Molloy v. Sikes

Filing 6

MEMORANDUM RULING regarding 1 Bankruptcy Appeal filed by Kevin R Molloy. The Appellant filed the Application before the Chapter 13 case had been converted to Chapter 7, the Supreme Court's ruling in Harris did not preclude the payment of at torney fees prior to the conversion. Additionally, the Bankruptcy Court's decision to decline the Application based on its "historical practice," when the court had the authority to award such a fee, was an abuse of discretion in this instance. Therefore, the Bankruptcy Court's Order (Bankruptcy Record Document 41) denying the "Application for Compensation by Attorney for Debtor Requesting an Ex Parte Order Approving Compensation" and the subsequent Order (Bankruptcy Record Document 45) denying Appellant's "Motion to Vacate Order" are hereby REVERSED. Signed by Chief Judge S Maurice Hicks, Jr on 2/7/2018. (crt,Putch, A)

UNITED STATES DISTRICT COURT
WESTERN DISTRICT OF LOUISIANA
SHREVEPORT DIVISION
KEVIN R. MOLLOY

CIVIL ACTION NO. 16-0218

VERSUS

JUDGE S. MAURICE HICKS, JR.

LUCY G. SIKES

MAGISTRATE JUDGE HORNSBY
MEMORANDUM RULING

Before the Court is an appeal (Record Document 1) of the Bankruptcy Court’s
Order (Bankruptcy Record Document 41) denying Appellant Kevin R. Molloy’s
(“Appellant”) “Application for Compensation by Attorney for Debtor Requesting an Ex
Parte Order Approving Compensation” and the subsequent Order (Bankruptcy Record
Document 45) denying Appellant’s “Motion to Vacate Order.” For the reasons which
follow, the Bankruptcy Court’s orders are REVERSED.
FACTUAL AND PROCEDURAL BACKGROUND
On February 26, 2015, the Debtor Mario C. Marshall (“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. See Record
Bankruptcy Case 15-10350, Page ID #55. The Debtor filed his Chapter 13 bankruptcy
petition in an effort to prevent the seizure of his 2011 Ford F-150, upon which Shreveport
Federal Credit Union maintained a lien. See Record Bankruptcy Case 15-10350, Page
ID #44.
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
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part, on the basis of the Debtor’s new employment and requested verified copies of all
pay records from the date of hire. See Record Bankruptcy Case 15-10350, Page ID #146.
On June 30, 2015, the Debtor filed a “Corrected Amended Chapter 13 Plan Before
Confirmation and Amended Schedules I and J,” (Record Bankruptcy Case 15-10350,
Page ID #177), reflecting the Debtor’s anticipated new income and expenses. See Record
Bankruptcy Case 15-10350, Pages ID #190-196. The Chapter 13 Trustee filed an
“Objection to the Amended Plan” and requested that the Debtor provide the Trustee with
income records. See Record Bankruptcy Case 15-10350, Page ID #205.
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. See Record
Bankruptcy Case 15-10350, Page ID #216. 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”). See Record Bankruptcy
Case 15-10350, Pages ID #259-261. The Application sought ex-parte attorney fees
pursuant to Local Bankruptcy Rule 2016-1. See id. The compensation for attorney fees
sought in the Application were for services provided in the Chapter 13 case. See id. The
Application recognized that the Debtor intended to convert his case to one under Chapter

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7. See id. On January 25, 2016, the Bankruptcy Court denied the Application for the
following reasons:
See Harris v. Viegelahn, 2015 WL 2340847, 1 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).
Record Bankruptcy Case 15-10350, Page ID #262.
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. See Record Bankruptcy Case 15-10350,
Pages ID #264-267. 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. 2 See Record Document 1-1. Appellant filed the instant appeal on February 2,
2016. See Record Document 1. In support of the appeal, Appellant filed a brief on April
18, 2016. See Record Document 4. No opposition brief has been filed.
LAW AND ANALYSIS
A.

Jurisdiction

The United States Bankruptcy Court has the authority to issue final orders pursuant
to 28 U.S.C. § 157(b). This United States District Court for the Western District of

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Harris v. Viegelahn, -- U.S. --, 135 S.Ct. 1829 (2015).
The Bankruptcy Court denied the Motion to Vacate ruling it is the “historical practice” of the court to not
rule on a fee application until a dispositive event (i.e. conversion); and, once the case is converted the court
is bound by Harris. See Record Document 1-1 at 5. The Bankruptcy Court further reasoned that even if it
did award an interim fee in a Chapter 13 case, which would later be converted to Chapter 7 pre-confirmation,
it “would have no force or effect.” See id. at 6.
2

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Louisiana, Shreveport Division has subject matter jurisdiction, pursuant to 28 U.S.C. §
158(a)(1) and 28 U.S.C. § 1334(b), to hear appeals from a final order of the Bankruptcy
Court. “Final orders” of a Bankruptcy Court under 28 U.S.C. § 158 include both (1) “a final
determination of the rights of the parties to secure the relief they seek” and (2) “a final
disposition of a discrete dispute within the larger bankruptcy case.” Bartee v. Tara Colony
Homeowners Ass'n (In re Bartee), 212 F.3d 277, 282 (5th Cir. 2000).
B.

Standard of Review

In reviewing a bankruptcy court decision, a district court functions as an appellate
court and applies the standards of review generally applied in federal courts of appeal.
See In re Webb, 954 F.2d 1102, 1103-04 (5th Cir. 1992). Because the same standard of
review applies to both the District Court and Court of Appeals when these Courts are
reviewing the decisions of a Bankruptcy Court, the District Court is tasked with reviewing
“the bankruptcy court’s award of attorney fees for abuse of discretion.” In re Woerner, 783
F.3d 266, 270 (5th Cir. 2015). According to the Fifth Circuit, “‘[a]n abuse of discretion
occurs where the bankruptcy court (1) applies an improper legal standard or follows
improper procedures in calculating the fee award, or (2) rests its decision on finding of
fact that are clearly erroneous.’” Id. at 270-271, citing In re Cahill, 428 F.3d 536 at 539
(5th Cir. 2005). Legal conclusions are reviewed de novo. See Id.; In re Herby's Foods,
Inc., 2 F.3d 128, 130 (5th Cir. 1993). A bankruptcy court's findings of fact are reviewed
for clear error, with proper deference to that court's opportunity to make credibility
determinations. See Fed. R. Bankr. P. 8013; In re McDaniel, 70 F.3d 841, 842-43 (5th
Cir. 1995). There are no factual disputes in this case. See Record Document 4 at 7. The

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issues presented on appeal are purely legal; therefore, the Court reviews the Bankruptcy
Court’s decision under a de novo standard of review.
C.

Analysis

This case presents two narrow issues of law: (1) whether the Supreme Court case
of Harris v. Viegelahn precludes the payment of attorney’s fees in a Chapter 13 case prior
to the conversion of the case to one under Chapter 7 and (2) whether the Bankruptcy
Court erred as a matter of law when it found it could not award attorney’s fees in a Chapter
13 case prior to confirmation of a Chapter 13 plan, conversion to a Chapter 7 case, or
dismissal of the case. 3 After a review of Harris, relevant case law, the Bankruptcy Court’s
written reasons accompanying its “Order Denying Motion to Vacate and Request for
Expedited Hearing,” and the appellant’s brief, the Court finds the ruling in Harris does not
preclude payment of attorney’s fees in a Chapter 13 case prior to the conversion and the
Bankruptcy Court was in error when it ruled it could not award such fees prior to
conversion.

3 Since this underlying bankruptcy proceeding has already been converted to a Chapter 7 case, the funds
to pay the requested attorney fees have been returned to the Debtor as directed in Harris. Thus, the
Appellant would not receive any funds from the Trustee even if the Bankruptcy Court were to grant his
application on remand. Because the “the actual controversy between the parties “must exist at [all] stages
of appellate or certiorari review, and not simply at the date the action is initiated,” this Court could be without
subject matter jurisdiction based on the doctrine of mootness. See Roe v. Wade, 410 U.S. 113, 93 S.Ct.
705, 712 (1973). However, an exception to the mootness doctrine arises in cases where the underlying
dispute is one “capable of repetition, yet evading review.” Gannet Co., Inc. v. DePasquale, 443 U.S. 368,
377, 99 S.Ct. 2898, 2904 (1979). Under this exception, two conditions must be satisfied: (1) the challenged
action must be in its duration too brief to be fully litigated before its cessation or expiration, and (2) there
must be a reasonable expectation that the same complaining party will be subject to the action again. See
id. The Court agrees with the Appellant that this matter falls within the exception to the mootness doctrine.
See Record Document 4 at 19. The Court will not address this issue any further.

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i.

Harris v. Viegelahn does not Preclude the Awarding of
Attorney’s Fees Prior to Conversion

In Harris, the United States Supreme Court held that plan payments made by a
Chapter 13 debtor from post-petition wages and held by the Chapter 13 trustee at the
time a case is converted to Chapter 7 must be returned to the debtor, rather than
distributed to creditors. See Harris v. Viegelahn, ––– U.S. ––––, 135 S.Ct. 1829, 1837
(2015). The Supreme Court specifically rejected the Chapter 13 trustee's argument that
on conversion undistributed funds must be disbursed to creditors pursuant to §§
1326(a)(2) and 1327(a). See id. at 1838. Instead, the Supreme Court found that § 348(f) 4
requires that on conversion accumulated wages must be returned to the debtor. See id.
The Supreme Court’s ruling in Harris is narrow and concise. Nothing in the ruling
indicates that administrative fees of the Chapter 13 case cannot be distributed prior to the
conversion. The ruling simply holds that after conversion any funds retained by the
Chapter 13 Trustee must be returned to the Debtor.
11 U.S.C. § 1326(a)(2) provides that:
A payment made under paragraph (1)(A) shall be retained by the
trustee until confirmation or denial of confirmation. If a plan is confirmed, the
trustee shall distribute any such payment in accordance with the plan as
soon as is practicable. If a plan is not confirmed, the trustee shall return any
such payments not previously paid and not yet due and owing to creditors
pursuant to paragraph (3) to the debtor, after deducting any unpaid claim
allowed under section 503(b). 5

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11 U.S.C. § 348(f)(1) provides that, absent bad faith, the Chapter 7 estate of a converted Chapter 13 does
not include post-petition wages; rather, it only includes property of the estate as of the date of the filing of
the petition that remains in the debtor’s possession or control on the conversion date.
5 11 U.S.C. § 503(b)(4) allows “reasonable compensation for professional services rendered by an
attorney… based on the time, the nature, the extent, and the value of such services, and the cost of
comparable services other than in a case under this title, and reimbursement for actual, necessary
expenses incurred by such attorney or accountant.”

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In the instant matter, the Bankruptcy Court found that, “As interpreted in Harris, §
348 trumps § 1236’s general instructions concerning the larger set of cases in which ‘a
plan is not confirmed.’” Record Document 1-1 at 6. Reaching this conclusion, the
Bankruptcy Court stated,
“Section 1326(a)(2) does not directly address cases of conversion; it only
generally governs cases ‘where a plain is not confirmed.’ On the other hand,
[S]ection 348 directly addresses the effects of conversion….”
Id. Respectfully, this Court disagrees with the Bankruptcy Court’s conclusion.
The Bankruptcy Court’s statement would be correct if its denial of the Application
were granted after the conversion of the case. However, the court’s ruling was made prior
to the conversion of the case. Since the case had not been converted, this Court finds
neither Harris nor § 348 applicable. Nothing in the Supreme Court’s decision, nor § 348,
prevents the awarding and payment of compensation for attorney fees prior to the
conversion of the Chapter 13 case to one under Chapter 7. In the instant matter, no
motion to convert had been filed prior to the fee application and it was the intent of both
the Appellant and the Debtor that the case would not be converted until after the Court
ruled on the Application. Therefore, this Court finds that Harris does not preclude the
payment of attorney fees in a Chapter 13 case prior to the conversion of the case to one
under Chapter 7.
ii.

The Bankruptcy Court’s Order

The Bankruptcy Court also denied the Appellant’s Application because of the
court’s “historical practice” of not ruling on a fee application in a Chapter 13 case until

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after such case is confirmed, dismissed, or converted. 6 See Record Document 1-1 at 5.
This “historical practice” is supported by the requirement that the attorney’s services must
be evaluated pursuant to 11 U.S.C. § 330. See id. Section 330(a)(4)(B) contains a specific
provision concerning compensation of debtor’s attorneys in Chapter 13 cases:
In a chapter 13 case in which the debtor is an individual, the court may allow
reasonable compensation to the debtor’s attorney for representing the
interests of the debtor in connection with the bankruptcy case based on the
consideration of the benefit and necessity of such services to the debtor
and the other factors set forth in this section.

Although this Court is not entirely clear as to its reasoning, the Bankruptcy Court
cited the case In re Polishuk, 258 B.R. 238 (Bankr. N.D. Okla. 2001), in support for its
conclusion. There, fees for preparation of the plan, for claims litigation, and for efforts to
keep the debtor’s car during a Chapter 13 case were not allowed based on the lack of
benefit to the debtor or the estate. See id. at 249-50. The court found that counsel could
not have reasonably believed that the debtor had a realistic hope of reorganization under
any chapter of the Bankruptcy Code. See id. at 249. Relying on In re Polishuk, the
Bankruptcy Court concluded, “[t]hese evaluations are best made by the Court after a
dispositive event in a Chapter 13 case.” Record Document 1-1 at 5.
Like the Appellant, this Court does not see the applicability of In re Polishuk to the
instant matter. See Record Document 4 at 17. If the Bankruptcy Court is implying that the
fee requested should not have been granted because the Appellant’s services were not
beneficial or necessary to the Debtor, this Court disagrees. In denying the fee request,
the Polishuk court found there was a “very strong indicia that Mr. Polishuk sought the

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If the Bankruptcy Court waited until the Chapter 13 case had been converted to rule on the Application,
any award of attorney’s fees would have been precluded by Harris.

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protection of this Court for the main purpose of deferring and/or defeating the efforts of
the State Court in the Divorce Action.” In re Polishuk, 258 B.R. at 246. The case was filed
one business day before the trial of the divorce action and the court concluded the debtor
never maintained a sincere desire to reorganize. See id.
The circumstances in the instant matter are not in any way similar to the facts in
Polishuk. Here, all of the fees requested by Appellant were for services provided in order
to allow the Debtor to meet his duties required under 11 U.S.C. § 521(a)(1) (the
preparation of the bankruptcy petition, schedules, statement of financial affairs and plan),
and attendance at the meeting of creditors required by 11 U.S.C. § 341. See Record
Bankruptcy Case 15-10350, Pages ID #259-261. Even if the services were ultimately
unsuccessful, that by itself does not preclude awarding fees. In re Woerner, 783 F.3d at
274, the Fifth Circuit stated, “Section 330 … explicitly contemplates compensation for
attorneys whose services were reasonable when rendered but which ultimately may fail
to produce an actual material benefit.” The Fifth Circuit further noted that:
The statute permits a court to compensate an attorney not only for activities
that were “necessary,” but also for good gambles -- that is, services that
were objectively reasonable at the time they were made -- even when those
gambles do not produce an “identifiable, tangible, and material benefit.”
What matters is that, prospectively, the choice to pursue a course of action
was reasonable.
Id.
As of the filing of this appeal, the standard no-look fee for a Chapter 13 case in the
Western District of Louisiana was $2,800.00. 7 See “Amended Standing Order Regarding
‘No-Look’ Fees in Chapter 13 Cases”, filed on September 19, 2013. Here, Appellant only

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Effective February 1, 2017 for cases filed on or after that date, the standard no-look fee for a Chapter 13
case in the Western District of Louisiana is now $3,000. See “Amended Standing Order Regarding ‘NoLook’ Fees in Chapter 13 Cases”, filed on January 24, 2017.

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sought $1,000. See Record Document 1-1 at 1. The Court believes such a fee is
reasonable. If the Bankruptcy Court believed it was unreasonable, it had the chance to
rule accordingly when it had the Application before it. Instead, it declined to do so based
on its “historical practice” and interpretation of Harris. As this Court has ruled, Harris did
not preclude such a determination because the fee application was filed before the case
was converted.
If the Bankruptcy Court relied on In re Polishuk to support its “historical practice”
of not ruling on fee applications until a dispositive event has occurred, then this Court is
unpersuaded. Just as the Bankruptcy Court has the authority to award final fees in a case,
it also has the authority to award interim compensation. 11 U.S.C. §331, entitled “Interim
Compensation,” reads as follows:
Section 330 gives a Bankruptcy Court discretion to determine the amount
of reasonable compensation. But the statute also constrains that discretion
by requiring the Court to “tak[e] into account” a set of listed factors, including
“whether the services were necessary to the administration of, or beneficial
at the time at which the service was rendered toward the completion of, a
case under this title.” (Emphasis in original). Id at 273 citing 11 U.S.C.
§330(a)(3)(C).
Although not commonly sought, courts have awarded interim compensation to attorneys
in Chapter 13 cases. See In re Orris, 166 B.R. 935, 937 (Bankr. W.D. Wash. 1994); In re
Boddy, 950 F.2d 334, 336 (6th Cir. 1991); In re Murray, 348 B.R. 917, 919 (Bankr. M.D.
Ga. 2006). Furthermore, Section 331 does not require the confirmation of a plan in order
to provide interim compensation. See 11 U.S.C. § 331. Although it may be the “historical
practice” of the Bankruptcy Court to wait for a dispositive event to occur before ruling on
fee applications, there is nothing in the law that requires such practice.
The Bankruptcy Court further supported its ruling by stating:

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Even if the Court granted the application for compensation, the Supreme
Court’s holding in Harris would prohibit the Chapter 13 Trustee from making
a distribution to the attorney once the case converted to Chapter 7. Since
most, if not all, Chapter 13 Trustees would not make a distribution of
attorney fees until a Chapter 13 case is either confirmed or dismissed (and,
prior to the Harris opinion, perhaps converted to Chapter 7), the granting of
an order for the payment interim attorney fees in a Chapter 13 case, when
the case will later be converted to a Chapter 7 preconfirmation, would have
no force or effect.
Record Document 1-1 at 6. The question before us is not whether the Trustee would
make the distribution before a Chapter 13 case is converted to one under Chapter 7, but
whether the Bankruptcy Court erred when it ruled it could not award attorney fees in a
Chapter 13 case prior to a dispositive event. As analyzed above, this Court believes it
did.
The Bankruptcy Court’s ruling makes the collection of attorney fees for work
performed during a Chapter 13 case 100% contingent upon the successful confirmation
of a Chapter 13 plan. Confirmations of Chapter 13 plans are not common. See Harris,
135 S.Ct. at 1835 (observing that Congress recognized the propensity of chapter 13
cases to fail, with only one in three ending in discharge). To require such an event would
be inequitable. As the Bankruptcy Court acknowledged in its ruling, “Harris has called into
question the validity of many bankruptcy courts’ local rules regarding pre-confirmation
conversion.” Record Document 1-1 at 5. To not effectuate a change in the court’s
“historical practice” would signify that the Judicial System is so entrenched in one way of
doing things that it cannot adopt to changes based upon new law.
To accommodate a significant change in the law, as Harris was, the Bankruptcy
Court had the authority, pursuant to Sections 330 and 331, to award the Appellant’s fee
he sought in his Application filed before the Chapter 13 case was converted. Instead, it

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chose not because of its “historical practice” of approving such fees after dispositive
events. This Court finds that decision to be an abuse of discretion.

CONCLUSION
Because the Appellant filed the Application before the Chapter 13 case had been
converted to one under Chapter 7, the Supreme Court’s ruling in Harris did not preclude
the payment of attorney fees prior to the conversion. Additionally, the Bankruptcy Court’s
decision to decline the Application based on its “historical practice,” when the court had
the authority to award such a fee, was an abuse of discretion in this instance. Therefore,
the Bankruptcy Court’s Order (Bankruptcy Record Document 41) denying the “Application
for Compensation by Attorney for Debtor Requesting an Ex Parte Order Approving
Compensation” and the subsequent Order (Bankruptcy Record Document 45) denying
Appellant’s “Motion to Vacate Order” are hereby REVERSED.
THUS DONE AND SIGNED in Shreveport, Louisiana, this 7th day of February,
2018.

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