v. Lanning, — U.S. -, 130 S.Ct. 2464, 177 L.Ed.2d 23 (2010), the Supreme Court quoted a Chapter 13 treatise in noting the urgency of some bankruptcy filings:
“Potential Chapter 13 debtors typically find a lawyer’s office when they are one step from financial Armageddon: There is a foreclosure sale of the debtor’s home the next day; the debtor’s only car was mysteriously repossessed in the dark of last night; a garnishment has reduced the debtor’s take home pay below the ordinary requirements of food and rent. Instantaneous relief is expected, if not necessary.”
Id. at 2476 (quoting K. Lundin & W. Brown, Chapter 13 Bankruptcy § 3.1[2] (4th ed.2009)); see also The Affordability Paradox, 52 Wm. & Mary L.Rev. at 1938 (“Every month a debtor spends saving up for an increasingly expensive bankruptcy lawyer is a month in which she has lost substantive bankruptcy rights for procedural reasons.”).
It may turn out that balanced assessments will, in fact, result in designating a relatively small number of fee-only plans as filed in good faith. Such plans may be flawed by circumstances beyond the fact that they propose payment of only attorney’s fees, or fees and a minimal amount of secured debt. In In re Buck, for example, the bankruptcy court expressed concern about the unrealistic budgets underlying the plans. 432 B.R. at 21. Similarly, in In re Paley, 390 B.R. 53 (Bankr.N.D.N.Y.2008), the two debtors proposed plans of limited duration despite the longer commitment expected under Chapter 13. Id. at 59 (“A plan whose duration is tied only to payment of attorney’s fees simply is an abuse of the provisions, purpose, and spirit of the Bankruptcy Code.”); see also In re Arlen, 461 B.R. 550, 555-56 (Bankr.W.D.Mo.2011) (noting that the court’s finding that the proposed plans were not in good faith was linked “to the failure of the Debtors’ plans to comply with the applicable commitment period”); In re Lavilla, 425 B.R. 572, 578 (Bankr.E.D.Cal.2010) (noting that the Paley court “had little difficulty finding that the debtors, who had the ability but not the intent to fund a meaningful chapter 13 plan, were not acting in good faith” because “[t]he brevity of their plans indicated that they were merely disguised chapter 7’s”). Yet the National Association of Consumer Bankruptcy Attorneys, as amicus, asserts that its members “have routinely had fee-only plans confirmed,” indicating that many such plans would satisfy the good-faith requirement if not rejected solely based on their fee-only characteristic.
In sum, in declining to fully join my colleagues’ approach, I do not question the need for caution in evaluating fee-only Chapter 13 plans. My concern is that a circumscribed totality of the circumstances analysis will unnecessarily, and perhaps unfairly, tilt the analysis against well meaning debtors. The experience thus far suggests that bankruptcy courts are able to draw distinctions between fee-only plans that comply with the Bankruptcy Code, including the good-faith requirement, and those that do not. Hence, unless further experience shows otherwise, I think we can be confident that the goals of Chapter 13 will be amply protected when the totali*88ty of the circumstances test is thoughtfully applied, without threshold limitation, by bankruptcy judges.

. In The Affordability Paradox, Professor Lit-win stated that "the heart” of BAPCPA was "the means test that bars relatively well-off debtors from Chapter 7." She went on to note, however, that
BAPCPA also subjected all filers to increased paperwork, stricter deadlines, new prerequisites such as credit counseling, and mandatory dismissals for myriad procedural mistakes. These new technical requirements caused many commentators to worry that the statute's real effect would be to increase costs and reduce the bankruptcy access of all debtors, especially the worst off.
52 Wm. & Mary L.Rev. at 1936 (footnotes omitted).