Berliner v. Pappalardo (In re Puffer)

Summarized by Bruce Harwood , US Bankruptcy Court - District of New Hampshire
13 years 11 months ago

Citation:

(No. 11-1831) (March 22, 2012)

Tag(s):

Ruling:

In a matter of first impression at the circuit level, the First Circuit held that a chapter 13 petition and a "fee-only" plan, under which the debtor proposes to pay essentially only the debtor's counsel's and the chapter 13 trustee's fees, leaving only a 2% dividend to unsecured creditors, is not per se bad faith as to either the chapter 13 petition or the plan. The court adopts the holistic, case by case, "totality of the circumstances" test for good faith in chapter 7 petitions (articulated in its 2005 opinion in Marrama v. Citizens Bank of Massachusetts, which the Supreme Court affirmed in 2007) as the applicable standard for measuring good faith in chapter 13 fee-only plans under Section 1325. Cautioning that its ruling "should by no means be read as a paean to fee-only chapter 13 plans," the Court stresses that such plans carry a "heavy burden of demonstrating that special circumstances justify its submission," and that bankruptcy courts are in the best position to assess all of the relevant facts and circumstances necessary to guard against potential abuses. Because the bankruptcy court had rejected the plan as per se bad faith, the First Circuit could not tell from the record whether there were any "special circumstances" justifying the fee-only plan and the $2,872 in chapter 13 fees and expenses sought by debtor's counsel and all but denied by the bankruptcy court. The First Circuit therefore reversed and remanded for further proceedings on the fee award consistent with its opinion. Judge Lipez' concurring opinion questions the need for circumscribing the "totality of the circumstances" test by superimposing a "special circumstances" requirement which, in his view, unnecessarily burdens a test which, properly and thoughtfully applied, should be sufficient to allow bankruptcy courts to accurately gauge good faith in fee-only plans on a case by case basis.

Procedural context:

The bankruptcy court denied confirmation of a fee-only chapter 13 plan as per se filed in bad faith, and converted the case to a chapter 7. The debtor's counsel applied for an award of $2,872 in fees and expenses for representing the debtor during the chapter 13 case, but was awarded only $299. The debtor appealed to the district court, which affirmed the bankruptcy court's $299 fee award. On appeal to the First Circuit, the debtor's position was supported by an amicus curiae brief filed by the National Association of Consumer Bankruptcy Attorneys.

Facts:

The debtor, Wayne Puffer, had unsecured debt of approximately $15,000, and monthly income of only $100. He consulted with a bankruptcy attorney who advised him that he could file a chapter 7 case, which would require an up-front retainer of $2,300, or a chapter 13 case, for which the higher estimated fees of $4,100 could be paid over time under a plan. Lacking the ability to pay the chapter 7 retainer, the debtor paid a $500 retainer to the attorney, who prepared and filed the debtor's chapter 13 petition and plan. The plan provided for $3,600 to be paid in 36 monthly payments of $100, which would generate an aggregate distribution of approximately 2% to the debtor's unsecured creditors, but which would pay $2,900 to the debtor's counsel and about $400 to the chapter 13 trustee. The bankruptcy court denied confirmation of this "fee-only" plan, finding that both the petition and the plan were filed in bad faith per se. The debtor elected to convert his case to a chapter 7 case, after which the debtor's counsel sought an award of $2,872 for fees and expenses incurred in the chapter 13. Based on its finding that the petition and the plan were filed in bad faith, the bankruptcy court awarded debtor's counsel only $299--the amount of the fee to convert the debtor's chapter 13 case to a chapter 7 case--thereby essentially requiring debtor's counsel to disgorge the balance of the $500 retainer he received before the commencement of the case. [Note: the debtor's counsel, the chapter 13 trustee and her counsel, the bankruptcy judge, the district court judge, and the panel of First Circuit judges in this case are identical to those in the First Circuit's opinion issued one day earlier in a separate case involving the reasonableness of fees for chapter 13 debtors' counsel. See Berliner v. Pappalardo (In re Sullivan), (No. 11-1830, March 21, 2012), also summarized on Volo.]

Judge(s):

Selya (author); Souter; Lipez (concurring in judgment); Lipez (concurring opinion)

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