Fee-Only Plans Not Per Se Bad Faith

Posted by NCBRC - March 23, 2012

Making specific reference to NACBA’s “helpful” amicus brief, the First Circuit Court of Appeals found that fee-only chapter 13 plans are not per se bad faith under section 1325(a)(3). In re Puffer, No. 11-1831 (1st Cir. March 22, 2012). Debtor’s chapter 13 plan proposed to pay $2,900 to his counsel, $300 to general unsecured creditors and $400 as trustee fees. The bankruptcy court declined to confirm the plan on the basis that it was per se bad faith to file a plan in which debtor’s bankruptcy counsel was essentially the only beneficiary. In reversing, the first circuit borrowed the totality of the circumstances analysis from section 706(a), placing the burden on the debtor to establish that the facts are such that the chapter 13 plan is in good faith. The decision will make bankruptcy relief more available to debtors who otherwise could not find competent counsel and for whom proceeding pro se is a poor alternative.

Though the decision is a win for debtors it is important to be cognizant of its limitations. Warning that fee-only plans have the superficial appearance of abuse by debtor’s counsel, the court noted that there may be “relatively rare” circumstances in which such plan may be proposed in good faith. In addressing the issue of good faith, a bankruptcy court may consider such factors as whether the debtor could have filed a pro se chapter 7 case or whether the debtor could have waited to file until he had the money to pay his attorney fees up front. The debtor carries a “heavy burden” of showing that the plan is in proposed in good faith.

Although the court did not list specific circumstances that would establish good faith, when considering a fee-only plan instead of a chapter 7 petition, debtor’s counsel may want to look at such factors as imminent harm, as in the case of a utility shutoff or foreclosure or whether there is a nondischargeable priority debt that would be dealt with in the plan.

Retired Supreme Court Justice Souter was a member of the panel deciding this case.

Because the issue in this case benefits debtors by removing an obstacle to obtaining counsel rather than by directly impacting interpretation of the Bankruptcy Code in debtors’ favor, NCBRC, which was established to directly support consumer debtors,  was not involved in the writing or submission of the amicus brief.

Tara Twomey and David Baker authored NACBA’s amicus brief.

Puffer opinion



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