Summary:
The Debtors paid their attorney $10,000 prior to filing Chapter 11 for pre-petition services, with nothing owed to the attorneys at the time of filing. In order to secure fees for services rendered during the pendency of the case, the Debtors granted their attorneys two future advance deeds of trust on tracts of land owned by the Debtors. The Bankruptcy Administrator objected to the application to employ the attorneys, asserting that the attorneys were not disinterested persons as defined in § 101(14) and as required by § 327(a). The bankruptcy court agreed that the attorneys were not disinterested and further found that the proposed fee arrangement rearranges the priorities set forth in § 507 and § 726(b), and effectively ensures that the attorneys would be paid over any other administrative creditor in the event that a trustee is appointed, the case converts to a Chapter 7, or the case becomes administratively insolvent. The bankruptcy court nonetheless allowed the employment of the attorneys, on the condition that the future advance deeds of trust be amended to be in favor of all administrative priority claims allowed under § 503(b) and, if the case were converted to Chapter 7, that the deeds of trust would be cancelled at the request of the Trustee.
Commentary:
This raises the question of whether a Chapter 13 attorney could take a security interest in a Debtor’s motor vehicle, subject to equal treatment of other administrative claims and to revocation in the event of conversion. This would not allow provide greater protection, but interest on the claim and the above median income Debtor, following Ransom, could then be entitled to a vehicle ownership deduction on the Means Test.
For a copy of the opinion, please see:
Garner- Security Interest in Property taken by Attorney for Debtor.pdf
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