Fifth Circuit Approves “Fee-Only” Chapter 13 Plan

Posted by NCBRC - August 21, 2012

In good news for bankruptcy debtors who cannot afford to file chapter 7 or for whom chapter 7 is otherwise impracticable, the Fifth Circuit affirmed the bankruptcy court’s confirmation of the debtor’s “fee-only” chapter 13 plan finding that such plan are not per se bad faith. Sikes v. Crager (In re Crager), No. 11-30982 (5th Cir. August 16, 2012), rev’g, W.D. La. 10-1863 (Sept. 30, 2011). The court found that the bankruptcy court had properly reviewed the “totality of the circumstances” to find that Ms. Crager had based her proposed plan on legitimate concerns of pressing debt and potential future medical expenses and that it was, therefore, not proposed in bad faith under section 1325(a)(3) or (7). Most importantly, the court explicitly stated that: “There is no rule in this circuit that a Chapter 13 plan that results in the debtor’s counsel receiving almost the entire amount paid to the Trustee, leaving other unsecured creditors unpaid, is a per se violation of the ‘good faith’ requirement, and the district court erred when it reversed the bankruptcy court on that ground.”

The court also approved the bankruptcy court’s finding that the attorney fees charged pursuant to the court’s standing no-look fee structure was reasonable but cautioned that the no-look fee is not an entitlement and once the trustee raises a reasonable objection to the fee the burden falls on the debtor to establish its reasonableness.

This decision is in harmony with the recent decision out of the First Circuit, Berliner v. Pappalardo (In re Puffer), 674 F.3d 78 (1st Cir. 2012), in which the panel, including Supreme Court Justice Souter, relying in part on NACBA’s amicus brief, rejected a per se rule of bad faith in fee-only plans.

Crager opinion

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