In re Stephen Falkner and Ahmed Alayah Debtors-Appellees Appeals of: City of Chicago

Holding: The Seventh Circuit affirmed the confirmation of Chapter thirteen plans that paid attorneys fees before nonpriority unsecured creditors, holding that such payment is consistent with the Bankruptcy Code.
Vote: Panel Decision
Practical effect: The ruling clarifies that below-median income debtors in the Seventh Circuit may structure Chapter thirteen plans to pay legal fees prior to nonpriority unsecured claims without violating the disposable income requirement.

The Seventh Circuit affirmed bankruptcy court orders confirming Chapter thirteen repayment plans that paid attorneys fees before nonpriority unsecured creditors. The court held that the Bankruptcy Code permits such payment timing and does not require attorneys to file proofs of claim for administrative expenses.

Background

Debtors Stephen Falkner and Ahmed Alayah filed Chapter thirteen petitions and proposed repayment plans that allocated funds to pay their attorneys fees before paying debts owed to nonpriority unsecured creditors like the City of Chicago. The City objected, arguing that paying attorneys first violated the requirement that all projected disposable income be applied to unsecured creditors. The bankruptcy court overruled the objections and confirmed the plans.

The court’s reasoning

The court reasoned that the Bankruptcy Code requires plans to pay priority claims, including attorneys fees, before or at the same time as payments to nonpriority unsecured creditors. The court found that the two thousand five amendment did not intend to displace this long-standing practice. Additionally, the court determined that bankruptcy attorneys qualify as unsecured creditors entitled to receive projected disposable income and may be paid via a request for administrative expense rather than a proof of claim.

What it means going forward

The ruling clarifies that below-median income debtors in the Seventh Circuit may structure Chapter thirteen plans to pay legal fees prior to nonpriority unsecured claims without violating the disposable income requirement.