Super Priority For Car Creditor - Harsh Words For Debtor Attorneys Trying To Get Paid In A Chapter 13 Bankruptcy

Recently Brian Lacoff a St. John's Law Student writing on Bankruptcy Case Blog analyzed the decision in In re Dispirito, 371 B.R. 695, 695 (Bankr. D.N.J. 2007), which states it is the debtor's attorney that bares the risk of any loss in regard to fees in a Chapter 13 bankrutpcy.

The New Jersey Bankruptcy Court following and expanding on Judge Mavin Isgur's opinion in In re DeSardi, 340 B.R. 790 (Bankr. S.D. Tex. 2006), ruled that an undersecured creditor, in this case Ford Motor Credit Co., was entitled not only to adequate protection payments, but “super-priority” status of the inadequate adequate protection provided during the case meant that the Chapter 13 plan had to pay those amounts before paying any of the debtor’s attorneys fee pursuant to 11 U.S.C. § 507(b).

In Dispirito the Bankruptcy Court held that by seeking to confirm a plan that provides for payments owing on a vehicle, the debtor “implicitly acknowledges that such expenses are both reasonable and necessary for the maintenance and support of the debtor."  As such, the adequate protection payments have super-priority over other administrative expenses, such as attorney fees, under § 507(b).  The Bankrutpcy Court reasoned that “if attorney’s fees are paid ahead of the adequate protection payments, then adequate protection fails; the funds . . . would be paid to someone besides the protected lender."

The court concluded, “[i]f the risk of non-payment of the debtor’s attorney fees . . . is too great to justify taking the case . . . [it] should say something about the case."

There is nothing much like a Bankrutpcy Court in a difficult decision taking a personal slap at the debtors' bar.

In any event, it appears that the DeSardi decision is slowly becoming the majority decision on the subject of attorneys' fees being paid upfront ahead of adequate protection payments of undersecured creditors.

Comments

[Patches]

It's true! With two vehicles it can be up to 3 years before you get all of your money through the plan. I can see why a ton got out of the biz and no new blood want in. First you strike at Attorney client privilege and then go after Attorneys fees? There are easier areas of law.

How can you tell someone, look them in the eye and tell them that they have to surrender one of their cars because it will take 3 years to get all of the Attorneys fees through the plan. Or in the alternative make them come up with 2k upfront to take the case. Having to tell someone that they "have" to give something up especially their home really really sux.. Most of the time you are their last hope. Kinda gets to you after a bit.

[Chris Barber]

Ive been hit with stuff like this a couple times. The most extreme example came from a lady I filed last year to save her car. Here are the relevant issues:

1. The 910 Rule came into effect, so shes paying the full note value and has unusually large monthly payments.

2. The Trustee disbursed a couple APD payments to the wrong creditor.

3. My client only paid about 1/2 of her second Trustee payment.

Per "Da Rulez", the Trustee has allocated every available penny to getting this secured creditor whole. I MAY get my second disbursement a little over a year into the bankruptcy! I should actually feel lucky in that the Trustee managed to track down and get back the improperly disbursed funds. If it wasnt for that stroke of luck, I probably wouldnt get disbursements until the very end.

Ive heard various people justify all this on the basis Debtors' attorneys know what theyre getting into by retaining someone with blemished credit. Given that, the poor auto finance creditor shouldnt suffer. Its not an invalid point. However, two things come to mind:

1. These creditors often loans funds to our clients when their credit is already in bad shape.

2. If worse comes to worse, the auto finance creditor can cut its losses through repossession and selling collateral at auction (after following proper procedures). We have no such option.

[Patches]

I totally feel you Chris.. It sux! What are you supposed to file chapter 13s for people who have better than a 650 Fico score? So you have to basically charge the debtor up front to file an amount that she/he can pay to the car creditor to get the car back?

It's like vehicle lenders have avoided all culpability. The lake has dried up and I think its partly due to the new law. We have twice as many people out there that need to restructure or liquidate but the "outflow" was constricted by Bankruptcy Abuse Prevention and "CREDITOR" Protection Act. Now, there is no new blood out there to lend to. Who can risk it? Neither the Vehicle lenders or the potential borrowers.